Most disturbing is the huge productivity gap between the United States and China in such critical sectors as technology, pharmaceuticals and telecommunications. While actual productivity figures (output per employee) by industry across countries are not available, we can use sales per employee as a proxy. In China, sales per employee are only 24.4 percent of those in the United States in technology, 30.6 percent of those in pharma and 31.4 percent of those in telecom.
Two changes could help boost productivity in China. The first is more competition. Current regulations limit the ability of foreign and private firms to invest and fully compete in key sectors in China. If China levels the playing field, it could further increase economic efficiency, promote innovation and boost long-term growth rates. The recent economic reforms announced by the Third Plenum of the Central Committee are an important step in the right direction, as they introduce a greater role for private enterprise and markets in the functioning of China’s economy.
The second is increased R&D spending. Over the past 20 years, investment in R&D has tripled in percentage terms, to nearly 2 percent in 2012. The government’s target is 2.5 percent by 2020. In absolute terms, the numbers are even more impressive. Over the last decade, the volume of R&D investment expanded 6.7 times, and China now ranks second in total R&D spending, behind the United States. However, as with capital project investment, there is a misallocation of resources. Most R&D investment centers on incrementally improving existing products and services. China’s independent innovation credentials still lag far behind the United States and other countries.
To catch up, the Chinese government needs to create a favorable environment for innovation, including a competitive and open system for R&D funding and effective intellectual property protection. More important, the nation must attain a dominant position in enterprise innovation, choose its own innovative models legitimately, broaden investment and financing channels for independent innovation, and strengthen the integration of study and research. The economic reforms recently announced are an important step in this direction, as they introduce a greater role for private enterprise and markets in China’s economy.