Download R & D Strategic Choice for Chinese SMEs

R & D Strategic Choice for Chinese SMEs
ZHANG Run-qing
(Department of Economics and Management, North China Electric Power University, Baoding,
Hebei, China 71000)
Abstract: This paper defines the standard for small and medium-sized enterprise (SME) and analyzes a
big gap in Research and Development(R&D) expenditure on SME between China and developed
countries by using the method of comparative analysis based on the SME R & D expenses data and
some survey data. Meanwhile, it studies constraints for the SME R & D expenditure in terms of funding,
staffing, entrepreneurship and government guidance, and puts forward building a core competitive
strength of SME and strengthening its capability in the long-term sustainable development through
individual technology’s development, characteristic product’s R & D innovation strategy, the R & D
alliance strategy made by complementary advantages and joint competition, and R & D strategies of
imitating innovation and following innovation.
Keywords: SMEs; R&D; Strategy; Strategic Alliance
Most of R & D appropriation expenditure in developed countries is concentrated on large and
medium-sized enterprises, but considering the results, most of them are performed by small enterprises.
Generally speaking, although not suitable for carrying out comprehensive research and development
activities, SMEs can maintain a low consumption in R & D. So in the early stage of technological
progress, they have certain comparative advantages. In machinery industry, both individual and small
enterprises can play important roles and in some high-tech fields, SMEs are also very active. For
example, most of the 70 main inventions of the 20th century in the United States are achieved by small
and medium-sized enterprises.
In Chinese SMEs, the extreme lack of core technologies and the great insufficiency of scientific
research personnel and funds lead to the technology can’t be put into an effective play, which plays a
key role in the core competition of enterprises, so that the survival and development of SMEs are
restricted a lot. Facing the fierce international market competition, the correct implementation of R & D
strategy will greatly strengthen the survival and development ability of SMEs and earlier form the
competition concentrated on R & D in order to making small and medium-sized enterprises a new force
for the rapid China's economic development in the 21st century.
1. Development Status of SME
1.1 Classifying Standard of SME
Consulting the “Demarcation of Small, Medium and Large Enterprises in Statistics (Provisional)”
issued by National Bureau of Statistics and according to the classifying standard of small, medium and
large enterprises in statistics and the development status of SMEs, this paper identifies SMEs as follows:
the industrial enterprises with personnel less than 300, sales below 30 million yuan and total assets
below 40 million yuan; the construction enterprises with personnel less than 600, sales below 30 million
yuan and total assets below 40 million yuan; the wholesale enterprises with personnel less than 100,
sales below 30 million yuan; the retail trade enterprises with personnel less than 100, sales below 10
million yuan; the transport enterprises personnel less than 500, sales below 30 million yuan; the postal
service enterprises with personnel less than 400, sales below 30 million yuan and the hotel and catering
enterprises with personnel less than 400, sales below 30 million yuan(see Table 1).
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Table 1
The Classifying Standard of Chinese SMEs
Industry
Item
Number of
Employed
Persons
(person)
Sales
(10 000yuan)
Total Assets
(10 000yuan)
Industrial
Construction
< 300
< 600
Retail
Trade
Wholesale
Transport
< 100
< 3000
< 1000
< 500
Hotel and
Catering
Services
Postal
< 400
< 3000
< 4000
According to statistics, in 2003 the number of Chinese SMEs reached 21 millions and the number
of SMEs with corporation’s qualification was 3.02 millions, over 99% of the total number of enterprises.
These SMEs created 70% of GDP, 60% of industrial outputs and 40% of profits and taxes; solved 75%
of the urban employment population; supplied 60% of sales revenue and more than 80% of new
employment opportunities; and occupied about 60% of total exports. SMEs play an important role in
promoting economic development, brisk market and employment; in attracting private capital and
optimizing the economic structure and so on. They have already become a new growth point stimulating
the national economy.
1.2 Research and Development(R&D) Status of SME
1.2.1 Research and Development(R&D)
We define systemic and creative work for enhancing and using knowledge to create new purposes
as research and development (R & D). Coombs (1996) has stated that R & D has two major articulations:
the investment mode, in which activities are concerned with the development of the firm’s technological
capabilities, and the harvesting mode in which the R&D unit independently or cooperatively takes
activities for the market and customer demand. Andrea Cavone(2000) divided R & D program into two
phases, experiment and development. Consisting of basic research and exploration, the phase of
experiment mainly looks for opportunities to make effective use of the available resources, enhances
enterprise’s knowledge accumulation and maintains the long-term core competition. The development
phase is to use every resource to create value and get short-term economic benefits through advanced
development, project development and operating system development activities and so on.
