China’s Path to Indigenous Innovation

William Lazonick and Yin Li

Conference on Finance, Business Models, and Sustainable Prosperity

New York City, NYDecember 7, 2012

Outline of the paper

Productive capabilities and economic development in China

Infrastructure investment Physical infrastructure Human infrastructure

Technology transfer Sino-foreign joint ventures Reverse brain drain

Indigenous innovation Computers, Automobiles, Telecom Equipment,

Semiconductors

China in comparative economic development

The analysis of China’s path to indigenous innovation considers dynamic interaction among

China’s path: the framework

(State) investments in physical and

human infrastructure

Technology transfer from advanced

nations

The formation and growth of

indigenous companies

The Theory of Innovative Enterprise: Key concepts and questions

Strategic control• Who makes innovative strategy?

– importance of the abilities and incentives of those who exercise strategic control in the firm

Financial commitment• How is investment in the innovation process sustained?

– sources of financial commitment that sustain technological transformation and market access

Organizational integration• What types of innovative investments do they make?

– need for the organizational integration of skill bases that can generate collective and cumulative learning

China’s Path in Cross-National Historical Perspective

An understanding of China’s path to indigenous innovation is important

to China: Will China’s path result in equitable and stable economic growth, i.e., sustainable prosperity?

to developing economies: They can learn from China, and must seek to develop in the presence of China.

to advanced economies: The challenge for the advanced economies is how to remain innovative themselves. For example, major US corporations that are making ample profits in China are failing to reinvest them to upgrade their innovative capabilities in the United States

Outline

Productive capabilities and economic development in China

Infrastructure investment Physical infrastructure Human infrastructure

Technology transfer Sino-foreign joint ventures Reverse brain drain

Indigenous innovation Computers, Automobiles, Telecom Equipment,

Semiconductors

Comparative economic development

Physical Infrastructure Investment

Investment through government programs and state-owned enterprises (SOEs) The surge of infrastructure investment in China started in

1993 with the restructuring of ministries into state-owned enterprises

The case of the automobile industry: government investment in road construction and SOE’s capacity of steel production enabled the car industry The world’s largest steel producer is dominated by SOE steel

mills Highway expansion driven by government programs:

National Trunk Highway System (1990), National Expressway Network (2004)

Physical Infrastructure Investment

Increased automobile production enabled by investment in road infrastructure

Human Infrastructure Investment

Education A commitment of 2% of GDP in education since 1952 except

the years of Cultural Revolution (1966-1976) Compulsory nine years of schooling in the 1990s Rapid expansion of tertiary education in the 2000s,

particularly in engineering

Human Infrastructure InvestmentCountry Completed post-secondary Average years of school

% pop., 25yrs.+ 1960 1980 2000 2010 1960 1980 2000 2010

USA 9.4 18.1 30.6 31.6 8.9 11.9 13.0 13.3

Japan 3.0 8.9 19.0 23.9 7.2 8.9 10.7 11.5

Hong Kong 3.1 4.1 7.2 7.2 4.4 6.7 8.7 10.0

Singapore 0.9 2.1 7.8 12.3 2.8 3.7 7.6 8.8

South Korea 1.9 6.6 14.8 17.3 3.2 7.3 10.6 11.6

Taiwan 2.4 4.7 8.0 10.6 4.6 6.4 9.6 11.0

Indonesia 0.1 0.3 1.7 1.6 1.1 3.1 4.8 5.8

Malaysia 0.7 0.5 3.1 5.0 2.3 4.4 8.2 9.5

Philippines 4.5 9.8 19.8 22.4 3.7 6.1 8.0 8.7

Thailand 0.4 2.9 5.1 8.9 3.4 3.7 5.4 6.6

Brazil 1.1 3.7 5.3 5.2 1.8 2.6 5.6 7.2

Mexico 1.1 3.9 10.2 13.9 2.6 4.0 7.4 8.5

Chile 1.8 3.3 9.5 11.6 5.0 6.4 8.8 9.7

Costa Rica 2.1 5.2 12.9 13.2 3.7 5.4 8.0 8.4

China 0.4 0.6 2.8 4.0 1.4 3.7 6.6 7.5

India 0.4 1.5 3.2 3.7 0.9 1.9 3.6 4.4

Post-secondary school completion rates and average years of schooling, selected nations. Source: Barro and Lee 2010

Human Infrastructure Investment

S&T system A small elite S&T system established in the 1950s In the 1980s, establishing national R&D programs Allowing spin-offs from PROs since 1984 Transformation of research institutions to business entities

(1980 - 1995) Reorganizing S&T programs and increasing funding (1997- )

Human Infrastructure Investment

Human Infrastructure Investment

Outline

Productive capabilities and economic development in China

Infrastructure investment Physical infrastructure Human infrastructure

Technology transfer Sino-foreign joint ventures Reverse brain drain

Indigenous innovation Computers, Automobiles, Telecom Equipment,

Semiconductors

Comparative economic development

Technology Transfer through JV

“Trading Markets for Technology” (1980-2001) Goal: import substitution and technological learning Method: foreign companies were invited to invest in JVs with

