China’s leading the way in innovation

This article is more than 12 months old

World's second-largest economy can count on its policies - and those of the US - to continue its success

China has achieved much since 1978, when Deng Xiaoping initiated the transition to a market economy.

The country's gross domestic product grew by nearly 10 per cent a year on average while reshaping global trade patterns and becoming the second-largest economy in the world.

This success lifted 800 million people out of poverty, and the mortality rate of children under five years old was halved between 2006 and 2015.

The question now is if China, well positioned to become the world's innovation leader, will realise that opportunity this year or soon after. Its transformation has been underpinned by an unprecedented manufacturing boom.

In 2016, China shipped more than US$2 trillion (S$2.65 trillion) worth of goods around the world - 13 per cent of total global exports.

It has also pursued economic modernisation through massive infrastructure investment, including bridges, airports, roads, energy and telecoms.

In less than a decade, China built the world's largest bullet train system, surpassing 22,000km in July last year. Annual consumption is expected to rise by nearly US$2 trillion by 2021, equivalent to adding another consumer market the size of Germany to the global economy.

Apple chief executive officer Tim Cook recently declared that "China stopped being a low-labour-cost country many years ago, and that is not the reason to come to China".

China's manufacturing strengths now lie in its advanced production know-how and strong supply-chain networks. Understandably, its leadership wants to increase productivity and continue to move up the value chain.

Building on its 13th Five-Year Plan (in May 2016), the authorities established objectives for China to become an "innovative nation" by 2020, an "international innovation leader" by 2030 and a "world powerhouse of scientific and technological innovation" by 2050.

To enable this innovation, municipal governments are building technology hubs, hoping to attract talent.

The city of Guangzhou is encouraging researchers, entrepreneurs and corporations to base themselves there. General Electric recently committed to build its first Asian biopharmaceutical project in an US$800 million bio-campus.

The southern city of Shenzhen is already known as the "Silicon Valley of hardware", and the greater Shenzhen-Hong Kong area is ranked second in terms of global inventive clusters, measured by patents.


Business in China often operates at a speed and nimbleness unlike anywhere else in the world.

China is fully embracing digital models, not just digitising old models. Its lack of legacy systems has already enabled it to leapfrog the West in areas such as digital payments, the sharing economy - dockless bicycles are sweeping the world - and e-commerce.

Total spending on research and development in China (as a percentage of gross domestic product) more than doubled from 0.9 per cent in 2000 to 2.1 per cent in 2016. The sheer volume of university graduates - 6.2 million in 2012, six times the number in 2001 - is likely to produce enough talent to achieve the desired effect.

But American workers are still considerably more productive than their Chinese counterparts.

Other factors in the United States' favour include 30 of the top 100 universities in the world, a risk-taking and entrepreneurial culture and its companies' heavy exposure to market forces. Traditionally, this has driven US firms to compete aggressively, often relying on innovation.

But the US industry is not as dynamic as it once was. Between 1997 and 2012, two-thirds of US industries experienced an increase in market concentration, and a record 74 per cent of employees are working at these ageing (16 years or older) incumbents.

US President Donald Trump's administration seems to have completely misunderstood what is needed. He favours a more protectionist future, which would take the pressure off US companies to be globally competitive or truly innovative.

US universities are being undermined by changes in the tax code and impending spending cuts - part of what appears to be a broader war on science. And immigration - an essential source of talent and ideas - looks likely to be restricted.

Given its own policies, and those of the US, China is on track to become the world's innovation leader.

By the end of this year, it will be more apparent just how quickly and easily this latest chapter in the Chinese success story will be written.

Simon Johnson is a professor at Massachusetts Institute of Technology (MIT)'s Sloan School of Management. Jonathan Ruane is a lecturer in the 
Global Economics and Management group at MIT. This article appeared 
in The Business Times yesterday.