Innovation Next Step for China

With its vast low-cost labor force and a consuming 20-year thirst for economic growth, China was a natural to become the world's factory. Now its central government faces the new, vastly more difficult challenge of making China a global innovator.

BEIJING — With its vast low-cost labor force and a consuming 20-year thirst for economic growth, China was a natural to become the world’s factory. Now its central government faces the new, vastly more difficult challenge of making China a global innovator.

Beijing has stated that it intends to make China’s economy innovation-based by 2020. Government experts have said the change will be essential to maintaining China’s economic health and improving the living standards of its people. Intellectual property rights protections, improved product quality and safety and a more competitive global economic base would result, and a manufacturing economy is not entirely sustainable in the long term, they say.

China has maintained its rapid economic rise on making the products that other nations have created and designed, often in violation of intellectual property protections. Now the downsides of low-cost mass manufacturing have begun to manifest themselves, with last year’s global scare over product safety in toys and complaints at the World Trade Organization over wholesale intellectual property theft. These developments have turned the focus even more on China’s capacity to innovate rather than just manufacture.

While 13 years is a long time for China to evolve, given its current rapid pace of change, analysts and experts are skeptical that the nation can accomplish its innovation goal without changes that reach into the very fabric of society.

“People don’t become innovative because of government policy, they become innovative because they develop creative minds,” said Fraser J.T. Howie, a China economic analyst and author of “Privatizing China: The Stock Markets and Their Role in Corporate Reform.” “What’s important has to do with educational systems and teaching people to think for themselves.”

A long-held criticism of China’s educational system is that it depends on rote memorization rather than free thinking and individualism. Howie said that, because of such ingrained societal challenges, along with China’s one-party system and the market dominance of state-owned firms, he sees little hope for innovation. Development of the private sector remains essential to creativity. Most innovation happens in the private sector, he noted, and China’s private sector remains woefully far behind.

“I don’t think they’re going to be able to do enough quickly enough,” he said.

This story first appeared in the January 3, 2008 issue of WWD.  Subscribe Today.

The Organisation for Economic Cooperation and Development takes a more optimistic view. In a recent report, the Paris-based group said that, while significant challenges remain, China has made great strides toward encouraging innovation and the outlook is somewhat positive.

Still, the report noted that, while China’s spending has increased by 19 percent on research and development since 1995, key areas such as IPR and gains in education lag far behind what is needed to foster innovation.

The OECD study found that, while China has more researchers than any other nation, undergraduate degrees in science are on the decline, and public funding has yet to fill in a major gap in research dollars.

The predominance of state-owned banks and closed capital markets hinder business development that leads to innovation in market economies, the report found, and in short, “the innovative capabilities of the Chinese business sector remain weak.” Financing, corporate governance and China’s propensity to develop product standards that differ from global norms are all roadblocks to a climate fostering innovation.

China’s drive toward creativity is not just a domestic issue, the OECD said.

“A failure to manage the process of integrating China smoothly into the global innovation system carries the risk of costly tensions,” said the group’s report. “There is a risk that discontent arising in both China and OECD member countries may complicate this process.”

Even domestic experts are skeptical, first that China even needs to become an innovator to survive. Cai Fang, director of the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences, said he believes productivity and efficiency are equally meaningful. China is improving in productivity, Cai said, which will help it maintain stable economic growth and keep manufacturing here even as wages and costs increase. Simple math dictates that China will remain a manufacturer.

“We will continue to be the biggest supplier of labor in the world,” predicted Cai.

Others, however, say China’s integration into the innovative global economy is vital, and key to the country’s own success.

“It’s counter to what they’ve been doing, but their current model is unsustainable,” said Howie. “Once you’ve made all the [neckties] in the world, you can’t make any more.”

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