Chinas indigenous innovation program, launched in 2006, has alarmed the worlds technology giants more than any other policy measure since the start of economic reforms in 1978. A recent report from the U.S. Chamber of Commerce even went so far as to call this program a blueprint for technology theft on a scale the world has not seen before.
Virtually every assessment of the indigenous innovation program has framed it as a win-lose proposition — a win for China and a loss for foreign multinationals. Our analysis, however, suggests that indigenous innovation measures have been counter-productive for China itself. Instead of inducing technology giants to shift leading-edge R&D work to China at a faster pace, its effect has been exactly the opposite.
China today hosts about 1,000 foreign-owned R&D labs. Yet, with rare exceptions, these labs focus primarily on local adaptations of innovations developed elsewhere, rather than the development of leading-edge technologies and products for global markets.
A comparison with India is illustrative. India has no equivalent to indigenous innovation rules. The government also is content to allow companies to set up R&D facilities without any rules about sharing technology with local partners or the like.
These policy differences appear to have a significant influence on corporate behavior. Consider the top 10 U.S.-based technology giants that received the most patents from the U.S. Patent and Trademark Office (USPTO) between 2006 and 2010: IBM, Microsoft, Intel, Hewlett-Packard, Micron, GE, Cisco, Texas Instruments, Broadcom and Honeywell.
Half of these companies appear not to be doing any significant R&D work in China. Between 2006 and 2010, the U.S. PTO did not award a single patent to any China-based units of five out of the 10 companies. In contrast, only one of the 10 did not receive a patent for an innovation developed in India.
India also has proven more fertile territory for these companies. For the 10 tech giants taken together, India-based labs received more patents (1,119) than did China-based labs (886) during this period.
At a company level, the difference can be even more striking. For the seven out of 10 companies where Indian units received more patents than Chinese labs, the aggregate numbers were 978 vs. 164. Only a strong showing for China from two outliers, Microsoft and Intel, pulled up its aggregate filings — Chinese labs at those two companies secured 722 patents compared to 141 from Indian labs.
Those exceptions to the rule are revealing. Unlike the others, both Microsoft and Intel have near-monopolies in technology platforms for the global PC industry. Since software applications are designed to run on these platforms, Microsoft and Intel have far less reason to be concerned about technology appropriation by competitors. While software piracy by potential customers is a concern, it is mostly a short-term challenge. In short, Microsoft and Intel leverage China as a global research hub precisely because these companies don’t have to worry much about the downsides of indigenous innovation.
The R&D disparity is all the more striking given China’s three seemingly major advantages over India. With a GDP more than three times larger, China offers a much bigger market than India. China also spends four times as much as India on R&D. And China produces a much larger number of Ph.D.s.
This is an excellent piece to show scholars only look at the immediate target to blame the problem for: Chinese government. There is a much deeper cause: the culture of counterfeit. In other words, the government did not cause rampant counterfeit, parents did. They did by encouraging short cuts and emphasizing the ends rather than the processes (the tunnel of light effect).