From Copycat to Global Innovation Driver: Rethinking Technology Transfer with China

From Copycat to Global Innovation Driver: Rethinking Technology Transfer with China, by Thomas Bonschab*

Technology transfer with China seems to have only one direction: Western industrialized countries supply, and China takes whatever it needs. This process does not enjoy a good reputation. Public media are constantly coming up with reports that Chinese companies are blatantly stealing Western technology as part of industrial espionage or breaches of contract. Because many of these stories are well-documented, they have largely sapped the mood towards China.

More heavily weighs the accusation that China operates on a distorted legal framework in order to acquire the desired technology. In fact, Western companies are still being forced into joint ventures with minority share in almost all key sectors, if they want to gain market access in China. Public tenders tend to be designed to grant approvals only when relevant technology is deployed and produced locally with Chinese partners (often assigned by the local administration). In addition, many international investors complain that they are compelled to transfer construction plans to Chinese institutes, thereby giving away their intellectual property. Similar charges comprise the requirement to provide training programs for local employees. And most notably, Chinese authorities are promoting, more or less transparently, M & A processes in the countries of origin of high technology. In Germany, the cases KUKA and Aixtron were widely and critically discussed.

Hence, Western governments are becoming increasingly nervous and trying to strengthen their position on China. Current messages from the US spur concerns for a new trade war. But even the more moderate EU and Germany are trying to impede market access for Chinese players with new foreign trade regulations. It is openly discussed whether China should be granted the status of a market economy due to its industrial policy.

Towards another realignment against China

No doubt, there are good reasons to take action and realign Western policy towards China. However, the approach adopted by most Western countries is problematic. Sure, it may be intuitively reasonable to look at China from today’s perspective or from the perspective of the past 10 years. But there is an inherent flaw in this view. From this perspective, China may appear as a new economic superpower, but still as a technology-developing country that can only acquire knowledge and innovation through unfair ways. From this point of view, the established Western self-understanding of technological superiority is not shaken at all.

This attitude will soon have to be corrected. The real momentum of China’s development is not only to be found in its impressive growth rates of its gross national product. It is rather in its ability to transform itself into a modern knowledge society and thereby to develop so-called indigenous technologies. China may still enter the international stage as a copycat, but not for long. Soon, technology transfer from China to the West is likely to be as common as the other way around. At least in selected sectors of the economy.

Here's a set of common sense considerations that make this trend visible.

Example 1: China as a Land of Inventions: In 1996, the share of research and development in gross national product was just over 0.5%. Although this was above the average of the least developed countries (LDC) of 0.2%, it was far from modern industrialized nations. Since then, annual spending has been growing at an average rate of 22%.

Source: Compiled from United Nations Educational, Scientific, and Cultural Organization (UNESCO) Institute for Statistics.

The catching-up process is unmistakable. In 2015, China has already invested 2.07% of gross national product in research and development. Germany in comparison: 2.87%. As early as 2006, the State Council announced in its "Outline of National Medium and Long Term Science and Technology Development Plan (2006 - 2020)" the target of 2.5% of gross national product for 2020. Since China does not understand such publications as a poem to the people, but instead as a tough promise, one must assume that in the next 10 years, the level of Germany and the United States will be reached. Only the special cases of technology countries such as South Korea (4.2% in 2015), Israel (4.3% in 2015) or Japan (3.3% in 2015) will then stand out.

It is noticeable that we only talk about aggregated data. In key sectors, defined by the Chinese government as part of its China Made in 2015 innovation program, the numbers are likely to be even more significant. New information technologies - notably artificial intelligence and aerospace sectors or biomedicine and the development of high-end medical devices - are investing heavily in achieving rapid independence from Western technologies. The true story is that China will most likely develop indigenous technologies in key sectors, beyond the picture visible when looking at aggregate data.

Example 2: China in patent fever: According to a recent survey by the World Intellectual Property Organization (WIPO), no country registers more patents than China. In fact, as many as the US, Japan, South Korea and the EU taken together.

Trend of patent applications in the five main WIPO offices

Source: WIPO 2016: World Intellectual Property Indicators 2016, Economic and Statistics Series, p. 23

It may well be objected that many of the registered patents are destined solely for the Chinese market, so that not all patens have the high quality to be found in technology driven countries like Germany. Nonetheless, this shows how much China is now presenting itself as a land of inventions and ideas.

