A new strategy

of technology
transfer to China
527
International Journal of Operations &
Production Management,
Vol. 19 No. 5/6, 1999, pp. 527-537.
# MCB University Press, 0144-3577
A new strategy of technology
transfer to China
Wang Xing Ming
Renmin University of China, China
Zhou Xing
Xiamen University, China
Keywords China, Foreign investment, Globalisation, Licensing, Technology transfer
Abstract In the face of an integrating world economy where significant changes are taking
place as a result of rapidly developing science and technology, China's government must attach
more importance to technology transfer to improve its economy. This paper analyses the features
of the new environment and discusses the framework of technology transfer based on a review of
theory, surveys and studies of Chinese enterprises. In particular, it considers the role of foreign
funded enterprises and the importance of creating a positive cycle of technology ``transfer-
digestion-absorption-dissemination'' in China for increasing involvement in international
production and trade activities within a global market.
Introduction
Technology transfer (TT) in China is facing a newbusiness environment and is
moving into a newphase. The features of this phase are:
A trend towards globalisation of industries
Businesses are adopting a global strategy and taking a whole-world view of
their operations. The evidence of this trend toward globalisation is the
increase in foreign direct investment (FDI). There were 140,000 foreign
funded enterprises in China by the end of 1996, and the total amount of
foreign investment had reached US$ 176 billion, which was 11.8 per cent of
total fixed investment in China. The output value of foreign funded
enterprises was 7.2 per cent of the total revenues of Chinese industry and
the value of their exports was 47 per cent of China's total export value. The
aim of TT has been to improve the level of technology in Chinese
enterprises, and thereby to enable them to join the global manufacturing
networks.
Internationalisation of the Chinese domestic market
Products of foreign funded enterprises compete with local products in the
domestic market and imports have dramatically increased. In 1997, imports
into China were worth US$169 billion and were largely technology-based,
while exports were US$196 billion and generally of lower technology
products. In the past, the transferred technology would be standard in
developed countries, but advanced in China. This situation will change,
however, since China is now seeking more advanced technology based on
world standards.
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China's economy will be entering a structural adjustment period
In this period two changes will be completed: first China will change from a
planned economy to a market economy, second it will change from an
``extensive'' economy to an ``intensive'' one. This second change is required
because the level of industry is low, due to the following causes:
.
The industry structure is not in balance. Basic industries, such as
transportation, energy and rawmaterials, are bottlenecked.
.
The growth of industry has been mainly achieved through investments
in more labour and capital. Only 30 per cent of industry has relied on
improving technology. In the period 1990-1995 fixed assets grew 3.3
times but the total value of output only grewtwo times.
.
The level of industry concentration is low. Companies are vertically
integrated and self-sufficient. They do not benefit from specialisation
and cannot achieve economies of scale. For example, the average scale of
oil refining companies is 1.67 million tonnes whereas the scale
internationally is normally more than six million tonnes. There are also
more than 100 car companies, but their total annual output is only about
1.5 million cars.
Technology transfer plays a very important role in adjusting industry
structure, so Chinese firms should adopt new strategies that are suited to the
newenvironment that has been described.
Review of theory
Research on technology transfer in China focuses on two areas:
(1) Making comparisons with technology transfer in different countries.
(2) Investigating the effect of government policy on technology transfer.
Reviewing technology transfer theory is necessary before discussing the strategies.
There are many contributions to this theory, the important ones here being:
Product life cycle
According to Vernon (1966) the product life cycle can be divided into three
stages: new product stage, mature product stage and standardised product
stage. In the new product stage, the product is manufactured in the home
country and introduced into foreign markets through exports. In the mature
product stage, as technology becomes sufficiently routine to be transferred and
a firm's export position becomes threatened, the firm is induced to produce
abroad, generally in other advanced countries. Finally, as the product becomes
completely standardised, production will be shifted to low-cost locations in
developing countries. Vernon pointed out that due to globalisation the
environment has changed. This change has weakened the power of the life cycle
theory, although the age of technology may be correlated with the form of
transfer, especially for large-scale projects. Firms invest large amounts of
A new strategy
of technology
transfer to China
529
resources in research and development (R & D) with the intention of creating a
unique competitive advantage. Their first move will be to export goods having
the technology content of the latest generation. It appears that brand new
technologies may be positively related to foreign direct investments and mature
technology with licensing. From the theory of the product life cycle developing
countries can mainly obtain standardised technology through licensing
agreements. Dunning (1995) points out that the only way in which developing
countries can obtain advanced technology is through foreign direct investment.
