China is a new player in the global knowledge economy dominated by Western countries and Japan, and to some extent by South Korea and Taiwan. Part two of this series assesses China’s potential to become a transformative force in global innovation.

MERICS Blog main image

The results of China’s changing R&D profile are evident in high-profile state-led projects such as China’s space, fast rail and commercial airliner programs, which admittedly face their share of obstacles. China is also now competing at the technological frontier in a number of defence-related fields, such as counterspace capabilities and hypersonic vehicles. But the key issue for China’s future place on the global technology ladder is how far and how fast its wider economy can embrace the ‘fourth industrial revolution’, characterised by disruptive innovation integrating the physical, digital and biological worlds. An aging population and stagnating growth model add urgency to the pursuit of economic transformation, to meet the official goal of turning China into a ‘modern socialist country’ by mid-century; or in development economics terminology, escaping the middle income trap. 

Key to this transition is digitised automation of production. China has become the world’s largest market for industrial robots, and while foreign suppliers still dominate, domestic robot makers are following the general path of incremental improvement and growing market share.  While the extent of automation, let alone digitisation, in China remains very low compared to advanced economies, the cost efficiency of robots is growing and Chinese firms are starting to integrate ‘fourth industrial revolution’ technologies, notably 3D printing.  Chinese overseas investment is also increasingly targeting high technology firms as a means of accelerating the shift towards intelligent manufacturing, with Germany in particular being courted at the government and company level.

Fast track upgrading through foreign acquisitions

Foreign acquisitions are emerging as a fast track to firm upgrading and market access across sectors from product distribution to agrichemicals, with China recently surpassing the US as the world’s biggest buying nation in the technology sector.  China has also evolved an indigenous startup complex that is emerging as a credible competitor to Silicon Valley, fuelled by the world’s second largest venture capital market, which now includes a mammoth array of state-backed funds.  While likely to be afflicted by the usual problems of bureaucratic interference, hazy regulation and quantitative fixation, the volume of money involved and the proven ability of Chinese startups to deliver commercialisable products suggests that the impact will increasingly be felt around the world, including in Australia.  

In some sectors, notably internet services, consumer electronics and telecommunications, rapid technological change – arguably assisted by state policy – has enabled Chinese firms to catch up with or leapfrog foreign competitors. This also potentially applies to fields where industrial policy has previously failed to close the gap, such as semiconductors and automobiles.  In the latter sector for instance, a mix of state owned enterprises and private Chinese firms is leveraging internet-enabled ride-sharing and automotive digitisation, backed by state policy to develop an ‘internet of vehicles’ composed of self-driving and electrically powered cars.  Because this ecosystem will be based on Chinese technology standards and developed by domestic firms, it presents a challenge to the dominance of foreign automakers in the Chinese market, and perhaps even overseas.

Catching up will take time, but China’s impact will be hard to ignore

Overall, China’s technological level remains that of a middle-income country. In high tech sectors its firms remain downstream in the production process, and its R&D system is still burdened by academic fraud, administrative fiat and an incentive structure skewed towards quantity over quality. In three decades China has built (from almost nothing) the framework of a world-class innovation system, yet the pace of its technological catch-up with the developed world remains incremental rather than transformative. But the foundation that has been laid allows us to envisage a future world economy – within a twenty, not a fifty, year timeframe – in which China is increasingly an equal player with Japan, the EU and the US.  The key to this outcome is deep reform of China’s innovation system, which is bound up in reform of the country’s wider political economy.

Yet even if Chinese innovation performance continues to lag that of the First World, China’s size means that its global impact will be hard to ignore.  While Chinese firms are still far from replicating the foreign investment footprint and international supply chains of established multinationals, China’s domestic market may be big enough to support the rise of globally competitive firms, with test cases already present in Huawei, Lenovo, Ali Baba, Tencent and others.  Chinese enterprises are finding ways of leveraging domestic scale to exploit high growth R&D intensive sectors outside the well-known examples of e-commerce and electronics manufacturing, for example in biotechnology

An expanding role for Chinese firms and researchers in an integrated global economy would have political implications, in an era of growing international tensions and secular stagnation.  It would undermine proposals to embargo China technologically, and would bolster China’s economic influence, which is already a focus of US-China strategic competition.  But it would also promote the rise of a more global civilisation, with increasing tapping of mutual resources for wealth creation and scientific progress.

Slightly different versions of this article were first published in The Interpreter, published by the Lowy Institute for International Policy, and in The Diplomat on 9 June 2016.