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How foreign investments fuel China’s research and development (R&D) surge

How foreign investments fuel China’s research and development (R&D) surge.

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China’s commitment to becoming a global innovation leader has ushered in a series of transformative policy measures to enhance foreign investment in research and development (R&D). This strategic move is not merely about enhancing China’s technological capabilities; it’s an open invitation for global businesses to participate in one of the most dynamic R&D ecosystems in the world.

Amidst these policy advancements, it’s crucial to understand the broader landscape of global R&D funding, where significant shifts have occurred over the past two decades. Historically, the United States has led the way in R&D spending, investing more than twice the amount of its closest competitor throughout the 2000s. Nonetheless, China has rapidly closed this gap, marking its territory as a formidable force in science and technology.

In 2000, China’s contribution to global R&D funding was less than 5%. However, by 2020, this figure had catapulted to over 24%, according to data from the Congressional Research Service (CRS), and it keeps increasing. This surge placed China ahead of other leading countries, highlighting its unwavering commitment to R&D. Today, China stands as the second-largest spender on R&D among leading nations, showcasing its ambitions to lead in scientific and technological innovation [1]. Understanding the meteoric rise in China’s contribution to global R&D unveils the strategic underpinnings of a nation poised to innovate. Let’s delve deeper into the blueprint of policies that China has orchestrated to harness foreign expertise and investment in its R&D sector.

China’s blueprint for R&D: A closer look at the policies

In an unprecedented policy shift detailed in documents released last year, China outlined measures to support foreign-funded R&D centres [2]. These policies are designed to empower centres to engage in fundamental research, facilitate access to national research programs and provide significant support in terms of infrastructure and funding. Furthermore, collaborations between foreign investors and higher-education institutions are encouraged, fostering a symbiotic relationship that aims to drive scientific innovation and technological progress.

They not only address financial and infrastructural support, but they also address critical operational and talent-related aspects such as:

  • Tax policies and simplification of procedures: The implementation of tax incentives for science and technology innovation showcases China’s dedication to bringing scientific breakthroughs. Local governments have been directed to streamline approval procedures, simplifying the operational maze for foreign R&D enterprises.
  • Infrastructural and financial aid: There’s a clear commitment to providing comprehensive support, including infrastructure construction, equipment procurement, and operational funding, to bolster the R&D ecosystem.
  • Educational collaboration: China is opening doors wider for collaborations with higher education institutions, scientific research institutes and vocational schools, aiming to create a synergy that could propel innovation to new heights.
  • Open innovation platforms: Foreign entities are encouraged to establish R&D centres that double as open innovation platforms, integrating diverse intellectual resources and fostering collaborative breakthroughs.
  • Financial support and government program participation: Financial institutions are being incentivised to back foreign-funded R&D initiatives while ensuring these entities can participate in government programs without obstacles.

Among the multifaceted approaches China has adopted to strengthen its R&D ecosystem, fiscal policy stands out as a cornerstone. The recent enhancements in tax policies and financial incentives exemplify China’s commitment to attracting and actively nurturing innovation through economic measures.

Enhancing innovation through tax policies and financial incentives

In March 2023, the Ministry of Finance and the State Tax Administration enhanced R&D incentives to encourage technological innovation:

  • Expanded pre-tax deductions: Enterprises can now deduct an additional 100% of R&D expenses if no intangible assets are formed. If intangible assets result, a 200% deduction of these costs allows amortisation, broadening the incentive’s scope beyond specific industries.
  • Scope and eligibility: While more industries can benefit, tobacco and real estate sectors remain excluded. Eligibility is reserved for resident enterprises with a sound accounting system capable of accurate R&D expense tracking.
  • Qualifying expenses:
    • Personnel expenses for staff directly engaged in R&D activities.
    • Direct expenses such as materials and utilities consumed in R&D.
    • Depreciation of R&D equipment and amortisation of intangible assets used in R&D.
    • Other related costs include design fees, clinical trials, and field test fees.
  • Compliance and application: Enterprises must self-assess and declare eligible expenses, maintaining documentation for verification. This policy encourages transparency in leveraging tax incentives for R&D.
Our article on tax incentives offers detailed information about these tax benefits.

While financial incentives lay the groundwork for a fertile R&D environment, China recognises that true innovation requires more than monetary support. It necessitates a streamlined, efficient management system to attract and retain global talent, as showcased in the next section.

Streamlining R&D in China: Optimising management and talent flow

The policies extend beyond financial and infrastructural support, addressing critical operational and talent-related aspects:

  • Optimisation of research material clearance: By improving the clearance and regulation processes for scientific research materials and expediting quarantine approvals, China is reducing bureaucratic friction, making R&D operations smoother and more efficient.
  • Introduction of overseas talent: Foreign-funded R&D centres are now empowered to apply for work and residence permits for their international researchers, significantly simplifying the talent influx process. Moreover, overseas talents are encouraged to pursue professional titles, while local governments are urged to offer holistic support, including subsidies and social security benefits for high-calibre talents.

