China’s “Innovation Mercantilism” Reduces the Rate of Global Innovation

Robert D. Atkinson, China’s “Innovation Mercantilism” Reduces the Rate of Global Innovation,” in Chinese State Capitalism: Diagnosis and Prognosis, edited by Scott Kennedy and Jude Blanchette (Center for Strategic and International Studies, 2021), 43-48.

Abstract

Most analysis of China’s mercantilist economic and trade practices has focused on its impacts on production and jobs in affected countries. But as Rob Atkinson writes in a volume published by the Center for Strategic and International Studies, the aperture needs to be widened to consider the effect on innovation outside of China.

Logic suggests that China’s “innovation mercantilist” policies have harmed the pace and amount of global innovation because Chinese firms are far from the frontier in virtually all industries, taking market share from innovation leaders. Indeed, China turned to innovation mercantilism in 2006 (as reflected in its Medium- and Long-Term Plan for the Development of Science and Technology and later in the Made in China 2025 initiative) precisely because the government desperately wanted to catch up to foreign technology leaders. These unfair policies, including limiting access to the rapidly growing Chinese market, reduce the global market share of foreign innovation leaders, in turn reducing their revenue growth and research and development (R&D) spending. This dynamic is particularly problematic in innovation industries (such as biopharmaceuticals, software, and semiconductors) characterized by high fixed costs relative to marginal costs and that rely on the largest possible global markets to cover those fixed costs. Moreover, firms in innovation industries rely heavily on intellectual property (IP) protection to justify their steep investments in R&D, and when Chinese firms get access to that IP without paying market rates—or, as is often the case, without paying anything at all—other companies’ returns are lessened, limiting their ability to continue to innovate.

Certainly, some Chinese government technology policies, such as supporting early-stage research and encouraging science, technology, engineering, and mathematics (STEM) graduates, enable both national and global innovation. But China has deployed an array of policies to gain global market dominance over advanced technology industries. Most of these policies—including forced technology transfer and domestically allocated markets—are clearly harmful to global innovation because they weaken incentives for investment by foreign firms while supporting innovation laggards and reducing the market share of more innovative firms. While some policies, such as China’s R&D tax credit, could help global innovation, this credit is more generous for Chinese firms than foreign ones, creating discriminatory effects that may, on net, harm global innovation.