Long Guoqiang, Zhang Liping, Hu Jiangyun & Fang Jin

To develop independent innovation is an important task in facilitating the change of the mode of economic development in China. During the era of globalization, to build capacity of independent innovation needs a thorough utilization of resources both from home and abroad. Only by advancing independent innovation in the opening up can we get twice the result with half the effort and catch up forthwith the developed countries. By the end of August 2009, the number of foreign-invested enterprises (FIEs) approved by China had reached an accumulative total of 670,000 and more than 950 billion US dollars had been put into actual use. How to bring the positive roles of FIEs in facilitating independent innovation into better play is a quite important issue for China’s future foreign investment policies.

On the basis of compiling and analyzing the related theories and empirical studies, the Task Force¹ has come up with a theory on the relationships between FIEs and independent innovation. In the first half of 2009, we carried out a questionnaire survey among foreign-invested manufacturing enterprises and foreign-invested R&D centers (institutions), and received 553 and 200 workable questionnaires respectively. The survey tells us the ongoing R&D innovation activities conducted by FIEs and their roles in independent innovation. In the end, we have put forward policy suggestions on giving full play to the positive role played by FIEs in independent innovation.

?. Relationships between Foreign Investment and Independent Innovation

1. What is independent innovation?

Independent innovation is understood in different ways since its presentation by the CPC Central Committee. The innovation in a broad sense refers to technical and institutional innovation. This paper only deals with the technical innovation in a narrow sense.

According to the documents issued by the central government, independent innovation comes up in three different forms, namely, original innovation, integrated innovation and introduction-digestion-absorption-reinnovation. The crux of comprehending independent innovation lies in how to understand the implication of "independent” innovation. It is not easy to precisely define independent innovation during the globalization period. However, effective policies for facilitating independent innovation cannot be formulated if independent innovation is not understood and defined accurately.

We hold the opinion that independent innovation refers to the following innovation activities: led by Chinese corporate bodies (enterprises or teaching and research institutions), beneficial to forming or enhancing the innovation ability of Chinese enterprises/institutions, and with the innovation results being possessed by Chinese corporate bodies. As this paper mainly deals with the relationships between FIEs and independent innovation, then it will not probe into the innovation activities conducted by natural persons.

According to the above statement, the definition of independent innovation is composed of three indispensable factors. The first is the corporate bodies in China have the decision-making right and dominating right relating to innovation activities. Without the dominating right, the innovation activities conducted by Chinese state-owned R&D institutions are not regarded as independent ones. For example, some overseas companies entrust their R&D projects to Chinese enterprises or R&D institutions, with the Chinese institutions having neither decision-making and dominating rights over the projects nor intellectual property rights (IPRs) over innovation results. Such R&D activities are not regarded as independent innovation. The Second is R&D activities should be beneficial to forming or enhancing the innovation ability of Chinese enterprises. If a Chinese enterprise entrusts an overseas company or R&D institution to conduct research, whereas the overseas institution is not the subsidiary of the Chinese enterprise and such activities are not beneficial to forming or enhancing the R&D capacity of China, then the R&D activities will not be regarded as independent innovation. For example, some Chinese auto enterprises entrust European designing companies to work out new types of cars to be produced in China, such R&D activities are not regarded as independent innovation. If the overseas R&D institution is the subsidiary of the Chinese enterprise, then the R&D activities will be regarded as independent innovation conducted by capitalizing on overseas R&D resources. If such activities also satisfy other two conditions mentioned in the definition, then they should be regarded as independent R&D. For example, Huawei Group has set up some R&D centers overseas and has conducted innovation activities through those centers and it satisfies the three conditions, thus, the activities conducted by Huawei overseas R&D centers should all be regarded as independent innovation. The third is the innovation results must be owned by Chinese legal entities. If a R&D activity is decided by the Chinese entity and is all completed in China, yet the IPRs do not belong to the Chinese entities but to an overseas company, then such an activity should not be regarded as independent innovation, either. For example, some ODM projects have been researched and developed by Chinese enterprises cannot be regarded as independent innovation for the IPRs belong to the overseas entrusting party.

2. Some R&D activities conducted by FIEs should be regarded as independent innovation

There have been controversies over the relationships between R&D activities conducted by FIEs and independent innovation. And diametrically opposed views have emerged on the independent innovation strategy set forth by the central government. Some argue that FIEs are legal entities of China and the R&D activities conducted by them in China should naturally be regarded as independent innovation. Others hold that the R&D activities conducted only by Chinese enterprises can be regarded as independent innovation whereas the R&D activities conducted FIEs.do not belong to independent innovation.

According to the above definition of the independent innovation put forward, to judge whether an innovation activity is an independent innovation should not be based on the investment sources but on whether it satisfies the three conditions. In recent years, transnational corporations have set up more than one thousand R&D institutions in China and quite a number of manufacturing enterprises have conducted R&D activities in China. Some of the activities have satisfied the defined three conditions and should be viewed as independent innovation, while others have not complied with the said conditions and should not be viewed as independent innovation. For instance, Pan Asia Technical Automotive Center is a joint venture established by General Motors Corporation and SAIC Motor with equal percentage of investment and is a corporation registered in China. The corporation conducts R&D activities in China and its IPRs belong to itself. Therefore, some of Pan Asia’s R&D activities conducted in China should be viewed as independent innovation activities though Pan Asia is a Sino-foreign joint venture. On the other hand, although a number of foreign-invested R&D institutions have registered themselves in China as China-based companies and are competent in doing research and development, however, as the R&D decisions are made by their overseas parent companies, they do not have the dominating right over R&D activities and the intellectual property rights over their R&D results are owned by their overseas parent companies, therefore, such R&D activities cannot be viewed as independent innovation activities.

To sum up, the relationships between FIEs and independent innovation and between such enterprises and innovation-oriented countries can be manifested by Figure 1.

Some of the innovation activities conducted by FIEs are viewed as an integral part of independent innovation.

Figure 1 Relationship between FIEs and Innovation-oriented Countries and between These Enterprises and Independent Innovation

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¹The project undertaken by the Task Force is entitled To Promote Independent Innovation through Utilization of Foreign Investment and members of the Task Force are researchers from the Research Department of Foreign Economic Relations of DRC