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China's Drive for the Technology Frontier
Indigenous Innovation in the High-Tech Industry
Yin Li
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eBook - ePub
China's Drive for the Technology Frontier
Indigenous Innovation in the High-Tech Industry
Yin Li
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About This Book
China has become an innovation powerhouse in high-tech industries, but the widely held view assumes the Chinese model is built on technological borrowing and state capitalism. This book debunks the myths surrounding the Chinese model with a fresh take on China's strategies for technological innovation. The central argument is that indigenous innovation plays a critical role in transforming the Chinese high-tech industry. Like any successfully industrialized nation in history, indigenous innovation in China allows industrial enterprises to assimilate knowledge developed elsewhere, utilize science and technology resources and human capabilities accumulated in the country, and eventually approach the technological frontier. The question is, how do Chinese businesses and governments engage in indigenous innovation?
Employing the "social conditions of innovative enterprise" framework developed by William Lazonick and colleagues, this book analyzes how the interaction of strategy, organization, and finance in leading Chinese high-tech firms underpinned by national institutions enables indigenous innovation with Chinese characteristics. It features detailed case studies of two critical high-tech industriesâthe telecom-equipment industry and the semiconductor industryâand within them, the business histories of leading Chinese innovators. The in-depth look into China's experience in indigenous innovation provides valuable lessons for advanced and emerging economies.
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1 Introduction Demystifying Innovation in China
DOI: 10.4324/9781003156451-1
1.1. Chinaâs Industrial Innovation
Indigenous innovation has become the defining characteristic of Chinaâs approach to industrial technology and development. In 2006, the Chinese government made the promotion of indigenous innovationâZizhu Chuangxin (in Chinese: èȘäž»ćæ°)âcentral to its Medium- and Long-Term Plan for the Development of Science and Technology (2006â20).1 To meet the goals of the indigenous innovation policy, the Chinese government subsequently implemented 16 National Science & Technology Mega Projects for breakthroughs in key science and technology areas2 and policies to cultivate the so-called strategic emerging industries, that is, the next-generation technology industries such as environmental technologies, next-generation information technology, biotechnology, high-end equipment manufacturing, new energy, new materials, and new-energy vehicles.3 In 2015â6, the Chinese government announced its new grand strategy âMade in China 2025â and then âInnovation-driven Development Strategyâ to make a concerted effort to enable Chinese companies to compete globally in higher value-added goods and services. Although China substantially toned down the Made in China 2025 plan amid the recent trade war with the United States, there is no doubt that Chinese government-business collaborations continue to invest in advancing indigenous innovation.
On most metrics of innovation, China is succeeding in becoming an innovation powerhouse. At the national level, China has an impressive record of investing in and generating results from innovation activities. On the input side, China has made massive commitments to research and development (R&D) spending and invests heavily in human capital for R&D. In terms of R&D spending, China has the second largest gross domestic product (GDP) expenditure on R&D in the world, with an R&D budget of about four-fifths of that of the United States, the worldâs top spender. But even on a per capita basis, China has spent more on R&D than other countries with similar levels of GDP per capita. According to OECD data (Figure 1.1), China invested 0.7 percent of GDP in R&D in 1991, the first year for which data were available, a level of intensity comparable to major developing economies such as India, Brazil, or South Africa but significantly lower than industrialized nations such as the United States, Japan, or Germany. By 2012, Chinaâs R&D spending had caught up with the OCED average (at 1.88 percent of GDP). Since 2014, Chinaâs R&D expenditure has reached more than two percent of GDP, a level matched only by a handful of leading innovation nations (i.e., Israel, South Korea, Sweden, Japan, Germany, Denmark, United States, Finland, and Belgium), even though Chinaâs GDP per capita only surpassed 10,000 USD in 2019, the level of a middle-income country. In terms of investment in human resources, the share of researchers in the population is growing steadily. From 1996 to 2014, the ratio of researchers in China had grown from 443 to 1,113 per million population. In comparison, the share for high-income countries was 3,985 per million in 2012, but the Chinese ratio in 2014 is comparable to upper middle-income countries (1,266 per million in the same year).4 This investment in human capital occurs while China already has the worldâs largest number of researchers, with more than two million in total.
It is perhaps unsurprising that China, combining a rapidly expanding R&D budget and the worldâs largest R&D workforce, makes progress on all fronts of innovation. In terms of innovation output, one common measure is the number of patents. The number of Chinese patents has experienced explosive growth in the 21st century. According to data from Chinaâs national patent office, the National Intellectual Property Administration, Chinese domestic patent applications have increased 60 times since 1995, from 68,880 in 1995 to 4,127,200 in 2019, while patent grants have increased from 41,248 to 2,458,000 in the same time period. This patent boom is not confined to utility model and design patents, which are usually small and incremental innovations. From 1995 to 2019, the share of invention patents, which receive intensive patent examinations and stronger legal protection, has in fact increased, as its applications have grown from 10,018 to 1,231,000. Consequently, China has become the country filling the largest number of patent applications in 2011, and only four years later, it became the country awarding the most patent grants. In international comparison, China filed 1,460,244 patents under the Patent Cooperation Treaty (PCT) in 2018, and that is almost three times greater than the United States (515,180) or Japan (460,369), the worldâs second and third leading patenting countries. In terms of triadic patent families, one of the worldâs highest standards for patents filed at the European Patent Office (EPO), the United States Patent and Trademark Office (USPTO), and the Japan Patent Office (JPO) at the same time, China accumulated 5,323 triad patent families by 2019, fewer than Japan (18,644) and the United States (12,752) but more than Germany (4,772).
