China: A Global Innovation Leader?
One of the more interesting questions to ask about China these days is: can China innovate?
One-time presidential hopeful Carla Fiorina (ex-CEO HP) has this to say on the subject:
'I have been doing business in China for decades, and I will tell you that yeah, the Chinese can take a test, but what they can’t do is innovate. They are not terribly imaginative. They’re not entrepreneurial, they don’t innovate. That is why they are stealing our intellectual property.’ (Huddleston, 2015)
Rather than engaging in a simplistic (and often biased) discussion, it is probably more instructive to look at the data.
R&D spending
Recently, Strategy& has published its 2016 Global Innovation 1,000 Study which identifies the top 1,000 public companies in the world that spend the most on R&D. The study shows that China leads the world in growth in R&D spending. While worldwide R&D spending in 2016 increased by only 0.04%, R&D spending by companies headquartered in China rose by 19% (which was more than twice the growth rate of US companies): see Figure 1.
Figure 1: Strategy& (2016)
An analysis of the number of companies in the top 5 industry sectors by region reveals that China is particularly strong in Industrials (29%), Automotive (18%), and Software & Internet (18%). China’s weakest performance is in the Healthcare sector where only 2% of innovation leaders are Chinese.
In total, 130 Chinese companies have made it to the Innovation Top 1,000. The top 5 Chinese spenders are: Alibaba Group, ZTE, PetroChina, China Railway Group and Baidu1.
Figure 2: Wu (2016)
Value-added ladder
When comparing the 2016 results to previous years, it is clear that China’s spending on R&D is continuously increasing. R&D spending in China is growing as the country is trying to gradually move up the value-added ladder. Given the continued erosion of its low (labor) cost-advantage, Chinese companies realize that technology development is necessary to sustain their position in the global economy.
Figures 3 and 4 document the increase – both in absolute terms as well as a % of revenue – over the previous 10 year time period (2006-2016).
Figure 3: Strategy& (2016)
Figure 4: Strategy& (2016)
Augmenting China’s continued investment in ‘indigenous’ R&D is the trend of foreign MNCs to increase their R&D spending in China. In 2015, foreign MNCs operated more than 1,500 R&D centers in China. By 2018, this number was predicted to increase by another 20% (Jolly, McKern & Yip, 2015)
Rapidly developing
Interestingly however, the nature of foreign R&D seems to be changing. In the past, a significant share of foreign R&D was cost-driven. Mirroring the gradual erosion of China’s low cost advantage, more and more foreign MNCs are establishing R&D centers for the purpose of tapping into the country’s rapidly developing science and technology base: see figure 5.
Figure 5: Jolly, McKern & Yip (2015)
Earlier this year, China’s State Council issued a national scientific and technological innovation plan in an attempt to transform China into an innovative power house. Based on the idea that innovation will be a key driver for future economic growth, the plan is a blueprint designed for technological innovation development during the period of the 13th Five-Year Plan (2016-2020). The plan aims to substantially improve China’s technology and innovation capabilities, and lift the country’s innovation capabilities into the world’s top 15 (State Council, 2016).2
Recent investments by foreign MNCs as well as the research results of large scale studies (such as the Strategy& Global Innovation 1000 Study) all seem to point in the same direction: China’s continued rise as a global innovation leader is unstoppable.
Can China innovate? The evidence seems to suggest it can.
1 Actually, Huawei is the largest Chinese spender on R&D ($9.48 billion in 2015). This would make Huawei the ninth largest spender in the world. However, Huawei is excluded from the Top 1,000 study because of its non-public status (Wu, 2016).
2 The 2016 Global Innovation Index (Cornell-INSEAD-WIPO) shows that China has joined the ranks of the world’s 25 most innovative economies (Global Innovation Index, 2016).
IMM Global Executive MBA
Filip Caeldries is Academic Director of the IMM – Global Executive MBA program where he teaches the Strategic Management and Geo-Competitive Perspectives courses.The IMM –Global Executive MBA program is a partnership program with TIAS School for Business and Society (NL), Purdue University (USA), Central European University (Hungary), Tianjin University (China) and FGV-EBAPE (Brazil). In 2016, Poets & Quants named him as one of the ‘Favorite Professors of the Best and Brightest EMBAs’.
Read more about the Masterclass IMM Global Executive MBA