The rapid rise of China’s innovation capabilities and the evolution of EU–China innovation relations
From a rather low base, China has made tremendous strides in the past few decades in science, technology and innovation. In the process it has become deeply tied into global innovation networks. China’s role in these networks varies across different types of R&D (namely research in fundamental new technologies, as well as for new product platforms, and to adapt existing products):
- Fundamental new technologies remain (on the whole) the domain of developed economy firms.
- New product platforms have often resulted from cooperation and networks, and here China has been an important location for MNCs to develop product adaptation, integrating with global R&D networks; this has been helped by more productive and lower-cost Chinese engineers.
- Product adaptation has generally been localized by MNCs in their largest markets, including in China; this helps with business development but says little about knowledge transfer.
This means that knowledge flows from Chinese consumers and engineers to MNCs, as the latter make use of indigenous talent. It also means that foreign R&D centres make up a significant part of the Chinese innovation system, and highlights differences between innovation in China and a previous phase of East Asian development in Japan and subsequently South Korea, where ownership was local and innovation and production tended to be vertically managed within single firms. Another difference in China has been the emphasis on ‘forward engineering’ (the role of university spin-off firms) in contrast to the ‘reverse engineering’ of South Korea and Taiwan (whereby indigenous enterprises could learn modern technologies and designs through the use, maintenance or breaking down into individual components of complex machines, in the process introducing improvements or adaptations for the local market and then export – that is, imitation, improvement, innovation and internationalization). It has also focused on the acquisition of technology and brands through international mergers and acquisitions; and parallel learning from FDI firms to promote indigenous companies.
This relates to a second feature, the ‘structural uncertainty’ in China’s political economy, under which the approach of a complex bureaucratic matrix at the level of firms or institutes is difficult to predict. As a result, China has not come up with radical breakthroughs in innovation, but has thrived in ‘second-generation innovations, including organization innovation and process innovation’. In the global innovation context, therefore, China – at an aggregate level – has to run to stand still. Two other reasons may be identified for the scarcity of breakthrough innovation in China, at least at present. The first is the relatively low percentage (around 5 per cent) of its total R&D expenditure devoted to basic research. The second is more cultural (and one can say is a broadly East Asian trait): there is too much respect for established scholarly authority. China is unlikely to be hospitable to an Einstein-like figure that demolishes the theories of Newton.
But this assessment of China’s innovation capabilities should be understood in the context of the country’s rapidly changing state of development. When it was still going through the early stage of modernization during the 1980s and 1990s, China clearly found it much more effective to adopt and adapt proven technologies and ideas from the developed world. In engineering and machine-related technologies, it has also been seen to be very effective in reverse engineering. The large and rapidly growing domestic market has meant that, for many Chinese enterprises, the fastest way to capture a share is to acquire the necessary technologies and ideas from the outside world and adapt such innovations in the local market. Indeed, some of the ongoing overseas acquisitions by Chinese enterprises are still driven mainly by this motivation of leveraging on overseas expertise to rapidly capture the local market, rather than to capture overseas markets.
But as its economy continues to grow and modernize, China is gradually evolving from an adopter and adapter in most technologies and innovations to a global leader in selected areas such as mobile technologies, P2P payment and internet commerce. The ability of the state to mobilize resources and put the best and brightest engineers into specific sectors has also enabled China to achieve breakthroughs and become a global leader in strategically chosen sectors, such as supercomputers, rockets, and nuclear and satellite technology.
At the same time, China is contributing to changes in the global geography of innovation. While developed economies remain the most significant players in terms of both inputs and outputs, their shares of innovation are beginning to decline, and emerging markets are playing a more prominent role, as shown by the data on patent filings cited above. For Europe, the challenges brought by these changes have been intensified by growing fiscal and economic pressures since the 2008 crisis. In sum, the innovation landscape is not just becoming more networked, but also more spread out and increasingly ‘multipolar’.
China is not the only relative newcomer to these networks. For 200 years, global innovation has been mostly dominated by the developed world, which – with less than 20 per cent of the world’s population – has been home to most of the world’s human capital in innovation. However, the amount of human capital in emerging economies has been increasing rapidly. The quality was initially weaker, as many graduates were still relatively young and inexperienced, but has been catching up with the developed economies. Exploiting this human capital is an important means of delivering ongoing innovation. China has also engaged more in South–South investment in technology-related industries and sectors. An increasing variety of actors in emerging economies are contributing to enrich the global innovation landscape. As these economies become important production bases and markets for developed-world MNCs, their R&D activities are needed to support local production, product localization and adaptation, and local market development. But there are often feedback loops that help MNCs to improve their innovative capabilities back home or in other markets (reverse innovation). Some emerging markets have evolved beyond being local market subsidiaries, attaining a regional or global remit for the MNCs concerned.