At the industry and corporate levels, a range of Chinese industries and their leading companies are rapidly approaching or already advancing into international technology frontiers. China has achieved the most success in high-technology industries where it has generated a growing number of innovative companies, including the telecom-equipment maker Huawei, the civilian drone maker DJI, Internet technology giants Baidu, Alibaba, Tencent, and ByteDance, that have emerged as technology and market leaders.5 Among them, Huawei and Zhongxing Telecommunication Equipment (ZTE) have held the positions of the companies with the most patent applications and grants with the World Intellectual Property Organization (WIPO) since the mid-2000s. More recently, Chinese companies are establishing themselves as top investors in corporate R&D. Since 2016, Huawei has invested over ten billion USD annually in R&D activities, putting the company among the global top ten corporate R&D spenders if Huawei were a public company.6
Chinaâs emerging innovation power is not limited to the information and communication technology (ICT) industries. It has already successfully created the worldâs largest industries in high-speed rail, solar panels, wind turbines, and electric vehicles. Over the last decade, China has made inroads into semiconductor fabrication and is increasingly threatening the U.S. technological dominance in this backbone industry of information technology.7 Most recently, China has been credited as an international leader in several emerging technology areas, including aerospace, digital currencies, electric vehicles, 5G advancements, renewable energy, quantum communication, and artificial intelligence.8
Of course, Chinaâs score in innovation is far from perfect. Considering the nationâs continental-sized economy and the worldâs largest population, Chinaâs advances in technology and innovation are less impressive when averaged by 1.4 billion people. On a per capita basis, Chinaâs R&D input and output, while ahead of other large developing economies, still fall behind the leading innovation nations.9 Many have cast doubts on whether the nationâs patent boom is commensurate with underlying technological progress, as the explosive growth in patenting is often correlated with patent subsidies from local governments.10 Even though a few star Chinese companies in selected high-tech industries have achieved the status of world leaders in innovation, the majority of the Chinese economy is far away from the leading edges.11 For example, despite being the worldâs largest automobile market, China has yet to generate any significant car makers in terms of technology leaders or world market shares. The contradiction in China is that the country is a top performer in aggregate R&D at the same time being a relatively low performer on a per capita basis, and it has both star companies and lagging industries.
However, Chinaâs success in industrial innovations by a small group of companies in its most advanced sectors raised a set of questions of particular importance: how did these Chinese companies innovate and approach technological frontiers? What are the institutional, organizational, and industrial conditions underpinning Chinaâs path to indigenous innovation? To what extent can their experience be learned by the rest of the Chinese economy and other parts of the world?
1.2. The Debates Over Chinaâs Innovation Model
In the debates over Chinaâs innovation models, there are two popular narratives. One narrative is the conventional wisdom that assumes Chinaâs high-tech industrialization is simply following the steps of its East Asian neighbors in transforming from imitation to innovation. In the other narrative, critics of the Chinese model have characterized Chinaâs high-tech industry as a model of state capitalism that relies on massive government subsidies and forced technology transfer. Based on this second perspective, the U.S. government has been targeting Chinese high-tech firms in the emerging Sino-U.S. antagonism. While these arguments are not completely false in capturing reality, they have made the mistakes of oversimplification, and their analysis is often not rooted in theories of innovation. It is helpful to set aside these two common misconceptions with a reality check before we set out to understand Chinaâs way of industrial innovation.
1.2.1. Is China Another Asian Tiger?
China is often assumed to have simply followed footsteps of an export-driven growth strategy well established by the neighboring East Asian nations. The subject of East Asiaâs newly industrialized economies, or the so-called NIEsâ experience of rapid economic growth after the World War II, have been extensively studied, and scholars often attributed their success to a mix of government policies and business strategies, including borrowing and learning technologies developed elsewhere, developmental state and industrial policy, and an export-driven growth strategy.12 China appears to have emulated much of these proven formulas, adopting policies from export promotion via special economic zones (SEZ), to attracting foreign direct investment (FDI), to encouraging international technology transfers, and to industrial planning and building national champions. But how well does Chinaâs success fit into the East Asian model? To what extent, can Chinaâs technological development be explained and predicted by the East Asian model?
To evaluate China in a framework based on the experience of East Asian nations, one needs to first clarify the so-called East Asian development model. Theories of East Asian development are built on the assumption of âlate development.â That is, East Asian countries entered the stage of industrialization and economic development while firms and technologies from the developed economies had already dominated the world. Thus, the latecomer countries and firms needed to engage in a process of âcatch-up.â There are both disadvantages and advantages to late development. Generally, the disadvantages are those associated with a status of underdevelopment at the beginning of industrialization: low personal income, lack of capital, underdeveloped or even missing markets, and a lack of capability in both government and business sectors. But late development theorists argue that by adopting a particular set of government policies and business strategies, a catching-up nation can turn its economic backwardness into advantages for development.
A strong government is often regarded as the key to unlock development in East Asia. Because firms in late development economies generally lack capabilities, the state with its administrative capacity must take the charge in development. This view can trace back to historian Alexander Gerschenkron in his account of the rise of Germany and Austria, two âlate industrializingâ countries in Europe in the 19th century.13 Chalmers Johnsonâs work on Japanese development, which inspired the modern interest to East Asia, attribute that the so-called âJapanese Miracleâ of rapid economic growth is the economic...