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Yifei Sun Assistant Professor Department of Geography California State University Northridge

Over-concentration of Foreign R&D in Beijing and Shanghai in China and Implications for Second Tier Cities. Yifei Sun Assistant Professor Department of Geography California State University Northridge May 28-29, 2005 Acknowledgement:

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Yifei Sun Assistant Professor Department of Geography California State University Northridge

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  1. Over-concentration of Foreign R&D in Beijing and Shanghai in China and Implications for Second Tier Cities Yifei Sun Assistant Professor Department of Geography California State University Northridge May 28-29, 2005 Acknowledgement: Support from the National Science Foundation is gratefully appreciated! Also thank many MNC R&D Directors/Managers for sharing their insights with me

  2. Globalization of MNC R&D: Observations • Increasing globalization of R&D • Traditionally, developed countries are the major origins and destinations • Recently, China and India have become very attractive locations • Growing Localization • China: Beijing and Shanghai • Von Zedtwitz (2004), 199 foreign R&D establishments • Beijing:78 • Shanghai: 61 • Together: 139 or 69.8%

  3. Research Questions • Why are foreign R&D establishments so concentrated in these two cities? • What are the implications for second tier cities in China in competition for foreign R&D

  4. Explaining Locations of Foreign R&D • Rational choice model • Internal factors • External factors

  5. Over-concentration in Beijing and Shanghai? City Top100 U MOE U Col. Students Beijing 19 (19%) 22 (30.1%) 212984 (5.2%) Shanghai 8 (8%) 8 (11.0%) 165129 (4.0%) City R&D Ins. KeyLabs Scientists Beijing 231 (5.7%) 97 (24.0%) 35506 (16.2%) Shanghai 156 (3.9%) 32 (7.9%) 13450 (7.0%) City HT Emp (000) HT Output (BY) HT Exports (M$) Beijing 403 (11.6%) 148 (11.4%) 2877 (8.7%) Shanghai 109 (3.1%) 94 (7.3%) 3010 (9.1%)

  6. Foreign R&D in USA

  7. Alternative Explanation • Imitating behavioral model • Following others • Stochastic • Uncertainty • Information shortage and inaccurate

  8. Developing Countries and Uncertainties • Developing countries • Under-developed market • Shortage of quality information • Intellectual property right protection • Uncertainties – risks • Choosing a cautious approach: • Start with small, peripheral activities: service, customization (Nortel Network) • Research vs. development (Lucent Technologies) • Seeking help from local governments • Finding the safest location • Following the leaders

  9. Location Decision with Uncertainty: Choosing the Safest Location “Unilever was already in Shanghai in the 1930s and it liked Shanghai: it is the mostdeveloped commercial city in China; it leads the consumption fashion in China; it has a relatively friendly business environment; it also has a large pool of high-quality labors in China. (That’s why) our R&D chose to locate in Shanghai. Broadly speaking, Shanghai and Beijing are the two only locations where people are conducting high-quality research: they have the highestconcentration of high-quality labors and universities. They also have research tradition. Finally, our headquarters is located here, and many facilities could be shared with our R&D facilities.” - Interviews with Director, Unilever China Research Center

  10. Following the Leaders • “Since many MNCs have established similar R&D centers in those two major cities, the market is already mature. More foreign enterprises are entering such markets. Some of them do not even know the environments well, but still choose to establish labs there simply because many others have done so. If so many are there, there must be something good about them. As such, the markets in the 1st tier cities become overcrowded.” • Interview with a Director of a major foreign R&D Center in Nanjing

  11. Advantages of Second Tier Cities • Availability of skilled labors • Lower operation costs • Lower labor costs and mobility • More government attention

  12. Advantages of Second Tier Cities I: Availability of Quality Labors • Presence of large pool of skilled labors • Universities (Nanjing) • 32 colleges and universities, • 22 provide BA and above degrees. • 10 among China’s top100 u. • 8 included in China’s ‘211’ program • R&D Institutes • among the 305 state Key Labs and Engineering Centers, Beijing and Shanghai: 129 • Nanjing (17), Wuhan (19), Chengdu (11), Hangzhou (11), and Xi’an (10) • High-tech industries • High-tech ents (2002): 28338 (China), Beijing (9567), Tianjin (1835), Xi’an (2092), Shengyang (1333), Dalian (951) • FDI: Shanghai: US$3.6 b or 7.9%, Suzhou ($2.8 b or 6.2%), Tianjin ($2.5 b or 5.5%), and Guangzhou ($2.7 B or 5.9%), Beijing (($2.1 b or 4.5%).

