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4/15/2006 12:04:00 AM

R&D vital to survival in China's changing economy

Government connections in China are becoming less important to a company's survival there, but they still cannot be ignored. To compete successfully with their state and collectively owned counterparts, private technology ventures in China need to focus on developing new products and technologies. According to a new study by university researchers, research and development are just as important for technology firms in a transition economy as they are in a market economy.

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In socialist countries like China and the former Soviet Union, a company's success or failure has often depended on its government connections. New, privately owned technology ventures that lack the privileges and resources from such connections are particularly vulnerable in a centrally controlled economy. New research shows, however, that those newer firms can eventually overcome their disadvantage in a transition economy like China by investing in research and development and focusing on what they do best.

"Close ties with the government or strong affiliations with a business group are still important in China for a firm's success or failure," explained Haiyang Li, an assistant professor of management at Rice University's Jesse H. Jones Graduate School of Management.

"However, as China transitions from a centrally planned economy to a market economy, companies are finding that their own strategies or resources, particularly in research and development, become more crucial to their survival."

An expert on product innovation and business strategies in China, Li recently collaborated with management researchers Weiying Zhang and Li-An Zhou from Peking University on the first empirical study to examine factors that affect the survival of technology ventures in a transition economy. Prior studies had been done on the successes and failures of new technology companies, but only in market economies.

According to Li, a transition economy poses unique challenges to the survival of new technology ventures. New firms, particularly those that are privately owned, lack support from the government, have limited access to resources, and in the absence of a well-established legal framework have few, if any, property rights.

"In fact, researchers have found that even as private firms have started to gain legal status in China, they still face a considerable amount of hostility," Li said.

As a result of the long legacy of Marxist ideology in China, collectively or state-owned technology ventures benefit from links to either local governments or to the central government.

"China's state-owned banks, for example, favor state-owned firms," Li said. "They generally offer loans more on the basis of political considerations than economic ones."

Collectively owned firms also have advantages over privately owned companies by way

of local government subsidies, access to credit and protection from government interference. Even foreign invested ventures are initially more secure than their privately owned counterparts, given China's desire to attract foreign investment.

"Since the early 1980s, foreign invested firms have enjoyed preferential treatment from the Chinese government," Li explained. "Because they are affiliated with a parent company, they also tend to have more advantages in terms of technology, marketing and managerial resources."

Another means of company survival in a transition economy is a business group, which can help new ventures obtain start-up funds and technological resources and generally provide them legitimacy in the market place.

"Business groups can act as intermediaries in much the same way as venture capitalists do in more established markets by helping entrepreneurs obtain capital, labor and raw materials," Li explained.

Li and his colleagues tested their theories against the experience of technology ventures in Zhongguancun Science Park in Beijing from 1995 to 2003. Because membership in the park requires firms to maintain a certain performance level, the researchers based a firm's success or failure on whether it remained in or left the park.

"We were able to show that privately owned firms, while initially the most disadvantaged, could catch up to other firms by developing successful new products and technologies," Li said.

"By focusing on research and development, they can obtain access to financial resources, enhance their market status and reduce their exit rate from the science park."

Li's research on China's emerging technology market appears in a number of scholarly publications, including the Academy of Management Journal, Strategic Management Journal, the Journal of Marketing, Management and Organization Review, the Journal of International Marketing and the International Business Review.

For more information on this research, contact Li at haiyang@rice.edu or Debra Thomas in the Jones School at dthomas@rice.edu.