Foreign investors have set up more than 600 research and development (R&D) centers in China as of June this year, focusing on telecommunications, electronics, automotive, pharmaceutical and chemical industries, according to a report from the Ministry of Commerce.

The report said foreign investors have stepped up establishing R&D centers with the government providing stronger support measures.

The report said the foreign-funded R&D centers, with a total investment of US$4 billion, have mainly been set up during the past two years. Four hundred have been opened since June 2002.

Instead of setting up factories to manufacture gadgets or parts, multinational companies have established plants to produce telecommunications equipment, data processing equipment, and other high-tech products. As part of the change in approach, they are setting up R&D centers in China, the report said.

These R&D centers - mostly established in the Municipalities of Beijing, Shanghai and Tianjin, as well as Guangdong and Jiangsu provinces - permit multinationals closer access to their large Chinese customer base.

Multinationals, such as Hitachi, IBM, Dupont and Volkswagen, have set up R&D centers in China to satisfy local customer needs.

The recent trend, however, especially among high-tech firms, is to establish high-level R&D centers in China for advanced work that is expected to influence both China and the world.

For example, Microsoft, Nokia, Matsushita, and Sony-Ericsson have all set up their global R&D centers in China, the report said.

Policy incentives and the growing importance of the Chinese market have boosted the establishment of R&D centers by foreign investors.

Legislation on foreign-funded R&D centers offers various tax incentives to encourage foreign investors to enhance their core R&D establishments in China, the report says.

For instance, an R&D center may import certain equipment for its use duty and import tax-free.

In addition, revenue derived from the transfer of technology researched and developed by R&D centers themselves is exempt from business tax.

If R&D expenses increase by 10 percent year-on-year, foreign companies may also qualify for a special additional tax deduction, the report said.

Foreign-invested R&D centers are also allowed to import and sell small quantities of high-tech products produced by their parent companies for the purpose of testing market response for products under research at R&D centers.

(China Daily August 17, 2004)