Over-concentration of Foreign Over-concentration of Foreign R&D in Beijing and Shanghai in R&D in Beijing and Shanghai in China and Implications for China and Implications for Second Tier CitiesSecond Tier Cities

Yifei SunYifei SunAssistant ProfessorAssistant Professor

Department of GeographyDepartment of GeographyCalifornia State University NorthridgeCalifornia State University Northridge

May 28-29, 2005May 28-29, 2005

Acknowledgement:Acknowledgement:Support from the National Science Foundation Support from the National Science Foundation

is gratefully appreciated!is gratefully appreciated!Also thank many MNC R&D Also thank many MNC R&D

Directors/Managers for sharing their insights Directors/Managers for sharing their insights with mewith me

Globalization of MNC Globalization of MNC R&D: ObservationsR&D: Observations

Increasing globalization of R&DIncreasing globalization of R&D– Traditionally, developed countries are the Traditionally, developed countries are the

major origins and destinationsmajor origins and destinations– Recently, China and India have become very Recently, China and India have become very

attractive locationsattractive locations Growing LocalizationGrowing Localization

– China: Beijing and ShanghaiChina: Beijing and Shanghai Von Zedtwitz (2004), 199 foreign R&D Von Zedtwitz (2004), 199 foreign R&D

establishmentsestablishments Beijing:78 Beijing:78 Shanghai: 61Shanghai: 61 Together: 139 or 69.8%Together: 139 or 69.8%

Research QuestionsResearch Questions

Why are foreign R&D Why are foreign R&D establishments so concentrated establishments so concentrated in these two cities?in these two cities?

What are the implications for What are the implications for second tier cities in China in second tier cities in China in competition for foreign R&Dcompetition for foreign R&D

Explaining Locations of Explaining Locations of Foreign R&DForeign R&D

Rational choice modelRational choice model– Internal factorsInternal factors– External factorsExternal factors

Over-concentration in Over-concentration in Beijing and Shanghai?Beijing and Shanghai?CityCity Top100 U Top100 U MOE U MOE U Col. Students Col. StudentsBeijingBeijing 19 (19%) 19 (19%) 22 (30.1%) 22 (30.1%) 212984 (5.2%) 212984 (5.2%)Shanghai 8 (8%)Shanghai 8 (8%) 8 (11.0%) 8 (11.0%) 165129 (4.0%) 165129 (4.0%)

CityCity R&D Ins. R&D Ins. KeyLabs KeyLabs Scientists ScientistsBeijingBeijing 231 (5.7%) 231 (5.7%) 97 (24.0%) 97 (24.0%) 35506 35506

(16.2%)(16.2%)Shanghai 156 (3.9%)Shanghai 156 (3.9%) 32 (7.9%) 32 (7.9%) 13450 (7.0%) 13450 (7.0%)

CityCity HT Emp (000) HT Output (BY) HT Emp (000) HT Output (BY) HT Exports (M$)HT Exports (M$)BeijingBeijing 403 (11.6%) 148 (11.4%) 2877 (8.7%) 403 (11.6%) 148 (11.4%) 2877 (8.7%)

Shanghai 109 (3.1%) 94 (7.3%) 3010 (9.1%)Shanghai 109 (3.1%) 94 (7.3%) 3010 (9.1%)

Foreign R&D in USAForeign R&D in USA

StateState No. Of FacilitiesNo. Of Facilities %%USAUSA 701701 100.00100.00CaliforniaCalifornia 188188 26.8226.82New JerseyNew Jersey 6767 9.569.56MichiganMichigan 4141 5.855.85OhioOhio 4040 5.715.71North CarolinaNorth Carolina 3434 4.854.85MassachusettsMassachusetts 3434 4.854.85New YorkNew York 3333 4.714.71PennsylvaniaPennsylvania 3030 4.284.28IllinoisIllinois 2424 3.423.42ConnecticutConnecticut 1818 2.572.57TexasTexas 1818 2.572.57

Alternative Alternative ExplanationExplanation Imitating behavioral modelImitating behavioral model

– Following othersFollowing others

– StochasticStochastic– UncertaintyUncertainty– Information shortage and inaccurateInformation shortage and inaccurate

Developing Countries Developing Countries and Uncertaintiesand Uncertainties Developing countriesDeveloping countries

