Summary of Key Points
China's R&D investment has caught up with that of the United States when measured in terms of Purchasing Power Parity (PPP), but there is still a gap when using market exchange rates. China's R&D funds are primarily directed towards "trial and development" efforts to transform technology into products, with only half as much funding allocated to basic research as the U.S. In the semiconductor industry, American companies have formed a virtuous cycle of high revenue → high R&D investment → technological leadership → even higher revenue. Although Chinese companies are eager to invest in R&D, their absolute investment is insufficient, and their resources are scattered. As China's R&D expenditure moves into the top tier, efficiency in converting research results into practical applications, effective resource allocation, and long-term support mechanisms become critical challenges.
I. "R&D Exceeds that of the U.S.? First, Let’s Understand the Metrics Used”
The news suggests that China's R&D investment has caught up with the U.S., but this is based on PPP (Purchasing Power Parity) calculations. Simply put, for the same amount of money (e.g., $100), more engineers can be hired and larger laboratories can be rented in China, which means that China's R&D expenditure in 2024 (approximately $860 billion) is on par with the U.S.'s according to PPP. However, if calculated using market exchange rates (e.g., $1 = 7 RMB), China's R&D investment would be only about half of the U.S.'s.
Both methods have their uses: PPP reflects the amount of domestic R&D resources that can be mobilized (such as conducting experiments and hiring staff domestically), while market exchange rates indicate the ability to purchase international equipment, technologies, and talent from abroad. Since semiconductors rely heavily on imported equipment and technology, neither metric should be ignored.
In conclusion, China's R&D scale is now in the same league as the U.S., but its capacity to acquire global resources has not yet caught up.
II. Where China’s R&D Funds Are Being Used
In 2024, 81% of China's R&D funds were spent on "trial and development." This involves using existing scientific knowledge to develop new products and improve processes—for example, transforming laboratory-developed battery technology into viable power batteries for vehicles or optimizing chip manufacturing from 14nm to 7nm.
This investment focus has its advantages: China's industries in photovoltaics, power batteries, and consumer electronics have been able to quickly gain market share because of their ability to turn laboratory technologies into mass-produced products. However, it also has drawbacks: only 7% of R&D funds are allocated to basic research (such as developing new materials and chip architectures), which is half of the U.S. level. Basic research is essential for groundbreaking innovations; without it, there will be a lack of new ideas to drive long-term development.
In the U.S., basic research accounts for 15% (conducted by universities and national laboratories), while trial and development account for 67% (led by companies). Chinese companies bear 77% of the R&D burden, but since they need to make profits, it is difficult for them to invest in long-term projects with no immediate returns. This is why basic research cannot rely solely on market forces.
III. The Semiconductor Industry: A Stronger “R&D Cycle” in the U.S.
In the semiconductor industry, it’s not just about the total amount of R&D investment; it’s about the specific efforts of individual companies. In 2025, American semiconductor companies planned to spend $76.8 billion on R&D, accounting for 15% of their sales. Chinese companies, despite accounting for a larger share of R&D spending, have much less revenue due to lower sales volumes, resulting in significantly lower absolute investment.
What sets the U.S. apart is its “commercial cycle”: For instance, NVIDIA earns substantial profits from selling GPUs and uses 15% of those profits to fund the development of next-generation technologies, which in turn generates even more revenue. Many Chinese semiconductor companies have smaller revenues and must address multiple shortcomings in equipment, materials, and manufacturing processes, making it difficult for them to compete with international leaders.
For example, a Chinese company might invest 30% of its revenue (300 million RMB) in R&D, while a leading U.S. company with $10 billion in revenue would invest 15% ($150 million). The latter can undertake more and more advanced projects.
IV. Why Some Technologies Are Still Hard to Catch Up On Despite Increased Investment
The semiconductor industry is highly dependent on a chain of processes; if one link breaks down, the entire system fails. For example, a missing component in a lithography machine can prevent the production of functional devices. R&D success is not measured by the number of papers or patents but by whether the technology can be practically applied: Can the equipment be integrated into customer production lines? Are the materials consistently reliable? China has a large market, but if customers only use the products temporarily before switching back to foreign alternatives, a true domestic substitution cycle is not established. Genuine domestic substitution requires customers to repeatedly purchase Chinese products, not just compliance with policy requirements.
V. Efficiency in Spending Once in the Top Tier
Once R&D investment reaches the trillion-level, the focus shifts from having enough funds to how efficiently those funds are used:
- Avoiding duplication: Forcing multiple regions to build chip manufacturing parks leads to resource dispersion.
- Supporting long-term projects: Semiconductor technology requires years of development; short-term evaluations based on revenue generation are unhelpful.
- Weeding out ineffective efforts: Allowting failures and redirecting resources towards promising initiatives is crucial.
China has already overcome the challenge of securing sufficient funding. The next step is to ensure that R&D investments translate into tangible industrial capabilities—e.g., ensuring that equipment operates reliably in production lines and that chips are accepted by global customers. This is far more challenging than simply announcing large investment figures.
In Conclusion
China’s R&D scale has indeed reached the global forefront, but to truly lead in the semiconductor industry, it must address weaknesses in basic research, establish commercial cycles within companies, and improve the efficiency of R&D outcomes. This cannot be achieved by merely increasing funding; it requires scientific planning and long-term commitment.