Emerging markets are no longer just “world factories.” Led by China, several are turning into global innovation hubs. Below, Dan Steinbock discusses how Europe can sustain innovation in the nascent multipolar world.
For a century, the major economies of Western Europe, the United States and Japan have dominated innovation. Today, they have been joined by large emerging economies, spearheaded by China. Can Europe maintain its innovation edge in the future?
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“New Deal” in Global Innovation
We can measure innovation by output indicators, such as patents, that tell us about past success, and input indicators, such as research and development (R&D), which reflect the willingness to invest into the future. In both cases, global innovation is under rapid transformation, thanks to a “New Deal’ in the worldwide distribution of innovation activities.
Shifts in Patents. In the century before 2011, only three patent offices – those in Germany, Japan and the US – occupied the world’s patent markets. Having bypassed the Japanese patent office (JPO) in 2010, China’s patent office (SIPO) overtook its US counterpart (USPTO) to become the largest in the world in 2012, as measured by the number of patent applications received. It already dominated most filings of utility models (UMs), trademarks and industrial designs. In Europe, the record is mixed, however. While the European Patent Office (EPO) and the offices of Germany and the UK have seen growth, those of France and Italy have recently received fewer applications.
Some argue that higher patent quality and commercial value are better illustrated by triadic patents, in which inventors simultaneously seek patent protection in three of the world’s largest markets (US, EU, Japan). In these fields, the shares of the US, the EU, and Japan stayed equal (about 30% each) from 2000 to 2010. Nevertheless, only diamonds are forever. Even triadic patents reflect past monopolies, which will fade out over time.
Shifts in R&D. As evidenced by the 2014 Global R&D Funding Forecast, R&D investment is rebounding in the US and growth is likely to continue through 2020. Meanwhile, China’s innovation capabilities are closing up with advanced economies, such as the Netherlands and Belgium, and by mid-decade, the Eurozone’s core economies, including France. R&D figures emulate GDP and economic outlook.
Despite growing “Asianisation” of global innovation, some critics think that what we are witnessing is a cyclical anomaly rather than a structural trend. That view could be tested with comparative reviews of student performance in reading, science and mathematics, which tend to anticipate innovation trends in the coming decades.
Shifts in Student Performance. According to the latest OECD PISA (Program for International Student Assessment) results, students in the US and Europe are falling behind their counterparts in China and emerging Asia. Internationally, Shanghai dominates math, sciences and reading. It is followed by Singapore, Hong Kong, Taiwan, Japan and South Korea. Of the advanced countries, only Finland, Japan, Canada and Ireland remain in the top-10 lists. The rankings also feature transitional and emerging countries, such as Macau, Vietnam, Poland, and Estonia. Intriguingly, Slovenian students leave behind both the French and the British, while Lithuanian students’ science performance beats that of Norwegians, Italians and Swedes. In turn, Vietnamese students excel in reading over French and US students.
In the US and even in Europe, these PISA results caused a major debate and allegations on “sampling” and Chinese “cheating,” among others. But as PISA appendices prove, the results are valid. The dramatic ascent of the emerging nations in education and skills only reflects a broader structural trend in global innovation.
And it has barely begun.
From Le Défi Américain to China Prices
Internationally, European companies dominated multinational competition and R&D performance until the interwar period in the early 20th century. In the postwar era, the major European economies were devastated, along with Japan. As U.S. multinationals were barely exposed to international competition, they took the global leadership. Indeed, through the 1950s and 1960s, America set the standards for prosperity, productivity and innovation.
During this period, American companies and industries seemed to be invincible. In his hugely influential Le Défi Américain (American Challenge, 1968), Jean-Jacques Servan-Schreiber argued that “this [economic] war is being fought not with dollars, or oil, or steel, or even with modem machines. It is being fought with creative imagination and organizational talent…The American challenge is not basically industrial or financial. It is, above all, a challenge to our intellectual creativity and our ability to turn ideas into practice.”
And yet, it was precisely then that U.S. competitiveness was already eroding relative to international competition. Following the devastation of war years, and reconstruction, the major economies in Western Europe enjoyed Les Trente Glorieuses; three decades of rapid economic growth, while Japan followed in the footprints. In the process, the US superiority in innovation began to diminish relative to competition from Europe and Japan, as reflected by the subsequent “trade wars.” The innovative capacities of the OECD member countries converged substantially.
Today the old era of US, Western European and Japanese dominance – or ‘Triad power’ as Kenichi Ohmae once called it – is fading away. Like Europe’s core economies in the postwar era, China has been engaged in catch-up growth hoping to move higher in the value-added chain, especially after the year 2001, when it became a member of the World Trade Organization (WTO). When US, European and Japanese companies were still adjusting to China’s price competition, Chinese senior executives were already internationalising their operations – starting in emerging and developing Asia, then Africa, the Middle East and Latin America, and finally in Europe, Japan and the US.
Today, the leading European multinationals include Germany’s automobile giants, Volkswagen, Daimler, BMW and Bosch; the Swiss pharmaceutical conglomerates Roche and Novartis; Swedish Ericsson, the Netherlands’ EADS and many more. US companies dominate 35 percent of R&D investment by the top 2000 companies worldwide, according to the 2013 EU Industrial R&D Investment Scoreboard. The US is followed by Europe (33.6%), most importantly Germany (10%), France (5%), UK (4%) and Switzerland (4%). In turn, the transatlantic economies are followed by Japan (19%), China (4%) and Taiwan (2%). Other R&D rankings of multinational companies and their R&D investments paint similar portraits.
