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Weapons of Mass Destruction (WMD)

Technology Transfer to China

U.S. Commercial Technology Transfers to the People’s Republic of China

EXECUTIVE SUMMARY

The phenomenal economic growth witnessed in China since Deng Xiaoping first declared China's "A Open Door" policy in 1978 has led many to predict China's certain emergence as an economic superpower in the early 21st Century. Indeed, China has followed a structured path toward gradual market reform of its still largely state-owned industrial sector, which has been transfused with increasing amounts of foreign capital and technology.

There have been numerous reports over the last several years, however, of US companies being "forced" to transfer technology to China in exchange for access to this enormous market. The purpose of his study is to assess the extent to which US commercial technology is being, in effect, "coerced" from US companies engaged in normal business practices and joint ventures in China in exchange for access to China’s market. The cumulative effect these transfers may have on China’s efforts to modernize its economy as well as its industrial and military base is also examined. Finally, this study addresses the impact of US technology transfers to China on the issues of long-term US global competitiveness and broad economic and national security interests.

PART 1:
TECHNOLOGY TRANSFER - CHINESE POLICIES AND PROCESSES

The first section of this study addresses China’s foreign investment and trade policies, regulations, and practices, which largely explain how and why US technology is being transferred to China. The answer lies in the underlying and stated objectives of China’s foreign investment and trade policies, the goals of which are modernization and self-sufficiency of China’s industrial and military sectors. The transfer of US and other Western technology plays an important role in these efforts. This section, therefore, describes China’s policies regarding reform of its scientific and research and development institutions; China’s ability to absorb, assimilate, and innovate transferred technology; as well as the emerging role of US high-tech firms in China’s science, technology, and research efforts.

Key findings:

Science and Technology

  • China’s large-scale science and technology development plans and projects are dependent upon indigenous research and technological advances as well as foreign investment, research, and technology. Comparative analysis of China’s rules and regulations regarding domestic and foreign investment in these and other state-run programs reveals discriminatory provisions regarding the rights and obligations of foreign partners. As a result, US companies currently engaged in collaborative research under the aegis of these state plans risk losing the monetary and technological gains from their investments.

Research and Development

  • By 1993, more than half of China’s large state-owned enterprises (SOEs) had established technical development centers, founded for the purpose of improving production efficiency as well as increased product quality and marketability. China’s policies for industrial and commercial reforms continue to emphasize the need for cooperation among China’s industrial, commercial, and research enterprises in an effort to bolster the revenues of China’s state-owned enterprises and to modernize China’s economy as a whole. This effort has achieved mixed results to date.
  • In an effort to spur domestic technological innovation and to diffuse applied technologies across government, industry, scientific, and academic communities, China has established numerous National Engineering Research Centers (NERCs) across the country. These centers play a key role in China’s strategy to reform its science and technology research system and are likely to become more prominent over time. The highly regarded Chinese Academy of Sciences (CAS) has also established over 500 commercial enterprises in the high-tech sector as part of a government program to develop "technical enterprises" as subsidiaries of existing research institutes.

China’s Ability to Absorb and Apply Technology

  • China has no shortage of well-trained scientists, engineers, mathematicians, or other technical experts, unlike the United States. Chinese scholars educated abroad over the last decade reportedly make up more than half of the top scientific researchers now working on key research projects and receiving priority in conducting this research. As China’s economic reforms continue and older researchers retire before the turn of the century, there will be more opportunities for China’s younger, Western-educated, science and technology-minded researchers and engineers. As a result, high-tech firms in the United States and the government of the PRC are competing in some cases today for the services of these same talented individuals.
  • China is increasingly attractive for highly skilled, Western-trained Chinese workers given the increased opportunities to work with US and other high-tech firms in China. This fact plus the benefits that accrue to the US firm as a result, make it likely that the trend toward US high-tech firms establishing joint ventures accompanied by R&D and training centers in China will continue for the foreseeable future.

