By Albert Hu

Geopolitical competition impacts global technological innovation

Escalating geopolitical competition is fundamentally reshaping the global economy by increasingly prioritising national security over economic efficiency as the dominant factor in resource allocation. If the current trends persist, this shift will have a significant impact on global technological innovation.

The initiatives led by the West to reduce China’s involvement in the global supply chain are aimed at “de-risking”. As a result, western multinational corporations are forced to relocate their production to their home countries or third nations, resulting in cost increases and reduced efficiency. Furthermore, restrictions on exporting high-tech products to the vast Chinese market will also impact the profitability of Western high-tech providers. To maintain their technological edge, Western countries are investing heavily in fundamental and cutting-edge research, which inevitably leads to reduced spending elsewhere.

Additionally, these de-risking initiatives have presented significant challenges to the innovation efforts of Chinese companies. As technology “followers”, these firms have taken advantage of opportunities to acquire and integrate advanced technologies from Western technology “pioneers” through international trade, foreign direct investment, and overseas ventures. Thanks to over four decades of reform and opening-up policies, as well as deep integration into the global economy, China has made remarkable technological progress that has captured the world’s attention, particularly since joining the World Trade Organization. However, Western companies have been constrained by de-risking in their ability to transfer technical solutions, which has ultimately led to increased innovation costs and complexities for Chinese firms.

Meanwhile, the significant influence of technology on great power competition prompts both sides to invest increasingly in technological innovation. For instance, following the successful launch of an artificial satellite by the Soviet Union in 1957, the United States established NASA the next year, ushering in a wave of new technologies and innovations.

Navigating Under Pressure: China’s Approach to Technological Innovation

How should China approach technological innovation amid the current geopolitical climate?

To answer this question, it is important to recognise that the challenges to China’s technological progress caused by geopolitics conform to a general rule of technological development. This progression follows a linear pattern, starting with fundamental research, followed by applied research, then product development, and finally application and dissemination across the economy.

For technology “followers” who lack original innovation, it is more efficient to learn from industry leaders and apply existing technologies than attempt to reinvent the wheel. Furthermore, effectively utilizing existing technologies requires followers to invest resources and develop their own technological capabilities, through which they can then acquire the ability to innovate independently. It is a process that all major Western countries and some East Asian nations have undergone: from imitation to innovation.

Despite significant technological progress, China still trails behind in basic research and cutting-edge technologies compared to Western “leaders.” Western sanctions have blocked access to upstream technology, resulting in increased difficulty and cost of innovation in China. Therefore, enhancing basic and original research has become a policy consensus in China.

In my view, to address the gaps in fundamental and original research, China should focus on “an open system with two balances.”

First, China should establish a more open system for fundamental scientific research and proactively encourage scientists of other nations to engage in Chinese research projects. One notable shift in scientific advancements in recent decades has been the growing size of research teams, with more and more major research outputs being produced by a larger number of researchers with diverse backgrounds. An open research system that facilitates worldwide collaboration has been crucial in maintaining the United States’ status as a technological superpower, which has attracted talents from all over the world, thereby enhancing its innovation capabilities and creating a virtuous cycle.

Compared to technological innovation, scientific research is less influenced by geopolitics. A fundamental difference between science and technology lies in the fact that science is open while technology is relatively closed. This difference arises from the incentive mechanisms for scientists and entrepreneurs. Scientists derive their professional rewards from their reputation, which is built on:

1) “Being the first,” i.e., being the first to propose a specific theory or discovery;

2) That theory or discovery being widely recognised by peers, thus becoming “well-known” in popular terms.

It is through such incentives that new scientific discoveries come to be rapidly disseminated and shared. In contrast, entrepreneurs generally prioritise the monopolization of innovation to maximise their own return on investment, which is central to driving business innovation in a market economy. Monopoly can be obtained via trade secrets or intellectual property rights, such as patents. Entrepreneurs in most cases opt for trade secrets to safeguard their monopoly profits. However, in certain industries (such as pharmaceuticals) where innovations are readily reproducible, trade secrets are no longer feasible, leaving patents as the primary means of protecting inventions, despite the cost of disclosing the technological specifics behind the invention in exchange for patent coverage.

