by Seamus Grimes, Emeritus Professor, Whitaker Institute, National University of Ireland, Galway

Since its opening up 40 years ago, China has benefitted hugely from its integration into the global economy and particularly since WTO accession in 2001, it has become one of the most significant manufacturing and assembly locations for technology global value chains. This is particularly the case in areas related to electronics and ICT generally. Yet China, which remains weak in indigenous intellectual property (IP) and is under increasing pressure to move up the value chain. The country needs to move away from a top-down state-centric approach if it is to give rise to sustainable innovation.

Moving up the value chain to escape the middle-income trap

The most recent evidence of this in the technology area is the Made in China 2025 (MIC 2025) programme which seeks to ensure that China will play a dominant role in emerging new technology sectors by 2025.

A driving force behind this new technology programme is the urgency on China’s part to face key challenges in its efforts to shift away from an outmoded economic model based on being a competitive location as an export platform to a model firmly founded on a higher value-added knowledge-based economy. The fear of policymakers that China, like other late developing countries, might remain stuck in the ‘middle income trap’ lies behind this sense of urgency.

The ambitious targets of China’s MIC 2025 programme have, however, contributed to growing tensions between it and the more developed world, as witnessed by the current talk of a ‘trade war’ (or perhaps ‘trade dispute’) between the US and China, and the growing awareness that China’s rapid technological catch-up could result in an ever-narrowing gap between the established technology hegemony of developed countries and particularly the US and this latecomer nation.

Technology transfer and local tech IP have been weak
Being a latecomer has some obvious disadvantages, but it also can have some advantages such as a lack of embeddedness in outdated legacy systems. China’s impressive leap forward in the application of internet technologies in areas like the cashless society is a striking example of this.

Some would argue that the first 40 years of China’s advancement constituted the easier part, as it had the huge benefit of a plentiful supply of low-cost labour migrating from the countryside, and this was matched with significant inward investment which helped to construct China as a manufacturing powerhouse. Although China’s policymakers had a relatively optimistic, if somewhat naïve expectation of considerable technology transfer from foreign to local companies during the opening up period, this only occurred in a small number of sectors such as telecommunications equipment, while much of the technology value chains within China remained dominated by either foreign lead companies or their foreign suppliers. The case of Apple’s supply chain in China reflects this with much of the core components and associated intellectual property being derived from non-Chinese companies, even if almost all the assembly activity is located in China.

While significant progress has been achieved by a small number of Chinese technology companies, particularly in the internet sector, China continues to be significantly dependent on foreign technology companies for core technology such as semiconductors and mobile operating systems. The recent debacle in the US with ZTE has highlighted this dependence. While China’s MIC 2025 programme seeks to rectify such deficiencies, varying perspectives are being forwarded on the likelihood of China, a latecomer to such complex technologies, achieving its ambitious targets in the short-term. More than anything else, successful Chinese technology companies have built their success by adapting existing technology to a rapidly growing dynamic market with requirements that are often different from more advanced regions and which rapidly change over time.

Despite the obvious and considerable success of Chinese companies in China and to some extent internationally, most of that success has depended on original technology, components and software coming from outside China, while some of the fundamental building blocks of the ICT sector such as semiconductors continue to lag behind more advanced regions. China’s policymakers are acutely aware of the threat to national security arising from this significant dependence on foreign technology, and the recent enormous investment in developing the semiconductor sector reveals that awareness. The issue here, however, is whether a latecomer nation can successfully move up the value chain by applying existing technology as opposed to constructing the essential building blocks for deriving new technologies.

While adapting existing technologies, often in more innovative and competitive ways than achieved by their originators has paid enormous dividends for China’s most successful technology companies, particularly the BAT companies, there appears to be definite limits to the extent to which such exploitation can continue to be profitable. Within China’s enormous market, these companies have experienced huge success, but since the technology sector is global in nature, these companies must also seek to benefit from internationalisation. In the case of companies like Xiaomi, however, the risk of patent infringement has presented barriers to internationalisation. In the case of Tencent’s enormously successful WeChat, its penetration internationally has been limited. A small number such as Huawei have expanded their development through internationalisation, while encountering some political restrictions particularly in the US. Some would argue that China’s most successful companies have achieved their success because of their global mindset, which is sometimes missing from policies that are overly nationalistic.

The top-down role of the state might hamper innovation
While many would argue that China’s integration into technology Global Value Chains (GVCs), partly facilitated by significant inward investment by global technology companies, has been an important factor in China’s rapid economic growth, many domestic economic features, including the huge size of its market, but also the significant and dominant role of its one-party government have also been important.

The state has played a key role in facilitating local companies in the domestic market, and while this market experiences intense competition, much of that competition is between local players. Almost all the internet sector remains dominated by the BAT companies.

In the developed world it is generally acknowledged that the role of the state in economic development is primarily about creating the best possible conditions in which knowledge can be commercialised, but it also tends to be accepted that for innovation to flourish, a non-interventionist approach towards facilitating a creative environment is essential.

China’s case is somewhat different, being a one-party political system in which the state plays a much more direct role in the market as the country transitions from being a planned economy to some form of hybrid model. Despite its mixed record, China’s on-going propensity to ‘pick winners’ in the form of state owned enterprises (SOEs) reflects a desire for significant on-going involvement of the state in the market.

And while China’s efforts in prioritising and investing in significant developments in its science, technology and innovation infrastructure has been impressive, in many respects it has followed a similar path to that taken by Japan, South Korea and Taiwan and also by Europe’s framework research agenda. Each country, however, has unique circumstances, and in many ways, China’s rise is unprecedented. As a latecomer, China has been able to benefit from observing the successes and failures of other countries, and yet because of its own techno-nationalist tendencies it may find it difficult to refrain from repeating some questionable practices such as its efforts to create national champions.

China and Global Value Chains by Yutao Sun and Seamus Grimes was published by Routledge in 2018.

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