A Study On MNCs' R&D Offshoring

Along with the further development of economic globalization, multinational corporations (MNCs) in growing numbers transfer their R&D activities abroad. This is what is called R&D offshoring. Unlike the significant expansion of manufacturing and marketing offshoring, R&D offshoring of MNCs is only in its initial stage. By extending its geographical R&D presence, MNCs may obtain inexpensive R&D resources from non-traditional regions and effectively integrate all sorts of knowledge and research resources scattered around the world, thus improving their R&D productivities. At present, the total volume of R&D offshoring is far less than that of overall business R&D globally. R&D offshoring, however, develops distinctively and will maintain such a momentum in the future. Since the 1990s, China has become an important offshore R&D destination for MNCs globally. Especially since the late 1990s, foreign R&D transferred to China has been accelerated. Foreign companies now have contributed one fourth of Independent Innovation Activities of large-and-medium scale enterprises in mainland China. This situation certainly will impact China's Innovation System (CIS). This paper tries to deeply and thoroughly study the phenomenon of MNCs' R&D offshoring and the potential impact of foreign R&D on CIS for the purpose of laying a theoretical and practical foundation for Chinese government to formulate national technology innovation and management policies.In addition to the Introduction and Conclusion sections, this paper is composed of three parts. The first part, including Chapter 2, Chapter 3, Chapter 4 and Chapter 5, undertakes the theoretical and positive analyses on R&D offshoring. With that, there is a transition part, Chapter 6, in which China's role and its position in MNCs' offshored R&D network is discussed. In the third part (i.e., Chapter 7 and Chapter 8), the author analyzes the relations between foreign R&D and CIS, and puts forward relevant suggestions for Chinese policymakers.At the very beginning of Chapter 2, theories and research findings on R&D offshoring are reviewed and sorted. Traditional theories, such as International Investment Theory, Multinational Corporation Theory, Competitive Advantage Theory and Transaction Cost Theory, may partly explain the phenomenon of R&D offshoring. Some recent research findings, which relate to R&D offshoring, together with the above-mentioned traditional theories, help to form a theoretical framework for this research work. These theories and research findings, however, are not enough for people to thoroughly comprehend the phenomenon, thus leaving much room for the researcher to explore.As a matter of fact, there is not a generally accepted definition of R&D offshoring in the academic circle. Furthermore, it is not systematically studied by researchers in related fields. For the convenience of this research, the related concepts of R&D offshoring are examined in Chapter 3, through which we may understand the concept further. In this research, the researcher classifies R&D offshoring into two categories: captive offshoring and offshore outsourcing. The classification proves to be necessary and helpful for the subsequent research. R&D offshoring activities of a MNC are determined by multiple factors. In this paper, the drivers of R&D offshoring are introduced from the perspective of external and internal environments respectively. The major external drivers include more intensive international competition, advancement of information and communication technology (ICT), lower entrance barriers for the global service market, amelioration of investment environment of host countries and so on. Nevertheless, the fundamental driving forces of R&D offshoring come from the multinationals themselves, which consist of reduction of R&D cost, acquirement of R&D resources (e.g., technology and professionals), support for overseas manufacturing, avoidance of technology research risk, establishment of R&D network that technologically sustains a multinational's global strategy etc.For the purpose of observing characteristics of R&D offshoring, parent countries of MNCs are divided into four types in this research: (1) the U. S. and the large European countries, (2) the small European countries, (3) Japan, and (4) the developing countries and regions. It is the parent countries' differences in economic and technological strength that influence the patterns and scales of MNCs' R&D offshoring. As a whole, we see a growing trend of R&D offshoring, though varied among countries. Offshored R&D mainly focuses on technology-intensive industries and is geographically concentrated in developed regions. However, developing regions become more and more important destinations for MNCs' R&D. Along with the growing trend of R&D offshoring, foreign R&D increasingly plays vital role on the host countries' R&D and MNCs' offshored innovation increases.R&D offshoring strategy of a firm involves a variety of issues, such as whether to