A man takes a picture with a Huawei device in February
Li Wenbo

BEIJING — "Innovation" has become a favorite word for Chinese headline writers. From individuals to private firms and even public institutions, everybody and everything aims to be an innovator.

Though the OECD Economic Outlook 2014 predicted that China will probably become the country in the world which invests most in Research and Development (R&D) within five years time, the "Innovative Country" that former President Hu Jintao set as a goal for China in 2006 still seems to be far away.

Sure, it's true that the Chinese lunar orbiter Chang'e successfully soft-landed on the moon and the manned submersible Jiaolong achieved considerable advances in deep-sea research. But both had seemingly limitless effort and money pouring in from the government. The significance of these accomplishments is more political than economic.

In today's global economy, markets aren't looking for a pompous race to the heavens or below earth, but rather those small but beautiful solutions that can solve everyday practical problems. Too many Chinese couldn't care less whether iPhone represents true independent innovation at its best, but do wonder whether the handset of Xiaomi — the world's third largest smartphone maker — can rival with iPhone quality at half the price.

On the European Commission's 2014 EU Industrial R&D Investment Scoreboard the top 50 places are almost entirely monopolized by American, Japanese and European companies. While Volkswagen AG is in the top spot for the second consecutive year, Samsung and Microsoft come in second and third. Meanwhile Huawei, China’s largest telecommunications equipment maker, which ranks 26th, is the only Chinese firm to make it into the top 50 worldwide for R&D investment.

Coincidentally, Lenovo, Xiaomi, Tencent and Huawei were listed by Boston Consulting as some of this year's global 50 most innovative companies.

As of 2013 Huawei invested about $5.1 billion in R&D, representing 12.8% of its annual turnover. Though Samsung spent almost three times what Huawei spent — $14.4 billion over the same period — Huawei's R&D intensity is nevertheless twice that of Samsung.

Workers in a Huawei factory in Shenzhen — Photo: Cheryl Diaz Meyer/TNS/ZUMA

Unfortunately Chinese companies such as Huawei are very rare. As this newspaper found out by reading the annual reports of China's top 30 listed companies, whether it's China CNR Corporation, a locomotive manufacturer, or Zoomlion, a construction machinery manufacturer, they spend on average only 2-3% of their annual revenue on R&D. This is also the average that most Chinese companies have invested in it since 2008. As one company executive bluntly put it: All Chinese enterprises put in little money in R&D.

What's missing?

So why is it that Chinese companies are devoting so little to R&D?

First, because following the crowd in China still pays off. Not only do you avoid risk, but this standard low-cost approach can produce returns in a fast developing market such as in China.

Chinese people"s rising revenue is bringing about huge demand and market opportunities. Even without creating anything original, as long as you are fast and efficient at copying, you will be successful.

In addition, Chinese enterprises are relatively weak in R&D capability. Such capability requires a long-term accumulation of experience and cannot be achieved overnight. Companies that pursue profits via R&D find it requires a long time to bear fruit, and this doesn't comply with most Chinese companies' criteria to see immediate benefits.

Perhaps it is not totally fair to blame Chinese companies' lack of passion and sense of necessity for the shortcomings on innovation. As a matter of fact, in comparison with the technological dilemma, what is even more urgent is improving the competitive and legal environment in China.

Fortunately, compared with the grand slogans of the past, such as "Building China as an Innovative Country," the current government of President Xi Jinping has a more sober and pragmatic approach. It places more emphasis on management and institutional innovation in paving the road for encouraging technological innovation.

Obviously, it can be useful for China to devote huge state resources (known as the Nationwide System in Chinese) to achieve breakthroughs, such as its moon landing and submersible expedition. But without providing the right soil for innovation on the ground level, the pursuit of meaningful technology for our lives and products with market value will be just a mirage.

What is certain is that the companies that invest the most are not necessarily the ones with the most creativity. But those who invest too little will never be the leaders driving innovation.

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Economy

European Debt? The First Question For Merkel's Successor

Across southern Europe, all eyes are on the German elections, as they hope a change of government might bring about reforms to the EU Stability Pact.

Angela Merkel at a campaign event of CDU party, Stralsund, Sep 2021

Tobias Kaiser, Virginia Kirst, Martina Meister


-Analysis-

BERLIN — Finance Minister Olaf Scholz (SPD) is the front-runner, according to recent polls, to become Germany's next chancellor. Little wonder then that he's attracting attention not just within the country, but from neighbors across Europe who are watching and listening to his every word.

