International Journal of Innovation Studies 2 (2018) 81e90

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International Journal of Innovation Studies

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ternational-journal-of-innovation-studies

Industrial upgrading based on global innovation chains:

A case study of Huawei technologies Co., Ltd. Shenzhen
Xuejun Lin a, *, Bingqian Liu a, Jiaxu Han a, Xiangyue Chen b
a
International Business School of Jinan University, Zhuhai 519070, Guangdong, China
b
School of Translation Studies, Jinan University, Zhuhai 519070, Guangdong, China

a r t i c l e i n f o a b s t r a c t

Article history: Although China is a global trade power, it has low value-added trade, which lies at the
Received 5 June 2018 bottom of the global value chain. Therefore, there is an urgent need to change the unfa-
Accepted 13 August 2018 vorable position of the international division of labor in China. The global innovation chain
Available online 3 September 2018
is a new development of innovation through which China can implement open innovation
and utilize the world's advanced knowledge, technology, information, and other resources
Keywords:
to enhance its innovation capabilities, promote industrial upgrading, and improve the
Global innovation chain
status of its global value chains. This paper takes Huawei as an example of international
Global value chain
Open innovation
cooperation and innovation, aspects that have allowed the company to rapidly improve its
International innovation cooperation position and prestige in the industry. The case study of Huawei suggests that China should
introduce talent, increase investment abroad, attract foreign investment, expand intel-
lectual property trade, develop outsourcing and international strategic research and
development alliances, build a global innovation chain, and promote industrial upgrading
to elevate the status of its international division of labor.
© 2018 Publishing Services by Elsevier B.V. on behalf of KeAi Communications Co., Ltd. This
is an open access article under the CC BY-NC-ND license (http://creativecommons.org/
licenses/by-nc-nd/4.0/).

1. Introduction

Innovation is an important factor driving economic globalization. Cano-Kollmann, Hannigan, and Mudambi (2017) be-
lieves that there are three major trends in the global economy today. First, international trade is shifting from finished goods
trade to intermediate trade, and the global value chain (GVC) is becoming increasingly important. Second, there has been an
increase in intangible knowledge-intensive assets and the importance of innovation. Third, the economies of emerging
markets are growing as part of the GVC. Therefore, it is of great importance to analyze the GVC and study the global innovation
chain (GIC) in order to promote industrial upgrading.
Many important changes have occurred in current global innovation. First, the emphasis on independent innovation is
now in the development of global open innovation. Among the 1000 largest companies in the world regarding research and
development (R&D) expenditure, 94% conduct R&D overseas (Jaruzelski, Schwartz, & Staack, 2015). Second, global innovation
extends from developed to emerging countries (Tang, 2017). Finally, multinational enterprises have developed from the mode
of “made in emerging countries” to “innovated in emerging countries.” Such enterprises have also shifted from integrating
within the GVC to integrating within the GIC in order to lead the world in innovation activities (Ma, 2016).

* Corresponding author.
E-mail addresses: [email protected] (X. Lin), [email protected] (B. Liu).

https://doi.org/10.1016/j.ijis.2018.08.001
2096-2487/© 2018 Publishing Services by Elsevier B.V. on behalf of KeAi Communications Co., Ltd. This is an open access article under the CC BY-NC-ND
license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
82 X. Lin et al. / International Journal of Innovation Studies 2 (2018) 81e90

Although China is a powerful force in global manufacturing, Liu and Cao (2016) believe that China's intermediate input and
production activities tend to be characterized by low added value and low technology involved. Furthermore, China has
suffered from a situation of low lock-in. Hu and Liu (2014) believe that Chinese enterprises have weak independent inno-
vation capabilities and that they rely too much on basic resources, such as human resources and natural resources, and
continue to develop labor-intensive industries based on primary elements (e.g., the labor force).
Urgent issues thus concern ways to improve China's position in the GVC and to reshape the international competitiveness
of Chinese industry. The key points in such remodeling relate to integrating the GIC and GVC, implementing open innovation,
and changing the situation of accumulating investment and production ability by relying solely on the GVC to improve en-
terprises' innovation ability based on the GIC. In this way, such actions can facilitate Chinese enterprises' ability to produce
commodities with complex transactions based on implicit knowledge and to promote the development of China's inde-
pendent innovation. Therefore, this article considers the transition of Huawei from a contract manufacturer to a world-class
communications company after 30 years of development in order to show that using open innovation, where global inno-
vation resources can improve a company's innovation ability, can promote rapid industrial upgrading and presents concrete
strategies of integration into the GIC.

