Chinese paths of innovation

Yu Zhou,

Geography

Vassar College

China as innovation nation?

• What is the state and potential of China’s indigenous innovation in important industrial sectors?

• How important is innovation to the sustainability of Chinese growth and national competitiveness?

• How does China's innovative path differ from other newly industrialized countries?

• What are some of the key social conditions and characteristics that underpin the paths of Chinese innovation?

• What are the social implications of Chinese innovation for the stability of economic growth, the equity of income distribution, the social wellbeing of the Chinese people, and China’s contribution to global wellbeing?

China tried to imitate innovative model of US, S Korea and Taiwan in reverse

• In 1980s: Taiwan small firm model• 1990s: S. Korea model-building “national champions”• 2000s. US new economic model-startups, IPOs, etc.

The first is the Taiwan model

• Low financial technical entry barriers, and a large number of players: SME-based supply chain development (Pearl River delta)

• 85% of export by FDI• The world largest exporting nation: 7 of top 10 ports in China• Low-value-added, little brand development e.g. I-Phone• Innovation• Run-of-Red-Queen model (Breznitz and Murphree (2011): rapid

adoption of a technological frontier into production capacity tailored to China, or lower cost exports

• Flexible and creative adaption: Shanzhai phone• Unlike TW, attention to both export and domestic market

• Unable to support large scale, strategic R&D

1990s. S. Korea model

• Building national champions: SOEs and JVE: automobile and IC, and later Railway.

• SOEs were largely unsuccessful in the highly competitive fields: IT

• Financial support but lacking in efficiency and accountability

• Most success in monopolized sectors: Rail, telecommunication services, Energy

• Growth of non-state companies: Huawei, Levono, ZTE.

Growth of high speed rail

• The length of high speed rail track 800 km (2008) -14,000km in 2013.

• The traffic: 128 million (2008) - 672 millions (2013).

• In 2013, Chinese HSR carried slightly more HSR passenger-km than the rest of the world combined.

High speed train networksHigh speed rail networks

High Speed Rail is an exception

• The entire system was orchestrated and implemented by one governmental entity-MoR: planning, construction, operation and regulation.

• Little international competition• Few countries of the world can afford or interested in the

system• Unique leverage: Favorable tech-transfer agreement• Potential for corruption and quality and management

questions.

Imitating the US new business

model

• From 2000, stock market to provide support for innovation enterprises• 2nd, 3rd board of exchange opened in 2006 and 2009.

• Foreign IPO, NYSE, NASDAQ, and Hong Kong. • Baidu and Alibaba toped US IPO size

• More companies now have access to VCs and stock markets, crowd funding, eco-system is maturing.

• Poor and changing governance of the stock markets, corporate governance-accounting, bankruptcy, wide fluctuation

• Chinese entrepreneurs also are experimenting with alternative financial arrangement.

Growth of venture capital investment in China: 1992-2013

Chinese characteristics for innovationDYNAMICS

• China as Innovation Nation? Zhou, Lazonick, Sun• In China, you can find features of all three models, but no

complete replicates.• Diverse• Studies of 10 different sectors:

Chinese innovation : DYNAMICS: overall system

• D: Dual innovation tracks. • Top-down innovation system organized by the state: SOEs, infrastructure

and education, innovation policies • Bottom-up innovation system: enterprises respond swiftly to market

demand changes.• Y: Youthful entrepreneurs and enterprises. • China’s competitive enterprises have been created only since the 1980s

and mostly after 2000s. (Lenovo 1984, Huawei 1987, Alibaba, 1999, Tencent 1998, Xiaomi, 2010)

• The first generation of entrepreneurs are in their 40s and 50s and eager to learn and change. (Jack Ma 51, Lei Jun, 46, Ma Huateng 44)

• Still evolving with changing business models, yet to reach the value extraction stage.

Sharply increase state funding

In addition: 16 mega-projects in microchip, broadband, alternative and nuclear energy, aerospace, diseases control and health, and fuel vehicle development, organized by the state council

Growing non-state sector: R&D spending

DYNAMIC: DNA from Taiwan and Silican Valley with dual domestic and export markets

• N: Networked industrial eco-system: • Most successful industries have developed specialized enterprises

connected through dense and rapidly evolving networks. Internet and IT firms, in particular

• A: Adaptive incremental changes: • Secondary development upon existing products and technology

adapted to the Chinese context. The adaption can happen both within the sector and across sector platform. Eg. O2O

• C: Cluster development. • Distinct spatial clusters, e.g. ICT sectors, such as IC design in

Shanghai, cell phone in Shenzhen and internet in Beijing.

ICT

Chinese innovation: DYNAMIC: Enhance strategic control within GPNs

• M: middle of the market: Chinese firms find most competitive edge in products targeting at Chinese middle class. “Good enough innovation.”

• I: integration of technology from foreign sources: System integration provides Chinese firms with opportunities for learning, selecting and strategic control.

Will China become an innovation nation?

• Innovation is inherently uncertain:• Key conditions in China• Diverse Institution with considerable undercertainty: both

state managed and the market-oriented economy

• Resources: Capital, human resources, experiences

• Infrastructure: R&D capacity, production capacity and division of labor

China's challenges

• Global production system: seeking indigenous innovative development in global competition

• Institutional governance: • Market: rapid evolving market-can a middle class China

still support domestic industry?• Corporate: prevent value extraction, corporate governance• Labor: long-term education and improvement under a fluid

market• State: corruption and inefficiencies: eg. Changing of R&D

fundings system, speculative drive on state subsidies.