Piling Into the Lead
China is now at the top of the tables when it comes to investment in research and development. But problems like bureaucracy and short-term thinking continue to hold innovation back.
The second decade of the new millennium has been a momentous one for China in terms of spending on technology development. The numbers indicate dizzying growth, whether in terms of overall spending, per capita spending or ratio of GDP.
According to data from China’s National Bureau of Statistics, the country’s spending on research and development reached 706.3 billion yuan, or more than 100 billion US dollars, in 2010, which many saw as a historic milestone. The next year, investment in R&D grew again by more than 50 percent, reaching 868.7 billion yuan, more than 150 billion US dollars. This put Chinese spending on R&D above that of Japan, long in the number-two position (though it was still dwarfed by the United States, which spent 400 billion dollars in 2011).
* In 2013, China spent more than 2% of GDP on R&D, meaning China has achieved its "technology takeoff." Since then, China’s R&D input has maintained a high rate of growth and might already have surpassed Europe in 2018.
* But Chinese innovation through R&D investment still faces fundamental problems. It is focused on the short term, with lack of basic scientific research. The problem of fraud, particularly with state-funded projects, is widespread.
* Despite assumption of high government input, Chinese companies are the engine driving R&D expansion.
* Chinese capital is keen to invest in research and innovation in the West, focusing on fields like telecoms, AI and biotech.
* R&D investment is just the first step in becoming an innovation giant. Ultimately, it is people, not capital, that defines a nation's innovative capacity.
By the time R&D spending topped one trillion yuan in 2009, it had nearly doubled in just three years since 2009. China’s R&D expenditure ratio – the proportion of GDP dedicated to research and development – had nearly doubled already in the decade from 2000 to 2010 (from 1 percent to 1.97 percent). Even through the global financial crisis in 2008 and 2009, as the US and other countries slashed R&D budgets to face the economic slowdown, China’s R&D input maintained a high rate of growth.
When the Battelle Memorial Institute, a non-profit science and technology development organization, released a study in December 2013 saying China’s R&D would surpass that of Europe by 2018, and exceed the US by 2022, this prediction garnered a lot of attention. The institute’s prediction for Europe has already come to pass.
Today, R&D expenditure in China’s more developed coastal provinces and cities – such as Jiangsu, Shanghai and Tianjin – has already surpassed that of countries like Italy and Spain, not only in absolute value terms but also in terms of R&D spending per capita. In 2017, for example, corporate R&D input in Shanghai reached more than 10 billion US dollars, while corporate R&D input in Italy stood at 6.5 billion dollars.
We can be reasonably certain that China’s R&D ratio will reach 2.5 percent by 2020, the goal set in the country’s 13th Five-Year Plan (2015-2020). At present, the average in developed countries is 2.8 percent, and the global average is 1.8 percent. Some people believe, in fact, that actual expenditure on R&D by Chinese companies may already have surpassed 2.5 percent as early as 2014.
According to a report from the World Intellectual Property Organization (WIPO), the proportion of China’s R&D expenditures in the world rose from 5 percent in 2002 to 13 percent in 2010, putting it in the number two position globally.
Consider that in 1993, just after the acceleration of economic reforms that followed Deng Xiaoping’s “southern tour,” Chinese R&D expenditures accounted for just 2.2 percent of the global total. For decades, the United States, still in the number one position, has maintained a global ratio of around 35 percent.
Based on the experiences of OECD countries in innovation development, it generally takes a very long time for a country’s R&D ratio to reach 1 percent. From that point, it experiences rapid growth until it stabilizes at around 2 percent. The stage between the 1 and 2 percent marks is what analysts call the “technology takeoff” period.
If we look at this “technology takeoff” in various countries, we find the process happening over the decade between 1950 and 1960 in the United States. In Germany, the process took 11 years, from 1951 to 1962. In Japan, it happened over a much longer period of 19 years, from 1959 to 1978. South Korea’s “technology takeoff” occurred over the shortest period thus far, from 1983 to 1988.
But regardless of how compressed or extended this period of “technology takeoff” is, the process is generally followed by a clear increase in innovative activities that then expand across society, resulting in the widespread creation and development of innovative companies and industries. We see innovative products from these countries acquiring international prestige and demand only after they successfully went through the process of “technology takeoff.”
China’s R&D ratio remained below 1 percent for a long time. For some time in the early reform and opening period, the ratio was actually below .5 percent. It was not until 2000 that it reached 1 percent, and from that point it continued to rise until it reached 2.08 percent in 2013. So we see that China took 13 years to achieve its “technology takeoff.”
This is an important milestone for China.
But if we compare China to developed countries, we can note that its “technology takeoff” has two distinct characteristics. First of all, if we look at China’s per capita GDP, it is still a developing country. And yet, China’s R&D spending is much higher than we can find in countries at the same income level – comparable to R&D expenditure in developed countries.
China’s R&D spending is much higher than we can find in countries at the same income level – comparable to R&D expenditure in developed countries.
Second, while China’s total R&D spending remains lower than that of developed countries, its input in certain cutting-edge areas – such as renewable energy, bioscience, and new materials – has reached or even surpassed spending in some developed countries. By contrast, R&D spending in a number of developed countries still focuses on traditional areas, such as the automotive industry.
One important factor that has propelled China’s growth in R&D input since the late 1990s is growing investment from all levels of government.
On the one hand, after the late 1990s, tax reforms in the Zhu Rongji era, which directed more tax income to the central government, substantially increased the central government’s fiscal income. Meanwhile, the rapid development of the property sector allowed local governments to increase their income through land sales. There is a popular belief in China that the government generally is flush with funds. While this may not be true everywhere, it is certainly true that the central government and various regional governments are investing in a wide range of research projects, both directly and indirectly, and most of these were begun after 2000.
On the other hand, as economist Steven Cheung (张五常) has pointed out in his book The Economic System of China, fierce competition among local governments has long been an important factor in China’s economic development during the reform and opening period. Once they have attained a certain level of economic development, local governments shift their focus to technological progress in pursuit of greater economic competitiveness. They establish a seemingly countless number of so-called “high and new technology development zones,” and they provide deep benefits to companies that settle in these zones and pursue technological development.
Two of the most prominent examples of this pattern of local stimulus and growth are western China’s Guizhou province and the city of Chengdu, in Sichuan province. Over a period of just a few years, Guizhou, once China’s poorest province, became a hotspot for companies in cloud computing. Once sleepy Chengdu, meanwhile, has become China’s “software capital,” and recently overtook Shenzhen as the country’s “best performing” city in the latest annual survey from the Milken Institute.