Foreign Direct Investment

  • China’s investment policies are explicit in the type of foreign investment that is "prohibited," "permitted," or "encouraged," with the latter category focusing on advanced technologies. Foreign investors in high-tech industries enjoy preferential treatment, such as tax rebates and lower tariff rates as incentive to transfer technology, but are at the same time subject to regulations not imposed on domestic competitors.
  • China’s investment policies are geared toward shifting foreign investment into the central and Western parts of China. As this trend takes hold, US companies will have to carefully determine the end use or end-user of US high-tech, potentially dual-use goods. China’s national laboratories and the majority of China’s military/defense industrial enterprises are located in this region, some of which are involved in foreign joint ventures.
  • The amount of FDI coming into China reached a peak of $111,436 million and 83,437 new contracts in 1993. The greatest growth has been in the number and value of joint venture contracts, although the number of overall contracts has decreased since 1993. China’s investment and industrial policies frequently include explicit provisions for technology transfers in the form of local content requirements, production export quotas, and/or collaboration in production, research or training.
  • China receives more foreign direct investment than any other developing nation and currently ranks second only the United States. In 1996, the US contribution to China’s FDI inflow was almost $3 billion, much of which was invested in manufacturing enterprises. The US is among the top FDI contributors to China.
  • The rate of Chinese utilization of FDI (contracts or investments that are actually implemented or used) amounted in 1996 to over 50 percent, for the first time since 1990. This indicates that Chinese officials and enterprises are making better use of, and can better absorb, foreign capital and the technology that typically accompanies it.
  • Exports outnumber imports in China’s top trading, coastal zones (except in the cities of Beijing, Shanghai, and Tianjin, where imports exceeded exports in 1996). According to Chinese statistics, the share of Chinese exports produced in foreign-invested plants (either joint ventures or wholly foreign owned enterprises) has grown significantly over the last decade, accounting for nearly half of all exports in 1996.

Import Policies

  • In the effort to develop indigenous high-tech industries, China's foreign import and investment policies have become increasingly selective and restrictive in the type of imports and investments that are allowed or officially encouraged. In particular, there has been an increased emphasis on industry-specific investment and high-technology imports.
  • The Chinese leadership has identified several industrial sectors as "pillar" industries, namely machinery, electronics, petrochemicals, automobiles and construction materials. The central government will provide more than $60 billion through the year 2000 to promote domestic capabilities in these industries. These pillar industries will be developed with preferential state support as the primary engines of continued economic growth in China.

Defense Conversion

  • China’s economic and industrial development strategies and defense conversion programs are also intended to assist China’s military development.
  • China’s military capabilities are considered by Western and US analysts to be far behind in terms of Western models of military technology as well as in command, control, and force structure. However, the extent to which the commercial activities of China’s civilian defense industrial complex are tied to the uniformed military departments (PLA) is not well understood in the West. More research is needed on this issue.

The Role of US Technology

  • One of the more common approaches to establishing a presence as well as goodwill in China is by donating equipment or funds for training or education in China. Numerous US high-tech firms have done so, often in connection with one of China’s leading universities or research centers.
  • The most significant commercial offset and/or initiative put forward by US high-tech companies in seeking approval for joint venture manufacturing partnerships or facilities in China is the establishment of an institution, center, or lab devoted to joint research and development. This is a relatively recent trend and involves many US firms in several high-tech sectors in China. Compared to donations of equipment and scholarships as well as training for Chinese workers, the new R&D initiatives would appear to involve more technology transfer to China. The extent of collaboration and product development, however, is as yet unclear.

 

PART 2:
US PERSPECTIVES ON TECHNOLOGY TRANSFERS TO CHINA

This section examines US investments in three key industry sectors in China: automotive, aerospace, electronics (including telecommunications). Each case study assesses the relationship between investment by high-tech US firms and provisions in China’s investment or industrial policies, competition with China’s state-owned or non-state sector enterprises, the effect of China’s infrastructure on investment, and the current state of the industry in China. Also addressed are technological or potential military advances that could result from US commercial technology transfers. Trade statistics are included as a means of assessing the effect(s) of US high-tech investment in these areas. Finally, a brief examination is made with regard to the approaches to technology transfers taken by the European Union nations and Japan, and contrasting these to the prevailing US view.

Key findings:

