A New Innovation Ecosystem

Even government policy plays a different, more complex and varied role in innovation in China than in purely market-based economies. First, China has made strategic use of government resources, policies, and capital, while at the same time shifting away from earlier policies that had stifled innovation by protecting state-owned enterprises at the expense of those privately held. This shift began in 2006 when officials announced their decision to transform China into an innovative society by 2020 and become a global leader in science and technology by 2050. In 2013, Beijing announced a multibillion-dollar investment into ten transformative technologies highlighted in its controversial “Made in China 2025” plan, forming a critical component of its path towards fulfilling that vision, one that draws together state and private expertise,?

money, and institutions.?

In this regard, China is little different than the United States, which in the twentieth century leveraged both private and government funding and initiative to promote breakthroughs in the medical sciences, computing and information technology, aerospace and “big science” projects.?

Today, in Europe and around the capitalist world, government remains a major player in the innovation race, so in this the Chinese model of executing innovation is both following common patterns but the nation’s leaders are carving a unique path.?

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For example, China is starting to shed much of the older style bureaucracy while empowering its entrepreneurial class. In recent years, the Chinese government has introduced further initiatives geared towards increasing both entrepreneurship and homegrown innovation. In addition to building a substantial number of new schools to train tomorrow’s workforce, Beijing is radically abbreviating the process for forming a new business and allowing existing firms to enter new industries more freely.?

“The more companies an industry has thinking about a problem,” says Nobel laureate economist Edmund S. Phelps, “the more likely a solution is to be found.” And the Chinese now claim to fully grasp the value of this approach in building a more competitive landscape to stimulate indigenous innovation. Thus, Beijing is removing protections on redundant firms—even SOEs—to facilitate their exit from the market in true Schumpeterian fashion. It also claims to be opening its markets to foreign experts who wish to work on new Chinese business projects.?

Officially at least, this is what Beijing is telling the world, that it will continue the process of opening up and becoming more market oriented. There is some concrete evidence that the policy is making a difference. China’s entrepreneurs have shed their earlier pariah status and developed into a potent economic force. Whole neighborhoods of startups are popping up in Beijing, Shanghai, and the Shenzhen-Hong Kong hub. This bottom-up development of a socialist market economy (as Deng Xiaoping called the process) continues to be empowered by social networks that support interfirm cooperation through fluid exchanges, both formal and informal, national and global, that connect businesses, universities, research laboratories, funders, government, suppliers, and customers.

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While many in the West remain highly skeptical of this improvisational process of “crossing the river by feeling the stones,” China’s gradual, controlled, incremental approach to economic reform has paid off. This year, 2021, marks the fortieth anniversary of China’s radical experiment in “reform and opening up” that has engendered an economic expansion without precedent in modern history, one that has lifted some 800 million people out of crushing?

poverty.?

According to the World Bank, in 1981 the poverty rate in China was 88 percent; today it is less than 1 percent. Economic output per capita in the world’s second largest economy is $12,000 today, up from $3,500 a mere ten years ago. Life expectancy has also skyrocketed. The economy surged from $395 billion GDP in 1990 to $12 trillion today. And China now has more homeowners, internet users, and college graduates than any other country in the world. In 2014, 14 percent of global unicorns (private tech start-ups with a market capitalization of $1 billion or more) were Chinese. Today, that number has grown to 35 percent.

Despite the negative chorus of voices from the West, this spectacular forty-year boom suggests that Chinese authoritarian capitalism may very well be a model for developing countries to emulate. It certainly presents a challenge and a conundrum to those who assumed innovation and democracy must go together. “Autocrats sometimes do succeed,” says economist Ruchir Sharma. “Authoritarian rulers can often ignore or overrun opposition from the legislature, the courts, or private lobbies, and that power allows visionary leaders to accomplish a lot more than democratic rivals.” In fact, at a time when the vast inequality of wealth and opportunity is creating social upheaval and destabilization in democratic societies in the West, many Asian economies are following a path closer to China’s than America’s. Just think of the lasting economic miracles wrought by President Park Chung-hee in South Korea during the 1960s and 70s and President Chiang Kai-shek and his son who reigned in Taiwan from 1949 to 1978. Innovation seems to benefit from political and social stability, so long as it does not impose stultifying conformity.?