China is a new player in the global knowledge economy dominated by Western countries and Japan, and to some extent by South Korea and Taiwan. Part one of this two-part series examines the foundations of China’s techno-nationalist drive for innovation.

China's dream of technological Innovation:  humanoid robot Jiajia at University of Science and Technology of China in Hefei City (Source: Imagine China)

Weaning China off dependence on foreign knowledge is a long-standing goal of China’s leadership, embodied in successive policies to promote technology transfer, research output and patent filings. 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 foundation remains weak.” 

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 towards engineering and science based invention.  But what progress has China actually made in transitioning from a low value-add 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 aero-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.

Competing in higher value-added industries

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 telco 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, 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 US, 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 US within two decades.

The world’s fastest-growing R&D budget

Chinese innovation is supported by the world’s fastest growing R&D budget, which is on track to surpass the US one by 2020, a trend ringing alarm bells in the US 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 emphasised 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 US researchers; Germany recently published a strategy for scientific cooperation with China.  Australia-China research collaboration has also steadily expanded, supported by federal funding.  And China’s state-led incentive programs to lure home Chinese scientists and technology entrepreneurs from Western countries are finally starting to show some results.

Part two of this series will focus on China's success to date in converting its innovation potential into viable technologies and its future capacity to compete with developed nations in this field.

Slightly different versions of this article first appeared in The Interpreter, a publication by the Lowy Institute for International Policy, on 8 June 2016 and in The Diplomat on 9 June 2016.