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Do imports from China drive higher rates of innovation in the United States and Europe?
A recent study suggests that competition from China has increased innovation in Europe. The study finds that 15% of technical change in Europe is a direct result of Chinese imports as European companies focus on high value economic activities and invest in IT, R&D;, and patenting. What do you think?
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3 Answers
It seems to me, that there’s a symbiotic relationship here. Higher rates of innovation in the US and Europe drive more imports from China and the resulting profits in turn drive more R&D and innovation here in the west.
China has positioned itself as a low-cost manufacturing center. As a result, their opportunity cost of producing goods is lower than it is here in the west. The resulting specialization and trade makes western firms allocate more resources to innovation and less to production. This natural economic force also makes Chinese firms do the opposite.
However, this may be changing very soon. China is showing signs that they want (and need) to participate in the higher value activities. It will be interesting to see what happens as the cost of production out of China begins to creep up. They may have less wiggle room than they need as far as production costs go.
Currency valuation is a huge piece of this equation. Upward movement on the Yuan or downward movement on the Dollar will make it almost impossible for them to turn it around or continue on the same course. I’m not convinced they’re painted into a corner just yet, but the evidence seems to indicate they’re getting there fast.
Scott I think this is a driving factor for business within NA and EU to reconsider how they are doing business. Competition always breeds innovation, and looking from both a EU and NA business perspective there has been some stagnation within those market places from both revenue and innovation stand points.
Looking at the question from a technological point of view as well, having Chinese business and technology starting to make greater leaps will push both NA and EU to remaining on the technological forefront. I believe that innovation and improvement will progress when there is the fear of loosing market to a competitor.
I definitely see this working with my manufacturing clients in the Midwest. Not only are they being forced to be more innovative with technology, as Steven suggested above, but they are also reconsidering what their core competencies are and deciding what functions should be outsourced abroad. This is forcing many companies to do business abroad when they had previously considered themselves to be an exclusively domestic operation.
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