Change Management 2/3
China has changed dramatically in the last forty years. Business writer and thought leader Bob Yovovich tells us that China urbanized in half the time it took the US and with ten times the number of relocations. Such rapid change must have induced complex interlocking social shifts and costs - customs broken, institutions abandoned, social ties destroyed. Now, wither China? Wither CCP?
Three questions in three posts. This is post #2.
Thesis #2 Can a communist regime support innovation in the long term? Will innovation in China fade with lack of political and moral freedoms? And #2a - a follow-on – if innovation slows, what of it?
To follow -
Antithesis #2 - China need not fail at innovation
CCP members are the bourgeoisie
Patents and innovation experts
Move Along- Nothing to See Here ... la la la
Refuting #2a – If innovation slows, so what?
Free to speak, associate, write, form groups as you wish - not
The operating assumption is that communist ideology is totalizing. It must exercise control over all elements of society, including science and technology. To move away from total control is to invite dissension, which leads to disruption, and eventual disintegration. Scientific communism must be rational and scientific. Marxism should be a discipline as precise and objective as mathematics.
This is in fact the political argument. Stalin and Mao and now Xi demand dominance over media, arts, cultural works, and thought. At the 19th Party Congress in 2017 Xi told the world “Party, government, military, civilian, and academic, east, west, south, north, and center, the party leads everything.” This is not a surprising statement. Communist theory has always demanded complete control. Thus it is possible under CCP to think incorrectly. Could the US government ever tell someone they were thinking incorrectly?
At some point the insults to human dignity will become too much for even CCP to hold back. There is plenty of history of large scale protests, not only Tian’anmen in 1989 and Shanghai and Beijing in 2022. When CCP members begin to join the protests – as some did in 1989 – it will be too hard for CCP to hold back the arc of human history bending toward freedom.
This argument is that innovation requires democracy. Without democracy, innovation must fade. There are plenty of arguments that democracy is inevitable.
In a 1964 Harvard Business Review article called, "Democracy is Inevitable," sociologist Philip Slater and business analyst Warren Bennis predicted the fall of the Soviet bloc and the rise of democracy: "Democracy... is the only system that can successfully cope with the changing demands of contemporary civilization." Pretty tough to argue with the likes of Slater and Bennis.
There is a sophisticated argument from philosophy. Ci Jiwei in Moral China in the Age of Reform sees moral decline in China as a result of lack of freedom to express oneself openly. When one cannot express human dignity through freedom, one must find other ways to assert individuality. Ci sees corruption, moral decline, and excessive consumption as part and parcel of the Chinese economic miracle when political and moral freedoms are unavailable. The question of freedom, he says, is unavoidable. Inevitably, whether as an outcome of Xi’s anti-corruption and purification campaigns or some other way, China must get past the corruption, excessive consumption and moral decline that has characterized the last two decades. The other way to express oneself is through freedom, freedom to speak and write as one wishes. Freedom, he says, is the only way to act and to be in a modern society. By implication, China must get there.
Xi Jinping was brought into power to combat the moral decline within CCP and within society. He has succeeded reasonably well on the anti-corruption front. But two caveats – first, success in anti-corruption has been achieved without China moving a whit closer to openness or democracy; if anything, it has retreated substantially.
And second, corruption and heavy use of connections from family and colleagues has been the Way in China for two thousand years. Xi is not going to change deep culture. In a deep way, a successful democracy depends on ability to trust strangers. That is not a cultural value in China.
Antithesis #2 - China need not fail at innovation
I wrote a series of posts three years ago that addressed many of these issues. The arguments there are more detailed.
Whither China's Economic Development with no Democracy?
But how about innovation - can you have that without democracy?
Briefly -
We’ve heard about the sterility of the education system. Huang Yasheng, who wrote Capitalism with Chinese Characteristics, on students in China in Educated and Fearing the Future in China -
The Chinese educational system is terrible at producing workers with innovative skills for Chinese economy. It produces people who memorize existing facts rather than discovering new facts; who fish for existing solutions rather than coming up with new ones; who execute orders rather than inventing new ways of doing things. In other words they do not solve problems for their employers.
