china as the world's technology leader by naubahar sharif

HKUST Ins*tute for Emerging Market Studies (IEMS)

China as the World’s Technology Leader

Naubahar Sharif Associate Professor, Division of Social Science, HKUST,

and Faculty Associate

China’s Economic Ascent

•  Rapid economic growth from 1979 onwards •  Obvious compe**ve advantages (i.e. popula*on)

•  Has now developed into a leading economic (poli*cal?, military?) superpower

•  Story of China’s economic ascent has been widely told, heard and understood –  . . . But how about the story of China as a technological superpower?

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How to Measure Leadership?

•  Four factors comprise ‘technology leadership’ – Research and development (R&D) intensity

– R&D personnel – Number of scien*fic publica*ons – Number of patent applica*ons

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A Snapshot Look at the Strength of China’s Innova*on System (1/3)

•  Rate of spending on R&D outpaces overall economic growth –  In 2012, China spent US$163 billion, or 1.98% of its growing GDP on R&D •  Placing it 2nd in the world, only to the United States

•  With 3.2 million R&D personnel in 2012, China now turns out the largest number of undergraduate, postgraduate, and doctoral students in science and engineering in the world

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•  Over the period 2001-‐2011, China ranked 2nd in the world in research output as measured by the number of papers published by Chinese scien*sts in research journals

•  Ranked 7th—but rising—in terms of cita*ons for papers authored by Chinese scien*sts

•  In 2012, China trailed only the United States, Japan and Germany in patent filings under the Patent Coopera*on Treaty (PCT) administered by the World Intellectual Property Office (WIPO)

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–  In 2012, two large telecommunica*ons equipment manufacturers, ZTE and Huawei ranked 1st and 3rd in worldwide ranking of top PCT applicants

– At the U.S. Patent and Trademark Office (USPTO), the number of patent applica*ons origina*ng in China grew 18% from 2009 to 2010 alone •  A rate matched by no other country

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China’s Technological Ascent Widely Ques*oned (1/3)

•  Despite these indicators, there exists considerable skep*cism over China’s capacity to alain global technological leadership – George Gilboy, a research affiliate at MIT • Wrote in Foreign Affairs, in 2004, that ‘Chinese firms . . . forgo investment in long-‐term technology development. . . [and] rely heavily on imported foreign technology and components’

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– David Shambaugh of George Washington University •  In 2012 iden*fied ten weaknesses in corporate and human resources management to explain why Chinese companies are s*ll taking baby steps towards parity in global business

– Dan Breznitz and Michael Murphee, professors at the Georgia Ins*tute of Technology •  Argued in 2011 that China has selled on merely keeping pace with technological advances elsewhere, pursuing innova*on only in later ! in less consequen*al stages of the produc*on process

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– Thomas Friedman (journalist, columnist, author) •  Argued, in Sep 2012, that driving economic growth through entrepreneurship and innova*on depends on a culture of trust ! observing that ‘China has a huge trust deficit’, a lingering remnant of Maoism

•  Aforemen*oned skep*cism overlooks several important factors that have posi*oned China to compete for global technological leadership

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China’s Sources of Technological Advantage

•  Three dis*nct sources of compe**ve advantage that China will leverage in developing its capacity for technological innova*on 1. Rapidly growing, large domes*c market 2. Autocra*c system of governance 3. Globaliza*on

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A Brief Look at Tech Leadership Throughout History (1/6)

•  Considering the period from the Bri*sh industrial revolu*on onwards . . .

•  . . . Technology has been leveraged to alain compe**veness, as well as economic and military leadership

•  Over the 70-‐year period of the Bri*sh industrial revolu*on, there were advances made in the iron, colon and steel industries –  These advances acted as catalysts for further technological change in associated industries

10


–  Technological changes led to social, economic, poli*cal and social changes (and vice versa)

•  By the end of the industrial revolu*on, Britain had developed a considerable technological lead over na*ons – Accomplishments demonstrated at the First World’s Fair in London (Crystal Palace) in 1851

•  Aqer Britain, Germany began to industrialize in Europe, and then also France –  Technology transfer played an important role

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•  From the turn of the 19th century the torch of global technological leadership shiqed from Europe to USA

•  America is the global technological leader today – ! But being threatened by China!