2. Literature review of the global innovation chain

2.1. Global innovation chain as a new development of innovation

Schumpeter's Theory (Joseph, 2004) of Innovation and List's Theory of State are the cornerstones of the National Inno-
vation System (NIS). Subsequently, Nasierowski and Arcelus (2003), Kravchenko (2011), the OECD (1997, pp. 7e11), and the
European Union have conducted extensive research on NIS theory. With the further development of economic globalization,
innovation is not just limited to national boundaries, and internationalization and networking have also come into being.
Fromhold-Eisebith (2007) focused on how regions, nations, and the international environment mutually connect within the
NIS. Niosi and Bellon (1994) divided the evolution of the internationalization of the NIS into three stages: the regional
innovation network, the NIS, and an open NIS. Research on these theories has studied how innovation transitioned from one
country to the world.
Zhang and Li (2015) argued that the rapid development of science and technology has changed the existence of the form of
knowledge and shortened the updating period of knowledge. As a result, the urgency of transnational R&D cooperation
among international enterprises has been highlighted. Furthermore, the all-pervading internet, wired and wireless
communication, and convenient and efficient global transportation have greatly reduced R&D costs and significantly
enhanced R&D efficiency. This has made it possible for R&D institutions, manufacturers, and suppliers to conduct extensive
scientific research cooperation, providing convenient conditions for transnational companies to transmit their international
R&D investment. Meanwhile, the encoding modular process of knowledge has resulted in a revolutionary transformation of
innovation. R&D design, which used to be centralized, is now being modularized and decentralized. What used to be done by
one country or one enterprise alone is now done through international cooperation and division of labor. While such pro-
cesses are interdependent, they also disintegrate vertical integration. Open global R&D, which is featured by consigned R&D
and R&D outsourcing, has taken full advantage of global innovation resources to accelerate the progress of R&D. Therefore, a
GIC has been formed. The structure of the NIS has also changed from the housing of all innovation chains to the possession of
certain innovation links and subjects. In addition, it has constituted a certain node state of the global innovation network. In
this way, the world is moving from economic globalization towards innovative globalization.

2.2. Connotation and the effect of the global innovation chain

Regarding the innovation chain, experts and scholars at home and abroad consider that it is an innovation-chain-mode
organization in which the innovation subjects make use of their comparative advantages in accordance with the process
of product innovation achievements and guided by the core of innovation to implement the division of labor and to
collaborate for success. Ma and Wu (2011) argued that the so-called GIC refers to a valuable innovation pattern with a highly
open network in which enterprises can search for available knowledge resources on a global scale and pay close attention to
the right of using such resources.
Dai, Liang, and Dai (2009) analyzed the cause of the innovation chain and considered that the GIC can accelerate the speed
of knowledge dissemination, especially tacit knowledge, and they indicated that it can reduce the cost of technological
transactions and enhance communication, trust, and collaboration among innovative entities. More importantly, the GIC is an
open system that promotes the absorption and utilization of global knowledge, technology, and other innovative resources,
and it increases the accumulation of domestic knowledge.

2.3. Governance of the global innovation chain

Gereffi, Humphrey, Kaplinsky, and Sturgeon (2001) argued that value chain governance is a non-market economic co-
ordination activity that leads enterprises to directly or indirectly influence global production, logistics, marketing, and other
 X. Lin et al. / International Journal of Innovation Studies 2 (2018) 81e90 83

activities. GVC governance can be divided into producer-driven chains and buyer-driven chains (Gereffi, 1994), as well as
externally driven chains (Kaplinsky, 2000).
Zhang and Li (2015) suggested that a similar governance structure also exists in the GIC. In the GIC, as the organizers and
administrators of international R&D investment engage in transfers, developed countries and multinational companies use
the advantages of mastering and integrating core technologies to play the role of “chain lords,” while developing countries
remain only at the low-end of the GIC and are engaged in peripheral or auxiliary work. Therefore, problems of low-end lock-in
and embedded obstacles may arise in the GIC.