For decades now, Chinese have prepared themselves to go to college – sometimes even high school – in the US. The understanding is that the education is better and students will be better prepared when they come back. Many choose to stay in the US when their education is completed. Why would they do that unless something greater than money, a fancy car, and a spouse were their only goals?
Recent events make the negation a bit tougher. Lack of moral freedom is not really at issue – it doesn’t exist. But let’s get the easy responses out of the way first. The Huang Yasheng quote above is from 2010, close to a generation ago. Education in China is generally poor to fair, but there are places of excellence. Education systems don’t change overnight, or even in a decade, but one has to ask how all these Chinese students are getting in to MIT and Caltech and doing well. If they remain in the US for any period of time, one thing they must learn is how to ask questions and how to think in new ways. Many of them return to China.
And on education in the US (and Germany and Australia and other western countries) -
It has been true for decades that some Chinese parents encourage their kid to stay outside. I know of several young Chinese in the US now whose parents pushed them to stay. Now, more of the 300,000 or so Chinese students do return, thinking their prospects for a wealthy and happy future might be better in China. If future economic prospects are roughly equivalent in the US and in China, why would young Chinese choose to stay? Immigration numbers are far greater coming to the US than coming to China. Over a period of eight years my foreign students in China were nearly all from Africa, the middle east, or Indonesia. One student from Finland, no others from a western country. There are the Schwartzman Scholars and short term semester abroad students, mostly from Europe. If any of them choose to stay, they do so purely for business reasons. They start businesses or join an existing business in China and make a contribution. Some of my civil engineering students have worked for Chinese construction companies doing work in the middle east or Africa. Their two or three languages give the Chinese companies a big leg up in foreign countries. You need not call that innovation. Call it development, if you wish.
There are many joint programs between Chinese universities and American and German schools. Harvard and Yale among them. Some of these allow for joint degrees in engineering and require two years or more attendance in the US. It is true that academic standards can slip in such programs. But the basic requirement to “think differently” does come up time and time again. (N.B. – I failed two-thirds of a class of student engineers at my school in China for plagiarism in writing a short paper. I had a frank exchange of views with the school administration, but in this one case, honesty won out).
In the midst of the current cold war, Hainan Island has taken advantage of new regulations from the Education Ministry permitting foreign universities to open independent branches in STEM subject areas. Up to now, all foreign schools were required to have a Chinese university partner. It is certainly unclear how well this will work. But this, I think you do need to call innovation.
Beginning in 2003 – admittedly, a different era – we accepted scores of Chinese government officials to our graduate public administration program at Illinois Institute of Technology in Chicago. The students – all midlevel, midcareer professionals from a wide variety of disciplines in Liaoning, Zhejiang, and Yunnan provinces – took a full load of courses for a year to learn about government management. None of our students were researchers or scientists or engineers. But this is the key point – when Scott Peters, our program director, went to China to sign one of the next year’s contracts with the Chinese Ministry of Education, he asked what the program was really for. “What is it that you want the government students to learn?” the answer surprised us – “We want them to learn to think differently.” Perhaps that is less valued right now under Xi, but people in government recognize the problem. One can think differently without being able to vote or protest in the streets, particularly when one is focused on career.
So a key question - Political and moral freedoms have been absent for more than seventy years now. The first thirty of those years were brutal. The next forty years showed all the fabulous economic development we know about, but political and moral freedoms were not any part of that. Just when is the moral-values-based decline supposed to kick in?
There are plenty of sad, wistful or angry posts about CCP destroying Chinese culture. Dan Wang in his 2021 Letter says China under CCP is culturally stunted – the deadening hand of the state has ground down the country’s creative capacity. A decade of tightening has strangled cultural production.
