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Research & Development

Bringing R&D to China

Research and development in China is gathering momentum, but key issues such as human resources and intellectual property must be managed effectively

by Evan Thorpe

As China's appetite for high-tech goods grows, more foreign companies are setting up research and development (R&D) centers there. Indeed, by the end of 2007, multinational corporations (MNCs) had established 1,160 research institutions in China, according to the PRC Ministry of Commerce. This demand for technology springs in part from the government sector, but China's consumers and private enterprises are also interested in products and technologies that foreign companies develop. PRC government policy encourages companies, whether domestic or foreign, to engage in R&D in China to boost domestically owned intellectual property (IP). Despite this encouraging and welcoming environment, R&D centers face many of the same problems that most foreign investors face, particularly in the areas of human resource (HR) management and IP protection.

Quick Glance

China's research and development (R&D) spending has been growing about 17 percent annually over the past 12 years.
By the end of 2007, multinational corporations had established 1,160 R&D centers in China.
Human resources and intellectual property protection are the main operational challenges facing R&D centers.

R&D in China: Spending and location

In the past few years, R&D spending in China has increased substantially. In 2005, China spent 1.4 percent of its gross domestic product (GDP) on R&D, considerably less than the United States and Japan, which spent 2.6 percent and 3.2 percent of GDP, respectively. Though it is unclear whether China will reach its goal of 2.5 percent by 2020, the country's R&D spending has been growing about 17 percent annually over the past 12 years and shows few signs of abating.

R&D spending in China jumped nearly 23 percent in 2006 to reach roughly ¥300 billion ($41.4 billion). The bulk of this spending came from private enterprises, followed by PRC government and university spending (see Figure 1). Meanwhile, total state funding of science and technology development, which overlaps with R&D spending, surged in 2006 to its highest level since 1998—¥168.9 billion ($22.4 billion).

Company and university-run R&D operations are primarily concentrated in eastern China, in the first- and second-tier cities that are home to the top dozen or so universities that produce the talent R&D centers need. Only a handful of cities in China can be considered first-tier R&D cities: Beijing; Shanghai; and Guangzhou and Shenzhen, Guangdong. Second-tier R&D cities include Nanjing, Jiangsu; Suzhou, Zhejiang; Xi'an, Shaanxi; and Wuhan, Hubei. In fact, Beijing, Guangdong, and the immediate Yangzi River Delta region (Jiangsu, Shanghai, and Zhejiang) accounted for 52 percent of all R&D spending in China and almost 56 percent of all science and technology funding in 2006.

Foreign R&D emerges

For the most part, foreign companies have been active in the China R&D market for only about 12 years and have historically focused on product development and localization (see box and Figure 2). Most of the handful of R&D centers that conduct basic research did not begin to do so until they had already established strong product development functions.

Companies acknowledge that the decision to introduce R&D functions into China—or to increase their level of sophistication—requires careful consideration. In most cases, a foreign company will locate certain R&D functions in China based, to some extent, on a variety of China-focused business decisions. For instance, if a company already has expertise in a certain product line or technology, it may not make sense to replicate those functions in China. On the other hand, with higher demand for certain technologies in, and the frequent need to adapt products for, the China market, companies may choose to expand their China R&D capabilities to satisfy customer demand.

Once corporate decisionmakers have identified how an R&D center will improve their capabilities in China, they are ready to further assess these centers' potential as platforms for global R&D by asking themselves two key questions. First, which broad, company-wide needs can a China-based R&D facility help to satisfy? Second, what particular strengths can a China-based R&D center bring to a company's global R&D capabilities? The more certain the answers to these questions, the more ready a company is to invest in R&D in China.

Companies with experience in global R&D understand that even in China, where market condtions and the labor pool present new challenges, global R&D standards cannot be compromised because they are critical to R&D competitiveness.

Partnerships

Foreign R&D centers can also help their companies establish relationships with important Chinese partners. Partnerships with universities are valuable to companies' R&D potential. For IP and management reasons, these partnerships are usually contracted on a project-by-project basis, but a single project can generate momentum toward future cooperation. Because many universities have close ties to the government, these projects and relationships between experts and professionals can help lead to government procurement projects. Joint efforts in curriculum development, book publishing, and special programs are key ways through which universities and enterprises can strengthen ties and promote innovation.

