(VERSION PRELIMINAIRE POUR DISCUSSION) CHINA’ DIGITAL TRANSFORMATION WHY IS ARTIFICIAL INTELLIGENCE A PRIORITY FOR CHINESE R&D ? Guilhem Fabre, Université Paul Valéry Montpellier 3, IRIEC EA 740 BRICS Seminar FMSH [email protected] * I. CHINA’S R&D POLICY Innovation requires human talent, financing, the capacity to discover, develop and distribute new products on growing markets with the help of intellectual property. Eco-systems of innovation may vary according to national economic conditions, i.e., the share of public versus private enterprises, the degree of confidence to intellectual property (I.P), the degree of interactions between the industrial-military complex, which is often at the vanguard of innovation, and the civil sectors, the insertion of the local economy in the global system. All these factors depend largely from national policies, which are the framework of the innovation dynamics. Besides, innovation is generally concomitant with creativity. Economic, social, institutional innovations tend to enhance artistic creativity. The best historical example is the « quattrocento » (XV th century) period, when Italy became the centre of institutional, scientific, and artistic innovation. The value given by education to the techniques of measurement and to the geometric concepts, allowed the people of quattrocento to develop a peculiar attention to the structures of forms, to the volume and superficies of the bodies. This union of science and art opened the way to the European Renaissance. In the case of China, the picture is full of contrasts. On one hand, the artistic scene, especially since 2000, has become global, in the plastic arts, literature and film industry, with renowned artists who have sometimes emigrated abroad. On the other hand, it is quite challenging to measure the actual degree of innovation. The 2006 medium to long term plan for the development of Science and Technology (2006-2020) has embraced the concept of « indigenous innovation » （自主创新) which guides policy to this day. In 2010, the government identified seven strategic emerging 1 * I thank my colleagues Fajwel Fogel (SANCARE) & Stephane Grumbach (INRIA) for their very useful comments and revision of this paper. industries (SEI) supposed to receive special support. Finally, the 13th five- year plan, adopted in march 2016, is completed by the Made in China 2025 plan (2015) and Internet Plus initiative. All these plans are inspired by a techno-nationalist point of view, by import substitution and export promotion strategies : the market is opened to attract foreign technology, to enhance technological progress and management learning from foreign enterprises. Once Chinese companies are making significant progress in closing the technology gap, the Chinese governement seeks to increase their market share by erecting barriers to foreign markets activities1. (Following Figures) In the same time, Chinese policy makers support a strong wave of outward investment in cutting-edge technologies in the U.S and Europe. Despite the difficulties of this path, the aim is not only to be technologically independent, but also to challenge the U.S scientific as well as technological supremacy, after having bypassed the U.S as the first industrial country in 2010. 1 Jost Wubekke & al., Made in China 2025, The making of a high-tech superpower and consequences for industrialized countries, MERICS Papers on China n°2, Dec. 2016 , p.55: https://www.merics.org/fileadmin/user_upload/downloads/MPOC/MPOC_Made_in_Ch ina_2025/MPOC_No.2_MadeinChina_2025.pdf 2 However, the measure of their success, is quite challenging from a macro- economic point of view, as there is a lag between inputs and outputs, according to a recent study by Scott Kennedy 2. If we focus on human capital, education is highly valued in Chinese culture and society, with the Confucian heritage. Since the Real Leap Forward in education, launched in the beginning of this century, China annually graduates the world’s largest pool of scientist and engineers. Although they are not especially encouraged to be creative in school, or to develop initiatives in the national system of education, China has sent millions of students abroad, attract foreign investors who tend to share technology and create R&D centres and train their Chinese employees. Chinese entrerprises create representative offices in the top high-tech hubs like Silicon Valley and acquire technology through mergers and acquisitions (M&A), hiring talent from their western competitors, and also from Taiwan, which has long been a world hub in information technology ( I.T), and has invested a lot in the continent with around one millions Taiwanese, mainly managers and engineers, now living in China. If we focus on funding, with 2.1 percent of its GDP invested in R&D, China has already bypassed the E.U in absolute terms, from 10.9 US $ billion in 2000 to US $ 232 billion in 2016, and is now catching up with the U.S.A. But this does not mean that these massive inputs translate in comparable outputs. Basic research represent just over 5 percent, applied research 10.8 percent and 84.2 percent of funding is directed towards development (2015). Most of the funding goes to companies (77 %), which decide according to commercial competitiveness criteria. By avoiding spending on basic research and foundational technologies, whose share are at least two to three times higher in other developed countries (14 percent in the U.S, 17 percent in Russia, 11 percent in Japan in 20153), income is less a result of new technologies and more a result of new applications or business models. 