3. Study of Huawei's integrating global innovation chain and open innovation

Founded in 1987 in Shenzhen, China, after 30 years of development, Huawei has grown from being a contract manu-
facturer to being a world-leading provider of information and communication technology (ICT) solutions. Huawei spends
more than 10% of its sales revenue on R&D every year. In 2016, approximately 80,000 people were engaged in R&D, ac-
counting for 45% of the company's total workforce. Its R&D expenditure was RMB 76,391 million, accounting for 14.6% of total
revenue. In the past ten years, the cost of R&D exceeded RMB 313,000 million (Huawei R&D Report, 2017). According to
Huawei's R&D Report (2017), until December 31, 2016, Huawei has applied for 57,632 patents in China and 39,613 patents
abroad, and it has received 62,519 patent licenses, of which over 90% are invention patents. One of the most representative
achievements is that Huawei has achieved a significant breakthrough in 5G key technology through close cooperation with
research institutions. Huawei also won the first 5G awards, namely, the “5G outstanding achievement award” and 2016
“outstanding contribution award of 5G innovation,” which fully demonstrates that Huawei has moved to the forefront of the
communication industry and that its innovation ability has been recognized internationally. Huawei has enhanced its po-
sition in the value chain in the communication industry and has proven the fact that innovation is the core competitiveness of
an enterprise.

3.1. Huawei's strategic thinking of setting up global R&D institutions

Huawei's efforts in building the GIC and its evolution in international R&D cooperation have obvious periodical charac-
teristics. Hou, Liu, and Liu (2011) argued that Huawei's internationalization development of independent innovation has not
been plain sailing, and it can be roughly divided into three stages: first, the technological imitation stage, where it mainly
imitated products; second, a stage focusing on the development of key technology, which begin to lead in some areas; third, a
stage in which it kept abreast to international developments, where it holds a lead in some areas. Huawei began its inter-
nationalization process in 1996. Since 1999, Huawei has invested heavily in overseas research institutions. The period of
2002e2005 was the initial stage of Huawei's R&D internationalization, with few R&D units at home and abroad, and no R&D
cooperation network was formed. With the acceleration of Huawei's R&D internationalization, the international R&D
cooperation network was gradually formed from 2006 to 2009, and it expanded rapidly from 2010 to 2013, with the fre-
quency of network connections and the number of network edges increasing rapidly. Furthermore, the main R&D unit was
developing continuously with stable cooperation underway. The dual-core R&D model centered in Shenzhen and the United
States was formed during this period (Si, Chen, Ingo, & Zeng, 2016).
To quickly catch up with the international advanced level, Huawei has attached great importance to setting up of an R&D
institution in the center of global information technology R&D institutions. Kumar (1995) argued that there are three pur-
poses for international enterprises to carry out R&D activities abroad: (1) to support the enterprise's overseas production, (2)
to take advantage of cheap R&D resources abroad, and (3) to absorb the overflow of foreign R&D activity. Therefore, to obtain
the latest foreign technology and international first-class talent and to absorb the overflow of foreign R&D activities, Huawei
decided to build its R&D center in developed countries, where it is close to well-known international institutions of higher
learning or industry leaders.
Huawei chose to set up R&D centers in locations of industry giants, such as Dallas, the center of the US telecom cluster with
MOTOROLA, Texas instruments; Stockholm, Sweden, with Ericsson, Nokia, and other telecommunications equipment en-
terprises; Dusseldorf, with Vodafone's headquarters. Later, for better management of R&D activities in Europe (Huawei has
R&D Centers in Berlin and Nuremberg, Germany; Ipswich, UK; Milan, Italy; Paris, France; Brussels, Belgium, etc.), Huawei
moved the European Research Center (ERC) to Munich, Germany, which is close to the Technical University of Munich
(Technical University 9), an important member of the German University of technology alliance, and other partners. Huawei
also spared no effort to attract international talent. In short, the location selection destination of Huawei's overseas R&D
centers is an excellent global communication industry center or a place close to world-class universities, research institutes,
and enterprises. Huawei attaches great importance to both application research and basic research. In May 2016, Huawei
established a new research center in Dubai, and in June, a mathematical research center was established in France. Through
the Huawei Innovation Research Program, Huawei has funded more than 200 research projects, and by funding mathematics,
physics, chemistry, and other basic theory research, it has explored the prominent technological innovation development in
the ICT industry (Huawei R&D Report, 2017).
84 X. Lin et al. / International Journal of Innovation Studies 2 (2018) 81e90

3.2. Huawei established the open-innovation cooperative relationship of the "core-cooperation circle" structure

Huawei's R&D can be divided into three layers. The first layer is the core, which is Huawei's headquarters in Shenzhen. The
second layer is Huawei's overseas R&D center, and the third layer is Huawei's cooperative partners at home and abroad.