The dynamics also suggest the direction in which the currently very critical debate with China on the protection of intellectual property rights (IPR) will develop. A country with so many patents will want to protect them, otherwise they are no value. The according laws in China already exist. Only their consistent implementation by the authorities is still a major challenge. Over the years, this is likely to be remedied. Ironically, in the long run China could become a global protagonist of IPR. Historically, that would follow the example of Japan, South Korea and other countries.

Example 3: "Speed ​​to Market" - from invention to product development: In this core competency for a successful technology transfer, China has already achieved world leadership. Hardly any population has more affinity for new technologies than Chinese. Customers demand constant product adaptation, using social media and the Internet. Successful entrepreneurs have to listen to that voice, or else they disappear quickly from the market. No doubt, poor product quality and product safety are commonplace in China, but are also rigorously punished by customers.

The speed and mentality of Chinese entrepreneurs are set accordingly. Lengthy strategy processes and consultant assignments are not part of Chinese business life. Innovation pressure also comes from the many government programs that operate either through regulations (such as environmental regulations) or market incentives. Market opportunities in the context of "Made in China 2025" or the "One Belt, One Road" program call for maximum flexibility and risk-taking even from the large state-owned enterprises.

Example 4: Incentives for returning intelligence: About 80% of overseas students return to China. That was not always the case. At the beginning of the 2000s, studying abroad, primarily in the USA, was seen as a perspective for a better life. Qualifying Chinese students was very beneficial for the hosting countries, both in terms of financing academic institutions and in terms of developing new technologies, using some of the most gifted minds. This trend has reversed dramatically in recent years.

Source: National Bureau of Statistics of China

Arguably, this development may be caused by a tightening of visa requirements in some countries. The decisive factor, however, is that China offers a more attractive working environment than in the past, especially in key industries. One of the most striking developments is the emergence of the many start-up centers, which were built especially for returning students. At the end of 2016, there were 347 of these centers, with more than 27,000 companies. A technology pool for the future. A perhaps a role model for Western industrial countries.

These are just a few examples of the dynamism with which China is currently developing into a global innovation driver, stripping off its role as a copycat of Western technology. It is apparent that the country will set the tone in future, at least in some sectors. Not just because of its market size or its political chutzpah, but because of its technological superiority. China builds up the necessary resources for this change at a historically breathtaking speed. The days are counted for Western countries to simply blame China as a technology thief.

In the future, therefore, the issue of technology transfer will probably be rated differently. For example, many German “hidden champions” and research institutions in the fields of automation, digitization and Industry 4.0 will step up their development in China in order to be able to sail hard on the wind. It is not only the internal market of China that is exciting, as hitherto. It is also the Asian and global programs along the Silk Road that are perceived as business opportunities. More fundamentally, however, China is above all a new, global competitor in the high-tech sector.

So where is the journey going?

The good news is that German and other Western technology companies are still in high demand in China. Many Western private sector companies are already underway in developing new business models in dealing with China. Re-engineering of technologies should soon go both ways. In fact, there is a lot to learn from China. WeChat, for example, has become a more powerful tool than WhatsApp, Alibaba and other companies have set similar signals. Looking at the Chinese Mittelstand to enter global markets, it is likely to get used to such cases.

At the political level, one can only hope that the approach of co-operation on equal terms and mutual learning curves will not remain a simple rhetoric. European and German advocacy for more fairness in international competition is justified and necessary. The foreclosure of their own markets by means of new foreign trade regulations, however, is rather a step backwards.

*Thomas Bonschab has worked many years for the Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH in Beijing on bilateral projects between German and Chinese ministries. In 2014, he founded the company TiNC International GmbH together with his Chinese business partner. His company deals with industrial projects in the fields of automation, digitization and industry 4.0, as well as educational cooperations between China and Germany. Thomas Bonschab runs the blog Weltneuvermessung (https://weltneuvermessung.wordpress.com), joint with Robert Kappel and Helmut Reisen, where this post appeared first in German.

China´s Development Finance – A Boon for Africa

Large emerging countries have become important development partners in recent decades. They are outside the old donor cartel of countries in the Development Assistance Committee (DAC) at the OECD. Countries that provide development partnerships but do not belong to the DAC are Brazil, China, the Gulf States, India, Malaysia, the Russian Federation and Thailand. These countries now spend billions of dollars throughout the developing world to build roads, dams, bridges, railways, airports, seaports, and electricity grids. These projects, often in countries left orphan by Western donors because of alleged governance problems (which is little reason of concern when the country is a Western ally), have been greeted with suspicion (´rogue aid´): Sour grapes for Western donors - who from the 1980s tended to spend money more on conferences, consultants and governance rhetoric – to see new emerging partners in their former ´chasse gardée´. The rise of emerging partners could also explain the increasing support of the DAC for blended finance, in order to lever meagre ODA resources with private finance, which won´t work for low-income Africa[1].

