Why China isn’t an innovation powerhouse
October 24th, 2013
10:23 AM ET

Why China isn’t an innovation powerhouse

By Guy de Jonquières, Special to CNN

Editor’s note: Guy de Jonquières is a senior fellow at the European Centre for International Political Economy. This article is based on his recently published paper, Who’s Afraid of China’s High-Tech Challenge?

Some of the sheen may be wearing off China’s miracle growth story as it faces a growing array of economic challenges. But the country’s drive to become an innovation powerhouse and global leader in science and advanced technologies continues to inspire shock and awe abroad.

China has already overtaken the United States and Japan to become the largest recipient of patent applications and is forecast to outstrip the U.S. as the biggest source of scientific publications by 2020. Its universities turn out about 2 million engineering graduates annually, more than any other country.

Beijing’s plans are more breathtaking still. The most far-reaching is the Strategic Emerging Industries initiative, which is backed by state funding of as much as $2 trillion over five years and aims to leapfrog today’s global leaders in sectors such as clean energy, information technology, biotechnology, advanced manufacturing and new materials.

However, as so often in China, all is not quite as it seems. Surging national patent applications, it turns out, have been spurred less by an explosion of innovation than by numerical government targets for filings and lavish state incentives to ensure they are met. This looks suspiciously like a case of “Never mind the quality, just feel the weight.”

In 2011, for example, fewer than a third of patent applications in China were classified as “innovation” patents, and these accounted for only one tenth of all patents granted between 1985 and 2010. Studies have also found patents granted to Chinese owners generally to be of lower quality than those held by non-Chinese.

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The difference is reflected in the huge imbalance between the income China receives from foreign royalties on patents it has issued – $1 billion in 2011 – and its $18 billion royalty payments that year to patent holders abroad. Though internal technology transfers by multinational companies to their Chinese affiliates account for some of the $17 billion deficit, China clearly still relies far more on imported technologies than on those it has developed itself.

The country’s fast-growing research and development efforts will be critical to closing that gap – and China is certainly throwing money at the problem: last year, it spent almost $300 billion on R&D, second only to the United States and more than Japan and Germany, the next two largest spenders, combined.

However, R&D spending measures only input, not output, which is what matters to technological and industrial success. By that yardstick, there are many questions about how well China performs. It possesses many clever – even brilliant – scientific brains and engineers. But they are minority. A 2008 study by Duke University found engineering degrees in the U.S. were generally superior to those in China, while all but a few of 80 companies worldwide surveyed in 2005 by McKinsey, the management consultancy, judged U.S.-educated engineers to be far more employable than those educated in China or India.

Other constraints also hinder R&D in China. In its universities, intense rivalry for career advancement among researchers has led to widespread academic plagiarism and corruption; fear or intolerance of failure, especially in the large state sector, tend to deter imaginative risk-taking, while political repression of dissent and an education system heavily based on rote learning hardly encourage original thinking and creativity.

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Innovation also involves far more than invention. It requires the ability to translate laboratory breakthroughs into successful products and services that tap into market demand. That, in turn, means harnessing a far wider and more complex combination of skills and capabilities than just technical competence.

A widely-used indicator of a country’s progress towards that goal is Total Factor Productivity (TFP), which measures all the economic inputs that cannot be explained by productivity of capital and labor: for example, technical skills, management capabilities, organizational competence, accumulated knowhow and the ability to apply as well as to develop technology.

In the decade or so up to 2007, China achieved rapid annual gains in TFP. Since then, however, they have fallen by as much as half. A recent study by Ernst & Young, the accountancy firm, says that instead of moving closer to the “technology frontier” – the TFP benchmark set by the most advanced economies – China is slipping steadily further away from it.

If China is to fulfill its leaders’ dreams of dominating world markets for the products and services of the future, it will need capable companies to deliver them. It boasts some nimble, enterprising and fast-growing technology companies, such as Huawei in telecom equipment and Baidu, Sina and Alibaba in online services, which have been adept at pioneering new markets. But they are still few in number and many have yet to venture far beyond China’s borders.

So how should China respond? To breed more industrial winners, the country needs to overcome several self-inflicted handicaps. Perhaps the biggest is a highly unbalanced economy that depends excessively on fixed asset investment – about half of GDP – for growth. This is the result of a skewed financial system that floods banks with abundant artificially cheap capital, much of which is then lent to manufacturers, construction companies and property developers. The system, combined with local governments’ frenzied efforts to boost growth and employment, has spawned massive excess capacity, eroding borrowers’ profitability and their capacity to repay mounting debt.