– Under-developed marketUnder-developed market– Shortage of quality informationShortage of quality information– Intellectual property right protectionIntellectual property right protection

Uncertainties – risksUncertainties – risks– Choosing a cautious approach: Choosing a cautious approach:

Start with small, peripheral activities: service, Start with small, peripheral activities: service, customization (Nortel Network)customization (Nortel Network)

Research vs. development (Lucent Technologies)Research vs. development (Lucent Technologies)– Seeking help from local governmentsSeeking help from local governments– Finding the safest locationFinding the safest location– Following the leadersFollowing the leaders

Location Decision with Location Decision with Uncertainty: Choosing Uncertainty: Choosing the Safest Locationthe Safest Location

““Unilever was already in Shanghai in the 1930s and Unilever was already in Shanghai in the 1930s and it liked Shanghai: it is the it liked Shanghai: it is the mostmost developed developed commercial city in China; it commercial city in China; it leadsleads the consumption the consumption fashion in China; it has a relatively friendly business fashion in China; it has a relatively friendly business environment; it also has a large pool of high-quality environment; it also has a large pool of high-quality labors in China. (That’s why) our R&D chose to labors in China. (That’s why) our R&D chose to locate in Shanghai. Broadly speaking, Shanghai and locate in Shanghai. Broadly speaking, Shanghai and Beijing are the two Beijing are the two onlyonly locations where people are locations where people are conducting high-quality research: they have the conducting high-quality research: they have the highesthighest concentration of high-quality labors and concentration of high-quality labors and universities. They also have research tradition. universities. They also have research tradition. Finally, our headquarters is located here, and many Finally, our headquarters is located here, and many facilities could be shared with our R&D facilities.”facilities could be shared with our R&D facilities.”- Interviews with Director, Unilever China Research - Interviews with Director, Unilever China Research CenterCenter

Following the LeadersFollowing the Leaders ““Since many MNCs have established Since many MNCs have established

similar R&D centers in those two major similar R&D centers in those two major cities, the market is already mature. More cities, the market is already mature. More foreign enterprises are entering such foreign enterprises are entering such markets. Some of them do not even know markets. Some of them do not even know the environments well, but still choose to the environments well, but still choose to establish labs there simply because many establish labs there simply because many others have done so. If so many are there, others have done so. If so many are there, there must be something good about there must be something good about them. As such, the markets in the 1st tier them. As such, the markets in the 1st tier cities become overcrowded.”cities become overcrowded.”– Interview with a Director of a major foreign Interview with a Director of a major foreign

R&D Center in NanjingR&D Center in Nanjing

Advantages of Second Advantages of Second Tier CitiesTier Cities Availability of skilled laborsAvailability of skilled labors Lower operation costsLower operation costs Lower labor costs and mobilityLower labor costs and mobility More government attentionMore government attention

Advantages of Second Advantages of Second Tier Cities I: Availability Tier Cities I: Availability of Quality Laborsof Quality Labors Presence of large pool of skilled laborsPresence of large pool of skilled labors

– Universities (Universities (Nanjing)Nanjing) 32 colleges and universities,32 colleges and universities, 22 provide BA and above degrees. 22 provide BA and above degrees. 10 among China’s top100 u. 10 among China’s top100 u. 8 included in China’s ‘211’ program8 included in China’s ‘211’ program

– R&D InstitutesR&D Institutes among the 305 state Key Labs and Engineering Centersamong the 305 state Key Labs and Engineering Centers, ,

Beijing and Shanghai: 129 Beijing and Shanghai: 129 Nanjing (17), Wuhan (19), Chengdu (11), Hangzhou (11), Nanjing (17), Wuhan (19), Chengdu (11), Hangzhou (11),

and Xi’an (10)and Xi’an (10)– High-tech industriesHigh-tech industries

High-tech ents (2002): High-tech ents (2002): 28338 (China), Beijing (9567), Tianjin 28338 (China), Beijing (9567), Tianjin (1835), Xi’an (2092), Shengyang (1333), Dalian (951) (1835), Xi’an (2092), Shengyang (1333), Dalian (951)

FDI: Shanghai:FDI: Shanghai: US$3.6 b or 7.9%, Suzhou ($2.8 b or 6.2%), US$3.6 b or 7.9%, Suzhou ($2.8 b or 6.2%), Tianjin ($2.5 b or 5.5%), and Guangzhou ($2.7 B or 5.9%), Tianjin ($2.5 b or 5.5%), and Guangzhou ($2.7 B or 5.9%), Beijing (($2.1 b or 4.5%). Beijing (($2.1 b or 4.5%).