With the wheels of innovation set into motion through optimised management and an influx of international talent, safeguarding the resultant intellectual property becomes paramount.

Elevating IPR protection: Safeguarding innovations

China’s intensified focus on IPR protection is a testament to its holistic approach towards creating a secure and thriving R&D landscape:

  • Improving IP protection systems: A swift acceleration in constructing IP protection centres and enhanced enforcement mechanisms ensures that sensitive business information and innovations are well-guarded.
  • Strengthening legal frameworks: The introduction of stringent legal structures for IPR protection reassures investors that their intellectual assets are secure, which is paramount in fostering an environment of trust for technological exchange.

Beyond national policies and frameworks, the local implementation of China’s ambitious R&D strategy plays a critical role in its success. Localised approaches adopted by various cities further define the country’s enrichment of the R&D landscape.

Localised support: Spotlight on multiple cities in China with R&D initiatives

Recognising cities’ critical role in the national ambition to dominate global innovation, Shanghai’s municipal government has unveiled a comprehensive plan to enhance and boost the development of foreign R&D centres. This initiative is released with the immediate goal of positioning Shanghai as a prominent global hub for science and technology innovation. It aligns with China’s overarching strategy to enhance the business environment for foreign companies.

Shanghai’s plan is distinguished by nine targeted areas of support, ranging from relaxed regulation of cross-border data flow to customs clearance facilitation for R&D materials. This bold strategy is designed to attract and support the clustering and capability upgrade of foreign-funded R&D centres, demonstrating Shanghai’s proactive approach to fostering an open, innovative environment.

The response from global technology leaders is a testament to the effectiveness of these local measures. Companies like Apple and Bosch have announced significant expansions of their R&D operations in China [3], signalling confidence in the country’s R&D trajectory and the specific opportunities presented by Shanghai. Apple’s plan to open a new R&D centre in Shenzhen and upgrade its Shanghai centre underscores the strategic importance of local initiatives in attracting foreign investment.

As cities like Shanghai step forward with ambitious R&D plans, the opportunities for foreign enterprises in China become rich and complex. The intricacies of local regulations, the nuances of the business environment and the strategic importance of aligning with China’s innovation goals can pose significant challenges.

Understanding and leveraging these opportunities requires more than a cursory knowledge of the landscape. It requires a partner with deep knowledge of China’s R&D sector, capable of navigating the complex landscape of regulations, identifying opportunities and planning strategically for success.

Conclusion

China’s commitment to becoming a global innovation leader is evident through its transformative policy measures to attract foreign investment in R&D. By creating one of the most dynamic R&D ecosystems in the world, China not only enhances its technological capabilities but also invites global businesses to participate. Over the past two decades, China has rapidly closed the gap in R&D spending and now stands as the second-largest spender globally. This rise in funding showcases China’s unwavering dedication to scientific and technological innovation. The country has implemented a blueprint of policies that support foreign-funded R&D centres, offering financial incentives, simplifying procedures and promoting collaborations with higher education institutions.

China’s tax policies and financial incentives demonstrate its commitment to nurturing innovation through economic measures. By streamlining R&D operations and optimising talent flow, China aims to create a streamlined and efficient management system to attract and retain global talent. Overall, China’s strategic approach to R&D showcases its ambition to innovate and solidify its position as a global player in the science and technology sector.

How Acclime can help

Acclime stands out with its expansive network and in-depth local expertise, positioning it as the premier partner for businesses looking to navigate and capitalise on China’s targeted R&D support frameworks and expansion opportunities in key cities. Acclime offers unparalleled localised knowledge and support, which is essential for success in the intricate R&D sector. Our services include:

  • Develop or enhance R&D management systems to streamline operations.
  • Execution of feasibility studies and strategic planning for securing government subsidies and optimising financial support.
  • Navigation through the application and implementation process for R&D tax incentives, ensuring you maximise available benefits.
  • Strategic planning for R&D tax incentives and supply chain structuring, aligning your operations with fiscal efficiencies.
  • Analysis of green tax incentives and management practices to enhance sustainability and profitability.
  • Intellectual property planning and application assistance, safeguarding your innovations.
  • Expert support for audit defence, minimising compliance risks.

Choosing Acclime as your partner guarantees a smooth entry and thriving presence in China’s vibrant R&D ecosystem. These services are designed to help your business fully leverage the myriad of opportunities, from navigating tax incentives and protecting intellectual property to acquiring top talent—all while reducing operational hurdles and compliance complexities. With Acclime, you gain more than entry into China’s R&D sector; you position yourself to lead.

Sources

  1. https://chinapower.csis.org/china-research-and-development-rnd/
  2. https://english.www.gov.cn/policies/latestreleases/202301/18/content_WS63c79b01c6d0a757729e5cf7.html
  3. https://www.globaltimes.cn/page/202403/1308687.shtml

Contact our teams for expert support and further information about China’s economy.

Russel Brown OBE, Vice Chairman, Partner, r.brown@acclime.com
Robin Tabbers, Partner, r.tabbers@acclime.com
Maxime Van ‘t Klooster, Partner, m.vantklooster@acclime.com