Accelerating R&D Investments into India and China

ASAKAWA Kazuhiro
Faculty Fellow, RIETI

Growing interest in India and China

A number of global companies are undertaking research and development (R&D) activities in emerging economies in Asia, particularly in India and China. The Economist Intelligence Unit (EIU), in its survey conducted in 2004, cited China and India as the world's leading R&D hotspots along with the United States. Meanwhile, a global survey of business executives, conducted by McKinsey & Company, Inc. in 2004, found that executives of U.S. and European companies give higher marks to India as a destination of R&D investment, whereas China exceeds India in popularity among business executives in the Asia-Pacific region. In general, U.S. and European companies are more aggressive than their Japanese counterparts in undertaking advanced R&D activities in India and China.

Developed countries' R&D investments in India concentrate on such sectors as information technology, telecommunications, automotive, pharmaceutical and biotechnology, whereas their R&D investments in China are centered on the personal computer (PC) and telecommunications industries followed by chemical, petrochemical, pharmaceutical, biotechnology, automotive and transportation industries. In terms of the nationality of investing companies, the presence of U.S. and European companies stands out in India, as well as South Korean companies. Meanwhile, in China, U.S. companies have the greatest presence, followed by European and Japanese companies (Bowonder and Richardson 2000; Gassmann and Han 2004; von Zedtwitz 2004).

China is beset with the problem of counterfeiting and it has yet to establish an efficient system for protecting intellectual property. At the same time however, the country is aspiring to evolve from being only a low-cost manufacturing center to being a center for advanced technologies, thereby putting such technologies to practical business use. India, equipped with advanced science and technologies, is rapidly shifting from being a contractor confined to the field of IT software to become a contractor capable of performing more advanced knowledge-based tasks. At the same time, however, the country shows little interest in the commercialization of R&D results, a tendency perceived to be a remnant of the national military regime. (See note)

Established theories in developed countries and the actual state of India and China

To what extent can companies in developed countries take advantage of their experience in undertaking R&D activities in India and China? Our survey found that what is assumed to be common sense in R&D investments in developed countries does not necessarily apply to R&D investments in India and China (Asakawa and Som 2005).

First, common sense in developed countries has it that R&D investments should be made in a gradually progressive manner based on careful consideration of the costs and benefits involved and, in particular, that a country without a regime for intellectual property protection should be avoided as a destination for R&D investments. In reality, however, a number of U.S. and European companies have made massive R&D investments both in India and China. In China, where the protection of intellectual property remains a major challenge, many big-name companies -- Honeywell International Inc., Dow Chemical Co., Nokia Corp. and General Electric Co., just to name a few -- have invested aggressively. Likewise in India, major R&D investments have been made by such companies as Oracle Corp., General Electric Co., Texas Instruments Inc., Siemens AG and Motorola Inc. Apparently, the possibility of future growth has served as the primary criterion for making investment decisions with companies betting on the rapid growth of these countries in the coming years.

Second, it is generally perceived that the role of overseas R&D bases evolves from their being a receiving point for technologies transferred from the parent company to being a development center for original technologies, and that the pace of this evolution is slower for those located in developing countries. But in India and China, both of which are emerging economies, there is a good possibility that the role of R&D bases will evolve in a very short period of time. Behind this prospect are special factors such as the upgrading of R&D capabilities through the recruitment of many returnees from the U.S. and vigorous technical support from headquarters in the U.S. and Europe.

Third, there is a prevailing notion that basic research in the seed-exploring stage can be carried out only in developed countries although research activities in the development stage can be partially performed in some developing countries. This is consistent with findings from a recent empirical study conducted by Professor Jaeyong Song of Seoul National University, which show that the degree of relative technology gap between the home country and a host country overseas is a crucial factor for companies in deciding their technology sourcing strategy vis-a-vis that foreign country. In reality, however, U.S. and European multinationals have begun to undertake, albeit partially, basic research activities in India and China despite the fact that technology capabilities of these two countries are still far below the level of those of the home country.

Fourth, it is perceived that an overseas R&D laboratory, if it is to sufficiently function as a knowledge production base, must be given a high degree of autonomy from its headquarters and needs to share knowledge with external researchers based on firm trust with the local community (Asakawa 2001). However, particularly with China, from the viewpoint of protecting intellectual property, hasty and easy trust may end up creating the source of trouble. In this case, the term "trust" needs to be redefined.

