The Dragon and the Elephant: Understanding the Development of Innovation Capacity in China and India: Summary of a Conference (2010)

STEP board member Mary Good of the University of Arkansas at Little Rock welcomed participants to the second day of the conference with some observations on the speed of the changes taking place in Asia. Between 1985, when she worked in India as vice president of technology at Allied Signal, and her return there in 1994 as a government official, spectacular changes had occurred which could not have been predicted. Business and governments often have different perspectives on conditions that promote innovation; but one point on which they can agree, and in Asia acted aggressively, is that competition and innovation create paths for prosperity.

Bruce Stokes of the National Journal, who served as the moderator of the first session on multinational companies (MNCs), posed a perennial question: where do MNCs’ interests and nation states’ interests converge and where do they diverge? Is foreign investment in China and India producing results or is it still a bet on the future? Many variables can affect the answers to those questions, but ultimately the perceived self-interests of global firms will play a major role in determining the success of China’s and India’s efforts to develop their economies’ innovation capacity.

James Jarrett, director of global public policy for Intel Corporation and former president of Intel China, Ltd., observed that 80 percent of the firm’s global sales are outside the United States, with 60 percent in Asia. In 2006 the Asian market represented $35.4 billion in sales. Moreover, while conducting R&D in 64 labs worldwide, Intel entered China and India relatively early, in 1985 and 1988, respectively. The scale of R&D operations, however, is vastly different. The company’s investment in China ($4 billion) dwarfs its investment in India ($700 million). In terms of market share, China will have 34 percent of Intel’s global market in 2008 while India’s share will be 11.8 percent. In short, said Jarrett, “In our business you must get China right.”

Intel’s Shanghai software laboratory, established in 1994, continues to adapt Intel designs to China’s demands. The Bangalore Intel laboratory works on advanced semiconductor prototypes such as the tera-scale prototype wafer. The company’s needs for middle managers continue to be filled by U.S. nationals for the most part, but Intel is contributing to the pipeline of local technical talent by

• training schoolteachers in 40-hour courses and using computers with 1.6 million K-12 teachers;

• building active relationships with more than 100 research universities; and

• producing textbooks such as Multi-Core Programming to help build a capability capacity for leading-edge processes.

Jarrett reiterated the point made earlier that another source of talent for trans-Pacific countries is their diasporas, which are being engaged at a distance but also lured home in greater number. “I think you’ll see more and more of that in the future,” Jarrett said.

Intel’s experience in China exhibits one multinational company’s responsiveness to government investment inducements. The company’s chip manufacturing operation is its largest in Asia, and the firm recently broke ground on a large-scale wafer fabrication facility in Dalian that will use 90-mm technology and

begin operations in 2010. Manufacturing in India had been hampered by infrastructural limitations of power supply and an “awkward” incentive structure but now is moving forward.

Asked about key factors in Intel’s decision to locate a major new facility in less-developed Dalian, Jarrett said that the Chinese government had made a decision to diversify industrial growth away from its traditional areas of concentration by a policy combining the restrictions on new facilities in older areas and “world-class” incentives for locating in less developed ones.

Jin Chen of Zhejiang University described how MNCs create links between China and international capital networks. At the end of 2004, foreign direct investment (FDI) in China stood at $562 billion. With the Chinese government positioning itself as a “learning government,” the level of FDI has risen quickly. Scale expansion and R&D growth have been rapid. From 200 R&D centers in 2001 the number more than quadrupled in five years, to 980 centers. MNC operations are still concentrated in Beijing (primarily in IT), Shanghai (chemical, auto and pharmaceuticals), and Shenzhen (telecom), with a second tier in Guangzhou and other cities.

MNC research in China is largely focused on adaptive R&D, with less devoted to basic research. MNCs, according to Chen, are perceived in China to have both positive and negative effects on indigenous technology development. They contribute to broadening and deepening the overall level of technology. But they can establish strong monopolies on certain closely held technologies that crowd out R&D in Chinese firms, and siphon off top talent that might otherwise be available to domestic firms.

Chen expressed his ambivalence about the fact that seven of his eight recent top graduate students were hired by multinationals. Overall, in Chen’s personal judgment, “MNCs have limited positive effects.” Yet movement toward a more collaborative innovation paradigm can shift the balance from a modestly positive to a substantially positive contribution to domestic technological capacity. If MNCs were to deepen their collaboration with local firms, then both the firms and China would benefit.

In the discussion session, Gail Pesyna of the Alfred P. Sloan Foundation sought clarification of China’s and India’s investment incentive policies. Jarrett replied that in India they take the form of cash grants and tax incentives. Chen noted that last year China adopted a new scheme, called “Innovation-oriented Country by 2020,” which includes 60 measures for promoting R&D, including facility set-up, tax incentives and infrastructural investments. Jarrett added that these policies have a new social value emphasis and indigenous development focus. For example, VC investment incentives are geared to domestic markets rather than the global market.

Addressing the balance between proprietary and more open, collaborative work, Jarrett said that the company’s strategy varies from country to country depending on the distribution of technological capability, the host’s intellectual property regime, government requirements, and other factors. In China, Intel is actively pursuing collaborations. An example is its work with Tsinghua University to develop a compiler. In India, on the other hand, “we are doing some very proprietary work.” Jarrett observed that spillover benefits are as much a function of the movement of human capital as of the open or closed nature of corporate research projects. As in the United States, in both China and India there is considerable turnover in information technology fields, with skilled employees leaving to create startups in software and computing. Intel views this not as a loss for the company but rather a natural phenomenon that contributes to ferment in the field.