How to setup a R&D center in China

Accounting for 2.12 % of China’s GDP in 2017, China’s investment in its Research and Development R&D sector is now on par with most developed European nations. For companies looking to enter the Chinese market, creating a R&D center in China can serve as an effective means of developing new technologies and products that are specifically tailored to Chinese consumer tastes. Additionally, the Chinese government has set ambitious goals in developing China’s technological capabilities and has provided numerous subsidies and tax incentives to achieve these goals. Foreign investors that leverage these incentives can access top-tier talent and infrastructure in a cost-effective environment. However, when creating a business plan, investors should also account for risks related to conducting R&D in China, specifically risks related to intellectual property rights among others.

Corporate Structure

Foreign investors who seek to establish a R&D center in China can do so through the main channels available in the establishment of any Foreign Invested Enterprise FIE:

  • A Wholly Foreign Owned Joint Venture WFOE
  • Either an Equity or Cooperative Joint Venture EJV/CJV

Depending on relevant government regulations and incentives, certain investment vehicles and corporate structures may be preferable depending on the kind of R&D being conducted. Certain institutional partners can also offer resources and access that can benefit a foreign invested R&D center. Toyota’s partnership in 2019 with Tsinghua University to establish a joint research institute is a good example of a foreign investor using an institutional relationship to align itself with state goals. There is also the question of whether to acquire a domestic firm or pursue a greenfield investment when establishing a R&D center in China. Be sure to read Acadia Group’s article outlining the topic in more detail.

Location

Given its size and economic diversity, location is a crucial consideration when establishing a Research Center in China. Most R&D centers in China are clustered in China’s East Coast Metropolises, for example, the Zhongguancun Science Park in Beijing, the Zhangjiang Hi-Tech Park in Shanghai, and the Economic-Technological Development Area in Tianjin. Similarly, different cities have different R&D specialties with R&D in Shenzhen focusing on manufacturing, Shanghai on pharmaceuticals, and Beijing on telecommunications and information technology. New centers for high-level industry specific R&D are constantly emerging such as the city of Suzhou near Shanghai for healthcare.

In addition to the networking benefits that come from locating a R&D center in one of these urban centers, there are also numerous location specific government incentives that come from establishing a R&D center in each location. For example, in Shanghai foreign research and development centers that deal in certain industries are given the same privileges and incentives as the regional headquarters of a multi-national corporation. Ensuring that you are working with someone that understands how to utilize China’s regional different specialties and incentives is crucial for any foreign investor deciding where to establish a R&D center in China.

Hiring

When hiring for a research and development center based in China special attention should be paid to the composition of your workforce. At least 80% of employees should be directly engaged in R&D activities and have, at minimum, a bachelors degree.

When hiring staff for a R&D center in China, special attention should be paid towards hiring Chinese nationals with overseas education and work experience, especially in the STEM fields. These employees, in addition to bringing high-level science and technology-based knowledge to a workplace can also serve as a critical link between a foreign investor and important actors within China’s complex business environment. Local Chinese-educated employees can also add value to a R&D center’s domestic workforce as China’s increasingly high-level science education complements networking connections formed from pursuing education and career opportunities domestically.

Government Incentives

The Chinese government provides numerous incentives for foreign investors looking to establish an R&D center in China, tax-based and otherwise. These incentives include:

  • “Super-Deductions” on Corporate Income Tax (CIT) for R&D expenses – up to 175% for SMEs, 150% deduction for large enterprises
  • Exemptions on value Added Tax (VAT), consumption taxes, and customs duties – potentially up to a 56% savings depending on the goods being imported
  • Faster customs clearance for exported products through a CIQ green channel
  • Rental assistance and preferential land use policies for R&D facilities
  • Preferential Visa policies for foreign employees

There are also specific rate reductions available for specific industries, such as the High and New Technology Enterprise Status, in which a business is entitled to a 15 % reduction in its corporate tax rate if it can demonstrate that it owns the intellectual property or core technology behind its products or services. Government funding is available for foreign investors that register their patents with the international patent system. Additional funding is also available for R&D in critical industries such as information-technology, artificial intelligence, and automotive development. According to The American Chamber of Commerce in Shanghai, this information is seen as crucial to foreign investors in planning the development of an R&D center in China.

Intellectual Property Planning

Intellectual property protection has long been regarded as one of the most important issues facing foreign investors in the Chinese market. For R&D centers that focus on developing new technologies and products, these issues are even more critical. Indeed in 2019, CNBC reported that 20% of North American investors claimed that they had been the victim of intellectual property theft. However, this issue has begun to improve as Chinese R&D has increasingly focused on the production of domestically produced intellectual property which has required strong enforcement of IP law in China. Regardless, foreign investors should still come into China with a clear plan on how they will protect their intellectual property and what legal options are available if theft does indeed occur.

Despite the importance of leveraging the numerous incentives available for investors that wish to establish a Research and Development Center in China while minimizing risks and expenses, the most critical factor in deciding to open a R&D center in China is whether or not it fits into an investors core business. Finding a trusted professional or firm with a detailed understanding of the procedures involved with establishing a R&D center in China will allow you as a foreign investor to focus on the core business of developing new products for the Chinese market as well as abroad.