Can China become an innovation hub?

Author: Seamus Grimes, NUI Galway

Despite the rhetoric about international cooperation on a wide range of issues, the business world is based more around competition than collaboration.

This reality results in what might be called the ‘political economy of innovation’. The state has an important role to play in this area of policy, which can often touch on issues of security, defence and military technology.

In the case of China, there is considerable mistrust and suspicion in the West about China’s long-term political goals, which creates obstacles for collaboration in the business arena. For example, although very successful Chinese companies, such as the telecommunications giant, Huawei, are already collaborating with a number of Western companies in R&D areas, they have been prevented from acquiring US technology companies because of suspicions about their relationship with the Chinese government.

These issues raise questions about the changing nature of the relationship between transnational corporations and the state in this increasingly global era. As Western corporations increasingly seek to become global, they often use the convenient rhetoric of becoming a ‘Chinese company’ when seeking to expand into China. US multinationals operating in the Chinese market often only become ‘US companies’ when they feel the need to use the lobbying power of their own government to seek better business conditions within the Chinese market. This has been the case in recent times as China is increasingly determined to prevent foreign companies from continuing to dominate technology sectors, and is giving local companies every advantage to take them on.

While China has been making huge strides in promoting innovation through significant levels of R&D investment, there are ongoing misgivings about the rates of return on this investment. Like most aspects of life in China, this important area of policy needs to be examined within the Chinese political model based on control and significant state intervention.

Innovation is not simply about increasing R&D investment, but also about transforming the learning environment to foster creativity, originality and critical thinking in education. This is quite a delicate challenge within China’s political climate of creating a ‘harmonious society’ by discouraging any forms of dissent or protest.

One of China’s current preoccupations in relation to innovation is to promote ‘indigenous innovation’ in order to reduce dependence on foreign technology. The rise of a number of highly successful Chinese corporations in international markets such as Huawei, Haier and Lenovo, also points to an emphasis in the Chinese approach to innovation on cost. In the past 30 years, foreign multinationals have accumulated considerable wealth by licensing their technology to their subsidiaries in China; but increasingly, Chinese companies have succeeded in taking on the multinationals, not only in China but also internationally.

Innovation in the Western multinational context has been strongly associated with the dominance of markets by major corporations, which invest heavily in R&D to ensure high-quality products. In order to remain competitive, many of these corporations have become increasingly globalised by outsourcing and offshoring much of their manufacturing and R&D activity to China and India. Within the context of the current recession, with China showing continuing high levels of economic growth, some might question whether such offshoring has reached a critical tipping point.

The basic rules of capitalism do not change, but the extensive relocation of economic activity toward the East has brought about a very significant shift in the centre of gravity of industrial organisation. China’s impressive performance during the current recession also suggests it has entered a new stage in its development. Therefore, there are some reasons  for wondering whether China’s particular brand of capitalism within a framework of strong state intervention may have the capacity to bring about major changes in the ongoing dominant role of major Western corporations in the global economy.

China’s experience in technology transfer to date with these companies has been disappointing, and there is an evident determination to change the rules of the game in the coming years in order to ensure that China benefits by insisting that products for its market are innovated in China.

The unprecedented power which China possesses in its bargaining with foreign firms, is based on its size, growth rate and dynamic market. To what extent it is capable of leveraging these powers to upend Western hegemony of technology is a truly fascinating question. China’s push to become a major global innovation hub is strongly grounded in its rapid rate of growth in R&D investment, but innovation must result in market dominance if is to have a really lasting impact. To date, a small number of Chinese ‘national champion’ companies have shown a capacity to dominate certain subsectors while some previously dominant Western technology corporations are beginning to lag behind.

While China faces huge obstacles as a technology latecomer to significantly alter the dominant knowledge nodes of Western technology, it is making a determined effort to slow down the aggressive advance of Western corporations into its lucrative market, and will seek a high price from such corporations in exchange for their future growth prospects in China.

Seamus Grimes is a professor in the Department of Geography Centre for Innovation and Structural Change, National University of Ireland, Galway.