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  • Writer's pictureDan Herman

On Chinese Innovation

Having just returned from a few days in Guangzhou, China I thought I’d post an update on my previous writing on Chinese innovation and the rapid pace of change underway there.

The city of Guangzhou and the Guangdong Province are particularly interesting as they were at the heart of the economic reforms led by Deng Xiaoping in the late 1970s and served as the country’s springboard into a more ambiguous/capitalist form of socialism. In 1979, the city (and its broader Guangdong province) were established as the first special export zone (SEZ) in the country, and the first host for foreign direct investment. Its early success in low-value manufacturing and industry saw the region (according to Ezra Vogel) become the “de facto archetype for how to advance modernization” across the country.

Fast forward three decades and Guangzhou is a fascinating example of the new China, and may serve as the archetype for a subsequent phase of modernization, this one focused on high-value technological innovation.

I first visited the city in 2002 and, at the time, saw it as a rather sleepy, low-rise, industrial city, then with a population of about 6 million. Today it’s home to over 12 million, and has transformed itself from a centre for cheap labour and low-value manufacturing into a (still evolving) modern centre for retail, industry and science. I walked out of the trilingual subway into a rather impressive financial district replete with dozens of sky scrapers and architecture that would be the envy of most cities.

A significant element of this transformation is a heavy focus on science and technology. Guangzhou is home to a series of targeted public investments aimed at developing a “Guangdong Development District”. These include Guangzhou Science City, Guangzhou High-Technology Industrial Development Zone, the Guangzhou Economic and Technological Development District, the Guangzhou Free Trade Zone, the Guangzhou Export Processing Zone, and Guangzhou International Biological Island.

The goal of these economic investments is to “spur transformation” of the local economy away from low-value manufacturing and industry to so called high-value, high-tech fields. All together they form part of the City’s “Master Plan for Building a National Innovation City.” This plan seeks to develop three “strategic and emerging industries” with revenues of approximately $20 billion each, 1500 high tech companies, and a science-based output of over 350 invention patents per million people. An analysis by the Rand Corporation of existing companies (over 300 as of 2012) in this district found that two-thirds are either ICT or biotech companies, both industries defined as emerging by the Country’s latest five-year plan.

All together this evolution of the Chinese and the Guangdong economy is fascinating and it speaks to the significant competitive pressures in high-tech that are, and increasingly will, come from this region.

To be sure, this evolution isn’t smooth. The same Rand report notes that while the district is impressive, it faces significant challenges related to access to expertise and financial capital, and ultimately, the quality of the innovations and patents that result. This issue of quality is increasingly present in conversations about Chinese innovation. China’s National Patent Development Strategy states a goal of 2 million annual patent fillings by 2014, and China’s State Council released a notice in 2011 which noted a goal of tripling the number of international patent applications in strategic emerging industries compared to a 2010 baseline. These quantitative goals, however, belie the fact that quality seems to growing far slower. For example, a recent report from the European Union Chamber of Commerce disputes the China-innovation-hype by noting “while patents are exploding in China and certain innovation is also on the rise, patent quality has not proportionately kept up and in fact the overall strength of China’s actual innovation appears overhyped.”

Overhyped.  I’m not so sure about that.

That a lag exists between patent output and patent quality is understandable in a country that a decade ago was a net development aid recipient and whose per capita income is still less than a quarter of Canada’s. The evolution of quality in Japan and South Korea, for example, highlight a similar lag between initial replication and eventual original design and innovation. And thus the fact that China still rates as a rather middling “innovation economy” according to rankings produced by the World Economic Forum (31st), the INSEAD Global Innovation Index (35th), and even the Chinese Academy of Science and Technology (21st) shouldn’t obscure the country’s dramatic push into high-value, high-tech industries.

So sure, there are real questions as to whether China can develop the right incentives to become a top-tier innovator. However as the world’s 2nd largest aggregate spender on research and development, and one that is increasingly seeking to attract top foreign thinkers and scientists (in addition to returnees), I’m rather bullish on the country’s chances.

In 1980 Guangzhou’s provided the first signs of China’s economic awakening. The city’s impact on global manufacturing and related employment, for example here in Canada, were profound. Three decades later, the city’s foray into high-value, high-tech industries, the same industries that we’re still trying to establish leadership in here in Canada, may portend a similarly impactful, though perhaps not immediate, competitive challenge.

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