Can China become an innovation hub? Part II – Is technological innovation the new protectionism?

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

Policymakers in many states have become increasingly preoccupied with promoting innovation, but it is not always clear what the specific nature of that innovation might be in different regions, or the extent to which investment in areas such as R&D bring about major changes in levels of innovation. It has already been mentioned that one of China’s current preoccupations in relation to innovation is to promote ‘indigenous innovation’ in order to reduce dependence on foreign technology. The rise of a number of highly successful Chinese corporations in international markets such as Huawei, Haier and Lenovo, also point to an emphasis in the Chinese approach to innovation based on cost. Many Chinese companies are regarded as being highly responsive to rapidly changing market conditions, and capable of using existing technology to produce low cost goods suitable for the rapidly growing middle or ‘good enough’ market in China. This phenomenon of cost innovation is creating a certain level of apprehension among foreign multinationals in China who have had a relatively easy market to date, particularly in the high technology sectors. In the past 30 years, foreign multinationals have accumulated considerable wealth from licensing their technology to their subsidiaries in China. But increasingly, Chinese companies such as Huawei in telecommunications have succeeded in taking on the multinationals not only in China but internationally. Some suggest that China may form a key battleground for establishing the new round of global competition, with success in global markets being somewhat related to the ability to compete effectively in China. An important dimension of this rapidly expanding Chinese ‘middle market’, which can be found in middle tier cities, is affordability. Thus companies producing medical CT scan equipment need to produce affordable models for middle tier hospitals. These affordable products can also serve significant markets in less developed regions.

Innovation in the western multinational context has been strongly associated with the dominance of markets by major brand corporations, which invest heavily in R&D to ensure high quality products. In order to remain competitive, many of these corporations have become increasingly globalised through outsourcing and offshoring much of their manufacturing and also significant R&D activity to both China and India. Within the context of the current recession, with China showing continuing high levels of economic growth, some might question whether such offshoring has reached a critical tipping point. The basic rules of capitalism do not change, but the extensive relocation of economic activity towards the East has brought about a very significant shift in the centre of gravity of industrial organization. China’s impressive performance during the current recession also suggests that perhaps this great country has entered a new stage in its development. There are some reasons, therefore, for wondering whether China’s particular brand of capitalism within a framework of strong state intervention may have the capacity to bring about some major changes in the on-going dominant role of major western corporations in the global economy.

During this period of transition when China is seeking to reduce considerably its dependence on foreign technology, foreign companies in China are likely to experience increasing obstacles in their efforts to capture the local market. Perhaps for the first time in history, a ‘developing country’ finds itself in a particularly strong bargaining position in relation to foreign companies. For such corporations to maintain their dominant position in global markets, they must grow with emerging markets and compete effectively in these markets, with China being the most significant market in terms of its size and rapid growth. China’s experience to date with these companies in terms of technology transfer has been disappointing, and there is an evident determination to change the rules of the game in the coming years in order to ensure that China benefits by insisting that products for its market are innovated in China. While corporations use rhetoric about their intentions to develop products for the local market, the underlying multinational model is to use the global resources of the corporation to develop global products. The differences between these two models are likely to create on-going tensions, which are reflected in the reports and reflections of lobby groups representing the interests of these companies. But the companies themselves have little choice but to develop various forms of compromise to ensure their continued growth in China.

The unprecedented power which China undoubtedly possesses in its bargaining with foreign invested firms is based on its size, growth rate and dynamic market. To what extent it is capable of upending in some respect western hegemony of technology and market dominance is a truly fascinating question. China’s push to become a major global innovation hub is strongly grounded in its rapid rate of growth in R&D investment. But innovation must finally result in market dominance, if is to have a really lasting impact. A relatively small number of Chinese ‘national champion’ companies have already shown a capacity to dominate certain subsectors, while some western technology corporations which dominated the Chinese market during the earlier phase of opening now appear to be languishing to some extent. It should be noted also that corporations from neighboring Asian countries such as Japan, Korea and Taiwan have also been very successful in the Chinese market. Thus while China faces huge obstacles itself as a technology latecomer to significantly alter the dominant knowledge nodes of western technology, it is making a determined effort to slow down the aggressive advance of western corporations into its lucrative market, and will seek a high price from such corporations in exchange for their future growth prospects in China.

Part 1 Innovation and Technological Independence

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