Is China on the right track for R&D activities?

At the opening day of the Fourth Great Wall Motor Festival, the Chairman of the Board Jianjun Wei announced that the Great Wall Motor would abandon car business temporarily and focus on SUV business.

Chairman photoLogo

It has been nearly one and a half year until the Chairman made any public announcement about the company’s strategy. Along with the announcement, there is a fact worth noticing that the automobile industry in China is becoming more and more competitive and there are more subdivisions in this market. Nearly all the other competitors, such as Volkswagen, Honda and Toyota are trying to bring their new models into the market to increase their own market shares.

It very strange to see that while other brands are making products “Wild”, the Great Wall Motor is making products “Narrow”. As mentioned by the Chairman, the reason for doing so is to resist the risk of developing. Increasing the expenditure on R&D activities and improving the product quality are measures the Great Wall Motor are taking now. Jianjun Wei told the journalists that his company spent nearly more than 2 billion on R&D activities every year, which is more than 3.5% of its annual turnover (based on the 2013 data).

But does the huge investment really work? The answer might be no. For the model Hafu H8, it has drawn the short straw. This model is listed twice but twice announced the suspension of listing, mainly because of the quality problems.

This raises a question worth investigating: does the huge R&D investments made by Chinese enterprises really efficient?

According to the 2013 annual data, the R&D/GDP ration for China exceeds 2% for the first time, which is already higher than Japan and Canada.

OECD CountriesGraph 2

From the graphs above, we can find for nearly all countries, as long as their R&D/GDP ration pass 2%, they will enjoy a fast increasing R&D/GDP ratio for some period. Based on that, we can predict for the next a few years, this ration for China will also keep increasing rapidly.

According to economic theory, high R&D/GDP ratio has positive effects on a country’s productivity and product quality. But is this also true for China? The answer might not be so obvious.

On one hand, we need to admit that the productivity in China does increase for the past few years and this is shown by the GDP per capital (ppp) data. For the past three years, the GDP per capital (ppp) is $8300, $9100 and $9800. The amount of exports is $2.12 trillion for 2013(1st in the world) and $2.049 trillion for 2012. The main export commodities are electrical and other machinery, including data processing equipment, apparel, radiotelephone handsets, textiles and integrated circuits.

On the other hand, there is some doubt about the increase in China’s product quality. According to trade theory, the export products should be more sophisticated than other products a country produces. The price of exports reflects the quality of the exports.

Based on the fact that the R&D expenditure increases so fast for China, we are looking forward to see an increasing price for China’s exports. However, according to Bing Xu (2007), in which she used the export price of Line Telephone Sets with Cordless Headsets as an example, the export price over the average price ratio of 2005 is even lower than that of 1996. Another fact is that China spends a higher proportion of R&D expenditure on applied research than the average of OECD countries. But without a solid background of basic research, it’s not easy for the applied research to be efficient.

According to what is mentioned above, even thought China has a huge R&D expenditure, lacking proper methods to invest it might be a challenge for China at this moment. More researches are needed on this topic to help China find the right track for its R&D activities.

Sources:

https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

http://baike.baidu.com/view/4396.htm?fr=aladdin

http://finance.ifeng.com/a/20140929/13155057_0.shtml

http://auto.qq.com/a/20140923/052596.htm

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