R&D Subsidiary Mandates of Western MNEs in China: A Bumpy Road towards Upgrading

The number of Western MNCs established R&D centers in China has been rising from the year 2000 starting with under 200 centers to over 1300 centers by the end of 2010 (Stanley, Yang, & Ritacca, 2013). These developments followed increased Foreign Direct Investment (FDI) to China, underpinned by strong Chinese government support and six to seven million graduates joining domestic workforce every year (Søberg, 2010; Stanley et al., 2013). According to the United Nations Conference on Trade and Development Survey, as early as in 2005, China became the most attractive location for R&D investment in the world (Motohashi, 2012). These R&D investments to a large extent are flowing into technological parks with good supporting infrastructure in Beijing, Shanghai, Guangzhou and Shenzhen (Stanley et al., 2013; Walsh, 2007). Aside from the lucrative advantages of offshoring R&D to China, there are numerous challenges associated with setting up R&D centers in China. To mention just a few: intellectual property rights enforcement concerns (Sun, Von Zedtwitz, & Fred Simon, 2007; Walsh, 2007), human resource issues related to high employee turnover, limited creativity and initiative, language and cultural differences with western counterparts (Simon, 2007; Von Zedtwitz, Ikeda, Gong, Carpenter, & Hämäläinen, 2007). Therefore, not surprisingly many activities of Western MNCs R&D subsidiaries followed the trajectory that started with a ‘local competence-exploiting’ mandate, meaning that the role of the subsidiary was primarily focused on development and product adaptation to the local market (Lundin & Serger, 2007), rather than conducting new basic research which could be applied globally across the MNC (Bartlett & Ghoshal, 1998; Govindarajan & Trimble, 2012). Overtime, some R&D subsidiaries evolved and achieved a ‘global competence-creating’ mandate. They have been successful in new product development aimed at the worldwide market, instead of just performing localization and product adaptation for the Chinese market. However, this road towards mandate upgrading may be rather bumpy. In this paper, we aim at contributing to the debate about why many Western MNCs in China struggle to transform their locally-oriented R&D subsidiaries to centers with global competence-creating R&D mandate. There are many well-developed theoretical and practical concepts that provide a good point of departure for this investigation. In particular, this paper draws on knowledge management studies and the role of knowledge management in the process of R&D mandate upgrading. Our approach to answering the research question of the paper is based on the principles of engagement with practice through case studies and action research (Yin, 2009; Coughlan&Coglan, 2002). The empirical foundation of this paper consists of two case studies of Western MNCs operating R&D subsidiaries on the Chinese market. The paper concludes with theoretical propositions about the challenges of R&D mandate upgrading and makes recommendations for managers dealing with these challenges in their daily work.