China's Shift from Imitation to Innovation

I highly recommend everyone to read this research paper by Robert Atkinson and Caleb Foote on one of the most important economic questions faced by advanced nations -- how innovative is the Chinese economy?

For those in the “China cannot innovate, they can only copy” camp, Europe, Japan, and the United States should stop worrying about issues such as intellectual property theft, forced technology transfer, and massive subsidies to Chinese technology companies because China is not an innovation challenger. For those in the “China is rapidly following the path nations such as Japan and South Korea took to become global innovation leaders” camp, advanced economies need to raise their game, including stepping up efforts to roll back Chinese innovation mercantilism.

Whether China’s economy is innovative has critical implications: If China is only a copier, then the risk to advanced economies is limited. But if China is more like the “Asian tigers” that rapidly evolved from copiers to innovators, the threat is serious. As those nations became more innovative, they took market share from leading companies in Europe and the United States. There is no reason to believe China will not follow the same path—only with significantly greater impacts because the Chinese economy is massive, Chinese policies are more aggressively mercantilist, and it is much more difficult to get China to compete fairly.

A COMMON MISCONCEPTION: CHINA CANNOT INNOVATE.

Notwithstanding the fact that no other government in history has done more to promote an innovation-based economy than China, there is a widespread view that China simply cannot succeed in innovation. The reasons given are many and diverse: Chinese students are taught rote learning and do not know how to think for themselves. China is too far behind the leaders to ever catch up. Weak IP laws and enforcement mean China will always be a copier. And of course, no economy subject to the heavy hand of state planning can ever be innovative These views are widespread. Zachary Karabell wrote in The Washington Post, “Chinese firms excel at copying but not yet at creating. As a result, smart foreign companies realize that the lasting solution is innovation, not courts and lawyers.” Kerry Brown, a professor at Kings College London, wrote, The Chinese government under Xi can pour all the money they want into vast research and development parks, churning out any number of world class engineers and computer programmers. Even with all of this effort, however, China is likely to produce few world class innovative companies. The fundamental structural problem is that the role of the state and government in China is still very strong. The system that China currently has still rewards conformity.

THE REALITY: CHINA CAN AND DOES INNOVATE. 

In short, while China is behind in first-to-the-world science- and engineering-based innovation, to say that China cannot innovate, and as such is not a threat to the economies of advanced nations, is misguided. As MGI concluded: Overall, Chinese companies show the greatest strengths in markets that require customer- and efficiency-driven innovation, and they have the most catching up to do in industries that rely on science- and engineering-based innovation. China has the potential to meet its “innovation imperative” and to emerge as a driving force in innovation globally.

While China has made considerable progress, a key question remains: Can it make the transition from its current fast-follower stage and become able to master first-to-the-world innovation, especially in science and engineering industries? As MGI wrote, “China has made science-based innovation a top priority and has invested in building the institutions and capabilities needed for discovery and invention. So far, these investments have not translated into innovation leadership, but they have created a strong foundation.

 

2019-china-catching-up-innovation.pdf437 KB