Restrictions on art, poetry, fiction, sculpture are essentially restrictions on speech. While there was some greater openness in the Hu Jintao era, CCP has never promoted political or moral freedoms. It cannot do so without jeopardizing its role as sole voice of authority and morality. No communist or authoritarian state can allow such openness.
Wang on innovation - It’s too early to tell if in a decade China will have fewer founders of Jack Ma’s daring. So far at least, entrepreneurial types around me have found his example too removed to be worth bother. He remains, after all, one of the wealthiest people in the world, while he spends his time playing golf, doing calligraphy, or examining agricultural technologies in the Netherlands. My view is that it’s going to take more than this regulatory campaign to defeat dynamism in China.
There are plenty of accounts from young Chinese about the hopelessness, the lack of faith in the future for their lives in China. The web site Sixth Tone often contains such stories. In early 2023 there came a fad for kong yiji literature. Kong Yiji was a character created by author Lu Xun in 1919. Kong was a pedantic man of letters who stubbornly clung to tradition and failed to adapt to the times. Now, many young Chinese, struggling to find a good job despite their degrees, have come to feel a certain kinship with him. Contrary to what they’d been led to believe, not only has higher education not translated into professional success, but it’s even become a burden….
Hence we get the idea of lying flat, or doing only what is necessary rather than working 996 for the benefit of their employer. Of course kong yiji and 996 are censored terms in China. China Digital Times is also an excellent source for stories that escape CCP.
Young Chinese writer Lin Mengyin mourns loss of ability to express itself -
My Chinese Generation Is Losing the Ability to Express Itself
The Communist Party’s monopoly on all channels of expression has helped prevent the development of any resistance language in Mandarin, especially since 1989, when the brutal military suppression of the Tiananmen Square student movement demonstrated what happens to those who speak out. If language shapes the way we think, and most people think only in their own language, how can China’s youth conjure up an effective and lasting resistance movement with words that they don’t have?
The problem isn’t the Chinese language itself. “Freedom,” “rights,” “democracy” — these exist in Mandarin, as they do in nearly every language. They are universal values. Both the May Fourth Movement in 1919 — a student-led uprising against Western colonial encroachment on China and the incompetence of Chinese leaders — and the student movement in 1989 weaponized Mandarin in both long-form writing and short slogans. But decades of censorship and fear of violating it have made Chinese people scared to even think with such words, let alone speak or write with them….
Author Lin Mengyin is a Chinese writer living in the United States. Dan Wang is a visiting scholar at Yale. Its easy to write when one is not physically in China. People learn to self-censor. No one would equate self-censorship currently on campus and in businesses in the US with that in China. But unwillingness to say what one thinks is common in the US as well.
If innovation slows, it won’t be because the culture is stunted or moral freedoms are unavailable. This following section is perhaps a digression, but useful to a discussion of CCP rigidity and what it misses.
It is important to recognize the vibrancy of Chinese culture beneath what CCP permits. The dead hand of CCP still obtains, but beneath the ham-handed fist are vibrant music, dance, painting and sculpture industries. We know of literary critic and Nobel Prize winner Liu Xiaobo who died in prison and whose name is still censored in China; and Ai Weiwei, who is still alive and living in the US. Within China, Inna Art Space is a wonderful example. Inna is herself not an artist, but she sponsors Chinese artists with studios in Hangzhou and New York. One of her artists in Chen Dongfan whose modern works have been in international shows and who (in a very small way) I helped gain some recognition in Hangzhou in 2009.
