How China Will Shape Global Innovation

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How China Will Shape Global Innovation

China’s track record for innovation spans centuries. This is the economy that gave the world such revolutionary inventions as paper currency, gunpowder, the waterwheel, and the compass.

Yet in recent decades, under Communist rule, China’s innovators and entrepreneurs have been burdened by bureaucracy and by a government that is too involved in their businesses. For example, as a Harvard Business Review article pointed out, every company with more than fifty employees is required to have a Communist Party representative onsite, and every business with more than 100 workers is required to have a Communist party cell with a leader who reports directly to the local party officials.1

China’s strength over the past thirty years has been based on its ability to imitate innovations from the West and to use its low-cost manufacturing capabilities to crank out cheap products and components for devices invented elsewhere. Even its biggest internet companies are simply adaptations of U.S. innovations. The massive online marketplace Alibaba, the giant auction site Taobao, and the dominant search engine Baidu are Chinese versions of Amazon, eBay, and Google, respectively.

China has also built a reputation for its approach to borrowing ideas and technologies that goes beyond imitation to outright piracy. An analysis by MIT Sloan Management Review estimates that Chinese theft of intellectual property costs American companies $300 billion every year.2

However, China is now beginning to take the first steps toward a dramatic shift from imitator to innovator. In a sense, the country has no other option. In the trend China Hits the Demographic Great Wall, we showed how China’s misguided population-control policy will cause its labor force to shrink. Already, its factory workers are demanding higher wages, so its advantage as a low-cost manufacturer is weakening. A report by the McKinsey Global Institute concludes that China will need to generate 2 to 3 percent of GDP growth per year from innovation in order to meet its growth targets of 5.5 to 6.5 percent per year.3

As a result, China’s government is placing a new emphasis on innovation as a path to continued economic growth. The results can already be seen in China’s higher-education system. In 1978, according to Harvard Business Review, fewer than 1 million students attended Chinese universities...

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