China's Innovation Problem

by: Alpha Author

Interesting article in yesterday’s NY Times (see China’s Race for Patents) echoing my sentiment from several months ago about the dangers for developing countries of falling into a commodity trap (see Taiwan’s Lessons for China).

According to the NY Times article:

As a national strategy, China is trying to build an economy that relies on innovation rather than imitation. Clearly, its leaders recognize that being the world’s low-cost workshop for assembling the breakthrough products designed elsewhere — think iPads and a host of other high-tech goods — has its limits.

Absolutely. I’ve been arguing this for awhile. There’s only so much development that a model based on cheap labor and export-led growth can deliver. As I pointed out in my previous post drawing similarities between Taiwan and China:

Taiwan’s overall economic development over the past 50 years has been nothing short of spectacular. And there is no doubt in my mind that China is trying to emulate elements of Taiwan’s development strategy. However, a strategy centered almost exclusively around manufacturing (whether it be in high tech or other industrial goods) comes with some serious risks.

The problem with such a strategy is that it relegates developing country firms to junior partner status, dependent upon a system in which they manufacture (for export) the designs of others. In the extreme, this results in a commodity trap.

The key for countries like China is to transition, at some point, from an economy that simply manufactures the goods that are designed and developed elsewhere to one in which innovation, creativity, and high value-added services take root. Unfortunately, these transitions are difficult, and take an inordinate amount of time.

As the NY Times article emphasizes:

Can China become a prodigious inventor? The answer, in truth, will play out over decades — and go a long way toward determining not only China’s future, but also the shape of the global economy.

“The leadership in China knows that innovation is its future, the key to higher living standards and long-term growth,” Mr. [David] Kappos [Director of the USPTO] says.

Despite China’s inevitable rise, Mr. [John] Kao [an innovation consultant] said, the United States has a comparative advantage because it is the country most open to innovation. “American culture, more than any other, forgives failure, tolerates risk and embraces uncertainty,” Mr. Kao says.

Many innovative products and technologies, he says, will be made elsewhere. “But America’s future lies in being the orchestrator — the systems integrator — of the innovation process,” Mr. Kao said.

In many respects I agree with Mr. Kao. It will take a long time for developing countries like China that rely on manufacturing for export to close the innovation gap with the West. I have discussed these issues in various blog posts (see Emergence of Emerging Market Innovation, China Attracting High-Tech Research, China Alternative Energy, and Globalization Discontents).

At the very least, China’s leaders recognize, and openly acknowledge, the issue. And the first step in any solution lies in problem recognition.

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