Can China become an innovation hub? Part 1: Innovation and Technological Independence

Guest Author: Professor Seamus Grimes Department of Geography/Centre for Innovation and Structural Change National University of Ireland, Galway

Despite the rhetoric about international cooperation on a wide range of issues, the business world is based more around competition than collaboration, although collaboration is possible also with those you can trust. Large corporation still work with an Intellectual Property (IP)/innovation model that is predominantly proprietary in nature, creating IP within the various far-flung subsidiaries of corporations, but for the corporation and not to be shared with competitors. This reality results in what we can call the ‘political economy of innovation’ in terms of the role of the state in this important area of policy, which often can touch on issues to do with security, defense and military technology.

In the case of China there is considerable distrust and suspicion in the west about China’s long-term political goals internationally, and this creates obstacles for collaboration in the business area. The US and other western countries try to ensure that China does not gain access to technology which could help them militarily. Although very successful Chinese companies such as the telecommunications giant Huawei are already collaborating with a number of western companies in R&D areas, Huawei has been prevented from acquiring US technology companies because of suspicions about its relationship with the Chinese government. Just as in China, where there is considerable government control over sensitive technological areas such as telecommunications and the internet, there is also some degree of paranoia within the US about doing business with China in defense-related technology areas.

These issues also raise questions about the changing nature of the relationship between transnational corporations and the state in this increasingly global era. As western corporations increasingly seek to become global, they often use the convenient rhetoric of becoming a ‘Chinese company’ when seeing to expand in China. The major goal of the modern corporation is to ensure the maximum level of profitability for their shareholders, irrespective of geography. In some cases this will involve seeking to retain as much revenue outside their home country to avoid paying high levels of taxation. In the case of US multinationals operating in the Chinese market, for example, they often only become ‘US companies’ when they feel the need to use the lobbying power of their own government to seek better business conditions within the Chinese market. This has been the case in recent times as China is increasingly determined not to allow foreign companies to continue to dominate technology sectors, as they have done for almost 30 years since the opening of China. China is determined to give local companies every advantage to take on the foreign companies in what is one of the most rapidly growing markets in the world, as other markets are in decline or are badly affected by recession.

While China is making huge strides in recent times in promoting innovation through significant levels of R&D investment, there are on-going misgivings about the rates of return on this investment. Some argue that China is on the cusp of achieving major progress in innovation, while others suggest a more gradual rate of improvement. Like most aspects of life in China, this important area of policy needs to be examined within the Chinese political model based on control and significant state intervention. To some extent China is seeking to regain its position of superiority after a long period of humiliation, partly ascribed to western imperialistic ambitions. This creates a particular type of business environment in China in which freedom of scope for companies will always have some limitations. The most recent indication of this has been the promotion by the state of ‘indigenous innovation’. One of the consequences of this policy is the use of the huge public procurement market in China to restrict access to products ‘innovated’ in China, which could result in some advantage being given to local companies. China is determined to reduce its dependency on foreign technology from the current estimate of around 50% to 30% in the coming years.

Innovation is not simply about increasing R&D investment, but also about transforming the learning environment to foster creativity, original and critical thinking in education. This is quite a delicate challenge within China’s political climate of creating a ‘harmonious society’ by discouraging any forms of dissent or protest. Within the business environment this can result in a small number of foreign companies, such as Google, deciding to relocate some of its activities to Hong Kong in order to have greater flexibility in its operations. It can also result in daily minor irritants associated with China’s famous firewall software monitoring email messages, which may raise questions about client confidentiality for some companies. Doing business in China must involve sensitivity to the state’s ideological priority of political stability, which may result in some forms of constraint in social activity.

Companies who wish to succeed in this increasingly attractive market must be prepared to work within the constraints of an authoritarian state, which does not permit outside agencies to intervene inside China. The state plays a key role in controlling certain restricted sectors such as energy and telecommunication services, in which the main players continue to be State Owned Enterprises (SOEs). While this is not unique to China, many of the Chinese SOEs are seeking to transform themselves from a highly bureaucratic culture to one which is more commercial and innovative. Thus with increased spending in R&D, China is making significant progress in the innovation rankings, but it has still considerable ground to make up before joining more developed regions.

Next: Part II – Is technological innovation the new protectionism?

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