Effects of Technology Transfer into China Unit

International business

Effectsof Technology Transfer into China

Unit

Chinahas for the last several decades experienced a ‘gold-rush’ of itsown kind with multinationals seeking a slice of the big market andcheap labor. The Chinese government has placed strict restrictions toforeign firms seeking to enter the Chinese market- firms have to setup local plants to access the market. For other industries such asbanking and brokerage houses social media, market access isrestricted. Firms are thus made to set up plants in China and carryout intensive technology transfer into China to maintain theirproduction standards. This process has its pros and cons with themain issues emerging being the potential loss of competitivenessresulting from technology transfer. The question then is, shouldfirms go along with China’s terms, or should they risk losing salesby refusing to transfer technology? To answer this question, it isonly proper to compare the benefits and potential pitfalls oftechnology transfer to China by foreign firms entering the Chinesemarket.

Tostart with, China represents one of the largest geographical marketsin the world. Currently, it is estimated the middle class populationin the country stands at over 200 million and is expected to surpassthe entire American population soon. Some predictions place theChinese middle class population at 670 million by 2021 (Kharas &ampGertz 2010). McKinsey Global Institute projects China’s middleclass will increase from 43% of the population today to 76% by 2025(Knowledge Wharton 2008). Such a large market with growing disposableincome presents an opportunity for significant growth for businesses.The requirement to establish plants in China and facilitatetechnology transfer in order to access this market seems to be asensible trade off. In fact, for firms even not interested in China’sdomestic market but rather the country’s cheap labor have set upplants in the which implies more profits.

Forfirms seeking to market in China, they not only enjoy cheap labor butalso generate home bias. Again, it allows foreign firms to adaptbetter to local needs as they learn. Most western-based firms developunique products and brands targeting specifically the westernmarkets. Attempts at marketing such products using their westernmarketing approaches have failed in China. Several western firms suchas Yahoo, Whirlpool and IBM have had to readjust their approach toChina. For example Whirlpool was forced to close down its washingmachine plant in Shanghai in 2009 and opted for a joint venture witha local firm same as IBM (Tita 2013) and UK retailer Tesco (Chinaloses 2014). This way, firms’ knowhow and technological capacityare transferred through local firms and not directly. Such moves havecreated an impression of failed firms in China but it is notnecessarily the case as it is just a change in strategy to recognizelocal business environment.

However,all is not bliss in China. There are claims that China’s growth isoverrated and that it is not sustainable. Some economists havepointed out that China’s massive population does not guaranteelocal consumer demand given that the economy is export based (Chinaloses 2014). Furthermore, growing wages have led to claims that thecountry is soon approaching the Lewis Turning point. This is a pointin an economy marked by increased labor costs after exhaustion oflabor supply from rural and agriculture-based sources. When economiesreach the Lewis turning point, some firms shift from labor intensivemanufacturing to service industry (China approaching 2013). A highlyrestricted service industry in China may not allow foreign players toshift into service industry meaning lost investments and highercosts.

Otherthan that, technology transfer creates risks of knowledge leak anddrain. The Chinese government’s policy to promote homegrownindustries to adapt better technologies and management skills toincrease the country’s competitiveness and quality of its productsis well thought out. To adhere to this policy and safeguard theircompetitiveness, foreign firms have resulted to FDI, licensing,contracting and international joint ventures as measures to accessthe Chinese market and facilitate technology transfer. However, someChinese firms seek to acquire foreign technology through inadvertenttechnology leak, reverse engineering, imitation, and evencounterfeiting. In fact, the US government estimates that 80% of allUS-based patent violations are from China (Schotter &amp Tearden,2014). This has been one of the greatest hindrances for foreign firmsthat have the potential to impact the long term profitability offirms.

Despitethe challenges posed by changing business environment in China, firmshave been unable to resist the allure of the Chinese market andenticing government policies. However, firms must develop mechanismsthat enable them to shift their knowhow, technology and innovationcapabilities to China safely without losing critical know-how thatcements their competitiveness. Some of the mechanisms suggested by(Kharas &amp Gertz 2010) include having strong confidentialityprovisions in the technology transfer contract, contractualagreements on technology improvements with Chinese parties as it isallowed in China and engaging in joint ventures and contractmanufacturing with clear intellectual property protection provisions.Other simple short term measures include encoding emails, registeringtrademarks and designs, screening visitors to RD and includingintellectual property clauses on employment contracts.

Wherethese issues are addressed, firms can enjoy the growth potentialoffered by the Chinese market by transferring technology and knowhowto China in an appropriate way that does not undermine long termcompetitiveness. Therefore, firms can rip the benefits of access tolarge market and retain their competitiveness in the short term. Inthe long run, China will hit the Lewis point resulting in highercosts and local firms will have gained know-how well enough tocompete better with foreign firms. As a result, Chinese firms will bemore effectively in the global market with foreign firms losing theirmarket share. But for now, all they can do is to safeguard theirknowhow and clamor for a piece of China.

References

Chinaloses its allure (25thJan 2014). TheEconomist.Retrieved from

http://www.economist.com/news/leaders/21595001-life-getting-tougher-foreign-companies-those-want-stay-will-have-adjust-China

Chinaapproaching the turning point (Jan 31st 2013). TheEconomist.China approaching the

turningpoint. Retrieved from

http://www.economist.com/blogs/freeexchange/2013/01/growth-and-China

Kharas,&amp Gertz (2010). The new global middle class: a cross-over fromWest to East. In Li,

C.(ed.). China’sEmerging Middle Class: Beyond Economic Transformation.Washington, DC: Brookings Institution Press.

KnowledgeWharton (2008). Thenew global middle class: potentially profitable — but also unpredictable. Retrievedfrom

The New Global Middle Class: Potentially Profitable — but Also Unpredictable

Schotter,A. &amp Teagarden, M. (17thJun 2014). Protecting intellectual property in China.

Retrievedfrom

http://sloanreview.mit.edu/article/protecting-intellectual-property-in-China/

Tita,B. (13thAug 2013). Whirlpool to buy majority stake in hefei sanyo for $552Million.

WallStreet Journal. Retrieved fromhttp://www.wsj.com/articles/SB10001424127887324085304579010493142864308

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