The “Asianization” of Innovation

For a century, the major economies of Western Europe, the United States and Japan have dominated innovation. Today, they have been joined by large emerging economies, spearheaded by China.

We can measure innovation by output indicators, such as patents, that tell us about past success, and input indicators, such as research and development (R&D), which reflect the willingness to invest into the future. In both cases, global innovation is under rapid transformation.

Structural shifts in Global Innovation

Having bypassed the Japanese patent office (JPO) in 2010, China’s patent office (SIPO) overtook its US counterpart (USPTO) to become the largest in the world in 2012, as measured by the number of patent applications received. While the European Patent Office (EPO) and the offices of Germany and the UK have seen growth, those of France and Italy have recently received fewer applications.

Some argue that higher patent quality and commercial value are better illustrated by triadic patents, in which inventors simultaneously seek patent protection in three of the world’s largest markets (US, EU, Japan). In these fields, the shares of the US, the EU, and Japan stayed equal (about 30% each) from 2000 to 2010. Nevertheless, only diamonds are forever. Even triadic patents reflect past monopolies, which will fade out over time.

As evidenced by the 2014 Global R&D Funding Forecast, R&D investment is rebounding in the US and growth is likely to continue through 2020. Meanwhile, China’s innovation capabilities are closing up with advanced economies, such as the Netherlands and Belgium, and by mid-decade, the Eurozone’s core economies, including France.

In turn, shifts in student performance suggest that these changes are long-term by nature. According to the latest OECD PISA (Program for International Student Assessment) results, students in the US and Europe are falling behind their counterparts in China and emerging Asia. Internationally, Shanghai dominates math, sciences and reading. It is followed by Singapore, Hong Kong, Taiwan, Japan and South Korea. Of the advanced countries, only Finland, Japan, Canada and Ireland remain in the top-10 lists.

The dramatic ascent of the emerging nations in education and skills only reflects a broader structural trend in global innovation.

Eclipse of “Triad Power”

Following the devastation of World War II and the subsequent reconstruction, the major economies in Western Europe enjoyed Les Trente Glorieuses; three decades of rapid economic growth, while Japan followed in the footprints.

In the process, the US superiority in innovation began to diminish relative to competition from Europe and Japan, as reflected by the subsequent “trade wars.” The innovative capacities of the OECD member countries converged substantially.

Today the old era of US, Western European and Japanese dominance – or ‘Triad power’ as Kenichi Ohmae once called it – is fading away. Like Europe’s core economies in the postwar era, China has been engaged in catch-up growth hoping to move higher in the value-added chain, especially after 2001, when it became a member of the World Trade Organization (WTO).

Currently, US companies still dominate 35% of R&D investment by the top 2000 companies worldwide, according to the 2013 EU Industrial R&D Investment Scoreboard. The US is followed by Europe (33.6%), most importantly Germany (10%), France (5%), UK (4%) and Switzerland (4%).

China’s R&D currently ranks only 10th relative to the US or Europe and other large emerging economies in the Scorecard. However, these Chinese firms already account for almost half of all emerging-country multinationals in the top-2000.

Europe at crossroads

Only a decade ago – after years of Euro euphoria – there was still great anticipation in Brussels that Europe was about to enter a new era of growth and prosperity, fueled by innovation.

The buzzword was the “Lisbon Strategy,” a 10-year development plan devised in 2000 for the European Union. The idea was to make the EU “the most competitive and dynamic knowledge-based economy in the world.”

Only a few years later, it became painfully clear that few objectives would be achieved. Nonetheless, in March 2010 the European Commission proposed a new Europe 2020 strategy. Unsurprisingly, it was ignored amidst the turmoil of the European debt crisis.

Even if Europe’s current challenges could be resolved without a “lost decade,” but its level of innovation continues to deteriorate, the region would continue to stagnate or fall behind its counterparts. Ultimately, this would be reflected in European living standards and social support systems – particularly as aging demographics and barriers against skilled immigrants will penalize the region’s productivity and growth.

What next?

Today, the U.S., China, Japan and Europe account for 80% of the more than $1.6 trillion invested in R&D across the world. The ongoing shift of China’s growth model from investments and exports to consumption is likely to increase its R&D investments, in both relative and absolute terms.

Due to growth differentials, China is positioned to bypass Europe before the end of the 2010s, whereas the U.S. could fall behind China by the early 2020s.

As Premier Li Keqiang has argued, China’s R&D as a percentage of GDP should increase to 2% of GDP in 2014 and to 2.2% by 2015. In the past few years, this R&D intensity has eroded in many European countries. In the UK, it is now barely 1.7%, while the average of EU-28 countries is only 2.1%.

Due to its massive population scale, China’s catch-up with the U.S. or Europe in innovation intensity (R&D expenditures divided by population) will take a lot longer.

In view of these structural trends, innovation in the advanced economies should not be seen as a win-lose game against emerging economies, but as a win-win race with emerging economies.

It requires a new mindset in advanced economies; one that is internally calibrated to competitiveness and pro-growth policies; and that is externally attuned to partnerships in emerging economies to participate in their catch-up growth.

The article was first published in The European Business Review Jul/Aug 2014 edition. http://www.europeanbusinessreview.com/?p=4945

One Response to "The “Asianization” of Innovation"

  1. windriven   August 6, 2014 at 9:44 am

    An excellent and informative piece! But I think you missed an important component of China's R&D, that being its willingness to employ state actors to steal the intellectual property of western companies and transfer it to Chinese businesses, many of which are instruments of the state and many more which are tightly aligned with the state.

    I also wouldn't get too fixated on innovation intensity in a country the size of China. Absolute R&D spending is the more appropriate measure or perhaps R&D spending divided by the number of scientists and engineers. A Duke University paper noted, "U.S. graduat[ed] 140,000 engineers, India produc[ed] 120,000 and China graduat[ed] 517,225 in 2004." I can tell you from personal experience that some of the engineers graduating from, say, Harbin are every bit as good as engineers from US programs.

    China is destined to become a significant economic competitor to the US and EU and I would think this will happen sooner rather than later.