Innovation Path for Large Countries: Chinese Experience from Economics Perspective
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
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
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
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
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.
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
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
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
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
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.