Beijng’s ZGC has been regarded as the most innovative region in China. There are 68 universities (including China’s most prestigious universities, Peking and Tsinghua), 213 state-sponsored R&D institutes (including the Chinese Academic of Science, CAS) and over 300 thousand students in Beijing. Moreover, Beijing hosts over 36% of the honorary fellows of the CAS and Chinese Academic of Engineering. All these indicate that Beijing has more affluent S&T personnel as compared to other cities in China.
During the early stage of economic reform, some scholars had utilized their scientific research results to build their own enterprises and created many famous mingying (none-governmental owned) high-tech enterprises such as Legend (spun-off from the CAS) and Stone. In 1988 the central government decided to
develop this area as the ‘Silicon Valley of China”, a well-defined area was delineated as the Beijing Experimental Zone for New Technology Industries (BEZ). Since then, new start-ups led by research scientists have mushroomed throughout the 1980s and early 1990s. Over the years, the development of the ZGC has been largely transformed into ‘One valley multiple parks’ (yiquduoyuan) arrangement. That means, ZGC can indicate many sciences parks in Beijing city, adding the Haidian district only in 1988, to 3 parks in 1997, to 5 parks in 1999, and to 10 parks at the current stage that are located almost around the city. Thus, the statistics used by ZGC refers to the establishment of all the parks rather than just the Haidian district.
Currently, ZGC has gathered over 13000 firms in the area in 2006 (mainly in the Haidian area), including Legend (later renamed as Lenovo), Stone, Fangzheng, and MNCs such as Lucent, HP, Ericsson, Hitachi, Siemens, etc (2008, Annual report of ZGC). But different from other regions in the south, especially Shanghai and Shenzhen, where the IT hardware is the dominant sector, the ZGC has concentrated more on the IT software development and production than on those of the hardware assembly. Many MNCs also established their R&D centers in this area. Until 2006, 95 among the top 500 largest firms in the world have set up branches in this area, among them, 65 were R&D centers (ZGC report, 2008). Even the biggest domestic firm, such as Leveno, has established it R&D center in this area and moved it hardware production and assembly into Suzhou and Shenzhen areas. Currently, many of China’s most notable ICT companies can be found in this area. Besides Lenovo, they include Baidu (百度), China’s leading Internet search engine company; UFIDA ( 用 友 ), China’s largest privately owned software company; Datang ( 大 唐 ), one of China’s largest telecommunication solution companies; Aigo ( 愛 國 者 ), China’s leading portable storage and digital entertainment product maker, etc. Together with the high concentration of R&D personnel and institutes in the Beijing area, ZGC has become the most important center for technology learning and innovation. For example, now over 70% of software developed and used in the domestic market are produced in Beijing (Beijing Statistics, 2004). The importance of IT industry in ZGC can be shown in fig. 1.
Figure 1: composition of industrial sector, ZGC
4.1 ZGC’s IT industry and innovation
The specific features of ZGC to become an innovation center have to do with the local state’s provisions of incentives and encouragement of R&D investments into the areas. Besides the usual approaches of tax break and other incentives that have been used in other areas, the Beijing municipality encouraged information flows and fostered economic and research links between enterprises, such as supporting meetings, publicizing new technological or organizational innovations, organizing job fairs for graduates of business, etc.
It also asked enterprises to use funds derived from tax breaks for further development of new technologies and forbade them to be used for collective welfare or be distributed among employees as bonus. In this sense, high-tech enterprises were required to consider tax breaks as government investment (Segal, 2003: 80). As a result, enterprises in ZGC invested more funds in R&D activities than other areas. In 2001, enterprises in ZGC invested 8 percent of their income in R&D, and technological developments contributed more than 50 percent to their profits; both figures are the highest for any enterprise in China (Segal, 2003: 78).
Moreover, due to the institutional segregation which was inherited from the socialist legacy that the Chinese state in the early 2000s forced many R&D institutes to become R&D centers of big state-owned firms and push universities to build incubation centers for nurturing venture firms. Under this new institutional arrangement, the linkage between universities, R&D institutes began to integrate, though in a very slow manner.
ZGC has also attracted large amount of overseas returnees to start their own adventures which has increased rapidly over the years (ZGC annual report, 2008). For example, the rising star Vimicro (中星微) is
founded by a returnee, whose specialties are on wireless communication chips and handheld equipments’
panel drivers. The products of Vimicro now are used widely in PCs and handsets. This type of design firms is the national hero that is highly supported by the Chinese state for its ‘independent innovation’
(z-zhu-chuang-xin) effort. Therefore the Chinese state supports this emerging firm to link closely with local handheld and service providers as to largely expand their market share.
