China’s Competitive Edge in Advanced Technologies; Global economic lessons and strategies to compete with China

Introduction

China has established formidable advantages across artificial intelligence, robotics, semiconductors, fusion energy, and other critical technologies through a comprehensive and coordinated national strategy that combines massive state support, industrial policy, rapid deployment capabilities, and control over essential supply chains.

Scale of Investment and State Support

China’s technological dominance stems from unprecedented government investment that dwarfs spending in Western nations.

Over 99% of China’s 5,260 listed firms received direct government subsidies totaling €35.3 billion in 2022 alone—double the amount from 2015.

When measuring overall industrial support, China spent approximately 1.73% of its GDP (€221 billion) on industrial subsidies in 2019, which is three to four times higher than major EU/OECD countries relative to GDP.

For large industrial firms, government support averages 4.5% of revenues in China compared to just 0.69% in OECD countries—making Chinese support nearly nine times greater.

In robotics and AI, specifically, China has announced plans for a state-backed venture capital fund of approximately 1 trillion yuan ($137.8 billion) over a 20-year period.

China’s public spending on quantum research has reached approximately $15 billion—eight times what the U.S. government previously planned to allocate and more than double the EU’s quantum spending.

In 2024, China established a $47 billion fund to support its semiconductor industry amid U.S. export restrictions.

Dominance Through Deployment and Scale

Rather than focusing solely on breakthrough innovations, China excels at the rapid and large-scale deployment of technologies, which matters most for economic productivity.

In 2024, China installed 295,000 industrial robots, representing 54% of global deployments and nearly 10 times the U.S. total of 34,200 units.

China’s robot density reached 470 robots per 10,000 employees in 2023, surpassing Germany and Japan, with the country now operating over 2 million active robots.

China also accounts for 40% of the global robotics market, valued at $47 billion in 2024, and is projected to reach $108 billion by 2028.

Domestic Chinese manufacturers have rapidly captured market share, growing from 30% in 2020 to 47% in 2023, while the share of foreign brands fell from over 70% in 2020 to 53% in 2023.

Supply Chain Control and Manufacturing Dominance

China’s control over critical supply chains provides structural competitive advantages. The country accounts for approximately 30% of global manufacturing output—roughly double that of the United States.

In 2024, China added more chipmaking capacity than the rest of the world combined, with its share of global mature-node production expected to grow from 31% in 2023 to 39% by 2027.

For batteries and electric vehicles, China dominates every stage of the value chain.

Chinese manufacturers produce 75% of the world’s lithium-ion batteries, with a total battery capacity of 0.9 terawatt-hours, accounting for 77% of the global share.

China refines 95% of the world’s manganese, 70% of cobalt and graphite, 67% of lithium, and over 60% of nickel.

The country accounts for nearly 90% of cathode active material capacity globally and more than 97% of anode capacity.

China produced 62% of global EVs in 2022 and will manufacture an estimated 10 million EV units in 2024.

Research Output and Innovation Capabilities

China is transitioning from a technology absorber to an innovation leader. Despite U.S. leadership in AI, China produces 30% of the top AI publications versus 18% for the United States.

According to the Australian Strategic Policy Institute’s Critical Technology Tracker, China leads in 57 of 64 critical technology categories, while the U.S. leads in only 7.

China leads at transforming proven quantum ideas into advanced products, exemplified by the 1,200-mile Beijing-Shanghai quantum key distribution network and the Micius satellite.

Between 2021 and 2022, China accounted for 55% of all semiconductor patent applications worldwide.

China has achieved world records in fusion energy research, with the HL-3 tokamak achieving atomic nucleus and electron temperatures both exceeding 100 million degrees Celsius in 2025, and the EAST tokamak maintaining steady-state high-confinement plasma operation for 1,066 seconds.

Integrated Ecosystem and Rapid Prototyping

China has built integrated technology ecosystems that enable rapid innovation cycles. Cities like Shenzhen offer unmatched supply chain proximity where “components for a robot, upstream or downstream, can be sourced within an hour”.

This integration spans from research institutions to manufacturing, with government-facilitated zones, such as Hefei’s Quantum Avenue, hosting around 20 quantum technology companies that accelerate the transition from theory to application.

China’s approach emphasizes experimentation, pilot programs, and gradual rollout rather than wholesale changes, allowing for rapid iteration and adaptation.

The “AI Plus” initiative aims to achieve penetration rates of new-generation intelligent terminals and AI agents exceeding 70% by 2027 and 90% by 2030, with plans to integrate AI into 90% of the economy by 2030.

