China’s place in the innovation economy

Whether measured through shares of global R&D spend, shares of peer-reviewed journal publications, or shares of high-value patent applications, the building blocks of innovation are increasingly dispersed across both developed and developing economies. The effects of this diversification of innovative capacity, notably from China, means the acceleration of competition for innovation rents, notably for North American jurisdictions who have long thought themselves in the lead.

Take, for example, China. As Chinese President Xi Jinping noted in March 4, 2013 speech, “boosting innovation-powered development (is essential) in order to make China an economic heavyweight.” Doing so has largely focused on the country’s indigenous innovation program, zizhu chuangxin, which aims to upgrade the country’s knowledge infrastructure in order to reduce the country’s reliance on foreign technology from 80% in 2006 to 30% by 2020.[1] Achieving this goal, and increasing the country’s competitiveness across a series of knowledge sectors, is predicated primarily on massive investments in science and technology. In the country’s 12^th Five Year plan released in 2012, over $18 billion was allocated towards research and development in “strategic industries” defined as next-generation information technology, biotech, renewable energy, materials and advanced manufacturing.

Such investments are part and parcel of the country’s increasing prominence across a series of innovation-related metrics. For example, the number of engineering PhD’s in China has tripled since 2000 and the number of science-oriented researchers has grown by an average 12% per year.  Chinese research in peer-reviewed journals has similarly grown by 16% per year since 1995, with the Chinese share of published articles now reaching 9%. China’s share of high-value triadic patents[2] has experienced similar growth, increasing more than seven-fold between 2000 and 2007 (Fu et al 2010:4).[3]

These foundational aspects help explain the increasing competitiveness of the country’s tech sector. As Jim Balsillie (former RIM co-CEO) noted at a recent INET conference in Hong Kong, “Of course they (Chinese tech companies) can innovate, and of course they are formidable. This is not a debate, it’s an inevitability…” He adds, “Look at the start-up vibrancy. Look at Huawei. There is no doubt in my mind that Chinese companies will emerge as competitive innovators in a process of industrial upgrading.” Across my research a similar refrain is voiced by leading technology stakeholders in Canada and the United States who note that China has shifted dramatically from imitation to original innovation.

Increasingly, however, this innovation is coming without direct state funding/direction, and is following the angel/venture model made successful (sometimes) in the West. For example, China Innovation Works, founded in September 2009 by former Google China head Dr. Kai-Fu Lee, manages $500 million in assets and has invested in 50 Chinese startups so far. At the Fund’s inception, Lee noted that “there’s almost no angel funding for Chinese startups unlike in the U.S. We want to fill that gap…”[4] Dr Lee notes that such efforts benefit from the depth of infrastructure, notably digital infrastructure, that is present across both tier 1 and tier 2 cities across the country, allowing for a vibrant ecosystem of entrepreneurs. Other venture capital groups such as Intel Capital have followed, investing nearly $700 million in Chinese startup ventures.

Now it’s likely that the failure rates of such Chinese funds are likely to be larger than developed economy rates owing to growing pains around governance and management skills. However, the emergence of startup companies such as YouKu (think YouTube), PaPa (think Instagram) and Weibe (think Twitter) that are capturing significant shares of domestic users and, in the case of others such as Huawei,  disrupting international markets, highlight that the innovation rents that have traditionally gone to market incumbents are increasingly at risk as dynamic competition from China and others like it make the global innovation economy even more hyper-competitive.

The result for North American jurisdictions, notably Canadian ones faced with ongoing challenges related to employment and economic growth, is a distinct need to better understand which policy instruments aimed at stimulating entrepreneurial activity work best, and which research and development mechanisms are most effective at leading to ongoing commercialization and competitiveness.

These just happen to be part of the DEEP Centre’s mandate.