[Econ4354] MNC RnD Impacts

Outline

Trend of MNC R&D (Expenditure Pattern)

R&D expenditure by foreign affiliates, based on a sample of 30 economies, values and share in business R&D, 1993-2002 - (Billions of dollars and per cent)

Source: UNCTAD, World Investment Report 2005

Trend of MNC R&D in China

Most attractive prospective R&D locations

Source: UNCTAD, World Investment Report 2005

R&D Labs in China, 1987 - 2003

1. Role as a global lead market and as a world manufacturing center

2. Increased Competition from Internationalization

3. Abundant human capital• Significant stock of R&D staff • Expanded their university systems• Extensive ‘Diaspora networks’

4. Government involvement • Strong network of public research organizations (e.g. Chinese Academy of

Sciences)• Nurtured the development of attractive regional clusters• Infrastructure for the protection of intellectual property• Offering incentives and infrastructure support

Trend of MNC R&D in China (Drivers)

Our Focus (MNC R&D: For better or for worse?)

Horizontal Spillover • Reverse engineering

• Skilled labor turnovers

• Demonstration effect

Vertical Spillover • Backward linkages

(1) Spillover effects

(2) Crowding out effect

Maturity Stage

- Develop own technology and new products - Corporate R&D will be aimed at both local global markets

Development stage

- Accumulate strategic assets & improve technological capability- Improve productivity and efficiency

Starting-up stage

- Understand the trends of technology development in time- Learn the advanced technology from MNCs

• 3-stage model of R&D development Bruce D. Merrifield 3-stage Innovation Model (1986)

Our Focus (Stages of R&D Development)

Our Focus

Country China

Industry Electronics Industry

Areas Evaluated

• What are the impacts of MNC R&D on the whole industry?

• Any spillover or crowding out effects?

• What stage of R&D development is China in?

Trend of China’s Electronics Industry

Methodology

Data Source

Origin Firm level data in China (CIE)

Number of firms 336,768

Year 2007

Industry focus Electronics manufacturing industry

Data categorization

Firm level data are aggregated into data of 73 sub-sectors according to the Classification of National Economy Industries (国民经济行业分类 )

Firm level data is separated into MNC* and non-MNC

*MNC definition: at least 25% capital share owned by HK, Macau, Taiwan or other foreign investors.

MNC R&D

Impact on Total Industry

PerformanceLocal R&D

Impact on Local Company

Performance

• Total profit• New product

• Total profit• New product

Regression Analysis

Model 1. Model 2. Model 3.

1. MNC R&D to Whole Industry 2. MNC R&D to Local R&D 3. MNC R&D to Local Firms

Dependent Variable

= β0 + β1 LN_MNC_RND + β2 LN_LOCAL_RND

+ β3 LN_TOTAL_ASSET + β4 LN_EMPLOYEES

+ β5 LN_FIXED_ASSETS + β6 LN_HK_MAC_TW_CAP

+ β7 LN_FOREIGN_CAP + β8 LN_EMPLOY_BENE

+ β9 LN_STATE_CAP

where dependent variables are:

1. LN_TOTAL_PROFIT 2. LN_NEW_PROD

• Effect of MNC R&D on whole industry performance

(1) Regression Analysis - Model


β0 = 0.6076 (0.72) S = 0.455647 R-Sq = 92.8% R-Sq(adj) = 91.7%

Independent Variables Description Coefficients

LN_MNC_RND Value of MNC R&D Expenditure 0.14633 (3.45***)

LN_LOCAL_RND Value of Local R&D Expenditure 0.14057(2.28**)

LN_TOTAL_ASSET Value of Total Asset -0.00980 (-0.19)

LN_EMPLOYEES Number of Employees 0.04415(0.48)

LN_FIXED_ASSETS Value of Fixed Assets 0.5191(3.97***)

LN_HK_MAC_TW_CAP Hong Kong, Macau and Taiwan Capital Share

-0.08542(-2.44**)

LN_FOREIGN_CAP Foreign Capital Share (Except Hong Kong, Macau and Taiwan)

0.11055(1.56)

LN_EMPLOY_BENE Value of Employee Benefit 0.1736(1.33)