3.2.1. Core of Huawei R&D

Huawei's inventors are mainly Huawei's employees. Patents applied by them accounted for 96% of the whole company's
patents in 2012, 90% of which were in Shenzhen. The headquarters of Huawei (Shenzhen) is the core of the global R&D
network. It is the master of the GIC and plays the role of organizing, controlling, and coordinating global R&D activities.
The cooperation of the headquarters and branches of Huawei with universities and research institutes is often achieved
through the following steps: first, according to the technological development trend and its own needs, Huawei headquarters
proposes to its branches around the world the technological field that needs to be tracked and developed in this year; then,
the Huawei headquarters or overseas branches identify and contact potential technical cooperation partners (enterprises,
universities, scientific research institutions, etc.). Finally, Huawei's headquarters determines the partners and signs contracts
with the partners to specify the schedule and tasks of the R&D activities.

3.2.2. Huawei's overseas R&D center

By 2016, Huawei had established 16 research institutes around the world and 36 joint innovation centers located in the
United States, Britain, Germany, France, Russia, and other countries. Huawei (Shenzhen) has been maintaining close R&D
cooperation with these research institutes, and its subordinate branches are the bridges that link Huawei to international
R&D activities.
To illustrate Huawei's R&D cooperation with overseas R&D centers, the International Cooperation Strength (ICS) is used to
measure the intensity of international cooperation.
International R&D cooperation is more conducive to the promotion of enterprise innovation performance than domestic
R&D (Arvanitis & Bolli, 2013). External knowledge acquisition based on patent cooperation and patent citation has an
important influence on innovation. Patents represent an important result of innovation. The index of international cooper-
ation intensity (ICS) in this article uses the research method of Guellec and Van Pottelsberghe (2001) as a reference. If patent
inventors do not live in the same country, the patent belongs to the multinational R&D cooperation. Therefore, this paper
measures the ICS of an enterprise by the proportion of the number of international cooperation patents of the total number of
all the patents. That is, the ICS equals the number of transnational cooperative patents/the gross of enterprise patents.
Another way to measure the strength of R&D collaboration is the Fruchterman-Reingold algorithm, which represents the
strength of collaboration based on the gravity generated by the association between a company and its partners. Taking the
figures in 2012 for example, the top ten institutions that cooperated with Huawei headquarters are shown in Table 1 (Si et al.,
2016).
Among the top ten institutions that cooperated closely with Huawei, seven of them are overseas branches of Huawei, such
as R&D centers located in Stockholm (Sweden), Santa Clara (Silicon Valley), Dusseldorf (Germany), and Futurewei (Huawei's
U.S. subsidiary). These overseas R&D centers were established earlier and have maintained stable R&D cooperation with
headquarters. The other three cooperative institutions are universities and research institutions, all of which are located
overseas, except Peking University. Huawei's overseas R&D centers have a specific division of labor in R&D, as shown in Table
2, which shows Huawei's (Shenzhen) intense participation in global R&D activities and highlights the importance of overseas
innovation resources to enhance Huawei's innovation ability (Si et al., 2016).

3.2.3. Huawei's cooperative partners at home and abroad

Although the overseas R&D center is the main source of Huawei's acquisition of overseas R&D resources, R&D cooperation
with overseas universities and research institutions is also an important part of Huawei's internationalization. The 2012
patent data show that within Huawei's external cooperation, industry-university-research cooperation has been the priority,
and cooperation among enterprises ranked second. In terms of regional distribution, transnational cooperation was the

Table 1
The top ten institutions of Huawei headquarters in 2012.

Cooperation Units Cooperation Units Cooperation Intensity

Huawei (Shenzhen) Huawei (Stockholm) 226
Huawei (Shenzhen) Huawei (Santa Clara) 216
Huawei (Shenzhen) Huawei (Dusseldorf) 166
Huawei (Shenzhen) Peking University 102
Huawei (Shenzhen) ASTAR (Agency for Science Technology and Research) 96
Huawei (Shenzhen) Huawei (Ottawa) 78
Huawei (Shenzhen) Futurewei (Huawei Subsidiary in North America) 68
Huawei (Shenzhen) Huawei (Plano) 60
Huawei (Shenzhen) Victoria University of Wellington 38
Huawei (Shenzhen) Huawei (Indian) 38
 X. Lin et al. / International Journal of Innovation Studies 2 (2018) 81e90 85

Table 2
Technological division of Huawei's overseas R&D center.