Because university resources are limited, foreign companies often contribute training, equipment, and funding to the partnership projects. In addition to building relationships and local ties, companies can use these partnerships to educate potential employees and customers about their products and introduce new products to local markets. Companies should carefully evaluate university capabilities and determine which key academics are leaders in their fields and most suitable to help run cooperative R&D projects. Many top Chinese universities have faculty with significant experience in conducting research jointly with MNCs.

A joint venture (JV) can allow the foreign partner to access the PRC partner's local talent and customer networks. Even wholly foreign-owned enterprises can conduct joint projects with local partners to gain access to local resources.

Domestic and global support

In the current PRC operational climate, many tech companies and manufacturers of advanced products have expanding customer bases with changing needs. In assessing what China-based R&D centers can bring to a company's global R&D capabilities, companies consider the potential for further growth and their current capabilities in China and beyond. Many companies already possess an established global network of R&D centers that supports not only local markets and nearby business units but also subsidiaries and entities elsewhere in the world. Most R&D centers in China serve only in-country customer needs, but some companies have also set up branches of global technology-building networks that have the potential to boost regional growth in Asia. A growing number of companies are allowing their centers in China to work in both capacities.

China's strong domestic talent pool remains one of the most powerful—if not the most powerful—factors drawing foreign R&D investment to the country. Adding to that talent pool's appeal, a significant number of top science and engineering graduate students in US and European universities are originally from the PRC and may be willing to return home to work.

Basic Research

Until recently, few foreign companies conducted basic research in China, but now they are beginning to develop technologies for global use in their China research and development (R&D) centers.

Applied research and product development

Taking existing, established technology and preparing it for the China market is a key function of R&D centers in China. Many companies are building capacity in these areas to expand market share and solidify product recognition.

Product localization

Customers in China have different requirements for high-tech equipment from their counterparts in other countries. Companies must be able to adapt their products accordingly.

Information technology support, customer service, and after-sales services

These types of services are especially important for companies that deliver complex products that require technical support. As Chinese companies expand, they buy large orders of sophisticated industrial goods more frequently and, as a result, often require plentiful, high-quality support provided by a large and able staff.

Supply chain base support

Proximity to suppliers and other partners means that companies can address matters locally and immediately. Locating complementary functions near each other can reduce costs or even provide tax exemptions depending on local taxation requirements.

Proximity to customer base

Locating R&D centers close to the customer base allows companies to respond more quickly to local demands for new or adapted products.

—Evan Thorpe

Bringing cutting-edge technology to China

Finally, since the PRC government wants to attract cutting-edge technologies, such as biotech and nanotech, conducting advanced research in China can be a helpful bargaining chip in gaining incentives and approvals. Though US companies report little pressure from the PRC government to import sophisticated research capabilities, some believe that the PRC government may regard companies that bring technological capabilities to China more favorably. This is particularly critical in light of recent changes to incentive structures created by the implementing regulations of the new Enterprise Income Tax (EIT) Law (see Tax Regime Change), under which companies could lose their high-tech enterprise status and the accompanying preferential tax treatment. Companies may have difficulty obtaining high-tech status if their industry does not fit neatly into the sectors deemed eligible.

Companies must also consider their home country's export controls. Some US companies say that even when they are confident that they can safely export a capability to China (that is, without undue security or IP risk), US export controls sometimes prevent them from doing so.

Top operational challenges

Human resources

HR management is the top challenge facing most foreign companies in China, and R&D centers are no exception. Though Chinese universities graduate thousands of talented R&D recruits each year, only a handful of universities produce this talent, and demand for these workers is outstripping supply. Many foreign-owned R&D centers are growing rapidly and view staff expansion as a necessary ingredient for boosting China R&D capabilities.

