China's innovation policy is all wrong
Source: Getty Images
July 20th, 2011
01:49 PM ET

China's innovation policy is all wrong

Editor's Note: Konstantin Kakaes is a Bernard L. Schwartz fellow at the New America Foundation. This post is part of the Global Innovation Showcase created by the New America Foundation and the Global Public Square.

By Konstantin Kakaes – Special to CNN

Will it be able to come up with a new one? Here is a story that Robert O’Brien tells in a recent paper in the journal China Security. In 2005, China’s National Development and Reform Commission, which had the power to set government procurement policies, said that state-owned wind farms could only buy turbines that had 70 percent of their parts made in China.

China, starting around that time, has become a major force in wind power, growing in the last 5 years at a dramatic pace: Chinese producers now control about 85 percent of the Chinese market, and half of the market globally, according to the New York Times, as O’Brien points out.

In 2005, Gamesa, a thirty-five year old Spanish company and one of the world’s largest producers of wind turbines, controlled about a third of the Chinese market. In response to the new rules, Gamesa started teaching local suppliers how to make parts of its turbines. But the suppliers then started to abandon it, and Gamesa’s market share is now only 3 percent. Up to now, China’s growth has been dramatic enough that no one complains–that 3 percent of today’s market is double what Gamesa was selling in 2005. This bonanza-like atmosphere has given the Chinese government license to act with license.

Besides the preferential procurement regulations, the Chinese government was also explicitly subsidizing Chinese industry to the order of several hundred million dollars. Those subsidies ended in June of this year after the U.S. government challenged them at the World Trade Organization (WTO) in February. And on July 5th, China lost another dispute at the WTO centered on restrictions of exports of minerals like bauxite, magesium, zinc, and silica.

The impetus on the Chinese government to encourage innovation was formalized in a 2006 strategy called the “Medium to Long Term Science and Technology Development Plan”. Though the Chinese government increased its R&D spending by 54 percent from 2006 to 2008, O’Brien says that the core of the strategy was industrial policy–such as the wind turbine procurement rules and mineral export restrictions. As part of the plan, products could apparently be designated as “indigenous innovation products” if they:

– Were made by a company that had full ownership of the intellectual property (IP) in China

– Had a trademark that is owned by a Chinese company

– Featured a high degree of innovation

– Were of dependable quality

These “indigenous innovation products” would then be given preference in government procurement, even if they were up to five or ten percent more expensive, in some cases. In December 2010, China relaxed these conditions in response to US government demands, removing the IP restrictions, and saying that Chinese subsidiaries of foreign companies would count as Chinese.

The problem with a supposed “innovation” strategy such as China’s is that it is not really a strategy for coming up with new ideas–the core of what we mean, or should mean, by innovation. It is instead just a means for choosing one’s compatriots over other comparable providers of like ideas and products.

Now, although on the face of it protectionism isn’t a good idea, one could make the contrarian’s case that it makes economic sense for China, as Chinese industry diversifies from manufacturing and assembly to a broader set of tasks. But industrial policy is industrial policy, and innovation is innovation. Preferential purchasing requirements (in China, as in U.S. “Buy American” campaigns) lead to market distortions more often than they actually encourage domestic innovation. To date, China’s indigenous innovation policy has been a procurement policy in disguise. This will have to change if China wants to compete in coming up with new ideas, instead of just boosting domestic industry. And there is every reason to believe that China does want to actually innovate.

The means: the dramatic increase in R&D spending over the last decade. The motive: the size of the workforce in China is likely to start to decline within the next five years. This will cause wages to rise, which means China may lose low cost manufacturing to southeast Asia (in the near term) or even a rising Africa (in the longer term). Even today, a focus on manufacturing means that little of the profit involved in creating, say, an iPod (in the most famous example) is realized in China. China’s phenomenal economic success, both in reality and in the eyes of the drafters of the “indigenous innovation policy”, is not sustainable. The WTO rulings of this month and last should act as a signal to China’s policymakers that the international community will push back at protectionism.

Some will argue that cultural and political factors mean the Chinese government will remain stuck in a mentality that ultimately stifles innovation, as Adam Segal has said in these pages. But this is far from apparent. Gustave Flaubert once wrote in a letter, recommending that his correspondent, "be regular and orderly in your life like a bourgeois, so that you may be violent and original in your work." Scientific research, in its way, is just as much of a creative endeavor as writing a novel. There is no fundamental reason why a scientist in China cannot be “regular and orderly” as a political figure, and yet “violent and original” in science. China’s to date fumbling attempts to recruit scientific luminaries illustrate a desire to cultivate such violent originality. Though that desire has been heretofore haphazard, there is no reason to believe it will inevitably remain so.

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Topics: China • Innovation • Technology

soundoff (21 Responses)
  1. Peter

    I remember how recently Home Depot got in trouble with our governemnt projects since they used Chinese materials that violated our own "Buy American" policy. Now we are berating China for their "Buy Chinese" policy?

    July 20, 2011 at 5:28 pm |
    • j. von hettlingen

      This procurement policy aims at protecting home-made products. A sign that China is focussing on self-reliance and self-sufficiency, but Chinese consumers prefer foreign goods if they may.

