China Is Rapidly Catching Up in Advanced Industry R&D as US Advantage Narrows, New Report Finds
WASHINGTON—U.S. firms still lead in advanced industry research and development (R&D), but new size- and wage-adjusted data show China is rapidly closing the gap, a shift that threatens America’s techno-economic leadership and industrial strength absent stronger policy support, according to a new report from the Information Technology and Innovation Foundation (ITIF).
The report uses the latest EU R&D Industrial Scoreboard to compare private-sector R&D investments by U.S.- and China-based firms across nine advanced industries. While U.S. firms continue to invest more overall, the data show that America’s lead is increasingly narrow, sector-dependent, and cost-disadvantaged.
“The PRC is executing a systematic campaign to dominate the advanced, traded-sector industries that power U.S. economic strength and national security,” said ITIF President Robert D. Atkinson. “Private-sector R&D investment provides a clear assessment of not only current performance, but which nation is positioned to win this techno-economic competition. America’s lead is eroding, and headline spending figures understate the speed of China’s advance.”
The study examines nine advanced industries, including aerospace and defense; electronics and electrical equipment; general industrials; industrial engineering; pharmaceuticals and biotechnology; software and computer services; technology hardware; alternative energy; and automobiles and auto parts.
For each industry, ITIF compares U.S. and Chinese private-sector R&D using size-adjusted measures, including: (1) R&D spending relative to the size of each country’s economy; (2) each country’s share of global R&D within a given sector or group of sectors; and (3) a location quotient (LQ), which measures how concentrated R&D activity is in a country relative to the global average.
“U.S. R&D investment is growing, but not fast enough to maintain its lead,” said Trelysa Long, economic policy analyst at ITIF and author of the report. “On a size-adjusted basis, in 2014, U.S. firms out-invested Chinese firms in eight of nine advanced industries. By 2024, the United States had lost its lead in four sectors, while China had closed much of the gap in the remaining five. Without stronger policy support, the United States is likely to continue losing global R&D market share as China expands investment with government backing.”
The picture is more concerning once controlling for R&D costs. R&D is significantly cheaper in China, allowing firms to deploy more researchers per dollar spent. ITIF finds that $100,000 in R&D supports 2.3 Chinese R&D workers for every 1 U.S. R&D worker. When adjusted for labor costs, Chinese firms’ share of advanced industry R&D rose 16 percentage points, from 9 to 25 percent, between 2014 and 2024. Meanwhile, U.S. firms’ share increased only 5 percentage points, from 40 to 45 percent.
But this reflects the massive lead the United States has in two R&D-intensive sectors: biopharmaceuticals and software and services. Outside these two sectors, U.S. firms’ R&D investment rose modestly—from $136 billion to $220 billion—and declined slightly relative to GDP.
“U.S. R&D growth over the past decade has relied heavily on pharmaceuticals and biotechnology and software and services,” said Long. “Excluding these two sectors, Chinese firms went from investing nearly seven times less than U.S. firms to less than twice as much. When spending is adjusted for wage differences, Chinese firms invest more in R&D than U.S. firms in the remaining seven advanced sectors.”
“China’s advantage goes beyond normal market competition,” said Atkinson. “Intellectual property theft and forced technology transfers have allowed China to free-ride on Western innovation. But Beijing is no longer just copying; it is scaling in-house capabilities across industries and massively subsidizing business R&D—including through its extremely generous R&D tax credit—bringing China close to parity with the United States in size- and wage-adjusted R&D investment.”
Size-adjusted measures confirm that this is a system-wide shift. When R&D investment is compared with the global average using the location quotient, U.S. firms’ R&D intensity has largely stagnated since 2014, while Chinese firms’ intensity has risen steadily across nearly all advanced industries. When China’s lower labor costs are adjusted for, Chinese firms’ LQ rose from 0.7 to 1.5, while U.S. firms’ declined from 1.8 to 1.7.
At the same time, we are moving toward a bipolar innovation system. U.S. and Chinese firms accounted for 63 percent of all R&D-investing firms worldwide in 2024.
“Rather than helping shape the technological frontier, most advanced economies are struggling to keep pace. Over the decade analyzed, U.S. firms boosted R&D spending by 150 percent, Chinese firms increased investment by 537 percent, and firms in the rest of the world raised R&D spending by just 32 percent,” said Long.
“As innovation leadership consolidates around the United States and China, America faces growing dependence on a geopolitical rival for advanced technologies critical to national power,” said Atkinson. “To avoid further erosion of U.S. leadership, Washington must do more to incentivize private-sector R&D investment at home. Once innovation capacity and global market share are lost, rebuilding them is extraordinarily difficult, if not impossible.”
ITIF recommends Congress take three steps:
- Boost R&D tax incentives, specifically raising the Alternative Simplified R&D Credit rate from 14 percent to at least 28 percent and doubling the regular R&D tax credit from 20 percent to 40 percent.
- Expand federal R&D programs, especially those that fund joint industry-university research in strategic sectors, such as the Manufacturing USA Center program.
- Confront Beijing’s mercantilism, particularly in advanced industries, where Chinese firms take advantage of and benefit from U.S. R&D and R&D performed in other countries.
This report is part of an in-depth research series led by ITIF’s Hamilton Center on Industrial Strategy, with support from the Smith Richardson Foundation. The series examines China’s mercantilist predation in strategically critical industries, assesses the erosion of U.S. and allied industrial power, and delivers a comprehensive policy agenda to prevent long-term American decline as China seeks global hegemony.
Contact: Sydney Mack, [email protected]
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The Information Technology and Innovation Foundation (ITIF) is an independent, nonprofit, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. Recognized by its peers in the think tank community as the global center of excellence for science and technology policy, ITIF’s mission is to formulate and promote policy solutions that accelerate innovation and boost productivity to spur growth, opportunity, and progress.