Companies engaged in R&D face stiff competition when it comes to hiring. Domestic enterprises, foreign-invested enterprises (FIEs), and the PRC government are the three principal employers vying for China's top graduates. As top foreign and domestic company salary levels converge, factors other than compensation are beginning to determine competitiveness in staffing. Foreign companies offer the global experience and the appeal of prestigious brand names that can sway a recruit's decision—but only if the name is well known in China. Domestic companies, on the other hand, offer potential hires an opportunity to move up the ranks more quickly and could satisfy entrepreneurial ambitions that are increasingly prevalent among Chinese workers. The PRC government, meanwhile, has little to offer that companies do not and is thus at a significant disadvantage in attracting top talent. Top PRC universities, however, are increasingly well-funded and offer top researchers significant prestige and independence in selecting research projects, as well as improving levels of compensation.

In this talent hunt, FIEs are competing most fiercely with each other. Generally, this is a tight race since many of these companies face similar operational, infrastructural, and cost-related constraints and can offer many of the same advantages: competitive compensation, job growth opportunities, and favorable workplace environment and culture.

Foreign companies invest heavily in promoting all three of these areas, but some have found that successful retention can come down to the work environment and company culture, for that is where unique, company-specific advantages lie. Such "soft" advantages may come in the form of special training opportunities, flexible project rotations, and physically comfortable workplaces and state-of-the-art R&D facilities. MNCs working on diverse technologies across sectors find that their operation of multiple business units is a strength that allows them to offer employees opportunities to specialize in diverse areas and develop their careers.

Foreign-owned R&D centers devote significant attention and resources to meeting HR needs in various ways, often by creating positions specifically aimed at outreach and recruiting. Because having a recognizable name is a key selling point in recruiting local staff, companies have sponsored special programs, speaking opportunities, scholarships, seminars, and curriculums aimed at raising the profile of their brand names and product lines. This kind of promotion is particularly important for a company whose name or product is not directed at individual consumers; producers of business-to-business products have to work even harder to raise awareness.

The nature of projects that companies assign to R&D staff is an important element in attracting and retaining employees.

The nature of projects that companies assign to R&D staff is another important element in attracting and retaining employees. Companies that have raised the level of sophistication or prestige of projects undertaken in their China R&D centers say that they have been rewarded by higher retention.

Nonetheless, the intense competition for talent does not abate even after employees are hired. At times, companies face the risk of serial résumé-building, whereby employees move quickly between companies to pad their résumés—a common trend in China across many industries. To prevent job-hopping, some HR professionals believe that rather than entering into fierce employee bidding wars, employers should try to preempt such situations by providing employees with enough reasons to change their minds about leaving, such as opportunities for advancement, stimulating projects, and increasing involvement in the company's future.

IP rights

IP is vital to a company's core competitiveness. Thus, effective IP protection at R&D centers where IP is developed is essential. Though many FIEs have found government-led enforcement initiatives to be somewhat successful, the best starting point for IP protection may be internal self-preparedness. Conducting due diligence ahead of time and establishing internal legal controls, such as writing non-compete clauses into employee contracts, are among the standard array of international best practices for IP protection widely used in China today. But because IP is particularly important to R&D centers, companies must go to additional lengths to safeguard their core competitiveness.

As part of a broader IP protection strategy, some R&D centers aim to instill a strong sense of the importance of IP rights in individual staff

Instituting limited-access policies, such as giving staff access to sensitive information on a need-to-know basis, prevents any staff member from acquiring all the knowledge needed to replicate IP. Physically partitioning different areas within an R&D center and requiring identification checks helps to enforce special clearance rules (see the CBR, January-February 2006, IP Protection Best Practice Tips).

The effective management of IP licensing rights is important for companies that want to maintain control over IP developed in China. Many companies ensure that IP developed by their R&D centers in China is owned by a larger entity, usually a regional office or home office outside of China. This office, often the company's headquarters, will contract the R&D center to complete fixed-term projects on a one-off basis. Doing so allows the company to manage its IP effectively and not unnecessarily expose IP to infringement risk in China. When gaining individual project approval from PRC government entities, such as local science and technology bureaus, it is important to be clear about to whom the resulting IP will be licensed and what the terms of the project in question are. Companies should also be aware that the PRC drive to promote "autonomous innovation" could lead to future requirements that any IP significantly researched in China must be legally owned within China. For example, the EIT Law includes criteria for foreign-owned China entities to legally own core IP rather than have it licensed back to a parent company, per current standard practice.