      July 20, 2011 at 5:43 pm |
    • Jdg

      China is the most protectionist country in the world.

      July 21, 2011 at 5:52 pm |
      • KJ

        to be innovated, you need to have the basic fundamental understanding of it. since author mention wind power, in order for china to invent new tech in wind power they need to learn how to make them first in-order to create new ideas to improve it. just like china invent gun powder, western country copy it from china and creates weapons today. what china is doing is call smart.

        July 22, 2011 at 1:39 pm |
    • Bill Rich

      And, of course, you don't see the difference between a buy-US policy for US government procurements, and buy-US policy for all of US citizens. Convenient.

      July 22, 2011 at 4:47 pm |
  2. That'snotTrue:(

    The difference is the US can go on about innovation all they like, but they invest very little in proper education. This system, while not perfect works, such as some inventions that US says it have such as electric cars remains to be unseened, while China showcased and used it in the world expo 2010 last year.
    Author instead of you and others at CNN go on and on about it, why not talk about reforming the education system or something, model it after something that works, like Asia's or Canada's.

    July 20, 2011 at 5:28 pm |
    • Jdg

      All of chinas tech comes from copies of foreign sources.

      July 21, 2011 at 5:50 pm |
      • Maersk

        Even you yourself is a Chinese copy since your mother opened her legs to whoever came along and it happened to be a Chinese.

        July 21, 2011 at 9:08 pm |
  3. RM

    Well, China must be doing something right as it has US running with tail between legs scampering to India to do its dirty biding in that volatile region. In return India hiding behind US's skirt trying to fire arrows. It is hilarious!!!

    July 21, 2011 at 1:55 pm |
  4. Deng's Cat

    Why glorify theories like theology? Be pracical, it's results that count!

    July 21, 2011 at 7:51 pm |
  5. Deng's Cat

    It is not necessary to re-invent the wheel. Just make a better mouse trap. Peter Drucker, the management guru, calls it creative imitation. Some prefer to call it copycat innovation. That's OK, the whole world is doing it.

    July 21, 2011 at 7:56 pm |
    • scott

      Absolutely right. Creative imitation happens all the time. If we have to reinvent every wheels, nothing will be done. Learn from others, imitate first, then improve and innovate from original. That is what China's success story.

      July 22, 2011 at 2:41 pm |
  6. Bill Rich

    What China is doing about innovation is perfect. There is no problem what so ever, and China should just continue down that road, for the good of the US.

    July 22, 2011 at 4:49 pm |
  7. Observer

    So long it it ECO FRIENDLY INNOVATION!! Also so long it is necessary to innovate not just for the sake of innovate. The Basic Living and Health are the areas needed to look into more...I think

    July 23, 2011 at 7:30 am |
  8. Stephen Foo

    Innovations and ideas arise from people, not country. China eventually will exceed the West in new ideas and innovations as a result of their people, not their government or policies. America is great not due to her government, but due to the many foreign nationals who live here, correct ? One case in point, if one will remove all the Jewish and Chinese students from a school district, what will happen to that school district's academic ranking ? So, is it the school or the students ?

    July 24, 2011 at 4:51 am |
    • theorycraft

      that ranking will stay the same... schools are led by their teachers and the system. If the teachers cannot teach or the neighborhood is bad, I don't care what nationality you are, your grades will suffer. Like a crappy boss with genius workers, it won't work, people will stop caring about work, and just do it to take home a paycheck

      July 24, 2011 at 7:00 pm |
  9. Big Fool

    well, Chinese should not do innovation at all, they should stay in their old life style and eat only two meals a day, so we can say they are not innovative !!!!!! we don't like any progress they made !!!

    July 24, 2011 at 1:36 pm |
  10. theorycraft

    I'm going to say it for the last time: it doesn't matter that China is moving up the education curve and out PhD-ing America. They have tons of book knowledge but because they get it from rote memorization, they cannot imagine working off the page/ coming up with original ideas. They can adapt ideas to their own country, but I refuse to call them innovative until they have stuff to offer the rest of the world. China's Twitter. China's Soviet sub. China's NYSE. How about something where Americans go, "we should build that over here"

    When China beats everyone at the college game, America will have long moved on to a different education system. I'd bet my life on it. We're already discussing whether college is worth the price and whether people actually learn anything. Private schools usually turn out better grades than public ones, yet it's the dumb popular kids from public schools that get ahead in life. Think about it.

    July 24, 2011 at 7:10 pm |
  11. Hank

    I've spent alot of time in China as a notebook development engineer. At a factory, a prototype computer had a DVD player that would play a movie for 5 minutes, then stop. I called a test enginner. The engineer popped in the DVD and it played–it works, she said. But it stopped after 5 minutes. I saId the DVD player needed a firmware update. She popped the DVD back in and it played. See, she said, it works. It stopped after 5 minutes. Back and forth we went for hours. That's the reality of the Chinese industrial revolution and innovative emmience.

    July 26, 2011 at 12:22 am |

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