offshore, what pattern to follow, where to conduct offshored R&D activities, how to allocate the functions among offshored R&D facilities, and how to manage scattered R&D activities. These strategic decisions are influenced by numerous elements. For instance, in order to choose the R&D offshoring pattern, a firm should, on the basis of the characteristics of offshoring patterns, take into account the nature of offshored R&D activities, the technology features of the industry the firm belongs to, the firm's overseas operation experiences, the firm's size and resources, and the policies of host countries etc. When it comes to allocation of overseas R&D functions, the types of offshored R&D activities or R&D facilities play a key role. Moreover, overseas R&D functions may be reinforced or weakened depending on the circumstance. According to the existing research findings, the functions and positions of offshored R&D fall into four types: (1) innovative development, (2) production support, (3) market application and (4) technology tracking. When it's functioned differently, offshored R&D may locate differently and link with parent R&D in a different manner. One thing is important: no matter how to organize offshored R&D network, it is indispensable for a firm to set up internal coordinating body and form an appropriate coordinating mechanism. In Chapter 6, the focus of this study turns to China's role in MNCs' R&D offshoring. Since early 1990s when MNCs started R&D activities in China's market, there have been distinct three stages: exploration, expansion and reinforcement. The R&D volume of the MNCs in China expands by degrees. The R&D organization model gradually upgrades. A more equal relationship comes forth between the MNCs and their Chinese partners. The important factors attracting foreign firms transfer R&D to China are its market potential, increased demand, competitive policies and technology talents. However, the significance of these factors varies when we consider different development phases or different regions of China. Besides, MNCs' strengths and strategies give an impetus to R&D offshoring as well. With the analysis of the characteristics and forms of foreign R&D in China, the author analyzes China's role in a context of regional industry development -transfer of R&D capacity of ICT industry within Asia-Pacific region. In addition to this, because India, similar to China in many areas, also a major offshore R&D destination, it is helpful to compare the patterns and focuses of MNCs' R&D activities in China and India by way of analyzing the R&D expenditures, RDT service trade volumes and R&D alliances of the U. S. Multinationals in/with both two countries. By doing so, China's role in MNCs' offshore R&D network becomes more and more clear.The research in Part Three focuses onto the impact of foreign R&D on CIS and puts forwards corresponding suggestions for the policymakers in China. In order to fulfill this aim, the evolution of National Innovation System (NIS) Theory is reviewed at the beginning of Chapter 7. Then, the author goes further, discussing the openness of NIS and the relationship between foreign R&D and self-organizing evolution of NIS; thus laying a sound foundation for subsequent analysis of relevant problems. Then, the impact of foreign R&D on CIS and its mechanism is observed in this research. After that, the impact of foreign R&D on the acquirement of China's innovation resources and the interaction between foreign companies and China's Innovation Players are analyzed one by one. It is obvious that foreign R&D may help China optimize allocation of innovation resources, improve the quality of innovation resources and make up the insufficiency of innovation resources. At present, with the quantitative and qualitative change of foreign R&D and the establishment of competitive advantageous of Chinese enterprises in some technology fields, the interaction between foreign companies and China's Innovation Players becomes more beneficial than before, which contribute to the advancement of China's NIS. At the end of Chapter 7, three negative effects of foreign R&D are underlined: brain drain, reverse diffusion of technology and technology control. These problems are interrelated and interacted. The most important thing for an economically developing host country like China is to manage to build up its independent innovation capacity.On the basis of thorough analysis of MNCs' R&D offshoring and its impact on CIS, relevant suggestions for policymakers on how to strengthen foreign R&D's linkage with CIS and improve the performance of CIS are put forward in Chapter 8. A preliminary policy framework is formed. It should, at least, contain the policies in three aspects: encouraging various foreign R&D in China, strengthening foreign R&D's linkage with CIS, and enhancing technological capacity of China's Innovation Players. The policies in these three aspects emphasize different things. However, they connect each other and cannot act effectively without others.