Eclectic theory of international production
Dunning (1979) developed the eclectic theory of international production.
According to this theory three conditions must be met for foreign direct
investment through multinational enterprises (MNEs) to occur. First, MNEs
must have ownership-specific advantage and be competitive. Second, FDI must
be preferred over trading and licensing. This will be the case when market
imperfections create additional transaction costs associated with trade and
licensing. Third, the location advantages of particular foreign countries should
make FDI into these countries preferable to making direct investments in other
potential host countries. The eclectic theory contributes to building both
necessary and sufficient conditions in which FDI can exist and be conducted.
Moving back up the product cycle
Amsden (1989) has pointed out that if industrialisation first occurred in
England on the basis of invention, and if it subsequently occurred in Germany
and the USA on the basis of innovation, then it occurs now among ``backward''
countries on the basis of learning. Learners do not innovate (by definition) and
must compete initially on the basis of low wages, state subsidies, incremental
productivity and quality improvements related to existing products. The shop
floor tends to be the strategic focus of firms that compete on the basis of
borrowed technology. It seems that the product cycle in developed countries is
along the route: research > development > design > production. In
developing countries, it is along the route: production > design >
development > research. The basis of the first route is innovation. It needs a
large number of highly qualified scientists, engineers and technologists and is
sustained by large R & D spending. The second route is a learning and
accumulation route, which is based on the transfer, absorption and adaptation
of existing knowledge. Learning is also enabled to create new technology and
new products to suit market needs. In this route, R & D is carried out mainly to
facilitate learning, and focuses on the technology that is excluded by foreign
firms.
Overall, technological progress in developing countries relies heavily on
imported technology and thus on an internal capacity to absorb foreign
knowledge. FDI (through wholly foreign-owned companies and joint ventures)
and licensing agreements are major channels for importing technology.
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The technology transfer strategy debate
By the end of 1997 China remained the second largest user of foreign direct
investment after the USA for a fifth consecutive year and FDI has become the
main channel for transferring technology. In the early 1980s, the bulk of foreign
investments came from Hong Kong, but mainly these involved labour intensive
sectors with little technology content. Investors used to adopt a ``hit-and-run''
strategy to make as many short-term profits as possible. Recently, investment
by MNEs has increased and mainly involves high technology and profitable
sectors such as telecommunications, automobiles, pharmaceuticals and
computers, which can achieve competitive advantage in the Chinese market.
There is currently a debate in China concerning the strategy towards
technology transfer. Some people argue that technology transfer though FDI
could crush national economic autonomy, foreign investors will attempt to
monopolise technology and squeeze domestic counterparts out of the market.
They suggest that if exports go well, China should make full use of its foreign
exchange reserves, which are worth more than US$ 100 billion, and should
directly import more technology and equipment rather than relying on FDI.
China should encourage smaller investors and discourage larger ones, like
MNEs, which harmChinese national industry and economic security.
The following factors should be considered:
.
FDI is an important channel for gaining access to the Chinese market for
the MNEs. According to Dunning's eclectic theory, China's huge market
opportunities are an important location-specific advantage to attract
FDI. From a questionnaire survey of British companies to find out why
they decided to consider transferring technology to China rather than to
alternative countries, exploitation of the Chinese market through
technology transfer constituted a substantial proportion of responses.
To gain access to the Chinese market was identified by 86 per cent of
companies, while 59 per cent indicated that transferring technology to
China was part of a global strategy (Zhao et al., 1997). However, at the
same time, practice has shown that FDI is also a very valid channel for
Chinese technology acquisition. For example in the 1980s and early
1990s, through FDI, Shanghai (the biggest city of China) imported large
amounts of technology, such as automobile manufacturing technology,
mobile phone technology, elevator manufacturing technology etc. These
kinds of advanced technology filled-in the gaps in these fields of science
and technology, and have had a profound influence in promoting
Shanghai's industrial structure.