Fixed ideas about India and China versus emerging signs of changes

Given the rapid improvement of R&D environments both in India and China, it is necessary to change some of the fixed ideas about these two countries (Asakawa and Som 2005). However, many Asian companies, caught in a trap of their own making, often underestimate the possibility of Asia (DeMeyer and Garg 2005).

For instance, the stereotypical belief that the development of advanced technologies always takes place in developed countries abroad is persistently held by those in Asian companies. But it is not rare for an Indian company to take a leading role in R&D collaboration with a U.S. or European company. GlaxoSmithKline plc of Britain is undertaking a joint research project with Ranbaxy Laboratories Ltd., the largest pharmaceutical company in India. Likewise in China, a number of U.S. and European companies -- including Henkel KGaA of Germany -- are actively engaged in joint research with Chinese universities. Some of these companies such as Adobe Systems Inc. and Nokia Corp. have had worldwide success with some of their products developed in India or China.

Also, many managers of Asian companies have a bias against their own researchers, believing that R&D personnel in Asia are inferior to those in the U.S. and Europe (DeMeyer and Garg 2005). But corporate managers in the U.S. and Europe do not necessarily agree with this. In the case of Adobe Systems Inc., half of its top engineers stationed in India are graduates from the Indian Institute of Technology (IIT), and PageMaker7.0, one of the flagship products of the company, has been developed in India. Meanwhile, in China, Honeywell International Inc. is actively recruiting local researchers at its Shanghai laboratory (China Chemical Report, Feb.16/26:5), while Nokia Corp., keen on the scouting and training of local human resources, has set up an in-house postdoctoral program within its Beijing affiliate.

Furthermore, it is often said that India and China are not as strong in bio and pharmaceuticals as they are in the IT, software and service industries. But their competence in the bio and pharmaceuticals sectors is now rising fast. In India, many companies -- National Chemical Laboratories, DuPont, Dow Chemical Co., General Electric Co. and so forth -- are aggressively embarking on investments. In China, Hoffman-La Roche, Ltd. established a development center in Shanghai's bio and pharmaceutical cluster in 2004 in the first such move in this cluster by any European or American company, quickly followed by GlaxoSmithKline and some other companies. According to DuPont, which has extensive operations experience in China, the research level of the Chinese chemical industry is already substantially high.

Learning from emerging economies while understanding their peculiarities

This all suggests that Japanese companies, in launching and conducting R&D activities in India and China, 1) need to re-acknowledge it is no good to try to blindly transfer their R&D management based on the common sense of developed countries, 2) must divest themselves of their deeply rooted prejudices about India and China, and only then can they, 3) think of how to extract the maximum potential of their local operations. These steps are crucial for Japanese companies particularly now that they are beginning to shift emphasis on their global R&D from the US and Europe to Asia.

Today, the buds of innovation are blossoming in various parts of the world and the trend is toward greater mobility of technology across borders. Thus, we cannot expect that the uneven distribution of technologies - i.e. concentration in developed countries - will continue forever. It is not at all surprising if certain new knowledge is developed in and spreads from an emerging economy in Asia. To be a truly global player, it is no longer sufficient to conduct R&D activities at multiple locations in developed countries. Companies need to establish willingness and mechanisms to explore advanced knowledge in emerging economies while sufficiently understanding the peculiarities of each. To realize a "metanational corporation" capable of accessing important knowledge resources scattered across the world and integrating fragmented pieces of knowledge within the company into strategy (Doz et al. 2001), it is first and foremost important for top managers to stop sitting back on the competitive advantage of Japan. They need to realize the importance of securing worldwide competitiveness, thereby creating a corporate culture that allows knowledge brokers to take active roles -- whether within or outside the company -- all around the world.

October 18, 2005

In 2003, India and China posted 8.2% and 9.1% respectively in real economic growth. The population of India stands at about 1 billion and that of China at about 1.2 billion. India's GDP per capita is $538 and China's $1,087. (Source: 2004 JETRO White Paper on International Trade and Foreign Direct Investment)

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  • Doz, Y., J. Santos, and P. Williamson (2001) From Global to Metanational. Boston: Harvard Business School Press.
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  • Von Zedwidtz, M. (2004) “Managing foreign R&D laboratories in China” R&D Management 34(4): 439-452.

October 8, 2005

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