China’s President Xi Jinping recently declared that “the situation of our nation being under others’ control in core technologies of key fields has not changed fundamentally, and the country’s S&T [science and technology] foundation remains weak.” Weaning China off dependence on foreign knowledge is a long-standing official goal, embodied in successive policies to promote technology transfer, research output, and patent filings.
The latest expression of this techno-nationalist drive is a blueprint to move Chinese manufacturing up the global production chain, by shifting domestic innovation from the customer-focused and efficiency-driven varieties at which it has excelled toward engineering and science-based invention. But what progress has China actually made in transitioning from a low value-adding assembly hub – “the world’s preferred subcontractor,” reliant on inputs developed and owned by firms in high income countries – to innovation at the technological frontier?
In a sample of 44 industries open to foreign competition in China, domestic firms now dominate 25. But of the 13 sectors where research and development (R&D) costs exceed 6 percent of revenue, 10 are led by foreign multinationals. China’s consumer electronics industry leads the world in exports, but accounts for only 15 percent of value added to the final product, and still relies heavily on chip imports and licensed use of foreign technology. And in strategically critical fields such as aircraft engines, the performance of China’s indigenous products still lags significantly. Speaking generally, China still occupies a subordinate role in the global knowledge economy.
However, several trends suggest that this is changing, albeit slowly and unevenly.
The processing share of China’s foreign trade has been falling for a decade, due to the rise in domestic production of intermediate components. While a large share of this domestic content still derives from intellectual property owned by foreign firms, Chinese firms are expanding the range and sophistication of their activities. Even within the export processing sector, domestic firms have been moving from pure assembly to control of the whole production process, including product specification and design; this accounts for the shift within China’s technology imports from capital goods to licensing and patent transfers. Such upskilling has allowed Chinese firms to start competing with foreign companies in higher value added industries, the standout examples being the telecom giants Huawei and ZTE, which have broken into the ranks of China’s top exporters.
Chinese patent filings have risen rapidly, both domestically and internationally. China is the largest growth source for filings with the World Intellectual Property Organisation, with Huawei and ZTE coming first and third in last year’s figures. While the average quality of Chinese patents is dubious, with the state-led incentive system still promoting quantity of filings over inventiveness and commercial applicability, these institutional distortions are starting to be corrected. And the gulf between China and the advanced economies in international patents may imply less about the quality of Chinese innovation than often assumed, given incentives to file at home in a country that now conducts a fifth of world manufacturing. Abroad, the gap is closing: even in triadic patents (filed in the U.S., EU and Japan), viewed as the “gold standard” and cited as proof of China’s technological lag, China could on the current trend catch up with the United States within two decades.
Chinese innovation is supported by the world’s fastest growing R&D budget, which is on track to surpass the United States’ by 2020, a trend ringing alarm bells in the U.S. scientific community. A key driver is the rapid growth in R&D spending by foreign firms within China, aimed at accessing not just the Chinese market but the local knowledge ecosystem, based on one of the world’s largest pools of STEM graduates. Basic research – generally regarded as critical to technological innovation – still accounts for a smaller share of China’s R&D spending than in advanced economies, but has been emphasized in the 13th Five Year Plan and could on one projection double to ten percent by 2020, closing the gap with most developed countries.
It must be noted however that simply throwing more money at Chinese innovation will not make it globally competitive: the key limiting factors now are the research environment and evaluation system, which still privilege quantitative metrics and quick results over long-term fundamental research and efficient collaboration. And China’s slowing economy reinforces the need for caution when extrapolating linear trends in funding.
Nonetheless, there has been quantifiable improvement in output quality. Chinese researchers now hold second place in aggregate on the Nature Index, which measures contributions to the world’s leading science journals, and citation rates for Chinese-authored articles have also risen steadily. China is driving the growth in international scientific collaboration, having displaced Germany as the top location of foreign partners for U.S. researchers; Germany for its part recently published a strategy for scientific cooperation with China. Australia-China research collaboration has also steadily expanded, supported by federal funding to universities and the Commonwealth Scientific and Industrial Research Organization (CSIRO). And China’s long-running state-led incentive programs to lure home Chinese scientists and technology entrepreneurs from Western countries are also finally starting to show some notable results.