.
According to a survey of 1,002 large and medium mainstay enterprises
including 59 joint-ventures carried out in 1991 by the Industrial Bureau
of Shanghai municipality, joint-ventures accounted for 71.2 per cent of
enterprises that ranked among China's top 200 in terms of profit,
whereas non-joint-ventures accounted for only 16.8 per cent. In
particular, among all the 1,002 enterprises, the five most profitable are
A new strategy
of technology
transfer to China
531
all joint ventures. China's door is gradually becoming more open to
foreign investment, so indigenous Chinese firms should learn how to
compete with foreign investment enterprises in their domestic market
and enhance their competitive ability, then they may have a chance to
compete with MNEs in the world market. Chinese firms need to be
exposed to real competition from MNEs, because such competition can
stimulate economic growth.
.
The process of technology acquisition by developing countries is one of
learning and improving their technological capability. This is a complex,
long-term, process with various levels of technological competence such
as the ability to use the technology, adapt it, stretch it, and eventually to
become more independent by developing, designing and selling it
(Barbosa and Vaidya, 1997). It very much relies on the effort of
technology acquirers. China No. 1 Automotive Works is a good example.
It created a joint venture company with Germany to produce Audi cars.
At first the Chinese partner organised a team of experts who were from
universities and institutes as well as from its own organisation to
translate and read all the technical documents provided by the foreign
partner. Then, the members of the team ``learned by doing'' how to use
the technology. They used, adapted, and changed existing technologies,
and finally they combined the newly acquired technology with their own
experience to develop new products under the ``Red Flag'' brand. On the
other hand, in Shanghai Volkswagen, people have complained that the
German partner has not provided the technology for localisation of its
new model and almost all the locally produced parts had to be developed
by the Chinese partner rather than through technology transfer to the
company. This assessment may be wrong because the capability for
localisation has been acquired through actual experience of operating the
technology that was previously supplied by the partner.
.
Licensing agreements are not always the best channel for technology
transfer. Many articles concerned with transferring technology to China
mention that licensing agreements are the best channel for transfer and
the percentage share of licensing agreements within FDI can be
regarded as a criterion for measuring the extent of technology transfer.
However, as was outlined above, developing countries mainly acquire
standard technology and licensees may concentrate their efforts on
approaching smaller firms, more diversified firms, and firms with
relatively little foreign manufacturing experience. Licensees may find
that an ability to offer technology in return is necessary to obtain access
to state-of-art technology in industries that require heavy R & D
investment. Moreover, while the host government finds licensing an
attractive alternative, it needs to be realistic with regard to the types of
technology it obtains because of the concern of the foreign licensor to
retain control of the technology. This is especially the case in industries
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that require heavy R & D investment and in developing countries that
are likely to obtain little access to advanced technology. In these cases it
is unlikely the acquirer can offer valuable technology in exchange, so
licensing agreements are not always the best channel for technology
transfer. For example the Ministry of Machinery Industry in China was
advised that software transfer constituted the best type of technology
transfer. Here the number of technology transfer contracts was 679
among which the number of licensing agreements was 501, accounting
for 72 per cent of the total.
According to a recent questionnaire survey in the machine tool industry in
China carried out by the author and colleagues at Aston University in the UK,
software has been the main type of technology transferred. After more than 20
years of technology transfer, the technology gap between developed countries
and China in this industry is still large. Among the 58 respondents to the
survey there was only one company that had the capability to produce
controllers and the main shaft of CNC machines. For the machine tools market
in China 70 per cent of standard machine tools and 80 per cent of CNC machines
were imported. This demonstrates that firms have generally been unable to
acquire the latest product technology through licensing agreements.
