The BRICS Summit: Innovative China and the Others

Another year, another month, another big summit: with the Doha-Round of the World Trade Organization a failure, and many Western economies stumbling from one financial crisis to another, the multi-polarization of the globe is gathering pace. One case in point is Brazil, Russia, India, China and South Africa – the BRICS.

The 5th BRICS Summit recently took place in Durban, South Africa. Commentary on the BRICS and their summit often took contrarian positions. Some cheered the group’s existence and plan for a development bank, arguing it is high time for the emerging world to create its own institutions to replace the Western-dominated World Bank and IMF. Others reiterated their doubts whether the BRICS can be a coherent group at all. Some also tried to explain why and how the summit’s hosts, South Africa, a small and sluggishly performing economy compared to the others, came to be a member and how the country may end up being the 35^th province of China.

Most commentaries concurred on the centrality of China in the BRICS: i.e. that China, with its geo-political aspirations, economic size, and “thirst” for natural resources, is really what binds the group together and keeps South Africa a member. The RMB trumps the Real, Ruble, Rupee or Rand.

What most commentaries however failed to point out is that at the same time that China binds together the BRICS, it is also moving away from them in many respects – and at a faster rate. It is not just that Malaysia has overtaken China as the largest Asian investor in Africa, or that China is “exporting unemployment” to the others, or that it is in an arms race with India (and buying some of the arms from Russia). It is that China has attained a significant technological superiority over the others.

In this respect, China’s big march is not towards the other BRICS, but towards the West – to surpass the USA not as the world’s largest economy (a given) but as the world’s most innovative. Figure 1 shows that in comparison to the others, China has been an outlier in terms of the sharp increase in its R&D spending in recent years.

Figure 1: China Rising: R&D Spending as % of GDP amongst BRICS

In contrast, India and Russia only spend as much on R&D now as a decade ago, whilst only Brazil saw a moderate increase. Since 2006 R&D in South Africa has been declining as a percentage of GDP. Figure 2 confirms China’s primacy in terms of innovation, showing the dominance in patents from Chinese firms registered at the US Patent Office over the 2004 to 2008 period.

Figure 2: China’s Dominance: Patents Registered in the USPTO, 2004-2008

Other indicators of technological innovation are consistent. China is now one of the major producers of wind energy turbines in the world: four of the largest producers are Chinese: Goldwind, Sinovel, Geodian United Power and Ming Yang. Chinese companies are actively pursuing attempts to get access to USA fracking technology, at the cutting edge of energy innovation, by investing heavily in the USA’s shale gas industry. China Railway Construction is the only BRICS corporation among the top 10 industrial R&D spenders in the world (its R&D budget is around US $ 1.3 billion). At the same time China is designing a next generation internet that is according to Leo Mirani “far ahead of anything any other country has at the moment”.

Why is there this divergence in innovation between China and the others?  Generally, countries can obtain technological know-how from abroad (e.g. from foreign firms investing and bring new technologies and management practices with them) and/or from domestic innovation efforts and capacity to absorb foreign technology (e.g. investing in human and physical infrastructure and subsidizing R&D).

China has been very successful in both areas. In particular, it stands out from the other BRICS, particularly Russia and South Africa, for having attracted most of its FDI into its manufacturing sector. In a recent UNU book published by Oxford University Press on Pathways to Industrialization in the Twenty-First Century and formally launched in April 2013 at the London School of Economics, Eddy Szirmai, Ludovico Alcorta and elaborate the value of manufacturing for development and growth.

Specifically, we stress that manufacturing is important for capacity accumulation and positive externalities, including spillovers of information and new management practices. At least before joining the WTO, foreign investors to China were expected to form joint ventures with local firms, through which technology transfers were facilitated. Although the country received huge amounts of FDI for manufacturing, this never replaced indigenous efforts: the country invested heavily in domestic fixed capital formation (see Figure 3 below).

Figure 3: Investment Driven Growth: Domestic Investment as Share of GDP in BRICS  (5-year averages)

Having said this, China is not yet as innovative as the USA or Europe; although the number of its patents are increasing, the economic value of  the patents are not yet comparable; its companies are rather known for incremental innovations and imitation. However this is changing: after all China invented paper, gunpowder, print and the compass. China is structurally diverging rapidly from the rest of the BRICS – see also the recent UNU-MERIT / UNIDO report on Structural Change, Poverty Reduction and Industrial Policy in the BRICS that details this in greater detail.

As its consumer market becomes more sophisticated, nurtured and supplied by its own corporations which have learned to incrementally innovate to adjust to consumers’ preferences, it may increasingly become even more of a challenge for the other BRICS to become anything less than suppliers of raw materials to China, or to compete with higher-tech exports from Chinese companies in other markets.

Being eclipsed in trade and innovation, it is clear why the others may pin their (misplaced?) hopes on a BRICS development bank. It remains to be seen whether China will contribute disproportionately to the establishment of such a bank – perhaps it will convince the smaller members to contribute equally, and hence show that one can indeed have one’s cake and eat it.

By Wim Naudé, Professorial Fellow at UNU-MERIT and the Maastricht Graduate School of Governance and Dean of the Maastricht School of Management.