There has been a lot of recent commentary in the media about the ‘new’ focus in ‘indigenous innovation’ by the Chinese government. This is more a new elaboration of the key Science and Technology 15 year plan published in 2006. Multinational companies here have had some concern that this would mean an uneven playing field, with some restrictions on their access to the market. But multinationals will need to rethink their business model if they are to gain access to lucrative contracts in this rapidly expanding market. The multinational model is increasingly global in its orientation, and although core R&D activity remains close to the corporation’s headquarters, there has been a growing trend in recent years to decentralize R&D functions to emerging regions like China and India, particularly to be close to existing manufacturing operations and to adapt products to local markets.
China has some rather unique features which might suggest that it is developing its own form of capitalism, which some have called state or authoritarian capitalism, in that the state plays a very significant role in controlling many aspects of the economy. State Owned Enterprises, which are often overly bureaucratic organizations continue to be very important, and certain sectors such as energy and telecommunications services continue to be strongly regulated and to a large extent closed to foreign companies. To some extent the state is seeking to allow for a transition period where Chinese companies can exercise a limited form of competition within such closed sectors, before the real global competition begins in earnest. Also the dominant political objective of creating a ‘harmonious society’, influences greatly China’s economic policies.
China is also adopting its position to global integration in relation to its increasing influence in the world economy. Part of its determination to develop its own technology is related to issues such as defence, since it has a long historical memory of being invaded and mistreated by foreign powers. There is little new about the scramble for China’s market: what is new is China’s ability to control access to what is seen by many as a major source of future expansion.
Although multinational companies have expressed concerns about how China’s new rules about intellectual property development may play out, they are probably more concerned about their own ability to compete within the Chinese market for a growing share of what is available. To date such companies have had the market to themselves, and they were in a position to obtain high profit margins and a good level of reward in the form of licence fees and royalty payments for any technology transferred to China. More recently, however, they are experiencing a new form of competition from local companies. In many cases Chinese companies are not very innovative and do not invest very significantly in R&D. They are also focused very strongly on the rapidly expanding middle segment of the market with hundreds of millions of people earning an average of $5,000 a year. Multinationals are being forced to develop less expensive products for this ‘good enough’ market, and this has implications for their very significant investment in R&D. Just at the time, therefore, when China is growing in significance as a key market for the future growth of major corporations, gaining market share in China may prove to be increasingly challenging.