How China’s ‘innovation machine’ is changing — and why that matters for the West

Since the 1980s, China's economy has been the world's fastest expanding. The country's pragmatic innovation system, which blends government direction and market-oriented entrepreneurs, has been a major engine of this unprecedented success.

This system is undergoing changes right now that might have far-reaching consequences for the global economic and political order.

The Chinese government is promoting greater R&D, "smart manufacturing" facilities, and a more sophisticated digital economy. At the same time, tensions between China and the West are putting a strain on international cooperation in industries like semiconductor and biopharmaceutical production.
These changes, when combined with the shocks of the Covid pandemic, notably China's quick and large-scale lockdowns, could result in a decoupling of China's innovation system from the rest of the globe.

Balancing government and market

China's present "innovation machine" emerged during the late 1970s economic reforms, which reduced the importance of state ownership and central planning. Instead, the market was allowed to experiment with new ideas through trial and error.

The government creates regulations that are in line with the state's goals, and it may convey signals to investors and entrepreneurs through its own investments and policy decisions. Private enterprises, on the other hand, chase opportunities that benefit them.

However, business freedom may be eroding. Last year, the government slammed the fintech and private tutoring industries for being out of step with government priorities.

Building quality alongside quantity

Many indicators of innovation performance, such as R&D spending, the number of scientific and technology publications, the number of STEM graduates and patents, and top university rankings, show that China is a leader.

However, the majority of these indicators track quantity rather than quality. China, for instance, has:
  • although it has produced a large number of scientific and technological publications, it falls considerably behind the United States in terms of highly cited articles, which show the impact and originality of research;
  • R&D spending has significantly grown. However, it still spends a much smaller percentage of its R&D budget on basic research, especially by businesses, than many other industrialised countries;
  • in recent decades, it has produced far more STEM graduates than any other country, but it still lacks top-tier expertise in numerous fields, like as AI and semiconductors;
  • despite having applied for the most international patents of any country, the quality of these inventions, as evaluated by scientific influence and potential commercial worth, continues to trail behind international competitors;
China's innovation goals will require the addition of "quality" alongside "quantity."

China's policies have previously attempted to "catch up" with known technology utilized elsewhere, but it will now need to shift its focus to developing unknown and emergent technologies. This will necessitate increased funding in long-term basic research as well as a change in research culture to accept failure.

Developing smart manufacturing

Chinese companies can already turn sophisticated designs into mass production with unrivaled precision, speed, and affordability. As a result, high-tech corporations like Apple and Tesla are attracted to Chinese manufacturing.

The next phase is to upgrade to "industry 4.0" smart manufacturing, which aligns with the government's Made in China 2025 blueprint's core industries.

China has the most "lighthouse factories" - benchmark smart manufacturers – in the World Economic Forum's "global lighthouse network" by 2020, with eleven.

Building an advanced digital economy

Machine learning and big data analytics are also being used by China's internet giants such as Alibaba, Tencent, and Huawei to develop in other industries such as pharmaceutical research and autonomous driving.

Biotechnology, bioengineering, and biopharmaceuticals restrictions in China are relatively liberal. Several leading biotechnology "clusters" have benefited as a result of this.

With a population of more than 1.4 billion people, China has a significant number of patients, especially for rare diseases. Precision medicine (treatments tailored to an individual's genes, environment, and lifestyle) is progressing thanks to massive patient databases.

The government has stepped in to guarantee fair market competition due to the growing dominance of China's huge IT businesses. Regulations compel digital businesses to exchange user data and consolidate crucial "platform products" like mobile payments across their ecosystems.

International collaboration is key

Global R&D collaboration is extremely valuable, as seen by the recent success of COVID-19 vaccines.

However, there are indicators that Sino-Western cooperation may be jeopardized.
The semiconductor manufacturing business is presently worldwide, but it is at risk of fragmentation.

While China is the world's largest consumer of semiconductors, it is highly reliant on imports to manufacture them. Many worldwide semiconductor businesses, however, are unable to sell in China as a result of US restrictions.

China is now investing heavily in order to produce all of the semiconductors it requires.

If China succeeds, Chinese-made chips will very certainly employ different technological standards than present ones.

Different standards

Divergent technological standards may appear to be a small issue, but they will make it more difficult for Chinese and Western technology and goods to interact. As a result, global commerce and investment may suffer, negatively impacting consumers.

The chasm between Chinese and Western digital innovation will widen as standards are decoupled. As a result, finance, commerce, and data are likely to become even more decoupled.

At a time when international tensions are at an all-time high, both China and the West must be clear about the importance of international innovation partnership.

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