Software giant Microsoft is tackling the mainland's growing domestic demand by forming a new unit that, for the first time, will develop and launch software for the Chinese market. The products developed for China will be based on local research and demand but, eventually, could be adapted and shipped to customers in the United States and other markets. The move marks a significant departure for Microsoft China, which has a formidable research team but has tended to work in tandem with research operations serving markets in the West. Now, China will be both a first market for the company and a testing ground for technologies untried elsewhere. The announcement comes in the wake of the increasing dominance of Linux in the mainland. Microsoft has identified Linux, a free operating system, as one of its biggest threats as companies and governments around the world switch to - or at least try out - the software. Linux is immune to many of the viruses which target the Microsoft operating system. Analysts have said that Linux could limit Microsoft's influence in the mainland, while allowing local software firms to grow in their market. However, the world's largest software maker planned to 'focus on a few products we believe will be a huge hit in the future', Microsoft Research Asia managing director Zhang Ya-Qin said. 'Products could start here and then move elsewhere.' Part of the goal is to encourage local software companies to contribute products that fit with Microsoft software. 'With the advanced technology centre, we are going to focus on developing the software ecosystem,' Mr Zhang said. The new team will start later this year with a handful of staff, but will eventually employ several hundred people. Currently, Microsoft China, including sales and support, is third after the US and Japan in its number of employees. Beijing houses one of Microsoft's four global research centres. Founded in 1998 and now with a budget of about US$30 million and 200 employees, Microsoft China has developed 200 US patents and contributed 70 software technologies for Microsoft products. Key contributions include technology for Xbox and Windows XP, in areas such as computer graphics and animation. An example will be available in the latest version of Outlook 11, consisting of a cartoon person called avatar that can be personalised with human like expressions. Many of the water scenes in the Xbox - difficult to create realistically - were made with computer code written in Beijing. 'A lot of the technology for Longhorn [the next generation of Windows] was developed in this lab,' said Harry Shum, assistant managing director and the head of the graphics group. The move to localise product development is testimony to China's increasing importance as a market for foreign companies. Apart from its huge size, China also offers advanced technology - such as the country's extensive mobile phone networks - that allow companies to try out new technologies. The products will be developed from one of Microsoft China's nine research groups in four areas: User interface, which includes voice recognition, text-to-speech, digital ink and language processing; wireless communication, which examines games over mobile phones and the interaction of networks; digital entertainment, including graphics, video processing and animation; and multimedia. The new centre also allows Microsoft to develop a group of local software companies capable of creating the next generation games, multimedia and communications software that will work with Windows XP and its successors. 'We look at what we can achieve in key technologies and work with local product groups,' Mr Zhang said.