China and Innovation

Stephen DeAngelis

August 17, 2012

Over the past couple of years a number of articles about innovation in China have been written. The reason for this interest might be the fact that “between 2006 and 2009, the number of patent applications in America, Europe and South Korea largely held steady. But filings in Japan sank while those in China soared.” [“Trading places,” The Economist, 30 September 2010] Patents are often used the article noted, as “a crude but useful measure of innovation.” The article continued:

“The change shows that Chinese inventors are developing a stake in intellectual-property protection, which is welcome. And because national patents protect the technologies of foreign firms too, the trend reflects how global companies are ploughing into China as a market and a manufacturing base.”

In a subsequent article, The Economist played down the importance of patents as a true measure of innovation. It noted that, “Chinese firms are filing lots of patents,” but asked, “How many represent good ideas?” [“Patents, yes; ideas, maybe,” 14 October 2010] The reason that the numbers of patent applications has exploded in China is that “the Chinese government has created an ecosystem of incentives for its people to file patents.” The article explained:

“Workers and students who file patents are more likely to earn a hukou (residence permit) to live in a desirable city. For some patents the government pays cash bonuses; for others it covers the substantial cost of filing. Corporate income tax can be cut from 25% to 15% for firms that file many patents. They are also more likely to win lucrative government contracts. Many companies therefore offer incentives to their employees to come up with patentable ideas.”

The article also noted that patent officials in China “are paid more if they approve more patents.” All of this leads to a certain amount of skepticism about the value of Chinese patents. The article indicated that analysis by Thomson Reuters concluded that only about 20 percent of Chinese patents “were of high quality.” The article nevertheless concludes that “it is clear that China really is growing more innovative. And the fact that the government now takes intellectual property seriously can only help.”

In January 2011, The Economist published a review of two books that focused on innovation in China. [“The red menace, reconsidered,” 27 January 2011] The review began with a few questions: “Will China eclipse America as the world’s innovation powerhouse? And where will the good, well-paid jobs of the future come from in developed countries if Asia’s rise continues?” The review stated, “Those are the questions taken up by two thoughtful new books on innovation.” Although the headline of the article, with it reference to a “red menace,” tends to stir up fear and nationalism, the article asserted, “Asia’s rise does not necessarily foreshadow America’s decline. One reason for this is that innovation is not a zero-sum game.” It goes on to state, “One company or country can benefit from the development and marketing of a clever invention, while the robust diffusion and adoption of such inventions can also benefit many others.” Adam Segal, the author of one of the books reviewed, indicated that he wasn’t too concerned that China would overtake the U.S. He believes that “America’s economy will remain on top.” The review continued:

“While accepting that Asia will probably surpass America in absolute spending and sheer numbers of graduates, he remains sceptical about the foundations of Asian innovation. He points to troubling evidence that challenges the quality of the many patents, papers and engineering degrees seen in India and China.”

In late 2011, John Bussey wrote that a number of U.S. business executives agree with Segal. He noted that during a dinner discussion of intellectual property theft in China one U.S. executive “with a big U.S. tech company leaned forward and said confidently: ‘This isn’t such a problem for us because we plan on innovating new products faster than the Chinese can steal the old ones.'” [“Does History Say China Wins?Wall Street Journal, 4 November 2011] Bussey continued:

“That’s a solution you often hear from U.S. companies: The U.S. will beat the Chinese at what the U.S. does best—innovation—because China’s bureaucratic, state-managed capitalism can’t master it. The problem is, history isn’t on the side of that argument, says Niall Ferguson, an economic historian. … Mr. Ferguson, who teaches at Harvard Business School, says China and the rest of Asia have assimilated much of what made the West successful and are now often doing it better. ‘I’ve stopped believing that there’s some kind of cultural defect that makes the Chinese incapable of innovating,’ he says. ‘They’re going to have the raw material of better educated kids that ultimately drives innovation.’ Andrew Liveris, the chief executive of Dow Chemical, has pounded this drum for years, describing what he sees as a drift in engineering and manufacturing acumen from the West to Asia. ‘Innovation has followed manufacturing to China,’ he told a group at the Wharton Business School.”

