The Battelle Memorial Institute, which looks at R&D in major nations, says that China will pass Japan as the No.2 spender next year. “China is expected to spend $153.7 billion on R&D in 2011, up from the $141.4 billion it will spend this year,” The Wall Street Journal reports. “Japan is expected to spend $144.1 billion next year, up from $142 billion in 2010.”

The U.S. holds the lead position with R&D expenditures expected to top $400 billion next year.

Battelle data is not terribly detailed. It does show that China has spent a good deal to advance alternative energy. That may not be important in a country like the US which has abundant coal and hydro-electric power reserves. America may even increase the output of nuclear energy as it looks at France where most electricity is generated by reactors.

China remains weak in intellectual property. It has not been able to produce the kind of technology which has created huge companies such as Microsoft (NASDAQ: MSFT), Amgen (NYSE: AMGN), Pfizer (NYSE: PFE), Google (NASDAQ: GOOG), Cisco (NASDAQ: CSCO) or Intel (NASDAQ: INTC).

China still must import products built using most complex technology and there is little evidence that it can create its own software or biopharma sectors. China remains an exporter of products based on relatively crude research.

China’s goal is to wean itself away from technology created in the US, Japan, and some parts of Europe. That may take decades. Until that time, finished goods which represent almost all of its exports will be the staple of its economic growth. That represents a problem. The People’s Republic must rely on raw goods to feed its factories. That means it is a hostage to inflation.

American R&D largely creates products and services which are not affected by inflation. Software creation and manufacturing costs do not rely much on outside goods. Neither does the manufacturing of complex drugs. This contrast works in the favor of the US, and China and may not be able to ever close that gap.

Douglas A. McIntyre

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