In­no­va­tion Path for Large Coun­tries: Chi­nese Ex­pe­ri­ence from Eco­nom­ics Per­spec­tive

China Economist - - Articles - OuyangYao(欧阳峣)andTangLinx­iao(汤凌霄)

Ab­stract: Over the past four decades, China has achieved pros­per­ity in eco­nom­ics as well as eco­nomic de­vel­op­ment. With­out doubt, China’s ex­pe­ri­ence of­fers in­spi­ra­tions to eco­nomic the­o­ries. In this pa­per, we at­tempt to iden­tify the the­o­ret­i­cal im­pli­ca­tions of China’s growth jour­ney. By cast­ing light on China’s in­no­va­tion path, this pa­per presents a co­her­ent the­o­ret­i­cal frame­work of eco­nomic prin­ci­ples to an­swer the fol­low­ing ques­tions: How did China as a large coun­try form its in­no­va­tion ad­van­tages by virtue of its mar­ket size? Why did China as a late-mov­ing coun­try choose im­i­ta­tive in­no­va­tion in catch­ing up with other coun­tries? How did China de­velop its own in­no­va­tion ad­van­tages dur­ing its eco­nomic tran­si­tion? In de­vel­op­ing a sys­tem of eco­nomic dis­course for China’s in­no­va­tion path, it is nec­es­sary to take stock of China’s eco­nomic his­tory and in­ter­na­tional ex­pe­ri­ences in re­la­tion to the wis­dom of eco­nomic philoso­phies.

Key­words: tech­no­log­i­cal in­no­va­tion, mar­ket size, catch-up for late-mov­ing coun­tries, eco­nomic tran­si­tion

JEL Clas­si­fi­ca­tion Codes: O33; O11; P23

DOI: 1 0.19602/j .chi­nae­conomist.2018.09.03

1. In­tro­duc­tion

An­cient China was known for the “Four Great In­ven­tions,” namely, com­pass, gun­pow­der, pa­per mak­ing and print­ing - these dis­cov­er­ies had a tremen­dous in­flu­ence on the de­vel­op­ment of world civ­i­liza­tions. How­ever, China lagged be­hind other coun­tries in the mod­ern­iza­tion process. In view of this, count­less Chi­nese vi­sion­ar­ies have de­voted them­selves to China’s mod­ern­iza­tion drive, both in­sti­tu­tional and tech­no­log­i­cal mod­ern­iza­tion, to achieve na­tional re­ju­ve­na­tion. Af­ter decades of en­deav­ors, China has trans­formed from a fol­lower to an equal player in the field of sci­ence and tech­nol­ogy on the world stage - and a leader in cer­tain do­mains. It has be­come a ma­jor coun­try of great in­flu­ence in sci­ence and tech­nol­ogy. In 2015, China ranked the first in the world in terms of the num­ber of its R&D per­son­nel, the sec­ond in terms of R&D spend­ing and the num­ber of pa­pers pub­lished in firstrate in­ter­na­tional sci­ence jour­nals, and the third in terms of the num­ber of PCT in­ter­na­tional patents.

As an im­por­tant topic of re­search in modern eco­nom­ics, tech­nol­ogy in­no­va­tion is widely dis­cussed in lit­er­a­ture. As far as China is con­cerned, stud­ies on this topic have been car­ried out gen­er­ally from the fol­low­ing per­spec­tives: First, China’s in­no­va­tion path and method; sec­ond, fac­tors that in­flu­ence in­no­va­tions in China; and third, how in­no­va­tion con­trib­uted to China’s eco­nomic growth. This pa­per will

re­view China’s jour­ney of tech­nol­ogy progress, and of­fer eco­nomic ex­pla­na­tions on China’s in­no­va­tion path. We ex­pect that our find­ings will con­trib­ute to open­ing up new bound­ary of con­tem­po­rary Marx­ist po­lit­i­cal eco­nom­ics. In this pa­per, we will an­swer the fol­low­ing ques­tions: What are the tech­no­log­i­cal in­no­va­tion char­ac­ter­is­tics for large de­vel­op­ing coun­tries, and what kind of frame­work did China put into place to pro­mote in­no­va­tion? Why do large coun­tries en­joy ad­van­tages of in­no­va­tion from an eco­nom­ics view? What in­no­va­tion strate­gies should be fol­lowed in var­i­ous stages of China’s eco­nomic de­vel­op­ment? This pa­per will of­fer sci­ence-based in­ter­pre­ta­tions to an­swer these ques­tions. Part 2 dis­cusses the re­la­tion­ship be­tween China’s tech­no­log­i­cal in­no­va­tion and eco­nomic de­vel­op­ment, and of­fers a de­scrip­tion of China’s in­no­va­tion path. Part 3 of­fers an in­ter­pre­ta­tion on how China de­rived its in­no­va­tion ad­van­tages from its large pop­u­la­tion and mar­ket size. Part 4 ex­plains China’s choice of im­i­ta­tive in­no­va­tion from the per­spec­tives of late-mover ad­van­tage and tech­no­log­i­cal catch-up. Part 5 ex­am­ines China’s choice of indige­nous in­no­va­tion in its eco­nomic tran­si­tion and na­tional strat­egy. Lastly, pol­icy rec­om­men­da­tions are pro­posed from the per­spec­tive of de­vel­op­ment strate­gies.