That was certainly the case this past weekend in Brdo, Slovenia, where the minister met with his European counterparts. And of particular interest for those in attendance is where Scholz stands on the issue of debt-rule reform for the eurozone, a subject that is expected to be hotly debated among EU members in the coming months.

France, which holds its own elections early next year, has already made its position clear. "When it comes to the Stability and Growth Pact, we need new rules," said Bruno Le Maire, France's minister of the economy and finance, at the meeting in Slovenia. "We need simpler rules that take the economic reality into account. That is what France will be arguing for in the coming weeks."

The economic reality for eurozone countries is an average national debt of 100% of GDP. Only Luxemburg is currently meeting the two central requirements of the Maastricht Treaty: That national debt must be less than 60% of GDP and the deficit should be no more than 3%. For the moment, these rules have been set aside due to the coronavirus crisis, but next year national leaders must decide how to go forward and whether the rules should be reinstated in 2023.

Europe's north-south divide lives on

The debate looks set to be intense. Fiscally conservative countries, above all Austria and the Netherlands, are against relaxing the rules as they recently made very clear in a joint position paper on the subject. In contrast, southern European countries that are dealing with high levels of national debt believe that now is the moment to relax the rules.

Those governments are calling for countries to be given more freedom over their levels of national debt so that the economy, which is recovering remarkably quickly thanks to coronavirus spending and the European Central Bank's relaxation of its fiscal policy, can continue to grow.

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive.

The rules must be "adapted to fit the new reality," said Spanish Finance Minister Nadia Calviño in Brdo. She says the eurozone needs "new rules that work." Her Belgian counterpart agreed. The national debts in both countries currently stand at over 100% of GDP. The same is true of France, Italy, Portugal, Greece and Cyprus.

Officials there will be keeping a close eye on the German elections — and the subsequent coalition negotiations. Along with France, Germany still sets the tone in the EU, and Berlin's stance on the brewing conflict will depend largely on what the coalition government looks like.

A key question is which party Germany's next finance minister comes from. In their election campaign, the Greens have called for the debt rules to be revised so that in the future they support rather than hinder public investment. The FDP, however, wants to reinstate the Maastricht Treaty rules exactly as they were and ensure they are more strictly enforced than before.

This demand is unlikely to gain traction at the EU level because too many countries would still be breaking the rules for years to come. There is already a consensus that they should be reformed; what is still at stake is how far these reforms should go.

Mario Draghi on stage in Bologna

Prime Minister Mario Draghi at an event in Bologna, Italy — Photo: Brancolini/ROPI/ZUMA

Time for Draghi to step up?

Despite its clear stance on the issue, Paris hasn't yet gone on the offensive. That having been said, starting in January, France will take over the presidency of the EU Council for a period that will coincide with its presidential election campaign. And it's likely that Macron's main rival, right-wing populist Marine Le Pen, will put the reforms front and center, especially since she has long argued against Germany and in favor of more freedom.

Rome is putting its faith in the negotiating skills of Prime Minister Mario Draghi, a former head of the European Central Bank. Draghi is a respected EU finance expert at the debating table and can be of great service to Italy precisely at a moment when Merkel's departure may see Germany represented by a politician with less experience at these kinds of drawn-out summits, where discussions go on long into the night.

The Stability and Growth pact may survive unscathed.

Regardless of how heated the debates turn out to be, the Stability and Growth Pact may well survive the conflict unscathed, as its symbolic value may make revising the agreement itself practically impossible. Instead, the aim will be to rewrite the rules that govern how the Pact should be interpreted: regulations, in other words, about how the deficit and national debt should be calculated.

One possible change would be to allow future borrowing for environmental investments to be discounted. France is not alone in calling for that. European Commissioner for Economy Paolo Gentiloni has also added his voice.

The European Commission is assuming that the debate may drag on for some time. The rules — set aside during the pandemic — are supposed to come into force again at the start of 2023.

The Commission is already preparing for the possibility that they could be reactivated without any reforms. They are investigating how the flexibility that has already been built into the debt laws could be used to ensure that a large swathe of eurozone countries don't automatically find themselves contravening them, representatives explained.

The Commission will present its recommendations for reforms, which will serve as a basis for the countries' negotiations, in December. By that point, the results of the German elections will be known, as well as possibly the coalition negotiations. And we might have a clearer idea of how intense the fight over Europe's debt rules could become — and whether the hopes of the southern countries could become reality.

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