The U.S. has been a global leader in innovation for the past 20 years, but recently, China has been catching up, according to analysis from researchers with the St. Louis branch of the Federal Reserve Bank.
In 1996, China invested 0.56 percent of its gross domestic product (GDP) in research and development. The U.S. invested 2.44 percent of its GDP. In 2015, China invested 2.06 percent of its GDP, and the U.S. invested 2.79 percent. In other words, according to economist Ana Maria Santacreu, and research associate Heting Zhu, the R&D intensity in China increased by 1.5 percentage points and by 0.3 percentage points in the U.S.
The authors say that two measures of innovative activity of a country are its R&D intensity (that is, the fraction of total output invested in R&D), which reflects the effort of innovation, and its number of patent applications, which reflects the output of innovation. They say that larger R&D investment is associated with faster technological progress, higher productivity and faster output growth.
One outcome of the R&D process is an increase in the number of patent applications. The authors note a positive correlation between the R&D intensity of a country and the number of patent applications in that country.
Regarding patent applications, the U.S. applied for 177,967 patents in 1996, which overshadows the 11,974 patent applications in China that same year. However, in 2015, China exceeded the U.S. in the total number of patent applications by 90 percent.
The authors say that several reasons may exist to explain why China is innovating so much more than before. For one, technological developments together with a growing market may favor investment in innovation.
The government also has been active at implementing policies to incentivize innovation. In 2006, the Chinese government announced the National Indigenous Innovation Campaign, which includes a goal to transform China into the world’s technology powerhouse by 2020.
In addition, the 12th and 13th “five-year” plans (2011-2020) detailed goals for R&D intensity and patent applications. The government offered subsidies targeted to increase the number of patent applications. This could explain why patent applications have grown faster than R&D intensity, the authors say.
In terms of R&D intensity, China is approaching the U.S. but still remains behind. In terms of patent applications, however, China has overtaken the U.S. and appears to be "the new global leader of innovation," the authors say.
Part of this increase, though, may be driven by government subsidies. And some studies argue that the quality of Chinese patents are incomparable to their quantity, and these patents are also highly concentrated in certain sectors, such as electronics.
If China wants to become the world’s technology powerhouse, more R&D investments targeted to a wider range of industries are needed, the authors say.