Written by Yutao Sun and Cong Cao.

Funding for applied and basic research in China remains low despite huge amounts being spent.

A recent OECD report on research and development around the world threw up some headline statistics for China to cheer. In 2012, the country invested 1.98 percent of its GDP in R&D, more than the same indicator for all the 28 EU member states put together. It is without doubt an impressive figure. But what does it mean for China’s long-term innovation quest?

There is no doubt about the sheer scale of China’s investment in R&D. The proportion of GDP that it now devotes to R&D is more than three times the level in 1995 when the Chinese government officially launched its new science, technology and education strategy.

Yet huge challenges face China in maximizing its return on investment. China’s R&D spending now stands mainly for the “D” and not so much for the “R”. The funding for applied and basic research remains low, even given the rapid growth of R&D.

In 2004, the share of money spent on basic and applied research was 6 percent and 20.4 percent respectively. Yet paradoxically since 2006, when the government called for “indigenous innovation”, there has been a significant decrease in spending on scientific research in China. In the year that China overtook the EU in R&D, China’s basic and applied research accounted for a mere 4.8 percent and 11.3 percent of its R&D expenditure – a total of 16.1 percent, which is way below the average of 35 percent in developed and newly industrialized economies.

There have been distortions in reporting how the funding is spent. It is understandable that most of the funding for scientific research comes from the public purse. But only a small share of the public funding is open competition, leaving about 70 percent to be distributed by a few program officers and a small group of scientists.

Research grants tend to go to established scientists, scientists with close links to the funders, risk-adverse projects and redundant research. Most of the money is spent on equipment and material, which are most likely imports from abroad, rather than on researchers. Academics are judged on the number of publications they publish and the amount of funding they receive, meaning promotion is not purely merit-based.

A significant proportion of the research carried out in China, even that under the major national programs, is derivative of what has been done elsewhere, which goes at least some way to explaining why Chinese science has not yielded significant results commensurate with its soaring R&D investment.

High-profile cases involving the misappropriation of R&D money have not only used up valuable public funds, but also dented the morale of researchers. For example, in 2006 Chen Jin of Shanghai Jiao Tong University was found to have secured hundreds of millions of yuan from various government agencies for research into semiconductors. It was later discovered that a chip he had bought was masquerading as an innovation. The university fired Chen Jin, stripped him of various honours and ordered him to return part of the research funding.

Last year, Duan Zhenhao at the Chinese Academy of Sciences was sentenced to 13 years in prison for embezzling 1.46 million yuan ($243,000).

This year, Chen Yingxu of Zhejiang University was sentenced to 10 years in prison for tricking funding agencies out of more than 9.45 million yuan by fabricating receipts and contracts. Most recently, about 50 senior science officials in Guangdong, including the head of the province’s science bureau, have been implicated in corruption cases.

According to an investigation by the China Association for Science and Technology, 60 percent of the budgets for R&D programs have been squandered, leaving only 40 percent for research.

There is little surprise, then, that a staggering rise in scientific output, such as journal papers, has not yet been matched by truly world-class achievements worthy of a Nobel Prize.

Statistically, enterprises in China, including foreign-invested ones, have become the primary contributors of R&D spending, funding and implementing about three-quarters of total R&D. This puts China on a par with, if not higher than, OECD countries. But Chinese enterprises still seem predominantly interested in acquiring technology from foreign sources despite calls from senior officials for the establishment of an “enterprise-centred national innovation system”.

In this case we must understand “enterprise” in the Chinese context. Indeed, the evolution of applied R&D institutes and government agencies such as the Ministry of Aviation and Aerospace of China into State-owned enterprises has transformed the composition of enterprises. As such, much of the funding now attributed to “enterprises” includes public money that used to support these R&D institutions and government agencies. In other words, a large number of these enterprises are merely so in name.

Central SOEs are led and managed by the State-owned Assets Supervision and Administration Commission, a government agency. According to an SASAC report, in 2011, centrally administered SOEs alone spent 274.72 billion yuan on R&D, accounting for 43 percent of R&D funding by enterprises.

In other words, SOEs are contributors to R&D funding, although their contribution is considered “enterprise spending”.

China has halved its number of SOEs since 2001. However, individually they are getting bigger. Unfortunately for China’s innovation goals, SOEs suck up large chunks of R&D funding and other resources yet have little motivation to be innovative because many of them can remain highly profitable through their monopolistic status.

Private enterprises, particularly SMEs, attempt to carry out R&D to drive innovation but they struggle to garner financial support from State-owned banks, hampering their ability to become competitive domestically and internationally.

So when we say that China has overtaken Europe in R&D, it means that China has spent more money on R&D than Europe but it does not mean that China has overtaken Europe in R&D performance and efficiency, let alone innovation.

Yutao Sun is a Marie Curie Fellow at the China Policy Institute. Cong Cao is a CPI senior fellow and reader at the School of Contemporary Chinese Studies, University of Nottingham. A version of this post appeared in China Daily on March 17.