Introduction

There are numerous factors driving the increasing internationalization of corporate R&D. The advent of information communications technology is the most obvious, but by no means the only catalyst behind this new trend.

Another important driving factor toward more global R&D is the way technological advances are realized in the information and communications industries, which relies as much on manufacturing technology as on services. That is, sustained growth in these industries requires not only equipment support and hardware improvements, but a continuous cycle of innovation accompanied by extensive intellectual support services. Imagine, for example, buying a new laptop computer for the first time and having no help line to consult when the computer inevitably freezes up or reports a total “system failure.” The growth in computer and other service-reliant industries has led to a corresponding increase in the level of services-based R&D, which now accounts for as much as 20 percent of overall industrial R&D in the United States.

Furthermore, services-based R&D—namely contract, retail, transport, and other support-related services—is in many ways more portable than manufacturing-based R&D; the latter is generally more closely tied physically, geographically, or intellectually to a particular location. As a result, corporations are more likely to shift services-based R&D activities abroad and are doing so in growing numbers. Multinational firms, in fact, are playing a central role in the internationalization of high-tech R&D. This is due to a widespread change in the source of funding for most R&D activities: today, industry investment far outpaces government funding for R&D. In the United States, this shift first emerged after 1980, as the latest wave of globalization was just getting under way. It was then that, for the first time, private-sector industry expenditures on R&D matched federal outlays, and from there industry-invested R&D has increased steadily.

By the turn of the century, US industry was funding more than two-thirds of all domestic R&D and performing nearly three-quarters of this work, while the share of government-funded R&D has declined across the board. Over the past decade, a similar trend has emerged in many other Western economies. It is not surprising, then, that as industry became the primary source of R&D funding, more of this investment and activity began to flow overseas, where MNC's are seeking to exploit new markets throughout the developing world.

As in earlier waves of globalization, overseas R&D is also made easier by the enhanced mobility of both human beings and financial capital. Today, talented individuals and foreign investors face few international barriers in seeking innovative opportunities across the globe. In fact, these assets are likely to be drawn to wherever a supportive environment for technological innovation exists and is fostered over time. For this reason, numerous countries are attempting to replicate the success of California's Silicon Valley by developing new high-tech development zones or “science parks” designed to attract researchers, entrepreneurs, and venture capitalists from around the world.

For their part, high-tech firms often find that R&D conducted in foreign locales can inspire new ideas and uncover unique sources of innovation. Moreover, conducting R&D abroad can at least temporarily reduce labor costs where firms are able to tap into local, and increasingly high-skilled, labor in the developing world. In turn, this growing, global dispersion of skilled engineers, scientists, and researchers—many of whom were trained in American universities—has helped promote the rise of international research consortia. Due in part to the decline in government funding for R&D, scientists from around the world are collaborating on tackling a number of difficult areas of fundamental and applied research, working together to more rapidly achieve a shared scientific objective. Projects such as the international space station, Antarctic field research, Human Genome Project, and efforts to find a cure for HIV/AIDS, to name just a few, all have benefited from cooperative international R&D. Newly formed global technology alliances among corporate partners also are growing in number, with hundreds more created each year. These inter-firm projects are designed to accelerate commercial advances in fields such as pharmaceuticals and biotechnology, information communications, aerospace and defense, advanced materials, and the automotive industry. Increasingly, scientists and researchers from less-developed countries are participating in, and contributing to, these scientific and technically ambitious efforts.

Another factor driving global R&D is the extremely competitive nature of high-tech industries such as computer software development and wireless telecommunications. Increasingly, the race for product innovation has led multinational firms to seek the competitive advantage gained from round-the-clock R&D. Having researchers located across different international time zones that, as a team, are able to work continuously on a specific problem or project allows a virtual 24/7 development cycle. Once again, the information communications revolution has made this possible, allowing R&D to transcend both national borders and normal work-force limitations.