Chen Dongfan. A Dance. At http://www.innart.org/en/artist/work/7b6eww.html
Tanner Greer at the Scholar’s Stage - Why Chinese Culture has not Conquered Us All –
Most observers place fault exactly where Dan Wang does: the claustrophobic cultural environment of enforced political orthodoxy. A common ancillary argument is that party-state calls for innovative cultural production are themselves the problem. Cultural innovation happens at the level of the individual artist, this argument goes. Steven Spielbergs cannot be produced on demand…. This gets to heart of China’s problems—and these are not problems of cultural sterility. In my experience, Chinese intellectual life is often more vital and vibrant than what I see in the West. Back in 2017 I did a stint of copy editing work for China News Service. Many of the articles were boiler plate propaganda, but the most interesting covered controversies and happenings in Chinese literature, history, and social life. I was constantly surprised, even amazed, at the vast number of fascinating thinkers never making their way into English language reporting on China. Something similar happened when I discussed political theory with Chinese of my generation. They would relate Zhihu debates between anons belonging to the “industrial party,” the “ruguanists,” the “auntologists,” and so forth. These debates were far more interesting—and intellectually serious—than America’s own anon flame wars. Even the teenagers and weebs posting on Bilibili seemed to be doing more intellectually compelling things than the long, reblogged whines emanating from Tumblr!
Dan Wang again -
This gets to heart of China’s problems—and these are not problems of cultural sterility. In my experience, Chinese intellectual life is often more vital and vibrant than what I see in the West. Back in 2017 I did a stint of copy editing work for China News Service. Many of the articles were boiler plate propaganda, but the most interesting covered controversies and happenings in Chinese literature, history, and social life. I was constantly surprised, even amazed, at the vast number of fascinating thinkers never making their way into English language reporting on China. Something similar happened when I discussed political theory with Chinese of my generation. They would relate Zhihu debates between anons belonging to the “industrial party,” the “ruguanists,” the “auntologists,” and so forth. These debates were far more interesting—and intellectually serious—than America’s own anon flame wars. Even the teenagers and weebs posting on Bilibili seemed to be doing more intellectually compelling things than the long, reblogged whines emanating from Tumblr!
Only a slice of this is ever available in English. Wang suggests the websites Chaoyang Trap House and Reading the China Dream for a tiny view into the vitality of Chinese internet culture and high intellectual life, respectively.
Music fests are expected to show explosive growth this year. These are not quite below the radar, but popular culture is not dead.
That is true for Chinese companies as well. Below the radar, Chinese companies make product improvements and share ideas and compete all the while CCP is hammering on the big tech and big real estate and big tutoring companies. CCP is not interested in stifling innovation. It is interested in stifling alternative sources of power.
Just a cultural comparison - How much of American popular culture – or literary culture, for that matter – could no longer find a popular audience due to shrieking from the left or direct government regulation? How about Blazing Saddles? How about Huckleberry Finn? China certainly restricts cultural production. But censorship is not unknown in the US, either.
Patents and innovation experts
The journal Nature prepares occasional indices of innovation, grant recipients, commercialization of inventions and the like. At the end of 2022 it published Is China Open to Adopting a Culture of Innovation? Their conclusion - Beset by regulatory issues and barriers to international collaboration, the country still faces challenges in commercializing basic research.
… China is still some way behind other leading research nations when it comes to widely used measures of innovation. It is still outside the top 10 in the World Intellectual Property Organization’s Global Innovation Index (GII), which ranks economies on a basket of metrics, behind Asian powers such as South Korea and Singapore. According to the report accompanying the 2022 GII, China leads in patents by origin, trademarks, industrial design and the size of its domestic market. However, the report identifies as “weaknesses” China’s regulatory environment, which includes the rule of law and environmental performance. China is also ranked well below the top 50 for GII metrics related to international relations, such as student numbers from abroad, joint ventures and foreign direct investment.
Nor do Chinese institutions appear in this Nature Index supplement’s list of the leading 50 organizations for innovation, based on how often they are cited by patents, although factors such as the time lag in patent-citation analyses and lack of local language coverage could be potential reasons. Outside the top 50, the highest ranked institution, the Hong Kong University of Science and Technology (HKUST) at 53, is based in the special administrative region of Hong Kong, outside China’s main higher-education and research system.
