Chinese innovation assessed

Can China innovate? How might its innovations change the rest of the world?

For many years, China has, like Japan before it, been condescended to about its record in technological innovation. China’s reliance on cheaply imitating Western technologies is a staple of discourse in the industrialised world. US diplomacy also wants redress for what it regards as China’s theft of American intellectual property. The value of patents filed in China and of its scientific papers is contested, while its science institutions are thought weak in critical thinking, deferential toward to hierarchies, and widely afflicted by plagiarism.

There is much in all of this. Yet we need to recall that for much of the 19th century the West held China’s governance and organisational powers – things that pertain very much to innovation – in contempt. In the early 20th century, too, Mark Twain ruthlessly attacked America’s insistence that China should pay tribute for its misdeeds (1). Today’s fear of China’s innovation capabilities and its computer hacking skills also has precedents: as cultural historian Christopher Frayling points out in a new book, The Yellow Peril: Dr Fu Manchu & the rise of Chinaphobia, worries about a faceless, secret Chinese army ‘equipped with the latest scientific research’ swept the West for years after 1912, when short stories about the evil Chinese aspirer to world domination, Dr Fu Manchu, first appeared (2).

To judge Chinese innovation capabilities accurately today means avoiding analyses that are variously contemptuous, alarmist or over-respectful. Take energy and climate change. On the one hand, the West often displays a sneaking and somewhat exaggerated regard for China’s prowess in wind turbines, solar power and even hydroelectric dams. Similarly, in November 2014, when Presidents Jinping and Obama signed a deal on CO2 emissions, North American radicalism’s Naomi Klein proclaimed that the Chinese government could not afford to ignore public opinion, or the ‘growing power’ of indigenous ‘social movements’. On the other hand, it is a fact that China is both a slouch and a world leader in the less polluting kind of coal-fired power stations. Nevertheless, elite opinion in the UK chooses to highlight the fact that China is the country most responsible for the greenhouse gas emissions associated with UK imports (3).

As Jonathan Fenby remarks, ‘Sinomania and Sinophobia go hand in hand’ (4).

Clearly innovation is a complex beast, measurable in several ways, and across different sectors of industry and services: it would be odd if China could nowhere point to innovation achievements somewhere in its vast, expanding economy. Indeed it would be particularly odd, given China’s historic earliness in inventing and using paper, printing, gunpowder and the compass (5), as well as China’s other significant innovations in fields such as ceramics and weaving. China can innovate, no doubt about it; and China’s proclivity for copying other people’s innovations is no more encoded in the DNA of the Chinese than it is in that of Westerners.

Innovation performance, past and future

China began a shift toward light manufacturing with Deng Xiaoping’s 1978 reforms. In the 1980s and 1990s there followed a series of state-backed R&D programmes, including a major programme for basic research. By the end of 2004, China’s Lenovo, which began life in the Chinese Academy of Sciences, had bought the PC division of IBM. China had begun to bring more innovation to its successes in consumer electronics, household appliances, notebook computers and mobile handsets. It had opened up to inward foreign direct investment (FDI) in R&D, and was making its own joint ventures and acquisitions around innovation resources overseas.

After all these efforts, however, China had not achieved a great deal. As Swedish analyst Jon Sigurdson pointed out in 2005, China had yet to capture ‘brainpower industries’ in a major way, and its US patent portfolio was ‘very weak’ (6).

