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APEC: THE ISSUES


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China wakes up to innovation

As the rising Asian nation shifts from a factory economy to research and development, the U.S. should forge strategic technology policies

By Dieter Ernst

POSTED:
LAST UPDATED: 02:22 p.m. HST, Aug 05, 2011



In November, the leaders of 21 Asia-Pacific economies will meet in Honolulu for the annual Asia Pacific Economic Cooperation summit. Leading up to the meeting, the Star-Advertiser presents a monthly column of analysis on major issues in the region from experts at the East-West Center.

***

In the last several years, China's leadership has placed high priority on shifting its economy from a "factory model" based on low-cost manufacturing of products designed elsewhere, to one that includes more original Chinese technology and design. To do this, Beijing has instituted so-called "indigenous innovation" policies resulting in massive investments in research-and- development infrastructure and higher education.

As a result, China is expected to overtake Japan soon as the world's second-largest R&D investor, although it still remains far behind the U.S. China's domestic doctorate awards in science and engineering have also increased more than tenfold since the early 1990s, and its share of the global pool of researchers has grown from less than 14 percent in 2002 to more than 20 percent today.

Only a few years ago, China's approach to innovation hardly played a role in international economic diplomacy. Today, it is a hot topic in U.S.-China economic relations, adding further to contentious disputes about exchange rates, trade and foreign direct investment.

When Chinese President Hu Jintao visited the U.S. early this year, public debate focused on widespread fears that China's emerging role in high-tech innovation will challenge American leadership in the global knowledge economy.

Among the concerns are that China's innovation policy unfairly favors domestic producers and poses a threat to global intellectual property protections; that it is used as a trade-distorting ploy against U.S. exports; and that it forces U.S. companies to offshore good jobs in engineering, product development and research.

The U.S. government considers China's innovation policy to be "discriminatory," and a recent report by the U.S. Chamber of Commerce claims it is "a blueprint for technology theft on a scale the world has never seen before," that has the potential to "undermine significantly the innovative capacity of the American economy in key sectors and, consequently, harm the competitiveness and livelihood of American business and the workers they employ."

However, our research shows that such fears are exaggerated. Despite China's remarkable progress, the U.S. retains a strong lead in overall innovative capacity, and China still has a long way to go to close the gap. A telling example is that no Chinese company is among the top 20 global R&D spenders in the information technology industry. After all its efforts, China owns just 2 percent of worldwide patents, with 95 percent of its patents in force domestically only.

Thus, Chinese firms will continue to need access to American technology across a broad spectrum of industries and services, and China's innovation push can actually create new market opportunities for American firms, provided they stay ahead of the innovation curve.

China's efforts to strengthen its innovation capacity should come as no surprise; they are part and parcel of today's intensified technology-centered competition on a global scale.

Like the U.S., China has no choice but to participate in an "innovation arms race" in which no country dares to fall behind the others in the creation of new products and processes.

What distinguishes China is that the implementation of its innovation policy is still shaped by the legacy of the centrally planned economy. An analysis of China's recent policy initiatives, however, shows signs of gradual, if uneven, progress toward greater pragmatism and less market regulation.

While technology-related trade conflicts will continue, it may now be possible to transform competition between both countries into a positive-sum game that benefits both sides.

Rather than fearing China, we need to focus our research and policy debates constructively on how this relationship can be improved.

To take advantage of the opportunities offered by China's innovation push, the U.S. government and private sector need to work together to develop a national strategy that will enhance innovative capacity and create quality jobs in research, product development and engineering.

Corrective action needs to start now, but there is still time to adjust policies and corporate strategies to the new challenges of an increasingly multi-polar global knowledge economy.






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