This study examines factors affecting MNCs’ establishment of R&D centers in China (i.e., China R&D centers). We argue that China offers not only location advantages (e.g., economic growth) that encourage MNCs to establish R&D centers there, but also location disadvantages (e.g., weak intellectual property protection) that discourage MNCs from doing so. Examining a sample of China R&D centers established by U.S. MNCs over fifteen years, we find that China’s location advantages and location disadvantages have both independent and joint effects on MNCs’ establishment of China R&D centers. We also find that MNC attributes moderate these effects.

Because of its significance in the competitive landscape, scholars have paid increasing attention to the globalization of research and development (R&D) by multinational corporations (MNCs). With the continued integration of the global marketplace,many MNCs are diffusing headquarters functions geographically and moving R&D activities to locations abroad(Cantwell, 1995; Cheng and Bolon, 1993; Nobel and Birkinshaw, 1998; Zhang et al., 2007). As an important strategic option of cross-country capacity expansion, R&D globalization provides MNCs opportunities to exploit firm-specific technological capabilities in new markets, and to access new sources of knowledge that can be used to expand those capabilities (Kuemmerle,1999). Options MNCs use for R&D globalization include merger and acquisition, technology licensing, and participating in an international R&D consortium. However, as Cheng and Rhee (2002, 3388-3389) noted, "none of these options would add to a firm's worldwide learning and innovation capabilities as effectively as establishing its own foreign R&D facilities."

During the first decade of the 21st century, MNCs have established more R&D centers in China (i.e., China R&D centers)than in any other country. According to Li et al. (2013), by 2012 there were more than 1,600 R&D centers founded by MNCsin China (Xinhua News, 2012). The MNCs' China R&D centers provide well-paying jobs for local workers and develop products and services sought by Chinese consumers (e.g., Gelb, 2000). Further, they bring advanced technologies into China,complementing its established strengths in manufacturing. In fact, research suggests knowledge spillover stemming from technologies introduced by foreign MNCs increases the productivity of local Chinese manufacturers (Zhang et al., 2010).Thus, MNCs' China R&D centers are not only critical for MNCs themselves, but are also important to China.Although establishing R&D centers in China has become popular, it also presents significant challenges for MNCs. For example, institutional support such as intellectual property rights protection (IP protection) is lacking in China. Even when it exists, such support rarely meets the standards in developed economies, and enforcement of the laws and regulations often remains weak. As such, MNCs performing R&D activities in China take a risk that competitors (particularly local ones)and even local partners might expropriate core technologies with little or no legal consequences (Awokuse and Yin, 2010;Keupp et al., 2009; Zhang et al., 2007).