•  By the First World War America firms—especially in chemical and electronic industries—had established first-‐class industrial R&D labs –  These labs were insulated from more immediate corporate pressures to solve shop-‐floor problems •  Allowed them to dedicate more *me to inven*on

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•  Post World War II American dominance was due to advanced technology –  Rise of large US corpora*ons noteworthy as they pioneered mass produc*on techniques, the assembly line, standardized product and long produc*on run •  From mid-‐1900s onwards, large US corpora*ons had developed a clear technological edge in global produc*on and trade

•  US viewed as ‘leader’ and other countries as ‘followers’ in the “catching-‐up hypothesis”

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•  American technological leadership has not remained uniformly strong throughout the 20th century

•  Was threatened in the 1980s by Japan •  Japan’s focus on innova*on and technological advance propelled Japan into the leadership posi*on within the Asian region

•  Ini*al explana*ons to describe Japan’s ascent focused simplis*cally on copying, imita*ng, and impor*ng foreign technology – With passage of *me this explana*on was no longer adequate

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– Gradually became clear that the correct explanatory factors were: higher technological sophis*ca*on of new products and processes, shorter lead *mes, rapid diffusion of new technologies, and integra*on of R&D, produc*on, and technology imports at firm level

•  Aqer Japan, smaller countries have focused their alempts on taking a ‘slice’ of the technological leadership pie (i.e. Israel, Sweden, Denmark, Finland, Korea, Taiwan, Singapore)

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China’s Three Compe**ve Advantages

•  In order to alain technological leadership, China has three dis*nct sources of compe**ve advantage (each discussed individually): – Market size – Governmental power

– Globaliza*on

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Growing Large Domes*c Market (1/6)

•  Market size is an important determinant of innova*on ac*vi*es – Greater the demand, greater the revenue – More efficient the produc*on process, greater the aggregate cost savings

•  Implies a growing market with growing demand will lead to increasing returns from investment innova*on –  Companies incen*vized to introduce new products to reap increasing returns

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•  Following World War II, US companies also benefited from selling to the world’s largest domes*c market (the US) –  These US firms led the world in developing and implemen*ng leading-‐edge technologies, and claimed largest worldwide share in many export goods ! These developments reflected longstanding American dominance in mass produc*on industries – a dominance that resulted from ready access to natural resources and the world’s largest domes*c market

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– Resource and capital intensive American manufacturing firms operated on a much larger scale than their counterparts elsewhere ! Due to economies of scale American firms enjoyed, innova*ons from Europe were developed and brought to market in the US

-‐  Similar dynamics will play out in the massive Chinese market ! China has strengths in mass produc*on (‘workshop of the world’) able to adapt Western techniques to Chinese condi*ons

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•  China’s emergence as a rapidly growing major market offers it a unique advantage for technological advancement – The likes of which no na*on other than the US has hitherto enjoyed

•  Local Chinese firms are best situated to sa*sfy the singular tastes of the Chinese market –  In terms of Chinese consumers expecta*ons regarding price, quality, and product features

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•  Integra*on of mass produc*on strength with the world’s second largest economy has led forecasters at Goldman Sachs, Standard Chartered Bank, the Economist to predict that the Chinese economy will be twice as large as the US economy by 2030 –  Jus*n Yifu Lin (former chief economist of the World Bank) predicted that by 2030, 100-‐150 of the largest Fortune 500 companies in the world will be Chinese firms

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•  If these forecasts prove true, capacity of Chinese firms to con*nuously leverage advantage of their large home market to enhance their technological compe**veness will be a major success factor

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– Governmental power

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Autocra*c System of Governance (1/9)

•  On the way to becoming global technological leaders, Chinese companies have benefiled significantly from the Chinese government’s industrial policy

•  Chinese government’s industrial policy is unmatched in scale and strength by Western standards

•  In fact, China has adopted the US model to boost their own state-‐backed R&D investments

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•  Success of high-‐tech industries in the US in the postwar era reflected massive private and public investments in R&D and scien*fic and technical educa*on (made aqer World War II)

•  Given the Chinese autocra*c system of governance, China is able to steer Chinese (state-‐owned) and private companies to increase their R&D investments –  This has been reflected in the amount of money spent on R&D in China

