Offshoring to China now

China is, famously, the world’s factory and a giant market for the world’s companies. More unremarked is its growing role as the world’s research-and-development laboratory. Between 2012 and 2021 foreign firms increased their collective Chinese research personnel by a fifth, to 716,000. Their annual R&D spending in the country almost doubled, to 338bn yuan ($52bn). Add investments by local firms and China now matches Europe’s R&D tally (see chart). Only America splurges more.

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In 2022, despite harsh covid-19 lockdowns, 25 new foreign R&D centres opened in Shanghai. Last year, when overall foreign direct investments in China shrivelled by 80%, those in R&D rose by 4%. In the process, Western R&D centres in China have been re-engineered, from places to learn about the domestic market into hotbeds of innovation whose fruits can be found in products sold everywhere.

Foreign chief executives now believe that China’s brainpower and its innovation-curious regulatory regime are crucial ingredients of their companies’ global success. Nowhere else in the world can newfangled technologies, from novel drugs to flying taxis, be tested as quickly as in China, marvels a foreign diplomat. So even as the Chinese economy slows—it grew by a surprisingly tepid 4.7% in the second quarter, year on year—and multinational businesses try to reduce their reliance on Chinese supply chains amid mounting geopolitical tension, global CEOs are desperate to protect this critical third function of their Chinese operations.

Last year, Volkswagen invested more than $1bn in an innovation centre in the inland city of Hefei. Bosch, a fellow German firm that supplies parts to Volkswagen and other car giants, is building its own $1bn R&D outpost in nearby Suzhou. HSBC, a British bank, employs thousands of people at an R&D centre in southern China, where they are working on uses of AI as well as other advanced technology such as blockchains and biometrics.

In February AstraZeneca, a British pharmaceutical company, said it would turn its Shanghai operation into a global R&D hub. In March Apple, maker of the iPhone, unveiled new R&D initiatives around Shenzhen. The next month Bayer, a German drugs-and-chemicals firm, said it was increasing its presence in Shanghai to bring “more technology from China to the world”. In June Tesla, an American electric-vehicle (EV) pioneer, was granted permission by Shanghai’s authorities to conduct tests of its most advanced autonomous-driving systems on the city’s streets.

A big reason for doing lots of R&D in China is the country’s surplus of young engineers and scientists. Southern China is full of small companies developing all manner of clever technologies, from new chemicals to artificial intelligence (AI). This is a giant talent pool in which foreign multinationals can fish.