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The economy is distorted further by political favoritism, which channels preferential financing and many other privileges to the state-owned enterprises (SoEs) that dominate many sectors of the economy. However, the SoEs are slow-moving and far less efficient than the private companies that are the main innovators and pace-setters in many of China’s high-tech growth markets. Indeed, some studies have found that collectively the SoEs destroy, rather than create, wealth.

China’s new leadership, headed by President Xi Jinping and Premier Li Keqiang, are well aware of the need to tackle these problems. Effecting change, however, means confronting an array of thorny challenges, starting with entrenched resistance from the many politically powerful interests that profit handsomely from keeping things as they are. It’s still unclear which way the battle over reforms now raging in the ruling Communist party will go.

Another of China’s disadvantages is that few of its companies yet possess an international presence or much experience of operating abroad. Most lack globally recognized consumer brands and the marketing expertise and distribution channels needed to control the downstream activities where established western competitors often earn much of their profit.

Increasingly, Chinese companies are seeking to make up for those deficiencies by acquiring businesses in the West. But despite the state’s deep pockets and a reputation for paying fancy prices, that route can also be an obstacle course. Many “crown jewel” foreign companies aren’t for sale – and if they are, Chinese bidders can run into local political opposition or barriers erected on national security grounds, especially in the United States.

Far from being poised to sweep to global dominance in innovation and high-technology, China is still struggling to catch up with the established world leaders. It has made some notable progress, including breeding some resourceful and fast-growing companies. However, many of these advances have been achieved in spite of, rather than because of, China’s state and its extensive control over the economy.

Whether China can ever produce fundamental breakthroughs or innovators to match Thomas Edison, Henry Ford or Steve Jobs remains an open question. What is increasingly apparent, though, is that China’s capacity to transform the global order in science and technology depends critically on its ability to confront tough challenges it faces at home.

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Topics: China • Technology

soundoff (115 Responses)
  1. JC

    Meh.

    Maybe because China was enough of an innovator in the past, you know, paper, printing, gunpowder, printed money, those kinda things.

    October 25, 2013 at 2:47 am | Reply
    • JC

      That was supposed to be printing on paper, lol!

      October 25, 2013 at 2:48 am | Reply
    • steven

      Now it's iPads, the cloud, nukes, and bitcoin.

      October 25, 2013 at 4:31 am | Reply
      • Albert911emt

        iPads are American ideas, designed and engineered by Americans. The only thing the Chinese have to do with iPads is manufacturing.

        October 25, 2013 at 12:48 pm |
    • Bob

      That's because every smart and rich chinese found a way to immigrate to the U.S. Only the communists, poor farmers and brainwashed remained. China is like a big kid with dow syndrome.

      October 28, 2013 at 3:23 am | Reply
  2. Sugan Naicker

    "Whether China can ever produce fundamental breakthroughs or innovators to match Thomas Edison, Henry Ford or Steve Jobs remains an open question." – Personally I think that China will produce fundamental breakthroughs & innovators in the future, currently they are setting up the base/platform and they are busy tweaking as they go along...just as the US did during Edison and Ford's era. I am certain that they will or even surpass....

    October 25, 2013 at 3:16 am | Reply
    • YUE DO

      i am a chinese . i like usa .

      October 25, 2013 at 7:27 am | Reply
      • Gwai loh

        Glad Yue Do

        October 25, 2013 at 7:48 am |
    • Evans

      It would be nice if you were right but... Truth be told, China has been the master of COPYING everything. And then spitting out a cheaply made version of this. This is the mindset that the Chinese have to get away from or else they will become stagnant.

      October 28, 2013 at 11:04 am | Reply
      • Just Another Opinion

        Well if you are educated enough to know how others have done the same with every innovations created in China in the past...China has learned from the best how to copy.

        May 29, 2014 at 12:04 pm |
  3. acrabahyiouspe

    It is so much easia to copy otha countly's technology than it is to leseach and develop one's own.

    October 25, 2013 at 5:22 am | Reply
    • ProudAmerican

      you mean STEAL don't you?? ie corporate, defense, etc espionage ?

      October 25, 2013 at 4:13 pm | Reply
      • marc

        Most of it is probably legitimately purchased or negotiated for fat profits for the corporation that consensually agrees to it. This is not stealing but I understand the negative way we portray to make ourselves feel better.

