Arguments Over Innovation Capacity Miss How Much the US and China Are Intertwined

Most discussions of current US–China trade tensions fundamentally misrepresent the globalized nature of innovation.

Expert comment Updated 7 December 2018 Published 30 May 2018 2 minute READ

Dr Tim Summers

Former Associate Fellow, Asia-Pacific Programme (based in Hong Kong)

K. C. Kwok

Honorary Senior Research Fellow, School of Economics and Finance, University of Hong Kong

The C919 aircraft, China's first modern passenger jet, is a flagship project of President Xi Jinping's ambition to build the country's domestic manufacturing capabilities. Photo: Getty Images.

The C919 aircraft, China’s first modern passenger jet, is a flagship project of President Xi Jinping’s ambition to build the country’s domestic manufacturing capabilities. Photo: Getty Images.

Among the many issues at play in the ongoing economic and trade tensions between the US and China are questions of technological capability and innovation.

Two of the main complaints in the US Section 301 report were that American companies have been forced to transfer technology to China and been the subject of cyber espionage. The presentation of the issues in this report has been disputed, but behind it lies concern in the US that Chinese innovative and technological capability is catching up with that in the US, thanks partly to the support of state policies set out in the Made in China 2025 initiative.

One important feature of the package of measures announced by the US last month is that it was designed to contain China’s technological development as much as to reduce the trade deficit, even though the latter has been the focus of President Donald Trump’s rhetoric.

(Some have cast doubt on this picture of Chinese innovation, suggesting that China is more of a ‘fat tech dragon’ whose massive inputs into research and development do not translate into real innovative capacity.)

The problem with the debate comparing Chinese and American technological capability is that it misunderstands or misrepresents the globalized nature of innovation in today’s world.

Contrary to the economic nationalist rhetoric emanating mainly from Washington, and to a lesser extent from Beijing, the US and China are not two separate economies competing for economic hegemony. As part of the globalization of manufacturing and production over the last 40 years and the more recent globalization of consumption, the shape and structure of innovation has also changed.

As we argue in a new paper, the key to understanding this is to think of innovation as being carried out through global or transnational networks linking economic actors, not within separated economies. What the recent phase of globalization has demonstrated is that innovation is achieved most effectively and efficiently when those engaged in innovation are connected not just within national borders but across them.

China has become integrated into these global innovation networks in ways which reflect its relative strengths and weaknesses in research and development. China’s extensive manufacturing ecosystem has enabled its companies to perform well in production-related and efficiency-driven innovation. Moreover the rapid growth in its large and dynamic consumer market provides fertile ground for consumer-related innovation by Chinese and foreign-invested enterprises alike. The rapidly increasing talent pool in China also provides additional human capital for innovation and technology.

Apart from the increased emphasis by Chinese enterprises on innovation, multinationals have also been stepping up their research and development (R&D) efforts in China. These now consitute a significant part of China’s R&D landscape, and are an increasingly important part of the global innovation by multinationals.

Things are of course changing. China’s overall innovation capacity is improving, and there are concerns in both in the US and Europe that Chinese policy is moving backwards towards the promotion of ‘indigenous innovation’ – or self-reliant innovation – and away from openness. In other words, we may be seeing a more ‘techno-nationalist’ China as well as a protectionist US.

China has also been criticized for inadequate protection of intellectual property rights, though the establishment of special courts for such disputes marks a commitment to improve – and the rights of Chinese companies increasingly need protection too.

As the benefits of globalization increasingly come under question, and with some degree of nationalist political pressure in both the West and China, it is not going to be possible – or politically desirable – to do away with national borders when it comes to innovation. But at the same time, the extent to which businesses and consumers have globalized means that fully ‘indigenous’ innovation is not possible, even if it were politically desirable.

EU-China innovation relations, as well as those between Washington and Beijing, therefore need careful management. But both Americans and Europeans should have more confidence in their innovation capability, given the relative strengths and weaknesses of Chinese innovation.

Americans and Europeans should acknowledge and promote the opportunities that come from globally networked innovation processes. Taking advantage of the comparative advantage of all the players in these networks means working with China as an innovation partner.