As part of a broader IP protection strategy, some R&D centers aim to instill a strong sense of the importance of IP rights in individual staff. For instance, IP rights training for new hires educates employees on internal IP management, while exit interviews educate staff moving on to other jobs about how important professionalism and integrity are to success in the high-tech realm and how being branded as an IP rights infringer will irreparably damage one's career.

Standards

Because the government often releases new standards with little notice, companies must be able to react quickly. Government relations teams need to coordinate closely with R&D center staff and trade associations in China and elsewhere before taking a stance on a particular standard so that they may respond appropriately. When given the opportunity to offer comments on standards setting, companies can collaborate with each other and lend their expertise to the PRC government.

US visa application process

As commercial ties between US companies and their JV partners, suppliers, and customers in China have grown closer, the volume of applications for US visas has risen. Likewise, as companies expand their training programs to include more trips to the United States for staff located in China, many companies face considerable difficulty in obtaining timely visa approvals. Since overseas training programs are an important incentive for local hires, retention is more difficult when these programs are reduced in size or duration or even cancelled altogether. Submitting applications early and maintaining communication with consular staff are the two most important steps that companies can take to ensure that Chinese staff receive visas promptly (see the CBR, May-June 2006, Visas: What Your Company Can Do).

A platform for domestic and international growth

As FIEs examine strategies for adjusting more quickly to local market needs, and as China's labor pool for science and technology staff becomes more competitive internationally, an R&D center located in China to serve the domestic market will be a useful ingredient in a strong China presence. And as the environment for basic research becomes more viable in China, companies may also want to consider the country as a location for global technology development. Companies are not only testing China as a growth platform for these functions but are also expanding the foundation for increasingly sophisticated China-based technological capabilities.

Evan Thorpe is manager, Business Advisory Services, at the US-China Business Council in Washington, DC.