Despite what analysts like Ferguson are saying, in January The Economist published another article that insists that “America is wrong to fear Asian innovation.” [“Brain Gain,” 21 January 2012] The article cites a report from the National Science Foundation (NSF) that warns “that America is losing ground fast to Asian rivals, especially China.” It quotes Subra Suresh, the Foundation’s director, who said, “We must re-examine long-held assumptions about the global dominance of … American science and technology.” The article goes on to note that “the ten largest economies in Asia now spend roughly $400 billion a year on research and development (R&D) — as much as America, and well ahead of Europe’s $300 billion. China’s investment leapt 28% in a year, propelling it past Japan to become the world’s second-biggest spender. ‘Troubling trends,’ declares one of the report’s overseers.” But the article states, “Hang on a minute. Merely counting pennies is no way to measure national prowess.” It explains:

“Research spending is an input, not an output. Many a clever gizmo produced by well-endowed Japanese corporate labs has turned out to be worthless. Useful innovation means fresh thinking that creates value. Booz & Co, a consultancy, has found that firms that spend little on R&D do indeed fare poorly by this measure. But those that spend a fortune do not, on average, outperform their more parsimonious peers. The NSF boffins fret that America’s share of global R&D spending is falling. In the decade to 2009, it tumbled from 38% to 31%, whereas Asia’s rose from 24% to 35%.”

The article then reiterates what it said in an earlier article about innovation, “science is not a zero-sum game.” It continues:

“One reason why spending in Asia has risen is that American firms nearly doubled their R&D investments there in the decade to 2008, to $7.5 billion. GE recently announced a $500m expansion of its R&D facilities in China. Such investments give American firms access to a wider pool of brains, many of them fizzing with ideas. Products developed in or for emerging markets are making their way to developed ones. … Foreign innovation may threaten American firms; but it can also make them more competitive.”

To learn more about the trend of products coming from emerging markets going into mature markets, read my posts entitled Innovation in (and from) BRIC Countries and Reverse Innovation Continues to Garner Attention. McKinsey & Company analysts have also taken a look at Chinese innovation. Their conclusion is that “Chinese innovation is evolving in diverse ways and at an uneven pace across a range of different industries.” [“Three snapshots of Chinese innovation,” McKinsey Quarterly, February 2012] The articles look at innovation in the automotive industry, the semiconductor industry, and the pharmaceutical industry.

In the automotive industry, Glenn Leibowitz and Erik Roth, conclude “that innovation in China’s auto industry is more about commercialization models than technical achievements.” In the semiconductor industry, McKinsey’s Bob Dvorak, Sri Kaza, and Nick Santhanam conclude, “China, … has one of world’s best-funded and ambitious tech industry policies, and acquiring semiconductor know-how and IP remains a high priority.” Concerning China’s pharmaceutical sector, Steve Yang concludes, “new models of innovation … could emerge from China, as well as the long-term commitment to talent development.” One reason for this is that there is a “different disease prevalence” in China than there is in the U.S. Writing in Forbes, Gary Shapiro, President and CEO of the Consumer Electronics Association, asks, “Is China the next hub for innovation?” [“Can China Eclipse the U.S. on Innovation?, 11 July 2012] He concludes:

“The Chinese have a long tradition of copying others; not respecting intellectual property or having a culture that even recognizes it; a bias towards conformism; and a government that quells dissent. Given this vast cultural difference, it may be a stretch for the Chinese to shift from manufacturing to innovation. But they are certainly trying, and their strategy is respectable.”

Frankly, a little competition to get America’s innovative juices flowing can’t hurt. In all the rankling associated with this year’s presidential election, it would be great to hear some creative ideas about how we can get America’s education system back on track and prepare coming generations to compete in a world that will be increasingly more innovative.