2 Scott Kennedy , The Fat Tech Dragon, Benchmarking China’s Innovation Drive, Center For Strategic and International Studies, August 2017 : https://www.csis.org/analysis/fat-tech-dragon 3 http://www.oecd.org/innovation/inno/researchanddevelopmentstatisticsrds.htm R&D by sector of performance and type of R&D. 3 The same may be said for other indicators of innovation. The number of patents for example is very high on a national basis, with only 21 % on inventions, but low from an international perspective. The domestic as well as international value of patents is still quite low. Triadic patents, successful in the U.S, Japan and E.U are in 2014, the latest available year, six times less than for applicants from the U.S and Japan (2582 versus 14,994 for the US and 17,121 for Japan). In 2015, patent licensing has generated only US $ 1.75 billion of local revenues and international sales of patent rights, US $ 1.38 billion, while IP licensing revenue in the U.S generated for the same year US $ 115.2 billion. If we turn to the balance of I.P receipts to payments, China is still a massive importer of I.P : US $ 22 billion of payments versus US $ 1 billion of receipts, according to the IMF. The ratio of receipts to payment in international licensing (Following Figure) indicate that China is still primarily an assembler and manufacturer in the global supply chain (Following Figure)4. 4 Scott Kennedy, op.cit. 4 Stan Shi’s famous smile curve is still valid for a lot of high tech exports : If we now focus on output, the commercial performance of innovation, the official vision is that the indigenous innovation works very well with indicators such as the National Innovation Index measuring essentially quantitative inputs (R&D intensity, human capital, etc.), and the Science and 5 Technology Contribution Rate, constructed in such a way that it would be impossible to fall in the absence of a strong economic contraction. A better approach, according to Scott Kennedy, is to look at the high tech’s contribution to manufacturing value added, rising from 8.8 percent in 2010 to 14.2 percent in 2014, and the share of high tech exports from domestic companies, which has climbed from 15 percent in 2000 to 19 percent in 2015, with diverging tendencies between sectors : 6 If we turn to a micro-economic point of view, Price Waterhouse Cooper (PWC) ranks in its annual report « Global Innovation 1000 » 5the companies according to their investment in R&D and through a survey of business executives asking them to identify the most innovative companies. By either method no Chinese company appears among the top 25 of this grading. The first Chinese Company in terms of R&D is Alibaba, which occupy the 56th rank. However, according to PWC, which underlines the global tendency to economic nationalism, there is no statistical relationship between R&D spending and commercial metrics (in terms of sales growth, profits, or shareholders returns). This is precisely the case of Chinese companies. The cross-finding between macro and micro data shows that prominent high tech Chinese companies (Following Figure in Scott Kennedy’s Report) have not risen on technological innovation, but that their growth is the result of two main factors : 1. Incremental innovations in applications and customization due to the scale of the market, from mobile phones (Vivo, Oppo, Xiaomi) and laptops (Lenovo), to telecom equipment (Huawei, ZTE), home appliances (Midea, Haier), E-commerce (Alibaba, Tencent, JD) or 5 https://www.strategyand.pwc.com/innovation1000 ; https://www.strategyand.pwc.com/media/file/Strategy-The-2017-Global-Innovation- 1000-Study.xlsx 7 search (Baidu). The scale also allows to pursue a low margin high volume pricing strategy and to get an unprecedented amount of big data from customers. 2. The second factor is relative to entry barriers. Chinese companies, have forged their competitiveness under a wide display of protectionist measures provided by state policies, not only in the public procurement system (Goldwind, Trina Solar, DJI Innovations, China Railway Corp.), but also in the financial, insurance, telecom and internet markets, which are based on profitable oligopolies. Scott Kennedy’s conclusions is that China’s drive to innovation may be highly inefficient in the sense that there is a lag between top down policies and massive inputs and the modest scale of inventions and technological breakthrough. But he adds that it may not be a problem as large mistakes and waste may facilitate learning and investment down the road, and that China’s size, not comparable to Japan and other NPI countries requires to judge the country’s performance not only on the consequences for Chinese companies, but for entire sectors and the global economy. Here is the point, as the lag between massive inputs and low immediate breakthrough innovations or technological Great Leap does not make sense in a development as well as historical perspective. From a development perspective, we can not deny, for instance that the high speed train program, based on retro engineering (Following Figure, Zhonghu wanglun tan) implemented before and during the global financial crisis, has been a success story, since China has built in less than ten years more high speed trains lines (20.000 km) than the whole world6. 6 « China sets its sight on dominating sunrise industries », The Economist, Sept.23, 2017. 8 Source : Zhonghua wang luntan Another example of the Chinese catch up capacity is the multiplication of Chinese participation in nuclear industry projects (in U.K Romania, Pakistan, Turkey, Argentina), in association with U.S, Canadian and French firms : 9 Source : Mercator Institute for China Studies If we rely on an historical perspective, technology and innovations may move quickly from a country to another. Italy was the center of innovation and artistic creation in the 15th century, but Portugal and Spain became the global powers in the 16th because their states had the political will and the financial capacity to finance fleets and recruit the most enterprising sailors such as the Genovese Christophe Colomb. At the end of the nineteenth century, Europe discovered the automobile, the cinema and the aviation, but the United States, with the scale of their market, and their managerial capacity were able to develop Taylorism, Fordism, Hollywood and air transport on an unprecedented scale. FROM INVENTIONS TO APPLICATIONS : ARTIFICIAL INTELLIGENCE AS A PRIORITY Thus, all the normative talk about the right path of innovations may be misleading, inventions may not be a precondition for technological breakthrough. Applications seem essential, in high tech industries as well as in the new frontiers of science, such as Quantum Technology. A recent U.S Congress Hearing (Subcomittee on Research and Technology & Subcomittee on Energy) has shown that although the United States retains global leadership in the theoretical physics that underpins quantum computing 10