How to benefit from China’s innovation boom

For more than a century, the United States has been the dominant global force for innovation. But China and other Asian countries are now testing that dominance, and the West should welcome the challenge.

China’s move from imitation to innovation has been a matter of national policy in recent years. In 2011, for example, the government established a set of ambitious targets for the production of patents. Almost immediately, China became the world’s top patent filer.

China soon surpassed the US in other important measures. Each year, Chinese universities award more PhDs in science and engineering than US institutions do – and more than twice as many undergraduate degrees in these fields.

Moreover, China is set to outpace the US in investment in research and development. Since 2001, China’s R&D expenditure has been growing by 18% annually and has more than doubled as a share of GDP. In the US, that ratio has remained relatively constant.

To be sure, such metrics can easily be manipulated – a fact that critics are quick to point out. But statistics from the US National Science Foundation reveal a genuine drive to innovate across much of Asia, with East, South and Southeast Asian countries together spending more on R&D than the US. And technology-intensive activity in the region is fast approaching that of North America and Western Europe.

In fact, Asian countries are helping to fuel one another’s innovative success. China’s invention initiative has produced such rapid results in part because the government actively cooperates with its Asian competitors.

Indeed, despite territorial disputes and other divisive issues, the commissioners of the patent offices of Japan, South Korea, China and, to a lesser extent, Singapore and Taiwan meet often to define and coordinate their intellectual-property (IP) policies. China’s leaders know that they can learn from countries like Japan and South Korea, which implemented policies to encourage innovation and protect IP rights long before China did.

The precise impact of Asia’s IP expansion is impossible to predict. But its transformative potential is obvious.

Asian countries are essentially giving tens of thousands of top minds the opportunities and incentives to tackle today’s most pressing challenges, such as developing cost-effective sustainable energy solutions, ensuring affordable health care for aging populations, and improving the quality of life in overcrowded cities. These complex problems demand a plurality of innovative talent and long-term international collaboration – not just to find solutions, but also to deploy them. In an increasingly knowledge-based global economy, partnerships and cooperation will be the natural order.

In this context, the West would be foolish to resist Asia’s IP emergence. Instead, Western governments should support, learn from and reap the rewards of the invention boom in the East. For example, the US, which leads the world in bringing innovative products to the market, should offer commercialization channels to innovative Chinese universities and small companies. And Chinese and Western companies should be encouraged to invest in one another’s IP.

Such cooperation has already begun. For example, in 2008 Intellectual Ventures (which I helped found) established a presence in China and other countries with emerging innovation cultures in order to focus their inventors’ talent and energy. The resulting global network of more than 400 institutions and over 4,000 active inventors has produced more patent applications than many R&D-intensive companies do.

In this ecosystem, everyone wins. The inventors gain access to the company’s expertise in IP development and to an international community of experienced problem-solvers. Intellectual Ventures gets a stake in valuable solutions. And the world benefits from those solutions.

Imagine if more such initiatives were launched, not only by companies but also by governments. A cooperative approach could help to improve the troubled trade dynamics between Asia and the West, characterized by disagreement over China’s lax enforcement of IP laws.

Instead of shaking its fist, the West could provide incentives that encourage China to become a responsible actor in the existing IP regime. These could include, for example, efforts to organize viable alternatives to piracy for the tens of thousands of Chinese companies that currently earn a living from it. Some Western entrepreneurs already turn to these so-called Shan Zhai enterprises to manufacture their prototypes at scale, creating a kind of cross-border Kickstarter culture.

Eventually, many Shan Zhai companies will evolve into legitimate businesses with their own IP. Given that Asian countries naturally will uphold and defend IP rights more vigorously when they have more at stake, the West should look for ways to hasten this transition.

The West can also take some lessons from the various models Asian countries are experimenting with as they ramp up domestic innovation. In South Korea, LG recently launched a program to solicit invention ideas from the public, promising inventors a hefty 8% stake in the proceeds of any ideas the company commercializes. That is probably not an approach that many American companies have considered. But maybe they should.

Asia is also experimenting with creative ways to finance innovation, such as China’s IP exchanges and Malaysia’s IP loan programs. The West should pay attention to these efforts, because they could offer alternatives to traditional avenues for sourcing and financing invention, such as venture capital, that are producing lacklustre results.

Finally, Western companies should be willing to supply inputs to Chinese businesses selling innovative products. This recommendation may seem radical, but only because the view of a one-way flow of innovation from West to East has become so entrenched. In fact, there is no good reason for Western businesses to stand on the sidelines as Asia produces whiz-kid entrepreneurs and high-tech start-ups. These pioneers are building ecosystems with points of entry at every level, and the West should enter at all of them.

As Asian innovation comes into its own, the US and other developed countries must find ways to participate – or risk missing the opportunity of the century in a vain bid to recapture bygone supremacy.

Published in collaboration with Project Syndicate

Author: Edward Jung, former Chief Architect at Microsoft, is Chief Technology Officer at Intellectual Ventures.

Image: A map of China is seen through a magnifying glass on a computer screen showing binary digits in Singapore in this January 2, 2014. REUTERS/Edgar Su