In a 2020 Foreign Affairs article Carl Benedikt Frey and Michael Osborne make the case for continued American dominance, even in artificial intelligence - China Won't Win the Race for AI Dominance. Their point is that even with great advantages in scale and timing, China can’t or won’t innovate in AI. Patent filings are not enough -
Decentralized experimentation and decision-making will likewise be critical if the world is to harness the benefits of artificial intelligence. China is at a disadvantage in this regard. The country’s recent surge in patent filings is often cited as evidence of its innovativeness, but simply counting patents isn’t a good way to measure innovation: studies show that ten percent of patents account for roughly 90 percent of total patent value, meaning that the vast majority are of little value. Patent citations offer a more useful indicator, and if we look at the 100 most cited patents since 2003, not a single one comes from China. Moreover, China’s leading artificial intelligence companies, including Tencent, Alibaba, and Baidu, are merely copies of Facebook, Amazon, and Google, tailored to the Chinese market.
Innovation requires collaboration. Voluntary international cooperation is likely to be better for all involved. But CCP takes the corrective plea of its cultural conservatives to heart – “look west for science, China for culture.” In other words, take what can be taken from western science and technology, but preserve the solitary excellence and institutions of Chinese culture. It is tough to take the science but not the freedoms. The government has worked very hard to follow this dictum, actually with quite a lot of success. We should also remember the flexibility of CCP to respond to situations at hand. If some greater openness to western investment or technology is needed, CCP can and will adjust. The only fundamental goal is CCP survival.
The role of the government in both fostering and stifling innovation is key. With the recent crackdowns on internet companies, real estate companies and tutoring companies, any Chinese has to wonder whether starting a company is worth the risk of a government taking, as was done post-1949. Pointedly, in 2023 Xi is seeking to reassure Chinese and foreign businesses that CCP will not swoop in, take them over and arrest the president. He is having to say this way too often now.
Of course, government plays an important role in the US as well. Government funding in - well, railroads going back to the 19th century – and semiconductors and solar and now AI is key. We remember that it was the Defense Department and its DARPA that created the internet. And we remember that Trump-era racism made life for Chinese researchers in the US much more difficult.
No one disputes the necessity for international cooperation in science and technology. There is a big But though. International cooperation right now is tough, due to political actions on both sides of the Pacific. But those restrictions can be lessened almost instantly, and to whatever degree Xi (on his end) decides is acceptable. And depending on the politics, restrictions can be lifted in one scientific discipline and not in others. There have been no crackdowns on more science-oriented industries like semiconductors or pharma.
More to the point of the question above, none of this has much to do with freedom of speech. Political and moral freedoms are about as relevant for most scientists as they are for most small businesspeople – which is to say, not much. Ability to read journal articles and submit articles and attend conferences is much more important.
China can’t innovate?
A well known Harvard business Review article from 2014 Why China Can't Innovate runs through the list – too much government money being thrown at science and technology, government picking tech industry winners, adaptation for its own huge market rather than going global, too much emphasis on state-owned businesses, too much use of partnerships with foreign companies, university governance structure, and a hide-bound memorization culture in college. After most of the article extolls Chinese advances in all those elements of success, the authors conclude that CCP interference is the problem - The problem, we think, is not the innovative or intellectual capacity of the Chinese people, which is boundless, but the political world in which their schools, universities, and businesses need to operate, which is very much bounded.
It seems that the political world need not impede at all. Dan Wang again in China's Hidden Tech Revolution - How Beijing Threatens U.S. Dominance (Foreign Affairs, April 2023).
In 2007, the year Apple first started making iPhones in China, the country was better known for cheap labor than for technological sophistication. At the time, Chinese firms were unable to produce almost any of the iPhone’s internal components, which were imported from Germany, Japan, and the United States. China’s overall contribution to the devices was limited to the labor of assembling these components at Foxconn’s factories in Shenzhen—what amounted to less than four percent of the value-added costs.
By the time the iPhone X was released, in 2018, the situation had dramatically changed. Not only were Chinese workers continuing to assemble most iPhones, but Chinese firms were producing many of the sophisticated components inside them, including acoustic parts, charging modules, and battery packs. Having mastered complex technologies, these firms could produce better products than their Asian and European competitors. With the latest generation of iPhones, this pattern has only accelerated. Today, Chinese tech firms account for more than 25 percent of the device’s value-added costs.
