China’s rapid transition from a low-cost manufacturing hub to an innovation hotspot with growing foreign ambitions represents both a threat and an opportunity for companies and investors around the globe, according to Lux Research.

Chinese firms in such sectors as energy storage, advanced lighting, emerging electronics and red-biotechnology industries are more likely to pursue both overseas growth and introduction of foreign capabilities into China.

During 2009-2011, Chinese companies’ foreign merger and acquisition (M&A) deals grew 75% to $28.1 billion. Simultaneously, M&A deals by foreign companies in China increased 16 times – from $400 million to $6.9 billion, suggesting new momentum in opportunities inside the world’s fastest growing country. All indications are that this is only the beginning.

“From Chinese companies’ perspectives, acquiring advanced technologies globally and entering foreign markets are major goals as they seek to shed the tag of a low-cost manufacturing hub,” said Zhuo Zhang, Lux Research Associate and the lead author of the report titled, “From the Horse’s Mouth: How Chinese Companies Value Foreign Partners and Opportunities.”

“Entities around the globe need to navigate the new reality of an increasingly crowded market in China where global leaders must learn to operate while developing strategies to face the imminent threat in their own backyard,” he added.

Lux Research analysts studied China’s complex emerging technology ecosystem, surveying and analyzing 380 entities. Among their findings:

• Sectors to watch. Energy storage, advanced lighting, emerging electronics and red-biotechnology all sat in the upper-right quadrant of the grid on Lux’s China Innovation Partnership Grid. This indicates that companies in these sectors have both strong foreign growth inclination and strong willingness to introduce appropriate foreign partners into China. In comparison, water treatment and construction material industries are closed to foreign growth and introduction.
• IP drives openness. Chinese companies with a strong IP portfolio are more open to foreign partnerships. Contrary to conventional wisdom regarding China, it is the companies that value IP, rather than just those looking to infringe upon the IP of others, who are most open. Specifically, 51% of companies with strong IP are open to partnering with foreign entities in China, compared to only 31% of those with weak IP.
• Government relationships enable growth introverts. Companies with poor government relationships are driven to look overseas, with 54% of these companies having meaningful foreign growth activities compared with only 44% percent of the companies with good government relationships. In many of China’s emerging technology industries, government relationships represent domestic sales channels, reducing the urgency for foreign growth.

The report, titled “From the Horse’s Mouth: How Chinese Companies Value Foreign Partners and Opportunities,” is part of the Lux Research China Innovation Intelligence service.

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