Global Economic Lessons

The Power of Coordinated Industrial Policy

China’s success demonstrates that coordinated, long-term industrial policy can drive technological advancement when properly implemented.

The “Made in China 2025” strategy, despite international criticism, successfully reduced import dependencies and built domestic capabilities across key sectors.

The approach involved multiple reinforcing policy layers: a central government strategy, detailed ministerial implementation (resulting in 445 national policy documents by 2018), and localized execution by provincial and city governments.

The key insight is that China doesn’t pursue complete technological independence but rather strategic positioning in critical chokepoints.

As the Made in China 2025 analysis shows, China achieved greater success in reducing import dependencies than in completely displacing foreign companies, often pressuring foreign firms to localize production rather than exit entirely.

State Direction Versus Market Efficiency Trade-offs

China’s model reveals both advantages and limitations of state-directed innovation.

The advantages include the ability to mobilize enormous resources toward long-term goals, coordinate across multiple sectors simultaneously, and absorb short-term losses to achieve strategic positioning.

China’s high savings rate (averaging 40% for households) is fueled by state financial policies, enabling one of the world’s highest investment rates.

However, the approach also creates inefficiencies.

Research indicates that while government subsidies significantly boost innovation outputs, threshold effects suggest an “incentive interval” beyond which subsidies may crowd out private initiative, particularly for state-owned enterprises.

The model works better for the deployment and scaling of proven technologies than for generating groundbreaking new concepts, which is why China excels in areas like quantum communication, where technology is ready for application, but lags in quantum computing, where theoretical pathways remain unclear.

Infrastructure as Foundation for Innovation

China’s massive infrastructure investments—in roads, ports, railways, electricity, telecom networks, 5G, and computing capacity—have created the foundation for the deployment of technology at scale. Modern infrastructure reduces business costs and enables China’s workforce to make the country the world’s manufacturing hub.

This “pave the road to riches” approach, similar to 1950s U.S. interstate highway development, demonstrates that physical and digital infrastructure are essential prerequisites for the diffusion of technology.

The Innovation-Diffusion Balance

While Western nations often focus on frontier innovation and knowledge creation, China prioritizes transforming innovations into tangible products and ensuring they transition smoothly from the lab to the market.

This deployment focus is particularly effective for productivity gains.

China’s approach recognizes that for technologies like AI, diffusion—the practical deployment of technology on the ground—is arguably more critical than frontier innovation in boosting productivity.

Supply Chain Concentration Creates Strategic Leverage

China’s dominance of critical mineral processing, raw materials refining, and intermediate goods manufacturing provides structural economic advantages and geopolitical leverage.

When China controls 70% of cobalt and graphite refining, 67% of lithium, 95% of manganese, and 90% of rare earth processing, it can influence entire global industries.

This concentration enables Chinese firms to access key inputs at lower prices, granting them a first-mover advantage in experimenting with new material combinations.

However, this concentration also creates systemic risks for the global economy. When a single country controls 44% of global chemical production capacity and 46% of the sector's capital investment, supply disruptions can ripple throughout global supply chains.

The economic lesson is double-edged: concentration creates power, but it also creates vulnerability.

Long-Term Orientation Versus Short-Term Pressures

China’s ability to pursue long-term technological goals without quarterly earnings pressures or election cycles allows sustained investment in areas that may take decades to mature, such as fusion energy.

The state-backed China Fusion Energy Co. launched with $2.1 billion in registered capital, and private firms like ENN Group are racing to build commercial fusion reactors by 2035.

This patient capital approach contrasts with Western venture capital models, which are increasingly focused on near-term returns.

The Limits of Technology Autarky

Despite ambitious self-sufficiency goals, China remains dependent on foreign technology in critical areas, particularly advanced semiconductor manufacturing equipment and extreme ultraviolet (EUV) lithography systems.

China’s semiconductor industry, while rapidly expanding in legacy chips, still lags behind industry leaders in cutting-edge nodes below 7nm.

This reveals that even with massive resources, specific technological capabilities require decades to develop and cannot be purchased or copied.

The “Made in China 2025” results show that China was more successful at increasing “Made-in-China” products (regardless of producer nationality) than achieving “Chinese-made” dominance by domestic firms.

This suggests that technological sovereignty is better understood as a spectrum of capabilities and access rather than complete independence.

Strategies to Compete With China

Invest Massively in R&D and Infrastructure

The U.S. and Europe must significantly increase public and private investment in critical technologies. In 2024, U.S. private AI investment reached $109.1 billion—12 times China’s $9.3 billion.

