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 Largely absent from American research hubs a decade ago, Chinese
firms including Huawei Technologies and ZTE Corp are now using U.S.
researchers to create patents ranging from new software to internet
infrastructure, according to an analysis of Thomson Reuters' global
intellectual property database.
The rapid growth in China's U.S. investments will be a key topic at
economic and security talks on Tuesday and Wednesday between top
U.S. and Chinese officials in Washington.
They are negotiating a bilateral investment treaty that could deepen
ties between the world's two largest economies even amid tensions
over China's military assertiveness.
Even without a treaty, China is pouring capital into U.S. research
as well as buying other assets. While its firms are still newcomers
to investing in America and few work on the technological frontier,
the Thomson Reuters data offers a glimpse of the advanced economy
China aspires to build.
Patented inventions by Chinese firms that involved at least one U.S.
researcher roughly doubled worldwide in each of the last three
years, reaching 910 in 2014.
"We have established a beachhead," said Vincent Xiang, who heads
international investment at Humanwell Healthcare Group <600079.SS>,
a Chinese drug company that has put over $50 million into a New
Jersey subsidiary that employs dozens of U.S. researchers.
Rather than compete with powerhouses like U.S. drug maker Merck <MRK.N>
to invent blockbuster medicines, Humanwell's U.S. researchers are
making smaller refinements such as figuring out how to administer
some drugs as pills rather than injections.
Humanwell's New Jersey researchers have won approval on four patents
so far in the United States and European Union, Xiang said. There
are advantages to setting up labs in the U.S., where there are over
800,000 people with research doctoral degrees in science,
engineering, and health.
"Without access to innovation, it is hard to win in the domestic
market," said Xiang.
A SMALL BUT GROWING PLAYER
And yet, direct investment between the United States and China is
remarkably low considering the size of their economies, and the
fruits of China's U.S. R&D are similarly modest compared with the
vast quantities of patents that emerge from America every year.
The cumulative stock of foreign direct investment in China from the
United States makes up just over 1 percent of the FDI sunk into
Chinese businesses by all nations, according to U.S. government
data. Most FDI in China comes from other Asian countries.
China's share of America's FDI stock is even smaller, but it has
been growing rapidly in recent years as Beijing has eased
restrictions on outward investment.
That is helping Chinese companies sink more money into a range of
advanced economies. The Thomson Reuters data also shows a sharp
increase in recent years in patents by Chinese firms using German
and Japanese researchers."This is a change in China's economic
development model," said Thilo Hanemann, who helps maintain a
database on Chinese FDI at the Rhodium Group, a New York
consultancy. "They want to move from an economy driven by domestic
investment and exports to one driven by consumption, technology and
services."
Annual flows of Chinese FDI into the United States have gone from
tens or hundreds of millions of dollars per year between 2000 and
2009 to $14.3 billion in 2013 and $11.9 billion in 2014, according
to Rhodium Group figures, which are widely cited because they track
China's investments made via third countries such as Singapore.
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That is now approaching the annual flows from America's traditional
sources of FDI: advanced countries such as Germany and Canada who
continue to mine much more knowledge from Americans than does China.
German companies extracted 1,416 patents last year using U.S.
researchers.
China already publishes more patent applications than any other
country, although development economists note that its
state-mandated patent targets often lead to lower quality patents,
particularly those taken out only in China.
However, the Thomson Reuters data, which brings together information
from patent offices in dozens of countries, points to many high
quality inventions using U.S. researchers.
For example, Huawei, the top Chinese company with patents fueled by
U.S. research, has a U.S. patent for processing fiber optic signals
that was cited by 101 later inventions.
The recent Chinese National Patent Development Strategy highlights
the country's plans through 2020, including seven strategic
industries positioned for growth: biotechnology, alternative energy,
clean energy vehicles, energy conservation, high-end equipment
manufacturing, broadband infrastructure and high-end semiconductors.
It also includes an increase in research and development
expenditures as a proportion of economic output from 1.75 percent in
2010 to 2.2 per cent this year.
One Chinese concern likely to be aired at the U.S.-China meetings
this week is that Beijing feels its companies' investments are
singled out in U.S. security reviews.
Huawei is a world leader in producing telecommunications equipment
and has six U.S. research centers, but is a bit player in America's
telecom infrastructure market. U.S. national security concerns have
helped scuttle several attempts by Huawei to expand its U.S.
presence.
"Huawei has occasionally found itself caught in the middle" of
geopolitical tensions between Washington and Beijing, said company
spokesman William Plummer.
Most Chinese FDI happens when investors snap up established U.S.
companies, such as when auto parts maker Wanxiang Group bought
California-based electric carmaker Fisker Automotive - and its
patents - at a bankruptcy auction last year.
The Chinese are also starting new ventures and have invested $3
billion in these "greenfield" projects over the last three years,
according to Rhodium.
America's state and local governments have set up dozens of offices
to compete with one another to attract this capital, which could
flow more freely under a U.S.-China investment treaty. Officials
offer potential investors tax incentives and introduce them to
potential local partners and to legal and accounting firms.
State officials understand there are no-go areas given tensions
between Washington and Beijing on security matters. Washington
reviews more potential investments from China for security concerns
than any other country.
"China being China we don't do aerospace or defense," said Bradley
Gillenwater, the Maryland state government's point person for
attracting Asian investment. "But biotech is a big deal."
(Reporting by Jason Lange in Washington; Additional reporting and
data analysis by Bob Stembridge in London; Editing by Alan Crosby)
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