2. Eco­nomic Growth and Tech­no­log­i­cal In­no­va­tion: The­o­ries and Ex­pe­ri­ences

In the his­tory of eco­nomic phi­los­o­phy, the evo­lu­tion of eco­nomic growth from a pri­mary stage to an ad­vanced stage was ac­com­pa­nied by in­creas­ing so­phis­ti­ca­tion and per­fec­tion of the the­ory of tech­nol­ogy in­no­va­tion. In this process, the key ques­tion was the role of tech­nol­ogy progress in eco­nomic growth. Stud­ies on growth mo­men­tum have gen­er­ally fol­lowed two ap­proaches: First, Adam Smith’s growth par­a­digm. Adam Smith at­trib­uted growth mo­men­tum to di­vi­sion of la­bor, be­liev­ing that “the great­est im­prove­ment in the pro­duc­tive pow­ers of la­bor, and the greater part of the skills, dex­ter­ity and judge­ment

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with which it is any­where di­rected, or ap­plied, seem to have been the ef­fects of the di­vi­sion of la­bor.” Di­vi­sion of la­bor can in­crease spe­cial­iza­tion and pro­duc­tiv­ity. The sec­ond ap­proach is Schum­pete­rian growth par­a­digm. Joseph Alois Schum­peter (2000) de­vel­oped an eco­nom­ics frame­work to ex­plain eco­nomic tran­si­tion and so­cial evo­lu­tion. He be­lieved that so­cial and eco­nomic evo­lu­tions re­sulted from en­tre­pre­neur­ial in­no­va­tion, and that changes in the tech­nol­ogy and mode of pro­duc­tion played a de­ci­sive role in eco­nomic growth. Marx­ist eco­nom­ics drew upon the ex­pe­ri­ences of world eco­nomic de­vel­op­ment and the wis­doms of eco­nomic phi­los­o­phy. Carl Marx is a fore­run­ner who in­cor­po­rated sci­ence and tech­nol­ogy into the scope of pro­duc­tiv­ity. In dis­cussing the de­vel­op­ment of cap­i­tal, he noted that: “Pro­duc­tiv­ity also in­cludes sci­ence”; “The power of sci­ence is an­other kind of pro­duc­tiv­ity

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at no ex­pense to cap­i­tal­ists.” In his view, sci­ence and tech­nol­ogy rep­re­sent a gen­eral form of po­ten­tial pro­duc­tiv­ity that can be turned into real pro­duc­tiv­ity once ap­plied in pro­duc­tion process. In steer­ing so­cial­ist de­vel­op­ment in their re­spec­tive coun­tries, Vladimir Lenin and Mao Ze­dong elab­o­rated the role of sci­ence and tech­nol­ogy in pro­mot­ing eco­nomic de­vel­op­ment. In ad­vo­cat­ing so­cial­ist in­dus­tri­al­iza­tion, Vladimir Lenin put for­ward the propo­si­tion that “com­mu­nism is Soviet gov­ern­ment plus na­tional elec­tri­fi­ca­tion,” be­liev­ing that “we will achieve a to­tal vic­tory only when the en­tire na­tion com­pletes

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elec­tri­fi­ca­tion and ac­quires nec­es­sary tech­nolo­gies for in­dus­try, agri­cul­ture and trans­porta­tion.” Mao Ze­dong, who was de­voted to de­vel­op­ing China into a modern so­cial­ist coun­try, be­lieved that “we are not only en­gaged in a revo­lu­tion to trans­form our so­cial sys­tem from pri­vate own­er­ship to pub­lic own­er­ship, but also em­bark­ing upon the revo­lu­tion of mech­a­nized modern mass pro­duc­tion to re­place

man­ual pro­duc­tion - these two rev­o­lu­tions are in­ter­linked with each other.” Ob­vi­ously, he at­tached equal im­por­tance to tech­no­log­i­cal revo­lu­tion and so­cial revo­lu­tion, fully rec­og­niz­ing the ne­ces­sity of in­sti­tu­tional and tech­no­log­i­cal in­no­va­tions.

In ex­plor­ing the path of so­cial­ism with Chi­nese char­ac­ter­is­tics, the Com­mu­nist Party of China has in­creas­ingly come to re­al­ize the de­ci­sive role of sci­ence and tech­nol­ogy in pro­mot­ing eco­nomic de­vel­op­ment. Mao Ze­dong’s con­tri­bu­tion is that he iden­ti­fied in­sti­tu­tional and tech­no­log­i­cal in­no­va­tions as the two ma­jor rev­o­lu­tions in de­vel­op­ing so­cial­ism. Com­rade Deng Xiaop­ing rightly pointed out that “sci­ence and tech­nol­ogy is the pri­mary pro­duc­tive force” on var­i­ous oc­ca­sions, reaf­firm­ing Carl

