Archives October 2006

China’s Spending on Research and Development Growing Faster than U.S.

While the United States still has a bigger share of the global R&D market, second-ranked China is gaining ground.

U.S. companies are falling behind on research-and-development spending, while their Chinese counterparts have upped their investments in recent years, according to a new report.

The study, conducted by R&D magazine and Battelle, a Columbus, Ohio-based research firm, could spell trouble for small businesses that benefit from local R&D activity.

This year, the United States is responsible for 32.4 percent of global R&D, but that number is down slightly from 32.7 percent in 2005, and is expected to drop to 31.9 percent in 2007.

China ranks second for most dollars spent, and while it’s only responsible for 13.4 percent of the world’s R&D, Battelle projects that number will rise to 14.8 percent in 2007. The percent changes may be small, but on a global scale, they translate into large figures — R&D magazine reports that global spending on R&D topped $1 trillion in 2006.

“There still is a considerable gap, but it’s closing,” Jules Duga, a senior Battelle research scientist and co-author of the report, said in a statement.

Chinese growth has been fueled by the liberalization of Asian economies and the ongoing development of a highly educated, technology-oriented population, according to Battelle.

The report explains the results in terms of an evolution in international competition: After the global arms race subsided, focus shifted to a “hands race” for lower-cost manual labor. Now shifting once again, the world is entering a “head and brains race” for technological advancement.

Falling behind in the “race” could have a negative impact on small businesses in the United States. Earlier research has shown that small-business formation and growth is directly linked to local R&D.

A 2002 study published by the Small Business Administration showed that communities with larger amounts of university R&D activity are home to more start-ups, and those companies significantly benefit from R&D during their early stages of growth.

This is due in large part to a “spillover effect” of knowledge and technology to the surrounding area.

The SBA research found that there is generally a two-year lag between the year of R&D expenditure and the spike in the launch and growth of new firms, during which the spillover takes place. That means that universities, government laboratories, and corporations need to consider changing trends of today in order to protect the vitality of small businesses in the future, according to the SBA

“These challenges can be accommodated only by long-term strategic investment and will,” Duga said.

Microsoft expands R&D team in China

SHANGHAI, China — Microsoft is planning to boost its R&D division in China by hiring 500 new engineers.

The recruits will join a team that has doubled in the last year to about 1,200. Within three to five years, Microsoft plans to increase its staff to 3,000 workers and invest $100 million in an effort to make China one of its core R&D bases.

The expanded staff will focus on mobile communications and embedded systems, Internet applications and services, digital entertainment and servers. Everything from basic research to product development will be conducted here in cooperation with local companies.

Yaqing Zhang, president of Microsoft’s R&D group in China acknowledged that many Chinese engineers are still inexperienced, especially in managerial ability. Hence, half of the new recruits will come from overseas or from within the electronics industry, instead of from China’s growing pool of job-seeking graduates.

China-ASEAN FTA necessary and beneficial

Upon entering the 21st century, the Chinese Government made timely diplomatic-strategy re-adjustments and started to push for better relations with its neighbouring countries, seeking mutual trust politically and co-prosperity economically.

As part of the effort, the process of bringing about a China-ASEAN (Association of Southeast Asian Nations) Free Trade Area (FTA) is being driven ahead.

As an arrangement for mutual benefits, the bidding for the FTA is powering the all-around economic co-operation between China and ASEAN that, in turn, works as a stabilizing factor for the region.

Since the 1990s, the integration of regional economies has had strong momentum a hallmark of accelerated economic globalization. Regional economic organizations such as the European Union (EU) and the North American Free Trade Area are acquiring increasingly important positions in the world economy. On the other hand, free trade agreements, those signed between developed countries in particular, are posing a serious challenge to both China and ASEAN because the preferential tariff rates granted to each other by free trade agreement members erode the economic and trade advantages enjoyed by developing nations.

China joined the World Trade Organization (WTO) in December 2001 after more than a decade of painstaking negotiations. As a result, the focus of the country’s foreign trade and economic strategy began to shift to regional economic co-operation.

China’s WTO membership means that the country’s economic development will become increasingly responsive to the world economy.

At the moment, regional economic integration is picking up speed and China would risk being marginalized if it did not join this process.

If China failed to embrace regional integration, it would find its global competitiveness significantly diminished.

Fortunately, involvement in regional economic co-operation constitutes a new focus of the nation’s overseas economic strategy.

In the meantime, the economies of the ASEAN members started recovering in 1999 from the ravages of the 1997 Southeast Asian financial crisis, which dragged on the once fast growing economies of the member states. Coincidentally, while ASEAN rose out of economic stagnation, the Chinese economy entered a phase of high-speed development.

Doubtless, Chinese demand helped facilitate their economic growth. In light of that, the nature of ASEAN’s economic recovery recommended a strengthening of relations with China.

It then became obvious that pursuing a China-ASEAN FTA was a wise strategic option beneficial to both sides.

In November 2002, therefore, the Chinese and ASEAN leaders signed the Framework Agreement on Comprehensive Economic Co-operation between China and ASEAN and decided that a China-ASEAN FTA would be set up in 10 years. The process of establishing the China-ASEAN FTA was thus set in motion.

Starting on January 1, 2004, the two parties began implementing an Early Harvest Plan (EHP), cutting tariffs on more than 500 products, as part of the effort to facilitate the birth of the FTA.