Although the iPhone is a special case—as one of the most intricate pieces of hardware in existence, it relies on an exceptional range of technologies—its expanding footprint in China captures a broader trend. In a majority of manufactured goods, Chinese firms have moved beyond assembling foreign-made components to producing their own cutting-edge technologies. Along with its dominance of renewable power equipment, China is now at the forefront of emerging technologies such as artificial intelligence and quantum computing. These successes challenge the notion that scientific leadership inevitably translates into industrial leadership. Despite relatively modest contributions to pathbreaking research and scientific innovation, China has leveraged its process knowledge—the capacity to scale up whole new industries—to outcompete the United States in a widening array of strategic technologies.
Wang describes the “communities of engineering practice” (a Brad DeLong term) that translate ideas into designs, designs into prototypes and prototypes into products – all the while seeking improvements and advantages. This is nothing new. Alfred Marshall asked why firms in the same industry were often geographically near each other. Proximity, he said, created something “in the air”: “…if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas.” Manufacturing clusters are well-understood. We’ve have furniture in the American south, Silicon Valley in the west, steel in the Midwest. No country has consciously developed manufacturing clusters better than China and that is now a major advantage. Sharing and competing happen at the same time. Process engineering and process improvements lead to new designs and new products and … well, innovation and GDP.
CCP members are the bourgeoisie
Part of the answer about innovation lies in the middle class. The middle class in China is … roughly … 300,000,000 people, or more. These are people who have steady jobs, can send their kid(s) to decent schools, can go on vacations and buy cars and maybe more than one apartment. They have some disposable income. The number of CCP members is about 100,000,000. With some overlap in two CCP-member families, but toss in a kid and a couple of grandparents … well, you can do the math about who is the middle class in China. Not all CCP members are middle class, many are retired, and not all middle class people are CCP. But the overlap is significant. None of these people see themselves as proletarians needing to be led. Nor do most of them see themselves as a vanguard of anything but a solid future for their kid. The CCP are the bourgeoisie. Many of them are comfortable in intellectual and political discussions, if done one to one. They know what they give up. They make the fully informed tradeoff. Knowing what they give up is quite possibly sufficient to give them peace of mind.
I can attest that many of the CCP officials I have met or had in class are able to conduct sophisticated intellectual discussions on philosophical or cultural topics – in English – with anyone. They are culturally adept and not technocrats. And I can attest to a vibrant life of art and music running right below the censors.
Employment and innovation scholar Carl Benedikt Frey reminds us that in the 1980s we all thought Japan would overtake the US in GDP and technology. That didn’t happen. Frey argues that data alone – which gives China a big advantage – is not sufficient for tech leadership. The argument has been that because data is centralizing, authoritarian governments are better able to encourage AI innovation than democratic ones. He notes that decentralized decision-making and experimentation are key to innovation, and China’s top-down management will make that difficult. CCP wants to pick winners, and that does not lend itself to creativity. “But radical innovation is a different matter, and historically, the most innovative societies have always been those that allowed people to pursue controversial ideas…. Under Xi, the Chinese Communist Party has stepped up efforts to penetrate private-sector businesses and consolidate political power. A surveillance state with a censored Internet, together with a social credit system that promotes conformity and obedience, seems unlikely to foster creativity: innovation is about breaking the rules, not abiding by them.”
Frey cites economic historian Joel Mokyr that the industrial revolution happened in the west rather than in China because European governments were more open to new and competitive ideas. Mokyr sees the evolution of a “republic of letters” – informal networks of tinkerers, inventors, thinkers, philosophers - as critical to European development success.
I think Mokyr makes an excellent point. I also think such networks are readily available now, with a couple of clicks – if Xi wishes. The networks were available in the Hu Jintao era. They can be again.
