China and India: the new innovation power houses?

3. Mar 2008

Cristina Chaminade, CIRCLE – Centre for Innovation, Research and Competence in the Learning Economy, Lund University, SwedenandJan Vang, CIT – Copenhagen Institute of Technology, Aalborg University, Denmark

It is most likely to be wrong that ‘The world is flat’ and that we can expect that countries like India and China will become the new innovation power houses, as the famous columnist Thomas L. Friedman concluded in his international best seller published a few years ago (Friedman, 2005). On the surface he and his supporters appear to be right. One of the most dramatic changes in China and India in the last decade is the rapid accumulation of science and technology capabilities. For many, like Friedman, this is a clear indication that China and India will become the new innovation power houses of the world. Indeed, in just one decade the number of firms locating R&D departments in India and China has grown very rapidly. In 2005 China and India were hosting 18% of the world R&D sites (only 8% in 1997) (UNCTAD, 2005). Only that year, 252 new foreign direct investments in R&D projects were located in China & India (80% of South, East and SE Asia). India is currently considered to be the second most popular destination of offshore R&D for certain industries such as ICT (only after the US) (The Economist Intelligent Unit, 2007).This global re-location of R&D activities has run in parallel and it is closely related to the growth in internal research capabilities in these two countries. China was in 2005 the third country in the world in terms of gross domestic expenditure on R&D in absolute terms, only after US and Japan (although as a percentage of Gross Domestic Product is only 1,4%, comparable to that of Southern EU countries) and the second one in the total number of researchers, only after US (OECD, 2006). And the R&D expenditure in China is growing on an average of 24% per annum since 1999.Looking at this numbers, there is no doubt that there is something happening in that corner of the world and that there are reasons to be watchful. But as we also know it is not an easy task to capitalize on investment in research. So, if we only look at research investments, is it right to conclude that they will become the worlds’ innovation power houses in the near future? We sincerely doubt it. There is a very extensive stream of literature on innovation studies that highlights that there is a very long way between investments in research (R&D) and innovation (launching new products, processes or services in the market). Innovation is definitively not a linear process that starts with R&D but is the result of a complex interactive process (Kline and Rosenberg, 1984), where new ideas emerge as a result of the interaction with universities, other firms, etc. China is strong on some areas of R(esearch) – speech recognition, for example – but is weak in D(evelopment). Furthermore, in China there are hardly any investments in research and development in the indigenous private firms. This makes it very difficult for firms to capitalize on the investments in public research. Moreover, for many firms and industries, R&D is considered to be only a minor input of innovation activities. Thus one can question the relevancy of the R&D fetishism in general when talking about innovation power houses. Looking almost exclusively at R&D investments in China and India or their ability to attract FDI on R&D will provide a very narrow and limited picture of their capacity to innovate.If one goes beyond input indicators such as R&D statistics and research capabilities, China and India do not display so well. In China, many of the organisations that characterise a well functioning system of innovation are there, but the linkages between them and the institutional framework are weak (Schwaag-Serger and Breidne, 2007) and thus the capacity of the system to mobilize the existing capabilities and turn them into innovation is rather limited. Yet, the realities and myths of the size about the Chinese markets have given the national policymakers a strong bargaining power over the TNCs – and this is probably on of china’s strongest cards. In India the situation is quite similar yet also different. Martin Kenny, has illustrated this nicely in a deep yet still unpublished analysis’s of venture capital (VC) investments in China (and India – India VC is almost only export oriented) (Kenney at al, 2008). In India, and more specifically Bangalore, which is considered the Silicon Valley of Asia, our research confirms that the system of innovation remains rather weak and fragmented (Chaminade and Vang, 2006a and 2006b, Vang et al 2007). The collaboration with other firms, final users or universities is very limited. And the importance of the home market neglectable. So, while China and India are rapidly catching up in terms of accumulating S&T capabilities, their capacity to transform those resources into new products and new services is still rather limited. At least at national scale.However some additional considerations need to be done. On the one hand, there are important industry differences. India seems to be excelling in innovation in certain industries like automotive (Mahindra and Mahindra Scorpio 4-wheel drive was awarded “Car of the Year” from Business Standard Motoring and the “Best Car of the Year” by BBC on Wheels, developed the electric car, the low-cost car, etc) or software (with Tata Consulting Services or Infosys as world players in the provision software services). On the other, one should not forget that innovation might take place in any place of the value chain, not only in the high-end (more visible). Chinese firms are increasingly becoming innovators in the low end of the value chain, for which it is not necessary to have a very well developed system of innovation and only cutting edge innovators in a few. Finally, as the Bangalore case has showed us, it is possible to become a global player and an innovator, without a well functioning system of innovation. Although it might not be sustainable over time as it requires a large amount of in-house investments in those activities that a well functioning system of innovation provides to firms otherwise.In sum, we could conclude that – some regions or even industries in – China and India are catching up but that there are important constraints before they can become innovators at a global scale. But it is important to keep an open eye on especially some of the science parks in for example Beijing which offers some of the best incentives in the world for foreign firms.References

Chaminade, C., Vang, J. (2006a) Innovation Policy for Small and Medium Size SMEs in Asia: an Innovation Systems Perspective in H. Yeung Handbook of Research on Asian Business. Edward Elgar.

Chaminade, C., Vang, J. (2006b) Globalisation of Knowledge Production and Regional Innovation Policy: Supporting Specialized Hubs in Developing Countries. CIRCLE Electronic Working Paper Series. 2006/15.

Friedman T (2005) The World Is Flat: A Brief History of the Twenty-FirstCentury. Farrar, Straus and Giroux. US.

Kenney, M. et al (2008) Comparing the Venture Capital Industries in China and India, presentation prepared for the SPRIE Conference The Shape of Things to Come: New Patterns and Paradigms in Global Innovation Networks, Stanford University, January 17, 2008. Accessed February 2008.

Kline, S.J. & Rosenberg, N. (1986) An Overview of Innovation.In The Positive Sum Strategy, eds. Landau, R. & Rosenberg, N., pp. 275-305. Washington: National Academy Press

OECD (2006) Main Science and Technology Indicators. 2006-2. Paris: OECD.

Schwaag Serger S. and M. Breidn
e (2007), China’s 15-Year Term Plan for Scientific and Technological Development – An Assessment”, in Asia Policy, July.

The Economist Intelligence Unit (2007). Sharing the idea: the emergence of global innovation networks. Accessed february 2008.

UNCTAD (2005) World Investment Report. United Nations, NY andGeneva.

Vang, J. Chaminade, C.; Coenen, L., (2007) Learning from the Bangalore Experience: The Role of Universities in an Emerging Regional Innovation System. CIRCLE Electronic Working Paper 2007/4. Forthcoming in D’Costa, A. and Parayil, G. (Eds) New Asian Dynamics of Science, Technology and Innovation (ST&I). Palgrave Macmillan. Series in “Technology, Globalization and Development”.