Innovation is a key word as China continues to develop. Image:

China has had the world’s fastest-growing economy since the 1980s. A key driver of this extraordinary growth has been the country’s pragmatic system of innovation, which balances government steering and market-oriented entrepreneurs.

Right now, this system is undergoing changes that may have profound implications for the global economic and political order.

The Chinese government is pushing for better research and development, “smart manufacturing” facilities and a more sophisticated digital economy. At the same time, tensions between China and the West are straining international cooperation in industries such as semiconductor and biopharmaceutical manufacturing.

Taken together with the shocks of the Covid pandemic, and particularly China’s rapid and large-scale lockdowns, these developments could lead to a decoupling of China’s innovation system from the rest of the world.

Balancing government and market

China’s current “innovation machine” started developing during the late 1970s when economic reforms lessened the role of state ownership and central planning. In their place, room was made for the market to try new ideas through trial and error.

The government sets regulations aligned to the state’s objectives and may send signals to investors and entrepreneurs via its own investments or policy settings. Within this setting, private businesses pursue opportunities in their own interests.

However, freedom for businesses may be declining. Last year, the government cracked down on the fintech and private tutoring sectors, which were seen to be misaligned with government goals.

China performs well on many measures of innovation performance, such as

  • R&D expenditure,
  • Number of scientific and technological publications,
  • Numbers of STEM graduates and patents and
  • Top university rankings.
This aerial photo taken on June 13, 2021, shows nearly 11,000 graduates attending a graduation ceremony at Central China Normal University in Wuhan, in China’s central Hubei province. Photo: AFP

Most of these indices, however, measure quantity rather than quality. So, for example, China has:

Adding “quality” alongside “quantity” will be crucial to China’s innovation ambitions.

In the past, policies have aimed to catch up with known technologies used elsewhere, but China will need to shift focus in order to develop unknown and emerging technologies. This will require both greater investment in longer-term basic research and reforms of the research culture to tolerate failure.

Developing smart manufacturing

Chinese firms can already translate complex designs into mass production with high precision and unmatched speed and cost. As a result, Chinese manufacturing appeals to high-tech companies such as Apple and Tesla.

The next step is upgrading toward “industry 4.0” smart manufacturing, aligned with the core industries listed in the government’s Made in China 2025 blueprint.

By 2020, China had built 11 “lighthouse factories” – benchmark “smart” manufacturers – the most of any country in the World Economic Forum’s “global lighthouse network.”

Alibaba Cloud, the cloud computing arm of China’s internet giant Alibaba, is sharing its AI-powered novel coronavirus disease diagnostic technology. Credit: Business Insider

China’s giant tech companies such as Alibaba, Tencent and Huawei are also using machine learning and big data analytics to innovate in other fields, including pharmaceutical research and autonomous driving.

In China, the regulations for biotechnology, bioengineering and biopharmaceuticals are relatively relaxed. This has attracted researchers and investors to several leading biotechnology “clusters.”

China’s population of more than 1.4 billion people also means that even for rare diseases it has large numbers of patients. Using large patient databases, companies are making advances in precision medicine (treatments tailored to an individual’s genes, environment, and lifestyle).

The rising power of China’s big tech firms has seen the government step in to maintain fair market competition. Regulations force digital firms to share user data and consolidate critical “platform goods,” such as mobile payments, across their ecosystems.

International collaboration is key

As we have seen in the recent triumph of Covid-19 vaccines, global collaboration in R&D is hugely valuable. However, there are signs that such collaboration between China and the West may be under threat.

The semiconductor manufacturing industry – making the chips and circuits that drive modern electronics – is now global, but at risk of fragmentation.

Making chips requires huge amounts of knowledge and capital investment, and while China is the world’s largest consumer of semiconductors, it relies heavily on imports. However, US sanctions mean many global semiconductor companies cannot sell in China.

China is now investing vast sums in an attempt to be able to make all the semiconductors it needs.

If China succeeds in this, one consequence is that Chinese-made semiconductors will likely use different technical standards from the current ones.

China is moving into more indigenous chip production. Credit: Handout.

Different standards

Diverging technical standards may seem like a minor issue, but it will make it more difficult for Chinese and Western technologies and products to work together. This in turn may reduce global trade and investment, with bad results for consumers.

Decoupling standards will deepen the fracture between Chinese and Western digital innovation. This in turn will likely lead to further decoupling in finance, trade and data.

At a time of heightened international tensions, both China and the West need to be clear on the value of international collaboration in innovation.

Marina Yue Zhang is an associate professor of innovation and entrepreneurship at Swinburne University of Technology

David Gann is vice-chancellor for development and external affairs, and a professor of innovation and Entrepreneurship, Saïd Business School, University of Oxford.

Mark Dodgson is a visiting professor at Imperial College Business School and emeritus professor at the School of Business, The University of Queensland.

This article is republished from The Conversation under a Creative Commons license. Read the original article.