Will China Eat Our Technological Lunch?

Foreign companies in China complain about what they regard as non-legal forms of preferential treatment for local companies. Under the banner of a new government procurement program, known as “indigenous innovation,” China is moving to give a competitive lift to domestic companies, especially state-owned enterprises.

Measures include the application of strict product standards for everything from cell phones to cars, which favor local companies. It includes a revision to patent legislation that could force foreign companies to hand over key technologies to local governments, and anti-monopoly rules designed to limit foreign access to sectors that include construction, machinery, telecommunications and energy.

And while U.S. companies and their lobby representatives might previously have been unhappy about China’s undervalued yuan and other export-friendly policies, they are becoming more vocal in their opposition.

It remains to be seen if major U.S. and other foreign companies are prepared to turn their backs on China’s mass market. But it will be interesting to see if Western companies at least start to redirect some of their foreign investment programs elsewhere in Asia, or even back home again.

China will have to tread carefully. Apart from a handful of large local companies that include Huawei Technologies, Lenovo Group (notebooks), Haier Group (appliances), TCL Corporation (consumer electronics) and Zhejiang Geely Holdings and Chery (automobiles), it doesn’t have many domestic corporate champions, and certainly not any global brands.

It aspires to be a leading player in the production and export of high-tech consumer goods, such as DVD players and laptops, and in developing electric car prototypes and technologies, and clean energy technologies, including solar panels and wind turbines.

While rules designed to create both more local champions and global brands are clearly not unique to China, rules alone will not generate a durable competitive edge in advanced technology.

Moreover, China needs access to foreign know-how as it seeks to move up the value chain and strengthen its position as the world’s premier manufacturing hub. It will presumably want to buy — where and when possible — stakes in global technology and brands, as shown, for example, by Geely’s purchase of Volvo from Ford in 2010.

Cong Cao, author of China’s Scientific Elite and other works on technology, has highlighted what he calls “misconduct in science” as a reason why China’s ambition to become an innovation leader by 2020 will be impeded.

Misconduct, including fabrication and fraud in scientific research papers, has increased because the campaign for international profile and prominence has emphasized quantity over quality as the basis for reward and promotion. Without an autonomous institutional watchdog, it is extremely difficult to expose and prevent such misconduct.

A culture that pushes too hard for this type of success and for mere volumes of scientific professionals won’t necessarily master the skills of nurturing talent and a creative culture, based on entrepreneurship and social innovation. And it can’t, therefore, ensure world—class achievement in a broad sense.

It is easy to point to the sheer volume of scientists and engineers produced by China’s higher education establishments, but size alone in this context only matters if it is accompanied by the spread of innovative capacity. This involves the application of new ideas and methods to the production of goods and services across a wide range of applications, supported by sound and supportive institutions.

These institutions, particularly research universities, are typically characterized by high levels of academic freedom, free inquiry, no barriers to ideas generated anywhere in the world, meritocratic organizational structures — and the full acceptance of skepticism about what is fact and what is theory.

Gordon Chang, author of the 2001 book, The Coming Collapse of China, certainly wasn’t shy about overstating his case that China was headed to the “scrap heap of history.” But he has drawn attention, subsequently, to several phenomena in China’s education system that repress its ability to produce world-class historians, economists and political thinkers, and complicate the quest for world-class scientists and innovators.

These include the demand for obedience, the stifling of free inquiry and a growing incidence of plagiarism and corruption in schools and universities.

China’s ability to become a leader in global technology and eradicate America’s clear edge should be judged not so much on what scientists extrapolate mechanically as its technical capability, but on a rather more mundane and easy-to-formulate criterion.

This is whether China’s current inferior institutional capacity to adapt and stimulate broad-based and sustained innovation is likely to undergo the kind of radical change that will allow it to chip away steadily at America’s advantage, and overtake it.

Put simply, what goes into being a world leader in the production of screen-based goods and green energy products isn’t the same thing as what goes into the design, organization, knowledge and innovation that drive, for example, the aerospace and bio- and information-technology industries. Here the United States and parts of Europe are likely to retain pole position for a long time.

They support adversarial but constructive conflict in the process of innovation, and give due weight to the need for proprietary ownership of processes, patents and copyrights in modern technologies.

Non-hierarchical and non-political organizational structures are encouraged. Criticism, free thinking, transparency, trust and the rule of law are essential ingredients in an innovative culture.

Editor’s Note: This feature is excerpted from George Magnus’ book, “Uprising: Will Emerging Markets Shape or Shake the World Economy?,” published by Wiley on December 28, 2010. Copyright 2010 George Magnus. Reprinted with permission of the author.