Marx’s view on the im­por­tance of sci­ence and tech­nol­ogy. Deng iden­ti­fied the new char­ac­ter­is­tics of con­tem­po­rary de­vel­op­ment of sci­ence and tech­nol­ogy as lead­ing fac­tors that de­ter­mine the qual­ity of la­bor and means of pro­duc­tion; modern sci­ence and tech­nol­ogy are com­pre­hen­sive in na­ture, and serve as the pri­mary growth driv­ers through high- tech in­dus­tries. From the di­men­sions of world eco­nomic his­tory and China’s eco­nomic his­tory and re-emer­gence, Xi Jin­ping elab­o­rated the strate­gic im­por­tance of tech­nol­ogy progress and indige­nous in­no­va­tion in China’s mod­ern­iza­tion drive. Based on in­ter­na­tional ex­pe­ri­ence, he con­cluded that “high-end tech­nolo­gies are the sym­bols of the na­tion’s strength in modern times. A key rea­son that Western pow­ers dom­i­nated the world in modern his­tory is their ac­qui­si­tion of ad­vanced tech­nol­ogy.” Sec­ond, re­gard­ing China’s ex­pe­ri­ence, he said that “over the past three decades, China’s de­vel­op­ment was pri­mar­ily achieved by in­tro­duc­ing the re­sults of the pre­vi­ous in­dus­trial revo­lu­tion - most of which were for­eign tech­nolo­gies. China pri­mar­ily ac­quired sec­ond-hand tech­nolo­gies in the ear­lier stage, and started to in­tro­duce cur­rent tech­nolo­gies later on. If this ap­proach con­tin­ues to be fol­lowed, not only will China lag fur­ther be­hind other coun­tries, but it will also be locked up at the low-end of in­dus­trial di­vi­sion of la­bor in the long run.” Third, based on his anal­y­sis of what large coun­tries like China should do to re­vi­tal­ize their econ­omy, he con­sid­ered that “the sheer size of econ­omy alone does not mean that a coun­try is strong. As a large coun­try, we must have our own in­no­va­tions in sci­ence and tech­nol­ogy. We must stead­fastly pur­sue indige­nous in­no­va­tion with Chi­nese char­ac­ter­is­tics.” His anal­y­sis of his­tory and real­ity sheds light on the ra­tio­nale of China’s in­no­va­tion path and in­no­va­tion-driven strat­egy.

From the early stage to the mid- and late stage of in­dus­tri­al­iza­tion, China’s tech­nol­ogy progress evolved from learn­ing and imi­ta­tion to indige­nous in­no­va­tion. Ini­tially a fol­lower of other coun­tries, China is catch­ing up with ad­vanced economies and be­com­ing a pace­set­ter. This is China’s ba­sic ex­pe­ri­ence of de­vel­op­ment and in­no­va­tion. As a typ­i­cal large de­vel­op­ing coun­try, China has ex­plored its own in­no­va­tion path with the fol­low­ing char­ac­ter­is­tics: (1) Size: as a large coun­try, China’s tremen­dous de­mand for tech­nol­ogy served as a pow­er­ful driver of in­no­va­tion at lower R&D cost and smaller risks of fail­ure. It is also nec­es­sary for a large coun­try to de­velop their own in­dus­trial and in­no­va­tion sys­tems. (2) Late-mover ad­van­tage: Large de­vel­op­ing coun­tries are well po­si­tioned to ben­e­fit from the tech­nol­ogy spillovers of de­vel­oped coun­tries by in­tro­duc­ing their tech­nol­ogy, equip­ment and in­vest­ment. Through tech­nol­ogy as­sim­i­la­tion and re-in­no­va­tion, they catch up with and over­take de­vel­oped coun­tries. In their jour­ney of tech­nol­ogy progress, de­vel­op­ing coun­tries in­evitably re­sort to im­i­ta­tive in­no­va­tion to catch up with de­vel­oped coun­tries. (3) Tran­si­tion: In ad­di­tion to learn­ing from de­vel­oped coun­tries, late­mov­ing coun­tries should pur­sue in­te­grated and indige­nous in­no­va­tion to reach in­ter­na­tional fron­tiers of tech­nol­ogy. Tech­no­log­i­cal and eco­nomic tran­si­tions should go hand in hand. Tech­nolo­gies and in­dus­tries which de­vel­oped through im­i­ta­tive in­no­va­tion locked up late-mov­ing coun­tries at the mid­dle and lower ends of in­ter­na­tional in­dus­trial chain. It is there­fore im­por­tant for them to de­velop crit­i­cal in­dus­trial tech­nolo­gies through indige­nous in­no­va­tion in or­der to climb up the value-added chain and join the

rank of de­vel­oped coun­tries. Size, late-mover ad­van­tage and tran­si­tions, as well as tech­no­log­i­cal and eco­nomic strate­gies based on them are the ba­sic char­ac­ter­is­tics of in­no­va­tion paths for large coun­tries, in­clud­ing China over the past few decades.

3. Mar­ket Size: An Ad­van­tage for Large Coun­tries

Re­search on the re­la­tion­ship be­tween the size of coun­tries and eco­nomic growth started from an aca­demic con­fer­ence held by the In­ter­na­tional Eco­nomic As­so­ci­a­tion ( IEA) in The Hague on “The Eco­nomic Con­se­quences of the Size of Na­tions,” where Si­mon Kuznets put for­ward some as­sump­tions. One of them is “Will R&D ac­tiv­i­ties lead to greater suc­cesses in large coun­tries?” Based on the economies of scale, he ar­gued that large economies had com­par­a­tive ad­van­tages for R&D and in­no­va­tion, i.e. Schum­pete­rian growth par­a­digm, while small economies were de­pen­dent on gains from spe­cial­iza­tion in free trade, i.e. Adam Smith’s growth par­a­digm. Large coun­tries are en­dowed with abun­dant hu­man re­sources and huge mar­ket, which are pos­i­tive fac­tors that pro­mote tech­nol­ogy progress.

