China’s Changing Role in Innovation

If you grew up in the 1980s and 1990s, you might have gotten your first impression of Chinese industry from “Made in China” labels on clothing, toys and souvenirs.

For a long time, a common view was that China was mostly “the factory of the world,” said Ana Maria Santacreu, a senior economic policy advisor at the St. Louis Fed.

“It was strong in low-cost assembly and manufacturing, but it wasn’t really seen as a leader in innovation,” Santacreu said. “Cutting-edge research and design were happening elsewhere, mainly in the U.S. or Europe.”

But as China has focused more in the last decade on high-tech industries and research and development, the view of China as primarily a maker of products like sneakers and snow globes has become outdated.

In an interview, Santacreu described China’s changing role in innovation, including:

• The strategy China has pursued
• The countries facing the most competition from China in high-tech sectors
• The balance between resilience—the ability to cope with shocks such as supply chain disruptions—and openness in trading

China Takes a Deliberate Approach to Innovation

China has been deliberate in its approach to start leading in high-tech industries instead of being dependent on technology from other advanced economies, Santacreu said. The government is putting resources into research and development, offering subsidies and building infrastructure to support new technologies, she noted.

“The strategy is really about becoming self-reliant and leading in the industries of the future,” she said.

During the “China Shock” of the 2000s, China emerged as a big competitor, Santacreu explained. (“China Shock” was the name economists gave to the period when Chinese imports to the U.S. accelerated following advances in trade relations, including China’s admission to the World Trade Organization.) But China was competing by exporting low-cost and labor-intensive products like toys and clothing, she said.

Now the country is starting to export advanced technology, such as computer electronics and transportation equipment.

“China is really moving from being a low-cost producer to be a high-tech producer, and in that sense, it’s starting to compete directly with firms in advanced economies that were traditionally exporting these goods,” Santacreu said.

China Moves from Accessing to Exporting Innovation

In addition to being seen as “the factory of the world,” China for many years was viewed as a “fast follower” that leveraged access to foreign technology, Santacreu and co-authors François de Soyres and Ethan Hunt wrote in an Aug. 14, 2025, On the Economy blog post.

Joint ventures with foreign firms played a role in China’s rise in innovation in the early 2000s, according to the authors. Technology was transferred through licensing agreements or informally through shared operations and employees.

Since the early 2000s, China has increased its own innovation exporting, with the amount paid to the country in global royalties increasing sharply from 2015 to 2022, as the line graph below from the On the Economy blog post shows. The countries paying the most royalties to China were advanced economies “with well-established innovation ecosystems and world-leading firms,” the authors wrote.

Global Royalty Payments to China: 2005-22

SOURCE: Aug. 14, 2025, On the Economy blog post, “China’s Role in Global Innovation Is Changing.”

China also has increased its share of global IP5 patents. IP5 patents are intellectual property patents that are considered high quality because they have been filed in at least two IP offices worldwide, with one of those offices in Europe, China, Japan, Korea or the U.S., as Santacreu and three co-authors wrote in a paper on evolutions in the global trade system (PDF) for the 2025 ECB (European Central Bank) Forum on Central Banking. (See the graph below.)

China’s Share of Global Intellectual Property IP5 Patents Rose from 2001 to 2020

SOURCE: 2025 ECB Forum on Central Banking paper, “Recent Evolutions in the Global Trade System: From Integration to Strategic Realignment” (PDF).

NOTE: Euro area countries are European Union member states that use the euro.

China Is Increasingly Competing in Patents with the U.S. and European Countries

Santacreu and fellow researchers have adapted indexes to measure the overlap in types of exports and patenting activity between China and other advanced economies.

If the index between China and another country or area is low, it means the countries’ economies are specialized in different areas or in different sectors, Santacreu explained in a Sept. 2, 2025, episode of the “Future Is Blue” podcast. If the index is high and rising, the countries or areas are increasingly competing in the same sectors.

The Export Similarity Index shown in the line graph below, originally published in an April 3, 2025, On the Economy blog post, measures whether countries are filing internationally for patents in similar industrial sectors.

The graph shows that the index has increased since 2014 for the U.S. and the euro area (European Union member states who use the euro), as Santacreu and co-authors François de Soyres and Ece Fisgin wrote in the blog post.

Export Similarity Index between China and Selected Advanced Economies

SOURCE: April 3, 2025, On the Economy blog post, “From Partner to Rival: Understanding China’s Technological Rise through Patent Data.”

NOTE: Euro area countries are European Union member states that use the euro.

“In Germany, for instance, the overlap in patent areas with China is now close to 80%—which means if German companies are working on advanced machinery or clean energy, there’s a very high chance Chinese companies are doing the same,” Santacreu said.

“And importantly, that’s not Germany changing its focus; it’s China stepping into those high-value sectors,” she added.

Countries Face Balancing Efficiency and Resilience in High-Tech Competition

So should Germany, the U.S. and other countries be worried about facing increasing competition from China in high-tech industries?

From an economic perspective, open trade is still valuable, because in a world where everything works smoothly, it can help countries or firms specialize, lower costs and spread innovation, Santacreu said.

“And that’s a classic argument for free trade, and it’s still valid today,” she said.

But real-world conditions include geopolitical tensions, export restrictions and “very concentrated” supply chains, Santacreu noted. For example, Europe is heavily dependent on China for minerals critical for making semiconductors and batteries, and China has been restricting the export of those minerals. That creates vulnerabilities in supply chains, Santacreu explained.

The challenge is to start thinking not just of efficiency, but also about resilience, Santacreu said. That means other countries have to adapt by innovating more at the frontier, while making sure supply chains can cope with disruptions.

“This balance between staying open and staying resilient: That’s what’s at the heart of the current debate,” Santacreu said.