Frey is a serious and oft-cited scholar of innovation. I think he is not sufficiently caught up on Chinese business or academic research, and puts too much emphasis on CCP domination of big businesses. CCP survival is the only fundamental goal. For forty years that has translated to “grow GDP.” The means with which to grow GDP must change, but change it will. It is critical to survival.
Move Along- Nothing to See Here ... la la la
Back to the 2014 HBR article Why China Can’t Innovate - The authors actually made a convincing case for emergence of Chinese excellence, and then, fearful of saying yes, said no to Chinese innovation. They already admitted to the inventiveness of the Chinese people – see the quote above. They did not understand ability of CCP to adapt. An American lawyer would have a field day in cross examination.
In 2021 Zak Dychtwald wrote an HBR update to the “can’t innovate” article – China's New Innovation Advantage. The bottom line - China is achieving a new level of global competitiveness, thanks to its hyper-adaptive population.
China now has at its disposal a resource that no other country has: a vast population that has lived through unprecedented amounts of change and, consequently, has developed an astonishing propensity for adopting and adapting to innovations, at a speed and scale that is unmatched elsewhere on earth.
It’s that aspect of China’s innovation ecosystem—its hundreds of millions of hyper-adoptive and hyper-adaptive consumers—that makes China so globally competitive today. In the end, innovations must be judged by people’s willingness to use them. And on that front China has no peer.
Chinese have lived through extraordinary change in the last forty years – even more in the last seventy. From the Dychtwald article - you might ask yourself how living through that sort of change would shape your expectations for progress and your sense of what government, technology, and commerce can do…. The point here is not that any one culture is better at innovation but, rather, that certain developmental ecosystems create naturally different attitudes toward change, adoption, and newness. More than any other population in the world, the Chinese in recent years have had to adapt to radical change—and they have learned that innovative technologies can be key to their survival.
Compare that with what we perceive as an American inability to do anything now. Fear of lawsuits. Hamstrung government. Lack of money. Oligarchy. Guns. Preoccupation with trivia. Above all – forgive me – there is very little “can-do” attitude.
We think of American businesses as intensely focused on consumer desires. If anything, that is even more the case for internet and finance companies in China. From the 2021 Harvard Business Review - China's New Innovation Advantage. A couple of Chinese adaptations, demonstrating willingness of companies and CCP to adapt -
Item 1 -
Chinese regulators did the unprecedented by granting banking licenses to two nongovernmental tech giants, Alibaba and Tencent, at the expense of state-owned lenders. Without that support the Chinese mobile-payment rocket wouldn’t have left the ground.
Item 2 -
Similarly, the online and offline retail ecosystems in China are merging in ways that are years ahead of what’s happening in the United States. In Chinese grocery and convenience stores, it is now commonplace to see rows of QR codes below meat and produce. Scanning a QR code with a smartphone will reveal the product’s entire story, from, say, where a cut of salmon was sourced to how far it was shipped. Similarly, scanning a tech product in a store can bring up the brand video and user ratings. This is what Alibaba calls New Retail, and it could well become the global norm, because it allows brands to deepen their relationships with customers directly. Nearly all multinationals operating in China have adopted this sort of digital-first, China-forward strategy. (U.S. companies operating there have rolled out far more advanced versions of this strategy than the ones they currently use at home.)
Dychtwald from above - … its hundreds of millions of hyper-adoptive and hyper-adaptive consumers …. Market scale is one advantage mentioned by Michael Porter in his 1990 The Competitive Advantage of Nations (link is to the HBR article, not the book). Porter examines the conditions under which an industry and a nation become competitive.
The Porter book deserves a little more note here. He developed a diamond of four interrelated attributes of a nation that individually and together work in favor of national competitive advantage. These determinants create the national environment in which companies are born and learn how to compete. Each point on the diamond—and the diamond as a system—affects essential ingredients for achieving international competitive success. The four attributes are –
1. Factor Conditions. The nation’s position in factors of production, such as skilled labor or infrastructure, necessary to compete in a given industry.