In the past 10 years that picture has changed. In 2011 it was felt that China thrived on ‘second-generation, production and process innovation’; performing innovative activities that might not advance the technological frontier or new products, even if they transformed how the world economy worked (7). Now China is thought both to absorb other nations’ innovations and to develop them afresh. (8) In an invaluable recent paper, Michigan State University’s Peilei Fan notes that for 35 years after the Deng reforms, China relied heavily on investments, exports and a huge, low-cost labour force. Now, though, to counter the slowdown of China’s old growth model, the state tries harder than ever to commercialise and diversify actors and activities in innovation. The old Public Research Institutes and State Owned Enterprises (SOEs) jostle with a newer network of large and medium enterprises, multinationals, joint ventures, township and village enterprises. Similarly, China has tapped into its innovation-orientated expatriates abroad, and has tried to woo some to return to boost its innovation drive at home. (9)

In 2012, President Hu Jintao upheld the need to move toward an innovation-driven economy. In 2013, Xi Jinping emphasised the need to ‘unswervingly go down the path of innovation with Chinese characteristics’. Yet if the spirit of Chinese innovation is more willing than ever, the actual practice of it is, as in the West, not without its difficulties. China’s innovation achievements, while impressive in supercomputing, space and mobile games, are not unqualified. China’s demand for robots looks like being mostly fulfilled by inward investors, not indigenous firms. Most obviously, domestic brands take only 30 per cent of China’s passenger car market, even if home firms such as Changan, Chery, FAW, Geely, SAIC and BAIC look like racking up some significant growth by 2020. Meanwhile, like GDP, exports and FDI, innovation activities are heavily concentrated on Beijing, Shanghai and Shenzhen, even if cities inland, such as Xian, Chengdu and Wuhan, have done well out of state and multinational investment in innovation.

It needs underlining once more, however, that China’s performance in innovation is mixed. McKinsey, for instance, detects a new entrepreneurialism in Chinese universities, a willingness of Chinese firms to get serious about the protection of intellectual property, and a raft of young graduate talent that is ‘highly malleable’ and raring to go. It enthuses about rapid time to market among Chinese new businesses, even if it frets about breakdowns in quality, wasteful development processes and unpredictability in production.

China’s performance in medicine is certainly mixed. In genomics, America’s National Institutes of Health has warned that the US faces overtaking by China, whose research centres in the field only opened in 1998 and 1999, just in time to contribute to the first draft sequence of the human genome. On the other hand BGI, the world’s largest company for DNA sequencing, relies on two US firms – Illumina and Life Technologies – for two of its sequencers.

It is a similarly mixed story in large passenger jets. There, the COMAC C919 is set to make its maiden flight in 2015, but will mainly do service as a form of import substitution.

Nevertheless, China is or shortly will be innovating. In technology-intensive horizontal drilling and fracking, the country may start to drill in earnest after 2020. Meanwhile, in ICT, companies such as Alibaba, Baidu and Tencent have done well, and Huawei boasts 70,000 researchers. A special strength is in quantum computing (qc). China has an unrivalled, $94m project to send qc encryption keys down a fibre-optic line from Beijing to Shanghai in 2017, so making its communications impenetrable – for a while, at least.

As late as 2008, the distinguished commentator Bill Emmott could write, of China’s economic prospects, that ‘the combination of fast monetary growth and rising wages can mean only one thing: the return of inflation’ (10). Today things look a little different. China is beset by deflationary trends, and it appears that its capacity overhang in manufacturing is as great as it is in, say, property and finance. To Chinese innovation once more falls the task of producing cheap wage goods that are exciting enough to encourage domestic consumption – as an alternative, the mantra goes, to the old pattern of heavy industries, heavy investment and a heavy orientation to exports.

Some indices of Chinese innovation (2012, unless otherwise indicated)

