Linn Maung
Despite being a global economic powerhouse and leading in AI patent filings, China’s ability to innovate is questionable.The impressive growth is driven more by capital and higher debt levels than by innovation or efficiency.
Products are often built on foreign technology, advanced by local companies with substantial subsidies. The centrally planned economy creates perverse incentives, valuing the favour of the public sector over innovation and product quality. The Chinese Communist Party’s control over innovative activity contradicts the nature of innovation itself.
Despite the potential for innovation, the structures of the Chinese authoritarian economy make it incredibly difficult.
Even though China stands as a titan in the global economy and tops the charts in AI patent filings, its capacity for innovation remains a puzzle. The growth that leaves many in awe is fuelled more by capital infusion and escalating debt than by genuine innovation or efficiency. A significant portion of products are derivatives of foreign technology, further developed by domestic companies with hefty subsidies. The centrally governed economy fosters skewed incentives, prioritizing public sector approval over innovation and product excellence.
The iron grip of the Chinese Communist Party on innovative activities clashes with the very essence of innovation. Despite the latent potential for innovation, the rigid structures of China’s authoritarian economy pose formidable barriers.
Innovation fuels productivity and efficiency, leading to growth in total factor productivity, a concept that encapsulates the idea of achieving more with less through technology and capital. While China’s economy appears innovative, it’s crucial to differentiate between innovation at the firm or sector level and at the economy level. Even economies with significant flaws, like the old Soviet Union or North Korea, can yield innovative products, but that doesn’t necessarily translate into an innovative economy.
In truth, the Chinese economy has been grappling with a prolonged period of limited innovation. Concerns about low factor productivity have been openly expressed by Chinese economists. The remarkable growth that often leaves observers in awe is largely driven not by heightened innovation, efficiency, or a workforce with advanced skills, but by an influx of capital manifested as escalating debt levels.
A range of products, spanning from Chinese high-speed rail systems to operating systems and aircraft, are rooted in foreign technology. This technology is then further developed and manufactured by domestic companies, heavily supported by substantial subsidies. In essence, economies progress by enhancing productivity, but the Chinese economy is heavily dependent on centralized planning and governance, leading to the creation of distorted incentives.
During the Great Leap Forward, there’s a tale about Mao Zedong’s directive for ramped-up steel production. In an attempt to meet these quotas, backyard furnaces were used to melt down household items. However, this process didn’t contribute to new steel production as it simply repurposed existing metal objects, which were of no industrial value due to their poor quality. Nevertheless, it served as a testament to the local groups’ compliance with centralized directives.
A parallel scenario unfolds in contemporary China. Upon Beijing’s declaration to boost semiconductor manufacturing, a surge of companies, irrespective of their connection to technology, rushed into the semiconductor sector in pursuit of government aid. This rush was subsequently followed by an unavoidable downfall and a series of bankruptcies. The firms that managed to survive continue to rely heavily on substantial subsidies for sustenance.
This highlights a key problem with China’s struggle to foster an innovative economy. In its centrally planned structure, the pursuit of public sector approval often overshadows innovation and quality. This aligns with economic studies showing that while young Chinese firms exhibit strong innovation and efficiency, they tend to stagnate and become reliant on financial investment and state support as they age.
As it is often stated in China, a significant portion of the country’s innovation is tied to the Chinese Communist Party. For instance, with the Party’s directive to intensify focus on “Xi Jinping Thought,” employees allocate part of their day to understanding his ideology, often at the expense of their business needs and improvement efforts.
The issue isn’t that the Chinese, as individuals or as a nation, lack the ability to innovate and achieve remarkable feats. The challenge lies in the fact that the incentives and frameworks of China’s authoritarian economy often serve as deterrents to innovation.
At a recent national science and technology conference, Xi Jinping emphasized the need for “strengthening the centralized and unified leadership of the Party Central Committee in scientific and technological work,” as reported by the state-run China Daily. This approach of subjecting innovative activities to Party control contradicts the inherent nature of innovation and the Party’s strict authoritarianism.
With an economy that’s experiencing stagnation and declining productivity, it appears that the Chinese Communist Party’s response is likely to be an increased demand for control, rather than fostering an environment conducive to innovation.