The Chinese and ASEAN economies complement one another as shown by the results of the EHP. ASEAN’s tropical fruits and China’s apples, pears, cabbages and potatoes are competitive respectively. The China-ASEAN FTA plan has already produced good initial results.

At the Eighth China-ASEAN Summit convened on November 29, 2004 in Vientiane, capital of Laos, the two parties signed a package of agreements on trade in goods and dispute settlement, laying down foundations for standardizing tariff cutting and resolving disputes.

Starting from July 20, 2005, China and ASEAN began to cut tariffs on more than 7,000 products, which marked the coming of the phase of substantial tariff reduction between China and ASEAN in the run-up to the establishment of the FTA.

The Framework Agreement on Comprehensive Economic Co-operation between China and ASEAN has helped advance bilateral trade, with the China-ASEAN trade volume crossing the threshold of US$100 billion for the first time in 2004 and hitting US$130.37 billion the next year.

In addition, the two sides have been co-operating closely in direct investment, services and technology, which has also yielded significant results.

From the point of view of regional economic integration, the future Asian economic integration should be based on a more extensive and more economically powerful regional co-operative entity, of which the China-ASEAN FTA is a vitally important component.

Once founded, China-ASEAN FTA will be the largest FTA in Asia, the most populous FTA in the world and the biggest FTA in the developing world. The China-ASEAN FTA is expected to accelerate the trend of regional integration in Asia and, in turn, will have positive impacts on the world economy.

The author is a researcher with the Economic Research Institute under the Ministry of Commerce.

HONG KONG — The elusive China Dream is fast becoming reality for many US companies.

US corporate profits in China passed $2 billion the first six months of 2006, up more than 50% from the first half of last year, according to the US Bureau of Economic Analysis. US companies are on pace to earn more in China this year than they earned there during the entire 1990s, notes Joseph Quinlan, chief market strategist at Bank of America.

The government numbers are consistent with private surveys: 81% of companies belonging to the US-China Business Council, a lobbying group, reported that their China operations were profitable. More than half said profitability in China matched or beat their worldwide profit margins, according to a recent council survey.

In 1999, the US State Department found that just 57% of US firms were profitable in China.

Equipment manufacturer Caterpillar cited strong growth in China, among other things, last week when it reported a 21% increase in third-quarter earnings. Like most US companies, Caterpillar doesn’t report China revenue and earnings separately and won’t talk about them in any detail.

But a telling sign of China’s importance to the company: Over the past 2.5 years, Caterpillar has doubled its China workforce to 5,000, says Jim Dugan, the company’s spokesman in Beijing.

“Just about any place you go in China, there are road and railroad and construction and energy projects,” Dugan says. “Those are all fields where we play ball.”

‘Business is good’

Starbucks, which already operates more than 190 stores in 19 Chinese cities, doesn’t break out its financial performance in China. But spokesman Eden Woon says, “Business is good. We are accelerating our growth.”

Not all successful US companies in China are household names: Greif, a Delaware, Ohio-based maker of industrial packaging, says profits are strong and growing in China, a market it entered five years ago when it acquired a competitor already operating there.

For centuries, Western businesses have cast covetous eyes at China, a dream market with the world’s biggest population, now 1.3 billion. And it’s virtually untouched by modern marketing. But their visions of profits, dating back to Marco Polo and before, usually came to nothing. They’ve been dashed by war, political turmoil, corruption, bureaucracy and grinding rural poverty.

“Time and again,” journalist Joe Studwell wrote in his 2002 book, The China Dream, “China has failed to fulfill the promise that foreigners ascribe to her.”

But now, China’s economy, which began opening to foreign investment and trade in the late 1970s, is booming, expanding at about 10% a year.

Living standards have improved in urban centers such as Beijing, Shanghai and Shenzhen, creating a middle class — and opportunities for US firms from Starbucks to General Motors.

From 1999 to 2004, according to statistics compiled by the American Chambers of Commerce in Beijing and Shanghai, the number of broadband lines rose to 31.7 million from 2.2 million.

Automobile ownership rose to 22 per thousand Chinese from one per thousand. Cellphones surged to 111 per thousand Chinese from three per thousand.

Learning how to do business

China’s entry into the World Trade Organization in 2001 made it easier for foreign companies to operate there. The WTO deal required China in 2004 to start letting foreign firms distribute their goods without first entering into alliances with state-owned Chinese partners, which often siphoned profits and stole technology. These days, more US companies are going it alone profitably without Chinese partners. The percentage of American Chamber members operating as joint ventures in China slid from 78% in 1999 to 27% in 2005.

US companies have learned how to do business in China. “Companies have gained experience from the early years,” says Robert Poole, vice president of China operations at the US-China Business Council. “They trained people, established management systems, built reputations for their products.”

US firms still face problems in China. Good help is hard to find. Theft of intellectual property is rampant. Competition is fierce as young Chinese companies try to take on more-established Western firms. Greif, for instance, reckons it has 400 competitors in China. But for now the profits are rolling in, and US companies are confident about the future: 97% told the US-China Business Council that they were optimistic about their prospects in China over the next five years.

“When the economy is growing this fast, profits will increase,” says Studwell, founder of the China Economic Quarterly. “At the same time, foreign firms have learned hugely from their mistakes of the 1990s.”

Courtesy of USA TODAY