Chinese SOEs in exchange for market access to China

First JV in telecom equipment manufacture approved in 1984

Heavy investment from the Chinese government in terms of financial and human resources put in

Technology transfer via Product localization Training engineers

Technology Transfer through Reverse Brain Drain

Technology Transfer through Reverse Brain Drain

As an outcome of economic development, the inflow of returnees sharply increased in the 2000s

Internet boom in late 1990s brought back the first wave of returnee entrepreneurs

Government strategy of competing for returnees Liberalization of migration control in the 1990s Central government’s investment in S&T system created

demands for returnee scientists and engineers starting in 1997

Local governments compete for high-tech ventures founded by returnees

On the path to indigenous innovation China now dominates US Advanced

Technology Product imports China’s share of US ATP imports increased from 5.5%

in 2000 to 33.5% in 2011, primarily because of China’s position in US-dominated global value chains

In 2011 China absorbed 7.0% of US ATP exports, after NAFTA nations Mexico (11.1%) and Canada (10.6%)

In 2011 China accounted for 54.0% of ICT imports,30.3% of opto-electronic imports, and 17.1% of weapons imports to the United States

In 2011, ICT represented 88.4% of US ATP imports from China, followed by opto-electronics at 6.1%

2000 2002 2004 2006 2008 2010 2011

Total US ATP imports $m. 195,660 196,100 238,478 290,848 331,170 354,195 386,005

China 5.5 10.2 19.2 25.0 27.6 32.6 33.5

Mexico 6.6 8.3 9.3 10.6 12.2 13.8 12.4

Japan 17.8 12.1 10.0 8.9 8.1 6.6 6.6

Ireland 3.4 6.7 5.6 4.9 5.3 4.9 5.6

Taiwan 7.6 6.8 5.4 4.8 4.2 4.3 4.8

South Korea 7.0 7.1 7.5 4.7 4.9 4.9 4.5

Malaysia 6.5 7.7 7.6 8.6 6.1 4.3 3.7

Canada 10.4 7.0 5.8 5.1 5.0 3.6 3.5

Germany 4.5 4.1 4.0 3.9 3.5 2.9 3.3

France 4.8 4.9 3.7 3.4 3.6 2.9 2.9

China central to globalization of US high-techUS ATP Imports, 2000-2011: % shares, top 10 nations, 2011

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2000 2002 2004 2006 2008 2010 2011

Total US ATP exports $m. 225,415 180,629 201,454 252,569 270,072 273,344 286,718

Mexico 6.7 7.0 8.2 7.4 7.3 10.0 11.1

Canada 11.4 9.6 10.1 9.3 10.0 10.1 10.6

China 2.4 4.6 4.7 7.0 6.4 7.8 7.0

Japan 9.8 9.3 9.0 7.7 6.5 5.7 5.5

UK 7.4 5.9 6.0 5.0 5.2 4.4 4.9

Germany 5.5 5.2 4.6 5.1 6.4 6.1 4.7

Brazil 2.6 2.2 2.2 2.8 4.0 4.0 4.1

South Korea 6.0 5.4 5.1 5.6 3.8 4.0 3.9

France 4.1 4.7 4.6 4.0 4.0 3.9 3.6

Singapore 3.9 4.5 5.0 4.8 4.3 4.0 3.6

China absorbs US high-tech exportsUS ATP Exports, 2000-2011: % shares, top 10 nations, 2011

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Source: www.census.gov/foreign-trade/statistics

