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K. Palonka: Innovation policy: new China strategy

There are mixed signals from Chinese economy these days. Financial markets turbulences and slowing rate of growth provide attractive opportunities for pessimistic prophecy. Let us look, however into the brightest side of reality. Some publications deliver interesting findings[1]. That will not immediately improve situation but it offers some hope for better future.

Between 2007 and 2015, R&D spending in China increased by 120 percent, to100$billion and corporate $55 billion, making it the second-largest location for corporate R&D, passing Japan and Germany ($50 billion and $32 billion, respectively). Although the U.S. maintains top position with total $145 billion spending (about 3% of GDP), its lead is narrowing: In 2007, R&D in China was 23% of the U.S. total. In 2015, it increased to 38 % of the U.S. total.

Major flow of innovation spending though, comes from international corporations operating in China. China’s imports of R&D from multinationals headquartered in other countries were $44 billion in 2015 — 81 percent of the $55 billion in-country total. That’s up from $25 billion in 2007, when virtually all R&D in China was imported. By 2015, top 12 Chinese companies spent $10 billion on R+D domestically. The U.S. led in exports of R&D to China in 2015, accounting for 39 percent of inflow, followed by Japan (20 percent) and Germany (10 percent). Just 15 years ago, China hosted merely 200 foreign-run R&D centers. In 2016 multinationals operate more than 1,500 innovation facilities throughout the country — and this number is expected to increase 20 percent by 2018.

Źródło: commons.wikimedia.org

Źródło: commons.wikimedia.org

“Investors are beginning to take note. Investments in China and India, where most of the biggest deals are taking place, more than tripled to $16.9 billion in the third quarter, just under the $17.5 billion invested in North America as of Oct. 1, according to Preqin Ltd., a London-based consultancy. Venture investors closed 1,016 deals in China up to the third quarter of 2015 – more than in all of 2014”[2].

1

Major rationale for moving R&D to China is – according to surveyed managers- proximity to a high-growth market (71 percent), followed by proximity to key manufacturing sites (59 percent), proximity to key suppliers (54 percent), and lower development costs (53 percent).

Importance of basic fields of implementing innovations are changing dramatically during past and next years (see exhibit below). Market driven (meaning consumers preferences considered) innovations are leading, followed by knowledge driven (meaning implementing the newest scientific discoveries). Cost effectiveness importance gives up its share. The last one was important during the first phase of investing in China, decades ago. (manufacturing and services with high labor intensity were leading there). Adaptation was essential during second phase, to meet local demand, to adjust to locally available resources, (industries such as autos, food, cosmetics, and construction materials usually making products that are differentiated for national markets and that exploit domestic components) and to comply with local regulations. The third phase focuses on pool of scientific research coming from Chinese institutions. Investors are interested in the full R&D spectrum: development, applied research, and, more and more frequently, fundamental research (chemicals, pharmaceutical, electronics).

2

Global companies did recognize China’s rise as an innovation leader, and now they try to exploit the country’s science and technology knowledge base to pursue fundamental research.

China’s surging investment in R&D is not led by government but by business. Business spending accounts for more than three-quarters of China’s R&D spending.  Huawei leads the group in China, but it is hardly the only Chinese company investing in R&D. In 2015, China had 301 companies among the world’s top 2500 R&D spenders. Overall, Chinese firms have more than twice as many patents in the United States as their Indian counterparts. Huawei alone holds more than 30,000 patents worldwide.

Patents, scientific publishing, and cited papers are internationally accepted measurements of country R+D level and significance. The latest data indicate that 13 percent of the most frequently cited science and engineering papers included an author from China. That was comparable to the figures for Germany and England, and more than double China’s total between 2004 and 2008[3].

Key part of the government’s innovation strategy is to draw talents. Part of it in China is  attracting skilled workers to return. China experienced around 17-fold increase in the annual return migration rate over the past 10 years[4].

There are apparent weaknesses in Chinese innovation policy. Still converting innovation inputs (money and well-educated labor) into innovation is not sufficient, intellectual property rights are not always honored and state has a tendency to order businesses where they should invest. China’s financial system directs too much capital to state enterprises and not enough to small private firms. It is true, however, the dominance of private and international companies may bring effect in the future. It is not immediate and obvious effect but while monitoring tendencies the optimists may hope for not so hard lending.

[1] ECONOMIST INTELLIGENCE UNIT –FEBR.15TH; Bloomberg data analysis.

[2] Bloomberg; January 15th,2016

[3] www.thediplomat.com/2016/02/

[4] According to PwC’s “Talent Mobility 2020” report, annual international assignments will increase by 50 percent between today and 2020—having already increased by 25 percent over the last 10 years.

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K. Palonka: Innovation policy: new China strategy Reviewed by on 24 lutego 2016 .

There are mixed signals from Chinese economy these days. Financial markets turbulences and slowing rate of growth provide attractive opportunities for pessimistic prophecy. Let us look, however into the brightest side of reality. Some publications deliver interesting findings[1]. That will not immediately improve situation but it offers some hope for better future. Between 2007 and

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