China’s Tech Power is Overrated

The country’s rise masks critical weaknesses.

Written by Lipton Matthews.

In both academic and policy debates, China is portrayed as a rising innovation superpower. People claim the country’s surging patent filings and dominance in high-tech exports signal its ascendancy. Yet a closer examination reveals that China's tech power is vastly overrated. In fact, the country’s rise masks critical weaknesses: its high-tech exports are foreign-led, its patent surge is driven by perverse incentives, its subsidies have failed to boost productivity, and a "diffusion deficit" hinders the spread of new technology across the economy.

At first glance, China's status as the world's largest exporter of high-tech goods seems to validate the “innovation narrative”. China’s share of high tech exports has been steadily rising since the early 2000s and by 2006, it had outpaced the United States, Europe and Japan—capturing a staggering 16.9% share of global high-tech exports​. However, this figure is highly misleading.

The backbone of China's high-tech export machine is not domestic Chinese industry but foreign-invested enterprises. By 2003, 86% of China’s high-tech exports were produced by FIEs​. These companies—multinational giants and Taiwan-based IT manufacturers—relocated their assembly operations to China to exploit lower labor costs, not technological prowess.

Even more revealing is that 93% of China’s high-tech exports involve importing sophisticated parts, assembling them, and then exporting the final products. China is an assembler more than an innovator. Domestic Chinese companies have played only a minor role, and when it comes to cutting-edge components—such as semiconductors or advanced sensors—China continues to rely heavily on foreign technology. In short, China’s dominance in high-tech exports is less about innovation and more about China's position within global supply chains (supply chains orchestrated by foreign corporations).

Another commonly cited indicator of China’s innovation capacity is the sheer volume of patents. Over the past two decades, China has led the world in annual patent applications, surpassing the US, Europe and Japan.

Yet this patent boom is largely the result of government manipulation. Following the introduction of “indigenous innovation policies” in 2006, local governments were given explicit targets for patent production​. The result was a bureaucratic race to maximize patent numbers, regardless of the technological novelty involved. Motivated by perverse incentives, local officials encouraged the mass filing of low-quality patents. Universities, companies and even individuals churned out applications to satisfy official quotas.

A detailed study of 4.6 million Chinese patents between 1990 and 2014 observed a dramatic decline in the novelty and impact of Chinese patents after 2006​. Although the volume increased markedly, the substance diminished. The patents filed were often minor variations of existing technologies designed to meet quotas, not advance the technological frontier. So while China's headline patent numbers are impressive, they are largely a mirage—an artifact of state-intervention rather than evidence of genuine innovation.

Novel patents in China. Source.

Given the importance of innovation for economic growth, China has poured enormous resources into R&D subsidies and industrial upgrading initiatives. However, the results have been disappointing.

A study of Chinese publicly listed firms between 2007 and 2018 found that government subsidies, including those explicitly aimed at fostering innovation, simply failed to enhance productivity​. On the contrary, firms that received subsidies often became less productive over time. Rather than bolstering “winners”, subsidies have served to prop up less competitive firms, preserving employment and avoiding politically sensitive bankruptcies. Indeed, subsidy allocation patterns suggest the government is just as concerned with supporting large state-owned enterprises as with cultivating dynamic firms in the private sector.

Chinese government subsidises. Source.

Despite its scale and ambition, China’s industrial policy has largely failed to promote the kind of firm-level productivity gains that technological leadership demands. And China’s economic fault lines are compounded by a broader slowdown in the manufacturing sector. From 1998 to 2007, manufacturing total factor productivity grew rapidly—driven by firm entry, competition and market liberalization. Yet from 2007 to 2013, TFP growth collapsed to just 1.4% annually, about a third of the earlier growth rate​.

This slowdown is pervasive: it cuts across industries, regions and ownership types. Most significantly, the contribution of new firm entry to productivity growth—once a major driver of dynamism—has all but disappeared​. And new firms today are less productive relative to incumbents, a possible harbinger of stagnation. Moreover, official data on manufacturing output and GDP have become increasingly unreliable, with growing evidence of over-reporting and statistical manipulation after 2007. This further obscures the state of China’s economy, making it difficult for even informed observers to assess the country’s potential.

China’s economic growth is overstated. Source.

Some have argued that the AI system DeepSeek showcases China’s capacity for genuine innovation. Yet despite its strengths, DeepSeek reflects China’s strategy of capitalizing on second mover’s advantage. And US sanctions are making this strategy increasingly precarious. Research indicates that American export restrictions have limited both the volume and quality of patents produced by targeted firms.

Even if China were generating many innovations at the frontier, it faces another weakness: a “diffusion deficit”. According to a paper by Jeffrey Ding, while China has become more innovative (albeit to a lesser extent than official figures suggest), its ability to diffuse innovations across its economy remains poor​. Note that diffusion refers to the spread and adoption of new technologies throughout industries, firms, and regions. It is the often neglected but essential process that transforms isolated breakthroughs into economy-wide productivity gains.

Measured by global indices, China performs well in indicators of innovation capacity but lags way behind in diffusion capacity. For example, in the Global Innovation Index, China ranks near the top in R&D spending and patents but falls dramatically when assessed on university-industry collaboration, digital infrastructure penetration, and the application of new technologies across firms​.

This gap matters. Historically, powers like the US succeeded not just because they invented new technologies but because they rapidly and broadly diffused them. In contrast, the Soviet Union, despite initially leading in key sectors like space technology, failed to do so—contributing to the country’s stagnation and eventual collapse​. China’s “diffusion deficit” suggests a similar vulnerability.

Its economy remains bifurcated, with world-class tech giants in major cities, but slow technological adoption across thousands of small and medium enterprises, particularly in rural areas. Digitalization of industry, cloud computing uptake and industrial robotics adoption all lag developed economy standards​. If China cannot close the diffusion gap, it will struggle to sustain high productivity growth or compete effectively at the technological frontier—regardless of how many patents it files or how much R&D it funds.

China’s reputation as a tech powerhouse is built on selective and often misleading indicators. Impressive high-tech export figures are driven by foreign firms. Surging patent filings reflects bureaucratic manipulation. Billions in subsidies have failed to meaningfully boost productivity. And the broader economy is suffering from an acute “diffusion deficit”. Innovation is about more than just invention; it’s about embedding new technologies in a wide range of firms and industries.

Let me offer a more realistic assessment. While China’s economic success is undeniable, its emerging status as an innovation frontrunner is undeserved. And without overcoming the weaknesses outlined above, it is unlikely to overtake the US any time soon.

Lipton Matthews is a research professional and YouTuber. His work has been featured by the Mises Institute, The Epoch Times, Chronicles, Intellectual Takeout and American Thinker. His email address is: lo_matthews@yahoo.com

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