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	China Foto Press E-Mail \| Print \| License Research & Development Bringing R&D to China Research and development in China is gathering momentum, but key issues such as human resources and intellectual property must be managed effectively by Evan Thorpe As China's appetite for high-tech goods grows, more foreign companies are setting up research and development (R&D) centers there. Indeed, by the end of 2007, multinational corporations (MNCs) had established 1,160 research institutions in China, according to the PRC Ministry of Commerce. This demand for technology springs in part from the government sector, but China's consumers and private enterprises are also interested in products and technologies that foreign companies develop. PRC government policy encourages companies, whether domestic or foreign, to engage in R&D in China to boost domestically owned intellectual property (IP). Despite this encouraging and welcoming environment, R&D centers face many of the same problems that most foreign investors face, particularly in the areas of human resource (HR) management and IP protection. Quick Glance China's research and development (R&D) spending has been growing about 17 percent annually over the past 12 years. By the end of 2007, multinational corporations had established 1,160 R&D centers in China. Human resources and intellectual property protection are the main operational challenges facing R&D centers. R&D in China: Spending and location In the past few years, R&D spending in China has increased substantially. In 2005, China spent 1.4 percent of its gross domestic product (GDP) on R&D, considerably less than the United States and Japan, which spent 2.6 percent and 3.2 percent of GDP, respectively. Though it is unclear whether China will reach its goal of 2.5 percent by 2020, the country's R&D spending has been growing about 17 percent annually over the past 12 years and shows few signs of abating. R&D spending in China jumped nearly 23 percent in 2006 to reach roughly ¥300 billion ($41.4 billion). The bulk of this spending came from private enterprises, followed by PRC government and university spending (see Figure 1). Meanwhile, total state funding of science and technology development, which overlaps with R&D spending, surged in 2006 to its highest level since 1998—¥168.9 billion ($22.4 billion). Company and university-run R&D operations are primarily concentrated in eastern China, in the first- and second-tier cities that are home to the top dozen or so universities that produce the talent R&D centers need. Only a handful of cities in China can be considered first-tier R&D cities: Beijing; Shanghai; and Guangzhou and Shenzhen, Guangdong. Second-tier R&D cities include Nanjing, Jiangsu; Suzhou, Zhejiang; Xi'an, Shaanxi; and Wuhan, Hubei. In fact, Beijing, Guangdong, and the immediate Yangzi River Delta region (Jiangsu, Shanghai, and Zhejiang) accounted for 52 percent of all R&D spending in China and almost 56 percent of all science and technology funding in 2006. Foreign R&D emerges For the most part, foreign companies have been active in the China R&D market for only about 12 years and have historically focused on product development and localization (see box and Figure 2). Most of the handful of R&D centers that conduct basic research did not begin to do so until they had already established strong product development functions. Companies acknowledge that the decision to introduce R&D functions into China—or to increase their level of sophistication—requires careful consideration. In most cases, a foreign company will locate certain R&D functions in China based, to some extent, on a variety of China-focused business decisions. For instance, if a company already has expertise in a certain product line or technology, it may not make sense to replicate those functions in China. On the other hand, with higher demand for certain technologies in, and the frequent need to adapt products for, the China market, companies may choose to expand their China R&D capabilities to satisfy customer demand. Once corporate decisionmakers have identified how an R&D center will improve their capabilities in China, they are ready to further assess these centers' potential as platforms for global R&D by asking themselves two key questions. First, which broad, company-wide needs can a China-based R&D facility help to satisfy? Second, what particular strengths can a China-based R&D center bring to a company's global R&D capabilities? The more certain the answers to these questions, the more ready a company is to invest in R&D in China. Companies with experience in global R&D understand that even in China, where market condtions and the labor pool present new challenges, global R&D standards cannot be compromised because they are critical to R&D competitiveness. Partnerships Foreign R&D centers can also help their companies establish relationships with important Chinese partners. Partnerships with universities are valuable to companies' R&D potential. For IP and management reasons, these partnerships are usually contracted on a project-by-project basis, but a single project can generate momentum toward future cooperation. Because many universities have close ties to the government, these projects and relationships between experts and professionals can help lead to government procurement projects. Joint efforts in curriculum development, book publishing, and special programs are key ways through which universities and enterprises can strengthen ties and promote innovation. Because university resources are limited, foreign companies often contribute training, equipment, and funding to the partnership projects. In addition to building relationships and local ties, companies can use these partnerships to educate potential employees and customers about their products and introduce new products to local markets. Companies should carefully evaluate university capabilities and determine which key academics are leaders in their fields and most suitable to help run cooperative R&D projects. Many top Chinese universities have faculty with significant experience in conducting research jointly with MNCs. A joint venture (JV) can allow the foreign partner to access the PRC partner's local talent and customer networks. Even wholly foreign-owned enterprises can conduct joint projects with local partners to gain access to local resources. Domestic and global support In the current PRC operational climate, many tech companies and manufacturers of advanced products have expanding customer bases with changing needs. In