We wrote in 2011 on China's 'indigenous innovation plan' of 2006 to reduce its dependence on the technology of foreign-owned firms and set the country on the road to become a world-class knowledge economy.
The challenge facing China can be illustrated by Apple's iPhone and the statement on the rear: 'Designed by Apple in California. Assembled in China' but that doesn't tell much of the story.
While the iPhone 5 retails for about $500 across the world, the value added in China per unit is less than $10 and is mainly labour with most of the materials coming from other Asian countries.
China's 'National Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020)' report, says China will build its dominance by "enhancing original innovation through co-innovation and re-innovation based on the assimilation of imported technologies." This key report is known as 'MLP.'
Also in 2006 another economy with a significant foreign-owned sector set itself a target to be recognised as a "world class knowledge economy by 2013" - - that was Ireland and 2013 came and went with official Ireland including the mainstream media tacitly ignoring that there was ever a target.
A recent paper [pdf] by Seamus Grimes, emeritus professor of geography, at the Whitaker Institute for Innovation and Societal Change, National University of Ireland Galway, and Dr Yutao Sun, School of Contemporary Chinese Studies, at the University of Nottingham UK and a member of the Faculty of Management and Economics, Dalian University of Technology, Dalian, China, examines the on-going high level of dependency of China’s economy on foreign sources of technology during the period since accession to the World Trade Organisation (WTO). Because this dependency is a major cause of concern for China’s leaders and policymakers, they have sought to shift the direction of the economy particularly since 2006 towards a greater focus on indigenous innovation.
The authors say that achieving such a major transformation, however, in an era when much of China’s economic activity has become integrated within the global value chains of major corporations, is very challenging, and the evidence to date suggests only a modest level of success on the part of Chinese companies to substitute for the on-going dominant position of foreign companies particularly in China’s high technology sectors.
They say that some progress has been made, however, in the private sector’s share of economic activity in contrast to the declining share of State Owned Enterprises (SOEs).
Last December, in its annual global R&D forecast, the US Batelle Foundation forecast that China's R&D spending would surpass the US, the current leader, by about 2022.
Batelle said that this year would see 10 countries spending about 80% of the total $1.6tn invested on R&D around the world; the combined investments by the US, China and Japan would account for more than half of the total.
Together, the US, China, Japan and Europe account for about 78% of 2014’s $1.6tn total.
In 2014, China will continue its two-decade trajectory in R&D investment, consistent with the current Five-Year Plan (FYP 2011 to 2015). According to Batelle, China’s research intensity will increase to 1.95% of GDP in 2014.
China’s FYP is aimed at achieving 2.2% of GDP by 2015 and the foundation says this rate of growth is expected to continue through the end of the decade as China strives to transition from a manufacturing economy to being “innovation-driven” by 2020.
At current rates of R&D investment and economic growth, China could surpass the U.S. in total R&D spending by about 2022.
Grimes and Sun say that a distinction should be
made between a relatively small number of highly successful, innovative Chinese
companies in high technology sectors, and many state enterprises (SOEs)
which are still undergoing transformation from the earlier command economy
(Boeing and Sandner, 2011).
The authors says that a distinction can be made between the political objective of the Chinese state to achieve technological autonomy and the pragmatic approach of many Chinese companies who, rather than cutting themselves off from global markets have considerable cooperation with companies in Japan, Korea and Taiwan. Some of China’s leading firms such as Huawei have called for a more open innovation policy which would allow them more easily to cooperate with foreign firms
The paper says that an analysis of the changing profile of China’s top exporting companies between 2001 and 2012, indicate a dominant, if decreasing role of foreign invested firms and the beginnings of an emergence of the private sector. It is clear, however, that despite their falling numbers and increased scaling, that SOEs continue to play a significant role more generally in China’s exports. It is clear that major challenges remain for China to transition from playing a relatively subordinate role within global value chains, and rather than focusing on developing a more innovative and globally competitive development model, there are some signs that China’s progress could be delayed by opting for a more inward model of technology autonomy within a relatively protected large domestic market.
Lessons from Japan and South Korea
McKinsey, the management consultants, asks: Why are General Motors and
Volkswagen more successful in China than Honda and Toyota? Why are LG and
Samsung bigger in India than Panasonic and Sony? Why is IBM larger in Japan than
Fujitsu is in the United States?
South Korea now dominates in mobile phones and television technology.
In common with Japan, deference to bosses is common in China, while innovation thrives in flat limited hierarchy organisations.
Warren Buffett, the renowned American investor, often says that nobody ever won by betting against the USA.
China's road to a world-class knowledge economy will be bumpy but it will get there.
Crucially, Chinese companies are developing overseas trading experience in developing country markets before taking on western multinationals in their own markets.
Chinese foreign direct investment (FDI) in Europe also reflects a desire to co-opt the local model - - for example usually Chinese investment involves acquiring companies, including German Mittelstand firms, rather than developing greenfield operations from scratch.
© Copyright 2011 by Finfacts.com