Scholars' views

Adhering to the Dual-Track Approach of Investment and Intelligence Attraction, Building a High-level Foreign-funded R&D Center

Professor Li Lei and Dr. Liu Zehuan from the Center for Transnationals’ Studies of NKU recently published an article titled Adhering to the Dual-Track Approach of Investment and Intelligence Attraction, Building a High-level Foreign-funded R&D Center in two consecutive issues of the International Business Daily, a newspaper under the Ministry of Commerce. 

First issue

Encouraging and attracting foreign direct investment (FDI) is an important way for developing countries to participate in globalization and promote national economic growth, as well as an important aspect of China's continuous expansion of its opening up to the outside world. Attracting foreign investment is of vital importance to attract foreign intelligence. Theestablishment of R&D centers by foreign-funded enterprises in China is an important demonstration of quality improvement of foreign investment utilization, which meets the requirements of high-quality development and is also an important way for China to move towards an innovative country. Recently, the Ministry of Commerce and the Ministry of Science and Technology issued the Several Measures for Further Encouraging Foreign Investment to Establish R&D Centers, proposing requirements from four major aspects, namely innovation, research and development, talents, and intellectual property, which will point out the direction for further promoting opening up and innovation, and strengthening cooperation with foreign countries.

Since the reform and opening up, China has continuously brought tangible economic benefits to foreign investment through a more open attitude towards foreign countries, a fair business environment, deep demand potential, and a complete industrial system. Foreign investment has also provided capital, jobs, technology, experience, and market support, making important contributions to China's modernization drive. Both sides have achieved mutual benefit and win-win results.

During the 14th Five-Year Plan period, China will build a great modern socialist country and put forward higher requirements for the scale and quality of foreign investment. In terms of scale, China has maintained an average annual growth rate of about 15% in the actual use of foreign investment over the past 40 years. In 2022, the actual use of foreign investment reached a record high of $189.13 billion, an increase of 8% year-on-year. By 2021, China has been steadily ranked second in terms of the scale of foreign investment in the world for four consecutive years. Regarding quality, in 2021, 13,427 new foreign-invested enterprises were established in China's high-tech industries, accounting for 28.2% of the total number of new enterprises; the actual use of foreign investment was US$52.2 billion, accounting for 28.8% of the total actual use of foreign investment for the year. By 2022, the actual use of foreign investment in high-tech industries increased by 28.3% year-on-year, an increase of 7.1 percentage points compared to 2021. To establish a new development pattern, China needs to tap the potential of domestic demand. To vigorously develop strategic emerging industries, advanced manufacturing, and modern service industries and achieve industrial structure upgrading, it is necessary to tackle a series of problems in technological research that hinder the country's development. Foreign investment is a link closely related to the domestic and international dual cycle. Multinational corporations with vast funds and key technologies organize investment and research and development space networks in various fields around the world, promoting the transformation and application of R&D results to obtain market returns. China's super-large market size and stable and reliable business environment also make it an ideal location for multinational corporations to establish R&D centers.

Foreign direct investment is an important source of R&D investment and innovation results. Currently, the international environment is complex, with rising unilateral protectionism and increasingly strict cross-border investment review and transfer of intellectual property rights. Although foreign-invested enterprises account for less than 3% of the total number of enterprises in China, they play an important role in China's research and development and innovation. The data from the China Statistical Yearbook shows that in 2021, the R&D expenditure of China's major industrial enterprises was 1.8 trillion yuan, of which the R&D expenditure of foreign-funded enterprises was 337.7 billion yuan, accounting for 19.2% of the country's total. Meanwhile, the number of patent applications for the major industrial enterprises above designated size was 1.4 million (495 thousand invention patents), of which foreign-funded enterprises accounted for 179,000 (64,800 invention patents), accounting for 18.7% (13.1% for invention patents) of the country's total. It can be seen that the R&D capabilities of foreign-funded enterprises in China will provide impetus to China's technological breakthroughs and industrial technological innovation to a certain extent.