The electronics industry mainly makes use of co-production, joint ventures
and wholly foreign owned companies to attract foreign capital for investment
in certain key sectors of the industry. These investments include production of
integrated circuits and processes for electronic devices and components. The
Ministry of the Electronics Industry has provided incentives including finance
and taxation benefits and favourable foreign currency exchange conditions. As
a result of this strategy, China is on the verge of becoming a leading global
player in the consumer electronics industry (Bennett et al., 1996). For example,
by 1993 exports of electronics products were US$ 8.11billion and in 1994 they
reached US$ 11billion, accounting for 11 per cent of China's total exports.
The comparison between two types of technology acquisition provides
substantial evidence of the superiority of FDI for technology transfer. From the
1980s, both licensing agreements and FDI have made substantial contributions
to Chinese technology acquisition; however, comparatively speaking, the effect
of FDI is better than of other types of technology transfer.
From an investigation of 23 joint ventures that entered into partnership
before 1982 and of some enterprises that imported technology using licensing
agreements at the same period, a number of factors can be compared, as follows
(see Table I for a summary of the comparisons):
.
The amount of capital China needed to provide. The 23 joint ventures
together invested RMB yuan 460 million (US$ 55 million) to import
technology for the enterprises' technological transformation. However, if
licensing agreements had been used to import the same technology in
order to reach the same level as the joint ventures, it is estimated that
China would have needed to invest RMB yuan 940 million (US$ 113
million).
A new strategy
of technology
transfer to China
533
Table I.
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IJOPM
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.
Construction period. In China, when using licensing agreements to
import technology, the average construction period from approval to
starting operation was 22 months. However, if using FDI the period was
only seven months.
.
The level of imported technology. Because technology suppliers are not
usually willing to disseminate core technology to other enterprises when
using licensing agreements to transfer technology, China can acquire
only some medium or low level technology using this source so a
technology gap exists when compared with the international latest
technology. However, if FDI is used to import technology China can
acquire much of the technology available in the world.
.
Effectiveness of investment. In the 23 joint ventures in which China
invested a total of RMB yuan 460 million, the average ratio of profit and
tax to investment two years later was 45.2 per cent. However, in those
using licensing agreements (where RMB yuan 590 million was spent in
total) their average ratio of profit and tax to investment was 20.8 per
cent.
.
Capacity to earn foreign exchange through exports. In the 23 joint
ventures, the ratio of foreign export earnings to capital investment was
6.88 per cent. However, in those enterprises using licensing agreements,
the ratio was 2.74 per cent.
.
The level of management. Those enterprises using licensing agreements
to import technology generally improved their management level by
going abroad on a tour of investigations and training. However, few
foreign experts took part in the whole management progress, so
technology acquisition played little part in ameliorating the enterprises'
organisational structure and operation system. On the other hand, in the
joint ventures foreign partners also took part in the management
process, so these enterprises' technology management has been
improved considerably.
The new strategy of technology transfer
The newstrategy of technology transfer can be described as follows:
.
To attract large MNEs to invest in China. MNEs are the major source of
technology. They not only create job opportunities, tax revenues,
capital, advanced technology, management and sales expertise, they
also contribute greatly to the establishment of a market mechanism and
the integration of China into the world's economies. China has generally
favourable policies towards MNEs.
The Chinese government provides preferential treatment for foreign
funded enterprises. For example, equipment imported for a firm's own
use, except for certain items that can be manufactured in China, will
qualify for exemption fromtariffs and value-added import duty.
A new strategy
of technology
transfer to China
535
Almost half of the world's 500 largest companies have established
their businesses in China. General Motors, General Electric, Siemens and
a number of other transnational corporations have announced plans to
expand their direct investment in China's automotive, power and
electronics industries.
.
A revised regulation on foreign investment is scheduled to be
announced in which the foreign funded enterprise sector is to be
encouraged including high-technology industries, agriculture and
infrastructure projects in the country's central and western regions.
.
The reform of state-owned enterprises to upgrade the level of industry
concentration provides a new investment niche for foreign investors,
especially MNEs. China has decided to sell off a myriad of small state-
owned enterprises. Foreign investors are now permitted to merge, lease
or buy out medium-sized and small state-owned firms, whereas
previously they could only form joint ventures or co-operate with state-
owned enterprises or establish wholly-owned subsidiaries to balance the
industrial structure.
