Many multinationals have shifted their research and development (R&D) centres to China, which is fast becoming the "brain" of many global firms.

The shift away from the nation's earlier role as a manufacturing workshop and a supermarket for foreign goods illustrates foreign investors' increasing confidence in the Chinese economy.

"Foreign investors have basically finished their probes and trials of the Chinese market, and are now gathering momentum to boldly integrate themselves into the country's economy," said Lu Jinyong, a professor at the University of International Business and Economics in Beijing.

"China has become an increasingly important link in multinationals' global operations," Lu told China Daily.

The experience of STMicroelectronics (ST) clearly shows the shift that has already taken place.

The European semiconductor company, a leader in the field, arrived in China in the 1980s. The company's products were first distributed on the Chinese mainland via its Hong Kong sales office.

ST began to set up liaison offices on the Chinese mainland in the 1990s, establishing its first assembly and test plant in China in 1996, a joint venture (JV) based in Shenzhen, which is currently one of the largest assembly and test facilities in China.

The setting up of ST's Shenzhen Design Centre followed hot on the heels of this, catering to growing local demand for microchip design.

The company then further improved its operations in China by establishing a logistics facility in Shanghai's Waigaoqiao bonded zone in 2002, consolidating the distribution and warehousing of ST products for its Chinese customers.

This experience was the precursor to ST's boldest investment decision yet in China, when it set up its advanced R&D centre in Beijing in late 2002 in order to develop leading-edge technologies, such as TD-SCDMA, which is one of the three 3G standards of 3GPP, multimedia applications, high-definition TV and set-top boxes for digital TV.

The centre now employs more than 60 R&D and application engineers, all of them Chinese, with that figure set to increase to more than 100 by the end of the year, said ST spokeswoman Qiu Hong.

Further increasing its localization in China, ST has launched a programme to recruit local postgraduates for the firm in Beijing, Shanghai and Shenzhen, with between 20 and 30 students already recruited in each city.

Apart from ST, an increasing number of high-tech, automobile, pharmaceutical, chemical and manufacturing multinationals have established global R&D centres in China in the past two to three years.

"It is natural for international giants to move part of their core businesses, such as R&D, to China," said Lu.

This is, to a certain extent, the result of a growing demand for localizing the firms' products, he said.

But Lu added that, more importantly, it is an important element in the readjustment of companies' global layout.

"Now China's high-quality R&D resources have made them willing to establish R&D centres here," Lu believes.

These centres are playing an important role in providing research findings which can be applied globally.

More than 400 of top 500 multinationals had set up R&D centres in China by the end of 2003.

And some global players also plan to transfer their regional bases to China to enhance their penetration into the world's fastest-growing market.

According to a Fortune survey, 92 per cent of top multinationals intend to locate their regional bases in China. They plan to situate the bases in the country's first-tier cities such as Shanghai, Beijing, Guangzhou and Shenzhen.

As of March this year, Shanghai was home to more than 50 such headquarters, with Beijing hosting about 30.

US-based speciality retailer Bestbuy, a newcomer to the Chinese retail market, is gathering pace in China.

One of the first things it did was to establish its Asia-Pacific base and a global purchasing centre in Shanghai, in anticipation of the full opening of this sector, as a result of China's commitments to the World Trade Organization (WTO).

The firm, a major player in the North American market, is likely to buy US$1.2 billion worth of household electrical appliances and computers from China this year.

The purchase will mainly be conducted by Bestbuy's Asia-Pacific base.

"Locating their command centres in China obviously reflects foreign investors' confidence in the growing and profitable Chinese market," Lu said.

The analyst believes China's robust economic growth and continuous efforts to meet its WTO commitments have increased multinationals' expectations.

China has led the world with an over 7 per cent gross domestic product growth in recent years.

And Lu pointed out that the consumption market is growing at a brisk pace of more than 9 per cent.

No foreign players can afford to miss out on such a big market.

And confidence has largely replaced doubts and uncertainties in many foreign investors' minds as China has stuck to its WTO pledges over the past two years, Lu said.

"Great achievements have been made in opening quite a number of sectors to foreign investment after WTO entry," Lu believes.

It is also thanks to this opening that many foreign investors have chosen to run wholly owned companies in China, instead of seeking Chinese partners.

Wholly owned foreign enterprises have outnumbered joint ventures in China since 2000.

More importantly, this illustrates that foreign investors are no longer hesitant about entering the China market, the expert suggested.

"Wholly owned foreign firms will mushroom as the three years of grace for many Chinese sectors will end by 2004 under WTO membership," he said.

The trade and advertising sectors are among those on the verge of being fully opened.

Overseas investors have shown interest in setting up wholly owned trading and advertising subsidiaries once deregulation takes place.

Lu believes that the deeper integration of multinationals into the Chinese market will also help develop local enterprises and industries.

"Since foreign investors are attaching more importance to raising R&D in China, local professionals will have more chance to pursue the state-of-art technologies," he said.

"It represents a new development in China's utilization of foreign funds," he believes.

But a larger capital inflow will also squeeze local players, Lu said.

Source: China Daily