Foreign direct investment is an important source for attracting global talent and building innovative teams. Science and technology innovation is based on talent. The report to the 20th National Congress of the Communist Party of China proposed to “improve the strategic distribution of human resources”, “move faster to build world hubs for talent and innovation, promote better distribution and balanced development of talent across regions and strive to build up our comparative strengths in global competition for talent”, and “bring together the best and the brightest from all fields for the cause of the Party and the people”. In 2021, China's major industrial enterprises above designated size had nearly 3.83 million R&D personnel, of which foreign-funded enterprises had 716 thousand R&D personnel, accounting for 18.7% of the country's total. Talent holds the key to innovation. Foreign-funded enterprises in China generally attach great importance to the training of R&D personnel and team building. By establishing R&D centers, foreign-funded enterprises can help China gather global talents and build international R&D teams.

Foreign direct investment is an important source for promoting technology transfer and solving practical problems. Transformation of scientific and technological achievements is the key to enhancing the contribution of technological progress to economic growth. Foreign-funded enterprises have a high degree of marketization and carry out more targeted research. Many foreign-funded enterprises have already formulated a mature transformation process and operation plan, which can improve the realization speed of R&D achievements and enhance the efficiency of promoting economic growth through technological innovation. In 2021, there were 958,000 new product development projects for China's major industrial enterprises, of which foreign-funded enterprises accounted for 13.1%, or 126,000 projects. The total expenditure for new product development was 2.26 trillion yuan, of which foreign-funded enterprises accounted for 20.1%, or 455.4 billion yuan. The sales revenue of new products was 29.5 trillion yuan, of which foreign-funded enterprises accounted for 24.4%, or 7.2 trillion yuan. The above data reflects to some extent the efficiency of marketization of foreign-funded knowledge achievements. Encouraging foreign-funded enterprises to establish R&D centers will help further promote the transformation of China's innovative achievements, enhance corporate sensitivity to market demand, and solve practical problems in innovation activities.

In summary, encouraging and supporting foreign-funded enterprises to establish R&D centers is not only an important measure for actively adapting to new changes in the international R&D environment and new trends in foreign-funded R&D, but also an important arrangement to combine China's industrial advantages, respond to international technology friction, and support the integration of foreign investment into the domestic R&D system. This is in line with the direction of development from quantity to quality, from mid-to-low-end to high-end.

Source: International Business Daily of the Ministry of Commerce, 2nd Edition, March 16, 2023

Second issue

In Adhering to the Dual-Track Approach of Investment and Intelligence Attraction, Building a High-level Foreign-funded R&D Center (First Issue), the author analyzed the positive role of foreign investment in innovation and development, talent construction, achievement transformation, and other aspects. This article, in combination with the Several Measures for Further Encouraging Foreign Investment to Establish R&D Centers issued by the Ministry of Commerce and the Ministry of Science and Technology, proposes the following countermeasures and recommendations based on the new characteristics and trends of foreign-funded enterprise R&D centers in China.

Firstly, promote the internationalization level of foreign-funded R&D centers, and build a global R&D system. It is essential to improve the research level of foreign-funded R&D centers, and guide them to achieve a balance between fundamental research serving the global market and applied research serving the local market. In terms of institutional arrangements, based on the Foreign Investment Law of the People's Republic of China and its implementation regulations, as well as the Law of the People's Republic of China on the Administration of Activities of Overseas Non-Governmental Organizations within the Territory of China, implementation rules will be formulated to highlight classification guidance. The approval, registration, and exit mechanisms for foreign-funded R&D centers of different categories, as well as their rights and obligations, will be clarified. In terms of intellectual property protection, we will actively adopt international standards and promote mutual recognition and protection. We will take the lead in pilot comprehensive knowledge asset financial services in key areas of foreign-funded R&D centers, explore intellectual property securitization, and reduce restrictions on knowledge achievements to enhance cross-border mobility. In terms of financial support, eligible areas can provide corresponding subsidies and rewards for high-level foreign-funded R&D centers. International capital restrictions will be appropriately relaxed, and overseas technology venture capital will be encouraged to provide financial support for foreign-funded R&D centers.

