Developed industrialized nations such as the United States, Germany and Japan have all experienced a transition from imitation-based manufacturing to independent innovation, a process that is rapidly unfolding in China. Indian newspaper Hindustan Times reported on December 5, 2012 that China is becoming the world's most dynamic research and development (R&D) base with an encouraging quantity of patent applications in the United States and Europe. Also, multinationals have set up an exploding number of R&D centers in China, which have contributed to the country's growing intellectual prowess.

Research sites sprouting up

Newspapers have recently been filled with reports on multinationals' establishment of R&D centers and expansion of such capacities in China. For instance, U.S.-based General Motors has inaugurated the second phase of its Advanced Technical Center, which includes 62 test labs and nine research labs. In turn, German automaker BMW has announced it will drastically enhance its R&D capacity in China by deploying another 300 research scientists in the country. Danish headset manufacturer Jabra has launched a new R&D center in Xiamen, a major city along China's southeast coast. Foreign companies invested 104.8 billion yuan ($16.9 billion) in R&D in China in 2010, 10 times the amount a decade ago.

U.S.-based PepsiCo Inc.'s inauguration of its first R&D center in China, the company's largest such facility outside the United States, in mid-November 2012 also sparked a media frenzy. British newspaper Financial Times covered the news with an article headlined, "China Offers a Taste of R&D to Come." The article said, "Fancy some purple sweet potato oatmeal or hot-and-sour-fish-soup-flavored potato chips? For multinational companies such as PepsiCo, which recently opened its largest research and development center outside the United States in Shanghai, this is the taste of R&D to come."

German chemicals company BASF now operates four R&D sites in China, covering fields such as auto making, construction, packaging, textiles, leather materials, paint, electronics and papermaking. On November 6, 2012 BASF opened a new R&D center in Shanghai's Pudong District, which, coupled with its well-established Asian technology center and polyurethane research center, constitutes the company's R&D hub in the Asia-Pacific region. The new facility, which integrates production, business and administrative departments, has become one of BASF's largest multifunctional bases around the world.

Exploring Chinese talent and market

Multinationals are eager to create R&D centers in China for two main reasons: One is to capitalize on the country's huge research talent pool and premium infrastructure while the other is to expand markets in the Asia-Pacific region at large.

BASF Vice President Stefan Dreher told People's Daily that the company employs about 10,000 R&D personnel across the world and is trying to locate to Asia a quarter of them, most of whom will be based in China. Dreher said the country is BASF's largest market in the Asia-Pacific region and closely connected with other regional players. Given its strong potential for future growth, China will see a further rise in its global and regional importance. Shanghai, one of the most important industrial centers in China, hosts the Asia-Pacific offices and R&D centers of many of BASF's key clients. In addition, there are a great number of top-notch universities in China, producing a host of scientists and engineers while offering competent R&D partners. These reasons have prompted BASF to speed up the establishment of research facilities in China.

A PepsiCo spokesperson said in an interview with People's Daily that the launch of it's new R&D center in Shanghai will be a major landmark for the company. The facility will serve as an advanced cooking center and an experimental kitchen, which will help make PepsiCo's food and beverages more suited to local tastes. Moreover, it will be an experimental center helping the company test its new ideas on products in days instead of in months. The spokesperson added that as a global player, PepsiCo feels lucky to have a R&D center in the country because the Chinese reap the rewards of success every day.

Looking to the East

As part of a global trend, companies are transferring their R&D activities from Europe and the United States to the Asia-Pacific region. In a recent report, consulting firm McKinsey&Co. said Chinese R&D sites are opening or growing almost as quickly as European and U.S. sites are closing or shrinking. In the pharmaceutical industry, 13 of the world's 20 largest drug companies have set up R&D centers in China. In the past five years, multinational drug companies have invested more than $2 billion in R&D in the country.

Following the early movers that started investing heavily more than a decade ago such as Britain's AstraZeneca, other large global pharmaceutical companies, including Britain-based GlaxoSmithKline and U.S.-based Eli Lilly and Merck, have significantly increased their investment in China. The United States, Japan and Western Europe, which have traditionally been the focus of healthcare companies, are less attractive now that players have to contend with shrinking markets, declining R&D productivity and the ongoing expiration of patents for many blockbuster drugs, the report said.

Swiss drug maker Roche announced in June 2012 that it would close an R&D center in New Jersey, the United States, and shed 1,000 jobs. The facility, which had been in operation for 80 years, sacked several thousand salespersons prior to the announcement. The Wall Street Journal, a U.S. newspaper, commented that although Roche remains one of the pharmaceutical companies with the strongest investment in R&D, the closure of the New Jersey site shows that multinational drug companies need to adjust their strategies and cut investment in labs that haven't produced enough new drugs.

A report issued by global consulting firm Booz&Co. not long ago showed the R&D investment of the world's top 1,000 innovative companies went up only 5 percent in Europe in 2011, as opposed to 27 percent in China and India.

Raising the bar to success

Of course, multinationals face challenges as they strengthen their R&D presence in China. A Financial Times report said Chinese R&D centers no longer have a cost advantage. The country is not the cheapest place to manufacture products, nor is it the cheapest place to invent them, it said. The report quoted Bruce McKern, Co-director of the Center on China Innovation at the China Europe International Business School, as saying, "The big advantage is the availability of good people, though it's another question whether you can keep them."

A survey showed that out of about 100 MBAs working for multinationals in China, four fifths did not plan to stay in their current jobs for more than two years, Financial Times reported. Innovating in China for the world, which is the eventual goal of multinationals' R&D centers, will therefore not happen overnight.

A McKinsey&Co. report said the market-access environment in China is becoming increasingly complex for multinationals. China, nevertheless, remains a bright spot, the report said, adding that the bar to success in this market is being raised.