R&D Center Technical Field

Stockholm Station architecture initiative and systematic design, analog/mixed signal design (RF: radio frequency); arithmetic; third-generation
partner project of mobile communication technology development (standard)

Bangalore Embedded software and embedded platform

Dallas CDMA overall solution; G3 UMTS; CDMA mobile intelligent network; Mobile data service; Optics; Skype

Silicon NGI, Microprocessor (chip)

Valley

priority, and domestic cooperation ranked second. Among institutions, Dallas semiconductor, Nortel Co. Ltd., Toga Networks,
Illusionistic Co. Ltd., and NextHop technology Co. Ltd. are all located overseas. They are the industry leaders or flagship
enterprises. Such external cooperation is mainly undertaken by Huawei's headquarters and its domestic branches. The in-
tensity of industry-university-research cooperation within Huawei's overseas branches is not very high. The branches mainly
act as liaisons, which indicates that Huawei's headquarters controls and protects its core technology (Table 3).
Fig. 1 lists ten universities and research institutions with the strongest cooperation intensity with Huawei (Si et al., 2016).
These universities and scientific research institutions are national or even international first-class institutions in the field of
science and engineering. Huawei maintains the strongest intensity of cooperation with Peking University, and the partici-
pants involved in innovation cooperation mainly come from the information security department of the school of software,
the physics department, and the international MBA (BiMBA) program of Peking University. Huawei's overseas R&D centers in
Europe and the United States also maintain a relatively close relationship with these countries' supreme universities, such as
the Technical University of Munich, Fraunhofer Institute for Applied Research Promotion, Delft University of Technology, and
Santa Clara University. At the same time, Huawei is also conducting research in emerging developing countries. Examples
include its cooperation with regional innovation centers such as Greece's University of Athens, Israel's Weizmann Institute of
Science, and Korea's Electronics and Telecommunications Research Institute in Daejeon. Through cooperation with these
international leading and regional leading universities and research institutions, Huawei has formed a cooperation network
of technological innovation with obvious gradient characteristics.
Huawei's global innovation cooperation thus mainly involves the internal cooperation of enterprises, and this has formed
the circular structure of Huawei headquarters (Shenzhen) being the core with overseas R&D centers being supporters.
Overseas R&D centers are the main sources for Huawei to obtain overseas R&D resources, and they provide services for the
enterprise's innovation and upgrading.

3.3. The flexible patent applications and achievement transformation strategies of Huawei

Liu and Ma (2015) argued that due to historical reasons, there is a huge technical gap between Huawei and international
manufacturers. When Huawei was still at the early stage of entrepreneurship, multinational enterprises had started the
development of advanced patents. Therefore, before 2007, Huawei acquired access to the international market mainly by
purchasing patents or paying patent fees, and it mainly focused on buying core technology and upgrading, since Huawei
lacked original core patents. After 2007, Huawei gradually attached importance to transnational R&D cooperation. Especially
in 2010 and 2011, Huawei improved its R&D ability through substantial R&D expenditures, and it gradually increased its
proportion of transnational R&D cooperation patents.
According to different universities and research institutes, Huawei and its patent cooperation are divided into three kinds
of commercial modes: (1) Scientists or engineers from universities and research institutions who write patent disclosures,
where Huawei then unilaterally determines the targeted organizations (e.g., the German Patent Office, European Patent
Office, United States Patent and Trademark Office, WIPO) to file a patent application. Huawei took on intellectual patent
applications independently, and it enjoyed all the income from the use of such patents. (2) Both parties will be jointly
responsible for the drafting and application of the patent report. Huawei will pay for the expenses but will enjoy all the
revenue generated from commercialization. (3) Both parties will apply for a co-patent or specify the share of the distribution
of the patent revenue per contract. The first two commercial modes are more common. Regardless of the model, Huawei's
employees will evaluate the possibility that the project's achievements will be applied to the knowledge patent. Furthermore,
they will place such achievements as having great possibilities of being applied for successful patents in the patent appli-
cation process. Throughout the process, the engineers sent by Huawei headquarters (Shenzhen) to R&D centers overseas and
R&D cooperation projects participated in and managed the operation of overseas R&D cooperation. The standardization and
intellectual property department of Huawei's headquarters almost represents its decision-making authority. In 2012, the
control of patent applications by Huawei's headquarters led to more than 30 patent applications filed by patent managers. It
can be seen that the inventors in the Huawei patent application are not necessarily the inventors of patented technology;
rather, they can be the manager in the process of knowledge commercialization.
In short, Huawei's transnational R&D cooperation is carried out through cooperation with international and regional first-
class science and engineering universities or research institutes.
86 X. Lin et al. / International Journal of Innovation Studies 2 (2018) 81e90

Table 3
Huawei overseas R&D cooperation strength in 2012.

