For a long time, China was only called the workbench of the West. In the meantime, the country has also become a superpower from an economic perspective. Where sewing took place back then, innovation is being created today. Once upon a time, the USA and Europe were the leaders in this field, but today, as Europeans, we are asking ourselves the following question: Innovation in China vs. EU, are we being left behind?
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What we need to know.
Let’s take a look at the beginning. It is no longer a secret that China’s position in the world has changed significantly in recent decades. The country is growing not only in terms of its population, but especially in terms of its economic performance. This has various positive effects on the country, its inhabitants and its political position. The immense performance of the Chinese economy has created a solid middle class, and participation in global world trade gives China enormous political influence. But where did this boom come from? While China has long been used as a country for cheap production by the West, knowledge and skills have emerged in China that the country now uses for its own interests. And this not only creates value, but also innovation.
Both Europe and the USA have long been leaders in terms of education, knowledge and resulting technological competencies and standards. What was once reserved for and protected by rich countries is now accessible to everyone through the Internet. Technological change has led to the information revolution, which has drastically reshaped all aspects of human life. Information has become available at a level never seen before. More than four billion people (half of the global population) have access to the Internet, and thus access to free education, knowledge, and often work opportunities in a global value chain. This has accelerated the global economy in turn and allowed more efficient distribution of work, lifting hundreds of millions of people out of poverty, particularly across Africa and Asia. This has also led to a redistribution of global power dynamics: the categories of developed and developing countries begin to make less economic sense. Today, many erstwhile developing countries are beginning to lead the global economy. Even Silicon Valley, the cradle of the information revolution, is being overtaken by the innovation ecosystem in China. Because of this, our current ways of organizing and producing value are being deeply challenged, regardless of which industry you consider.
So, what does this change mean for us? When comparing innovation in China, there is some data that is worth knowing. This data was collected and published by the OECD. They refer to China as an R&I powerhouse. R&I stands for Research & Innovation and generates an index that can be used to make international comparisons. Of particular interest in this comparison are the investments of the respective countries in research and innovation. The percentage of GDP invested in R&I is used as the base value. Based on a survey by the OECD, this value has exceeded the investments of the EU since 2015 (see figure below). Although this means that China is below its own expectations, the rising trend in investment is continuing.
The investments are having an effect on innovation in China. China’s scientific and technological output has increased significantly over the past decades. This is particularly evident in publications and patents. Data from Elsevier show the share of the US, EU and China in terms of the most cited publications. While the EU remains at a stable level with a slight downward trend, China’s shares are increasing significantly (see figure below). The competencies developed in China are expressed above all in China’s tech dominance, with 5G technology serving as an example of innovation in China.
"Made in China": The China Innovation Plan
What seems bad from a Western perspective is China’s great advantage for innovation: The state sets the direction of the economy. For years, the phrase “Made in China” was not necessarily a seal of approval. Since 2015, however, it has been the title of the Chinese government‘s 10-year plan to increase and improve Innovation in China. With this China Innovation Policy, the government sets the goal of first catching up with the West in certain sectors and then overtaking it. Of particular interest for innovation in China are segments such as new energy or electric cars and high-tech IT, telecommunications, robotics and AI. Some of these basic ideas, originally invented in the Western world, are being turned into groundbreaking innovations (also read Innovation vs. Invention) in China.
This does not just mean that China is claiming an increasingly large share of global markets. It also means that in certain sectors China is becoming a serious competitor for developed industrialized countries such as Germany or the USA. It can be assumed that this will have an immense impact on future innovations in China. The current China Innovation Policy therefore poses a major challenge for the West. And it has one major disadvantage: China is able to implement a long-term strategy without being influenced by a changing domestic political situation as fast and easy as in western countries. Thus, the state can set a direction that society and the economy must follow. China’s economic system is no longer what it used to be. But despite opening up to world trade, the economy is directed by the state. In this way, innovations in China do not mean a head start for an individual company, but for the country as a whole.
This forms the major difference between western markets and China’s innovation policy. While in western markets innovative ideas and products are used to gain advantage on the respective market, innovation in China is used to gain advantage in a worldwide competition.
Innovation in China: Looking into an uncertain future
What does this mean for the future in Europe? We definitely need to rethink the way we see and drive Innovation. And for free markets this will be a rough challenge. Different than in Western Markets, Chinese companies are not even dependent on financing innovation entirely themselves. As part of the “Made in China” plan, the government supports companies in the targeted sectors. This gives Chinese companies a distinct advantage over Western companies and lowers barriers to entry. It remains exciting how industrial powers like the US and the EU will react to this, because one thing is clear: global trade without China is no longer conceivable. And the money that the West once saved through cheap production must now be paid in order to remain competitive.
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