China Set to Own the Second Largest Research and Development Industry by 2020

China’s economy, once attractive for its cheap labour force, has been experiencing transformation towards higher value-added services and products. Since due to the more expensive workforce, production of cheap items has been moving towards other low-cost countries such as Vietnam or Bangladesh, China has been gradually switching its focus from ‘Made in China’ to ‘Created in China’.

Over 2009-2014, China’s research and development industry demonstrated impressive growth, at a CAGR of 20% and is projected to grow further at a CAGR of 15%, during 2014-2020. By 2020, China is predicted to outpace Japan and own the second largest research and development industry in the world. Increasing investment in research and development activities, development of highly skilled workforce and new government initiatives are expected to be among the major drivers boosting the technology level in the country.

Chart 1. Revenue of Five Largest R&D Industries, US$ million in 2014 and 2020


Source:         Euromonitor International from National Statistics

Research and development intensity on the rise in China

Total expenditure on research and development in China grew from 1.7% of total GDP in 2009 to 2.1% in 2013-2014 – the same level as in Western Europe. Such fast growing research and development intensity indicates China’s increasing role in global innovations development.

In addition, according to the World Intellectual Property Organization, China was the leading country in Intellectual Protection filings for patents and industrial design in 2013, showing the country’s growing emphasis on the protection of intellectual property.

Chart 2. Top 10 countries by Number of Intellectual Protection Filings in 2013


Source:         Euromonitor International from the World Intellectual Property Organization

Being active in research and development in such areas as nuclear power plants, high-speed rail, space exploration and solar energy, China will be focusing more on innovation in social areas and green energy over the upcoming years.

Due to its ageing population and fast expanding urban areas, pharmaceuticals and food safety will be future areas on which China will focus. Green energy development is also expected to become one of the key areas for the research and development industry in the future. China’s government in its 13th Five Year Plan for 2016-2020 in particular emphasises green development, thus boosting research and development activities in emission reduction, mitigation of global warming and other nature protection measures.

Consequently, as social issues and green energy are among the major global concerns, China is projected to be a strong player and its innovative solutions are expected to be demanded not only in the local market but also by overseas countries.

Research and development is driven by government expenditure

The Government is the key buyer of research and development services in China. It accounted for close to a third of total demand in 2014, compared with just 12% in Japan or 10% in South Korea.

Innovation Strategy 2020 is among the largest projects initiated by the Chinese Government. This 10-year plan is set to enhance applied industrial and basic research in such key areas as the environment, energy, biotechnology, food agriculture and fisheries, as well as launch new science parks and research centres.

National Medium- and Long-term Plan for Human Resource Development (2010–2020) – the first national plan in China focusing on the development of human resources, is intended to increase the educated and highly skilled workforce. Such government programme is projected to be especially beneficial for the research and development industry as it significantly improves the quality of services and ensures China’s transformation to an innovative country.

International projects such as the EU Framework Programme for Research and Innovation – Horizon 2020, nuclear-related research programmes in cooperation with the US Electric Power Research Institute, and other projects with EU countries are also set to improve the quality of research and development services in the country in the future.

As a result, implementation of government initiatives, further raising of public financing and support via international projects are projected to become even more vital over the upcoming years. In line with slowing economic expansion, China will have to position itself as the provider of high quality products and services, thus putting further importance on the research and development industry.