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‘Asianization’ of Innovation: China closing gap with US, Europe on R&D spending
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FOR a century, the major economies of Western Europe, the United States and Japan have dominated innovation. Today, they have been joined by large emerging economies, spearheaded by China. In 2012, China’s patent office (SIPO) overtook its US counterpart (USPTO) to become the largest in the world, as measured by the number of patent applications received.
As evidenced by the 2014 Global R&D Funding Forecast, research and development investment is rebounding in the US and its growth is likely to continue through 2020. Meanwhile, China’s innovation capabilities are closing up with advanced economies, such as the Netherlands and Belgium, and by mid-decade, the Eurozone’s core economies.
Shifts in student performance suggest that these changes are long-term by nature. According to the latest OECD PISA (Program for International Student Assessment) results, students in the US and Europe are falling behind their counterparts in China and emerging Asia. Internationally, Shanghai dominates math, sciences and reading.
Of the advanced countries, only Finland, Japan, Canada and Ireland remain in the top 10. The dramatic ascent of the emerging nations in education and skills only reflects a broader structural trend in global innovation.
Eclipse of “Triad Power”
Following the devastation of World War II and the subsequent reconstruction, the major economies in Western Europe enjoyed Les Trente Glorieuses; three decades of rapid economic growth, while Japan followed in the footprints.
In the process, the US superiority in innovation began to diminish relative to competition from Europe and Japan, as reflected by the subsequent “trade wars.” The innovative capacities of the OECD member countries converged substantially. Today the old era of US, Western European and Japanese dominance — or “Triad power” as Kenichi Ohmae once called it — is fading away. Like Europe’s core economies in the postwar era, China has been engaged in catch-up growth, hoping to move higher in the value-added chain, especially after 2001, when it became a member of the World Trade Organization (WTO).
Currently, US companies still dominate, with 35 percent of R&D investment by the top 2000 companies worldwide, according to the 2013 EU Industrial R&D Investment Scoreboard. The US is followed by Europe (33.6 percent), most importantly Germany (10 percent), France (5 percent), UK (4 percent) and Switzerland (4 percent). China’s R&D currently ranks only 10th relative to the US or Europe and other large emerging economies in the Scorecard. However, these Chinese firms already account for almost half of all emerging-country multinationals in the top 2000.
What next?
Today, the US, China, Japan and Europe account for 80 percent of the more than US$1.6 trillion invested in R&D across the world. The ongoing shift of China’s growth model from investments and exports to consumption is likely to increase its R&D investments, in both relative and absolute terms.
Due to growth differentials, China is positioned to bypass Europe before the end of this decade, whereas the US could fall behind China by the early 2020s.
As Premier Li Keqiang has argued, China’s R&D as a percentage of GDP should increase to 2 percent in 2014 and to 2.2 percent by 2015. In the past few years, this R&D intensity has eroded in many European countries. In the UK, it is now barely 1.7 percent, while the average of EU-28 countries is only 2.1 percent.
Due to its massive population scale, China’s catch-up with the US and Europe in innovation intensity (R&D expenditures divided by population) will take a lot longer. In view of these structural trends, innovation in the advanced economies should not be seen as a win-lose game against emerging economies, but as a win-win race with emerging economies.
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