China’s Economic Success Is Due More to Quantity of Production than Innovation [Mises]

Mises Power & Market by Lipton Matthews / October 31, 2022 at 11:41PM

China’s investment in scientific research and technology intimidates U.S. officials who fear that the former’s emergence as an innovation powerhouse could eclipse America’s dominance as the leader in cutting edge innovations. According to the US National Science Board in a politically charged report, America is trailing China in critical components such as financing research and development, building novel technologies, and patents for innovative systems.

The findings indicate that China accounted for 29 percent of the global expansion in research and development between 2000 and 2019, relative to America’s 23 percent. Read in geopolitical terms the report paints an unflattering image of innovation in America; however, a broader dissection of the data reveals that China is still struggling to close the gap with the US. China is a major player in patent filings, yet Chinese patents have attained only one-third the quality of non-Chinese patents.

In a publication exploring China’s capacity for innovation, the Atlantic Council notes that China scores poorly on primary indicators of innovation performance. Compared to America, China files a paltry 9.7 percent of patents abroad, in stark contrast to the former’s 45.3 percent. 

Patents in America also have a higher likelihood of approval with America’s grant ratio being 59.4 percent, significantly higher than the 39 percent of patents approved in China. Though the most relevant point is China’s lower rate of commercialization. Research institutions in China are responsible for 7.8 percent of China’s granted patents, but deliver an industrialization rate of 18.3 percent and a licensing rate of two percent.

American institutions however are better at commercializing research observing that in 2018, American universities were responsible for four percent of granted patents, but licensed 40-50 percent for commercial use. Some research suggests the proliferation of patents in China does not reflect scientific innovation, because only 11-19 of granted patents are inventive.

Further, notwithstanding the hype about Chinese researchers few are considered innovators in their fields when compared to American professionals. Evidently, China’s strengths reflect quantity rather than quality.

Moreover, China depends heavily on foreign expertise to cultivate local sectors. For example, China has produced a few big names in the pharmaceutical sector, though America continues its lead. Chinese manufacturers have yet to release breakthrough innovations that rival American supremacy and predominantly invest in generic drugs. Based on research figures, China remains a laggard, with only 9 esteemed life science and medical research centers, well below the 52 in America.

Global analyses show that China has few innovative companies that can compete on an international level. Additionally, a large portion of small businesses fixate on creating generic products at the lower end of the value chain, instead of innovating. China’s success rate for converting technologies into industrial applications is 15 percent, but in advanced economies it is 30 percent.

Another understudied problem facing China is the misallocation of research funds that succeed in undercutting innovation policies. In a new paper Koenig and co-workers argue that excessively funding research and development expenditure is unnecessary for fostering innovation and reducing distortions in the economy would be a better strategy for boosting innovation. Limiting these distortions would enable China to transition from the paradoxical status of a high tech, low productivity country to an innovative country with high productivity

According to Alexander B Hammer and Shahid Yasuf in a 2020 document published by the U.S. International Trade Commission, spending on research in China is incommensurate with significant gains in productivity. The researchers’ comment on China’s inability to escape the low productivity trap:

On the one hand, its firms have fielded major advances in areas such as image recognition using machine learning, digital payment technologies and mobile financing, 5G telecommunications, and quantum communications. On the other hand, despite official goals and unprecedented amounts of R&D spending, China has yet to realize what its government assumed to be concomitant productivity gains…The level of China’s TFP has been unchanged since 1981 at about 40 percent of the U.S. level.

Indeed, China appears to be a serious competitor to America’s dominance in innovation. However, despite improvements, China is yet to achieve parity with the U.S. and is primarily playing the role of a developing country aspiring to surpass America.

This article was originally published on Read the original article. Republished with permission.