Innovation is a key driver of economic growth and global competitiveness. However, a nation’s ability to compete does not depend solely on how much it invests in innovation inputs, such as research and development (R&D) spending, researchers, and scientific infrastructure. Nations also need the institutions, firms, and processes that allow these inputs to be efficiently transformed into innovation outputs. As a 2024 study explains, innovation “consists of a series of stages in which inputs are converted into intermediate outputs, which are subsequently refined to generate an innovation.” Innovation inputs can include research findings, R&D investments, creative ideas, and human resource capabilities, while intermediate outputs can encompass tangible and intangible results generated during the innovation process, including patent families.

China has increasingly developed the ability to efficiently convert innovation inputs into outputs, particularly in high-tech, advanced industries where it competes directly with the United States. Data from the 2025 China Statistical Yearbook show that China’s patent applications in high-tech industries increased rapidly from 2005 to 2024, while the resources used to generate those outputs grew at a much slower rate. This suggests that China is not simply investing more in innovation but is also becoming better at translating those investments into valuable technological outputs with commercial potential.

This trend should concern U.S. policymakers because improvements in innovation efficiency can enable Chinese firms to develop and commercialize technologies faster and at lower cost, increasing competitive pressure on U.S. companies. Policymakers should focus on strengthening the U.S. innovation system by improving technology commercialization, bolstering manufacturing capabilities, and helping firms scale new technologies into globally competitive products.

Innovation efficiency matters because countries that can generate more outputs from the same level of inputs gain a significant competitive advantage. For example, consider a hypothetical Chinese semiconductor company that required 10 R&D employees and 50 million yuan in investment to develop a new technology in 2005. However, as firms gained experience, research institutions improved, and commercialization capabilities strengthened, the same company might need only 5 researchers and 10 million yuan to produce a similar innovation. The resources saved could then be reinvested into additional R&D, allowing firms to generate even more innovations over time.

China's high-tech, advanced industries appear to be following this trajectory. Between 2005 and 2024, Chinese patent applications in these industries increased at an average annual rate of 19.2 percent. Meanwhile, measured innovation inputs, including the number of R&D institutions, full-time equivalent R&D personnel, R&D expenditure, and expenditure on new product development, grew at slower average annual rates of roughly 12 to 18 percent. (See figure 1.) This divergence indicates that China has improved its ability to convert innovation resources into measurable outputs.

Figure 1: Average annual growth rate of patent applications (innovation output) compared to innovation inputs for high-tech industries from 2005 to 2024

As a result, the amount of innovation output generated per unit of input has increased substantially across China’s high-tech industries. In 2005, China produced approximately 10.4 patent applications per R&D institution, 972 applications per 10,000 full-time equivalent R&D employees, 46 applications per 100 million yuan of R&D expenditure, and 40 applications per 100 million yuan of expenditure on new product development. By 2024, these figures had risen to approximately 16 patent applications per R&D institution, 3,210 applications per 10,000 full-time equivalent R&D personnel, 62 applications per 100 million yuan of R&D expenditure, and 47 applications per 100 million yuan of new product development investment. (See figure 2.)

Figure 2: Invention patents per innovation input in 2005 and 2025 for high-tech industries[1] (see endnote)

Although patent applications do not capture every dimension of innovation quality, these trends suggest that China’s innovation system has become much more capable of generating technological outputs from available resources. The apparent improvement likely reflects reforms to China's innovation system since the mid-2000s, including the Medium- and Long-Term Plan for Science and Technology Development, efforts to strengthen intellectual property protections, and industrial policies, including Made in China 2025, that directed resources toward strategic technologies.

This improving innovation efficiency creates a growing challenge for U.S. competitiveness in advanced industries. As Chinese firms become better at developing and commercializing new technologies, they will be increasingly able to compete in industries historically dominated by U.S. companies, including semiconductors, advanced manufacturing, artificial intelligence, and other high-value-added sectors. As an ITIF report explains, losing competitiveness in advanced industries has fundamentally different consequences from losing competitiveness in lower-skill industries. Unlike lower-skill industries, where production can often be restarted by purchasing equipment and hiring workers, advanced industries, such as semiconductor manufacturing, require extensive technical capabilities and complex supply chains that are difficult to rebuild once lost.

The United States therefore cannot assume that maintaining leadership in advanced industries will happen automatically. If Chinese firms continue to improve their ability to convert research investments into market-ready technologies, they may capture larger shares of global markets and weaken U.S. industrial capabilities.

To maintain its technological leadership, the United States should pursue policies that strengthen the entire innovation pipeline, both by increasing research inputs and by ensuring that those investments translate into commercial success. This includes strengthening university-industry collaboration, supporting technology commercialization, investing in advanced manufacturing capabilities, and helping firms scale breakthrough technologies. The future of global competition will not be determined solely by which country spends the most on innovation, but by which country can most effectively transform ideas, research, and investments into technologies that shape global markets.

Endnotes