“Chinese Import Competition Can Act as Both a Stimulus or a Brake”

Questions & Answers

How Does Chinese Innovation Affect German Companies?

Dr. Philipp Böing on China’s innovation policy and its impact on German companies.

As the coronavirus pandemic continues to slow sown global markets, China’s economy is booming like the crisis never happened. More importantly, China is making massive investments in innovation in a bid to become the global leader in technology.

How will the surge of new investment affect Germany, one of China’s major trading partners? Dr. Philipp Böing, a senior researcher at ZEW, is studying the question as part of an international project for Germany’s Federal Ministry of Education and Research.

Is it only a matter of time before China becomes the world leader in technology and economic power?

While technically speaking the leading industrialised nations could manufacture nearly all Chinese goods themselves, the reverse is not yet the case. So China has decided to focus on innovation and stepped up its investment in research and development. Its state-run enterprises have taken the lead in pursuit of that objective, which puts government control over economic efficiency. The goal of technological independence could also lead to the replacement of internationally established technologies with cost-intensive new ones, decreasing productivity and gross domestic product growth. It is debatable whether China can become the world’s economic and technological leader without cooperating with the global community in reaching its full potential.

What is the project studying specifically?

We want to figure out how efficient China’s R&D policies are in promoting innovation and competitiveness. We put particular attention on the question of whether China’s innovation policy succeeds in generating stronger productivity effects through mission-oriented innovation incentives than market-oriented innovations. Moreover, we want to know the extent to which German companies are adapting to increasingly competitive Chinese imports. China has been a leader in German imports since 2014. The important issue for business leaders and policymakers to understand is whether product market competition with Chinese companies and the supply of increasingly sophisticated intermediate inputs from China will stimulate or slow down innovation in Germany.

Why study research and innovation now?

In many European countries, the aim of research and innovation policy is to supply proper incentives and address urgent future questions such as digitalisation, climate change and demographic transition. By contrast, Chinese policy takes a rather dirigiste approach, defining not only the “what” but also the “how”. The public often regards China’s industrial policy and economic growth as causally linked. But there are clear indications that the privatisation of state-owned companies and the elimination of economic planning are what have been behind China’s growth. We are trying to understand to what extent China’s research and innovation strategy offers economic benefits or whether it contributes to the misallocation of resources. Both the US and the EU have criticised China’s subsidies for distorting competition. However, additional evidence is needed to assess their overall impact.

Have subsidies for research and innovation increased productivity?

A previous study of ours, looking at the period from 2001 to 2011, paints a different picture. Although we found that subsidised companies increase their total spending on research and innovation, they increase their productivity no more than other companies. In addition, we found clear weaknesses in policy implementation. Nearly 50 per cent of subsidised companies used their subsidies for unintended purposes. But even with companies that did not, we found no connection between subsidies and productivity.

Are Chinese imports impeding German innovation?

In theory, Chinese imports can act as both an incentive and a brake on German innovation. A comprehensive empirical study has not yet been conducted for Germany, so we are looking forward to our first results. For the US, previous studies have found that Chinese competition has had a negative effect; for other industrialised nations, the findings have been varied. We ultimately expect a multi-layered picture for German companies, because they are not only affected by Chinese imports but also benefit from exporting to China.