An aging population, rising debt, and declining returns on investment mean that the country must promote innovation to secure a high-growth future, a new McKinsey Global Institute report finds.
How innovative is the Chinese economy? On the surface, the answer seems clear: by traditional measures, China is innovating on an increasingly large scale and is close to becoming the global innovation leader. In 2014, for example, it spent nearly $200 billion on research and development, the second-largest investment by any country in absolute terms (and about 2 percent of gross domestic product). China’s universities graduate more than 1.2 million engineers each year—more than any other country. And it leads the world in patent applications, with more than 825,000 in 2013, compared with about 570,000 for the United States.
Are these metrics the most appropriate ones to assess China’s innovation ascendancy? We took a deeper “micro” view to understand the actual impact of Chinese innovation—as demonstrated by global success in specific industries—and the country’s potential to evolve from an “innovation sponge”—absorbing and adapting technology, best practices, and knowledge1 —into an innovation leader. And making that transition is critical; China needs to succeed at innovation in all types of industries to raise productivity and create the high-value-added jobs that are needed as wages rise and millions more workers migrate to China’s cities.
Despite the headline numbers, the impact of innovation on China’s GDP growth (as measured by multifactor productivity2 ) has declined in recent years. From 1990 to 2010, multifactor productivity supplied 40 to 48 percent of GDP growth. However, over the past five years, its contribution was just 30 percent, or some 2.4 percentage points of GDP annually—the lowest level since about 1980. To maintain annual GDP growth of 5.5 to 6.5 percent through 2025, China will need to generate 35 to 50 percent of it (2 to 3 percentage points) from multifactor productivity.
More in: The China Effect on Global Innovation study to be released by the McKinsey Global Institute.