China May Have Hurt Innovation But Not By Much
It is well-known that for the past couple of decades China has acted as a factory to the world. It is also common knowledge that many manufacturing jobs in both Europe and the USA were lost to China. The deeply cheaper labor costs in China were simply much too difficult to compete with. In more advanced economies, there are minimum wage standards and worker benefits that must be met.
More recently, some economists in the west have started to add to the concerns regarding China by claiming that China has hurt and damaged innovation. How? Well there are many reasons that have been postulated and expounded on. Still, the one major line of reasoning points out the fact that innovation is costly. Therefore, in order to recoup the costs invested in innovation, the returns need to be higher. However, higher returns become more challenging to achieve when China continues to undercut everyone else with lower prices. The reasoning is sound and the points appear to be factual.
However, thus far, the data does not appear to support the above-mentioned concerns. Rather, data gathered has consistently identified that China and its competitive pricing has fueled innovation, not stifled it.
At Bouchard Fintech, we understand that lower production costs and sharp price competition can pose a challenge. It is also clear that competition has a healthy role to play in spurring companies to do better, to lower their costs, to improve quality and to achieve higher customer satisfaction. Additionally, innovation and the conditions that surround it are not one dimensional but rather multi-faceted and complicated.
It is a known fact that some types of competition are in fact healthy and promote the right kinds of changes and behavior while other kinds of competition may, in fact, be unwelcome and unhealthy to businesses. After all, if prices are cut too low by competitors, in China or elsewhere, then there might simply be no room left for any profits.
Some see China and its competitive edge in terms of lower pricing as reducing their profits and therefore having a dampening effect on their innovation and innovative spirt. Then there is the added concern about the government backing that many Chinese manufacturers receive from the regional and central governments in China. After all, when China wishes to fund an industry or market sector, they certainly have the wherewithal to do so.
Some worry that an unhealth mix of lower prices coming out of China and the government support that China gives its businesses, means that their industries suffer and that their efforts to innovate are also damaged.
More recently, the issues surrounding the transfer of knowledge from European and North American companies to China has come to the fore. China, has been reported to have insisted that large corporations wishing to do business in China must agree to certain levels of information and technology transfers. These points appear to be corroborated by the fact that patents in China have continued to rise sharply but have actually dropped in other parts of the world.
However, there have been studies that have shown the opposite effect. Some studies have noted that because of the competition from China, European and North American companies had to innovate more, had to improve their offerings and had to make bigger technological strides. Those facts tend to show that competition from China helped rather than damaged those companies. Additionally, companies in both Europe and some parts of North America saw a decrease in their lower paying manufacturing jobs but at the same time saw an increase in the more technically-challenging and more financially rewarding jobs.
When the USA is considered separately, a slightly different image appears. Here, the competition from China appears to have, at times, lowered some innovation due to the price pressures.
Bouchard Fintech points out that more recent studies appear to provide contradictory facts and data sets. For example, the USA has, once again, seen a rise in patent applications. That was not the case in Europe, where patent applications have not rebounded.
Still, there is a silver lining. In North America, the competition from China has led to new innovation even if that innovation is on a more selective basis. Rather than squander time, money and resources, companies are being more discerning in deciding which projects to fund. They are being more judicious in their selection of new innovations to invest in and which ones to steer clear from.
Furthermore, some companies in North America have opted to be more selective in their target markets. Some have moved away from industries that have too much competition and have focused on other, more promising, areas.
The research has found that lower prices from China and the price competition that Chinese manufactures have brought to the market, have not had that much of a negative impact on innovation. Its shows that North American firms have absorbed the competition and have continued to innovate and adapt. North America and the USA, in particular, can rest easy knowing that their companies continue to innovate and that local innovation is still alive and well
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