Finally, an important driver facilitating the globalization of R&D is the move toward normalization of international trade through the World Trade Organization (WTO). As more developing countries become members of this international forum, their economies will become substantially more attractive to foreign high-tech investors concerned with fair trade measures and effective enforcement of intellectual property rights. Even the expectation of China's pending membership in the WTO had a palpable effect on investor confidence, leading many high-tech corporations to expand their investments there long before China's entry into the WTO became official in December 2001.

If the factors and conditions outlined above persist, there is no reason not to expect further expansion of global R&D to continue at least over the near-term, if not considerably longer. With this in mind, the next section briefly explores how this trend has affected international trade and investment, in both the developed and developing world.

An essential factor in determining the significance of increasingly global R&D on China's development, US-China relations, and international trade more generally is the degree to which the PRC has the capacity to leverage these forces. Since Mao Zedong's civil war victory led to the formation of the People's Republic of China in 1949, PRC leaders have attempted through numerous phases and shifts in science and technology policymaking to modernize China's S&T development system. In 2003, yet another major reform of China's S&T apparatus and infrastructure is expected.

A common characteristic in all of these reform efforts has been the PRC's attempt to catch up to the West. This objective poses a perpetual dilemma for Chinese officials over whether to try to leap ahead technologically or to follow a more incremental, absorptive strategy of S&T development in order to ultimately catch up to, if not surpass, the US and other industrialized economies over time. As this report goes to press, the debate in Beijing continues.

EVOLUTION OF THE CHINESE S&T SYSTEM

In 1978, at the historic Third Plenum of the Eleventh National Party

Congress Central Committee meeting, China's paramount leader, Deng

Xiaoping, announced the formal implementation of a series of “Four

Modernizations” intended to guide the PRC into the modern era. These were, in order of priority:

  1. industry
  2. Agriculture
  3. Science and technology
  4. National defense / military

Having achieved the first two stages of modernization, Deng has left much of the remaining agenda to his successors. While this grand vision may no longer represent the formal roadmap for China's development, Deng's third modernization—science and technology—was and remains a high priority for the Chinese leadership.

To understand the impact and long-term implications of globalization and foreign high-tech R&D investment on China's own technological and industrial development, it is important to consider the evolution of science and technology policy on the Mainland. Two major periods stand out: the pre-reform era and the years since China first began instituting market-oriented economic reforms. During both periods, progress toward reform was either delayed or accelerated due to overriding domestic political forces. From the PRC's formation under Mao in 1949 until Deng Xiaoping's ascension to power three decades later, China shaped its S&T programs according to the Soviet model.

Once Deng's “Open Door” economic reforms began to take hold in the mid-1980s, China's S&T system also came under pressure to meet the demands of the marketplace. Over the last quarter century, progress toward modernization has proceeded steadily, if slowly.

Adopting the Soviet S&T Model (1949-1965)

From its earliest days, Chairman Mao declared that the PRC would “lean to one side”—that is, in world affairs China would side with the Soviet Union. In 1950, the two communist states formalized their relationship by signing the Sino-Soviet Treaty of Friendship, Alliance, and Mutual Assistance. Given their then close bonds, it is not surprising that the PRC adopted essentially the same model of scientific, technological, and defense industrial development as its neighbor and ally. Yet, despite the alliance, security remained Beijing's overriding concern. In order to shield vital military, industrial, and technological capabilities from potential external threats, PRC leaders decided to position the nation's strategic technological assets—China's defense and heavy industry as well as the S&T research institutes that served them—in the nation's vast interior provinces. This inland location would comprise a “Third Front” thought to be beyond the reach of potential enemies. This strategy, however, would have two long-term consequences. First, the PRC's S&T programs were, from the start, integrally linked with broader defense-oriented policies and practices. Secondly, these S&T assets would be removed from the PRC's most dynamic economic growth areas along China's coastline, where the bulk of productive commercial enterprises are concentrated.