Index		China overtook…	Remarks
Gross expenditure on R&D (GERD), current PPP, $bn	294	Japan, 2009	EU28 341 EU15 318 US 454 UK 39 Germany 102 Japan 152 South Korea 65
GERD as per cent of GDP	1.96	Spain, 2001; Italy, 2003	EU28 1.98 EU15 2.13 US 2.79 UK 1.73 Germany 2.98 Japan 3.35 South Korea 4.36
Total researchers, FTE, million	1.4	US, 2005	2007 total was more than double that of Japan. 2012: EU28 1.66 EU15 1.49 Japan 0.65 2011: US 1.25
Total researchers per thousand total employment	1.83	South Africa, 2005	EU28 7.34 EU15 8.06 UK 7.95 Germany 10.37 Japan 10.07 South Korea 12.79 2011: US 8.81. Bigger than India but still behind Turkey
US patents, thousand	2010-13: 23.4 2013: 6.6	UK and France, 2013	2010-13: South Korea 54 Taiwan 44 India 9. China’s US patents have enjoyed rapid growth, but in 2013 they still lagged US 148 Japan 54.2 Germany 16.6 South Korea 15.7 Taiwan 12.1 Canada 7.3
National IP office applications: Patents, Utility models, Trademark class count, Industrial design count, thousands	653, 740, 1652, 658	US, in patent applications, 2011.	Germany 61, 15, 193, 56 Japan 343, 8, 219, 32 US 543, na, 429, 33 UK 23, na, 94, na
High-tech exports, $bn, and as per cent share of general manufactured exports	506, 26.3	$bn: US, 2005 or earlier; Germany well before 2005. High-tech’s per cent share of manufactured exports: China’s has declined from 31 per cent in 2005	Germany 183, 15.8 US 149, 17.8 Japan 123, 17.4 UK 68, 21.7
Scientific and technical journal articles, thousands, 2011	90	Germany, Japan, UK, 2006-7	Germany 46 US 209 Japan 47 UK 46
Total Factor Productivity growth	3.1 per cent, 2007-11; 0.6 per cent, 2012; zero per cent, 2013		Clear decline in TFP growth, 2007-2013

Source: Pan, op cit; Organisation for Economic Cooperation and Development, Main Science and Technology Indicators; World Intellectual Property Organization; The Conference Board Human Capital Exchange

The global impact of Chinese innovation

So far, the global impact of Chinese innovation has been modest. Yet that impact is growing – just as much as it is underrated. Apple has already drawn wide benefits from innovation among its 349 Chinese suppliers. One of its principal sub-contractors, Taiwan-owned Foxconn, has recently opened a facility in Beijing to try to nurture Western start-ups. Perhaps one day soon, China will go further than mobile handsets, in which its manufacturers have a 17 per cent global market share, and add to them exports of electric bikes powered by lithium-ion batteries, as well as exports of ‘smart’ pedal bicycles equipped with health sensors.

In construction, the Chinese firm Broad Sustainable Building boasts formidable techniques, but it has yet to take them abroad. However in engineering and construction services more generally, Chinese firms have secured more than $250bn of contracts with Algeria, sub-Saharan Africa, Iran, Venezuela and Vietnam. In the processes and products that surround the building of infrastructure, the Chinese are often at or near the cutting edge of innovation. In the future, too, China may also start to set a kind of informal worldwide standard in the development of reputedly sustainable ‘vertical cities’, even if Chinese firms have yet to figure among the world’s most prominent lift manufacturers.

FDI made by China is often in technology-intensive sectors: above all in energy, but also quite strongly in transport, metals (especially in Australia), and property/construction. In Europe, China has offered Britain assistance in nuclear power and in high-speed trains, while China’s Cosco has brought new technology, a rail-head and wage cuts to the port of Piraeus, Greece, establishing it as a potential rival to Antwerp, Hamburg and Rotterdam. Especially in 2011 and 2012, China invested billions of dollars in energy in France, Italy and Portugal. Also, by the end of 2012, investors from China and Hong Kong had bought up nearly 200 SMEs worth €6bn in Italy, many of them in that country’s classic sectors for innovation: clothing, furniture, motorbikes and yachts.

In America, the Committee on Foreign Investment in the United States ensures that China cannot invest in high-tech sectors it deems a security risk. The reciprocal exchange between China and America is anyway modest – a surprise, given these two countries’ world-class status as both projectors and recipients of FDI. Still, Chinese organisations are on the prowl in America. Mostly though now not exclusively SOEs, they have made acquisitions in unconventional oil and gas, transport, finance, and – more modestly – in medical technology.