Research and development (R & D) activities can be divided into three converged, closely linked
levels, namely, basic research at the upward position, applied research at the middle and experimental
development (including technology development and commercialization) at the lower position.
Generally, as the theory research, the basic research which is mainly subsidized by the state can not
directly create economic benefits; The significant value of R & D at the middle is to develop basic
theory and research results into general technologies which can be applied for competition and
eventually turned into commercial products, which is more suited to large enterprise with a certain
strength; as far as SMEs are concerned, since the lack of funds and researchers as well as high risk
investment, they are more suitable to maintain their competitive low products through appropriate
investment in order to ensuring their R & D ability and the core of innovation activities.
As changes and combination in knowledge, technology and procedure, consumers have changed
their potential demand patterns, and international R & D innovation has developed from continuity into
discontinuity of the fourth generation. At present, the biggest challenge in innovation is to link new
technologies and emerging markets, which is a double common evolutionary process, when the new
technologies present, the markets will be influenced; When the markets are rising, the new technologies
will be influenced.
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1.2.2 National R & D Status of SME
Since the mid-1990s, funds for R & D in SMEs have continually been increasing, the total amount
from 3.7 billion in 1995 rising to 33.69 billion yuan in 2004, nearly increasing 10 times in the decade,
and the proportion of social expenditure has risen to 17% (see Table 2). From the changing data, it can
be seen that the Chinese SMEs are more and more attaching importance to the investment in R & D
projects. But under the lack of expenses on R & D in the overall environment, this growth hasn’t
substantially changed and it wasn’t enough to have a technological upgrade to SMEs. According to a
survey, there are only 27% of SMEs in the country with research institutions, only 30% of SMEs whose
technology development funds are accounted for 1% of proceeds of sale in the same year, 18% of SMEs
do not have their own technological inventions and patent products, and only 25% are through the ISO
international quality certification. Due to lag in technology, low-technology products and weak market
competition, currently, only 15.3% of them have the capacity of export.
Table 2 R&D Expenditure Proportions of National Enterprises Accounting for GDP in 1995-2004
Total
Year
Large Enterprises
R&D
R&D
Expenditure
Expenditure
(a hundred Accounting for
million yuan)
GDP (%)
SMEs
R&D
Expenditure
(a hundred
million yuan)
R&D
Expenditure
Accounting for
GDP (%)
R&D
Expenditure
(a hundred
million yuan)
R&D
Expenditure
Accounting for
GDP (%)
1995
349.1
0.60
141.7
40.6
37.0
11
1996
404.5
0.60
160.5
39.7
41.9
10
1997
509.2
0.64
188.3
37.0
49.1
10
551.1
0.69
197.1
35.8
51.4
9
0.83
249.9
36.8
65.2
10
1998
1999
678.9
2000
895.7
0.90
353.6
39.5
162.3
18
2001
1042.5
0.95
442.3
42.4
115.4
11
2002
1287.6
1.07
560.2
43.5
146.2
11
2003
1539.6
1.13
720.8
46.8
188.1
12
2004
1966.3
1.23
954.4
48.5
336.9
17
Data Sources: China Statistical Yearbook on Science and Technology 2005
Note: Data in 2004 are calculated according to GDP published after the economic census and data in 1999—2003
are calculated according to the adjusted GDP.
1.3 Comparison R & D Status between China and Developed Countries
China's R & D funds have increased from 34.91 billion yuan (about 4.4 billion dollars) in 1995 to
196.6 billion yuan (about 23.8 billion dollars) in 2004, the proportion of R & D expenditure to GDP has
risen from 0.60% in 1995 to 1.23% in 2004(see Table 2), and both the total R & D expenditure and its
proportion to GDP have a relatively big increase.
By comparing the proportion of R & D expenditure to GDP in China with those in developed
countries, we find that although since 1998 the proportion in China has presented an increasing linear
trend, the curve places in the lowest position of the diagram. As an example, in 2003, all of the
proportions in the United States, Germany and South Korea have been more than 2.5% and in Japan
even more than 3%, but in China, it has only accounted for 1.13% (see Figure 1). Therefore, in the scope
of the world, compared with the United States, Japan and other developed countries, the Chinese R&D
expenditure proportion is still low and China has a large gap with the developed countries in R & D
expenses.