  13. Advantages of Second Tier Cities II: Lower Operation Costs • Lower Operation Costs • Cost is an important consideration of MNCs • However, the factor is missing in subnational discussion • Housing: Shanghai (6,627 yuan/m2) and Beijing (5,052 yaun/m2) Wuhan (2,520 yuan/m2).

  14. Advantages of Second Tier Cities III: Labor Costs and Mobility • Labor cost: Shanghai per capita income (27,406 yuan) in 2004. Wuhan or Chengdu: 1/3 of Shanghai. In Nanjing, 60% lower • Labor mobility and motivation: 8% (Von Zedtiwitz) - 20% (Fortune on Lucent Technologies)

  15. Labor Costs I -Interview with a R&D manager in a Japanese Company in Shanghai “The living cost in Shanghai is pretty expensive. I worked at Thailand from 2000 to 2002. Compared with Thailand, the living cost here at Shanghai is three time of that at Bangkok in Thailand. I though it would be very cheap in Shanghai. It is not the case at all, particularly in the Hongqiao (Gubei) area.”

  16. Labor Costs II- Interview with a R&D manager from a Foreign R&D Center in Nanjing • “We did not consider Beijing and Shanghai because we found that working forces in these two cities are too expensive and our main cost here is human resource. Human resource is the most important factor… The labor cost difference between Nanjing and Shanghai, I would say is about 30 to 50 percent. It is a huge difference!”

  17. Labor Mobility I -Interview with a R&D Director from a major Chinese TeleCom company “Nanjing people are very simple and hard working. Generally speaking, the regional culture in Nanjing is relatively conservative and people are not as open as those in Shanghai. It is pretty clear in Shanghai and Beijing people keep jumping from enterprise to another, though we want to keep our development team relatively stable…How to reduce the mobility rate is a headache for those managers. As such, those managers experience much higher pressure in retaining their team compared to those in Nanjing… The mobility rate in Shanghai and Beijing is about twice of that in Nanjing. The average mobility rate is about 6-8%, where it is about 3-4% in Nanjing and as high as 9 or10% in Shanghai and Beijing.”

  18. Labor Mobility II -Interview with aChief engineer in a Taiwanese R&D Center in Nanjing “Beijing and Shanghai are different. Shanghai is the financial center and Beijing is the political center. ..Maybe such cities are too big and costs are very high for R&D operations. Also it is possible that life tempo is too fast for engineers. Engineers have their own unique identity: relatively they like quiet places and a more intellectual environment …From the perspective of individual workers, Nanjing is better for R&D. None of my classmates in Shanghai are doing R&D: they are either working on business, finance and others. Some have their own businesses. I feel that Nanjing is better for R&D. We will expand our R&D facility in Nanjing and the new R&D center is under construction in the west Nanjing.”

  19. Labor III – Interview with a R&D Director in Nanjing “People are interacting with the social environment and the local context has strong impacts on personal behaviors. For example, a lot more people in Nanjing are willing to work overtime than those in Shanghai. If Nanjing has three people willing to work over time, Shanghai may just have two people willing to do so. In Nanjing, people volunteer to work overtime while many in Shanghai are persuaded to work overtime by their supervisors.”

  20. Advantages of Second Tier Cities IV: More Eager Local Government • “Shanghai and Beijing already have many MNCs establish R&D centers there, and they do not care so much any more. Their support and preferential policies will not be as attractive as those from the 2nd tier cities.” – Interview with a R&D Director at Nanjing • Intel: Chengdu and Shanghai

  21. Weaknesses of Second Tier Cities • Image: less developed – imagined • Infrastructure: international flights • Attracting of international talents (management) and non-local talents

  22. Implications for Second Tier Cities • Win the trust of MNCs • Image building • what is important is not just who you are, perhaps more important is what other people think who you are • Building a business friendly environment: • be friendly to current MNCs, as well as domestic companies • Improve the efficiency of government operations • Win the attention of talents • Improve urban planning and construction, Urban amenities

  23. Implications for MNCs • Broaden their horizons in looking for suitable sites for R&D facilities in China, as many cities in China have advantages in comparison to Beijing and Shanghai • Get attention from top city officials

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