INNOVATION

How China’s Government Helps — and Hinders

— Innovation
by Anil Gupta and Haiyan Wang
NOVEMBER 16, 2016
By all accounts, the Chinese state is on all-out drive to move the country up the technological ladder. As the era of China as the world’s low-
cost manufacturer comes to an end, innovation has become the most important element in the state’s development blueprint.
Given its ideological leanings, China presents itself as a unique experiment in the power of the state to help the economy become more
innovative. Our analysis suggests that, so far, the results have been mixed. Along some important dimensions, the state is clearly playing a
major enabling role. Yet, along other dimensions, the state is unwittingly hindering China’s emergence as a technological giant.

As a helpful enabler, the state’s single most important role has been to ramp up the inputs to innovation – aggressively. Total investment in
R&D (as a proportion of GDP) grew from 0.9% in 2000 to 2.0% in 2015 and is on track to reach a targeted 2.5% by 2020. At 20%, China’s share
of global R&D expenditure in 2015 was well above Japan’s at 9% or Germany’s at 6% and second only to that of the U.S. at 26%. The number
of PhDs in science and engineering graduating each year has grown dramatically and is now just behind that of the United States.

In recent years, the government has also launched a number of

Drucker Forum 2016: The Entrepreneurial Society
programs aimed at cultivating scientific talent. The more prominent
This post is one in a series of perspectives by presenters and participants in
among these include the National Science Fund for Distinguished
the 8th Global Drucker Forum.
Young Scholars which provides research support to deserving
scientific projects, the Chang Jiang Scholars Program aimed at
attracting distinguished visiting professors, and the Thousand Talents
Plan aimed at luring back top Chinese researchers from abroad.

The Chinese state has also played a direct role in technological advancement in sectors such as space exploration, defense, and
supercomputers. Globally, these are industries where the state is often the sole or dominant customer. Thus, technological innovation in
these sectors tends to be financed by the government and carried out within government or quasi-government laboratories.

There’s thus been a lot of activity on what you might call the “input side.” But what’s the effect? How does the “output side” look? China’s
record there is much less impressive. From 2010-2015, the share of China-origin patents among all patents granted by the US Patent &
Trademark Office (USPTO) was only 2.2%. Over the same period, the share of USPTO-granted patents for inventions originating in Japan,
Germany and South Korea was 18.8%, 5.5%, and 5.5% respectively. As per the latest OECD report, there is not a single Chinese university
among the global top-30 in terms of top-cited scientific publications. Relatedly, China’s global share of top-cited publications is miniscule.

Part of the explanation for the seemingly low productivity of China’s R&D regime lies in lags between investments in R&D and the resulting
outputs. Part also lies in aspects of the Chinese socio-cultural context such as the legacy of rote learning and respect for hierarchy.
Importantly, however, China’s innovation challenges go well beyond time lags and cultural factors. Some of the government’s policies and
practices, designed ostensibly to help China become an innovation giant, are themselves a major impediment.

First, as noted in an editorial in Science magazine, the bulk of China’s government R&D funds are allocated on the basis of political
connections rather than merit as judged by independent scientific panels. This practice increases the risk that some of the funds are spent on
fancy buildings and equipment rather than actual research.

Second, China spends relatively little (only 4% of total) on basic research as compared with the OECD economies (17% of total). As a result,
the primary emphasis in China’s R&D regime remains on tweaking existing knowledge to tailor products and services for the Chinese market;
not enough research efforts are directed towards developing “new to the world” scientific ideas and technologies.

Third, the government places far greater priority on the quantity over the quality of patents. From 2010 to 2015, the number of patent
applications filed with the State Intellectual Property Office tripled from 300,000 to over 900,000. The 13th Five-Year Plan intends to double
the number again to 1.8 million by 2020. Pursuit of scale for the sake of scale risks devaluing the quality of the typical patent even further.