assessing what China-based R&D centers can bring to a company's global R&D capabilities, companies consider the potential for further growth and their current capabilities in China and beyond. Many companies already possess an established global network of R&D centers that supports not only local markets and nearby business units but also subsidiaries and entities elsewhere in the world. Most R&D centers in China serve only in-country customer needs, but some companies have also set up branches of global technology-building networks that have the potential to boost regional growth in Asia. A growing number of companies are allowing their centers in China to work in both capacities. China's strong domestic talent pool remains one of the most powerful—if not the most powerful—factors drawing foreign R&D investment to the country. Adding to that talent pool's appeal, a significant number of top science and engineering graduate students in US and European universities are originally from the PRC and may be willing to return home to work. Basic Research Until recently, few foreign companies conducted basic research in China, but now they are beginning to develop technologies for global use in their China research and development (R&D) centers. Applied research and product development Taking existing, established technology and preparing it for the China market is a key function of R&D centers in China. Many companies are building capacity in these areas to expand market share and solidify product recognition. Product localization Customers in China have different requirements for high-tech equipment from their counterparts in other countries. Companies must be able to adapt their products accordingly. Information technology support, customer service, and after-sales services These types of services are especially important for companies that deliver complex products that require technical support. As Chinese companies expand, they buy large orders of sophisticated industrial goods more frequently and, as a result, often require plentiful, high-quality support provided by a large and able staff. Supply chain base support Proximity to suppliers and other partners means that companies can address matters locally and immediately. Locating complementary functions near each other can reduce costs or even provide tax exemptions depending on local taxation requirements. Proximity to customer base Locating R&D centers close to the customer base allows companies to respond more quickly to local demands for new or adapted products. —Evan Thorpe Bringing cutting-edge technology to China Finally, since the PRC government wants to attract cutting-edge technologies, such as biotech and nanotech, conducting advanced research in China can be a helpful bargaining chip in gaining incentives and approvals. Though US companies report little pressure from the PRC government to import sophisticated research capabilities, some believe that the PRC government may regard companies that bring technological capabilities to China more favorably. This is particularly critical in light of recent changes to incentive structures created by the implementing regulations of the new Enterprise Income Tax (EIT) Law (see Tax Regime Change), under which companies could lose their high-tech enterprise status and the accompanying preferential tax treatment. Companies may have difficulty obtaining high-tech status if their industry does not fit neatly into the sectors deemed eligible. Companies must also consider their home country's export controls. Some US companies say that even when they are confident that they can safely export a capability to China (that is, without undue security or IP risk), US export controls sometimes prevent them from doing so. Top operational challenges Human resources HR management is the top challenge facing most foreign companies in China, and R&D centers are no exception. Though Chinese universities graduate thousands of talented R&D recruits each year, only a handful of universities produce this talent, and demand for these workers is outstripping supply. Many foreign-owned R&D centers are growing rapidly and view staff expansion as a necessary ingredient for boosting China R&D capabilities. Companies engaged in R&D face stiff competition when it comes to hiring. Domestic enterprises, foreign-invested enterprises (FIEs), and the PRC government are the three principal employers vying for China's top graduates. As top foreign and domestic company salary levels converge, factors other than compensation are beginning to determine competitiveness in staffing. Foreign companies offer the global experience and the appeal of prestigious brand names that can sway a recruit's decision—but only if the name is well known in China. Domestic companies, on the other hand, offer potential hires an opportunity to move up the ranks more quickly and could satisfy entrepreneurial ambitions that are increasingly prevalent among Chinese workers. The PRC government, meanwhile, has little to offer that companies do not and is thus at a significant disadvantage in attracting top talent. Top PRC universities, however, are increasingly well-funded and offer top researchers significant prestige and independence in selecting research projects, as well as improving levels of compensation. In this talent hunt, FIEs are competing most fiercely with each other. Generally, this is a tight race since many of these companies face similar operational, infrastructural, and cost-related constraints and can offer many of the same advantages: competitive compensation, job growth opportunities, and favorable workplace environment and culture. Foreign companies invest heavily in promoting all three of these areas, but some have found that successful retention can come down to the work environment and company culture, for that is where unique, company-specific advantages lie. Such "soft" advantages may come in the form of special training opportunities, flexible project rotations, and physically comfortable workplaces and state-of-the-art R&D facilities. MNCs working on diverse technologies across sectors find that their operation of multiple business units is a strength that allows them to offer employees opportunities to specialize in diverse areas and develop their careers. Foreign-owned R&D centers devote significant attention and resources to meeting HR needs in various ways, often by creating positions specifically aimed at outreach and recruiting. Because having a recognizable name is a key selling point in recruiting local staff, companies have sponsored special programs, speaking