LN_STATE_CAP State Owned Capital Share -0.03787(-1.20)

(1) Regression Analysis – Results (Profit)


Independent Variables Description Coefficients

LN_MNC_RND Value of MNC R&D Expenditure 0.10636 (2.04**)

LN_LOCAL_RND Value of Local R&D Expenditure 0.33418 (4.45***)

LN_TOTAL_ASSET Value of Total Asset -0.00980 (-0.19)

LN_EMPLOYEES Number of Employees 0.04415 (0.48)

LN_FIXED_ASSETS Value of Fixed Assets 0.6029 (3.80***)


-0.07135 (-1.66*)


0.03268 (0.37)

LN_EMPLOY_BENE Value of Employee Benefit 0.1968 (1.23)

LN_STATE_CAP State Owned Capital Share -0.03865 (-1.00)

β0 = -1.019 (-0.99) S = 0.560753 R-Sq = 91.6% R-Sq(adj) = 90.4%

(1) Regression Analysis – Results (New Product)


LN_LOCAL_RND

= β0 + β1 LN_L_MNC_RND + β2 LN_L_VALUE_ADDED

+ β3 LN_L_TOTAL_ASSET + β4 LN_L_EMPLOYEES

+ β5 LN_L_FIXED_ASSETS + β6 LN_L_HK_MAC_TW_CAP

+ β7 LN_L_FOREIGN_CAP + β8 LN_L_EMPLOY_BENE

+ β9 LN_L_EXP_VALUE

• Effect of MNC R&D on local R&D



β0 = -7.554 (-5.85) S = 0.577459 R-Sq = 89.0% R-Sq(adj) = 87.3%

Independent Variables Description Coefficient

LN_L_MNC_RND Value of MNC R&D Expenditure 0.12054 (2.48** )

LN_L_TOTAL_ASSET Value of Local Firm Total Asset 2.4983 (7.11***)

LN_L_EMPLOYEES Number of Employees in Local Firm -0.6664 (3.06 ***)

LN_L_FIXED_ASSETS Value of Local Firm Fixed Assets -0.6992 (-2.20 **)

LN_L_HK_MAC_TW_CAP Hong Kong, Macau and Taiwan Capital Ownership of Local Firm

-0.08080 (-1.75 *)

LN_L_FOREIGN_CAP Foreign Capital Ownership of Local Firm (Except HK, Macau and Taiwan)

-0.07826 (-1.08 )

LN_L_EMPLOY_BENE Value of Local Firm Employee Benefit -0.03233 (-0.76 )

LN_L_VALUE_ADDED Value of Local Value Added -0.2519 (-1.10)

LN_L_EXP_VALUE Value of Local Export Value 0.06664 (1.24 )

(2) Regression Analysis - Results


Dependent Variable

= β0 + β1 LN_MNC_RND + β2LN_LOCAL_RND

+ β3 LN_L_TOTAL_ASSET + β4 LN_L_EMPLOYEES

+ β5 LN_L_FIXED_ASSETS + β6 LN_L_HK_MAC_TW_CAP

+ β7 LN_L_FOREIGN_CAP + β8 LN_L_EMPLOY_BENE

where dependent variables are:

1. LN_L_TOTAL_PROFIT 2. LN_L_NEW_PROD

• Effect of MNC R&D on domestic firm performance



β0 = 4.399 (0.66) S = 2.65415 R-Sq = 34.9% R-Sq(adj) = 26.4%


LN_MNC_RND Value of MNC R&D Expenditure 0.5394(2.28 **)

LN_LOCAL_RND Value of Local R&D Expenditure -0.0261 (-0.04 )

LN_TOTAL_ASSET Value of Total Asset -0.631 (-0.33 )

LN_EMPLOYEES Number of Employees 2.529 (2.47**)

LN_FIXED_ASSETS Value of Fixed Assets 0.668 (0.44 )


-0.2210 (-1.08)


-0.653 (-1.94 *)

LN_EMPLOY_BENE Value of Employee Benefit -0.9631 (-1.20)

(3) Regression Analysis – Results (Profit)



LN_MNC_RND Value of MNC R&D Expenditure 0.05007 (1.05 )