In an­cient societies, hu­man re­sources played an im­por­tant role in large coun­tries’ tech­no­log­i­cal achieve­ments, which may an­swer the “Need­ham Ques­tion,” i.e. be­fore the 17th and 18th cen­turies, China led the world in terms of tech­nol­ogy, and its gun­pow­der, pa­per mak­ing and print­ing were re­puted as the “three in­ven­tions that brought the Euro­peans out of the Dark Ages.” How­ever, af­ter the In­dus­trial Revo­lu­tion swept across the Western world in the mid-19th-cen­tury, China started to fall be­hind the Western world in both tech­nol­ogy and econ­omy. Based on the pat­terns of sci­en­tific dis­cov­er­ies and in­ven­tions, Lin et al. (1994) di­vided China’s his­tory of sci­ence and tech­nol­ogy into two stages, and be­lieved that in the pre- modern era, most dis­cov­er­ies and in­ven­tions de­rived from crafts­men and farm­ers’ prac­ti­cal ex­pe­ri­ences and gifted per­sons’ ob­ser­va­tions on the Na­ture. “With its large pop­u­la­tion, more crafts­men, skilled farm­ers and gifted tal­ents, an­cient China en­joyed com­par­a­tive ad­van­tages in sci­ence and tech­nol­ogy, and led the world in terms of sci­en­tific dis­cov­er­ies, in­no­va­tions, pro­duc­tiv­ity and wealth. It be­came the most pros­per­ous econ­omy in the world.” Modern-time dis­cov­er­ies, how­ever, in­creas­ingly re­lied on sci­en­tific ex­per­i­ments. “China’s com­par­a­tive ad­van­tage in sci­ence and tech­nol­ogy sup­ported by its large pop­u­la­tion had di­min­ished” (Lin, et al. 1994). What used to be the most pow­er­ful and pros­per­ous coun­try in­evitably de­clined and fell be­hind. In modern times, mar­ket size re­placed large pop­u­la­tion as the most im­por­tant fac­tor in large coun­tries’ tech­nol­ogy de­vel­op­ment, which ex­plains the rise of ma­jor coun­tries in to­day’s world (Ouyang, 2014).

China’s adop­tion of re­form and open­ing up pol­icy in the 1980s re­moved the in­sti­tu­tional bar­ri­ers to tech­nol­ogy progress and in­tro­duced the role of mar­ket de­mand in pro­mot­ing in­no­va­tion. New com­par­a­tive ad­van­tage in in­no­va­tion trans­formed the pat­tern of in­no­va­tion. (1) China’s world rank­ing has been on the rise in terms of the amount of in­no­va­tion re­sources. In 2013, China ranked the 29th in the world in terms of in­no­va­tion re­sources6. Specif­i­cally, China had 3.8 mil­lion R&D per­son­nel, rank­ing the first in the world, and 1,331.2 bil­lion yuan in R&D spend­ing, the sec­ond in the world. (2) China also boasts a huge cor­po­rate com­mu­nity that con­trib­utes to in­no­va­tion de­mand. In 2013, China had 22.58 mil­lion SMEs, rank­ing the sec­ond in the world, and 95 com­pa­nies on the Global 500 list, next only to the U.S. (3) In terms of in­no­va­tion out­put, China ranked the sec­ond in the world in 2014 by the num­ber of in­ter­na­tional sci­ence pa­pers ci­ta­tions, next only to the United States; 660,000 in­ven­tion patent li­censes, rank­ing the third in the world; and over 10 tril­lion yuan in the gross out­put value of high-tech in­dus­tries. (4) In terms of the size of tech­nol­ogy mar­ket, the con­trac­tual amount of tech­nol­ogy trans­ac­tions in China amounted to 983.6 bil­lion yuan, and the to­tal value of China’s high-tech im­ports and ex­ports stood at

1,204.6 bil­lion US dol­lars, in­clud­ing 655.3 bil­lion dol­lars in ex­port and 549.3 bil­lion dol­lars in im­port, rank­ing the first in the world (see Ta­ble 1). Af­ter years of rapid growth, China’s eco­nomic ag­gre­gate now ranks the sec­ond in the world with a huge do­mes­tic mar­ket larger than those of smaller coun­tries like South Korea and Sin­ga­pore (see Ta­ble 2). China also de­rived sig­nif­i­cant in­no­va­tion ad­van­tages from its large mar­ket de­mand, and fos­tered a huge tech­nol­ogy mar­ket. China’s pop­u­lous and more de­vel­oped eastern re­gions ac­count for two thirds of the con­trac­tual amount of tech­nol­ogy trans­ac­tions na­tion­wide. China’s na­tional in­no­va­tion in­dex ranks the 19th in the world, mak­ing it an im­por­tant power of sci­ence and tech­nol­ogy with sig­nif­i­cant na­tional in­no­va­tion ca­pa­bil­i­ties.

4. Catch-Up of Late-Mov­ing Coun­tries: Ad­van­tage of the Im­i­ta­tive In­no­va­tion

In dis­cussing the in­dus­tri­al­iza­tion of back­ward coun­tries, Western econ­o­mists put for­ward the “late­mover hy­poth­e­sis” and “catch-up hy­poth­e­sis.” Ac­cord­ing to Carl Marx (1867), so­cial de­vel­op­ment fol­lows nat­u­ral laws.” In­dus­tri­al­ized coun­tries are what back­ward coun­tries will be­come at some time point in fu­ture. Alexan­der Ger­schenkron (1962) con­tended that “the more tech­nol­ogy in­no­va­tions that back­ward coun­tries draw upon from de­vel­oped coun­tries, the bet­ter their in­dus­tri­al­iza­tion prospect ap­pears.” Such “ad­van­tages of back­ward­ness” al­low back­ward coun­tries to catch up with de­vel­oped coun­tries. Based on this hy­poth­e­sis, back­ward coun­tries boast the ad­van­tage of “im­i­ta­tive in­no­va­tion” in their in­dus­tri­al­iza­tion and tech­nol­ogy progress, which al­lows them to ben­e­fit from the tech­nol­ogy spillovers of de­vel­oped coun­tries to form late-mover ad­van­tage.

