Innovation is a strategic policy priority for the EU and China, seen by both as a means to further develop their economies and deal with sustainability challenges including climate change and local environmental degradation. Nurturing an efficient science and technology sector and innovation ecosystem can promote long-term economic growth – as returns diminish from physical means of production, revenues from ideas and innovation can fill the gap (see Box 1). Smart, sustainable and inclusive growth with innovation at the core has been a priority under the EU’s Europe 2020 strategy and China’s 12th and 13th five-year plans. This paper explores the opportunities and challenges in EU–China innovation relations as a basis for policy recommendations to 2025. It was produced as part of a research project on EU–China relations carried out by Bruegel, the China Center for International Economic Exchanges (CCIEE), Chatham House and The Chinese University of Hong Kong (CUHK).
The EU has described itself as facing an ‘innovation emergency’, with total spending on research and development (R&D) at around 2.03 per cent of GDP during 2013–15, after a rise from 1.77 to 2.01 per cent during 2007–12. However, this expenditure is, respectively, some 0.7 percentage points and 1.5 percentage points lower than in the US and in Japan, and other countries have caught up fast, including China and South Korea. In response, under the Europe 2020 strategy, the aim is to spend 3 per cent of GDP on R&D by 2020. According to the EU, more innovative products and services could help with job creation through increased output and exports that arise from greater competitiveness and productivity, and better use of resources. Innovation could also help address a range of challenges from climate change and clean energy to managing ageing populations. The EU claims the strategy could create 3.7 million jobs and increase annual GDP by €795 billion by 2025. The key EU instrument for delivering this objective is the Horizon 2020 programme, which aims to fund €80 billion of activity from 2014 to 2020, coupling research and innovation in science with industrial leadership and tackling societal challenges. The EU further aims to develop a European Research Area as ‘a genuine single market for knowledge, research and innovation’.
The Chinese government’s 13th Five-Year Plan, which sets out strategic economic and social goals for 2016 to 2020, features innovation as one of its most important themes. The target for annual R&D spending by 2020 is 2.5 per cent of GDP (compared with 2.07 per cent in 2015, below the targeted 2.2 per cent). Other major goals are enhanced internet penetration (with plans for mobile broadband to reach 85 per cent of households), a contribution of science and technology to economic growth of 60 per cent (55.3 per cent in 2015), and 12 invention patents filed annually per 10,000 head of population (compared to 6.3 in 2015).
The 13th Five-Year Plan also identifies 75 priority technologies and key sectors, including six strategic emerging industries. The ICT sector is the highest priority, and the Made in China 2025 plan has been developed to boost innovation in manufacturing, with the intention of ‘elevat[ing] a small vanguard of Chinese manufacturers to a higher level of efficiency and productivity’. This is against a background of a substantial increase in the scale and quality of China’s human capital resources in recent years, notably in engineering-related disciplines. China’s extensive manufacturing ecosystem has enabled it 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 as ‘Chinese consumers enable innovation by accepting early iterations of products and services and providing feedback for rapid refinement’. Public procurement can also spur innovation by creating space to test new technologies on a large scale, though most of this is managed by the government. Furthermore, given its latecomer status, China can often leapfrog technological and market developments; when the regulatory stance has been relatively liberal (especially at local levels of government), new business models have been able to develop rapidly, for example in financial technology (FinTech) and P2P payment systems. China was the world’s largest filer of patents in 2015, though most of these are domestic, while Europe was fifth in global rankings behind the US, Japan and South Korea, as well as China (the US continues to lead in the stock of patents in force). Some have even suggested that the EU is ‘on the sidelines of the globalization of science process’. However, as discussed below, there is plenty of evidence to the contrary, and filings of triadic patents indicate that Europe remains well ahead of China in this international measure.
Box 1: What is innovation?
Innovation in economic growth and sustainable development depends on the relationship between long-term economic development, productivity growth and endogenous innovation. Efficient allocation of the scarce physical means of production will lead to diminishing returns as the marginal benefits of adding more factors of production decline over time, leading economic growth to slow. However, economic growth theories argue that new technologies and ideas can turn diminishing returns into increasing returns. Given the non-zero-sum nature of ideas, greater innovation can lead to more productive and faster growth. Economic policy can promote this significantly by nurturing an efficient science and technology and innovation ecosystem (thus facilitating endogenous innovation and technological development). A diverse range of players (universities, science institutes, large corporations, small and medium-sized enterprises (SMEs), startups etc.) with different strengths can all contribute to a strong innovation ecosystem. The effective integration of different levels and players in the field of innovation is therefore important.
A distinction can be drawn between three levels of innovation: theoretical, production and consumer.Enabling innovative products or services to have an impact on the economy typically involves high-level conceptual or theoretical knowledge or inventions; mid-level innovations related to production and industrial design that turn these into quality products and services; and, in turn, lower-level, consumer-related innovations (market analyses, marketing, logistics etc.) to make these products and services a success. These often include feedback loops that lead to the adaptation or modification of the inventions and industrial designs. The importance of this third level of innovation is demonstrated by the fact that many innovative startup firms are concerned more with the speed and effectiveness of their efforts to bring innovative products and ideas to the market, rather than with the science and technology involved.
The OECD also notes that innovation goes far beyond R&D. This approach to innovation is illustrated by the Oslo Manual published by the OECD and Eurostat, which provides guidance on how innovation could be measured. It identifies four types of innovations at the level of the firm:
- Product innovations that produce entirely new or significantly improved products and services;
- Process innovations that significantly change production and delivery methods;
- Organizational innovations that involve changes in business practices, in workplace organization or in the firm’s external relations; and
- Marketing innovations that lead to changes in product design and packaging, in product promotion and placement, and in methods for pricing goods and services.
Innovation has also been identified by the EU and China as an area for collaboration, though more work is needed to judge the effectiveness of this cooperation. The EU–China 2020 Strategic Agenda for Cooperation affirms the relationship between EU–China trade and investment and innovation, and the role of innovation in promoting sustainable development. It envisages cooperation in innovation in the fields of food, agriculture and biotechnology, and lists five initiatives for science, technology and innovation cooperation under the agenda’s third theme of sustainable development. These range from sustainable growth and urbanization to new and renewable energy and nuclear energy (see Annex). The European Commission’s more recent Elements for a new EU strategy on China suggests that ‘the EU’s economic strengths are complementary to the priorities of China’s 13th Five-Year Plan, such as innovation, services, green growth and balancing urban and rural development’. These issues were themes of a series of meetings of the EU–China Innovation Cooperation Dialogue (ICD).
At the same time, in both the EU and China, some voices in policy and business circles see retaining the fruits of innovation as an essential part of their competitiveness. Such a mindset militates against cooperation in innovation. Many Chinese see risks of greater protectionism in the business environment in Europe, while European governments and businesses in China have become more concerned that Chinese policy is moving (backwards) towards ‘indigenous innovation’ and away from openness, reflecting an underlying strand of Chinese policymaking that seeks to maximize ‘self-sufficiency’. A couple of recent high-profile Chinese investments in Europe have been a focal point for European concerns (see discussion of European debates, below). There are also arguments that the earlier complementarity between the two economies has given way to a more complex relationship as a result of China’s growing economic influence and technological strength. Dealing with the tensions between cooperation and competition in innovation is therefore part of a wider challenge facing EU–China economic and commercial relations. Different perceptions on issues such as intellectual property protection, indigenous innovation and market access have made it difficult for the two sides to agree on a comprehensive investment agreement.