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•  Use of industrial policy to help domes*c companies upgrade technological capability have their roots in Hamiltonian economic philosophy ! Holds that a big country needs big organiza*ons

to succeed and that the federal government should partner with private enterprise to finance scien*fic research and provide resources and infrastructure that businesses lack

•  Under this Hamiltonian approach, American government sponsored projects such as the Erie Canal, transcon*nental railroad, land-‐grant universi*es, network of airports

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– Helped create within the US a huge interconnected marketplace •  Companies such as Standard Oil, General Motors, US Steel, General Electric and Sears Roebuck prospered and grew

– US government and military led the way in financing innova*on in its early stages

– Government-‐financed research and procurement fueled industries that produced hybrid seed, radar, synthe*c rubber, the microchip, GPS, Internet, etc.

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– Helped create within the US a huge interconnected marketplace •  Companies such as Standard Oil, General Motors, US Steel, General Electric and Sears Roebuck prospered and grew

– US government and military led the way in financing innova*on in its early stages

– Government-‐financed research and procurement fueled industries that produced hybrid seed, radar, synthe*c rubber, the microchip, GPS, Internet, etc.

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•  Most of the centralized power that enabled China to run a planned economy remains in place – Government is able to play a significant role in shaping increasingly market-‐oriented ac*vi*es

•  Chinese government has more policy instruments at its disposal than do its Western counterparts –  Enables the government to facilitate technological learning on part of indigenous firms

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•  With beneficial policies, Chinese government has bolstered the wind turbine industry, and ‘strategic emerging technologies’ which include: environmental technology; telecommunica*ons; biotechnology; advanced manufacturing; renewable energy; advanced material and green vehicles –  Beneficial policies include large-‐scale government grants, tax concessions, easy access to bank loans, policies regarding intellectual property, standardiza*on, etc.

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•  China is the 2nd largest performer of R&D globally, accoun*ng for 12% of global total – US is the largest performer, with 31%

•  The pace of real growth in China’s overall R&D expenditure over the period 1999-‐2009 has been excep*onally high, at 20% annually

•  In March 2006, China launched its ‘Na*onal Mid-‐ and Long-‐Term Science and Technology Development Plan for 2006-‐2020’

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Mid to Long-‐Term S & T Development Plan, 2006-‐2020

•  A plan that demonstrates remarkable foresight for a developing country

•  In the Plan, the R&D expenditure to GDP ra*o is to be raised to 2.5% by 2020 –  In 2012, it was 1.98%

•  The Plan proposes ‘indigenous innova*on’ –  Represents the Chinese leadership’s ambi*on to sustain economic growth through indigenous innova*on and increased government-‐led R&D investments

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•  There is of course concern in the US and elsewhere that Beijing’s visible hand is giving China an unfair advantage because China is not playing fairly, ‘by the rules of interna*onal trade’ – This too is a symptom of the CCP’s style of governance (where a heavy hand combined with secrecy prevails)

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– Globaliza9on

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Intensified Forces of Globaliza*on (1/9)

•  In a globalized era, Chinese companies need not develop every cuzng-‐edge technology on their own

•  Rather, they can undertake mergers and acquisi*ons as a deliberate strategy for acquiring advanced technologies owned by foreign firms

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•  As early as the Tenth Five-‐Year Plan (2001-‐2005), Chinese government unveiled its ‘go global’ strategy to encourage Chinese companies to invest abroad

•  China’s outward foreign direct investment (FDI) accelerated aqer 2009 –  In 2010, China’s outward FDI amounted to US$68.6 billion, ranking it 5th in the world

•  Goal of many outward FDI projects has been acquisi*on of advanced technology ! some illustra*ve examples:

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•  Lenovo Group struck two deals in close succession in early 2014 –  Jan: Bought IBM’s low-‐end server business for server business for US$2.3 billion

–  Feb: Bought Google Inc’s Motorola handset division for US$2.91 billion

•  These acquisi*ons further remodel Lenovo as a force in mobile devices in addi*on to data –  Posi*ons them to challenge largest global tech firms such as Apple and Samsung

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•  Beijing Automo*ve Industry Holding Company Limited (BAIC) acquired IPRs affiliated with Saab vehicles and engines (Swedish car manufacturer owned by General Motors), its en*re R&D facili*es, quality management systems, and supplier development and management systems in Dec 2009 –  BAIC’s objec*ve in acquiring Saab was to integrate Saab’s technology into its future R&D opera*ons to develop an indigenous BAIC vehicle •  First indigenous BAIC-‐brand vehicle developed based on the Saab technology was launched in Sep 2014