Advantages of Second Advantages of Second Tier Cities II: Lower Tier Cities II: Lower Operation CostsOperation Costs Lower Operation CostsLower Operation Costs

– Cost is an important consideration of Cost is an important consideration of MNCsMNCs

– However, the factor is missing in However, the factor is missing in subnational discussionsubnational discussion

– Housing: Shanghai (6,627 yuan/m2) Housing: Shanghai (6,627 yuan/m2) and Beijing (5,052 yaun/m2) Wuhan and Beijing (5,052 yaun/m2) Wuhan (2,520 yuan/m2). (2,520 yuan/m2).

Advantages of Second Advantages of Second Tier Cities III: Labor Tier Cities III: Labor Costs and MobilityCosts and Mobility

• Labor cost:Labor cost: Shanghai per capita Shanghai per capita income (27,406 yuan) in 2004. income (27,406 yuan) in 2004. Wuhan or Chengdu: 1/3 of Shanghai. Wuhan or Chengdu: 1/3 of Shanghai. In Nanjing, 60% lowerIn Nanjing, 60% lower

• Labor mobility and motivation: 8% Labor mobility and motivation: 8% (Von Zedtiwitz) - 20% (Fortune on (Von Zedtiwitz) - 20% (Fortune on Lucent Technologies)Lucent Technologies)

Labor Costs I Labor Costs I -- Interview with Interview with a R&D manager in a Japanese Company in a R&D manager in a Japanese Company in ShanghaiShanghai

““The living cost in Shanghai is pretty The living cost in Shanghai is pretty expensive. I worked at Thailand from 2000 expensive. I worked at Thailand from 2000 to 2002. Compared with Thailand, the to 2002. Compared with Thailand, the living cost here at Shanghai is three time living cost here at Shanghai is three time of that at Bangkok in Thailand. I though it of that at Bangkok in Thailand. I though it would be very cheap in Shanghai. It is not would be very cheap in Shanghai. It is not the case at all, particularly in the the case at all, particularly in the Hongqiao (Gubei) area.”Hongqiao (Gubei) area.”

Labor Costs II- Labor Costs II- Interview with a R&D Interview with a R&D manager from a Foreign R&D Center in Nanjingmanager from a Foreign R&D Center in Nanjing

““We did not consider Beijing and We did not consider Beijing and Shanghai because we found that Shanghai because we found that working forces in these two cities are working forces in these two cities are too expensive and our main cost here too expensive and our main cost here is human resource. Human resource is human resource. Human resource is the most important factor… The is the most important factor… The labor cost difference between labor cost difference between Nanjing and Shanghai, I would say is Nanjing and Shanghai, I would say is about 30 to 50 percent. It is a huge about 30 to 50 percent. It is a huge difference!” difference!”

Labor Mobility I Labor Mobility I -- Interview with a Interview with a R&D Director from a major Chinese TeleCom R&D Director from a major Chinese TeleCom companycompany

““Nanjing people are very simple and hard working. Nanjing people are very simple and hard working. Generally speaking, the regional culture in Nanjing Generally speaking, the regional culture in Nanjing is relatively conservative and people are not as is relatively conservative and people are not as open as those in Shanghai. It is pretty clear in open as those in Shanghai. It is pretty clear in Shanghai and Beijing people keep jumping from Shanghai and Beijing people keep jumping from enterprise to another, though we want to keep our enterprise to another, though we want to keep our development team relatively stable…How to development team relatively stable…How to reduce the mobility rate is a headache for those reduce the mobility rate is a headache for those managers. As such, those managers experience managers. As such, those managers experience much higher pressure in retaining their team much higher pressure in retaining their team compared to those in Nanjing… The mobility rate compared to those in Nanjing… The mobility rate in Shanghai and Beijing is about twice of that in in Shanghai and Beijing is about twice of that in Nanjing. The average mobility rate is about 6-8%, Nanjing. The average mobility rate is about 6-8%, where it is about 3-4% in Nanjing and as high as 9 where it is about 3-4% in Nanjing and as high as 9 or10% in Shanghai and Beijing.” or10% in Shanghai and Beijing.”