Since China’s R&D currently ranks only 10th relative to the US or Europe and other large emerging economies in the Scorecard, the innovation of Chinese multinationals remains underestimated. And yet, these Chinese firms (those that are incorporated in the mainland, or abroad) already account for almost half of all emerging-country multinationals. While Huawei (€3.5 billion R&D in 2012) is in a class of its own, it is followed by Petrochina (€1.7 bn), ZTE (€1.5 bn), railway giants, car companies, software conglomerates, construction firms, industrial companies, engineering firms, and so on. In other words, China’s emerging portfolio of large R&D investors is already broad, fairly diversified and extends from low- to high-tech.
Since British industrialisation and Adam Smith’s pin factories, Western economies have dominated innovation. As a result, their accumulated intellectual capital remains predominant. But if the spotlight is shifted to relative growth, it is easy to see the writing on the wall.
From Visions to Progress in European Innovation
Certainly, only a decade ago – after years of Euro euphoria – there was still great anticipation in Brussels that Europe was about to enter a new era of growth and prosperity, fueled by innovation. The buzzword was the “Lisbon Strategy,” a 10-year development plan devised in 2000 for the European Union.
In Brussels, the Lisbon Strategy was seen as manna from heaven. The idea was to make the EU “the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion.” Only a few years later, it became painfully clear that few objectives would be achieved. Nonetheless, in March 2010 the European Commission proposed a new Europe 2020 strategy, although the failure of the old strategy had been barely brushed away under the carpet.
Like a decade before, the initial reactions were mildly positive among the policymakers, but business leaders did not find strong incentives to fuel their interest. What’s worse, the exercise took place only weeks before the onset of the sovereign debt crisis in Europe. Unsurprisingly, the Europe 2020 was ignored amidst the turmoil of banking crises, austerity policies, bailout packages, and severe social dislocations – all of which contributed to the European election earthquake in May.
But how could Brussels achieve a pragmatic, actionable and effective innovation strategy? Four principles would go a long way to build a foundation for European economies in the early 21st century.
Internal innovation capabilities need drastic upgrading. Europe needs broad and deep upgrading of its innovation capabilities. Along with Japan, the region’s greatest innovation achievements tend to be mainly historical. Further, these capabilities are under structural decline, both internally and relative to the rise of innovation in large emerging economies, particularly in China and Asia.
Innovation priorities should be focused on economic competitiveness. In the past two decades, Brussels has repeatedly linked social and environmental goals with innovation objectives. The priorities of European innovation should be defined with greater focus to economic productivity, competitiveness and growth. To make a real difference in innovation, these goals should not be super-imposed on innovation from the outside, but incorporated in such efforts from within.
Innovation initiatives must attract all stakeholders and core economies. In the past, Brussels has downplayed the role of European business in the creation of its innovation strategies. And yet, the prime goal of the region’s innovation initiatives should be to foster and provide incentives to principal European businesses: industrial leaders, trade associations, leading multinational corporations, small- and medium-size enterprises, family firms, technology startups and emerging industries. These initiatives should incentivise the core economies in the region, particularly Germany – the continent’s growth engine.
Fostering innovation partnerships with emerging economies. The shift of growth to Asia offers many opportunities to European companies that have invested in the region’s trade and investment. In the past, China was seen mainly as the site of cost-efficiencies, or as an export platform. Accordingly, European companies in China basically traded market share for expertise and know-how. Today, the relationship is equalising, while Chinese multinationals, foreign investment and R&D play a growing role in global markets. Fostering innovation partnerships with Chinese and other emerging-country multinationals is a viable way for European companies to participate in growth in the world’s most dynamic region.
What next?
Today, the U.S., China, Japan and Europe account for 80 percent of the more than $1.6 trillion invested in R&D across the world. The ongoing shift of China’s growth model from investments and exports to consumption is likely to increase its R&D investments, in both relative and absolute terms. As Premier Li Keqiang has argued, China’s R&D as a percentage of GDP should increase to 2 percent of GDP in 2014 and to 2.2 percent by 2015.
In the past few years, this R&D intensity has eroded in many European countries. In the UK, it is now barely 1.7 percent, while the average of EU-28 countries is only 2.1 percent. Due to growth differentials, China is positioned to bypass Europe before the end of the 2010s, whereas the U.S. could fall behind China by the early 2020s. Due to its massive population scale, China’s catch-up with the U.S. or Europe in innovation intensity (R&D expenditures divided by population) will take a lot longer.
In view of these structural trends, innovation should not be perceived as a win-lose game against emerging economies, but as a win-win race with emerging economies. In Europe, it requires a new mindset; one that is internally calibrated to competitiveness and pro-growth policies; and that is externally attuned to partnerships in emerging economies to participate in their catch-up growth.
A reverse scenario would not be pretty. Even if Europe’s current challenges could be resolved without a “lost decade,” but its level of innovation continues to deteriorate, the region would continue to stagnate or fall behind its counterparts, which, ultimately, will be reflected in European living standards and social support systems – particularly as aging demographics and barriers against skilled immigrants will penalise the region’s productivity and growth.
About the Author
Dr. Dan Steinbock is an internationally recognized expert of the nascent multipolar world. In addition to advisory activities (DifferenceGroup), he is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). He was born in Europe, resides in the US and spends much of his time in China and Asia. For more, see www.differencegroup.net
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