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•  Chinese carmaker Geely completed acquisi*on of another Swedish automaker, Volvo, from Ford motors in Aug 2010 – Geely needed Volvo’s technology in order to improve quality of its own brand of cars because of increasing local compe**on

– Geely requires Volvo engineers to help it improve its engineering capabili*es

– Geely owns all of Volvo’s key technologies and IPRs and also has the right to use the IPR •  IPR ownership represents the core value of this acquisi*on

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•  In avia*on, China Avia*on Industry General Aircraq (CAIGA)—largest general aircraq manufacturer in China—acquired US-‐based Cirrus Aircraq in Jun 2011 – By acquiring Cirrus, CAIGA will complete development of a new single-‐engine ‘Vision’ jet

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•  In renewable energy, R&D alliance between China’s Sinovel and US-‐based Windtec in 2008 allowing Sinovel to produce five-‐ and six-‐ megawal turbines in 2010 and 2011

•  Chinese company Goldwind acquired 70% ownership of German-‐based Vensys Energy in 2008 allowing it access to the world’s leading technology and professionals in area of permanent magnet direct-‐drive wind turbines

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•  In machinery, Sany Group—China’s largest construc*on equipment manufacturer—acquired German company Putzmeister (manufacturer of high-‐tech concrete pumps) in Jan 2012 – For its cuzng edge technology

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•  In energy, CNOOC acquired Canadian oil producer Nexen for US$15 billion in Feb 2013 and Sinopec purchased 49% of the North Sea opera*ons of Talisman Energy (another Canadian oil company) in Jul 2012 – Provides Chinese firms with advanced produc*on technologies to draw oil and gas from nontradi*onal areas such as deepwater fields and hardened rock forma*ons more efficiently

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Implica*ons for Emerging Markets (1/3)

•  There exist plen*ful opportuni*es for emerging market (EM) firms to partner with, or invest in Chinese firms and R&D facili*es

•  Corporate execu*ves in EM should expand their horizons beyond the tradi*onal S&T superpowers such as the US, Japan and Germany

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•  In China, opportuni*es will abound in industry (and academia) for – Coopera*on in S&T applied research –  Investment in R&D partnerships – Sourcing technologically sophis*cated manufacturing components and R&D resources

•  Not only will EM firms find it cheaper to move into China, since some of them are Asian, they will also find cultural affini*es there

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•  Knowledge and products that result from such coopera*on will be closer to market for domes*c consump*on (for those located near China)

•  EM firms that partner with Chinese firms/universi*es to conduct R&D or manufacturing in China will be able to take advantage of China’s growing and improving S&T infrastructure and human capital – And be closer to what is soon to be the world’s largest consumer market

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Conclusions (1/4)

•  Too few in policymaking and financial circles an*cipate the rise of Chinese mul*na*onals to posi*ons of global technological leadership

•  To be sure, some Chinese companies have benefiled enormously from monopolies granted by Beijing and con*nuous improvement of Chinese firms’ technological strength relies on poli*cal stability in the country

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Conclusions (2/4)

•  However, more of this technological rise should be alributed to: – China’s massive growing domes*c market – Strong government support aimed at turning China into an ‘innova*on na*on’

–  Intensified forces of globaliza*on

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Conclusions (3/4)

•  Combined, and individually, these factors help explain how and why Chinese companies will move beyond their tradi*onal reliance on low factor-‐input costs to scale the value-‐added chain –  Thereby realizing the country’s development and strategic goals based on its burgeoning technological strength •  M&A cases are par*cularly insigh|ul because they indicate the extent to which technology transfer to China is now taking place across a broad swathe of industries

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Conclusions (4/4)

–  In the past, Chinese companies had to be content with acquiring technology through license agreements or joint ventures with foreign partners •  These arrangements limited use of technology by Chinese firms

– When a Chinese company acquires an overseas counterpart outright, it owns the underlying technology •  Can use the technology is as it wishes (domes*cally or interna*onally)

–  Furthermore, overseas acquisi*ons represent a point of pride in China, showcasing its rising economic strength •  Signaling both Chinese triumph and decline of its Western counterparts

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