Will China eclipse U.S. in high-tech innovation?

CHENGDU, China—One reason for the fashionable fear that Beijing is out to overtake America is the worry that China will soon outstrip the United States in key areas of technology.

Chinese President Xi Jinping fanned this fear with his Made in China 2025 pledge to catch up with the USA in 10 critical areas of tech by the middle of the next decade, including automation and artificial intelligence. Add to that the incidents of Chinese theft of intellectual property and forced technology transfer from multinational firms that want access to Chinese markets.

This all adds up to a tizzy about future Chinese technological triumphs.

Yet a visit with a group of young entrepreneurs in Chengdu, the capital of Sichuan province, raised a question that clouds China’s huge aspirations: Can your nation truly be innovative if your government directs the process from the top down?

Chengdu is a logical place to noodle over that question. Best known abroad for its panda preserve and its spicy Sichuan food, this major city has become a center for a vibrant start-up culture that draws young Chinese and foreigners with its cheaper cost of living than Shanghai or Beijing. I met several entrepreneurs in a conference room at WeWork, a provider of shared office space located in a glass tower in the newish Jinjiang district.

“China has opened more than 5,000 (tech) incubators, with 200 in Chengdu alone,” said Erik Ackner, a German who has lived in China for five years. He helps China’s start-up community connect with the rest of the world, through programs such as Startupbootcamp China in Chengdu. “There are so many innovation centers in universities, and in government,” he added.

And there is a ton of government money sloshing around to fund start-ups and fly young aspirants around to conferences (there is also substantial private venture capital). So even though half the 5,000 incubators may prove useless, adds Ackner, the government strategy is to see which can survive.

But then there is the flip side, starting with the horribly slow internet controlled by government servers that ban Facebook, Google, and other outside content. The young entrepreneurs described having to “play hopscotch” with VPNs, the virtual networks designed to leap the great internet firewall. Often VPNs must be changed daily. Chinese business developers frequently write sophisticated software to get around the firewall.

Internet restrictions harm China’s bottom line. “A lot of start-ups leave China to Thailand and elsewhere because it is very hard to expand internationally,” said Hungarian entrepreneur Rafael Raj, who has worked in Chengdu for 15 years and is cofounder of Blockwise Consulting. “We work in an isolated bubble here,” he added. “Development is top down and the government tells you where the money should be used.”

The tech entrepreneurs were also troubled by a rigid Chinese education system that tells people “don’t think” and a culture averse to risk-taking (the aim of successful start-ups is not to go public but to get bought out by medium-sized Chinese companies). Not an outlook that produces technological breakthroughs.

Instead, the Chinese take a different approach. “The big thing now is not innovation, but implementation,” said investment fund manager Dinis Gaspar Nunes. In other words, while the U.S. excels at innovation, the Chinese focus on taking established technologies and making them better. For example: “They didn’t invent artificial intelligence (AI), but they want to be best at it,” Gaspar Nunes said.

So when it comes to technological breakthroughs, the United States will no doubt remain the leader. But given the scale of the Chinese market and available government funds, the Chinese could leapfrog ahead in some fields. And forced technology transfers could help them make that jump.

A key area where China could take the lead is AI, in large part because the size of the Chinese population provides access to so much data.

E-commerce is very advanced here, with everyone from kids to grandmas paying for nearly everything by flashing the barcode on their cell phones. And everyone can afford a cheap smartphone. Just imagine the amount of data that provides the Chinese government.

What surprised me at the roundtable was the accepting attitude of some Chinese entrepreneurs toward government use of that data, which includes compiling a “social score” on individuals that can affect everything from jobs to mortgages to whether they are allowed to travel.

We in the West assume that technological advances come from the bottom up in an open society. But the Chinese aim to prove that a top-down, closed system can still enable their country to play catch up—with some help from forced technology transfer. Their odds appear disturbingly favorable.