China’s Top-Down Take on Innovation; State-Run Model Is Limiting, Some Chinese Economists Say

September 29, 2013, 4:18 p.m. ET

China’s Top-Down Take on Innovation

State-Run Model Is Limiting, Some Chinese Economists Say

BOB DAVIS

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BEIJING—To understand why China has such a tough time producing world-class innovations, take a look at how the Chinese play games. Ping pong tables are everywhere in public spaces and open to all comers, from kids to agile retirees, producing a reservoir of talent that has made China a ping pong innovator and champion. By contrast, basketball courts in China are generally locked up. Entrance is controlled by the state—in this case, school officials—shrinking the talent pool and the chance for youngsters to hone their moves. The result: basketball mediocrity.For decades, China has followed a state-led innovation model, where science and technology ministries identify priority areas, fund them generously and send thousands of students overseas to study in those areas. In some fields, the approach has been successful, including space exploration, supercomputers and military technology. Now, China’s leaders are looking to replicate that state-driven model in dozens of other technologies, including biotechnology, alternative energy and new materials.

But many Chinese economists and scientists say the central-planning tack has come up short on new ideas, noting that these fields are well-trod technologically by the West. They are calling for China to move beyond a “catch-up” strategy.

“With innovation, there is serendipity. You need a lot of participants [because] only 1 in 1,000 ideas may succeed,” said Bai Chong-en, an economist at Beijing’s Tsinghua University. “It’s just like ping pong, where there is a lot of grass-roots participation.”

In preparation for a November meeting of the Communist Party leadership, China is putting together a reform plan that is supposed to guide the country over the coming decade. But with China’s growth slowing to about 7.5% this year from 10.4% in 2010, economists inside and outside China worry about a far sharper slide ahead. China needs to step up its game, they argue, so it no longer relies as much on low-cost exports on the one hand, and immense state-owned oligopolies on the other.

But how?

Former World Bank chief economist Justin Yifu Lin argues that because China is still a developing nation, it can still grow by imitating Western technologies and producing them better or more cheaply. “Our innovation doesn’t necessarily have to be based on invention,” said Mr. Lin, who now teaches at Peking University.

Other economists disagree. “You have to let big ideas flow” to power economic growth in the future, said Cai Fang, a senior economist at the Chinese Academy of Social Sciences. “We’re at a big turning point from government-led investment to innovation based on free-market growth.”

In China, that’s an especially tough transition. Chinese scientists complain that Beijing focuses too heavily on headline-grabbing efforts, like building supercomputers—it currently makes the world’s fastest supercomputer, in a ranking done every six months by Top500, a group of leading computer scientists—rather than fundamental science that could spawn new industries.

China has become the world’s No. 2 spender on R&D behind the U.S., but the U.S. spends 19% of its R&D budget on basic science—the kind of research that can spawn new fields over time—compared with just 5% for China, according to the U.S. National Science Foundation.

“Chinese politics is a major inhibiting factor—with so many circumscribed ‘no-go zones’ for research,” said David Shambaugh, a George Washington University China scholar. Singapore’s prime minister, Lee Hsien Loong, noted during a speech to a senior Communist Party school last year, “all eight Nobel Prize winners in science who are of Chinese descent either were or subsequently became American citizens.”

Some Chinese startups have managed to handle the obstacles, including Tencent Holdings Ltd., whose WeChat talk-and-text service is a hit internationally. The company is politically as well as technologically savvy. Earlier this year, Tencent’s chief executive, Pony Ma, joined China’s nearly powerless but symbolically significant parliament, a sign the company had become part of the Chinese establishment.

Even so, Mr. Bai, the Tsinghua economist, says China’s state-owned telecom giants still have huge power to decide which Internet-based ideas can make it commercially because they control China’s telecom infrastructure. The monopoly firms “have their self-interest” to protect, he said.

In some instances, the state doesn’t intervene enough to protect invention, China technology experts argue. Intellectual-property protection is weak and private domestic firms frequently are barred from competing in lucrative state-owned sectors, such as telecommunications, energy or electricity production.

But for the most part, say a number of economists in and out of China, the problem is too much state control, which snuffs out what’s often called “curiosity-based” innovation. Research grants must be approved by science and technology bureaucrats who judge whether they fit into a pre-approved state project. Corruption, or simply bad judgment, can kill ideas.

Over the coming weeks, Chinese leaders will need to confront a fundamental question: How much are they willing to ease control, let markets operate more freely and encourage curiosity-based innovation? The more they pull back, the more they may reduce their ability to control society. The more they continue to dominate, the less they spur the kind of innovation that can create new technologies and industries.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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