Secondly, enhance the cohesion of foreign-funded R&D centers, and encourage them to deeply participate in the domestic economic circulation system. It is important to prevent R&D isolation, strengthen the relations between foreign-funded R&D centers and domestic organizations, and support foreign-funded enterprises to integrate into the domestic R&D system in China. In terms of exchanging and cooperating with domestic research institutions, foreign-funded R&D centers are encouraged to establish high-quality international cooperation platforms for fundamental research with domestic universities and research institutes. The platform will operate based on international standards and supporting policies will be formulated. In terms of conducting business cooperation with domestic enterprises, foreign-funded R&D centers should enhance their market-oriented level, extract research topics from enterprise needs, and solve practical production problems for enterprises. They should provide diversified technical support for domestic enterprises with more professional division of labor, thereby enhancing the resilience of China's value chain. In terms of maintaining communication and contact with the government, foreign-funded R&D centers are allowed to apply for national and local project grants independently or jointly with other institutions. Restrictions on the nationality of scientific and technological awards will be lifted. Foreign-funded R&D centers will enjoy convenience and treatment in equipment procurement, tax refund processing, and technology transfer projects. This will enhance the sense of integration and belonging of foreign-funded R&D centers in the domestic R&D system.

Thirdly, leverage the cluster effect and focus on key areas for investment. R&D centers of multinational companies are often located in the same area as their headquarters, forming a layout feature of Headquarters + R&D or Production + R&D. First-tier cities should attach importance to the headquarters-R&D integration mode and rely on foreign enterprise headquarters to undertake high-level R&D center work. In terms of exploring innovative management models, a one-stop service platform will be established to ensure that foreign-funded R&D centers have the right to use various local technology innovation public service platforms for corresponding R&D experiments. Qualified foreign-funded R&D centers are encouraged to jointly cultivate talents with domestic and foreign universities and establish the Postdoctoral Programs. In terms of stimulating the positive spillover effects of foreign-funded R&D centers, key regions can learn from the development experience of Silicon Valley, Tsukuba Science City, and other parks based on their own location advantages and industrial characteristics. Super technology innovation parks will be planned to attract domestic and foreign-funded R&D centers. It is critical to strengthen the connection and cooperation between foreign-funded enterprises and domestic enterprises, as well as between foreign-funded R&D centers and domestic R&D centers.

Lastly, attract talents and implement the strategy of making China a talent-strong country. We should adhere to the idea of assembling the best minds and drawing fully on their expertise, and creating a favorable environment in which people with talent are easily identified, well valued and respected, and fully display their talent. In terms of exploring overseas talents, we should adhere to the principle of targeted introduction, establish a foreign talent pool, strive to attract top talents and young scientists in key fields, and encourage foreign-funded R&D centers to hire researchers from foreign universities and institutions. Talent introduction measures should be flexible. We should simplify talent introduction procedures, relax visa requirements for talent, simplify procedures for R&D personnel to bring their relatives to China, and build international talent apartments and international schools to alleviate the concerns of high-level foreign talents after their arrival in China. In terms of cultivating domestic talents, we should support foreign-funded R&D centers to hire domestic scientific researchers, provide corresponding convenience for talents at different levels of foreign-funded R&D centers in settling down, transferring social security, and professional title recognition, support experienced researchers to work part-time as university teachers to guide students. In terms of salary and performance incentives, we should ensure that the salary level is market-oriented and support R&D centers to adopt international salary arrangements. We should establish a salary and incentive mechanism for overseas talents, and establish a multi-level reward and recognition system based on research contributions to motivate the enthusiasm of overseas talents.

Source: International Business Daily of the Ministry of Commerce, 2nd Edition, March 17, 2023