DECEMBER 12, 2006
Asia
By Bruce Einhorn
China, R&D Superpower? Think Again
The mainland's research and development spending may outrank Japan's this year, but a lot of that money goes overseas for equipment
In the intense economic rivalry between China and Japan, the mainland has grabbed all the attention in Asia with its double-digit growth rates and $1 trillion stockpile of foreign currency reserves. But the Japanese have been able to console themselves that they still have the edge when it comes to research and development spending, right?
Not according to controversial figures released by the Organization for Economic Cooperation & Development. On Dec. 4, the OECD announced that China's total spending on R&D for the year will top $136 billion.
According to the Paris-based group's calculations, China's total spending this year tops that of Japan, at $130 billion, for the first time and is second only to the U.S.'s $330 billion. The OECD arrived at its $136 billion figure by adjusting for purchasing power parity.
Another Look at the Figures Since labor and other R&D costs are so much lower in China, researchers in the People's Republic get four times more bang for their buck (or in this case, their yuan) than their counterparts across the Sea of Japan. "China is becoming a major player" in R&D, says Mario Cervantes, a senior economist at the OECD in Paris and one of the co-authors of the China report. "China is not yet an innovation powerhouse, but there's a potential for that."
As flattering as the OECD's conclusions are, however, a good number of people in Beijing and Shanghai find them a little suspect. While there's no doubt that the Chinese are devoting more resources to boosting their R&D levels, many experts are unconvinced that the country has made such a great leap forward. Measured as a percentage of gross domestic product, China's spending on R&D is much smaller than that of its Asian rival&about 1.3% for China vs. 3.15% for Japan.
Moreover, China's R&D culture is still emerging. "You do have a general improvement in the quality standard across the board in research institutions," says Anne Stevenson-Yang, a Beijing-based entrepreneur and former managing director of the U.S. Information Technology Office, an industry lobbying group in the Chinese capital. Still, she adds, "it's just prima facie obvious that China's R&D spending is still quite low."
Still Importing Equipment Chinese scientists also point out that the purchasing power theory doesn't reflect reality in the lab, where much of the most expensive equipment has to be imported from the West or Japan. Those payments have to be in hard currency, not China's yuan (which still isn't freely convertible). Cancer expert Dr. Guo Yajun, a former professor at the University of Nebraska Medical Center, is now director of the Shanghai Center for Antibodies, which receives about $10 million annually in government support.
He employs 215 people, about half of whom are Ph.D.s, but he also has to spend more than a third of his budget on machinery to analyze DNA and proteins. And 70% of that equipment is imported. "That's worth a lot," says Dr. Guo. He's trying to do more purchasing locally, "but so far we still purchase a lot from overseas," he says. When it comes to vital equipment to perform analysis of DNA and proteins, "all of that equipment is from overseas."
Sometimes, Chinese scientists get even less for their money than their foreign counterparts. Dr. Ming-Wei Wang, director of the China Academy of Science's National Center for Drug Screening in Shanghai, says that it's very expensive to import high-end machinery. "For us to buy sophisticated biochemistry equipment, we normally pay at least 30% to 40% higher prices than our U.S. or Japanese counterparts," says Dr. Wang.
China's Sweat Equity Companies that sell 2,000 machines in the U.S. might find demand for just 20 machines in China. But since companies have fixed costs no matter how many machines they sell, the vendors pass along the higher cost of doing business to their Chinese customers. "A lot of international companies do not have direct sales mechanisms" in China, adds Dr. Wang. With the additional layers of distributors adding commissions and mark-ups, costs for the end-user head upward.
Still, Dr. Wang agrees with Cervantes, the OECD's economist, that the Chinese have an advantage when it comes to other R&D costs, such as labor. "You put one dollar in Japan, one in the U.S. and one in China, in China you certainly get more out of it, mainly in terms of manpower as well as overhead," he says. Chinese researchers may still have a long way to go before they can be on the same level as the Japanese or the Americans, but there's little doubt that they're moving in the right direction.
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