The Chinese economy is in need of a transition – an escape from the nation’s brand as the world’s sweatshop.
Despite racing to the forefront of industries such as internet services, consumer electronics and infrastructure-related technology, Chinese corporations are now facing difficulties in moving further up global value chains. Three decades of remarkable economic growth in China propelled by labour-intensive manufacturing and expansion is finally weakening. International media has seen no short supply of dramatic headlines that give a sense of foreboding to the future of China’s economic prowess and makes no haste in highlighting their lowest growth rates in 25 years.
However, this slowdown is a natural stage in the country’s economic development. Like its neighbour South Korea before it, China’s economic development has been largely based on imitating and adapting already existing technologies, high investment returns and intensive manufacturing. South Korea has escaped this imitation-based growth and now dominates the global tech market – it was recently ranked the most innovative country in the world in Bloomberg’s World Innovation Index (China came in at 22). In the same fashion, China needs to transform its economy from that of labour-intensive manufacturing based on imitation, to one that is technology-intensive and knowledge-based – entrepreneurship and innovation will be key. A report by the McKinsey Global Institute stressed that in order for China to reach growth forecasts of 5.5–5.6% per year, during the coming decade the country must generate two to three points of annual GDP growth through innovation.
But what is ‘innovation’, and can China unleash it?
The Chinese government wants to up its innovation game by reshaping its slowing economy to rely more on entrepreneurship and new ideas. It has made this a policy priority and, in its recently published thirteenth five-year plan, positioned innovation as one of the country’s key objectives. China injected more than $200 billion into research and development (R&D) in 2014, has taken the number one spot for global patent applications in order to safeguard new ideas, and churns out more than 30,000 PhDs in science and engineering every year. They are excelling in the areas of internet services and consumer electronics, where their huge human capital and market demand has propelled innovation and growth in its tech industry. For the first time, three Chinese corporations scored positions in the 2015 global survey of the world’s most innovative companies. The domination of Tencent, Huawei and Lenovo demonstrates China’s progress in the high-tech arena and gives credit to incremental innovations in technology made through market feedback and efficiency. However, the World Economic Forum’s Global Competiveness Report ranked China number 74 out of 140 countries for ‘technological readiness’.
Despite closing the gap between its global competitors in terms of R&D quantity (second only to the United States) Chinese companies are still struggling with the ‘quality’ side – they are only globally competitive in a small number of high-tech industries. The majority of the nation’s patent applications were granted to academic institutions in non-scientific or business-related fields, and a large number were owned by multinationals. Even with access to large human capital and foreign talent, critics argue that the pace of China’s innovation game is too slow in a playing field that is characterised by speed.
There is no lack of drive. ‘Made in China 2025’ and the recently launched ‘Internet Plus’ initiative are helpful moves by the government to upgrade Chinese industry and to integrate more efficient technology across the board. However, to become a global leader in innovation, drive is not enough. The McKinsey Global Institute Report highlighted that China’s evolution from imitation to innovation is possible, but far from inevitable. In a country with an education system that places less value on game-changing ideas, and with open exchange and freedom restricted by the government, facilitating greater innovation and creativity seems at first a challenge. However, China has the access to the talent and the capital necessary to unleash the entrepreneurship required. By further innovating their manufacturing industry and services sector through digitisation, greater connectivity and internet enablement – and by making greater strides in knowledge-based arenas – the nation can become a global innovation leader.
China is aiming for a position as a knowledge-economy rather than what observers call the ‘sweat-shop economy’. With structural reforms and targeted measures ‘Made in China’ has the potential to become ‘Invented in China’.
Luisa Cools is the China Fellow at Young Australians in International Affairs.