        October 26, 2013 at 4:27 am |
      • Maersk

        If they paid for virginity and you agreed to sell it to them, it is not called stealing.

        October 26, 2013 at 7:31 pm |
      • Just Another Opinion

        I happen to think America is a great country. Like I mentioned in my other posts though, the Chinese has not waged a war on any country who has "stolen" from them in the past, they just peacefully acknowledged that when a product is wonderful enough, it will inspire others to create something of the same thing...even artist has copied or plagiarized from each other. You will have to go and educate on these facts yourself. So the wisdom goes, realize you have done something great, and feel good that others are coping you.

        May 29, 2014 at 12:15 pm |
    • Just Another Opinion

      Again, I can say the same about the pasta you are eating, the compass everyone is relying on, the printing press with which books from all over the world are made...these are just one of the few things that the chinese has unwillingly allow the world to copy off of.

      May 29, 2014 at 12:08 pm | Reply
  4. KM

    "In 2011, for example, fewer than a third of patent applications in China were classified as “innovation” patents"

    Lmao, well researched. Innovation patents require only a lower standard of inventive step to be granted than normal patent applications. So saying this like it's a bad thing and they should have more is fallacious.

    October 25, 2013 at 6:02 am | Reply
  5. tdsd

    As usual, CNN and the likes politicizes China issues, much like the way RT opines on America.

    October 25, 2013 at 9:48 am | Reply
  6. tyuukoku no bakamono

    Why bother innovating when most tech can simply be brought?

    October 25, 2013 at 10:04 am | Reply
  7. Rick

    Because that would require them to have an original thought. Pretty embarrassing that with so many of them they contribute so little and think only of themselves.

    October 25, 2013 at 10:17 am | Reply
    • From Mt Doom

      "they think only of themselves." Isn't that the basic tenet of free market business? Why waste capital on ideas that never work, and just steal those that do work and do it better. I am not condoning this, but it happens all the time in the US.

      As for patents, only 2% ever return the money invested in them, so in and of themselves, patents cary no inherent value. It's all about execution.

      October 25, 2013 at 3:45 pm | Reply
  8. Karl

    Maybe they could start, for one, by producing food products that don't kill babies or dog food that doesn't kill dogs. That would be nice.

    October 25, 2013 at 11:11 am | Reply
  9. UriNation

    China's main innovation is counterfeiting.

    October 25, 2013 at 1:41 pm | Reply
  10. julnor

    In my career I've worked with at least 3 people who were born and raised in China who came to the USA and received PhD's in Engineering. All very smart people. If you gave these individuals very specific direction on what you needed done they were able to do excellent work. If you told them to figure out what was wrong and fix it they almost became paralyzed. It makes me wonder if there is something in their culture or educational system that inhibits the free form thinking needed for innovation.

    October 25, 2013 at 1:58 pm | Reply
    • Karl Marx

      The only inhibitor to free form thinking in the Chinese culture is the communism in Chinese culture, and the intellectual purge a few decades ago.....

      October 25, 2013 at 7:17 pm | Reply
    • Cookiez

      In my AP Bio class there was this Chinese girl who immigrated, and she was incredibly smart. She could memorize anything and do great on tests, but when it came to doing labs, she had no clue what she was doing. When asked to search for variables, create her own, etc. After talking with her it ended coming down to the way they teach in China. It's just practical, no experimental. So they sit in a classroom and just learn, but never experiment or do any free thinking. It's basically just, do this and do it this way. They never gave her any assignments where they had to do free thinking to figure out the answers, so I understand where you're coming from.

      January 28, 2014 at 4:24 am | Reply
      • Vince

        But how do you explain Chinese or even Asians who are raised and educated in western countries like US, haven't made much innovations. At least not on par with other ethnic groups, e.g. like Jewish.

        June 9, 2014 at 1:02 pm |
  11. Ed

    A lot of the stuff they are saying about China, they used to say about the U.S.A., and some still do. Ask a German what he thinks of American cars. What's the use of all these patents, when the actual work and technology transfer is sent overseas? Factories employ more than just assemblers, engineers for example, lots of them. I used to work in a factory, so I've seen this. Why do you think China is graduating so many engineers. America is becoming a land of semi-literate rap singers, driving German cars. Is that the future you want?

    October 25, 2013 at 2:28 pm | Reply
  12. dumbttt

    Why is China currently not an innovation star? The answer is simple. At the current stage, it is far more cost effective for China to just copy/imitate than to innovate. Do you think it makes sense for a junior engineer to attempt a breakthrough in computer chip designs before he's learned the basics? Innovation will come in due time, China is simply not ready for it yet. To blame this on culture or education is simply stupid. China had been immensely innovative in the past, more far so than the West. It may or may not be able to innovate in the future. Only time will tell.

