China's 'Indigenous Innovation' as Protectionism

♠ Posted by Emmanuel in , at 10/13/2010 11:59:00 PM
This post is a neat continuation of the one below. And, it offers a contrasting perspective on the increasing belligerence of China towards Western multinationals. While I think it's an offshoot of the "obsolescing bargain," Adam Segal of the CFR presents a more conventional argument.

It's certainly a tempting proposition if you have 1.3 billion people--perhaps not a captive market, but not really quite a true market economy as Chinese officials like to portray it, either. Broadly speaking, the idea behind the article from Foreign Affairs which follows is that since a lot of the value-added activities in global supply chains are still not provided by China--intellectual property, branding (more on this later), and so forth--it will be increasingly difficult to capture value-added if all you can offer are labour and environmental arbitrage opportunities. Not only are the prices of commodities going up worldwide, but wages are too in the PRC.

Chinese officials do recognize that, sooner or later, an increasingly affluent middle class will demand a move towards less labour- and energy-intensive forms of production. Or, a greater deployment of "knowledge economy" inputs to create more from less (and, it goes without saying, more profitably). There comes a time when LDCs need to move up the value-added ladder. However, it is certainly an open question if the Chinese can manage this feat with a lot of what I can only describe as "semi-enlightened central planning." For instance, they are keen on choosing national champions and requiring foreign firms support knowledge transfer more explicitly. Here is a snippet from the introduction; the rest is well worth reading even if I don't entirely agree with the conclusions:
If you want to get to the bottom of indigenous innovation, the Chinese policy so deeply aggravating Western businesses and governments, look at the bottom of your DVD player. Most likely, the machine was made in China. For Beijing’s leaders, that is part of the problem: for every Chinese-made DVD player sold, the Chinese manufacturer must pay a large royalty fee to the European or Japanese companies that patented various components of the unit, such as its optical reader. These foreign firms reap substantial profits, but the Chinese take is extremely small -- and is shrinking further as energy, labor, and commodity prices rise. Policymakers in Beijing, looking to strengthen China’s economy, are no longer satisfied with the country’s position as the world’s manufacturer. Their solution is to break China’s dependence on foreign technology, moving from a model of “made in China” to one of “innovated in China.”

The Chinese phrase for indigenous innovation, zizhu chuangxin, was introduced in a 2006 state-issued report, “Guidelines on National Medium- and Long-Term Program for Science and Technology Development.” The paper contained a curious mix of top-down, state-directed policies alongside bottom-up efforts meant to foster technological innovation. The top-down measures echo China’s old state planning system. They include 20 state-driven megaprojects, including initiatives to develop nanotechnology, biotechnology and new drugs, high-end generic microchips, and aircraft. The bottom-up efforts seem to follow a Silicon Valley model and are centered on university-industry collaboration, small start-ups, and venture capital.
Well, they can always try. Ha-Joon Chang will most likely be supportive of the PRC's efforts.