There is a nat­u­ral link be­tween catch-up and im­i­ta­tive in­no­va­tion. The ad­van­tage of tech­no­log­i­cal back­ward­ness means that late-mov­ing coun­tries ac­quire and as­sim­i­late ad­vanced tech­nolo­gies from de­vel­oped coun­tries. If wage cost is suf­fi­ciently low, im­i­ta­tive goods will bring im­i­ta­tors a com­pet­i­tive ad­van­tage of price and such a late-mover ad­van­tage will be par­tic­u­larly sig­nif­i­cant for large coun­tries. To catch up with de­vel­oped coun­tries, back­ward coun­tries must move faster, mak­ing im­i­ta­tive in­no­va­tion a wise choice. In world eco­nomic his­tory, the United King­dom was an early mover of in­dus­tri­al­iza­tion, and France and Ger­many ac­quired their own crit­i­cal tech­nolo­gies and equip­ment by mod­el­ling af­ter the U.K.’s. Ja­pan was also a late mover and fol­lowed an in­no­va­tion path of learn­ing and imi­ta­tion. Other emerg­ing in­dus­tri­al­ized coun­tries in Asia were also driven by late-mover ad­van­tage. South Korea, for in­stance, com­pleted its catch-up process through tech­nol­ogy learn­ing and im­i­ta­tive in­no­va­tion. Kim (1998) re­viewed South Korea’s up­grade from imi­ta­tion to in­no­va­tion, and be­lieves that “the rea­son that South Korea achieved rapid in­dus­trial de­vel­op­ment is largely due to its imi­ta­tion.” In the 1960s, South Korea started to ex­port La­bor-in­ten­sive prod­ucts. In the 1970s, it started to man­u­fac­ture steamships, steel and elec­tronic prod­ucts. Af­ter the mid-1980s, South Korea de­vel­oped com­puter, semi­con­duc­tor and auto in­dus­tries, as well as mul­ti­me­dia elec­tron­ics, high res­o­lu­tion TVs and per­sonal com­mu­ni­ca­tion sys­tems. Not only did Ja­pan and South Korea ac­quire late-mover ad­van­tages through learn­ing and imi­ta­tion, but they also caught up with de­vel­oped coun­tries in Europe and North Amer­ica through as­sim­i­la­tion and rein­no­va­tion.

Upon the es­tab­lish­ment of the Peo­ple’s Repub­lic in 1949, China turned to the USSR for the im­por­ta­tion of tech­nol­ogy. But as the USSR later ter­mi­nated its tech­ni­cal aid to China, China started to em­bark upon indige­nous in­no­va­tion un­der iso­lated con­di­tions, mo­bi­liz­ing all its re­sources to un­der­take re­search projects, which led to im­por­tant achieve­ments in na­tional de­fense. Af­ter the adop­tion of an open­ing- up pol­icy, China started to in­tro­duce ad­vanced tech­nolo­gies from de­vel­oped coun­tries in var­i­ous forms, which cul­mi­nated at the end of the 20th cen­tury and early 21st cen­tury (see Ta­ble 3). Com­rade Deng Xiaop­ing re­marked that “We must learn ad­vanced sci­ence, tech­nol­ogy and man­age­ment method­olo­gies, as well as all knowl­edge and cul­ture to our ben­e­fit from de­vel­oped cap­i­tal­ist coun­tries.

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Self-seclu­sion leads us to nowhere.” Rec­og­niz­ing one’s own back­ward­ness is the first step be­fore set­ting out to change it; and one must learn from ad­vanced coun­tries in or­der to catch up with and over­take them. China ben­e­fited from tech­no­log­i­cal dif­fu­sion from de­vel­oped coun­tries, which is re­flected in three forms in its im­i­ta­tive in­no­va­tion:

(1) China im­ported ad­vanced tech­nolo­gies and equip­ment from de­vel­oped coun­tries, and cre­ated ap­pro­pri­ate tech­nolo­gies of its own af­ter adap­ta­tions. In the 1970s, China started the sec­ond-round im­por­ta­tion of com­plete equip­ment. It im­ported com­plete equip­ment of chem­i­cal fiber and fer­til­izer from France, Ja­pan, the U.S. and the Netherlands, as well as other equip­ment from Ger­many and Ja­pan. In the

early 1980s, there was a new wave of tech­nol­ogy and equip­ment im­por­ta­tion. Dur­ing 1980-1984, China im­ported 16,000 tech­nolo­gies and equip­ment worth 12 bil­lion US dol­lars. Such im­por­ta­tion nar­rowed China’s gaps with the in­ter­na­tion­ally ad­vanced lev­els of tech­nol­ogy.

