Innovating China

Can anything stop China’s rise to the top?

Reading books like When China Rules the World and The New Asian Hemisphere: The Irresistible Shift of Global Power to the East, you would be forgiven for thinking your best bet right now is to get down to the Durham University Language Centre and enrol on a Mandarin course. China’s progress both economically and as a global player has been well documented, now the second largest economy and the world’s largest exporter. Economic reforms dating back to 1978 have seen China become the world’s fastest growing major economy with official GDP growth a slower but still impressive 9.2% for 2011. Navigating the economy from Communism into the world’s factory has been a successful strategy, yet this mercantile growth model will not sustain China forever.

Extensive investment in infrastructure and manufacturing, a large and cheap labour force and an artificially low exchange rate have all contributed to China’s success in driving exports. The problem is that all this growth in capacity has to be filled with a global appetite to import from China or from demand within China itself. However, the low wages, making China such an enticing place to import from in the first place, will impede the 1.3 billion population from becoming consumers and supporting their own economy. It is the population that puts the GDP figures into perspective too, while China’s GDP is second to America, per capita it is 90th at 5184, one place above Angola, by comparison America’s GDP per capita is 48147 and ranks 15th (IMF 2011).

Innovation is seen as the way to bridge the gap from an emerging to a fully developed economy, but it won’t be easy. China knows this and has already spent vast amounts on research and development (R&D). Spending has increased by 10% each year for the past ten years and as a result China was the top patent filer last year. China’s higher education system has been vastly expanded and the number of science and engineering PhD graduates has greatly increased. China is still largely dependent on foreign technology and, of its exports, only half of the value added is created in China, which is significantly less than its US, German and Japanese competition.

China’s National Development and Reform Commission (NDRC) has managed much of the R&D spending with areas such as space travel, genome sequencing and nanotechnology being targeted. However, there are fears that the private sector, a big contributor to innovation, is being crowded out of key resources, owned by the state. Eastern commentators argue that the West is a good example of how the private sector can fail in innovation, innovating products that we don’t need, such as much of the recent so called financial innovation, and not innovating enough of the right things, such as green technology. As the world’s largest CO2 producer, innovation in green technology can only be a good thing, but the NDRC, formerly the State Planning Commission in China’s communist days, also has a mandate to maintaining state control whilst increasing innovation. This need for control differs from its South Korean and Japanese role models yet the Chinese state clearly believes it is best for them.

A Chinese brand would help to induce consumer spending but sometimes a university laboratory is not the best incubator for this kind of creativity. Many of the parts that make an Apple product are produced in China but it is the magic of the Apple brand and design that adds most of its value. A chauffeur driven Chinese executive, as they are likely to be, may miss the consumer focus that makes a Mercedes Benz more than just a technologically advanced car. There were no Chinese bands listed in Interbrand’s top 100 brands of 2010 with Lenovo, Huawei and Haier China’s best known brands.

We should give China credit, for it is still a relatively immature economy and we wouldn’t necessarily expect to see the fruits of its innovation just yet, but we would expect to see it soon. Just as some commentators have talked up Chinese domination, others have predicted China to stall and it has, up to now, proved those wrong.

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