Why China Can't Innovate

By Kerry Brown

August 19, 2014

Xi Jinping praises innovation in the abstract, but China’s system is not set up to encourage innovation in practice.

There are plenty of differences between the Xi Jinping and Hu Jintao administrations, but if there is one policy area where they are absolutely in concord, it is the worship of an abstract notion of innovation as the solution to almost all of the country’s great challenges. For the last decade, Hu Jintao’s concept of “scientific development” has served as the seminal statement on innovation. Under Hu, this idea was backed up by steep increases in research and development spending, more resources and efforts devoted to the education sector, and support for enterprises (state-owned and private) that were in the priority areas of information technology, high-tech manufacturing, and computers. This sector even got its own 15 year plan beginning in 2006, a major statement of where the country was heading in terms of developing its own indigenous world class capacity.

China churned out patents under Hu Jintao at almost the same dizzy rate it produced raw GDP growth. But patents alone do not make for an innovative product With irritating effectiveness, largely American and European companies continue to produce the technology everyone else wants to get their hands on. On one level, the vast Chinese efforts to steal intellectual property via cyberattacks or other means are crimes. But viewed another way, these IP thefts are a mass act of flattery and an admission that so far, for all the planning and strategizing, China’s break-through moment remains elusive.

A new book on innovation in the military sphere, Forging China’s Military Might edited by Tai Ming Cheung, helps spell out why this might be the case. Innovation, like reform, is a good word in China. Politicians like to use it in their speeches, and associate themselves with it. Despite this, there is little consensus over what precisely innovation is and what helps to nurture it. For one thing, Tai Ming Cheung and his co-authors make it clear that historical innovations are highly disruptive. True innovations create winners and losers and carry high costs. For every Apple and Microsoft, there are thousands of failures. Out of every scientist at a research institute or university who comes up with a brilliant idea, only a tiny number are able to tap into funding to develop their idea and put it into practical action. Innovation, at least on this reading, is inherently destructive. And it flourishes only with risk takers and a culture that tolerates them.

Based on the evidence in this book, the Chinese government under Xi can pour all the money they want into vast research and development parks, churning out any number of world class engineers and computer programmers. Even with all of this effort, however, China is likely to produce few world class innovative companies. The fundamental structural problem is that the role of the state and government in China is still very strong. Much of the funding comes from the state, and the rewards are eventually meant to flow back to it. Hierarchy, vested interests, and complacency get in the way of anyone who aspires to be the Steve Jobs of modern China. There are brave characters who do get through – people like Jack Ma, the founder of Alibaba. But as it stands, the Chinese state-supported system is intolerant of failure, highly punitive to those who venture much and gain little, and demanding of swift returns. The murkier market systems of the U.S. and Europe are better incubators for crazy ideas, a tiny number of which finally get through and succeed.

In recent speeches, Xi Jinping has emphasized innovation as strongly as his predecessor did. He will almost certainly continue this emphasis at the plenum meeting coming up later this year and just as certainly, most of what he says will be rhetoric. The bottom line is that it would be a vast innovation in its own right for the risk averse, highly prescriptive knowledge system that currently dominates China to come up with diverse and challenging new ideas about how to do things differently, design things in a new way, or live in a different fashion — the sort of things innovation involves. The system that China currently has still rewards conformity. To change it would be the act of a brave person. To paraphrase Chen Yun from the 1980s, innovation is fine – as long as it is like a bird in a cage. It has to be controlled.

However, there is one massive incentive that Xi and his fellow leaders need to consider while they contemplate the support for innovation in their current system. For almost every policy challenge China currently faces, from producing growth to addressing climate change, from solving demographic issues to defending Chinese national interests with a modern army, innovation lies at the heart of the needed solutions. No area better shows the complexity and contradictoriness of modern-day China than this battle between risk-averse control and pragmatic engagement with disruptive innovation. This leadership, like the last, cannot afford to walk away from innovation, despite all its intrinsic risks and problems.