By Dan Blacharski
From the time of the European Renaissance to Silicon Valley’s tech bubble, the greatest eras of innovation often cluster around specific geographical regions. Those periods of greatness are fleeting, and Silicon Valley’s brief time of exclusivity is passed as China’s contributions to tech innovation are on the rise.
China’s economy continues to progress, now depending less on low-end, export-oriented manufacturing, and more on increased domestic consumption, high-tech manufacturing, and research and development. “Made in China” no longer means cheap trinkets and knock-off handbags. What’s more telling about China’s growth is something that Europe and the Americas are reluctant to accept: China’s innovation engine and status as a serious competitor is on the rise. According to a report from advisory firm Waterstone Management Group titled “The Real China Threat: Innovation,” author Tom Manning notes, “China is making a strategic pivot towards innovation, and it will be game-changing.”
A recent report from the National Science Board shows that Southeast, South, and East Asia are rapidly growing in the area of science and engineering, with the region accounting for 40 percent of global research and development. China takes the lead in innovation, research and development, and a well-educated workforce skilled in the science, technology, engineering, and mathematics (STEM) fields. The report shows that China ramped up its investment in research and development initiatives between 2003 and 2013 by 19.5 percent annually, an increase far greater than that of the United States.
China’s growth in high-tech manufacturing and knowledge-intensive resources is no less than phenomenal. China ranks second in high-tech manufacturing, which is only slightly below the U.S., according to the NSB report.
According to the Organization for Economic Cooperation and Development’s Programme for International Student Assessment results for 2012, Asian countries, including China, Singapore, Hong Kong, Taiwan, Japan, and Korea, have the highest scores in math, reading, and science, with China ranking first for all three categories. In mathematics, for example, seven of the top eight highest-ranking countries are Asian, with the exception of tiny Liechtenstein, which ranks sixth; all place higher than the United States, where a perception of superiority and exceptionalism in education does not mesh with reality.
“Fifteen years of tech investing, venture capital, and backing of young startups have now bred a culture of innovation in China,” said Manning. “It’s creating a lot of excitement about what can be, and China’s own talent base is gaining much more confidence than ever before.”
It’s no secret that China has a vested interest in promoting a well-educated populace, and China is the world’s biggest producer of college graduates with STEM degrees. That’s not just raw numbers, either. Forty-nine percent of all bachelor’s degrees awarded in China are for STEM, and in 2012, Chinese students earned 23 percent of the world’s STEM degrees, with the EU taking 12 percent, and the U.S. 9 percent.
In a working paper from the National Bureau of Economic Research, the common assumption that economic growth is a continuous and persistent process is called into question. It notes factors that limit potential growth and point toward a future in which no single country can claim to be the undisputed leader in innovation. Education plays a big role in China’s current move toward becoming an innovation leader, as well as in the decline of the West in this category. According to the NBER paper, the U.S. is seeing a steady decline in the percentage of its population that has completed higher education. This is due to the rapid increase in tuition relative to the prices of other goods. Furthermore, at the secondary school level, OECD student assessment results for 37 nations show the U.S. ranking 21st in reading, 31st in math, and 34th in science, which illustrates the country’s decline in education relative to Asian nations.
China’s strategic, long-term plan for innovation and growth differs from the short-term, quarter-by-quarter plan of the West. As a result, China’s government has been investing more in research and development, while the U.S. commitment to government-funded research and development has been wavering since the American Recovery and Reinvestment Act of 2008. Today, China is seeing a powerful combination of state and private capital being invested in industrial development and research. “Fifteen years ago, the venture capital community was quite new in China, with mostly Western firms investing from Hong Kong into Chinese companies with small amounts of money,” said Manning. This started changing in 2000 when the first initial public offering occurred on the Nasdaq for a Chinese company, and confidence started brimming. Today, the amount of venture capital in China is huge, and it’s no longer exclusively Western. The biggest trend in venture capital investing has been the rise of China-based firms in the last five years.
We have started to see significant expertise and development in certain subdomains, and this is a harbinger that the rest of the world needs to look at in order to see where China is going. “There are two innovation areas that will create a lot of lift for the entire set of inventions in China,” said Manning. “One is the ‘smart cities’ program, which for the most part, U.S. cities haven’t taken up. We’re behind in making our cities more efficient and automated, and China has been active in that area with 29 or 30 cities they have identified to designate as smart cities in the next five to eight years. That’s a rallying cry and a magnet for innovation.” The second area that will propel China’s status as a global innovator is its space initiative, which will do as much for China’s economy as NASA did for the U.S. economy in the 1960s and 1970s.
The U.S. and Europe are adopting an increasingly dangerous isolationist attitude in their reluctance to accept the emergence of China as a top-tier innovator. This ignorance ultimately works to stifle growth in the West. Recommended actions for Western companies include broadening their strategic view to include Chinese partners and modeling the competitive dynamic to include consideration of new competition from the East and of China as a new center of innovation. Western firms may also wish to reconsider joint ventures as opposed to wholly-owned ventures, taking on new Chinese partners for specific market segments. On a public policy note, the West may also want to reconsider both education and immigration policies. Budgets that encourage more research and development and STEM education would be advantageous to the West from a competitive viewpoint. In addition, current policies that discourage foreign STEM-educated students from remaining in the U.S. only serve to send the brightest innovators elsewhere—a new policy that makes it easier for them to remain and contribute to the economy would enhance the West’s competitive power relative to China.
If instead the U.S. and Europe continue to see China as a center for low-end export manufacturing and ignore China’s status as a leader in innovation, they will also be ignoring the possibilities of cross-cultural collaboration in business and technology.
Dan Blacharski is a thought leadership consultant with Ugly Dog Media.
[Photo courtesy of Jucember]