Recruiting in China

Kathy Chen
Jason Dean
The Wall Street Journal, 14 March 2006

BEIJING -- Multinational companies, drawn by a huge and inexpensive talent pool, are pouring money into research and development in China -- a trend that promises to broaden the country's huge role in the global economy.

The total number of foreign-invested R&D centers in the country has surged to about 750 from 200 four years ago, according to China's Ministry of Commerce. And in a survey of multinationals published in September by the United Nations Conference on Trade and Development, China was by far the most frequently cited location for R&D expansion, well ahead of the U.S. and third-place India, China's chief rival as an emerging innovator.

Still, China's growth as a global R&D hub faces some constraints. Among them is the country's weak protection of patents and other intellectual-property rights. That has encouraged some foreign companies, fearful of risking their trade secrets, to keep more cutting-edge research out of China, analysts say. But others have rushed to expand the scope of their development efforts here.

Whereas R&D investment in China initially focused on adapting existing products and technologies to the Chinese market, companies such as Procter & Gamble Co., Motorola Inc. and International Business Machines Corp., among many others, have been investing to expand their Chinese R&D operations to develop products for the global market.

P&G opened a research arm in China in 1988, consisting of two dozen employees concerned mainly with studying Chinese consumers' laundry habits and oral hygiene. Today, the U.S. consumer-products giant runs five R&D facilities in China with about 300 researchers who work on innovations for everything from Crest toothpaste to Oil of Olay face cream.

The Chinese facilities have been a lead site for developing a new grease-fighting formula of Tide laundry detergent that sells in Asia, Eastern Europe and Latin America. At one facility in Beijing's university district, researchers use computer modeling to tinker with other promising formulas that chemists in white lab coats and protective glasses then mix and test. "We are developing capabilities in China that we can use globally," says Dick Carpenter, director of P&G Technology (Beijing) Ltd.

Giving impetus to the R&D expansion in sectors from biotechnology to pharmaceuticals to semiconductors is China's government. Having enlisted foreign investment to transform China into a manufacturing powerhouse over the past few decades, Beijing now is mounting a campaign to strengthen domestic innovation that could help push the country into more advanced niches of the global economy.

In his annual report at the National People's Congress in Beijing, which ends tomorrow, Chinese Premier Wen Jiabao said the central government will increase spending on science and technology by nearly 20% this year. "China has entered a stage in its history where it must increase its reliance on scientific and technological advances and innovation to drive social and economic development," he said.

China's State Council, or cabinet, recently said the country would seek to boost R&D investment to 2% of gross domestic product in 2010 and 2.5% by 2020. At a news conference Friday, senior officials outlined tax breaks and other tools they plan to use to meet that target. Last year, total R&D spending in China -- not including foreign investment -- reached $29.4 billion, rising steadily from $11.13 billion in 2000, according to the government.

China faces numerous obstacles to joining the ranks of the world's innovation leaders -- beyond its weak intellectual-property protections. Research spending is still small compared with that of developed countries; the U.S., for example, spends about 2.7% of GDP on R&D, compared with 1.3% of GDP in China last year. And much of what is spent in China still comes from foreign companies: Less than a quarter of Chinese midsize and large enterprises had their own science and technology institutions in 2004. Of China's high-tech exports, valued at $218.3 billion last year, nearly 90% was produced by foreign-invested companies, according to the Ministry of Commerce.

Still, the R&D trend is bolstering China's position relative to other developing countries, particularly India, which is also seeking to build its innovation abilities. India's total domestic spending on R&D rose an estimated 9.7% to $4.9 billion, or 0.77% of GDP, in the fiscal year ended March 2005, according to India's Ministry of Science and Technology.

India is also trying to build R&D, "but the scale of investment is not much" because of budgetary constraints, says V.S. Ramamurthy, a top official at the ministry. Foreign investment in Indian R&D has also lagged behind that of China, he says. And while Mr. Ramamurthy argues that the amount of investment isn't the only way to measure R&D success, "it is a concern for us."

Zhang Jun, director of the China Center for Economic Studies at Shanghai's Fudan University, says that given time, "China's advantages in this area will become more obvious...and its attractiveness will increasingly become stronger than India's."

Among China's draws, he says: the relatively low cost of hiring engineers and researchers; a huge talent pool, including five million university graduates annually (one-fifth majoring in science or engineering); and China's own huge market of 1.3 billion consumers. China offers its students abroad incentives to return once they graduate, including generous research grants and chances to run their own R&D projects.

One early returnee is Enge Wang. Mr. Wang, who had worked as a research associate at the University of Houston, decided to return to Beijing to conduct research under a Chinese Academy of Sciences program in 1995. At the time, he says, his U.S. colleagues and friends questioned his decision, but he says he is glad he made the move. Today, Mr. Wang is director of the Institute of Physics under the academy, one of China's top research organizations, which is engaged in several R&D cooperative ventures with foreign companies.

China's "research funding is getting much better," Mr. Wang says, and as a result, overseas Chinese are flocking back from top U.S. institutions like Harvard University and Lawrence Berkeley National Laboratory. Talented returnees can secure enough backing "to build up their own lab and extend their research in one direction for 10 years," he says. "It's hard to find such conditions elsewhere."

"There's been a paradigm shift among foreign companies in China," says Chen Zhu, a Chinese Academy of Sciences vice president. "Now, more foreign companies realize

China is not just a market but a country with huge amounts of talent."

Motorola, which began investing in low-level R&D in China in 1993, now has 16 R&D offices in five Chinese cities, with an accumulated investment of about $500 million. The U.S. company has more than 1,800 Chinese engineers, and the number is expected to surpass 2,000 this year. They have recently begun developing new phones and other products for sale not only in China, but also overseas, executives say.

One phone developed in China, the A780, lets users write on the screen with just a finger, rather than a stylus. It's now available in the U.S. and Europe. Another phone that can scan contact information from business cards using a built-in camera and enter it into a contact database is expected to be marketed in the U.S. "China is moving from the manufacturing center into advanced R&D," says Ching Chuang, who heads Motorola's Chinese R&D operations.

Microsoft Corp.'s basic-research lab in Beijing was only its second outside the U.S. when it opened in 1998. That China lab now employs about 200 full-time scientists, and the software giant expects its total R&D headcount in China to double in this year to about 800 researchers.

At IBM's research lab in Beijing, Chinese scientists have led the development of several technologies now being used abroad. Among them: "voice morphing" software that can convert typescript or a recorded voice into another voice. "Our R&D now has a global mission," says Thomas S. Li, director of IBM China Research Lab.

At the state-run Institute of Computing Technology, engineers are tackling one of technology's tougher challenges: designing a computer microprocessor. Though still many years behind industry leaders like Intel Corp., the institute last year unveiled its second-generation microprocessor, with about the same computing power as mainstream chips in the late 1990s. This year, it plans to finish work on a third-generation chip that could narrow the gap.

China is also emerging as an R&D force in such sectors as nanotechnology, biotech and genetically modified crops. It was the first country to establish a full rice genome database, which has helped Chinese scientists develop hardier and higher-yielding strains of the staple cereal.

Swiss pharmaceuticals companies Novartis AG and Debiopharm SA have teamed up with the Shanghai Institute of Materia Medica under the Chinese Academy of Sciences to conduct research into traditional Chinese medicines to look for treatments for malaria and Alzheimer's disease. "This last decade, the progress we have seen in China's scientific research sector is phenomenal," says Ju Li-ya, director of Debiopharm's China department.