Labor Mobility IILabor Mobility II - - Interview with aInterview with a Chief engineer in a Taiwanese Chief engineer in a Taiwanese R&D Center in NanjingR&D Center in Nanjing

““Beijing and Shanghai are different. Shanghai is Beijing and Shanghai are different. Shanghai is the financial center and Beijing is the political the financial center and Beijing is the political center. ..Maybe such cities are too big and costs center. ..Maybe such cities are too big and costs are very high for R&D operations. Also it is are very high for R&D operations. Also it is possible that life tempo is too fast for engineers. possible that life tempo is too fast for engineers. Engineers have their own unique identity: Engineers have their own unique identity: relatively they like quiet places and a more relatively they like quiet places and a more intellectual environment …From the perspective of intellectual environment …From the perspective of individual workers, Nanjing is better for R&D. None individual workers, Nanjing is better for R&D. None of my classmates in Shanghai are doing R&D: they of my classmates in Shanghai are doing R&D: they are either working on business, finance and are either working on business, finance and others. Some have their own businesses. I feel others. Some have their own businesses. I feel that Nanjing is better for R&D. We will expand our that Nanjing is better for R&D. We will expand our R&D facility in Nanjing and the new R&D center is R&D facility in Nanjing and the new R&D center is under construction in the west Nanjing.” under construction in the west Nanjing.”

Labor III Labor III –– Interview with a Interview with a R&D R&D Director in Director in NanjingNanjing

““People are interacting with the social People are interacting with the social environment and the local context has environment and the local context has strong impacts on personal behaviors. For strong impacts on personal behaviors. For example, a lot more people in Nanjing are example, a lot more people in Nanjing are willing to work overtime than those in willing to work overtime than those in Shanghai. If Nanjing has three people Shanghai. If Nanjing has three people willing to work over time, Shanghai may willing to work over time, Shanghai may just have two people willing to do so. In just have two people willing to do so. In Nanjing, people volunteer to work overtime Nanjing, people volunteer to work overtime while many in Shanghai are persuaded to while many in Shanghai are persuaded to work overtime by their supervisors.” work overtime by their supervisors.”

Advantages of Second Advantages of Second Tier Cities IV: More Eager Tier Cities IV: More Eager Local GovernmentLocal Government ““Shanghai and Beijing already have Shanghai and Beijing already have

many MNCs establish R&D centers many MNCs establish R&D centers there, and they do not care so much there, and they do not care so much any more. Their support and any more. Their support and preferential policies will not be as preferential policies will not be as attractive as those from the 2nd tier attractive as those from the 2nd tier cities.” – cities.” – Interview with a R&D Director at Interview with a R&D Director at NanjingNanjing

Intel: Chengdu and ShanghaiIntel: Chengdu and Shanghai

Weaknesses of Second Weaknesses of Second Tier CitiesTier Cities Image: less developed – imaginedImage: less developed – imagined Infrastructure: international Infrastructure: international

flightsflights Attracting of international talents Attracting of international talents

(management) and non-local (management) and non-local talentstalents

Implications for Implications for Second Tier CitiesSecond Tier Cities Win the trust of MNCsWin the trust of MNCs

– Image buildingImage building what is important is not just who you are, what is important is not just who you are,

perhaps more important is what other people perhaps more important is what other people think who you arethink who you are

– Building a business friendly environment:Building a business friendly environment: be friendly to current MNCs, as well as domestic be friendly to current MNCs, as well as domestic

companiescompanies Improve the efficiency of government Improve the efficiency of government

operationsoperations Win the attention of talentsWin the attention of talents

– Improve urban planning and construction, Improve urban planning and construction, Urban amenitiesUrban amenities

Implications for MNCsImplications for MNCs Broaden their horizons in looking Broaden their horizons in looking

for suitable sites for R&D facilities for suitable sites for R&D facilities in China, as many cities in China in China, as many cities in China have advantages in comparison to have advantages in comparison to Beijing and ShanghaiBeijing and Shanghai

Get attention from top city officialsGet attention from top city officials