Innovation in China

Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at:

As technology becomes an increasingly central point of friction between Europe and China, it is imperative to gain an understanding of the role that European companies play in China’s innovation ecosystem. Within such context, the European Union Chamber of Commerce in China have published their latest industry report, China’s Innovation Ecosystem: Right for many, but not for all. Based on a member survey and in-depth interviews, the report highlights that while there are many positive aspects to undertaking R&D in China, there are still areas where European companies need to exercise caution.

Therefore, as European investors, what is the current state of China’s innovation ecosystem? What are the most prevalent innovation priorities for European companies and crucially, what are the related opportunities and challenges identified by European companies in the China market?

China’s Innovation Ecosystem

First and foremost, European companies see enormous value in the variety of collaboration partners available in China (China’s research bodies/universities/independent academics/state labs were partners for 71% of survey respondents), with other notable positives include the size of China’s market and the fast pace of commercialisation of R&D results, both of which were recognised by 68% of survey respondents.

As a result, some European companies are increasingly integrating China R&D with their global efforts, and while the majority are using China R&D to refine existing products, more and more are creating new goods and services in China, including as part of their global portfolios.

However, while participants in both the survey and interviews held positive overall views on doing innovation work in China, the benefits that European companies can derive from their participation very much depends on the sector they are in. The generally positive findings of the surveys and interviews must be viewed in the context of the industries that are the most represented, which are chemicals (29% of total respondents), automotive (13% of total respondents) and machinery (16% of total respondents). These industries are ones in which European companies have experienced considerable success in the China market and enjoyed improved market access and increasingly favourable conditions in recent years.


However, industries such as information and communication technology (ICT), telecommunications and all things digital—find themselves increasingly squeezed out of the market, and are struggling with local R&D as a result in the Chinese marketplace.

While China’s prowess in the ICT/ telecommunications sector makes competition harder for European companies in these sectors, it should also mean that European players in that industry would want to contribute more resources to local R&D to tap into local talent and benefit from being part of the ecosystem.

European Companies Innovating in China

Onshoring and localisation strategies have become increasingly stronger for many companies in order to compete successfully in China, as European companies need to consistently tailor their products to meet the requirements of highly-demanding Chinese consumers which requires local R&D and has driven many firms to up their R&D budgets locally.


Despite R&D-spending declining in Europe since the pandemic began, spending has increased in China operations for 73% of survey respondents and is expected to increase further in 2022 for 77% of respondents.

In addition, while respondents’ China-based innovation activities are well-integrated into their global strategies, with all reporting moderate (45%) or high (55%) levels of integration, over the next five years some respondents noted that they anticipate a slight decrease in integration. This is likely due to certain aspects of decoupling and technological divergence, which acts as a real concern for investors as China pursues technological self-reliance. Certain European companies are even exploring how to decouple their China R&D operations from their global ones. Further EU-China engagement is required on this front, however, if such issues are left unaddressed, companies may have to make difficult decisions about their global and China R&D strategies.

Challenges in the Market

It should be noted however that several negative factors also exist in China’s innovation ecosystem, with the most commonly reported—weak IPR protection—cited by a third of respondents.


Although results from the European Chamber's annual Business Confidence Survey show that China’s IPR system has steadily improved year-on-year since the survey began in 2004, interviewees from the chemicals and energy industries reported that China’s enduring weakness in trade secret protection and enforcement continues to harm their businesses. This was especially true regarding non-compete clauses for engineers and researchers, who often go to work for state-owned competitors and take European know-how with them. Companies should therefore determine how to maximise the opportunities of a vibrant innovation ecosystem while minimising the leakage and theft risks that may result from having a large presence in the market. For SMEs in the Chinese market, such risks are immeasurably higher, as SMEs may only manufacture and develop one or two crucial technologies, suffering IP theft would not only be extremely resource-intensive to counter, but it could also result in them losing their primary competitive advantage altogether.


Another notable downside cited is the lack of qualified young hardware engineers, as although China’s education system yields engineering graduates that have good theoretical knowledge, they have little practical experience, as European Chamber member companies have reported requiring a 1-2 year/s to get graduates to the basic level for reliable work, let alone to contribute to the company’s innovation activities. Further exasperating the issue is the mobility of talents, with the current blockage on the release of visas for European students looking to enter China, acting as a severe dampener on the interest of new students interested in working and improving the innovation environment in China. The lack of international flights also makes it complicated for engineers from company headquarters to fly back and forth between Europe and China in order to see the operations first-hand, forming an additional level of decoupling between the EU & China.

Unequal access and limited access to government innovation support schemes has also been reported to be prevalent in China overall, with only a minority of respondents indicating that they received any resources from the government or academic / research institutions in the country.


Unclear application information/processes, explicit rules preventing foreign companies from accessing support, and even support schemes not publicly announced, but communicated only to local companies, are some of the factors which have respondents considering entering local partnerships to make it easier to access government innovation support. This reflects the fact that most respondents (42%) report local companies as having much easier access to government innovation support schemes



China’s R&D market is not for everyone, and careful strategic planning to map out where your company stands in the broader ecosystem is an important first step in determining if/how much your company should invest in China-based R&D activities as the market is so sector sensitive.

For those that see good reasons to engage in significant R&D work in China, determining which strategy to adopt is imperative. In areas in which Chinese firms are at or nearing technological parity with your company, an “all-in” approach may be necessary to be competitive. However, in areas in which Chinese firms are still lagging, it may be more sensible to leave some of your most critical R&D work in your home market to mitigate leakage risks.

With that being said, protecting your company’s intellectual property is becoming more and more important, as in a growing number of industries as China’s IPR protection system is increasingly mature for patent filing and enforcement, it is still lagging behind in trade secrets, especially in cases where researchers and engineers go to work for competitors in violation of non-compete clauses.