China’s Bigger Innovation Problem; It’s not just about money for R&D. Innovators have to want to live there, too

China’s Bigger Innovation Problem

It’s not just about money for R&D. Innovators have to want to live there, too.

KEN MILLER

Dec. 4, 2013 12:24 p.m. ET

Last month’s Third Plenum meeting of Chinese leaders seemed to signal Beijing’s intention to experiment with more economic and financial freedom. Leaders now acknowledge the old model of cheap inputs—inexpensive labor, low-cost capital for state-owned enterprises, and the socialization of environmental costs—no longer works.Instead, the Plenum’s closing communique speaks of unleashing the inherent creativity of the people to drive the economy. So the relevant question for businesses, both at home and abroad, has to be how effectively Beijing will pursue that aim. The answer, so far, is discouraging.

On one level, leaders appear to be highly motivated. Communist Party General-SecretaryXi Jinping

and his fellow Politburo members hate that time and again the valuable intellectual property is created elsewhere for products that are merely manufactured on China’s shores.

So they have thrown themselves at the problem the best way they know how. Beijing is pursuing a so-called Medium- and Long-Term Plan to play a leading role in technologies aimed at revolutionizing agriculture, manufacturing, transportation, information, health and extractive industries by the year 2020. Leaders are attempting to create an innovation ecosystem whereby government ministries funnel money through universities, think-tanks, businesses of all sizes, cities, real-estate developers and venture-capital investors.

The government also has created the “Thousand Man Plan” to attract foreign researchers through bespoke laboratories and attractive financial packages. And Beijing is at last beefing up legal protections for intellectual property, in the expectation that Chinese innovators will soon create intellectual property to protect.

Measured by inputs, the effort is impressive. Today’s China spends more as a percentage of its GDP on science and technology than any other major economy except the U.S. Some measures of output also are notable. Roughly 10,000 science Ph.D.’s graduate every year from Chinese universities, Chinese patent filings are soaring, and more scientific papers are published and cited in journals each year. Some of the larger companies such as Huawei and Baidu now engage in fundamental research.

In other respects too, Beijing is eagerly encouraging Chinese creativity—although it is doing so by copying Western techniques for fostering innovation. The Chinese venture-capital industry invests at a rate that makes it second only to that of the U.S. Over 1,000 technology incubators exist across China to stimulate the earliest stage start-ups, and the best universities imitate their U.S. counterparts by forming their own “innovation labs.” The hope is that in unusual protected pockets of creativity, like Tsinghua University’s new X Lab, or NYU’s joint venture with East China Normal University, students and faculty will dare to be more innovative.

Yet in key respects, this innovation falls short of what China’s economy will need. For instance, most successful Chinese Internet companies are based on non-Chinese business models. Almost every successful U.S. Internet company has a Chinese counterpart. Google GOOG +0.47% has Baidu, Facebook FB +4.04% has Kaixin, Ebay has Taobao, Groupon has Meituan, Amazon has Dangdang and Youtube has Youku. But Chinese business-model innovation is more in the category of adaptation than de novo innovation.

Meanwhile, despite large investments in innovative individuals, China still has trouble retaining its best and brightest talents onshore. A white paper published in October by the official Chinese Academy of Social Sciences noted a growing number of Chinese scientists who had returned to China from the West are now leaving again.

The reasons are complex (the white paper cites pay differences and desire to reunite with family members who stayed in the West), but a big factor is the political environment. Beijing seems to expect that creative professionals will be able to thrive in an environment where they can’t network on Facebook or voice freewheeling opinions on any topic, business or political, under the sun. But leaders should be worried about whether those professionals will even want to live in such a place, let alone be able to create productive new products and businesses there.

From this perspective, the Third Plenum fell noticeably short. While Party leaders signaled their intention to experiment with more economic and financial freedom, popular bloggers have been detained while some universities have been instructed in the “seven no’s.” There is to be no discussion of universal values, press freedom, civil society, citizens’ rights, past mistakes of the Party, state capitalism or judicial independence. This is a warning to innovators that politics is entirely off the table, and therefore that various anti-innovation elements of Chinese life will remain.

The mammoth size of a market which already buys 14% of the world’s mobile phones and 26% of the cars should be a huge magnet for creative practices. It is highly likely that in a country with 1.3 billion brains, more fundamental innovation can eventually emerge.

But the Internet and other manifestations of Western innovation flourished in a climate of considerable freedom and tolerance for failure. China may well have a Newton or Einstein in its future, but meanwhile it may have to borrow some Western societal concepts currently out of favor to attract and retain a Chinese Gates or Jobs.

Mr. Miller is president and chief executive of Ken Miller Capital, llc and chairman of the NYU-Shanghai International Advisory Board on Innovation and Creativity.