  • The dynamism of China’s relatively rapid economic liberalization since 1978 has overshadowed in large part China’s industrial goals and policies that are explicitly designed to restrict and manage foreign investment in order to protect and bolster China’s domestic industries through acquisition of high-technology imports.
  • While numerous complaints have been registered by US companies with the US Government (formally and informally) with regard to unfair trade practices in China, many companies are hesitant, if not unwilling, to complain publicly or even privately about the numerous difficulties inherent in doing business in China. Nevertheless, the majority of industry representatives interviewed for this study clearly stated that technology transfers are required to do business in China, although most also were optimistic about their future business prospects in China. They also did not think the "price" had yet become too high in terms of the level or type of technology transferred as a result.
  • China’s is a buyer’s market. As such, the leverage of such an enormous potential market allows Chinese officials to frequently play foreign competitors against one another in their bids for joint venture contracts and large-scale, government-funded infrastructure projects in China. The typical result is usually more technology being transferred as competitors bid up the level or type of technology that they are willing to offer. There are also recent cases, however, of foreign companies joining forces with domestic or foreign companies in the same industry in order to enhance their own leverage. Microsoft, DEC, and Oracle, for instance, have joined forces in selling software in China and Exxon, Raytheon, Dupont, and Union Carbide have teamed up with Japanese companies in China. Although cooperation may not be possible across all industries, where such an arrangement is possible, there will likely be less technology being transferred or coerced from foreign firms.
  • The answer given most often in interviews and in press reports as to why, despite demands made for commercial technology transfers and other unfair trade practices in China, US industry continues to invest heavily in China is that one cannot not be in China lest a competitor get a foothold. US high-tech firms seem willing to pay the price in technology transfers - in exchange for limited market access.
  • US high-tech firms in China enjoy large market shares in the aerospace and electronics industries, although not in the automotive sector. Despite several years of high-level investment in China, however, survey data and press reports indicate that relatively few US companies are realizing profits or even a return on their investments in China.
  • China’s electronics sector, more than the other industry sectors studied, has emerged rapidly and achieved some technological successes. This is because of the sheer size of China’s market, the learning curve in the electronics industry (the potential for "fast followers" based on the success of other Asian nations in this sector), and the potential for "leapfrogging" to the most advanced technologies (which China’s comparatively immature electronics market and infrastructure makes more likely). China’s capacity and increasing sophistication in the electronics sector could, if current trends continue, easily make China a leading producer (by volume) of electronics in the next decade or two. However, China’s electronics industry remains highly dependent on foreign inputs for design, marketing, and R&D.
  • While the EU has fully and officially embraced technology transfers to China, Japan has been in the past more conservative in investing or sharing its advanced technologies, while the United States’ approach has been somewhere in the middle.

Conclusion: US Commercial Technology Transfers to China

This section addresses the potential short- and long-term economic and security implications of US technology transfers to the People's Republic of China. The conclusion addresses the basic questions that this study is designed to answer: "Is the transfer of US technology the price of entry into China’s market?," and "Are US commercial technology transfers forced?" The following are key findings resulting from this study:

Key Findings:

  • According to experts and executives interviewed for this study, the transfer of advanced US technology is the price of market access in China for US high-tech companies.
  • Most US and other foreign investors in China thus far seem willing to pay the price of technology transfers - even "state-of-the-art technologies - in order to "gain a foothold" or to "establish a beachhead" in China with the expectation that the country’s enormous market potential eventually will be realized. A primary motivation for investing in China at this time and despite the difficulties and risks involved, is in order to beat foreign and domestic competitors to the China market.
  • Numerous US high-tech firms have agreed to commercial offset or technology transfer agreements in exchange for joint ventures and limited market access in China. An increasingly frequent type of commercial offset is the establishment of a training or R&D center, institute, or lab, typically with one of China’s premier universities or research institutes located in Beijing or Shanghai.
  • Technology transfer is both mandated in Chinese regulations or industrial policies (with which US companies wishing to invest in China must comply) and used as a deal-maker or sweetener by US firms seeking joint venture contracts in China.
  • Unless significant changes are made to China’s current investment regulations and import/export policies, US commercial technology transfers to China are likely to continue, potentially enhancing Chinese competitiveness in high-technology industry sectors such as aerospace and electronics. The US-China trade imbalance may continue to worsen in the short term as commercial offset demands and foreign-invested enterprise exports increase and in the long term as China’s plans to develop indigenous capabilities in both basic and advanced technology industries are implemented.
  • In the industry sectors studied, it is apparent that what technological advances and increased exports exist are disproportionately due to foreign investment capital and technology rather than to indigenous technological advances.
  • The US export control review process is not designed to evaluate continuing US commercial technology transfers to China that are demanded or offered in exchange for market access.
  • Although it is not possible to make a clear determination of the US national security implications of commercial US technology transfers to China, the continuation of the trends identified in this study could pose long-term challenges to US national security interests. This study does not identify any specific Chinese military advances made as a result of US commercial technology transfers, but does suggest that continued pressures on foreign high-tech firms to transfer advanced commercial technologies, if successful, could indirectly benefit China’s efforts to modernize its military.

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