(2) China adopted a “mar­ket for tech­nol­ogy” strat­egy by em­brac­ing for­eign di­rect in­vest­ment. Since the 1990s, China’s FDI in­flows in­creased sharply, to­tal­ing 306 bil­lion US dol­lars dur­ing 19791999, ac­count­ing for about 10% of world to­tal or about 30% among emerg­ing economies. China of­fered its huge mar­ket, cheap la­bor and pol­icy to at­tract man­u­fac­tur­ers from de­vel­oped coun­tries and re­gions to estab­lish lo­cal fac­to­ries, learned and im­i­tated for­eign tech­nol­ogy through “learn­ing by do­ing,” and fi­nally cre­ated its own en­ter­prises in all sec­tors such as elec­tron­ics, com­mu­ni­ca­tions, home ap­pli­ances, ev­ery­day chem­i­cals and light tex­tiles. With its late-mover ad­van­tages and la­bor cost ad­van­tage, China cre­ated a mir­a­cle of man­u­fac­tur­ing de­vel­op­ment.

(3) China cre­ated its com­pet­i­tive ad­van­tage through the im­por­ta­tion and as­sim­i­la­tion of for­eign tech­nol­ogy and in­te­grated in­no­va­tion. Based on the high-speed train tech­nol­ogy trans­fer from ad­vanced coun­tries like Ja­pan, Ger­many and France af­ter the dawn of the 21st cen­tury, China suc­cess­fully ac­quired crit­i­cal and sup­port­ing tech­nolo­gies in­clud­ing the pow­er­train, com­part­ment, trac­tion, elec­tri­fi­ca­tion net­work and brake sys­tem, and man­u­fac­tured high-speed trains with its own in­tel­lec­tual prop­erty rights. In a mat­ter of five years, China ac­com­plished what took four decades for other coun­tries to ac­com­plish with re­spect to high-speed rail­way de­vel­op­ment. Its “high-speed train model” of­fers a par­a­digm of a large de­vel­op­ing coun­try that suc­cess­fully tran­si­tioned from im­i­ta­tive imi­ta­tion to indige­nous in­no­va­tion.

5. Eco­nomic Tran­si­tion: Ad­van­tage of Indige­nous In­no­va­tion

In the En­cy­clo­pe­dia Bri­tan­nica, there is no ex­pla­na­tion on the con­cept of “indige­nous in­no­va­tion.” Western schol­ars used the term “en­doge­nous in­no­va­tion,” which refers to a new model of tech­nol­ogy in­no­va­tion dif­fer­ent from im­i­ta­tive in­no­va­tion, im­por­ta­tion and de­rived in­no­va­tion (Krug­man, 1999). Indige­nous in­no­va­tion is a spon­ta­neous be­hav­ior within a sys­tem (Rainer & Frankel, 2005). A sim­i­lar con­cept is “indige­nous in­tel­lec­tual prop­erty rights,” which refers to in­tel­lec­tual prop­erty rights of core

tech­nolo­gies pos­sessed by lo­cal man­u­fac­tur­ers. The con­cept of “indige­nous in­no­va­tion” was put for­ward by Chi­nese schol­ars in light of the char­ac­ter­is­tics of late-mov­ing coun­tries. As an early re­searcher of the learn­ing model from tech­nol­ogy im­por­ta­tion to indige­nous in­no­va­tion, Chen (1994) be­lieves that a tech­nol­ogy can be ac­quired in the real sense only through indige­nous R&D. Forth­com­ing schol­ars came up with three rep­re­sen­ta­tive def­i­ni­tions: The first stresses that cor­po­rate indige­nous in­no­va­tion is in­de­pen­dent R&D with in-house ca­pa­bil­i­ties; the sec­ond def­i­ni­tion puts premium on the pos­ses­sion of in­tel­lec­tual prop­erty rights; the third high­lights the var­ied forms of indige­nous in­no­va­tion. In sum­mary, we con­sider “indige­nous in­no­va­tion” as the tech­nol­ogy in­no­va­tion that aims to ac­quire in­tel­lec­tual prop­erty rights with one’s own ca­pa­bil­i­ties, and such in­no­va­tion in­cludes pri­mary in­no­va­tion, in­te­grated in­no­va­tion and re-in­no­va­tion af­ter im­por­ta­tion and as­sim­i­la­tion.

The evo­lu­tion of fac­tor en­dow­ment and tech­no­log­i­cal ca­pa­bil­i­ties of coun­tries nat­u­rally brings about a shift in the mode of tech­nol­ogy in­no­va­tion. When a coun­try falls be­hind de­vel­oped coun­tries, im­i­ta­tive in­no­va­tion be­comes a nat­u­ral choice; when it starts to catch up with de­vel­oped coun­tries, co­op­er­a­tive or indige­nous in­no­va­tion be­comes more ap­pro­pri­ate. Large de­vel­op­ing coun­tries should as­sess their fac­tor en­dow­ment and tech­ni­cal ca­pa­bil­i­ties in a sci­en­tific man­ner be­fore shift­ing its mode of in­no­va­tion and pur­su­ing eco­nomic tran­si­tion, so as to evolve from a tech­nol­ogy fol­lower to a pace­set­ter and in­crease its com­pet­i­tive­ness. Judg­ing by its cur­rent sta­tus, it is es­sen­tial for China to pur­sue indige­nous in­no­va­tion to ac­com­plish its eco­nomic tran­si­tion, and for that, Gen­eral Sec­re­tary Xi Jin­ping pointed out the di­rec­tion of China’s eco­nomic tran­si­tion based on China’s na­tional con­di­tions.

