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Business trends

Alibaba and Tencent in hot pursuit of US in innovation potential

Nikkei-Hitotsubashi survey finds Chinese outpacing Americans in R&D spending

Alibaba Group Holding boosted research and development spending by 470% over five years.   © Reuters

TOKYO -- Chinese tech leaders, such as e-commerce provider Alibaba Group Holding, are rapidly closing in on their bigger U.S. counterparts when it comes to innovative potential, according to an index published by Nikkei and Hitotsubashi University in Tokyo.

The top five U.S. companies are still far ahead in many key metrics, from market capitalization to profit. But Chinese players are spending aggressively and adopting a more flexible leadership style in order to thrive in a rapidly changing industry.

Overall, the index shows the U.S. leaders -- Facebook, Google parent Alphabet, Apple, Amazon and Netflix -- beating their Chinese counterparts -- Alibaba, Tencent Holdings, Hangzhou Hikvision Digital Technology, Midea Group and JD.com -- in innovation by an average score of 185 to 161. The figures are based on the companies' organizational capacity, innovative potential, and value creation.

At the time the study was conducted, the American tech leaders had a combined market value of $2.86 trillion, or more than twice Chinese peers. Their large size gives them a definitive edge in their ability to create value.

With regard to operating profit, the U.S. side outperforms China by nearly five times, at roughly $111 billion. Apple and Google parent Alphabet lead the pack at $70.9 billion and $26.3 billion, respectively. By contrast, Alibaba earns $11 billion, meaning elite Chinese enterprises face a daunting game of catch-up.

But the gap is not nearly as wide when it comes to innovative potential. The subindex for this category shows U.S. companies at 64, while Chinese companies are close behind at 62, mainly because of a rapid increase in China's research-and-development spending.

The Americans come out on top in total R&D spending, with Amazon, for one, shelling out about $22 billion. But over the past five years, the top U.S. tech companies increased R&D expenditures by an average of 290%, far below their Chinese counterparts' 430%.

Alibaba alone lifted R&D investments by 470% to over $3 billion. CEO Daniel Zhang Yong considers data technology to be the core of the business, prompting the Chinese e-commerce giant to expand into social media and payment services.

"The young executive teams at Chinese enterprises are making bold investments," said Yaichi Aoshima, professor and director of the Institute of Innovation Research at Hitotsubashi University.

Large Chinese tech companies have adopted the outside-the-box thinking and swift decision-making that have defined their peers on the other side of the Pacific. The average age of directors at the top five Chinese companies is 54 -- six years younger than at their U.S. counterparts.

Both sides face heightened regulatory risks. Last year, the European Union implemented the General Data Protection Regulation for safeguarding personal data, and other countries are planning their own data-privacy rules. And while Chinese regulations on data privacy at corporations are not as strict as in the West, the Communist Party is gaining increasing influence at Alibaba and other top-tier enterprises. These shifts could force companies to adjust their business operations, which in turn could potentially slow growth.

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