How China’s Government Helps — and Hinders — Innovation

21 November, 2016 / Articles
China

By all accounts, the Chinese state is on all-out drive to move the country up the technological ladder. As the era of China as the world’s low-cost manufacturer comes to an end, innovation has become the most important element in the state’s development blueprint.

Given its ideological leanings, China presents itself as a unique experiment in the power of the state to help the economy become more innovative. Our analysis suggests that, so far, the results have been mixed. Along some important dimensions, the state is clearly playing a major enabling role. Yet, along other dimensions, the state is unwittingly hindering China’s emergence as a technological giant.

As a helpful enabler, the state’s single most important role has been to ramp up the inputs to innovation – aggressively. Total investment in R&D (as a proportion of GDP) grew from 0.9% in 2000 to 2.0% in 2015 and is on track to reach a targeted 2.5% by 2020. At 20%, China’s share of global R&D expenditure in 2015 was well above Japan’s at 9% or Germany’s at 6% and second only to that of the U.S. at 26%. The number of PhDs in science and engineering graduating each year has grown dramatically and is now just behind that of the United States.

In recent years, the government has also launched a number of programs aimed at cultivating scientific talent. The more prominent among these include the National Science Fund for Distinguished Young Scholars which provides research support to deserving scientific projects, the Chang Jiang Scholars Program aimed at attracting distinguished visiting professors, and the Thousand Talents Plan aimed at luring back top Chinese researchers from abroad.

The Chinese state has also played a direct role in technological advancement in sectors such as space exploration, defense, and supercomputers. Globally, these are industries where the state is often the sole or dominant customer. Thus, technological innovation in these sectors tends to be financed by the government and carried out within government or quasi-government laboratories.

There’s thus been a lot of activity on what you might call the “input side.” But what’s the effect? How does the “output side” look? China’s record there is much less impressive. From 2010-2015, the share of China-origin patents among all patents granted by the US Patent & Trademark Office (USPTO) was only 2.2%. Over the same period, the share of USPTO-granted patents for inventions originating in Japan, Germany and South Korea was 18.8%, 5.5%, and 5.5% respectively. As per the latest OECD report, there is not a single Chinese university among the global top-30 in terms of top-cited scientific publications. Relatedly, China’s global share of top-cited publications is miniscule.

Part of the explanation for the seemingly low productivity of China’s R&D regime lies in lags between investments in R&D and the resulting outputs. Part also lies in aspects of the Chinese socio-cultural context such as the legacy of rote learning and respect for hierarchy. Importantly, however, China’s innovation challenges go well beyond time lags and cultural factors. Some of the government’s policies and practices, designed ostensibly to help China become an innovation giant, are themselves a major impediment.

First, as noted in an editorial in Science magazine, the bulk of China’s government R&D funds are allocated on the basis of political connections rather than merit as judged by independent scientific panels. This practice increases the risk that some of the funds are spent on fancy buildings and equipment rather than actual research.

Second, China spends relatively little (only 4% of total) on basic research as compared with the OECD economies (17% of total). As a result, the primary emphasis in China’s R&D regime remains on tweaking existing knowledge to tailor products and services for the Chinese market; not enough research efforts are directed towards developing “new to the world” scientific ideas and technologies.

Third, the government places far greater priority on the quantity over the quality of patents. From 2010 to 2015, the number of patent applications filed with the State Intellectual Property Office tripled from 300,000 to over 900,000. The 13th Five-Year Plan intends to double the number again to 1.8 million by 2020. Pursuit of scale for the sake of scale risks devaluing the quality of the typical patent even further.

Fourth, the “Great Firewall of China” makes it difficult for Chinese researchers to access global information. Chinese researchers cannot access Google Scholar. They can use Baidu Scholar, which works well for searching Chinese but not international journals.

Fifth, foreign companies feel pressured to transfer technology in order to gain market access and are at a distinct disadvantage regarding intellectual property (IP)-related judgments in Chinese courts. The outcome has been that, while almost all western technology giants have R&D labs in China, bulk of what they do is local adaptation rather than developing next generation technologies and products. They do not want to risk premature transfer of leading-edge technological work to Chinese competitors. As a direct result, China misses out on spillover effects from leading edge R&D work by the world’s top technology developers, a key driver in the emergence of innovation ecosystems such as Silicon Valley.

A comparison between China and India provides a stark contrast. Other than in a few sectors such as defense, India has no policies designed to aid domestic over foreign companies. The typical foreign company also feels much safer about IP protection in India than in China. Thus, even though India spends only one-tenth as much as China on R&D, the world’s technology giants do more cutting edge R&D in India than in China. According to our analysis, during 2010-2015, the India labs of the top 10 American technology giants obtained 50% more patents from USPTO than their China-based labs.

The above analysis yields three conclusions about the role of the state as an innovator. One, the content of policies matters. Two, policy goals do not always translate into desirable outcomes at the ground level. Three, inherent contradictions between political ideology and innovation imperatives may be difficult to sidestep.

Given China’s scale and the quality of its math, science, and engineering education, we deem it inevitable that it will eventually become one of the world’s technology giants. However, for this to happen sooner rather than later, its leadership would need to rethink the design of policies and programs, the pros and cons of free access to information, the importance of a strong IPR regime, and the role of foreign MNCs in accelerating spillover effects.

The science man and innovator, Fernando Fischmann, founder of Crystal Lagoons, recommends this article.

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