(1) China should trans­form from a large econ­omy to a strong and com­pet­i­tive one. Af­ter decades of de­vel­op­ment, China has be­come the sec­ond largest econ­omy in the world. How­ever, for such a large econ­omy, “we can­not al­ways rely on oth­ers to pro­mote our own level of sci­ence and tech­nol­ogy; still

8

less should we be­come a tech­nol­ogy fol­lower of other coun­tries and al­ways move be­hind oth­ers.” Given its size and large-coun­try ad­van­tages, China in­evitably has ma­jor im­pacts on the world econ­omy. In de­fend­ing their na­tional in­ter­est and in­ter­na­tional sta­tus, some de­vel­oped coun­tries have im­posed re­stric­tions of high-tech ex­ports to China. We should be un­der no il­lu­sion with re­spect to tech­nol­ogy im­por­ta­tion, be­cause core tech­nol­ogy can never be pur­chased. We have no choice ex­cept for indige­nous in­no­va­tion.

(2) China should trans­form from ex­ten­sive growth to in­ten­sive growth. In their in­dus­tri­al­iza­tion process, de­vel­oped coun­tries all ex­pe­ri­enced a tran­si­tion from an ex­ten­sive to an in­ten­sive pat­tern of growth - such a tran­si­tion pri­mar­ily oc­curred in the ad­vanced stage of in­dus­tri­al­iza­tion. As proven by eco­nomic stud­ies, the modern eco­nomic growth of early in­dus­tri­al­ized coun­tries was pri­mar­ily driven by tech­nol­ogy progress and ef­fi­ciency im­prove­ment rather than ma­te­rial cap­i­tal ac­cu­mu­la­tion. How­ever, China had pushed its in­vest­ment-driven growth to the ex­treme in its early stage of in­dus­tri­al­iza­tion, caus­ing a se­ri­ous waste of re­sources and pol­lu­tion (Wu, 2005). Given the size of China’s econ­omy, an ex­ten­sive pat­tern of growth based on re­source in­put and quan­ti­ta­tive ex­pan­sion is un­sus­tain­able. While about one bil­lion peo­ple live in the de­vel­oped world, China alone has more than 1.3 bil­lion peo­ple. “If we con­sume re­sources as peo­ple in de­vel­oped coun­tries do, all the re­sources in the whole world will not be suf­fi­cient to meet our needs. The way out lies in in­no­va­tion and in the shift from fac­tor- and

9

in­vest­ment-driven de­vel­op­ment to in­no­va­tion-driven de­vel­op­ment.”

(3) China should trans­form from a mid­dle-in­come coun­try to a high-in­come coun­try. In 2007, the World Bank is­sued a warn­ing of the “mid­dle-in­come trap.” Com­pared with wealth­ier or poorer coun­tries, growth will be slower for mid­dle-in­come coun­tries; if mid­dle-in­come coun­tries fail to be­come

high-in­come coun­tries af­ter a long pe­riod of growth, they fall into the mid­dle-in­come trap. Among the coun­tries and re­gions that at­tained the mid­dle-in­come sta­tus in the 1960s, only Ja­pan, South Korea, Sin­ga­pore, and China’s Tai­wan and Hong Kong as­cended to high-in­come economies. In or­der to avoid the mid­dle-in­come trap, China must climb up the in­dus­trial chain from the low-end links, form an in­ter­na­tion­ally com­pet­i­tive in­dus­trial struc­ture through indige­nous in­no­va­tion, and en­ter the high-end links of value chain in in­ter­na­tional di­vi­sion of la­bor.

China’s tech­nol­ogy progress and eco­nomic de­vel­op­ment of­fer nu­mer­ous lessons and ex­pe­ri­ences. Shortly af­ter the found­ing of the Peo­ple’s Repub­lic in 1949, China suc­cess­fully de­vel­oped its nu­clear and hy­dro­gen bombs and launched its first man-made satel­lite. Since re­form and open­ing up in 1978, China has achieved “leapfrog­ging” de­vel­op­ment in elec­tronic, com­mu­ni­ca­tions, bi­o­log­i­cal and aero­space tech­nolo­gies, and now keeps abreast with or even leads the world in sci­ence and tech­nol­ogy. How­ever, as Xi Jin­ping pointed out, “over the years, the prob­lem of overem­pha­sis on tech­nol­ogy im­por­ta­tion with­out suf­fi­cient as­sim­i­la­tion has ex­isted widely, giv­ing rise to a vi­cious cy­cle of

10

im­por­ta­tion, back­ward­ness and re- im­por­ta­tion.” Ex­pe­ri­ence tells us that we will not be able to over­take and be in­de­pen­dent from oth­ers un­less we pur­sue indige­nous in­no­va­tion. For in­stance, both Ja­pan and South Korea caught up with de­vel­oped coun­tries quite rapidly af­ter a short pe­riod of imi­ta­tion. With its “as­sim­i­la­tion plus re-in­no­va­tion” model, Ja­pan joined the de­vel­oped world. Through im­prove­ment and R&D of im­ported tech­nol­ogy, South Korea also be­came an emerg­ing in­dus­tri­al­ized na­tion. In the 1980s, China adopted a “mar­ket for tech­nol­ogy” strat­egy to en­cour­age for­eign di­rect in­vest­ment. Un­der this strat­egy, lo­cal gov­ern­ments fo­cused on short-term eco­nomic growth and were sat­is­fied by tax rev­enues from for­eign-in­vested com­pa­nies, while com­pa­nies were re­liant on gov­ern­ment R&D spend­ing as an im por­tant source of their in­come and lack of tech­nol­ogy as­sim­i­la­tion and R& D slowed indige­nous in­no­va­tion. The fol­low­ing lessons can be drawn from China’s ex­pe­ri­ence: First, com­pa­nies must at­tach im­por­tance to as­sim­i­lat­ing ad­vanced tech­nol­ogy rather than sim­ple imi­ta­tion; sec­ond, lo­cal gov­ern­ments must set clear ob­jec­tives of “mar­ket for tech­nol­ogy” strat­egy and strive to achieve its in­tended re­sults; third, the cen­tral gov­ern­ment should adopt a pol­icy that en­cour­ages indige­nous in­no­va­tion and use R&D spend­ing to sup­port en­ter­prises with their own in­tel­lec­tual prop­erty rights.