    October 25, 2013 at 2:59 pm | Reply
  13. Anna

    The biggest difference between USA and China is,

    that USA accepted immigrants from all over the world, and along came brains among them.

    like Einstein, Tesla, Von Braun etc. even Chinese scientist.

    I don't believe too many brainy people would immigrate to China, even in the future.

    and that would make the huge difference.

    October 25, 2013 at 4:00 pm | Reply
  14. ✠RZ✠

    So be it, how about the rest of us focus instead on getting off this messed up planet.

    October 25, 2013 at 5:19 pm | Reply
  15. Anna

    I am due to socialism and information control

    October 25, 2013 at 6:06 pm | Reply
  16. Rick McDaniel

    They need not BE innovative.......all they need do, is copy and steal the innovations of those who send their innovations there, to be made.

    They are succeeding greatly, in that regard, and no other country, can compete with them, therefore no other country can knock them from the top of the world's economic powers.

    October 26, 2013 at 11:09 am | Reply
  17. Romeo

    It's been only a few decades since China gain its independence from colonial powers. Is there any other country around that has made so much progress in such short time? You can just imagine what the next century will be like for China?

    October 27, 2013 at 9:33 pm | Reply
  18. Bender the Offender

    China hasn't had an original idea ever. Everything they have "designed" or "made" has been stolen or copied. There is a reason why "Made in China" means buyer beware because they dont know how to make anything with quality.
    We need to Keep American Ideas in America and take pride in "Made in America"

    If companies were rewarded for staying and keeping business in America we would never need to worry about what we are buying.

    Drywall made in China – Made everyone in America sick because it was made with Hazardous Chemicals.

    Dog Food Made in China – Is killing hundreds of Pets in the US

    Food Made in China – They have been shipping Chicken to America and has made thousands sick because of eating it

    Movies made to not Offend China – The Remake of Red Dawn was made with China as the country that tries to take America over, but because Obama for some reason loves China they had to re-digitize everything to make it look like North Korea.

    China is a monster that is looking to devour everything but it can and will not last if America fights back by saying no to Chinese products, Chinese trade and wanting to purchase American Companies.

    If our elected officials wont do anything to help us then we as consumers need to stand up for ourselves.
    USA USA USA USA!!!

    October 28, 2013 at 2:42 pm | Reply
    • jimmy

      read the history first, who invent paper, gun powder, printing ...... so that could make you not look so stupid.

      December 23, 2013 at 2:56 pm | Reply
    • YYJ

      Perhaps China does copy a lot but you know China is growing and changing. Nobody ever makes mistakes or trips up while acclimating to things, right? Nobody ever makes mistakes or a wrong move while learning things or especially when your growing, right? I'm sure while you were going through puberty, you never did anything dumb or questionable.

      With that said, I believe what I always believed about China and many emerging economies. Many emerging economies all hit a fork in the road. Some have not reached it but countries like China and India are there. Which fork they decide to traverse will determine what type of country they will become. President Xi and his brilliance knows this. That is why he wants to gravitate towards a consumer driven economy. Anyways, the world can only wait and see what direction some of the major economies head towards. Right now I only see China and India at this fork in the road.

      May 29, 2014 at 11:31 pm | Reply
  19. rad666

    Why bother striving to be a power house when you can just steal everything that American corporations hand over so willingly all so the CEO"s & other corporate officers can become rich off of the sweat. blood & tears of the poor.

    October 28, 2013 at 2:56 pm | Reply
  20. Really?

    After the one that I avoided as much as possible with China is for the body, I will have a bitter experience

    November 6, 2013 at 5:06 pm | Reply
    • YYJ

      I agree. That is an issue, as one US senator put it, will need to be resolved one way or another.

      May 29, 2014 at 11:33 pm | Reply
  21. truth

    there are of course a lot of innovations in China. And China actually has already exported a lot of innovatiom products to the west. Just these products are not for consumers but for big companies, like telecom infrastructures, heavy mechanism, etc. They are not so fluential as apple or google. China also has many innovative Internet products, but they are only used domestically, so no international visibility at the moment. But the App wechat may change this.

    November 10, 2013 at 9:10 pm | Reply
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    September 23, 2014 at 6:10 am | Reply
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