Cooperative Partner Other Enterprises (Aboard) University and Scientific Research

Institutes

Domestic Abroad
Huawei (Domestic) 146 211 274
Huawei (Overseas Branches) 9 15 25

Note: In 2012, Huawei did not apply for WIPO patents with domestic enterprises (Si et al., 2016).

Fig. 1. The major participation of patent cooperation of Huawei with domestic and foreign research institutes in 2012.

This open R&D cooperation is different from the general R&D outsourcing or offshore R&D, as Huawei's parent company
and its overseas R&D institutions have an in-depth R&D process, where they learn from partners, study new knowledge,
absorb new technology in the process, and make the most use of innovation from external resourcesdwhich not only speeds
up the pace of innovation and reduces the cost of innovation but also improves Huawei's innovation ability and promotes the
upgrading of enterprise development.

4. Data analysis of Huawei's open innovation

Taking Huawei as an example, we show that the international cooperation of open innovation can improve the innovation
ability of enterprises and effectively improve enterprises' performance from the perspectives of the degree of international
innovation cooperation and R&D output elasticity.

4.1. Analysis of the relationship between international innovation cooperation and corporate performance

4.1.1. Corporate performance (ROE)

Corporate performance refers to the operating benefit of the enterprise and operator performance in a certain operating
period (Cui & Wang, 2016). The ways to study enterprise performance at home and abroad are quite similar. Tian and Feng
(2014) used earnings per share, return on equity, and Tobin Q in empirical research analyzing the relationship between the
R&D expenditure of listed companies and their corporate value. Zhao (2014) obtained return on equity, operating profit rate,
capital preservation rate, and returns on asset as indicators in a study of how R&D investment can affect enterprise value. This
paper uses return on equity to measure enterprise performance.
Return on equity is the percentage of net profit and the average stockholder's equity, which reflects the income level of
shareholders' equity and is used to measure the productivity of a company's use of its own capital. The higher the index value,
the greater the investment returns, and the higher the performance of the enterprise.
 X. Lin et al. / International Journal of Innovation Studies 2 (2018) 81e90 87

4.1.2. Data analysis

The data in this paper are compiled according to the financial reports of Huawei from 2006 to 2016 (Huawei Annual
Report, 2006e2016).
First, we analyzed the correlation between ROE and ICS using the Pearson correlation coefficient, as calculated using
EXCEL. The Pearson correlation coefficient is 0.58 > 0.5, which shows that there is a correlation between ROE and ICS. In
addition, to further examine the relationship between ICS and ROE, a trend graph for the two indicators that have been
standardized is plotted in Fig. 2.
It can be seen from Fig. 2 that the development trend of Huawei's ICS and the development trend of enterprise perfor-
mance are roughly the same for the past 11 years. Although there have been some fluctuations, there has been a general
upward trend since 2011. In addition, in 2009, the enterprise performance and international cooperation reached a high point,
which is closely related to Huawei's own development strategy. In 2009, Huawei entered the world's top 500, with an in-
crease in sales revenue by 19%, rising from the world's fourth largest telecom equipment manufacturer to the second largest.
In conclusion, the strengthening of international innovation cooperation can promote the development of enterprise
performance.

4.2. Analysis of R&D output elasticity for Huawei

R&D output elasticity (eR&D) is the ratio of output change ðDQ =Q Þ to R&D ðDK=KÞ.

DQ K DlnQ
eR&D ¼  ¼ :
DK Q DlnK

Output (Q) denotes annual income; K is the annual input of R&D. Table 4 shows the output elasticity of Huawei. It can be
seen from Table 4 that Huawei's R&D output elasticity is high. For example, in 2013, it was 4.28, which means that there was
an increase of about four units of output per unit input of R&D.
Chen and Liu (2014) studied the competition between Huawei and Ericsson. They argued that Huawei has quickly caught
up with Ericsson because its R&D output is more flexible than Ericsson's (Huawei is 0.85, much higher than Ericsson 1.0).
According to the application of world intellectual property, Huawei had only one patent application in 1999, while Ericsson
had 1034. As at 2007, the number of patent applications had increased to 1373 for Huawei, with 997 for Ericsson. Although
Huawei's patent number per capita was only half of Ericsson's at the beginning, Huawei has been taking steady measures to
increase its R&D funding and R&D personnel, to improve its R&D input and output elasticity, to implement open cooperation
innovation, and to utilize global innovation resources. Huawei finally stands out in the technological competition with
Ericsson.

