How Beijing Is Stifling Chinese Innovation By ANIL K. GUPTA AND HAIYAN WANG China's indigenous innovation program, launched in 2006, has alarmed the world's technology giants. A recent report from the U.S. Chamber of Commerce even went so far as to call this program "a blueprint for technology theft on a scale the world has not seen before." The goal of the indigenous innovation program is to accelerate China's move up the technology ladder. Using a variety of mechanisms (such as making access to China's market dependent on transfers of leading-edge technologies and R&D labs to China), the program supposedly helps Chinese companies assimilate, absorb and re-innovate upon the proprietary technology developed by foreign companies. Virtually every assessment of the indigenous innovation program has framed it as a win-lose propositionâ€”a win for China and a loss for foreign multinationals. Our analysis, however, suggests that indigenous innovation measures have been counterproductive for China itself. Instead of inducing technology giants to shift leading-edge R&D work to China at a faster pace, its effect has been exactly the opposite. China today hosts about 1,000 foreign-owned R&D labs. Yet, with rare exceptions, these labs focus primarily on local adaptations of innovations developed elsewhere, rather than the development of leading-edge technologies and products for global markets. Tech company executives are eager to leverage the quality and scale of China's talent pool. However, given the indigenous innovation measures, they do not trust China as a secure location for leading-edge R&D. A comparison with India is illustrative. India has no equivalent to indigenous innovation rules. The government also is content to allow companies to set up R&D facilities without any rules about sharing technology with local partners or the like. These policy differences appear to have a significant influence on corporate behavior. Consider the top 10 U.S.-based technology giants that received the most patents from the U.S. Patent and Trademark Office between 2006 and 2010: IBM, Microsoft, Intel, Hewlett-Packard, Micron, GE, Cisco, Texas Instruments, Broadcom and Honeywell. Half of these companies appear not to be doing any significant R&D work in China. Between 2006 and 2010, the U.S. Patent Office did not award a single patent to any China-based units of five out of the 10 companies. In contrast, only one of the 10 did not receive a patent for an innovation developed in India. India has proven more fertile territory for these companies. For the 10 tech giants taken together, India-based labs received more patents (1,119) than did China-based labs (886) during this period. At a company level, the difference can be even more striking. For the seven out of 10 companies where Indian units received more patents than Chinese labs, the aggregate numbers were 978 vs. 164. Only a strong showing for China from two outliers, Microsoft and Intel, pulled up its aggregate filingsâ€”Chinese labs at those two companies secured 722 patents compared to 141 from Indian labs. The R&D disparity is all the more striking given China's three seemingly major advantages over India. With a GDP more than three times larger, China offers a much bigger market than India. China also spends four times as much as India on R&D. And China produces a much larger number of Ph.D.s. Yet Beijing is standing in the way, because it's looking at the problem from the wrong angle. Instead of trying to extract technology from foreign firms today, it should be creating a hospitable environment for these firms to create and train world-class innovators. When a tech giant sets up an R&D lab in a new location such as Beijing or Bangalore, more than 95% of the researchers are hired locally. Over time, many of them leave and use the expertise they've acquired to start new ventures or join other, often local, companies. This kind of personnel "spillover," far more than sharing individual technologies, has been key to thriving innovation ecosystems like Silicon Valley. If it wants to become a global technology leader, China needs open doors, strong intellectual property protection, and no stacking of the deck in favor of Chinese companiesâ€”a policy mix exactly opposite to some of its current indigenous innovation measures. Mr. Gupta is a professor at the University of Maryland's Smith School of Business and a visiting professor at INSEAD. Ms. Wang is managing partner of the China India Institute. They are the co-authors of "Getting China and India Right" (Wiley, 2009).