Innovation is critical for high-tech manufacturing. Firms and governments constantly seek cutting-edge design and advanced manufacturing capabilities to produce the latest consumer goods and machinery. High-tech manufacturers drive economic growth—especially in advanced economies—and enable a country to compete in the global economy.
China is seeking to dominate high-tech manufacturing. While China has made massive economic gains over the past forty years, it has done so by applying technological developments from advanced countries to their own economy. This “fast-follower” approach has helped China catch up to advanced economies. However, to lead the high-tech sectors of the global economy, China needs a high-level innovative capacity of its own.
In recent decades, China has made a concerted effort to develop its innovative capacity to assert itself in the high-tech sector. As part of this effort, China has made major investments in research and development (R&D) and is fostering an environment that supports innovation in science and technology.
Conventional Western Thinking on Chinese Innovation
Conventional wisdom maintains that China is not an innovative country. This Eurocentric view holds that Western cultures have spearheaded technological change since the Scientific Revolution of the 1600s, and that the rest of the world merely adopted these advancements.
Western thinkers posited several explanations for Europe’s scientific progress based on factors including race, climate, and culture. David Hume, for example, believed there were “No ingenious manufactures among [non-whites]” and that “Such a . . . difference could not have happened . . . if nature had not made an original distinction betwixt these breeds of men.”
Modern thinking regarding China’s innovation capacity assumes that their culture stifles creativity and innovation. In 2015, former Hewlett-Packard CEO Carly Fiorina wrote that “innovation and entrepreneurship are not their strong suits” and that their society is “too homogenized and controlled to encourage imagination and risk-taking.” This faulty belief has led many Western political and business leaders to conclude that China cannot surpass the United States and the European Union as the prevailing innovating power.
China and Foreign Technology
China depends on foreign technology for high-tech industries. This dependency is particularly evident in semiconductors, which are considered a foundational technology for high-tech industries. China accounts for nearly 60 percent of global semiconductor demand and 13 percent of global supply, which leaves a significant amount of demand to be fulfilled by imports.
The shortfall between demand and supply presents an opportunity for Chinese businesses to reduce their spending on foreign technology and grow that sector of their domestic market. This opportunity is not lost on Chinese leaders, who have identified meeting 70 percent of domestic demand for core components and materials with domestic supply as a national goal.
To narrow the high-tech gap, China strives to acquire foreign knowledge and build domestic innovative capacity. One way Chinese firms are attempting to acquire foreign knowledge is by investing in foreign companies and gaining access to their technological knowledge. For semiconductors, the country has established a $150 billion fund to acquire foreign companies, notably increasing the number and value of mergers and acquisitions.
Another way that Chinese firms access foreign technology is requiring foreign firms in certain industries to form joint ventures with Chinese companies in order to access the Chinese market. Chinese companies can require foreign firms to transfer technology and information to China as part of the joint venture agreement—a practice the government encourages. The American auto industry, for example, has reportedly experienced pressure from the Chinese government to transfer technology to Chinese companies in order to do business there.
In response, many Western critics and politicians have criticized China’s acquisition of foreign knowledge by emphasizing blatant intellectual property (IP) theft and other strategies as coercive tools. IP theft is a legitimate issue that reportedly affects one-in-five companies in the CNBC Global CFO Council, which represents over 130 of the world’s largest corporations. However, what critics often overlook is that China is improving its IP protections and trying to align them with World Trade Organization standards.
China strengthening its IP protections is largely a result of its increase in innovative capacity. Strong IP protections are a political priority for businesses in countries transitioning from importing to exporting innovation and knowledge. For example, the United States relied heavily on obtaining and fabricating British and European technology during the 1800s, then began developing robust IP protections in the early 1900s as it transitioned into an innovation exporter.
In conjunction with rising innovative capacity, China has increased penalties and patent durations, and plans to debut more than twenty specialized courts to protect IP. Furthermore, the US-China Business Council—which represents approximately 200 major US companies that do business in China—reported in their 2019 Member Survey that 58 percent of member companies believe China’s IP protections improved in 2019, while none of them reported that China’s IP protections deteriorated. Disregarding China’s efforts to improve its IP protections for both domestic and foreign companies fails to reflect how the issue is changing and inaccurately portrays Chinese companies as dependent on Western innovation.
Western critics have also argued that the size of the Chinese economy presents such a lucrative opportunity that firms are forced to surrender their IP to access it. This claim omits important context regarding these strategies and overstates their impact. The joint venture requirement is a common and accepted practice that many developing countries in Asia and Africa have used to promote domestic ownership and generate wealth. Furthermore, the US–China Business Council reports that only five percent of respondents were asked to transfer technology and, on aggregate, respondents indicated that knowledge transfers were not a major concern.
Development of Chinese Innovation
In conjunction with acquiring foreign technology, China has taken gradual steps over decades to dramatically upgrade their domestic innovative capacity. Since 1997, China has increased its annual R&D spending twentyfold over twenty years. While the US maintained its position as the largest investor in R&D—$485 billion to China’s $445 billion—its spending has increased less than twofold during the same period.
Chinese R&D spending will likely continue increasing in order to meet the goals set out in the “Made in China 2025” plan. Adopted in 2015, the plan is a blueprint for China to become the world’s dominant high-tech manufacturer. The plan prioritizes ten high-tech sectors—including information technology, high-end medical equipment, and robotics—and designates substantial funding and credit to grow them. As of March 2018, it was reported that there was approximately $432 billion earmarked for government industrial funds. The scale of high-tech investment is unprecedented for China and illustrates the high likelihood of China becoming the dominant innovator.
One objection to the rising R&D argument is that China has not observed an improvement in R&D efficiency during this time. If R&D efficiency is understood as the relationship between R&D spending and new product sales revenue, China’s high-tech R&D efficiency has experienced constant returns to scale. This relationship indicates that China has not substantially improved its innovative capacity, but it fails to show the full story of Chinese innovation. This is because most of China’s R&D activity is targeted towards developing new products and technologies rather than producing existing products more efficiently.
Two other indicators of innovation—patent applications and scientific publications—also indicate the rise in China’s innovative capacity. Between 2009 and 2018, the number of annual domestic patent applications increased by over 500 percent. In comparison, US domestic-origin patent applications increased by 27 percent during the same period. Although many factors such as population, regulation, and the general business landscape influence the number of patent applications, this comparison illustrates how dramatically China has ramped up its innovative capacity.
When it comes to scientific publications, China is on par with the United States in many fields and even surpasses the US in engineering and computer science publications. In 2013, China produced about 35 percent of global engineering publications and 21 percent of global computer science publications. This selective dominance is not by accident. Engineering and computer science are critical to the investment strategies outlined in the Made in China 2025 plan.
In recent decades, China has created a fertile ecosystem for innovation. While it still depends on high-tech imports, the Made in China 2025 plan is an unprecedented national effort to galvanize China’s innovative capacity and harness it in high-tech industries.
It would be foolish to characterize these developments as simply part of a “catch-up” scheme. The rise in the number of Chinese patents and their dominance in specific scientific papers are critical efforts to position themselves as premier innovators in the coming industrial era. Absent a concentrated effort by the United States to match China’s pace, it is highly likely that China will become the world’s leading innovator.