Since re­form and open­ing up in 1978, China has wit­nessed rapid de­vel­op­ment in sci­ence and tech­nol­ogy, as man­i­fested in in­creas­ing patent li­censes, R&D spend­ing, sci­en­tific pa­pers and high-tech ex­ports (see Ta­ble 4). Com­pared with coun­tries like Ja­pan, South Korea and Sin­ga­pore, China still has sig­nif­i­cant gaps in eco­nomic de­vel­op­ment as a re­sult of low in­no­va­tion in­dex (see Ta­ble 5). Aware of the real­ity of China’s in­no­va­tion ca­pac­ity and level of sci­ence and tech­nol­ogy, Xi Jin­ping made the fol­low­ing re­marks: “China’s in­no­va­tion ca­pac­ity is not strong, and the over­all level of its de­vel­op­ment in sci­ence and tech­nol­ogy is not high. China’s eco­nomic and so­cial de­vel­op­ment is not ad­e­quately sup­ported by sci­ence and tech­nol­ogy, whose con­tri­bu­tion to eco­nomic growth is far be­low the level of de­vel­oped

11

coun­tries. This prob­lem is the Achilles’ heel for China’s econ­omy.” The prob­lem is how to change this ad­verse sit­u­a­tion. We should bring into play China’s ad­van­tages of large pop­u­la­tion and mar­ket, as well as its ad­van­tages of so­cial­ist mar­ket eco­nomic sys­tem that en­cour­ages in­no­va­tion. “With re­spect to the roles of gov­ern­ment and mar­ket, we should give full play to the de­ci­sive role of mar­ket in re­source al­lo­ca­tion in ar­eas that can be left to the free mar­ket, and the gov­ern­ment should avoid in­ter­ven­tions in fields such as the dis­tri­bu­tion of fi­nan­cial and ma­te­rial re­sources. In this man­ner, the gov­ern­ment should fo­cus on im­prov­ing its strate­gic plan­ning, fos­ter­ing a con­ducive en­vi­ron­ment, and of­fer­ing pub­lic

ser­vices. 12 The bound­ary of gov­ern­ment must be clear: While the cen­tral gov­ern­ment’s poli­cies should re­flect na­tional in­ter­ests, lo­cal gov­ern­ment poli­cies must sup­port re­gional in­no­va­tion and strive to cre­ate a pro-in­no­va­tion en­vi­ron­ment with­out pick­ing win­ners; they should or­ga­nize fun­da­men­tal re­search and in­no­va­tions, and ac­quire core tech­nolo­gies es­sen­tial to the high-end links of the value chain. Tech­nol­ogy in­no­va­tion through in­sti­tu­tional in­no­va­tion is piv­otal to China’s na­tional re­ju­ve­na­tion.

6. Con­clud­ing Re­marks

As a typ­i­cal large de­vel­op­ing coun­try, China has ex­plored its unique in­no­va­tion path af­ter decades of de­vel­op­ment, and cre­ated a com­plete in­no­va­tion frame­work. China’s ex­pe­ri­ence of­fers the fol­low­ing lessons: First, the im­por­tance of huge de­mand, both mar­ket-based de­mand and gov­ern­ment-guided de­mand, to in­no­va­tion. Sec­ond, eco­nomic tran­si­tion driven by a com­bi­na­tion of im­i­ta­tive and indige­nous in­no­va­tions. Third, a clear di­vi­sion of re­spon­si­bil­i­ties be­tween the mar­ket and the gov­ern­ment.

In pur­su­ing its na­tional re­ju­ve­na­tion, China should give pri­or­ity to in­no­va­tions in sci­ence and tech­nol­ogy and im­ple­ment an in­no­va­tion-driven strat­egy. In­ter­na­tional and Chi­nese ex­pe­ri­ences show that large de­vel­op­ing coun­tries must fully uti­lize their large-coun­try and late-mover ad­van­tages, and con­duct in­no­va­tions us­ing global re­sources. They should re­spect the laws of mar­ket-based econ­omy, and give play to the de­ci­sive role of mar­ket in al­lo­cat­ing in­no­va­tion re­sources. While com­pa­nies are the back­bone of tech­no­log­i­cal in­no­va­tion, the gov­ern­ment must also sup­port in­dus­trial R&D. Great im­por­tance should be at­tached to as­sim­i­la­tion and re-in­no­va­tion in the process of in­tro­duc­ing for­eign tech­nol­ogy, which are key to the tran­si­tion to­wards indige­nous in­no­va­tion. Large de­vel­op­ing coun­tries should ap­ply the re­sults of in­no­va­tion in sci­ence and tech­nol­ogy in their real in­dus­tries, so as to en­ter the high-end links of value chain in in­ter­na­tional di­vi­sion of la­bor and avoid the “mid­dle in­come trap.” These steps are es­sen­tial for them to in­crease their eco­nomic strength and com­pet­i­tive­ness.

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