LN_LOCAL_RND Value of Local R&D Expenditure 0.3898(3.31 ***)

LN_TOTAL_ASSET Value of Total Asset 0.7497 (1.96 **)

LN_EMPLOYEES Number of Employees 0.2725 (1.32)

LN_FIXED_ASSETS Value of Fixed Assets -0.0901 (0.30 )


-0.03418 (-0.83 )


0.02227 (0.33)

LN_EMPLOY_BENE Value of Employee Benefit -0.2109 (-1.31 )

β0 = -1.696 (-1.25) S = 0.535723 R-Sq = 91.0% R-Sq(adj) = 89.8%

(3) Regression Analysis – Results (New Product)

Dependent Variable Result

1. The whole electronic industry

a. Total Profit +

b. New Product Produced +

2. Local R&D +

3. The local firms

a. Total Profit +

b. New Product Produced NA

• MNC R&D impact in relation to the following variables:

Regression Analysis – Summary

Stages of MNC R&D evolution:

Maturity Stage- International markets have equal importance to domestic markets- Corporate R&D will be aimed at global markets directly

Development stage- Accumulate strategic assets & improve technological capability- Development of oversea market

Starting-up stage- Understand the trends of technology development in time- Learn the advanced technology from developed countries

• Limited spillover effect• MNC R&D impacts only the total profit of local firms

Regression Analysis – Analysis

• Industry and corporate contributions1) Increase supply of qualified employees• Cooperate with selected universities in research areas

and recruitment events to attract skilled graduates• Organize travelling and trainings to improve employee

exposure2) Foster interactions with MNCs to facilitate information

exchange

Insights for Chinese Domestic Firms & Govt

• Government initiatives1) Introduce incentives to attract technology, talent and

capital from abroad• Establish science parks• Provide R&D subsidies• Set up R&D incubators

2) Increase strategic investment in human resources3) Targeted FDI policies4) Protect better intellectual property rights

Insights for Chinese Domestic Firms & Govt

• Limited timespan of data• Unable to carry out time series analysis to evaluate the

MNC R&D effect over time

• Limited in the degree of detail of the data available• e.g. no patent filing data of a type of company of a

specific industry

• Further topics to be investigated• Spillover effects on the academia• Comparison with MNC R&D in India

Limitations of Study

• LI Hongyu1,*; LIU Meiyue2; YU Yang3, “The Spillover Effect of FDI on the

Manufacturing Industry in China” International Business and Management

Vol. 3, No. 1, 2011, pp. 200-208

• Peter J. Buckley, Jeremy Clegg and Chengqi Wang, “Inward FDI and host

country productivity: evidence from China’s electronics industry”

Transnational Corporations, Vol. 15, No. 1 (April 2006)

• National Bureau of Statistics of China

http://www.stats.gov.cn/

References

• Brief Literature Review: impact of FDI/R&D on the host economy

1.) Todo and Miyamoto Study (2006)

MNCs’ R&D activities enhance the extent of knowledge spillovers from foreign to domestic firms.

2.) Yasuyuki Todo, Weiying Z hang, Li-An Zhou Study(2006)

Positive effects of R&D stocks of foreign-owned firms on the productivity of domestic firms.

Trend of MNC R&D in China

• A positive but diminishing number of new entries• Mainly non-MNC firms

Trend of MNC R&D in China Electronics Industry

• Rapidly decreasing growth rate for non-MNC companies

• Relatively steady high growth rate from MNC companies

Trend of MNC R&D in China Electronics Industry

Appendix #1: Development of Electronics Industry in China

• Annual growth rate : Sales generated = 30.9% Profits = 32.7%

FDI Inflow to China by Industry

• Increased flow of FDI into China

Appendix #2: Development of Electronics Industry in China

• Rapid growth of output value

Appendix#3: Development of Electronics Industry in China

• Increasing number of employees• Generally increasing number of RND personnel

Trend of MNC R&D in China’s Electronics Industry

• Continual growth in sales of both MNCs and non-MNCs

Trend of MNC R&D in China’s Electronics Industry

[Econ4354] MNC RnD Impacts

Education

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