A Dragon In R&D

China's labs may soon rival its powerhouse factories—and multinationals are flocking in for tech innovation

by Bruce Einhorn

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As a young man, Zhang Xiaolin dreamed of becoming a top research scientist. But to reach that goal, the native of China's Anhui Province felt he had to leave his homeland. Now, after two decades in the U.S., he's back home again, and he couldn't be happier. Zhang will be heading up drugmaker AstraZeneca's (AZN) Shanghai lab, where he says he expects ``to do real innovative research.'' Adds his boss, James Ward-Lilley, president of AstraZeneca China: ``In 20 years, where do you see new ideas coming from? A significant chunk will be from China.''

It's the year of innovation in China. Led by President Hu Jintao, the government is exhorting companies to transform China by focusing on the lab as well as the factory. To make that happen, Beijing has pledged to boost funding. In the late '90s, China spent less than 1% of gross domestic product on research and development. That figure is now up to 1.5%, but Hu wants to raise it to 2.5% by 2020 -- meaning outlays of $115 billion a year. ``Everybody from government to individuals recognizes that [the Chinese] need to innovate,'' says Dan Goldstone, head of the Shanghai office for London consultant ?WhatIf! The Innovation Co.

Companies, both foreign and domestic, are taking up the challenge. From chipmaker Intel (INTC) and search giant Google (GOOG) to AstraZeneca and Dow Chemical (DOW), multinationals are stepping up investment in R&D on the mainland. Chinese computer maker Lenovo Group (LNVGY) and telecom equipment giant Huawei Technologies are pouring resources into cutting-edge technology. Manufacturers such as Chery Automobile are hiring top engineers to design cool new models.

Biotech startups are offering experimental therapies unavailable or prohibited in the West. Shenzhen Beike Biotechnology Co., for instance, is implanting adult stem cells in patients to treat conditions such as autism, Lou Gehrig's disease, and strokes. While some foreigners might balk, ``the whole Chinese government is promoting this,'' says Dr. Sean Hu, a 39-year-old Guiyang Medical College graduate who earned a PhD in Sweden, did a postdoc at University of British Columbia, and is now chairman of Beike. ``That is the biggest advantage we have.''

Of course, China has a long way to go. While the Chinese invented gunpowder, paper, and the compass, since the decline of the Qing Dynasty China has taken a backseat not only to Western nations but also to Asian neighbors Japan and South Korea. In the eyes of many Westerners, the Chinese are outstanding manufacturers but lag behind such innovative Indian companies as software service provider Infosys Technologies Ltd. (INFY) and drugmaker Ranbaxy Laboratories Ltd. Making matters worse, Chinese companies are often labeled copycats of their Western rivals. Cisco Systems Inc. (CSCO) sued Huawei in 2002 for allegedly stealing Cisco's router technology, and General Motors Corp. (GM) took Chery to court in 2004 for allegedly copying a GM design for Chery's popular QQ compact. In both cases, the companies settled out of court. China's schools, meanwhile, don't always turn out the kind of worker many companies want.