Return to site

China's changing R&D investments - Developments and Implications

Chinese rise in R&D spending and output

· miscellaneous

{{{Dr. Ross Jaggers}}}

Research and development (R&D) efforts sit at the heart of innovation. They fuel the introduction of new products, services and processes that affect all corners of modern society, and improve the quality of lives of billions of people around the globe every day.

On a planet plagued by a host of global challenges and threats, technical and scientific innovation offers viable solutions, as long as the underlying R&D efforts are sufficiently supported. In a world so reliant on technology, how nations do this has a significant impact on their economic success, as well as the prosperity of their citizens.

How China became the second largest spender on R&D globally

While, in terms of nominal USD, the USA has remained the greatest spender on R&D for many decades, China has undergone significant changes in its spending patterns over this period, rising to the second biggest spender on R&D in the world. Unsurprisingly, China’s rapid economic growth has allowed it to allocate a greater proportion of its resources to R&D.

This is reflected in an increase in the percentage of GDP spent from 0.72% in 1991 to 2.07% in 2015, driven in part by government intervention (and particularly technocratic leadership). For example, the 5-year plan of 2010-2015 established an R&D spending target of 2.2% of GDP, which was missed by only 0.13%. Furthermore, the 5-Year Plan of 2015-2020 outlined China’s goal to increase R&D spending to 2.5% of GDP by 2020, a target it is on route to match (it successfully reached 2.1% in 2016). In nominal terms, this is an increase in spending from $13 to $376 billion, and currently more than Japan, Germany and South Korea combined (though as a percent of GDP China is outspent by many countries such as Japan, Israel, South Korea and Germany). Though these numbers suggest a big shift, it is important to consider the link between spending and scientific and/or technological output.

The consequence of the additional R&D spending on R&D output

China’s R&D spending started to become globally competitive just before the turn of the millennium. Although China has a history of scientific and technological capabilities, its transition from a planned to a market economy introduced a new dynamic regarding R&D strategy, in part due to an influx of available funding. R&D is a costly venture, in which innovations that leave the laboratory are not even guaranteed to make it to market.

An influx of capital can be correlated to an increase in the number of researchers in both the private and public sector. China’s human R&D resources have recently outnumbered that of the US and dwarf that of the UK. China, however, is a radically different environment to the US and UK.

Left: Breakdown of Gross domestic expenditure on R&D (GERD) by source of finance - business or government - in 2015. Graph constructed from OECD main science indicator data. Right: Total number of full-time researchers from 1991-2015 in the US, UK, and China. Graph constructed from National Bureau of Statistics of China data.

China’s planned economy had a significant impact on its attitude to R&D and innovation, one that is in some ways still felt today. To understand why, one must consider that the market economy provides several things: (i) it provides more capital needed to conduct research, (ii) it allows for higher wages for researchers, and most importantly (iii) it plays a key role in incentivising researchers to translate their research in productivity.

Innovation in China was, arguably, only possible following a switch to a market-style economy, as this entailed the implementation of incentive structures needed to allow R&D to grow and flourish. For this reason, China has been catching up to R&D leaders in the West, in terms of its spending, output, and innovation culture. If we are now at a point where China has the financial resources, human capital, and entrepreneurial strategy needed to be a global leader in R&D, then what role should the business sector play?

Private companies are the major source of the increase in R&D output

It is not uncommon for the majority of a country’s R&D output to come from its business sector- a perhaps unsurprising fact considering that the sector typically outspends the public one. In recent years, the contribution of different enterprises operating in China has varied, with a steady increase in private companies engaging in R&D. This is indirectly quantifiable by looking at the number of inventions (i.e. successfully granted patent applications) reported by the Chinese government for the different enterprises of China. The trends since 2011 suggest that China is moving in the direction of Japan, by bolstering its private R&D base.

Number of inventions in the public and private sectors from 2011-2016. Figure constructed from National Bureau of Statistics of China data.

There could be another explanation for this trend - as the process of liberalisation of business continues in China, a shift of R&D to private companies from state-owned enterprises (SOEs) may be more of a structural reshuffle, as opposed to redirection. The role of SOEs in China’s R&D efforts is a complicated topic that cannot be sufficiently discussed here, but it is worth noting that many studies show that innovation is not only possible in these organisations, but the institutional structure may actually enhance it. For these reasons, China should carefully consider how it structures its R&D efforts, and rely on both public and private efforts supported by strong government initiatives.

Conclusion

Too much of a focus on private R&D can leave structural holes in the country’s innovation network between government, industry, and academia, all of which are needed for long-term prosperity. Conversely, not enough private sector R&D can result in the country lagging behind in global indexes, as in the current case of the UK.

China’s continued scientific success is aided by a large human capital foundation and a government willing to invest in science and technology in a coordinated fashion - characteristics that other countries hoping to expand their science base should emanate. It is important, however, to remember that too much government interference can stifle innovation.

This article was originally published at https://www.rossinchina.com/blog/chinacatchup

All Posts
×

Almost done…

We just sent you an email. Please click the link in the email to confirm your subscription!

OK