China's leaders also adopted a centrally planned, highly bureaucratic, and strictly hierarchical structure similar to the Soviet S&T system. For instance, China's premier scientific institution—the Chinese Academy of Sciences (CAS)—was modeled closely on the Soviet Academy of Sciences. Consequently, however, China suffered from the same lack of cross-institutional communication, interaction, and effective coordination among its scientists and researchers (who were scattered and isolated across self-contained research institutions variously affiliated with CAS, government ministries, regional institutions, and Third Front defense research institutes) as the Soviet Union. While this type of vertically integrated system provided a degree of enhanced administrative control, ultimately it proved to be a serious obstacle to China's overall technological development and subsequent efforts to modernize the S&T system.

In addition, PRC leaders shared the same socialist-inspired penchant for long-term, central planning of economic, industrial, and technological development as the Soviets. China's own formal five- and ten-year plans sketch out various long-term goals and “major tasks” deemed essential by PRC leaders. This practice continues today, despite China's many market-oriented reforms over the past two decades.

While China's early Cold War-era S&T system might appear hapless from today's perspective, at the time the system served Chinese leaders reasonably well. Within the first two decades of its founding, the PRC had demonstrated surprising technological achievements in the military sphere, including the successful development of nuclear weapons and ballistic missiles. Along with substantial technical assistance from the Soviets, the centrally planned nature of China's system helped leaders in Beijing to mobilize China's scientific—primarily Third Front—forces to achieve these singular objectives. However, it took an exceptional level of effort and enormous economic expense to achieve these milestones.

Thus, while representing impressive technological advances, these feats proved atypical in China's overall S&T evolution.

Major Setbacks and a Lost Generation (1966-1976)

Despite these early achievements, China suffered significant national and international setbacks through much of the 1960s and 1970s, which inevitably affected overall S&T development. A fundamental shift in international orientation came with the Sino-Soviet split, which by 1960 had become apparent to the entire world and resulted in a suspension and then withdrawal of Soviet advisors, assistance, and technology. The split also seared into the Chinese memory the dangers inherent in becoming overly dependent on foreign aid and technology. Due to Cold War tensions and trade sanctions, Western aid in the form of technology assistance remained limited until President Nixon's historic visit in 1972 ushered in a new relationship vis-à-vis the United States. Even then, technological cooperation was viewed warily by both sides.

China's technological progress also was stalled by periodic domestic political campaigns. Although intended to stimulate China's economy, comparative industrial strength and revolutionary spirit, Mao's “Great Leap Forward” (1958-60) proved disastrous. A truly radical experiment, the plan called for urban industrial laborers and collectivized agricultural communes in China's rural provinces to vastly increase production levels, an effort that resulted instead in economic collapse and widespread famine. Further political, social, and economic upheaval came several years later with the start of Mao's “Great Proletarian Cultural Revolution” (1966-1976). The enormous turmoil sparked by the radical fervor of Mao's “Red Guards” during this era effectively paralyzed Chinese society and stifled scientific development for more than a decade. During this period, the country's universities were shut down, and China's intellectual elite either fled or faced harassment, imprisonment, or worse. Consequently, the PRC continues to suffer the effects of an entire “lost generation” of smart, capable, and educated academics and professionals who were shut out during this unfortunate and chaotic period.

The “Open Door” and Growing Western Influence (1977-1997)

Following the political upheaval surrounding Mao's death in 1976 and the ensuing struggle for power in Beijing, Deng Xiaoping reemerged from internal exile to lead the PRC in a new and more prosperous direction. The hallmarks of his now famous “Open Door” strategy instituted in 1979 were increased foreign trade, market-oriented economic reforms, institutional and legal reforms, and the importation of Western science, technology, and know-how intended to help catapult the PRC into the modern era. This formative period would witness several milestones, marked by periodic reviews of lessons learned as well as new ideas and strategies for accelerating China's modernization.

