Chinese firms ramp up R & D spending as they catch up with the West by Michael Casey @FortuneMagazine October 27, 2014, 4:23 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Chinese companies are significantly ramping up their spending on research and development, according to a new report. Companies based on the mainland of China have increased their spending by a factor of 15 over the past decade, according to a report from the management consulting firm “Strategy&,” and the number of Chinese firms on Strategy&’s 2014 Global Innovation 1000 has gone from eight in 2005 to 114 today. The reason for the R&D growth: Chinese companies are shifting away from producing cheap goods for export and concentrating on higher quality economic growth. “When we are looking at the regional cut, China continues to go gangbusters,” said Barry Jaruzelski, the report’s author and a senior partner with the firm. “It’s been in the high double-digits for many, many years,” he added. “The rest of the world was double-digit, but lower — around 13 percent — and North America and Europe were positive, but much lower, at 3. 5 percent in North America and 2.5 percent in Europe.” The findings dovetail with overall research and development trends in China, including government spending, which the National Science Foundation found, is second only behind the United States. Patents, too, increasingly have a Chinese flavor, with the largest number of applicants coming from China and Chinese residents. The Chinese overtook the United States in 2012, according to the World Intellectual Property Organization. “In terms of their development, they have advanced a lot over the past 20 years,” said Mosahid Khan, head of the intellectual property and statistics section at WIPO in Geneva. “They are sort of catching up with the United States and Japan on the technological frontier whether it be patents or R & D investment.” Chinese companies are still are dwarfed by American-based firms when it comes to the $647 billion spent on global research and development. The Americans, as they have traditionally done, are the biggest spenders at $256.9 billion followed by European-based companies at $193.8 billion and then Japan which is third at $116.7 billion. Still, the Chinese growth can’t be ignored. It has gone from almost negligible number in 2005 to $30 billion in 2014. Chinese firms increased their spending from a year ago by 46 percent. Robert Atkinson, the president of The Information Technology and Innovation Foundation, a Washington, D.C., technology policy think tank, warned that some of the Chinese figures may be “somewhat overstated” due to a “rewards system” for state-owned enterprises which is based on them doing “a lot of R & D” and thus classifying some things as research and development which wouldn’t be treated as such in the United States. Still, he said, China was “pulling out all the stops” in R&D as part of a strategy to become more self-sufficient by producing as much as they can indigenously and ending their dependence on foreign firms like Apple or Boeing for help. “They have basically decided the old strategy of attracting foreign firms to set up assembly operations is no longer their path to growth,” Atkinson said. “They feel like they have maximized that potential,” he said. “This is one reason why you are seeing now a real backlash against foreign technology firms in China going after companies like Microsoft, Qualcomm and other with whole set of trumped up anti-monopoly complaints and things like that. They feel like they don’t need them anymore.” And while China is spending more, the United States has been cutting its government R & D spending which could be one reason why the Chinese could one day surpass the Americans. The 2014 Global R&D Funding Forecast, published by Battelle/R&D Magazine, projects China could overtake the United States as early as 2025. Atkinson said the goal of China is “beat us” and that America must do more including more generous tax incentives for R&D and reversing cuts in science and technology if it wants to remain the world’s innovation leader. “We’ve got to go back and just bite the bullet and you know what we are going to do that because we are not going to lose,” he said. “If we did those things, I have every faith we could stay ahead of China from an innovation perspective. If we don’t do those things, within 10 years or 15 years China will have caught up to us in many, many areas or surpassed us.” The report, which uses data from Bloomberg and Capital IQ data combined with surveys and interviews, looks both at a company’s R&D spending and its level of innovation. Along with charting global trends, the report also highlighted the sectors and companies that are doing the most in research and development. One promising indicator for the United States is there wasn’t one Chinese firm either in the overall spenders or innovator top 10 — a sign that no Chinese firm is about to match the exploits of a Google or Johnson & Johnson in the near term. In fact, the highest ranking Chinese company was ranked 62nd. Volkswagen VOW3 and Samsung SMSN , for a second year running, topped the list of companies spending the most on research and development at $13.5 billion and $13.4 billion respectively. Intel INTC and Microsoft MSFT increased their spending to move up to third and fourth on the list while Google for the first time joined the 10 just ahead of Merck and Co. MRK . Along with Merck, there were three other health care companies on the top 10 list of spenders for 2014. “Our industry’s pace of change is so fast that we need to continuously plan to replace our own technologies,” Intel spokesperson Christine Dotts said, singling out the company’s 14 nanometer processors as example of that. “We can’t sit back and do little because the expectations of Moore’s Law demand constant innovation.