However, this advantage is concentrated in private funding for large language models, while China leads in deployment infrastructure and practical applications.[atlanticcouncil +3]

Specific recommendations include substantially increasing basic science research funding, as the U.S. R&D spending at academic institutions has declined from 2% of GDP in 1960 to just 0.35% today.

The U.S. CHIPS and Science Act represents a step forward, but sustained funding is crucial for its success. Europe’s AI investment in 2024 ($16.43 billion) is gaining ground but still lags far behind that of the U.S.

The EU must follow through on its AI Continent Action Plan and substantially increase capital available for technology startups.

Build Strategic Alliances and Trusted Supply Chains

No single country can match China’s scale across all dimensions.

The combined GDP of the U.S., the EU, and allied nations is three times that of China, accounting for half of global manufacturing. It exceeds China’s military spending by more than twice and boasts twice as many patents and top-cited publications as China. The key is coordination.

The U.S. and Europe must develop a joint semiconductor pact aligning American chip design strengths with European chipmaking equipment dominance (notably the Netherlands’ ASML monopoly on EUV lithography).

This should extend to “friendshoring” critical supply chains to trusted partners rather than attempting complete reshoring, which is often economically unfeasible.

Specific initiatives should include coordinated investments in satellite constellations, space infrastructure, 5 G and 6 G networks, and quantum technologies.

The U.S.-Japan-South Korea semiconductor alignment, along with the newly announced Tech Prosperity Deal between the U.S. and the UK, represents promising models for future collaboration.

Deploy Targeted Export Controls and Investment Screening

Strategic use of export controls can slow China’s acquisition of critical chokepoint technologies.

The October 2022 U.S. semiconductor export controls targeted advanced chips and semiconductor manufacturing equipment.

These controls should be multilateral rather than unilateral, requiring coordination with the Netherlands, Japan, South Korea, and Taiwan.

However, controls must be precisely targeted rather than overly broad to avoid harming Western companies and driving China toward faster indigenous alternatives.

The key is to focus restrictions on technologies where China appears close to securing unique, strategically significant advantages, while maintaining openness in areas where restrictions are futile or counterproductive.

Investment screening mechanisms should protect critical technologies from acquisition through foreign direct investment while maintaining openness to beneficial capital flows.

The U.S. Disruptive Technology Strike Force, which has charged fourteen significant cases in its first year, should be expanded beyond twelve cities.

Accelerate Domestic Deployment and Adoption

Western nations must match China’s deployment speed, not just innovation capability.

Europe’s AI adoption lags significantly, with only 48% of large organizations and 31% of SMEs scaling strategic AI initiatives.

The U.S. and Europe should create demand signals through government procurement, deploy charging infrastructure for EVs, mandate AI integration in public services, and provide incentives for industrial automation.

This requires reducing regulatory barriers that slow deployment.

The Trump administration’s approach emphasizes deregulation and industry-led guidelines over Biden-era AI risk frameworks.

Europe must strike a balance between its values-based regulatory approach and speed-to-market considerations.

Develop Alternative Critical Mineral Supply Chains

China’s near-monopoly on critical mineral refining represents a strategic vulnerability. The U.S. and its allies must urgently develop alternative sources of supply for gallium, rare earths, lithium, and cobalt.

This requires targeted government investment, as market forces alone are insufficient to break China’s monopoly.

Specifically, countries should develop domestic refining capacity for minerals, not just mining.

China controls 60% of rare earth mining but processes 95% of rare earth refinement globally—the bottleneck is processing, not extraction.

The financial investments needed for alternative gallium sources are relatively modest, but sustained policy attention is required.

Reform Incentive Structures and Capital Markets

Western companies face pressure to deliver quarterly results and short-term shareholder returns, which can discourage long-term R&D investments.

Policy reforms should consider tax incentives that encourage more extended equity holding periods, patient capital funds for strategic industries, and modified accounting rules that don’t penalize R&D spending.

Creating federal or EU-level industrial investment banks that can make long-term loans, take equity positions in strategic industries, and coordinate with private capital would enable funding for projects with timelines spanning decades.

Germany’s KfW development bank and similar institutions provide models, though scaled-up versions are needed.

Leverage Democratic Advantages in Talent and Openness

Despite China’s mass production of STEM graduates (perhaps eight times U.S. numbers), Western nations retain advantages in attracting global talent, fostering creativity, and enabling breakthrough innovation through open research environments.