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3.50
3.00
2.50
% 2.00
1.50
1.00
0.50
0.00
China
U.S.A
Japan
German
Britain
South Korea
1998
1999
2000
2001
2002
2003
Figure 1 Proportion of R&D Accounted for GDP in Some Countries
2. Analysis of the Factors Constraining Development of SME in R & D
2.1 Enterprise’s Own Less Capital Investment
As can be seen from Table 1, the R & D expenditure has continually increased in recent years whose
growth rate has been much higher than the rate of growth in GDP and the proportion of all enterprises in
the R & D funds has been continuously improved reaching 65.5% in 2004. All of these show that from
the government to enterprises the investment for high-tech is attached an increasing importance and
enterprises have become the main part in the technical innovation. However, compared with developed
countries, the proportion of expenditure on R & D in China's enterprises is still much lower. All R & D
expenditure in 2004 was 129.13 billion yuan (about 16.3 billion dollars) that only matched up to some
large enterprises. For example, in 1997, R & D expenditure of GM reached 14 billion dollars and Ford
Motor’s was 10.7 billion dollars. In 2004, the proportion of R & D expenditure to sales was less than
0.5% in China, even though in large and medium-sized enterprises this item only reached 0.71, which
was one-sixth of that in developed countries (3%).
In most Chinese SMEs, for less funds, higher risk of operating and poor self-confidence, it’s very
difficult for them to credit from commercial banks. At the same time, they do not have the means of
financing such as shares(
) which are commonly used by large enterprises, so it also is hard for
them to get R & D financial support from government departments. R & D expenditure on SMEs in
2004 was 33.69 billion yuan (about 4.1 billion dollars) and whole of the capital of SMEs is less than
one-third of the all enterprises, it looks more scarce in the inadequate R & D input and the technical
innovation is hardly supported in SMES independently.
2.2 Few Research Institutions and Inadequate Researchers in SMEs
The main factor restricting the independent innovation of technology in SEMs is the lack of those
people who engage in technological development, innovation, organization and management. Chinese
SMEs are poor in quantity and quality of research institutions and researchers, only the 1.5% staff
engaging in development of new products. In China, only 14 per 10,000 workers in 2004 engaged in R
& D, but in developed countries this figure basically reached in the range of 120-130 which is almost
9-10 times as Chinese, even though in South Korea, a moderately developed country, it has reached 81,
six times that of China (see Figure 2). In large and medium-sized enterprises, the number of R & D
personnel per 10,000 is only 65.4 from which we can see that the researchers of R&D are few not only
in SMEs, but in large and medium-sized enterprises.
Talent is the foundation of technical innovation and the key of forming the enterprise's core
competition. At present, for the survival, SME makes a lot of efforts to manage, especially pays much
regard to marketing personnel and the mode of management is very flexible adopting a series of
effective incentive measures. All of these help the enterprise survive well in the fierce competition.
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However, in China, for some inherent disadvantages and lack of long-term strategic thought, SME
doesn’t pay adequate attention to the R & D personnel and fails to establish an effective mechanism to
encourage competition, which results in largely restricting the long-term development. Compared with
large enterprises, SMEs are more difficult to attract the necessary technical and managerial personnel for
innovation, which makes SMEs weak in innovating independently, the innovation management model
outdated and a strong dependence on external technologies.
person
140
China
120
100
Japan
80
Germany
60
40
France
20
0
South
Korea
1998 1999 2000 2001 2002 2003
Figure 2 R&D People Per 10 000 Manpower
2.3 Insufficient Attention on R&D from Enterprise’s Leadership
In a long term, Chinese SMEs’ economic development wandered in high input
high
consumption
low efficiency and basically tracked an extensive development road with the form of
expanding extension. A phenomenon, introduction -- backwardness -- then introduction, existed in many
fields and enterprises dropped into the trap of pursuing technology so that it was hardly to form a
competition concentrated on R & D. Through analyzing, the main reason was they didn’t pay sufficient
attention and the entrepreneurs of SME lacked for awareness of the importance of R & D or took an
evasive attitude.
As we all know, enterprise’s R & D is an uncertain trial activity. If successful, its result will bring the
enterprise substantial economic profits and greatly enhance its market competitive strength. Once
unsuccessful, the input during the process of R & D will become sunk cost, even the enterprise’s market
competitive strength will be influenced seriously. Just because of the high risk, the entrepreneurs in
charge of enterprises and R & D departments are fear of risk so that the enterprise’s run is long rooted
not only in the traditional thought of avoiding the competition, maintaining the status quo and negating
changes, but in the inertia of satisfaction and stagnancy. In developed countries, 100% of the large and
medium-sized enterprises set up specialized R & D institutions, but in China this figure in the large
enterprise is only 58.1%, in medium-sized enterprises is only 20.8%, in most small enterprises there are
even no such institutions, so it can be seen that how little attention is paid to R & D in SMEs.
