China has boosted its targets with regards to research and development (R&D) spending and improved business conditions to attract a new wave of FDI, but concerns over the impact of the decoupling of the Chinese market still remain. 

In its 14th Five-Year Strategic Plan, the government has announced that it will increase R&D spending by 7% annually between this year and 2025. According to preliminary government data, its total expenditure on R&D rose 10.3% in 2020 to 2.44 trillion yuan ($374.3bn) from the previous year, putting its R&D as a ratio of GDP at a record 2.4%.

“Both the National 14th Five-Year Strategic Plan and the Shanghai municipal government’s work report for 2021 including ‘innovation-driven development’ play key roles to provide solid support for the innovation and development of foreign-funded enterprises in China, which is greatly encouraging,” Will Song, global senior vice president and China chairman at US-based pharmaceutical company Johnson & Johnson said in a statement.

In February, Johnson & Johnson became the first foreign-funded open innovation platform accredited by the Shanghai municipal government after it set out regulations last year to encourage foreign R&D centres to take root in the city.

Policy support measures, which range from customs clearance facilitation for R&D and tax cuts to talent acquisition and participation in government projects, came into effect on December 1, 2020 and will run until November 30, 2025. 

 ‘Conditional embrace’

Against a backdrop of continued diplomatic tensions between the US and China, which began in 2018 under the Trump administration, businesses are cautious of betting too heavily on the technology sector in China amid fears that the two nations’ digital ecosystems are becoming mutually exclusive.

Kyle Freeman, partner at law firm Dezan Shira & Associates in Beijing, says foreign companies might look to “seize on some of the information” provided by the government and targets in the 14th Five-Year Strategic Plan and approach the Chinese market with what he terms a “conditional embrace”.

But he adds that businesses, especially technology businesses, may be reluctant to pursue such a strategy as it might also have a knock-on effect on operations in other overseas markets such as the US or Europe.

Better business conditions

In recent years, the government has cut some of the red tape for foreign investors. The Foreign Investment Law, which came into force in January 2020, grants foreign investors legal protection. China has also scrapped many of its 50% foreign ownership limits last year, meaning that foreign investors could fully own businesses operating in China. 

In a research note, Fitch Ratings reported that FDI into China’s hi-tech services sector has grown faster than its overall FDI in recent years. Its improving intellectual property protection and business conditions have in turn become “conducive to improving the [country’s] R&D ecosystem”.

“The government has made a lot of investment but it is not enough to narrow the technological gap. Given China’s reliance on hi-tech imports, it will need to attract [more] hi-tech FDI,” says Flora Zhu, director of corporate research at Fitch Ratings.

China climbed from 78th to 31st place in the World Bank’s Ease of Doing Business index between the years 2018 and 2020.

Now, as the government seeks to become more self-reliant while pursuing international integration through its “dual circulation” strategy, it is likely that China will call on foreign investment to boost its technological prowess.

Larry Hu, head of China economics at Macquarie Capital, believes that the government support is a “meaningful pull” for foreign investors but cautions that the government has failed to deliver on its R&D targets under previous Five-Year Plans.

In 2020, greenfield project announcements in China fell to 359 from 788 in 2019, with total capex dropping from $49.8bn to $29.7bn, according to fDi Markets.