Due to the abundant human resources in ZGC, many foreign IC design firms have set up their R&D centers in this area to take the advantage of low cost and of the local state’s favorable tax reduction. Since the MNCs pay good salary17, therefore they can recruit the most talented engineers at the expense of local IC design firms. In general, the R&D centers of MNCs in ZGC rarely have local connection with local firms. The only connection that these R&D centers have established in the area is the elite universities where they have donated labs so as to find talented students for future recruitment.
In contrast to the IT hardware industry, the IT software industry currently is the most innovative sector in ZGC. MNCs’ strategy in software industry in ZGC has mainly focused on office application and middleware software. Due to the widespread and extensive piracy rate in China’s software market, the MNCs have almost lost their competitiveness in the consumer software market field. Therefore, in this sector of the software industry, MNCs are the major system and application suppliers, including office application, enterprise management software such as enterprise resource planning (ERP), data base, etc. It is also in this sector that MNCs have interest to collaborate with Chinese firms in the expectation of high market growth.
Different from IT hardware, whose production procedures can be universalized, the IT software has to consider and adjust to the language, needs and customs of local users. That is, the utilization of office and middleware software has to be indigenized. To fulfill this demand, the MNCs can only depends on local people and local firms to expand the market share. Therefore, all the major software MNCs, such as Oracle, Sun, Cisco, collaborate with local firms to sell their products. It is also through this collaboration, the MNCs have trained local engineer related knowledge and through which knowledge diffusion has occurred (Zhou and Tong, 2003). In some cases, the local firms may develop their own products but target at lower end market in order to avoid directly confronting the interests of the MNCs. The lower end market is neither the
17 The salary for the engineers work for MNCs is average RMB 7000 per month, higher than that of local firms, average from
place where MNCs have the interest to step in nor have the capability to enter. Our interviews in ZGC found that the high end office software market is dominated by MNCs. The lower end however is dominated by local firms whose technological capability has largely learned from MNCs. For instance, the most innovative local ERP firm UFIDA (用友) learned extensively from Oracle in its early stage and then began to develop its own office software that targeted at enterprises of smaller cities or smaller enterprises in big cities.
Since UFIDA was able to enter the market where MNCs was not able to enter, it then began to take off and recently has become the biggest ERP software firm in China. In the process, UFIDA has collaborated with university professors to develop and improve new products and begun in recent year to enter into the higher end market that intend to confront with MNCs head by head in big cities.
4.2 Institutional weakness
The transformation of ZGC has largely reflected the historical transition of China’ innovation system since the early reform ear. ZGC indeed has agglomerated large amount of enterprises and R&D institutes in it since the late 1980s, which was naturally favorable for learning activities to take place. Also, due to the close connection between MNCs, abundant overseas returnees, and the synchronization of R&D with hardware production in the south, ZGC has shown strong capability in technological learning. Nevertheless, as compare to Silicon Valley and HSIP, GZC lacks a friendly institutional environment that is favorable for networking and deep technological learning to occur. This relates to the following institutional arrangements that generate the fragmentation of R&D system and de-linkage of R&D institutes and firms.
First of all, the R&D institutes tend to do researches that are not directly related to the needs of the industry. The state-sponsored R&D institutes are targeting frontier technologies or basic researches, however what the local firms need are not the frontier technologies but the middle level technologies which can support them to catch up rapidly. As a consequence, as our interviews show, managers of local firms indicate that the local R&D institutes can only provide them information and consulting functions rather than R&D collaboration. What the local universities function to them is mainly providing them future engineers than product development.
Secondly, as compared to HSIP, ZGC is a low trust cluster; enterprises show little interests in building
local networks. Local firms are more interested in seeking opportunity to expand their market share in this booming economy rather than to cooperate with other firms to deepen their technological capability. As Zhou (2005: 1127) shows in her field research, ‘When we asked the manager of a Chinese hardware company about the company's partnership with other Chinese firms, the immediate response was blunt: ZGC firms do not cooperate with one another.’ Our field research in ZGC shows similar result. Zhou (2005:1128) attributes this lacking of networking among local firms to the institutional root of Danwei (單位) mentality, or so-called `big and complete' or `small and complete' systems. We suggest instead that it is also due to the legacy of socialist system that generate distrust among people on the one hand, and the high competition among firms due to their similar level of technologies which engenders horizontal competition than collaboration on the other.
Finally, there is also downside of the rapid development of ZGC. Similar to other rapidly developing regions in China, both the leaders of the local state and enterprises in ZGC are more interested in the development of real estate than on technological innovation. This has led to the decline of entrepreneurialism that ZGC had been very proud of (Tan, 2005). In addition, this rapid development of real estate sector has also pushed up the prices of rent to a level that was not favorable for the start-ups or smaller firms to survive in this area18. Many smaller star-ups already moved out of this expensive area and sought cheaper places at the outskirt of the city to survive. The local state’s GDP-ism has greatly improved the image of this area which however is a strategy that pursues for short term growth at the expense of long term innovation investment (see also Wang, 2007).