China the Innovator?
With all the press China gets about IP theft, we find it a bit ironic that the nation is about to become the world’s largest supporter of R&D. Our source for this fact comes from a recent OECD (Organization for Economic Co-Operation and Development) study and a related Business Week article, both of which tackle trends in R&D investment in the region. According to both sources, China is destined to spend more than anyone else on R&D by year end (their total annual R&D spending at the end of 2006 will exceed $136 billion).
The willingness of a country to invest in innovation where basic IP goes unprotected surprises’ us a bit. And that’s because building a common law IP protection system―or a variant thereof does not exactly happen overnight. Current Western IP law is based on case law (i.e., regional and country case precedent) far more than government edicts. For it is the interpretation of the law―not the writing of the original law itself―which ultimately creates a legal framework and environment, rather than the parchment the laws are printed on in the first place.
But the lack of IP protection in China certainly is not stopping the number of young―and in some cases older―minds getting in the R&D game. Perhaps the most surprising fact that jumped out at us from the recent study is how between 1995 and 2004, the number of researchers in China increased by 77%. According to the OECD, “China now ranks second worldwide with 926,000 researchers, just behind the United States [which has more than 1.3 million researchers]”. Given the failure of the Chinese higher education system to keep up with the demands of the economy—researchers, after all, are not trained overnight―we find this growth almost exceptional. Certainly, as China continues to invest more in undergraduate and graduate training in the sciences and engineering, we can expect these numbers to climb further.
In total, two-thirds of Chinese research spending this year is expected to come from industry and one-third from the government, the report said. However, that distinction is blurred in a system where big research spenders are state-owned companies carrying out official mandates. The primary areas that Chinese companies and the government are spending on include “telecommunications” and “biotech” primarily “to reduce [their] reliance on foreign know-how, which Communist leaders see as a strategic weakness.” In total, the Communist party is supporting R&D investment in 11 areas that also includes lasers and nuclear power. Taking a card from the West to spur private sector investment, the party has “promised to support private research with tax breaks and improved patent and copyright protection,” according to the research.
The fact that central planning is guiding investment should come as no surprise. There is no doubt that the lines between government and industry aren’t just thin in China—they’re completely blurred. Earlier this year, we had the opportunity to meet with the owner of a metals plant in Shandong Province. He drove us around in his nice, though dated Volkswagon Passat. The local party boss, however, showed up to one of our meetings in a brand new version of the same car that looked as it was right off the assembly line. After that, we wondered who really called the shots—or at the very least, skimmed off of the top—of this “private” sector operation.
Our experience is one that is no doubt duplicated thousands of times per day throughout China. But regardless of who really is profiting from individual operations, it’s clear that China is no longer satisfied remaining just a source of low cost manufacturing for the West. Given the massive investment in R&D, it is only a matter of time before the region begins to compete on product innovation as well.