Fourth, the “Great Firewall of China” makes it difficult for Chinese researchers to access global information. Chinese researchers cannot
access Google Scholar. They can use Baidu Scholar, which works well for searching Chinese but not international journals.
Fifth, foreign companies feel pressured to transfer technology in order to gain market access and are at a distinct disadvantage regarding
intellectual property (IP)-related judgments in Chinese courts. The outcome has been that, while almost all western technology giants have
R&D labs in China, bulk of what they do is local adaptation rather than developing next generation technologies and products. They do not
want to risk premature transfer of leading-edge technological work to Chinese competitors. As a direct result, China misses out on spillover
effects from leading edge R&D work by the world’s top technology developers, a key driver in the emergence of innovation ecosystems such
as Silicon Valley.

A comparison between China and India provides a stark contrast. Other than in a few sectors such as defense, India has no policies designed
to aid domestic over foreign companies. The typical foreign company also feels much safer about IP protection in India than in China. Thus,
even though India spends only one-tenth as much as China on R&D, the world’s technology giants do more cutting edge R&D in India than in
China. According to our analysis, during 2010-2015, the India labs of the top 10 American technology giants obtained 50% more patents
from USPTO than their China-based labs.

The above analysis yields three conclusions about the role of the state as an innovator. One, the content of policies matters. Two, policy goals
do not always translate into desirable outcomes at the ground level. Three, inherent contradictions between political ideology and
innovation imperatives may be difficult to sidestep.

Given China’s scale and the quality of its math, science, and engineering education, we deem it inevitable that it will eventually become one
of the world’s technology giants. However, for this to happen sooner rather than later, its leadership would need to rethink the design of
policies and programs, the pros and cons of free access to information, the importance of a strong IPR regime, and the role of foreign MNCs in
accelerating spillover effects.
 Anil Gupta is the Michael Dingman Chair in Strategy, Globalization, and Entrepreneurship at the University of Maryland’s Smith School of Business,
cofounder of the China India Institute, and a coauthor of Getting China and India Right (Wiley, 2009).

Haiyan Wang is the managing partner of the China India Institute and a coauthor of Getting China and India Right (Wiley, 2009).

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6 COMMENTS
Bajie Zhu a year ago
He who laughs last is the winner.

In human endeavors, there are many types of innovations. The most applicable to the 7 and a half billion souls living on Earth, are innovations that make technology
AVAILABLE. Availability means affordable prices. In that regard, China is the most important innovator on Earth in the last 30 years.
And the results are impressive. In about 40 years since Deng took charge, China has completed industrialization that took almost everyone else 200. Today China
under SWCC has the world’s largest industries in steel, cement, and aluminum, shipbuilding, autos, 90% of rare earths produced, fastest supercomputer in the
world, the fastest and biggest high speed train network, and no net foreign debts ($700 B in foreign currency debts, AND $3.6 Trillion in foreign currency holdings).

Just take ONE industry out of many. Solar panels had been around for many decades, but despite Western "innovations" (it is not as if Westerners did not try) had
never been competitive with grid power. Entered China, and in a short few years, solar panel prices dropped by over 90%, and today parity is here. Multicrystalline
Si panels have dropped to something like $0.25/Wp, US$3.00 installed (before rebates). If that is not innovation, MIT should try producing solar panels at that price,
“out of standard components”.

With the same vigor, China Price drove the cost of wind energy to US$1.00/Wp, installed.

Another example would be the Tianhe-2, the fastest supercomputer in the world for the last 2 years. It is built around chips by Intel, the quintessential American
company. Yet America cannot build the fastest supercomputer with the same chips, and basically conceded failure by playing dirty pool (by banning the export of
the chips to China’s supercomputer industry). Then the Chinese surprised everyone by coming out in short order with the Taihu Light, with the leapfrogging 260 core
Shenway 26010 CPU (the best American offering from Intel has less than 80 cores). The Taihu Light uses less than half the power of the best U.S. entry (a Cray) per
pFLOP, and the cost of construction is lower by 50% per pFLOP.

You cannot achieve that through copying. Foresight, intelligent deployment of resources, innovative reordering of systems and markets. These have much greater
impacts than patents or published papers.

The world celebrates Made in China, and now innovated in China. Entire industries now celebrate the China Price. The effects are in fact accelerating in this China
Century. Despite the higher labor costs, China remains the most competitive manufacturing nation in the world.

With the West reverting to mean (1% growth avg.), and China forging ahead, the world advances.

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