Once, the words ‘innovation’ and ‘China’ rarely appeared in the same sentence. But things are changing fast and innovators in mainland China are gaining rapidly in competitiveness compared with companies in developed economies of Europe, the US and elsewhere.

That’s the conclusion of  a fascinating report from US consultancy Strategy& (formerly Booz & Company) that draws on interviews with multinationals operating in China to assess how  they rate China in the innovation league.

The China Europe International Business School and the Benelux Chamber of Commerce in China also helped conduct the survey.

Download An Emerging Innovation Power: 2013 China Innovation Survey This year, nearly two-thirds of the respondents said some Chinese competitors are at least as innovative as their own companies, a strong increase since last year.

Less surprisingly perhaps, Chinese companies also said their innovation efforts are competitive with those of MNCs in China, although they still see significant room for improvement.

And though they believe they are less innovative when operating overseas than their multinational rivals, they plan to increase the amount of their innovation directed toward overseas markets.

The Chinese are coming and western firms need to prepare for the prospect of growing competition from Chinese technology-based industries in their domestic markets — an idea that would have been scoffed at  five or six years ago.

EngagingChina wrote a few years back about how Europe’s machine tool industry was feeling increasingly threatened as Chinese machine  tool manufacturers moved up the value chain.

The Chinese upstarts began offering quite basic technology but then started buying western machine-tool makers so they could gain access to advanced technology and enter western markets.

For the future, China is putting the emphasis on R&D to drive innovation and so will have less need to buy western companies to access advanced technology.

The number of Chinese companies in Booz & Company’s Global Innovation 1000, which  lists the publicly-held companies that spend the most on R&D each year, has risen from 15 to nearly 50 over the past five years.

In 2011, companies headquartered in China increased their R&D spending by 26.5% —more than double the global average, five times as much as European firms, and 11 times as much as Japanese firms.

The survey also shows that China is becoming a global innovation hub for MNCs from developed markets with two thirds of the respondents reported that they are conducting R&D in China for foreign markets—and even more plan to do so in the future.

The authors of the Booz & Company report  want to finally lay to rest the widely held perception that Chinese companies tend to focus on copying and making incremental improvements to existing products.

Their data show that Chinese companies—to a higher degree than most global competitors—pursue the same kind of innovation strategies that are practiced by the world’s most successful innovators, including those based in Silicon Valley.

The full report can be read here.