China taking the innovation game to the West

Dan Steinbock says emerging Asia, led by China, may soon leapfrog the West and Japan in the innovation race, judging by both the number of patents filed and R&D spending

PUBLISHED : Wednesday, 06 February, 2013, 12:00am
UPDATED : Wednesday, 06 February, 2013, 4:16am

If, just half a decade ago, you had asked leading senior executives in the United States, Western Europe or Japan how they intended to cope with the rise of China, you would have got a familiar response: "We shall move higher in the value-added chain."

Perhaps China was the "world's factory", but the conventional wisdom reassuringly said, "Cheap manufacturing may migrate to China - but innovation will remain in the advanced economies."

Well, the conventional wisdom is a myth. From Huawei and Lenovo to Haier, the most sophisticated multinationals in China have been converting their cost advantages to more sustainable competitive advantages since the late 1990s - often by innovation.

Today, prosperity is seen to be based on productivity, which rests on innovation. In turn, innovation is often measured by input indicators, such as research and development, and output indicators, such as patents. These indicators are crude but they can reflect significant trends.

Throughout the 1950s and 1960s, the US set the standards for prosperity, productivity and innovation. It enjoyed superior leadership in science and technology, R&D and patents.

After the second world war, the economies of Europe's leading nations and Japan were too devastated to pose a competitive threat to US multinationals, which were barely exposed to international competition.

Since the late 1970s and 1980s, the innovative capacity of the member countries of the Organisation for Economic Co-operation and Development have converged substantially, however. Like Britain, Germany and France in the post-war era, China has been engaged in catch-up growth, especially after 2001, when it joined the World Trade Organisation.

At the time, American, European and Japanese companies were still adjusting to the idea of Chinese price competition. However, Chinese senior executives were already internationalising their operations - first in Asia's emerging and developing economies, then in Africa and the Middle East and Latin America, and finally in Europe, Japan and the United States.

After the global recession, a new phase of competition emerged, accelerating the expansion of Chinese innovation relative to the innovation of the developed economies. The trend is reflected by innovation indicators.

According to the World Intellectual Property Organisation, China's patent office became the largest in the world in 2011, as measured by the number of patent applications received. Even before, China accounted for most filings of utility models, trademarks and industrial designs.

In the century before 2011, only three patent offices - Germany, Japan and the United States - dominated the world's patent markets. Of course, it is not simple to compare intellectual property rights across borders. Still, the changing trends reflect significant shifts in the geography of innovation.

In the US, patents are dominated by multinational giants, including Qualcomm, IBM, Hewlett-Packard, 3M, Procter & Gamble, Microsoft, Dupont and Intel. They represent computer technologies, medical sciences, pharmaceutical industries, energy and digital communication. In China, the patent kings include ZTE, Huawei, Alcatel-Lucent Shanghai Bell, China Academy of Telecommunications Technology, Hunan Sany, Tencent, Ocean's King and Xiamen Solex. These companies represent digital communication, pharmaceutical industries, computer technologies and energy.

Actually, the shift from one patent era to another may already be more extensive than we assume. In the long-term patent monopolies, the US, the core European economies and Japan still represent the global patent elite.

But as these monopolies fade out, new players - China, but also South Korea, Russia, India and Brazil - will become more prominent.

As output indicators, patents occasionally tell us more about past glory than future trends, unlike research and development. Today, international R&D rivalry is no longer driven by the US, Europe or Japan, but Asia - more precisely, emerging Asia, which, in practice, translates to China and other major Asian nations.

Currently, the US, Europe and Japan account for over 60 per cent of the world's R&D investment. If, however, these figures are analysed regionally, Asia dominates 35 per cent of the total, while the US has 28 per cent and Europe some 23 per cent. Moreover, a significant part of these investments actually take place in emerging economies.

On a country basis, the global rivalry is presently dominated by three nations: the US (US$419 billion) China (US$197 billion) and Japan (US$160 billion), which together are expected to account for more than half of all research and development expenditures worldwide. In their footprints follow countries such as South Korea, France, India, Britain, Russia, Brazil and Canada.

As the global crisis is entering a new phase, in which the developed economies can no longer defer their debt challenges indefinitely through monetary policies, the research and development budgets of the most developed economies are either growing slowly or standing in place, in real terms.

In the large emerging economies, however, these same budgets are either growing rapidly, as in China, or enjoy strong and solid growth in relative terms. Consequently, the top rankings of the leading R&D nations will morph dramatically in the next decade.

Only a while ago, China's research and development expenditure was barely half of that in Europe. Due to relative growth differentials, however, it looks increasingly likely that China may bypass Europe before the end of the decade, whereas the US could fall behind China by the early 2020s.

Of course, the catch-up in innovation intensity (R&D expenditure divided by population) will take a lot longer.

Nonetheless, innovation is no longer the monopoly of the West.

Dr Dan Steinbock is research director of international business at the India, China and America Institute (US), and a visiting fellow at the Shanghai Institutes for International Studies (China) and at the EU Centre (Singapore)