Western donors and lenders are generally skeptical about China’s efforts to assume a leadership role in providing global infrastructure, and point to the benefits international competitive bidding rules and environmental and social safeguards provide to ensure responsible and sustainable implementation of infrastructure projects. And Western politicians and media have warned African counterparts that China may be motivated not by a desire to improve the lives of ordinary Africans but more by a desire to gain access to the continent’s natural resources.

Table 1. Recipients of Chinese Official Finance, 2000 - 2014

World Region	Total, $bn	ODA Terms, %		No. of Projects
Africa	118.1	58		2345
Eastern Europe	56.7	3		171
Latin America	53.4	12		317
South Asia	48.8	10		423
Southeast Asia	39.2	7		507
Other Asia	28.5	6		183
Middle East	3.1	1		93
Pacific	2.8	3		265
Total/Average	350.6	24.5		4304

Source: Aid Data (Dreher et al., 2017); my calculations.

China, in particular, has positioned itself as a leading global financier of the “hardware” of economic development. Unfortunately, China does not disclose comprehensive or detailed information about its international development finance activities. However, Aid Data (Dreher et al., 2017)[2] have recently constructed a dataset with a new methodology for tracking underreported financial flows. This paper introduces a new dataset of official financing—including foreign aid and other forms of concessional and non-concessional state financing—from China to 138 countries between 2000 and 2014.

According to these new data, the scale and scope of China´s overseas infrastructure activities now rival or exceed that of other major donors and lenders. Between 2000 and 2014, the Chinese government committed more than $350 billion in official finance to countries and territories in Africa, Asia and the Pacific, Latin America and the Caribbean, the Middle East, and Central and Eastern Europe. Transport and power generation are the two main sectors financed. Chinese cooperation also invests significantly in health, education, water and sanitation, agriculture, and other social and productive sectors.

Chinese official finance consists of Official Development Assistance (ODA), which is the strictest definition of aid used by OECD-DAC members, and Other Official Flows (OOF). China provides relatively little aid in the strictest sense of the term (development projects with a grant element of 25 percent or higher). A large proportion of the financial support that China provides to other countries comes in the form of export credits and market or close-to-market rate loans. Table 1 provides a calculation of the weighted average of China´s development finance that was extended at concessional ODA terms: 24.5 percent for the period 2000 – 2014.

Table 1 shows that Africa received most from Chinese development finance during the period 2000-14 – in terms of amounts, degree of concessionality (percentage share at ODA terms) and number of projects. More than a third of overall Chinese official finance went to Africa during 2000 and 2014. Zimbabwe, Angola, Sudan, Tanzania, Ghana, Kenya and Ethiopia headed the ranking of Africa´s recipients in number of projects. Africa has received more Chinese ODA-like finance than all other developing regions in the world combined, almost 80% of Chinese aid.

But did Africa benefit from Chinese aid? Dreher & Co. show that Chinese official development assistance (ODA) boosts economic growth in recipient countries. The popular claim that significant financial support from China impairs the effectiveness of grants and loans from Western donors and lenders is clearly rejected. The Aid data paper also benchmarks the effectiveness of Chinese aid vis-á-vis the World Bank, the United States, and all members of the OECD’s Development Assistance Committee (DAC). The results indicate that Chinese, U.S., and OECD-DAC ODA have positive effects on economic growth, but no robust evidence is found that World Bank aid promotes growth. The Aid Data research suggests that ODA compatible aid helps growth, despite the many (populist?) claims to the contrary from the likes of Dambisa Moyo.

By contrast, it is found that, irrespective of the funding source, less concessional and more commercially-oriented types of official finance do not boost economic growth. Too bad DAC donors are becoming so stingy. DAC Country Programmable Aid (CPA), the (most valuable) portion of aid that recipients´ budgets can really count on (because it excludes OECD-based spending for conferences, consultants, migrants, etc), has declined from 2014[3].

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[1] Kappel, R. & H. Reisen (2017), The G20 »Compact with Africa«: Unsuitable for African Low-Income Countries, Friedrich-Ebert-Stiftung, Berlin.

[2] Dreher, A. et al (2017),  Aid, China, and Growth: Evidence from a New Global Development Finance Dataset, Aid Data Working Paper No. 46, William & Mary, October.

[3] https://stats.oecd.org/Index.aspx?DataSetCode=CPA