The U.S. should maintain immigration pathways for high-skilled workers and researchers while protecting against technology theft through better cybersecurity and research security practices.

Open science and international collaboration should continue in non-sensitive areas, as innovation benefits from diverse perspectives and cross-pollination of ideas.

The challenge is maintaining openness where beneficial while protecting critical advantages.

Focus on Next-Generation Technologies

Rather than attempting to catch up in areas where China has established dominance (like legacy semiconductors or current-generation lithium-ion batteries), Western nations should leapfrog to next-generation technologies.

The U.S. should invest heavily in solid-state batteries, advanced nuclear fission and fusion, next-generation AI architectures, quantum computing applications, and synthetic biology.

This “leapfrogging” strategy enables Western firms to compete on innovation rather than manufacturing costs, playing to their strengths rather than weaknesses.

It also avoids pouring resources into commoditized products where China’s cost advantages are insurmountable.

Create Resilient, Diversified Supply Chains

Companies and governments must move beyond single-source dependencies for critical components. This means actively developing “China Plus One” strategies where manufacturing is distributed across multiple countries rather than concentrated.

Vietnam, India, Mexico, and Eastern European nations are emerging as alternative manufacturing hubs, though building these capabilities requires sustained investment and technology transfer.

However, diversification must be realistic. For some supply chains, such as those for solar panels, where China controls over 90% of multiple upstream segments, complete near-term diversification is impossible.

Strategies must prioritize the most critical and feasible supply chains first, focusing on sectors where national security concerns are highest.

Maintain Market-Based Innovation Strengths

While state direction has advantages, market-based innovation systems excel at packaging research into consumer goods, driving down costs, and generating entrepreneurial dynamism.

Western nations should resist the temptation to fully copy China’s state-directed model, which risks inefficient resource allocation and political capture.

The optimal approach combines strategic government investment in basic research and infrastructure with market-driven commercialization.

The U.S. military-funded research that led to the creation of GPS, the internet, and semiconductors, but private companies commercialized these technologies and drove costs down through competition.

Address Domestic Weaknesses

European industrial competitiveness has declined relative to both the U.S. and China, creating a strategic vulnerability.

Europe must simplify regulations, increase venture capital availability, improve university-industry linkages, and reduce fragmentation across national borders.

The U.S. must address its infrastructure deficits, education gaps, and political polarization, which hinder long-term strategic planning.

Both must recognize that domestic economic strength is the foundation for technological competitiveness.

If citizens face stagnant wages, unaffordable housing, and declining opportunity, political support for long-term technology investments will erode regardless of strategic necessity.

The competition with China in advanced technologies represents a fundamental challenge to the post-World War II global order, in which Western nations led technological development.

China’s combination of massive state resources, coordinated industrial policy, manufacturing dominance, and increasingly sophisticated innovation capabilities creates formidable competitive pressure across multiple technology domains simultaneously.[itif +3]

However, this competition is not predetermined. Western nations collectively retain substantial advantages in frontier innovation, capital availability, skilled talent, alliance networks, and institutional strengths.

The question is whether democratic nations can muster the political will, strategic coordination, and sustained investment necessary to maintain technological leadership in an era of intensifying great power competition.

The stakes extend beyond economics to encompass national security, democratic values, and the future shape of global governance.

Whether technologies like AI, quantum computing, and biotechnology are developed and deployed according to democratic principles or under authoritarian control will profoundly shape the 21st-century geopolitical order.

Conclusion

China’s competitive edge in advanced technologies is rooted in a combination of state-led industrial policy, aggressive investment in R&D, robust domestic manufacturing ecosystems, and a consistent focus on strategic self-reliance across sectors like AI, robotics, electric vehicles, and green energy.

The “Made in China 2025” strategy has catalyzed the country’s transformation into a global leader in high-end manufacturing, with China now dominating key green technologies and rapidly advancing in AI and digitization.

Global economies have come to understand that China’s approach to technological competition is characterized by a coordinated, long-term strategy that leverages state support, dense supply chains, and an integrated innovation ecosystem.

China’s dominance in advanced technologies is not solely due to state subsidies but also to its ability to integrate manufacturing prowess with rapid innovation cycles, foster entrepreneurial agility, and embed deep process knowledge in its industrial base.

For other countries to compete, a multi-faceted strategy is essential: boosting homegrown innovation, strengthening supply chains, protecting intellectual property, and forming international alliances to counter China’s techno-mercantilist approach.

Future competitiveness will depend on how effectively these strategies are implemented, striking a balance between state-led direction, market dynamism, and global cooperation.