5. Strategies of strengthening open innovation and promoting industrial upgrading

The implementation of open innovation and construction of GIC aim to achieve international technological spillovers and
make full use of global innovation resources. Keller (2004) suggested that international technological spillovers include

Fig. 2. Trend chart of Huawei's ICS and enterprise performance.

88 X. Lin et al. / International Journal of Innovation Studies 2 (2018) 81e90

Table 4
Huawei R&D output flexibility table (RMB billion).

Year 2012 2013 2014 2015 2016

R&D input 30.1 30.7 40.8 59.6 76.4
Sales Revenue 220.2 239.0 288.2 395.0 521.6
R&D Output Elasticity e 4.28 0.63 1.02 1.14

Data source: Annual financial report of Huawei Investment Holding Co. Ltd. from 2012 to 2016 (Huawei Annual Report, 2006e2016).

channels such as international trade, foreign direct investment (FDI), and information exchange. Intermediate goods in in-
ternational trade involve technical knowledge, and the use of the products will create an overflow of technical knowledge. Ma
and Wu (2016) argued that there are three ways to absorb international knowledge spillovers in accordance with the different
forms of participation in internationalized production: inward foreign direct investment (IFDI), foreign trade, and outward
foreign direct investment (OFDI). Ma and Wu (2016) suggested that we can strengthen the introduction of innovative talents
and investment in foreign high-tech enterprises, improve the construction of overseas R&D institutions, enhance the
expansion of the trade of intellectual property rights, and make use of outsourcing and strategic alliance to expand inter-
national cooperation and innovation.

5.1. Enhancing the cultivation and introduction of innovative talents

Talent is the key to innovation and the carrier of knowledge. Therefore, enterprises should strive to attract and foster
various types of innovative talent through the following ways that Huawei has adopted. China is a country with a serious
problem of brain drain. For example, in 2008, of the 1.4 million foreign students, who rank highest in the world, less than
400,000 returned to China to work, with millions of talented individuals retained in foreign countries. In 2017, the situation
took a favorable turn. According to the 2017 Overseas Talent Employment Analysis Report issued by Lockin China, on March 24,
2017 (QianLong news, 2017), the number of Chinese students returning to China is expected to exceed 600,000, which will
markedly surpass the total number of overseas students this year. Therefore, various methods must be adopted to attract
talent. For instance, the government could engage in efforts for attracting talent through offering favorable immigration
policy, hiring high-wage talents, introducing talent by means of scientific tourism, establishing an R&D institute in a wholly
owned or joint venture in countries with talent to utilize local talents, funding overseas students, and taking advantage of
opportunities such as corporate restructuring to recruit the lost scientific and technological personnel.

5.2. Investment abroad and construction of overseas R&D institutions

Foreign investment and the establishment of R&D institutions are effective ways to obtain actively knowledge. Chen
(2014) presented the concept of R&D revenue in the process of studying FDI reverse technology spillover. He argued that
R&D revenue includes factor spillover, resulting feedback, and cost sharing. Factor spillover refers to the FDI enterprises that
utilize in production infrastructure and elements to master advanced technology and R&D achievements through partici-
pation in the host country enterprises' R&D and production. Resulting feedback refers to the fact that FDI enterprises obtain
R&D achievements and technical knowledge by means of cooperation with the host country and employment of employees.
Cost sharing refers to the fact that FDI enterprises share R&D expenditure and costs generated by their R&D cooperation with
host country enterprises or research institutions. Huawei has set up its overseas R&D institutions in developed regions of
information and technology, which can reduce the cost of information search and help absorb cutting-edge technology and
train technical personnel. Furthermore, such efforts are especially beneficial for learning and absorbing tacit knowledge.
Huawei controls and absorbs R&D cost, as well as reduces the transaction costs of purchasing patented technology through
overseas branches. Huawei has accelerated the R&D process by using overseas research resources and taking advantage of
cooperation with overseas institutions. Huawei's development process confirms that establishing R&D institutions abroad is
an effective way to improve enterprises' innovation capability.

