R&D transaction choices by MNCs in China: empirical analysis based on contracts

Zheng Feihu Shi xiaoxiao

BackgroundBackground

• China’s potential for innovation;China’s potential for innovation;

• China attracts foreign R&D since 1995;China attracts foreign R&D since 1995;

• Beijing offers location advantages for Beijing offers location advantages for research-intensive R&D units since research-intensive R&D units since

1999.1999.

A “Paradox”A “Paradox”

• A “paradox” in the statistic about the A “paradox” in the statistic about the MNCs’ R&D contract transactions in Beijing MNCs’ R&D contract transactions in Beijing during 2001-2006during 2001-2006

• ““Paradox”——only 18.15% of the deals is Paradox”——only 18.15% of the deals is inside the MNCs under the same inside the MNCs under the same ownership, while most of the contracts are ownership, while most of the contracts are executed between the parties not having executed between the parties not having close ownership relationship.close ownership relationship.

• For the R&D contractsFor the R&D contracts transaction transaction demanding mutual trust and large demanding mutual trust and large deal of proprietary assets inputs, why deal of proprietary assets inputs, why not choosing internalization but not choosing internalization but putting it to outside market ( here in putting it to outside market ( here in after called outsourcing) ?after called outsourcing) ?

Aims of this paperAims of this paper

• what’s the cause of the so-called what’s the cause of the so-called “paradox” in R&D contract “paradox” in R&D contract transaction in Beijing?transaction in Beijing?

• what factors determine the choice of what factors determine the choice of R&D contract outsourcing in Beijing R&D contract outsourcing in Beijing using the framework of Williamson’s using the framework of Williamson’s ” three-dimensional hypothesis”? ” three-dimensional hypothesis”?

Descriptive analysisDescriptive analysis

• R&D activities in Beijing are in R&D activities in Beijing are in superior levels, and the spillover superior levels, and the spillover effect to abroad is obvious.effect to abroad is obvious.

• The internalization of R&D The internalization of R&D transaction in Beijing is not obvious, transaction in Beijing is not obvious, but the outsourcing of R&D contracts but the outsourcing of R&D contracts is prominentis prominent. .

Data and Research MethodData and Research Method

• Dependent variable—— Dependent variable—— Outsourcing is coded as “1” and Outsourcing is coded as “1” and internalization-oriented activities Is internalization-oriented activities Is coded as “0”coded as “0”

• Independent variables—— Independent variables—— We We design the factors under the design the factors under the framework of ” three-dimensional framework of ” three-dimensional hypothesis”hypothesis” ，， all factors are all factors are categorized into three dimentions.categorized into three dimentions.

• transaction frequencytransaction frequency( the variable includes( the variable includes ：：

the average dealing amounts of the average dealing amounts of R&D in the same district in half a R&D in the same district in half a yearyear))

• UncertaintyUncertainty (the Proxy variables are from the (the Proxy variables are from the

outside R&D clustering environment, outside R&D clustering environment, includingincluding ：：

average salaryaverage salary 、、ratio of Manufactory industryratio of Manufactory industry 、、Intellectual Property protectionIntellectual Property protection 、、Financial disbursement meansFinancial disbursement means) )

• Assets specificityAssets specificity ( that’s up to MNCs’ features of ( that’s up to MNCs’ features of

ownership, the proxy variables ownership, the proxy variables include:) include:)

contracts time-spancontracts time-span 、、contracts types contracts types 、、controlling interests of the R&D controlling interests of the R&D

unitsunits..

• control variables——control variables——dummy variable dummy variable ((INDIND) to control for industry differences.) to control for industry differences.

those fields with human-those fields with human-orientation(mainly in fields of software orientation(mainly in fields of software and network development) is coded as and network development) is coded as “1”, “1”,

other fields with asset-orientation is other fields with asset-orientation is coded as “0”.coded as “0”.

IND Freq. Percent Cum.

0 202 32.79 32.79

1 414 67.21 100

Total 616 100 　

Table 7. dummy variable for IND

MethodologyMethodology

P(ifos)=β1 IND+β2 otheramount+β3 avsalary+β4 secper+β5 intelpro+β6 method+β7 period+β8 contype1+β9 selltype3+β10 secsalary+β11 perfield+ μ

ifos Coef. Std.　Err. P>|z|

otheramount -3.31E-10 4.60E-09 0.943

avsalary -0.0002765　(***) 0.000096 0.004

secper -16.95722 11.12798 0.128

intelpro -0.2900843　(***) 0.094578 0.002

contype 1.449447　(***) 0.313532 0

method 0.6134641　(***) 0.232429 0.008

period 0.0011284　(***) 0.000259 0

selltype3 -0.4822039　(**) 0.21263 0.023

IND 1.156235　(***) 0.420541 0.006

secsalary 0.0009668　(***) 0.000358 0.007

indper -0.0011648　(***) 0.000286 0

_cons 5.382802 3.754648 0.152

Table 9. Logistic Model Estimates for Formation of outsourcing-oriented R&D transaction

Notes: ( *,p<10%; **, p<5%; ***, p<1%)

Results and DiscussionsResults and Discussions

• the findings suggest that the two the findings suggest that the two dimensions of Uncertainty and Assets dimensions of Uncertainty and Assets Specificity can be used to explained Specificity can be used to explained MNCs’ R&D transaction in Beijing. MNCs’ R&D transaction in Beijing.

• But the dimension-transaction But the dimension-transaction frequency, because of the unfavorable frequency, because of the unfavorable proxy variable, still can’t be tested.proxy variable, still can’t be tested.

Results and DiscussionsResults and Discussions

• the variables representing Uncertainty the variables representing Uncertainty such as such as average salary level, IPRP, average salary level, IPRP, financial reimbursement means;financial reimbursement means;

• and the variables representing Assets and the variables representing Assets Specificity such as Specificity such as contract time-span, contract time-span, contract types, and controlling contract types, and controlling interests in seller’s R&D unitsinterests in seller’s R&D units are are significantly related to the mode of significantly related to the mode of outsourcing-oriented transaction.outsourcing-oriented transaction.

Solving the “Paradox”Solving the “Paradox”

• the combination of two conditions the combination of two conditions provides a good explanation for the provides a good explanation for the above so-called “Paradox”above so-called “Paradox”

————necessary conditionnecessary condition ：： the maturity of the maturity of outside supplying resourceoutside supplying resource ；；

————adequate conditionadequate condition ：： outsourcing outsourcing

businessbusiness not conflicting with the not conflicting with the ownership of the MNCs ownership of the MNCs

Some suggestionsSome suggestions

• For the local government, focusing on For the local government, focusing on developing the conditions necessary developing the conditions necessary to maintain a thriving localized to maintain a thriving localized research and development communityresearch and development community

• For the MNCs, enhance the synergy For the MNCs, enhance the synergy between their international oriented between their international oriented R&D and the local oriented R&D R&D and the local oriented R&D activity.activity.

Limitation and future Limitation and future workwork• Find a suitable proxy variable for the Find a suitable proxy variable for the

transaction frequencytransaction frequency

• Better our model with new factors Better our model with new factors such as the different contract such as the different contract features(international oriented/host features(international oriented/host oriented) and culture distance.oriented) and culture distance.

You are Welcome!You are Welcome!