Long Guoqiang

Currently, China is undergoing a very crucial period of transforming its mode of economic growth. At the same time, the industrial transfer at the global level is also experiencing profound changes. Therefore, to accurately seize the new opportunities arising from globalization and to push forward the upgrading of industrial structure while China's economy is opening to the outside world are of far-reaching strategic significance.

I. New Opportunities for China's Industrial Upgrading

Over the past two decades, the accumulated foreign direct investment (FDI) to China has exceeded US$700 billion. As a result, a large amount of export-oriented labor-intensive industrial activities has been transferred to China. The process has also greatly boosted the exports of local enterprises. At present, China has become the world's major exporter of low value-added manufactured products. In the future, China needs to continue to develop the labor-intensive industries due to enormous population pressure. At the same time, it is also imperative to transform the country's mode of economic growth and its mode of foreign trade growth. To this end, the CPC central committee has put forward the concept of scientific development, along with the goal of comprehensive, coordinated and sustainable development. Against the backdrop of economic globalization, the transformation must be proceeded with a view to elevating China's status in the global industrial value chain.

China is facing rare opportunities both at home and abroad for elevating its status in the industrial value chain. Specifically, these opportunities arise from the following areas.

1. Opportunities for developing capital- and technology-intensive industries

(1) There is a strong domestic demand for the development of the heavy and chemical industries. The current round of the country's rapid economic growth has mainly been driven by two forces. One is the accelerated urbanization, which has led to a surge in urban infrastructure construction and has in turn boosted a strong demand for the heavy and chemical industries such as iron & steel, cement, petrochemicals and construction machinery. Another is the upgrading of people's consumption structure prompted by the rise in per capita income, which has pushed up the demand for automobile and houses to a new level, which has again spurred a strong demand for the heavy and chemical industries. Experts conclude that China has entered a period for rapid development of heavy and chemical industries and this period will last for several years. In face of such a strong domestic demand, domestic capital has flocked into the heavy and chemical industries. Foreign investors have also begun transferring their capital- and technology-intensive heavy and chemical industries to China. In the sectors of iron & steel, petrochemicals, machinery and chemicals, there have been more and more cases of mergers and acquisitions (M&As) or new investment projects conducted by foreign investors. In light of this trend, the Chinese government has, for the first time in history, promulgated relevant regulations in order to create a better systematic environment for transnational M&As.

(2) Massive export-oriented assembly activities have formed a great demand for the upstream industries. Over the past two decades, foreign investors have massively transferred their export-oriented labor-intensive activities to China. As a result, a huge assembly capacity has been formed, which has in turn produced a huge demand for the upstream spare parts industries. In order to reduce cost and enhance competitiveness, more and more upstream spare parts have been produced in China, leading to the formation of industrial clusters between upstream and downstream industries. This trend will become an important direction for foreign investors to transfer their industries to China. In fact, this "import substitute" is completed under the conditions of opening to the outside world, which will result in a continuous extension of the value chain of the processing trade production in China.

2. Opportunities for technological innovation under opening conditions

(1) R&D internationalization and its "spillover effect". R&D internationalization has become a striking new phenomenon in transnational investment. The World Investment Report 2005 of the United Nations highlighted the topic: Transnational Corporations and the Internationalization of R&D. The first manifestation of R&D internationalization is a sharp growth of overseas R&D investment. The United Nations Conference on Trade and Development (UNCTAD) conducted a survey on the largest R&D investors in the world from November 2004 to March 2005. The survey indicated that in 2003, each transnational corporation spent an average 28% of their R&D budget on overseas R&D activities. The second manifestation of R&D internationalization is a constant growth in the number and scale of overseas R&D institutions. While there were 26 countries around the world that had foreign-invested R&D institutions in 1985, the figure rose to 45 in 2000 . In the year 1999, a total of 375 foreign companies established 715 R&D subsidiary institutions in the United States. During the 1986~1990 period, the number of the overseas R&D institutions established by the Japanese enterprises increased 86.6%, with their employees rising 121.2%. The third manifestation of R&D globalization is a growing number of patents and inventions applied by overseas R&D institutions. Statistics indicate that of all the patents applied in the United States in 1995 by the world's largest transnational corporations, 11.3% were applied by their overseas R&D institutions. In the UK, the Netherlands, Belgium, Switzerland and other European countries, over 50% of the patent applications came from the overseas R&D institutions of transnational corporations.

R&D internationalization is an important content of the corporate strategies adopted by transnational corporations to cope with fierce international competition in the course of globalization. On the one hand, the advance in information technology and the modulization of R&D activities have made it possible for transnational corporations to conduct overseas R&D activities. On the other hand, conducting overseas R&D activities can bring several benefits to transnational corporations. First, as these activities are closer to the markets of the host countries, transnational corporations can increase the relevance of their corporate R&D activities and boost the market competitiveness of their products. Second, they can take advantage of the low-cost R&D resources and especially the human resources of the developing countries to drastically reduce their R&D costs. Third, they are more consistent with the policies of the host countries and can improve corporate image and their relations with the host countries.

China is the most important destination among developing countries for transnational corporations to establish overseas R&D institutions. Currently, a total of over 800 foreign-invested R&D institutions have been set up in China. This is because China has the low-cost and high-quality human resources for R&D activities and it has a huge stock of foreign direct investment. As the Chinese economy continues to grow at a high speed, the appeal of the Chinese market will be increasingly stronger and more transnational corporations will be attracted to establish R&D institutions in China.

In general, the R&D institutions of transnational corporations can produce a "spillover effect" on the host countries, mainly through the mechanisms of demonstration, the movement of employees and information, cooperation, and competition. Whether the spillover effect can fully play its roles depends on the strategy, system and absorbing ability of the host countries. How to ensure foreign-invested R&D institutions to produce full spillover effects is a major topic for developing countries in enhancing their innovation capacity.

(2) Globalization has provided numerous opportunities for developing countries to conduct independent innovation. First, they can establish R&D institutions in developed countries to make full use of the local R&D resources. Second, they can acquire overseas R&D institutions or technology companies so as to acquire intellectual property rights and R&D capacities. Third, they can hire foreign experts to help solve technological problems. Fourth, they can take advantage of overseas venture investment funds and capital markets to industrialize the results of technological innovation.

3. Transfer of service industry and service outsourcing

(1) The service industry has become the main area for transnational investment. In the early 1970s, the service industry accounted for only one-fourth of the global foreign direct investment. This ratio rose to 50% in the 1990s. During the 2001~2003 period, the service industry attracted US$461 billion of foreign investment, accounting for 66% of the global total². Most of the foreign investment attracted by the service industry was in the production service sectors, including business service (29%), financial service (25%), transport / warehousing / communications (16%), and trade (11%). In addition, transnational corporations have begun establishing regional headquarters in some heavily-invested developing countries. This also helps the host countries to develop their high value-added service links. The service investment made by transnational corporations in developing countries will greatly raise the overall level of the service industry in developing countries through the mechanisms of demonstration, competition and movement of human resources.

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¹UNCTAD: World Investment Report 2001: Promoting Linkages, China Financial Publishing House, 2002, p. 98.

²UNCTAD: World Investment Report 2005, Attached table A.1.6.