Rival reports paint China as friend – or foe – of innovation

Canada faces dilemma as China’s rise brings technological opportunities and dangers

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Global advancements in technology and other fields continue to shift east to Asia, specifically to China, which has “posted an environment ideal for innovation,” a new report says.

But while the same report notes R&D spending rankings worldwide now place three Asian countries among the top five, another suggests the rise in a “mercantilist trade” environment fostered by China is harming global innovation by “shrinking markets and cutting profits innovators need to invest” in research.

The opposing opinions come from two U.S.-based research groups: Lux Research in Boston and the Information Technology and Innovation Foundation (ITIF) in Washington, D.C. In its State of Innovation in Asia report, Lux lead analyst Yuan-Sheng Yu said China (second), Japan (third) and South Korea (fifth) have joined the United States (first) and Germany (fourth) in the global top five for R&D spending. Combined, China, Japan and South Korea invested US$613 billion into such efforts in 2018.

Yu noted China’s strong venture capital funding, which overtook U.S. levels in 2018 at US$85 billion and an average deal size of US$45 million. That same year, the country also accounted for about half (48%) of the region’s academic publications and received 1.6 million patent applications (87% of the Asian market). The numbers indicate that more eyes in the innovation sector are turning to Asia and China.

“China has ramped up its innovation efforts as a new era of leadership under [Chinese president] Xi Jinping pegged innovation as the primary force behind the country’s development and modernization,” Yu said in the report, highlighting Beijing’s “Made in China 2025” initiative to lead advancements in sectors like information technology, robotics, aerospace, transportation, new energy, agriculture and pharmaceuticals.

“While the developments will come in phases well beyond the five-year time frame, China has fostered an environment ideal for innovation,” Yu said.

Yu also noted that South Korea shares much of China’s diversity and dynamism in the pursuit of technological advancement, meaning the two markets may be able, by collaborating more closely, to significantly strengthen their global positions in an era where innovative prowess is synonymous with economic prestige.

China is also extending its tech influence to Southeast Asia and India via innovation centres and venture capital funding.

The picture from ITIF president Robert Atkinson, however, isn’t as rosy. In a report from the think tank called Innovation Drag: China’s Economic Impact on Developed Nations, Atkinson said that the conventional trade theory – that global economic integration benefits all parties by improving systematic efficiency – doesn’t work when considering China’s technological rise, because it is largely based on a mercantilist trade ideology.

The report suggests Beijing’s approach is heavy-handed, “propping up weak competitors, closing markets, creating overcapacity and limiting revenue,” – thereby hurting global innovation, especially in developed economies.

“To date, most of this discussion has been focused on the impact of the rise of China on jobs in western economies,” Atkinson said in the report. “Much less attention has been given to the impacts on innovation in those economies, and even less on the impacts on global innovation writ large.”

Key issues highlighted by ITIF include the large subsidies Beijing provides to domestic companies and the manipulation of the Chinese currency (renminbi) to gain price advantages globally, as well as the practice of taking foreign intellectual properties (IPs) without paying. The ITIF report says these “innovation mercantilist policies” have damaged non-Chinese companies’ ability to fund R&D because of “intense competitive pressures” from an unfairly subsidized rival.

Atkinson singled out IP acquisition, pointing to the controversial forced technology transfer, a common practice – especially in China – for foreign companies wanting to do business in certain markets. It forces the foreign company, as a condition of doing business in China, to transfer technology to a Chinese company in a joint venture.

“Firms in innovation-based industries depend on intangible capital, much of it IP,” Atkinson’s report said. “Strong IP rights spur innovative activity by increasing the appropriability of the returns to innovation, thereby enabling innovators to capture more of the benefits of their own innovative activity…. However, if competitors are able to enter and remain in the market because they obtain an innovator’s IP at less than the fair market price, they are able to siphon off sales that would otherwise go to innovators. Why would a firm invest in IP when other firms could copy it to compete against them?”

The issue has not escaped attention in Canada, as Chinese telecom giant Huawei Technologies Co. Ltd. tries to make its case for being involved in the development of Canada’s 5G network.

Meanwhile, national security analysts in Canada and elsewhere in the West are increasingly worried that such a move may open up much of a country’s telecom networks (and other sensitive communications infrastructure) to undue influence by Beijing.

In its 11 Things to Watch in 2020 report, Vancouver-based Asia Pacific Foundation of Canada named regional digital connectivity as one of the main items and highlighted the Huawei-5G controversy and the Washington-Beijing rivalry over tech innovations and IPs.

“The U.S. … has spent the past year pressuring countries to follow its lead and block Huawei,” the report said, adding that countries like Canada are caught in the middle and will likely have to make a difficult choice. “In response, Huawei has upped its marketing and PR and is developing its own native components and technologies, and the Chinese government has redoubled its domestic program to build advanced semiconductors. 2020 will be a pivotal year for 5G rollout as many countries, including Canada, will need to make important 5G--related decisions as other countries like the U.S., China, and those in Southeast Asia expand their 5G networks and diversify their capable devices.”

The Lux report can be seen at luxresearchinc.com/blog/china-and-south-korea-emerge-as-global-innovation-powerhouses. The ITIF report can be read at itif.org/publications/2020/01/06/innovation-drag-chinas-economic-impact-developed-nations.