China creeping up from behind in the technological race

By Dr Adrian B L Soh

Xi_Jinping_March_2017
Xi Jinping / Wikipedia

Since the Global Financial Crisis  (GFC) of 2007-2009, governments all over the world in particular Western governments have been grappling with multiple threats and challenges. They face pressure not to raise taxes, because of the rise of China and other developing nations and with lower wages and tax rates. However, by keeping taxes low, they have been unable to fund investments that would allow them to solve other problems threatening their competitiveness.  In particular they have reduced spending on Research and Development.

Multiple OECD reports have stated that R and D will help economies create new industries, lower costs and allow us to absorb foreign technologies.  First, R and D needs consistent investment in areas such as research buildings, training and creating a “pipeline” of human resources.

Secondly, however, funding needs to be consistent over a long period of time. R and D has to undergo a period of basic research before it can be commercialised. Inconsistent funding for R and D causes problems from lack of planning and loss of human resources as researchers move to other jobs. These lost human resources would not be easily retrieved from other sectors of the economy once they lose their jobs.

Even worse, research depends on the findings of other pieces of research. Funding cuts in one area block research in other areas. Yet this exactly what has happened since the GFC with the end of the credit and commodity booms of the late 1990s and for most of the 2000s.

The downturn in tax revenues, persistent budget deficits, increasing public debt have forced governments to cut back on spending. When governments cut spending when the economy is already in a downturn, economists call this a “pro-cyclical” cut. Cuts at that time make economic problems worse. Instead, governments should be increasing their R and D expenditure in preparation for an economic recovery.

R and D is only a small fraction of GDP in an economy. This may make some people think the issue is not important. However, the absolute amount of funding devoted to R and D and high technology exports that matters.

As the following table shows, China rose from 4th place in the in 2007, to second place in 2013.

R and D spending, $bn 2007 2013
US 359.4 396.7
China 116 290.1
Japan 139.9 141.4
EU 251.3 282

However, it must be remembered that public and private investment in R and D has only been happening since China started to look towards more valued added production. This happened as labour costs in China rose and as it faced stiffer competition in low-skilled-low-wage industries such as textiles in the early 2000s.  China has benefited from trade surpluses and foreign investment inflows for many years since the opening of its economy in 1978. China is now a foreign investor in its own right. While foreign direct investment into China stayed stable from 2011 to 2016, outward investment rose 145 percent.

Chinese firms have started to become big players in a whole range of technology-based industries such as China Mobile in telecommunications, Tencent in gaming, Alibaba in internet retailers and Baidu in the search engines sector. The other prime targets of Chinese firms in their march to become value added producers is the high-end chemical, automotive, aircraft and electronics industries. Chinese firms like Huawei, OPPO, Vivo and Xiaomi are also said to be expanding rapidly into international markets.

What does this all mean for us? That developed countries are still in the lead in the race for the production of value added goods and we are still relatively technologically advanced.  However, in the face of increasing global competition, especially from a technologically surging China, this is not the time to be neglecting our innovators through lack of public funding for R and D.

China has a large population and has more human resources devoted to R and D than other countries. It is catching up in the numbers of published R and D papers:

2013 millions of workers

in R and D

% change in papers

2008 to 2014

US 1.27 11
China 1.48 151
EU 1.73 14
Japan 0.67 -4

China is still behind on these measures. But they are catching up.

Given the size of the Chinese economy and the human resources being devoted to R and D, all other nations should be providing even greater resources to our innovators, otherwise the west risks being left behind by China.  If we neglect them, it will only worsen the efforts to create a faster growing economy that has been sluggish since the Global Financial Crisis.

~ ~ Adrian B L Soh completed a PhD in economics from La Trobe University in 2013. His thesis topic was the economic policies of the Chavez government in Venezuela

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