.
The sources of FDI will be diversified to speed up technology transfer
and localisation of foreign funded enterprises and to prompt competition
among themselves.
.
There has been a ban on Chinese authorities at all levels from collecting
random fees from foreign invested firms and the central authorities will
implement foreign investment-related regulations covering anti-
dumping, anti-subsidy and anti-monopoly actions and protection of
intellectual property rights.
.
There will be promotion of outward FDI to attract up-to-date
technology. The new strategy focuses on attracting MNEs to speed up
the rate of technology transfer. Technology transfer associated with FDI
has been fairly restricted, because of limited partner firm technological
capacities, poor assimilation capabilities and policy distortions. The new
strategy of technology transfer is also an attempt to solve this problem
by creating the positive mechanismexplained below.
The mechanism for technology transfer-digestion-absorption-
innovation-dissemination
China is a huge country, and its modernisation is dependent largely on its own
efforts. The transfer of advanced technology from developed countries is
essential. However, the capacity to create and market new technology is more
important than straightforward technology transfer (Wang, 1995). The
traditional mechanismfor transfer is shown in Figure 1.
This cycle of transfer-production-lag-transfer cannot create the capability for
innovation and development. Therefore the Chinese Government will pay more
attention to creating a positive cycle of ``TDAID'' which is showin Figure 2.
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Lack of sufficient technological capability is a major inadequacy at the firm
level for implementing this cycle. The restructuring of the Chinese R&Dsystem
from a centrally planned mechanism into a flexible system is an attempt to
solve the problem. The restructuring includes:
.
Creating R&D centres within large enterprises. The Government is
supporting R&D and innovation activities in the six biggest enterprise
groups to provide examples and obtain experience of enterprises' R&D
activities. The six centres are located in: Baoson Iron & Steel
Corporation, North-East Pharmaceutical Corporation, Hier Electronics
Corporation, Zhanghong Electronics Corporation, Jiangnan Shipyard
and Fangzhen Electronics Corporation of Beijing University. These
large firms are leaders in technology development because they have the
greatest concentration of innovation activities.
.
To combine the forces of institutions conducting scientific studies and R
& D units of enterprises and universities through structural adjustment.
In the past, 85 per cent of scientific research was carried out in isolation
from enterprises so efforts have been made to encourage their
combination. There are two ways of doing this: through contracts; and
with institutes (or universities) that have their own production locations.
.
Some institutes with independent capabilities will be transformed into
high-technology enterprises, others will be turned into scientific research
units for public service, such as technical information consultancies.
.
Creating incentive systems for innovation activities. Incentives are both
``spiritual'' and material. Many provinces, major cities and ministries
have created foundations for providing awards to inventors, excellent
innovators and entrepreneurs. Innovators who make a major
contribution towards the development of new products may share the
profits fromthose products.
Transfer Production
Figure 1.
Traditional mechanism
for transferring
technology to China
Transfer Digestion Absorption Innovation Disseminaton
Figure 2.
New mechanism for
transferring technology
to China
A new strategy
of technology
transfer to China
537
.
Training engineers and managers. The rise of Japan as an economic
power was not due to its being a pioneer in technology but by becoming
a leader in management. In the short term, technology transfer could
improve Japan's economic situation. However in the long term,
investment in human capital was more important for the advancement
of the economy. Chinese universities and institutes can provide different
kinds of training such as part time courses, distance learning packages
and MBAprogrammes in companies.
Conclusions
In China's new business environment FDI will be the principal means for
technology transfer. It has the advantage of low risk (risk is shared with the
foreign partner) and the technology is advanced. Technology is transferred not
only as hardware, but also software, managerial skill and market experience.
China is a huge country and its economic development is geographically very
unbalanced, so it will also use many other types of technology transfer. There
is a growing consensus that technological innovation is critical for rapid
economic development. Creating a positive cycle of TDAID is still a crucial and
difficult task for China.
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