The three elements of China’s innovation model

Manoj Kewalramani January 9, 2019

In November 2018, the New York Times published a series that began with a story titled, The Land that Failed to Fail. The central argument of the piece is that defying Western expectations, the Communist Party has maintained its control in China while adopting elements of capitalism, eschewing political liberalisation, and pursuing innovation. The last of these three — innovation — is the subject of this piece.

What drives innovation in China? This is not merely a question about the mechanics of policy, the might of capital, the determination of dogged entrepreneurs, or the brilliance that is conjured up in university dormitories. Increasingly, it is a question that has acquired geopolitical significance, not just in the context of power politics but also in the debate over fundamental values about political and economic organisation. In other words, the question that China’s march towards becoming a “country of innovators” raises is whether a political system that prioritises control can foster genuine innovation.

Answering this requires an understanding of the key elements of the Chinese model of innovation. To my mind, there are three key components of this model—state support, a systems approach towards the development of new technologies and businesses, and building an effective “bird-cage.” There are, of course, other factors like the pursuit of prestige, the desire to rebalance the economy, the need to enhance the effectiveness of governance, and the size of the consumer market, which supports innovation. But it is the first three components that form the key pillars of China’s innovation model.

Political and State Support

Party-state focus on science and technology development dates back to the early 1960s, with the articulation of the four modernisations—agriculture, industry, defense, and science and technology. The framework returned into prominence with the ascent of Deng Xiaoping after the death of Mao Zedong, as the leadership focussed on economic development. That’s remained the prime driver even today, with the focus now being high-quality development. But what one witnesses now is not just greater political commitment towards innovation but also government planning increasingly becoming more industry-specific.

Deng Xiaoping's focus on economic development remains at the core of China's innovation. Seen here with former US president Jimmy Carter.
Deng Xiaoping’s focus on economic development remains at the core of China’s innovation. Seen here with former US president Jimmy Carter.

In 2006, the central government issued a ‘Medium- to Long-term Plan for the Development of Science and Technology.’ The stated goal of this was to cultivate an innovative society by 2020. In the years since, what has followed are specific plans with regard to robotics, semiconductors, artificial intelligence, overall industrial upgradation, and so on. These plans offer policy guidance, define targets and help mobilize capital, creating an incentive architecture within which local governments pursue implementation.

In this process, these local actors enjoy substantial freedom in charting their individual courses in terms of framing policies and channelising resources. So provinces and cities tend to set up what are called guidance funds, which bring together state and private investors to support innovative enterprises. This is evident in China’s growing R&D expenditure, estimated at $257 billion in 2017, along with increasing fundraising by Chinese technology startups. Along with this, local governments provide a whole range of subsidies to firms to shore up talent and liquidity. In addition, efforts are directed towards streamlining administrative procedures to enhance the ease of doing business. Finally, the state also plays an important role as a consumer, which is evident in the development of technologies such as facial recognition, smart transportation, and intelligent speech. This, essentially, is a top-down approach, which engenders moral hazards and rent-seeking. It is, therefore, no surprise that it yields inefficiencies. But what this also does is that it provides an effective support system for innovators and entrepreneurs to experiment and advance.

Competition and Systems Approach

In his book, AI Superpowers: China, Silicon Valley, and the New World Order, Kai-Fu Lee, the former chief of Google in China, uses the metaphor of gladiators in the Coliseum to describe the technology business environment in China. He argues against the notion that Chinese tech giants have thrived by copying Western ideas and applying them in a sheltered and protected marketplace. Instead, he says, while the copycat phase helped build up “baseline engineering and digital entrepreneurship skills,” it is the intense competition for survival in the Chinese marketplace that has fostered innovation by Chinese enterprises.

Kai-Fu Lee, author and former head of Google in China
Kai-Fu Lee, author and former head of Google in China

While one can, and I do, disagree with Lee’s disregard of the significance of protectionist policies, the rest of his argument is based on solid ground. Tencent and Bytedance’s battles in a Beijing court in 2018 are an example of this intense and often ugly competition. At the heart of the dispute are questions of companies engaging in exclusionary and anticompetitive practices. These, of course, are only possible when the rulemakers are still playing catch-up—which is the case not just in China but in most parts of the world—while one or more of the players command significant amount of market power. That, therefore, is the Holy Grail for Chinese tech companies, whose quest for market power is characterised by a systems approach.

This isn’t a cultural argument about Western thinking being atomic and the Eastern approach being systemic. This is about identifying opportunities, strategic acquisitions, and devising real-world business models in a competitive and relatively wild marketplace to maximise market share and, thereby, power. This is evidenced in WeChat’s development into a multipurpose app and in the development of Meituan from a discount platform to an all-purpose platform covering food deliveries, lifestyle services, ride-hailing and bike-renting. Increased market power attracts greater capital, talent, and access to data, which further fuel innovation. One other aspect of this approach is the links that are being established between private businesses and universities. For instance, while Baidu is supporting AI research at Peking University, Tsinghua University is collaborating with Tencent. The country’s first AI textbook for high school students was penned by the CEO of SenseTime.

‘Bird Cage’ Theory

This leads us to the third and final component of the Chinese model, i.e., a reimagination of the bird-cage. This refers to the theory propounded by Chen Yun in the early 1960s, in which he likened the free market to a bird calling for the state to build a cage of planning as opposed to either letting it free or holding it too tight. Viewed from a present-day lens, this is essentially what the party-state is attempting to do and perhaps even struggling to manage.

Sophia, the humanoid developed by Hong Kong company Hanson Robotics.
Sophia, the humanoid developed by Hong Kong company Hanson Robotics.

At one level, there is greater capital support by the state, and local governments are less risk-averse in terms of policy experimentation, say for autonomous vehicles. Also, weak regulations on data and intellectual property rights, along with the state’s commitment to building open systems, provide space for innovation. In effect, the entire apparatus is working to commercialise research advances. But it is important to note that the leadership’s repeated calls supporting innovation often also accompany an emphasis on political integrity. This plays out in the form of the Party-state’s hypersensitivity to the potential of innovation to cause social disruptions. Bytedance founder Zhang Yiming’s public apology in April 2018, Tencent’s downslide amid tightened online gaming regulations, and the Communist Party’s push to establish party committees in tech companies are examples of this. Essentially, the effort is aimed at forcing tech firms to align with the interests of the state. This can yield big rewards for certain actors but could also dampen innovative capacity and spirit.

That takes us back to the big question: Can a political system that prioritises control foster genuine innovation? China’s entry into the 2018 Global Innovation Index’s top 20 most innovative economies list perhaps helps answer one part of it. But can China lead? The fog is yet to clear on that.

With this essay, Manoj Kewalramani, Associate Fellow-China Studies at The Takshashila Institution, starts a monthly column, Sino Circuit, on China and the factors powering its tech prowess.


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