2.4 Little Support of Government to Enterprise’s R & D
From 54.9% in 1990, the proportion of China's total R & D expenditure accounting for the whole
social expenses is declining year after year. In 1995, this proportion was 50%, but in 2004 it only
reached 34.5%. From this we can see that the government prematurely reduces the input in this area
before solving the problem of enterprise’s R&D input, which is not conducive to support the enterprise
and its own development. While the proportion of enterprise’s input continually increases, this input is
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obviously inadequate in the condition of less total amount. In the initial stage of economic takeoff, the
western developed countries supported enterprises a lot. In the United States, for example, the main R &
D input resources are very different at different times. Before 1970s, the federal government’s input
occupied an overwhelming advantage but after that as the industrial enterprises’ input continually
increasing and the government's dropping off, enterprises began to become the main input part
gradually.
3. Suggestions
3.1 Individual Technological Development and Innovation Strategy of Characteristic Product
Because of inadequate funds, the lack of scientific and technological personnel and the existence of
investment risk, it is impossible for SMEs to spend great efforts on all R & D projects. Since restricted
by various aspects, an individual SME is weak in both its internal R & D activities and full-time R & D
activities, which influences the enterprise to develop R & D activities. Although SMEs can accomplish
the technology and results needed in R & D innovation through introduction or committing other
enterprises, in the view of the whole society and the long-term development, the internal R & D is a
very important factor in SMEs’ innovation and it is also a main impetus to innovate. Therefore, it is
necessarily based on their own characteristics to choose national and regional characteristic R & D
projects with concentration and profession, carrying out the individual technological development and
the innovation strategy of the individual products, and then making use of the market segmentation and
technological development to enter blank fields of market and opening up new technologies and product
markets in order to sharing the market again.
3.2 Building R & D Strategic Alliance through Complementing Each Other's Advantages and
Joint Competition
Through uniting several enterprises in the same field, we can get a leading position of the
technology in the world. Especially through a strategic alliance with international companies, we can
directly absorb an advanced technology. By building the strategic alliance, we can also ease the fierce
competition from competitors in R & D market, share high expenses, cut research and development time
and share or reduce the investment risk resulted from the fierce competition and shortened product life
cycle.
R & D strategic alliance also includes the technology alliance made by SMEs, scientific institutions
and universities. Through a common R & D belief and a sound information exchange network, various
R & D researchers in the alliance will be closely integrated into an organic whole and under their
collaboration, some world-class, presenting the trend in technology development, new technologies and
products are continually developed.
Virtual R & D Strategy
forming a business model of an open virtual factory through
connecting information networks and transportation systems, is also a form of R & D development
strategies should be considered. The main idea of this mode is that if a link is not our key competitive
edge, if such activity doesn’t lead to separating with the client, if the higher valuable resources can be
gained through less costs, then we may let our partners do it so that in the basis of equality and mutual
benefit, we can achieve a corresponding development, learn from others' strong points to offset our
weakness, develop market together, and make a close union with a complementary symbiosis and a
corresponding development.
3.3 Imitational and Following Innovation Strategy
On the basis of duplicating other people’s work, imitational innovation strategy continuously
improves and innovates original technology in order to making it more sound and completed. As an
innovation based on imitation, it is a strategy with the minimum cost to improve the level of
technological progress of SMEs and it can make SMEs share some advanced manufacturing, design, and
management techniques as soon as possible. Meanwhile, through combining their own technical
characteristics and consulting the changing market demands, developing the technology imitated again
will greatly accelerate the pace of technology advancement and narrow the gap with the international
advanced technology.
Following innovation strategy is that followers pay close attention to the leader’s innovative action
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for avoiding the relatively high risk in the early stage of the technology and if the leader comes through,
they rapidly keep up with him. Through doing so, the followers can minimize the risk of the
technological innovation and make most use of the greatest profits during its growing and mature stages.
In the following innovation strategy, the followers need have a strong ability in technological innovation,
imitation innovation and a quickly responsive ability to the market. At the same time, the leader’s
intellectual property right should be cared.
3.4 Application of Patent and Self-protection Strategy
Belonging to the scope of enterprise’s intellectual property and consisting of technology, economy
and law, a patent connects technology and market. The patent has a natural connection with R & D
strategy. The patent itself is originated from technological inventions and is an interim result of the
intensive study of R & D. It has unique functions such as legal, market exclusive, secret,
non-independent and so on, which can escort the investment for R & D activities. In the condition of
technical achievements attaining legal protection and maintaining the competitive advantages that R &
D project has gotten, looking for the ultimate benefit of R & D activities will promote the long-term
survival and sustainable development of SMEs.
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