China R&D key part of ‘global portfolio’, but technology leaks remain concern, report says

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China’s vibrant innovation ecosystem makes it increasingly part of global research and development strategies for multinational companies, but concerns over technology leaks remain, a report said on Wednesday.

Eyeing the sizeable market potential and the fast pace of the commercial application of research and development results in China, an overwhelming majority of European firms will increase spending in China this year, according to a report by the European Union Chamber of Commerce in China and the Berlin-based Mercator Institute for China Studies (Merics).

“China-based R&D strategies are becoming more and more integrated with global strategies, a component of a global portfolio,” said Jacob Gunter, senior analyst with Merics.

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He noted that some companies are increasingly using China as part of their round-the-clock innovation strategy, where they have other research and development centres in East Asia, America and Europe.

If you are actually cutting [yourself] out of the Chinese market, you might cut yourself out of that kind of product development, speed and efficiency that you find [in China]

Joerg Wuttke

The report is based on a survey of 32 respondents and interviews with 11 companies, which are mainly in the chemical, automotive and machinery sectors, conducted between December and February before the latest coronavirus outbreaks in China and resulting lockdowns of key economic centres.

The disruptions caused by China’s coronavirus controls and growing geopolitical confrontations have led to an increase in discussions over technological ring-fencing and the reduction of dependency on Chinese supply chains.

But there remains a lot of common ground, according to European Union Chamber of Commerce in China president Joerg Wuttke, who added that a decoupling in research and development would have a devastating impact.

“For European companies, to drive innovation and new product development is something which is unique and meaningful. If you are actually cutting [yourself] out of the Chinese market, you might cut yourself out of that kind of product development, speed and efficiency that you find [in China],” he said.

“Hence, European companies are really keen on China sorting itself out in order to maintain this kind of competitive edge that they used to have.

To retain its place as the world’s factory, China pushes technical colleges

“So in a way, we are like twins, bound together. We have the same fate. We need China. China needs us. So the kind of disruption that we fear about the decoupling would actually cause not only China to lag behind on innovation, but also of companies’ ability in order to be global, relevant players.”

The report also highlighted concerns over a weak intellectual property right protection regime, an unlevel playing field, negative sentiment in companies’ home countries towards research and development in China and challenges to find suitable local hardware engineers.

“Companies do not stay away from Silicon Valley because they fear strong competitors, they go there to learn from them, instead, the opposite is taking place in China,” the report added.

“After decades of being able to take technological cooperation with China at the corporate, academic, and political levels for granted, the last few years has seen a shift toward more critical viewpoints of such engagement in the capitals of liberal democracies from Europe to Japan to the United States.”

This shift has left European companies cautious about long-term, substantial research projects in China, added Wuttke.

“I can imagine that many companies feel far more comfortable in [Organisation for Economic Co-operation and Development] countries than they do [in China], something that also should make China think,” he said.

China spent 2.79 trillion yuan (US$418 billion) on research and development in 2021, or 2.44 per cent of its gross domestic product, close to the pre-pandemic level of 2.47 per cent for Organisation for Economic Co-operation and Development countries.

It is imperative for European firms to understand how to maximise the value of China’s vibrant innovation ecosystem, but also important they mitigate the risks of leaks, the report noted.

China’s innovation system is right for many, but not for all

Joint report

China has big ambitions to become a technology super power by the middle of the century, aiming to strengthen innovation, scientific research and achieve breakthroughs in core technology to fuel economic upgrades, strengthen self-sufficiency and counter the heightened containment efforts led by the United States.

Some of its plans have raised concerns of squeezing foreign companies, in addition to their long-held grievances of unfair competition amid suggestions of favouritism towards domestic and state firms.

China’s State-owned Assets Supervision and Administration Commission set up a new bureau in March to increase the role of state firms in innovation and technology upgrades.

“China’s innovation system is right for many, but not for all,” the joint report said.

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