The results of this changing R&D profile are evident in high-profile state-led projects such as China’s space, high-speed rail, and commercial airliner programs, which admittedly face their share of obstacles. China is also now competing at the technological frontier in a number of defense-related fields, such as counterspace capabilities and hypersonic vehicles. But the key issue for China’s future place on the global technology ladder is how far and how fast its wider economy can embrace the “fourth industrial revolution,” characterized by disruptive innovation integrating the physical, digital, and biological worlds. An aging population and stagnating growth model add urgency to the pursuit of economic transformation, to meet the official goal of turning China into a “modern socialist country” by mid-century; or in development economics terminology, escaping the middle income trap.
Key to this transition is digitized automation of production. China has become the world’s largest market for industrial robots, and while foreign suppliers still dominate, domestic robot makers are following the general path of incremental improvement and growing market share. While the extent of automation, let alone digitization, in China remains very low compared to advanced economies, the cost efficiency of robots is growing and Chinese firms are starting to integrate “fourth industrial revolution” technologies, notably 3D printing. Chinese overseas investment is also increasingly targeting high technology firms as a means of accelerating the shift toward intelligent manufacturing, with Germany in particular being courted at the government and company level.
Foreign acquisitions are emerging as a fast track to firm upgrading and market access across sectors from product distribution to agrichemicals, with China recently surpassing the United States as the world’s biggest buying nation in the technology sector. China has also evolved an indigenous startup complex that is emerging as a credible competitor to Silicon Valley, fueled by the world’s second largest venture capital market, which now includes a mammoth array of state-backed funds. While likely to be afflicted by the usual problems of bureaucratic interference, hazy regulation, and quantitative fixation, the volume of money involved and the proven ability of Chinese startups to deliver commercializable products suggests that the impact will increasingly be felt around the world, including in Australia.
In some sectors, notably internet services, consumer electronics, and telecommunications, rapid technological change – arguably assisted by state policy – has enabled Chinese firms to catch up with or leapfrog foreign competitors. This also potentially applies to fields where industrial policy has previously failed to close the gap, such as semiconductors and automobiles. In the latter sector for instance, a mix of state-owned enterprises and private Chinese firms is leveraging internet-enabled ride-sharing and automotive digitization, backed by state policy to develop an “internet of vehicles” composed of self-driving and electrically powered cars. Because this ecosystem will be based on Chinese technology standards and developed by domestic firms, it presents a challenge to the dominance of foreign automakers in the Chinese market, and perhaps even overseas.
Overall, China’s technological level remains that of a middle-income country; in high tech sectors its firms remain downstream in the production process, and its R&D system is still burdened by academic fraud, administrative fiat, and an incentive structure skewed toward quantity over quality. In three decades China has built (from almost nothing) the framework of a world class innovation system, yet the pace of its technological catch-up with the developed world remains incremental rather than transformative. But the foundation that has been laid allows us to envisage a future world economy – within a 20-year, not a 50-year, time frame – in which China is increasingly an equal player with Japan, the EU and the United States. The key to this outcome is deep reform of China’s innovation system, which is bound up in reform of the country’s wider political economy.
Yet even if Chinese innovation performance continues to lag behind that of the first world, China’s size means that its global impact will be hard to ignore. While Chinese firms are still far from replicating the foreign investment footprint and international supply chains of established multinationals, China’s domestic market may be big enough to support the rise of globally competitive firms, with test cases already present in Huawei, Lenovo, Ali Baba, Tencent, and others. Chinese enterprises are finding ways of leveraging domestic scale to exploit high growth R&D intensive sectors outside the well-known examples of e-commerce and electronics manufacturing, for example in biotechnology.
An expanding role for Chinese firms and researchers in an integrated global economy would have political implications, in an era of growing international tensions and secular stagnation. It would undermine proposals to embargo China technologically, and would bolster China’s economic influence, which is already a focus of U.S.-China strategic competition. But it would also promote the rise of a more global civilization, with increasing tapping of mutual resources for wealth creation and scientific progress.
A shorter version of this article first appeared at the Lowy Interpreter Blog.
John Lee is a visiting Academic Fellow at the Mercator Institute for China Studies (MERICS) in Berlin.