Power & Market

Why China Is Not a Technology Powerhouse

In the American imagination, China is on course to overtake America as an economic superpower. Commentators and average Joes alike are mesmerized by China’s manufacturing prowess and the swift ascent of Alibaba. On the nativist right, the rise of China is so intimidating that many propose industrial policy as a tool to enhance domestic competitiveness. While the ascendance of China should not be underestimated, Americans are forgetting that China is still a laggard in technology.

Innovations are radically disruptive and historically America has been more adept at managing disruption than China. To appreciate the rewards of innovation, one must be willing to embrace failure. On the first attempt at inventing, only a few succeed, so true innovators are unfazed by the perils of failure. In fact, failure is celebrated in Silicon Valley. Some even argue that replicating Silicon Valley in other countries is a mammoth task because most people are not as receptive to the lessons of failure as Americans.

Despite China’s achievements in engineering, America will always have an edge due to its unique culture. In America, perfection is not the goal of innovation. Innovation is perceived as a subversive act intending to transform society, and failing is simply part of the process. Unlike in America, in China, innovation is inextricably linked to national success and wary of failure, since the aim is to elevate the standing of China instead of disrupting society. Americans also innovate to project superpower status, but they embrace the potential of innovations to topple the existing order. However, on a broader level, China is hesitant to appreciate that innovation is a messy endeavor necessitating failures and wide-ranging disruptions in the fabric of society.

Companies like Amazon, Apple, and Google are the natural consequence of a culture fostering disruption. None of these companies were planned by bureaucrats. They are the outcome of creative initiatives sparked by entrepreneurial fire. Bureaucrats lack control over how people will respond to products, since value in the market is subjectively determined. Inherent in American culture is the assumption that markets choose winners and that usually they are unpredictable. As a result, Americans are likely to tolerate failure on the journey to innovation.

In contrast, China’s politicians and bureaucrats envision innovation without disrupting society. Managed change can yield modest economic growth, but producing superstars like Facebook and Skype mandates entrepreneurs to break the rules. Chen Baoming and Ding Minglei in a 2017 report assessing China’s capabilities articulate that the weakness of the pro-innovation culture in China, bolstered by the absence of a dynamic free market, has failed to spur radical innovations. Moreover, their sober remarks should dampen the hysteria of those contending that China will eclipse America as an innovation powerhouse: “According to a survey conducted by China Economist in the second quarter of 2017, 43.1% of economists believe that the biggest barrier to China’s industrial international competitiveness is a lack of technology.” They further note: “China lacks major original innovations that can propel industrial change and disruptive innovations and still follows advanced countries in the major changes of industrial and technical pathways.”

Regimented structures are antithetical to inducing innovation. Scott Kennedy, a senior advisor at the Center for Strategic and International Studies posits that the inability of China’s commercial aircraft industry to catapult to greater heights is attributable to the top-down vertical control structure of the Commercial Aircraft Corporation of China (COMAC). “COMAC, is a state-owned enterprise (SOE) that is well-suited for top-down vertical control but ill-suited for the primary job of an aircraft manufacturer, horizontal integration. Its management system and internal organization create internal obstacles to success,” he writes.

Another hurdle to innovation in China is collectivism. Individualism is the most robust cultural predictor of economic performance, and the Chinese are not as individualistic as Americans, who are more individualistic than other Westerners. Unsurprisingly, individualism is associated with innovation, because individualistic people are likely to deviate from the norm and doing so can result in innovation. Economist Carl Benedikt Frey in a recent piece lucidly explains how collectivism hampers innovation in China: “Under Xi Jinping, China’s leadership has signaled a strong commitment to reinforcing collectivist values while clamping down on the flow of ideas. China’s surveillance state and censored internet, together with a social credit system that promotes conformity, make it unlikely that the country will take the lead in innovation. Xi’s decision to let state-owned enterprises (SOEs) exert more control over the economy will also slow them down: Chinese businesses, particularly SOEs, are lagging foreign-owned companies in terms of returns on R&D spending.”

And as Frey and other authors have pointed out: few firms in China are really global. Indeed, if we are being objective, major firms in China are replicas of American companies and not true innovators. China is still in the business of learning from America, and this is indicated by a deficit in its intellectual property trade. For example, in 2018 the United States received $8.47 billion from China in royalties and licensing fees, but China only obtained $0.76 billion. The surplus is in America’s favor because disruptive cultures facilitate innovation. China will only gain the upper hand by entertaining radical disruptions.

Hence, Americans should relax from worrying about the rise of China. Yes, China may continue to grow, but it lacks the radicalism that can make it a real powerhouse.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. 

Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Become a Member
Mises Institute