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The transition of China into an innovation nation

The writing is on the wall: China is the world second largest economy and the growth rate has slowed sharply. The wages are rising, so that the fabled army of Chinese cheap labor is now among the most costly in Asian emerging economies. China, in the last thirty years has brought hundreds of millions of people out of poverty, but this miracle would stall unless China can undertake another transformation of becoming an innovation nation. Historically, leading national economies are almost inevitably the global leaders in technology. Can China accomplish this new transition?

The Chinese government thinks so. In 2006, it issued a report called Medium and Long-term Plan for Science and Technology, which envisions China joining the top rank of “innovative nations” by 2020, and become a world leader by the mid-21st century. Central to this vision is indigenous innovation, stressing autonomous and strategic control of innovation through promoting domestic intellectual property rights (IPR) and brands. Under this vision, China’s R&D budget skyrocketed since 2007 from government or non-government sources.

The results are now visible. China is home to some of the world’s most innovative companies such as Alibaba on e-commerce, Tencent on social media, and Huawei on telecommunication. Measured by scientific publication and patent, China also rose to be among the world top rank. However, critics charge that bureaucratic control of the R&D, the rampant IPR violation, inefficient state-owned enterprises, and a rigid education system would ultimately doom China’s innovative drive.

I argue that the most solid evidence of China’s innovative capacity can be found through an analysis of Chinese diverse and dynamic industries. Innovation in each industry involves transformation of their organization, upgrading of technology, and access and competitiveness in the domestic and global market. Integrate findings from each industry allow us to put this ‘elephant’ of Chinese innovation together, through an acronym, DYNAMIC:

Zhongguancun technology hub,Haidian District, Beijing. Photo by Charlie fong, public domain via Wikimedia Commons.
Zhongguancun, Haidian District, Beijing by Charlie fong. Public domain via Wikimedia Commons.

D: Dual tracks

Differing from the image of the commanding height of a state-capitalism system, Chinese innovation is powered by both top-down and bottom-up forces, depending on the nature of the industries. The extreme top-down case is China’s railroad. Through massive state investment and debt financing, China Railroad Corporation has installed and put in operation the world’s largest high-speed rail system within one decade. Yet, similar top-down attempts to create national champions in automobile and semi-conductor foundries during the 1980s-90s ended up in disappointment as such enterprises failed to keep up with global leaders. The extreme bottom-up case is represented by mobile phone manufacturing where the grass-roots players mobilized by intense market competition have powered innovation, moving companies from producing knockoffs to leading brands.

Y: Young entrepreneurs and enterprises

The first group of Chinese competitive technological companies was created from scratch only since the 1980s and mostly only after 2000s. The founding entrepreneurs behind these companies are in their 40s and 50s. They are still in the prime age of accumulating expertise, thus are open to new ideas and experimentations.

N: Networked Eco-system
A: Adaptive incremental changes
C: Clustering

These three are related, and represent a collective and incremental approach of Chinese innovation through geographical clustering. Innovation is not usually an individual feat and novel breakthrough. Even Steve Jobs’ accomplishments have been built upon collective efforts by many others. This approach of incremental adaptation of foreign products is even more evident in China. Geographical clusters such as the cell phone cluster around Shenzhen, the IC design cluster in Shanghai, and the internet cluster in Beijing are centers of innovation as clusters facilitate specialization and exchanges among networked enterprises, improving flexibility and aid technology upgrade.

M: middle of the market
I: integration of technology

These two represent the key strategies to attain strategic control in indigenous innovation. Foreign firms occupy the premier market segments in China, so domestic enterprises target the middle market by providing similar but affordable products, called good enough innovation. The middle market has seen intensified competition for price and quality, forcing Chinese industrial leaders to improve on both measures.

Most Chinese companies rely on others for sophisticated core technology, but they are able to gain strategic control through system integration of technology from multiple sources. They learn from working with customers and global suppliers, and benefited from comparison and integration of global progress. If companies also invest in internal R&D, they can gradually catch up with the global leaders. Examples are found across the board, particularly prominent in high speed rail and alternative energy. This suggests that the so-called Chinese indigenous innovation is a result of China’s integration with, rather than separation, from global technological development.

In sum, the common caricatures of China as a copycat with no originality, or a Leviathan state intend of global domination are misleading. Institutional deficits in the Chinese innovation system are real, but can be overcome. While paths of innovation are long and inherently uncertain, close reading of trajectories of China’s industries reveals that the prospect is bright.

Featured image credit:China Railway Highspeed(CRH) CRH-2 380A high speed train by Alancrh. CC-BY-SA 3.0 via Wikimedia Commons.

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