Blog China: Innovation, Driven by the Government

China: Innovation, Driven by the Government
With its regulations and subsidies, Beijing is attempting to make the country more innovative. But the importance of the internet is increasing.

Over the past 15 years, China has made significant investments in research and development (R&D) in an effort to close the gap between the People’s Republic and other countries.

According to official data, the share of Chinese GDP attributable to R&D expenditures more than doubled between 2000 and 2015, climbing to around 2 percent in 2015, or 228 billion US dollars (or 373 billion US dollars, adjusted for purchasing power parity). While this figure is impressive, it is still 25 percent less than the United States. Furthermore, the effectiveness of these considerable R&D investments has been quite mixed so far.

On the one hand, there have been some major successes in the telecom and internet sectors, where China has caught up to the rest of the world in terms of R&D capacity, creating companies that are extremely profitable and competitive both domestically and internationally. The market leaders in these two sectors not only invest at least 10 percent of their revenues in R&D, they are also among the 25 companies with the highest spending overall in this sector in China. On the other hand, there are still many companies in knowledge-intensive sectors that do not invest enough in R&D, and they continue to face overcapacity and intense price competition.

The Chinese government is serious about promoting innovation as a major driver of the economy. Education reform, such as the expansion of tertiary education over the past two decades, has helped to boost China’s pool of human capital. According to the government’s plan, R&D expenditures are to be increased to 2.5 percent of GDP by 2020. Credit Suisse estimates that this would represent an increase of 73 percent compared to 2015, meaning the US will likely be surpassed (adjusted for purchasing power). 

Similar to the Olympics

However, whether the country’s current regulatory policy will actually promote innovation is an open question. The way the Chinese government is promoting scientific progress strongly resembles its almost superhuman efforts to win gold medals at the Olympic Games: massive government-controlled programs supported by enormous national resources, but with relatively little leeway for market and social forces to unfold freely.

However, the internet is increasingly contributing to the strategic importance of the private sector, and these new entrepreneurs are also being recognized to a greater extent by the government as important drivers of innovation and technological developments.

In what areas could China become a global market leader?

  • Biotech: The market for biologics and biosimilars is still in its infancy in China, but it has grown quickly in recent years thanks to a large domestic market, a favorable regulatory environment and strong government support.
  • Big data and artificial intelligence: The Big Data sector in China grew by 65 percent in one year, reaching a volume of 2.32 billion US dollars in 2015. This represents 10.7 percentof the global Big Data market.
  • Internet of Things (IoT): China is the world’s largest hardware manufacturer and it has a broad internet user base. IoT is the new mega trend in China that should drive demand for technology across hardware, software, services and infrastructure sectors.
  • New Energy Vehicles (NEV): China is now the largest NEV market in the world. In 2015, sales of alternative-powered vehicles in China rose by 343percent over the previous year to 331,000 vehicles. As a result, the penetration rate of NEV rose from 0.3 percent in 2014 to 1.3 percent, outpacing the NEV penetration rate in the US of 0.6 percent.
  • Nuclear power: Based on installed nuclear capacity, China is not the world’s largest nuclear power producer, but its planned nuclear projects will make it the world leader in this area. The country has pushed forward with its ambitious nuclear energy generation plan, which calls for a doubling of capacity, from 28 GW in 2014 to 58 GW by 2020.

Source: Credit Suisse Bulletin “The New Asia” published in March 2017