China has become one of the most important FDI destination since it implemented open-door policy in 1980s. Particularly, in the past decade R&D growth in China has been swift. The regulatory environment has improved significantly and is reasonablly expexted to continue improving.
In addition,the progression from manufacturing to indigenous creation and invention is natural and has been a policy goal for many years. Behind this drive, there is a large pool of talent, which has so far been available at reasonable cost.

Unsurprisingly, three locations lead the pack for R&D centres: Beijing; the Yangtze River Delta; and the Pearl River Delta . In Beijing, there seems to be a concentration in IT and telecommunications. For Shanghai and Suzhou, it’s pharmaceuticals, the automotive industry, energy efficiency and chemical engineering. The Pearl River Delta covers IT, electronic appliances, telecommunications and pharmaceuticals, as well as the automotive industry. These appear to be the destinations of choice and with the many already established centres, new arrivals will benefit from their presence. In addition, a concentration of R&D activities is indicative of the local talent pool. Although there may be increasing competition for talent, areas where R&D has prospered are likely to be acceptable or preferred destinations for the well-educated scientific community and their families. Conversely, pioneering destinations are likely to present more challenges.

As with any business operation in China, it needs an appropriate corporate vehicle to establish a R&D center, either an existing one or a new one. Common vehicles include the wholly foreign-owned enterprise (WFOE) or a Sino-foreign joint venture, usually of the equity joint venture type (JV). Short of an R&D entity, there are purely contractual collaborative R&D efforts as well, but the trend appears to be investment in one’s own facilities, rather than shorter-term collaborative projects.

Investors should first consider the rules governing what types of businesses are prohibited or restricted for foreign investment and what types of technologies may not be imported or may only be imported conditionally. In restricted industries, investments are allowed but with conditions. The conditions vary, but typically mandate a JV, with the Chinese party in control or holding the leading position.

As with a R&D centre in any location, employment and intellectual property concerns need careful planning and consideration. China is no exception to this and in some respects presents unique challenges. Understanding these challenges are crucial to the success of R&D centres.

The prudent approach ensures employees bring with them no secrets and do not divulge any secrets during or following their tenure. Contractual protections with statutory support are available and full advantage should be taken of these. In addition, care should be taken at the outset to limit information within the R&D operations such that few employees, if any, have complete access to works in progress, inventions and trade secrets.

Additionally,the employment and workplace management cannot be ignored. The general landscape in China is very employee-friendly and employers must ensure they meet applicable standards. Policies, procedures and rules are incorporated into generally applicable workplace rules. Violation of any of these can support disciplinary action, including termination in an appropriate case. Management may find itself without effective recourse or exposed to the risk of a wrongful termination claim.