The Innovativeness and Heterogeneity of ForeignInvested HighTech Companies in Shanghai

China has taken a foreign direct investment-based approach toward increasing its capital and knowledge base, and developing into an innovative economy. However, little quantitative evidence exists about the factors that drive innovations of foreign-invested enterprises (FIEs) there. This paper uses survey data from high-technology firms in Shanghai to discuss factors affecting their innovativeness. It takes the concepts of absorptive capacity, export orientation, and innovationrelated cooperation as a starting point. It highlights how the interplay of strategies and resources affects innovativeness and heterogeneity of FIEs. The most innovative FIEs are endowed with a strong human capital base and R&D activities, which at the same time target export markets and whose cooperative partners involve firms other than their parent company. The results underline the necessity to differentiate between the different types of FIEs when examining their innovativeness. A central pillar of China’s economic development strategy is foreign direct investment (FDI) (Görg and Greenaway 2004; Kim 1991; Wei and Liefner 2012). Foreign investors are offered access to the country’s huge market and benefit from a range of preferential policies. In exchange, the Chinese government expects a substantial knowledge transfer from transnational companies (TNCs) to their Chinese subsidiaries (Hayter and Han 1998). The intention is that the subsidiaries (also known as foreign-invested enterprises, FIEs) contribute to innovations generated in China. However, the literature does not address the extent to which FIEs produce innovations in China. Empirical results often contain contradictions. Niosi and Ingo Liefner is a professor in Justus Liebig University Giessen, Giessen, Germany. His e-mail address is: [email protected]. Yehua Dennis Wei is a professor in the University of Utah, Salt Lake City, UT, USA. His e-mail address is: [email protected]. Gang Zeng is a professor in East China Normal University, Shanghai, China. His e-mail address is: [email protected]. The authors like to acknowledge the funding of the Alexander von Humboldt foundation (3.1 TCVERLDEU/1131699) and the German Research Foundation (Scha198/42-1). We also like to thank the reviewers for helpful comments. bs_bs_banner Growth and Change Vol. 44 No. 3 (September 2013), pp. 522–549 Submitted December 2010; revised January 2011; accepted March 2012. © 2013 Wiley Periodicals, Inc Marcotte (2004) and Buckley, Clegg, and Tan (2004) present examples of both successes and failures in international technology transfer, and Farris (2007) claims that most innovations in China originate overseas. In contrast, Xue and Liang (2008) highlight the boom of foreign-invested R&D laboratories in China, and Hu and Mathews (2008) claim that FIEs exhibit the highest levels of innovative efficiency in China. We argue that the real problem behind contradictory evidence is rooted in the specific characteristics of FDI in China. In particular, it is due to variations in the interplay of TNC strategy and FIE resources. When looking at innovations produced by FIEs in China, three aspects need to be considered: internal resources of FIEs, TNC strategies, and characteristics specific to the Chinese economy. In line with the dominant strand of literature, one must assume resource bundles to determine the core competence of FIEs, their absorptive capacity, and thus their level of innovativeness (Cohen and Levinthal 1989; Dierickx and Cool 1989; Wernerfelt 1984). Second, the strategic decisions of TNCs, i.e. of their parent firm, must be considered. A TNC may encourage its subsidiary to carry out R&D and create innovations; it may use the FIE for knowledge-seeking activities, asking it to absorb knowledge from local universities and research institutes (Dunning 2000; Guan et al. 2009; Kuemmerle 1999; Wei et al. 2012). However, the TNC may also restrict the subsidiaries to carrying out narrowly defined manufacturing tasks or product adaptations below the level of innovations. TNCs have the option of allocating innovative tasks to different sites and regions, and of transferring knowledge needed for innovation to the FIE without relying on its internal resources. Hence, the different strategies affect FIE innovativeness (Szulanski 1996; Teece 1977; Wang, Tong, and Koh 2004). Third, in China, FIE resources and business activities may have different functions than those assumed in theoretical models. For example, FIEs are regarded as highly reliable and well-paying employers, and are thus attractive to highly qualified employees and may hire them regardless of any strategic aim to use their abilities for innovation. Moreover, FIEs may claim to be conducting R&D to receive tax benefits (Gassmann and Han 2004). Such peculiarities of contemporary China blur the effect that the factors examined usually exert on innovativeness. We propose that analyses of FIE innovativeness in China need to take into account both company resources and TNC strategy. Moreover, features related to the transitory context of the Chinese economy must be considered. Empirical data are most accurate when it comes to assessing FIE resources, although we only have information on the quantity of resources commanded and little knowledge about their quality. Moreover, some reliable indicators exist that have a clear relation to TNC strategies, for example indicators for cooperation and knowledge FOREIGN-INVESTED HIGH-TECH FIRMS IN SHANGHAI 523