The dissemination of technology can be credited to trade and direct investment, yet it is impeded by geopolitical plays that restrict these pathways. Although scientific cooperation is also subject to geopolitical influences, scientific progress remains at its core open, with collaboration as the driving force. An internationally accessible system for fundamental research can assist China in contributing to scientific advancement that benefits the global community and enhances China’s soft power.

Two Balances in Scientific Innovation

In addition to the aforementioned “open system,” striking “two balances” is also essential.

First, it is important to balance addressing “chokepoints” with encouraging scientific exploration.

The sanctions imposed by the United States on China’s high-tech sectors target specific chokepoints where Chinese tech firms heavily depend on US solutions. Naturally, breaking through these chokepoints has become a key focus of China’s technology strategy. However, while investing heavily in addressing these issues is vital, it remains crucial to continue promoting scientific exploration, especially that which is driven by scientists’ curiosity.

The innovation system of the United States has always sought to balance curiosity-driven exploration and mission-based research. Exploratory research is backed by the National Science Foundation, whereas the government runs mission-oriented programs to deal with pressing technological challenges aligned with the national interest and public welfare. The 2022 CHIPS and Science Act of the US doubled the National Science Foundation’s budget within five years. Additionally, the Biden administration intends to facilitate cancer research with the Cancer Moonshot project, with the goal of lowering cancer mortality rates by 50% in 25 years.

To become a scientific powerhouse, China must strengthen its comprehensive capability for basic scientific research. While the emergence of future disruptive technologies is uncertain, an interdisciplinary and cross-industry approach is sure to be necessary. A research capacity that is both deep and broad will empower China to take advantage of the opportunities afforded by disruptive technologies.

Second, striking a balance between “government intervention” and a “functioning market” is key. 

The market mechanism is typically the most effective way to allocate resources in most contexts, but basic scientific research is a notable exception. The market mechanism relies on prices to reflect scarcity, whereas there’s no real market for most fundamental scientific research, let alone a price. One crucial reason for this is that basic scientific research has an impact on the entire society, which makes it challenging to privatise its benefits. However, as we progress through the linear model, the potential for privatisation increases, price signals get stronger, and the market becomes more efficient in allocating resources.

The role of the government and the market at each end of the linear model are undisputed: the public sector typically funds most basic research while the market largely invests in application, product development, and promotion. However, the challenge is to establish a balance between these two mechanisms.

In response to competition from Japan, the US Congress passed the Bayh-Dole Act in 1980 to expedite the transfer of scientific and technological knowledge from universities and research institutions to businesses, aiming at bolstering the competitiveness of the US economy. Prior to that Act, the intellectual property rights for research outcomes that were government-funded at US universities belonged to the state. The Bayh-Dole Act allowed institutions to take title to the intellectual property rights, enabling them to gain profits through technology transfer. This, to some extent, resulted in the privatisation of public property. The Act strongly encouraged technology transfer in American universities, leading to the proliferation of technology transfer offices and a significant rise in university-led startups and patent applications.

China has made significant strides in basic scientific research in recent years. While it still lags behind the US in terms of the number of papers published in leading journals such as Science and Nature, it is the only second-tier nation that is rapidly closing the gap with the US. The Nature Index measures research output by counting the papers published in over eighty top scientific journals. According to the Index, China’s research output was only 37% of that of the US in 2015. However, it exceeded the US for the first time in 2022. Meanwhile, the proportions of research output for Germany, the United Kingdom, France, and Japan remained unchanged during the past six years.

For China, there is a pressing need to improve the translation of research findings through institutional innovation. The relationship between the government and the market in China is reflected, to some extent, through the relationship between state-owned enterprises (SOEs) and private businesses. SOEs typically possess abundant resources for innovation and the ability to take risks, while private firms are more agile in responding to the market and seizing opportunities, backed by stronger operational efficiency. How to further involve the private sector in the development of national science and technology and enhance the overall efficiency of the innovation system is therefore a critical issue.

Hu Guangzhou (Albert Hu) is Professor of Economics at CEIBS. For more on his teaching and research interests, please visit his faculty profile here.