2011 2010 2009

Advanced Technology Products Exports Imports Exports Imports Exports Imports

US ATP trade, $m 286,718 386,005 273.343 354,196 244,708 300,892

China as % of US ATP Category

Biotechnology 2.3 0.4 1.4 0.8 1.0 0.8

Life Science 7.9 3.9 7.1 3.6 6.3 3.3

Opto-Electronics 5.4 30.3 7.5 29.1 4.5 28.0

ICT 4.3 54.0 5.2 49.9 5.4 46.6

Electronics 11.1 9.9 14.1 10.0 14.2 8.1

Flexible Manufacturing 14.5 5.3 14.4 7.1 9.4 6.9

Advanced Materials 10.1 8.0 9.9 8.3 14.9 7.3

Aerospace 7.2 1.8 7.1 1.7 6.4 1.4

Weapons 0.1 17.3 0.0 15.7 0.0 14.0

Nuclear Technology 3.7 6.9 1.8 0.0 1.4 0.0

TOTAL 7.0 33.5 7.8 32.6 7.0 29.8

Importance of US ATP imports from China, especially ICT and Opto-Electronics

Source: www.census.gov/foreign-trade/statistics

2011 2010 2009

Advanced Technology Products Exports Imports Exports Imports Exports Imports

US ATP trade with China, $m 20,134 129,486 21,445 115,632 17,202 89,674

% Distribution of US Trade with China by ATP Category

Biotechnology 1.0 0.0 0.8 0.1 0.7 0.1

Life Science 11.5 1.4 9.2 1.3 9.3 1.4

Opto-Electronics 1.6 6.1 2.2 6.5 1.2 7.3

ICT 18.9 88.4 18.8 88.4 20.8 88.1

Electronics 23.4 2.5 30.3 2.4 30.7 1.9

Flexible Manufacturing 10.2 0.6 10.7 0.6 4.6 0.5

Advanced Materials 1.1 0.1 1.0 0.1 1.5 0.1

Aerospace 31.9 0.5 27.0 0.4 31.1 0.5

Weapons 0.0 0.1 0.0 0.1 0.0 0.1

Nuclear Technology 0.4 0.2 0.2 0.0 0.2 0.0

TOTAL 100.0 100.0 100.0 100.0 100.0 100.0

Concentration of US ATP imports from China in ICT

Outline

Productive capabilities and economic development in China

Infrastructure investment Physical infrastructure Human infrastructure

Technology transfer Sino-foreign joint ventures Reverse brain drain

Indigenous innovation Computers, Automobiles, Telecom Equipment,

Semiconductors

Comparative economic development

Indigenous innovation in China

Pioneering study of China’s emerging ICT sector, published in 2000 by the late Qiwen Lu

Studies of Stone Group,

Legend Computer (Lenovo), Founder Group,

China Great Wall Computer

See the summary of Lu’s work in W. Lazonick, “Indigenous Innovation and Economic Development,” Industry & Innovation, 11, 4, 2004.

In 2006, “indigenous innovation” became the centerpiece of China’s Medium and Long-Term Plan for Science and Technology

Indigenous Innovation in the 1980s-- Computer Electronics

The cases of Stone, Legend, and Founder Non-government S&T companies were autonomous business

enterprises allowed by early reform Availability of S&T infrastructure provides technological

resources for indigenous innovation Stone: electronic printers with Chinese-character output capability Legend: Chinese word-processing add-on card Founder: EPS with Chinese-character capability

Restraint from the state in extracting rents from enterprises Strategic control over revenue allowed firms to invest in

R&D and organizational capabilities, while luring key employees from the state sector

Indigenous Innovation in the 1990s-- Automobiles

The cases of SOE and JV automakers The goal of technological learning in auto JVs was practiced

as product localization. Massive expansion in capacity as a result of this strategy Neglecting product development resulted in ceding strategic

control to foreign partners

All the cars in China

• In 2010 China produced 13.9 million cars, 23.8% of the world total, about 37,000 cars greater than the combined production of Japan (8.3 million) as number two and Germany (5.6 million) as number three.

• In 2010 no indigenous Chinese companies were represented among the top 16 car producers in the world, although combined the top 16 companies (six Japanese, three each German and American, two French, and one each South Korean and Italian) produced 8.6 million cars in China.

• Of the next 27 largest car producers in the world, however, 19 were Chinese, with a total output of 5.9 million cars, or 42% of China’s car production. (Note: There is some double-counting between foreign and indigenous producers because of JVs.) (www.oica.net)

Indigenous Innovation in the 1990s-- Telecommunications Equipment

The cases of Huawei and ZTE Huawei and ZTE were non-governmental companies

excluded by TMFT, but which stressed an indigenous innovation strategy

The indigenous discovery of “HJD-04 ” digital telecom switch model in 1991

Tapped into technological resources provided by JV investments as well

They grew by committing to technological learning as well as investing in organizational capabilities neglected by MNCs and JVs to cater to the growing Chinese market.

Innovation and competition in the communication technology industy

Rankings 2008 2009 2010 2011

1 Nokia NokiaNokia-

SiemensEricsson

2 Ericsson Ericsson Ericsson Huawei

3Alcatel-Lucent

Motorola HuaweiAlcatel-Lucent

4 MotorolaAlcatel-Lucent

ZTENokia

Siemens

5 Nortel HuaweiAlcatel-Lucent

ZTE

Source: iSuppli

Indigenous Innovation in the 2000s--Semiconductors

The case of SMIC Returnee entrepreneurs and technologists

were allowed to take strategic control of domestic firms

Through the returnee entrepreneurs’ global contacts, such firms are able to tap into a very large pool of engineering and management talent – the expatriate community

Global recruiting accelerates the process of absorption of foreign technologies

Competing local governments are major early investors

Conclusions

China’s Path as an Unfolding Phenomenon: Catching up with History A case of the success of the developmental

state in fostering a dynamic of growth depends on the emergence of innovative enterprises

Future studies should integrate the case of China into cross-national comparative-historical analysis of the process of economic development and changes in international economic leadership

With the framework that we have presented, informed by a theory of innovative enterprise, we can follow China’s development in real time, a process that we call “catching up with history”

Thank you!