Growing International S&T Cooperation

As part of his Open Door initiative, Deng Xiaoping visited the United States in January 1979. He came away with a bilateral agreement on S&T cooperation that remains in effect today.8 Government-sponsored research collaboration under this agreement and its many subsequent protocols, annexes, and other related accords continues apace, involving no less than eleven different US federal agencies. While the contribution this agreement has made to China's overall industrial, economic, or military success is difficult to gauge (the State

Department characterizes it as modest at best), there is no doubt that the continuous scientific and technical exchanges that this agreement makes possible have had a profound effect on the PRC's approach to S&T development. Many of the reforms Beijing has implemented over the last quarter century reflect strategies, priorities, and lessons learned from the West, particularly the United States.

The US-China S&T Agreement was only one of a series of collaborative S&T-related arrangements the PRC implemented with other industrialized nations around this time. A key objective in all of these accords was the exchange of scientific and technical personnel as a means of acquiring advanced technological training and know-how. The Chinese interest in personal exchanges as a vehicle for technology transfer came as a result of lessons learned from earlier decades when the PRC favored wholesale transfers of entire plants, turnkey facilities, and heavy industrial equipment (primarily from the Soviets) instead of the fundamental know-how underlying these capabilities and technologies. This practice did not yield the necessary understanding China needed to build on (or successfully reverse engineer) advanced technologies, which became apparent once Soviet aid ended. Thus, China's opening to scientific and technological exchanges of personnel reflected a conscious decision to “acquire the hen and not just the egg” in future technology transfers.

As a result of the PRC's new openness, hundreds of thousands of Chinese have since had the opportunity to study abroad. The vast majority have attended American universities. While running the risk of a serious “brain drain” from the Mainland, this policy, perhaps more than any other Chinese S&T development measure has provided China with long-term tangible and intangible benefits. It also has allowed China to regain much of the ground lost during the Cultural Revolution, helping to train a new generation of scientists, engineers, and researchers to take the place of China's aging scientific community. At the same time, the ever increasing numbers of China's best and brightest studying and working abroad have infused the international scientific community with new, young talent while enhancing global R&D collaboration.

The First of China's Special Trade and Investment Zones Appears

Another significant and early reform dating back to this period was the introduction of Special Economic Zones in 1979. While primarily an economic reform measure, the SEZ's were only the first of several other types of experimental new development and direct investment zones that have come to play an important role in China's technological modernization.

The SEZ's were established purposely far from the capital along China's southeastern coastal areas: in Fujian Province (opposite Taiwan) and Guangdong Province (outside Hong Kong). These zones represented the PRC's first cautious attempts to implement market-oriented economic reforms and to open wide the door to foreign investment and technology. While these zones were successful overall in attracting foreign investment, the SEZs initially did not lure the desired high-tech industries as intended. Rather, light industry and low-tech commercial manufacturing have dominated investment in these areas.

To encourage additional, more advanced forms of foreign investment, Chinese leaders expanded on this model by announcing the formation of several new types of investment zones. From 1984 to 1995, the PRC established special Economic and Technological Development Zones (ETDZs), Free Trade Zones (FTZs), and High Technology Development Zones (HTDZs).11 In these cordoned areas, foreign invested enterprises, Sino-foreign joint ventures (JVs), and now wholly foreign-owned enterprises (WFOEs) are allowed and openly encouraged to transfer foreign technology and know-how along with building manufacturing, export-processing, and assembly plants. Foreign investment in these corridors is attracted by special regulatory treatment, preferential customs and tax rates, and other financial incentives designed to lure the world's leading high-tech commercial enterprises.

As such, China's special economic and other investment zones have become the main engine for growth in the Chinese economy. These zones are also the primary conduits for foreign commercial technology transfers. As noted earlier, however, with the exception of the expansive HTDZs, most of these investment zones are located in coastal areas far from China's defense industrial enterprises, which monopolized most of the nation's S&T assets through the mid-1980s. In order to exploit the growing influx of foreign investment and technology, leaders in Beijing decided a new strategy was needed to accelerate scientific and technological development.

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