5.3. Introducing foreign capital, especially attracting foreign high-tech enterprises and scientific research institutions to invest in
China

The introduction of foreign capital can not only solve the problem of fund shortages but also introduce advanced tech-
nology and management experience, especially the introduction of high-tech enterprises with advanced equipment and
management teams, rich knowledge, information, and talent. The technological standard, management rules, and the training
system of foreign-invested high-tech enterprises have a demonstrative effect on domestic enterprises. The research Xu et al.
(2007) showed that FDI enterprises have positive horizontal chaining spillover effects on the industry through demonstration
and competition. In addition, due to the imitation of host enterprises, FDI enterprises have to continually increase their input
in technical knowledge. Therefore, innovation and spillover of technological knowledge can be further promoted (Caves,
1974). Therefore, the introduction of foreign capital is an effective way for enterprises to learn advanced technology,
obtain international knowledge spillovers, and improve the innovation ability of domestic industries.
 X. Lin et al. / International Journal of Innovation Studies 2 (2018) 81e90 89

Fig. 3. Growing trend of world intellectual property trade. Sources comes from the World Bank database (2018).

5.4. Expanding intellectual property trade and introducing advanced technology

In the past decade, global trade in services has accelerated much faster than trade in goods, with a growth rate of 4.41%,
while the growth rate of the global trade in goods is only 2.5%. Global trade in services has become an important driving force
for boosting economic growth (Zhou & Chen, 2017). Technology and knowledge account for a large proportion of trade in
services. From 1981 to 2011, the world's intellectual property trade grew by an average of 11%, 4% higher than the import and
export of trade in services during the same period. In addition, there was an accelerated trend after 2000, when global in-
tellectual property trade grew rapidly, which is also an important way of absorbing and learning the world's advanced
technology, as shown in Fig. 3.
Through technology and intellectual property trade and market exchange, one can learn global scientific and technological
achievements, promote the innovation ability of enterprises, and upgrade industries. Therefore, governments ought to
actively develop intellectual property trade.

5.5. Expansion of R&D cooperation in ways such as outsourcing and establishing strategic alliance

In the process of R&D globalization, according to each link in the innovation chain, enterprises should practice R&D
cooperation, make full use of global R&D resources, and develop a professional division of labor from the proposal of the
concept of the innovation, selection, design, and R&D of key components. At present, enterprise R&D outsourcing is gradually
becoming a trend, and professional R&D services are expanding. For instance, new forms of R&D industries continue to
emerge, such as integrated circuit design companies, consumer electronics design companies, third-party design companies,
software R&D outsourcing companies, and biomedical contract research organizations. The outsourcing of R&D promotes the
efficiency of R&D activities, saves R&D costs, and reduces the risk of R&D.
In addition to outsourcing, companies can participate in R&D strategic alliances, sign R&D agreements to define the goals
and tasks of R&D, coordinate the personnel division of labor, and share the cost, risk, and the achievements of R&D.

6. Conclusions

The chain of open innovation and global innovation represents the optimization of global innovation resources and the
implementation of innovation activities that make the most of the comparative advantages of innovation throughout the
world so as to shorten the innovation cycle and reduce the risk and cost of innovation. Huawei in Shenzhen is a typical
example of the use of global innovative resources to improve its innovation capability and grow from a contract manufacturer
to a world-class enterprise in such a short period of time.
Today, China is at the lower end of the GVC; hence, China should strive in attracting talent and establishing overseas R&D
institutions, as well as introducing foreign high-tech enterprises and their advanced technology. This can be achieved by
expanding intellectual property trade, utilizing outsourcing and strategic alliances to expand international innovative
cooperation, promoting Chinese industrial upgrading, and enhancing China's status in the international division of labor with
the help of the GIC.

Acknowledgements

This paper is funded by “Moving from global value chain towards global innovation chain: a strategy research on
improving China's status in international division of labor” of Chinese National Social Science Foundation Project (Grant ID:
90 X. Lin et al. / International Journal of Innovation Studies 2 (2018) 81e90

18BJY003), and “A study on improving the status of Guangzhou in the global division of labor, based on the global innovation
chain and the double-helix model of the global value chain” of Guangzhou Social Science 13th five year plan project (Grant ID:
2017GZYB41). Thanks to the reviewers for their valuable comments.

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