opportunities, scholarships, seminars, and curriculums aimed at raising the profile of their brand names and product lines. This kind of promotion is particularly important for a company whose name or product is not directed at individual consumers; producers of business-to-business products have to work even harder to raise awareness. The nature of projects that companies assign to R&D staff is an important element in attracting and retaining employees. The nature of projects that companies assign to R&D staff is another important element in attracting and retaining employees. Companies that have raised the level of sophistication or prestige of projects undertaken in their China R&D centers say that they have been rewarded by higher retention. Nonetheless, the intense competition for talent does not abate even after employees are hired. At times, companies face the risk of serial résumé-building, whereby employees move quickly between companies to pad their résumés—a common trend in China across many industries. To prevent job-hopping, some HR professionals believe that rather than entering into fierce employee bidding wars, employers should try to preempt such situations by providing employees with enough reasons to change their minds about leaving, such as opportunities for advancement, stimulating projects, and increasing involvement in the company's future. IP rights IP is vital to a company's core competitiveness. Thus, effective IP protection at R&D centers where IP is developed is essential. Though many FIEs have found government-led enforcement initiatives to be somewhat successful, the best starting point for IP protection may be internal self-preparedness. Conducting due diligence ahead of time and establishing internal legal controls, such as writing non-compete clauses into employee contracts, are among the standard array of international best practices for IP protection widely used in China today. But because IP is particularly important to R&D centers, companies must go to additional lengths to safeguard their core competitiveness. As part of a broader IP protection strategy, some R&D centers aim to instill a strong sense of the importance of IP rights in individual staff Instituting limited-access policies, such as giving staff access to sensitive information on a need-to-know basis, prevents any staff member from acquiring all the knowledge needed to replicate IP. Physically partitioning different areas within an R&D center and requiring identification checks helps to enforce special clearance rules (see the CBR, January-February 2006, IP Protection Best Practice Tips). The effective management of IP licensing rights is important for companies that want to maintain control over IP developed in China. Many companies ensure that IP developed by their R&D centers in China is owned by a larger entity, usually a regional office or home office outside of China. This office, often the company's headquarters, will contract the R&D center to complete fixed-term projects on a one-off basis. Doing so allows the company to manage its IP effectively and not unnecessarily expose IP to infringement risk in China. When gaining individual project approval from PRC government entities, such as local science and technology bureaus, it is important to be clear about to whom the resulting IP will be licensed and what the terms of the project in question are. Companies should also be aware that the PRC drive to promote "autonomous innovation" could lead to future requirements that any IP significantly researched in China must be legally owned within China. For example, the EIT Law includes criteria for foreign-owned China entities to legally own core IP rather than have it licensed back to a parent company, per current standard practice. As part of a broader IP protection strategy, some R&D centers aim to instill a strong sense of the importance of IP rights in individual staff. For instance, IP rights training for new hires educates employees on internal IP management, while exit interviews educate staff moving on to other jobs about how important professionalism and integrity are to success in the high-tech realm and how being branded as an IP rights infringer will irreparably damage one's career. Standards Because the government often releases new standards with little notice, companies must be able to react quickly. Government relations teams need to coordinate closely with R&D center staff and trade associations in China and elsewhere before taking a stance on a particular standard so that they may respond appropriately. When given the opportunity to offer comments on standards setting, companies can collaborate with each other and lend their expertise to the PRC government. US visa application process As commercial ties between US companies and their JV partners, suppliers, and customers in China have grown closer, the volume of applications for US visas has risen. Likewise, as companies expand their training programs to include more trips to the United States for staff located in China, many companies face considerable difficulty in obtaining timely visa approvals. Since overseas training programs are an important incentive for local hires, retention is more difficult when these programs are reduced in size or duration or even cancelled altogether. Submitting applications early and maintaining communication with consular staff are the two most important steps that companies can take to ensure that Chinese staff receive visas promptly (see the CBR, May-June 2006, Visas: What Your Company Can Do). A platform for domestic and international growth As FIEs examine strategies for adjusting more quickly to local market needs, and as China's labor pool for science and technology staff becomes more competitive internationally, an R&D center located in China to serve the domestic market will be a useful ingredient in a strong China presence. And as the environment for basic research becomes more viable in China, companies may also want to consider the country as a location for global technology development. Companies are not only testing China as a growth platform for these functions but are also expanding the foundation for increasingly sophisticated China-based technological capabilities. Evan Thorpe is manager, Business Advisory Services, at the US-China Business Council in Washington, DC. Further Reading Art of the State: Acquiring Chinese Technology Cultural Dimensions of HR China's 2006 IPR Review Click here for copyright permissions Copyright 2008 US-China Business Council Top of Page Table of Contents
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