It is early days, but the foreign currency owned by the Chinese state and its banks amounts to more than $4 trillion. Therefore in future we can expect China to purchase more sites for R&D abroad than it has done to date, and to work harder among its network of expatriate innovators. Baidu and WuXi PharmaTech have opened new R&D centres in the US, while Gloria Pharmaceuticals has a modest ($2m) joint venture with Cumberland Pharmaceuticals in Tennessee. From these small beginnings, we are likely to see more of the world’s innovation effort come under Chinese influence and ownership.

The biggest impact China may have in the long term may lie in the management of innovation. In 2014, both the Sloan Management Review and the Harvard Business Review published articles praising what might be called China’s ‘rapid slice-and-dice’ approach to innovation management, an approach which it is especially able to apply by flinging abundant resources, in the shape of R&D personnel, at large but subdivided R&D projects and activities. What cannot yet be predicted is whether less populous countries or regional blocs will prove able to emulate this kind of approach to innovation.

Three directions for the future

Perhaps China can only face in one of the following three directions.

Direction 1: Business as usual, but more so. Here the current formula continues: more or less useful inward FDI in R&D, growth in indigenous R&D inputs and outputs, extensive use of expatriate networks and improvements in the number of innovation ‘returnees’, smoothly rising pattern of Chinese acquisition of labs and innovators in other countries. The result is a tense and somewhat partial kind of success, accompanied by growing confidence

Direction 2: One more failed attempt at autarchy. Here, problems with different trade and investment blocs around the world, as well as with a Republican Congress, count against China, which turns out to lack reliable or especially useful allies. As geopolitical isolation grows, resorts to nationalism, like neo-Maoist calls for ‘mass innovation’, compound Beijing’s legal and other sanctions against inward investors. The result is disaster, as China’s rulers have to learn for the nth time about the international division of labour that has for years dominated innovation

Direction 3: Soft power. In a victory for market-orientated factions in the leadership of the Chinese Communist Party, China turns outward. It smoothes over the brashness and the Afro-centrism of its previous efforts in soft power. It increases its commitment to international collaborations (genomics, space, nuclear fusion), and gains a reputation for both opening up its management style in R&D, and for delivering world-class results in innovation. If China establishes the first manned base on the moon, its prestige will bring it more innovation allies from all over the world.

ENDNOTES

(1) See ‘To the person sitting in darkness’, February 1901, Mark Twain’s essay against American missionaries’ policy of demanding reparations for the Boxer Uprising of 1900, in Jim Zwick, editor, Mark Twain’s weapons of satire: anti-imperialist writings on the Philippine-American War, Syracuse University Press, 1992.

(2) Christopher Frayling, The Yellow Peril: Dr Fu Manchu & the rise of Chinaphobia, Thames & Hudson, 2014.

(3) Committee on Climate Change, Reducing the UK’s carbon footprint, 1 April 2013, Figure 1.7, p21.

(4) Jonathan Fenby, Tiger head, snake tails: China today, how it got there and where it is heading, Simon & Schuster, 2012, p13.

(5) Jialu Fan, Qi Han, Zhaochun Wang, Nianzu Dai, ‘The four great inventions’, in Yongxiang Lu, ed, A History of Chinese Science and Technology, Volume 2, Springer, 2015, pp 161-299.

(6) Jon Sigurdson and others, Technological superpower China, Edward Elgar, 2006.

(7) Dan Breznitz and Michael Murphee, Run of the Red Queen: government, innovation, globalization, and economic growth in China, Yale University Press, 2011.

(8) Kirsten Bound, Tom Saunders, James Wilsdon and Jonathan Adams, China’s absorptive state: research, innovation and the prospects for China-UK collaboration, Demos, October 2013.

(9) Peilei Fan, ‘Innovation in China’, Journal of Economic Surveys, Volume 28, Issue 4, September 2014, pp725-45.

(10) Bill Emmott, Rivals: how the power struggle between China, India and Japan will shape our next decade, Allen Lane, 2008, p67.