2. Demand Conditions. The nature of home-market demand for the industry’s product or service.
3. Related and Supporting Industries. The presence or absence in the nation of supplier industries and other related industries that are internationally competitive.
4. Firm Strategy, Structure, and Rivalry. The conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry.
China has assembled a manufacturing system that is unrivaled in all four of these attributes. With a government - including funding of science – that sees development as a key national goal, there is no reason to expect China to lose its position. The exception would be the national demographic decline, in which the working age population is now falling by 5 to 7 million per year, with attendant rising national costs for health care and pensions. I can’t make the call on that factor. But science and technology will always be available from outside if needed. Capitalism doesn’t much care about political and moral freedoms, either.
Shan Weijian summarizes Chinese development now in another 2021 Harvard Business Review piece - “Americans Don’t Know How Capitalist China Is” -
What is it that Americans don’t understand about China?
They don’t know how capitalist China is. China’s rapid economic growth is the result of its embrace of a market economy and private enterprise. China is among the most open markets in the world: It is the largest trading nation and also the largest recipient of foreign direct investment, surpassing the United States in 2020. The major focus of government expenditure is domestic infrastructure. China now has better highways, rail systems, bridges, and airports than the United States does. For example, over the past 15 years it has built the longest high-speed rail system in the world. At 22,000 miles, it is twice as long as the rest of the world’s combined. China’s high-speed rail could cover the distance between Boston and Chicago in about four hours, whereas Amtrak’s fastest service takes 22 hours….
A final point – Alibaba, Huawei, Tencent and Baidu are privately built companies that emerged under CCP. The thousands – thousands – of small shops tinkering, adapting, cooperating and also looking for advantage in Shenzhen, Guangzhou, Beijing, and Shanghai are completely under the radar of CCP. The world acknowledges that supply chains are nowhere deeper and more diversified. (Supply chains are part of the Michael Porter analysis as well). Those businesses are no more bothered by government than a small business is in the US. They are no not bothered by lack of political and moral freedoms in China. No question but that the big tech companies need to pay obeisance to CCP. But they were all once small. How did they get to be so big?
Many economic historians see the first industrial revolution starting in the Song dynasty, around 900 CE. Chinese were tinkerers, inventors, copiers, adapters extraordinaire.
You might know part of the Song dynasty story. In 1078, China produced 125,000 tons of cast iron, more than the rest of the planet put together. This would not be surpassed until the 1790s in Britain. A whole range of technological breakthroughs and improvements were made. These included movable type printing (1000), the blast furnace (1050), mechanical water clocks (1090), paddlewheel ships (1130), the magnetic compass (1150), water-powered textile machinery (1200), and most dramatically, huge oceangoing junks with watertight bulkheads, a carrying capacity of 200 to 600 tons, and a crew of about 1,000 (1200).China had the world’s largest GDP until the Ming.
The Yuan, Ming and Qing did bring the hammer down on change. You know the adage – guoxin, mintui the state advances, the private retreats. CCP is the dynasty now, but in a decade or less Xi will be gone.
Prohibitions on free speech and writing and thinking and heavy censorship of foreign work can have regime-challenging impacts, and affect ability to innovate. One can make an argument that authoritarian regimes can eventually collapse because of misadventures with neighbors and adversaries, spurred in part by failure to get accurate or truthful information from outside. Wars and military buildups draw resources from more productive work, and lack of moral freedoms makes the misadventures that end in war more likely. This could be the case for China, with its aggressive posture toward all its neighbors except Russia. (The USSR drained its own resources with a war in Afghanistan). Russian Siberia, though, could be an enormous long lasting gift to China in the next decade when resource development begins.
Refuting #2a – If innovation slows, so what?
The follow-on question – even if indigenous innovation were to flag, what of it? Of course the quickfire answer for China and the US is greater exposure to military risks, whether within the country or for allies. You remember - “… We must not allow … a mine shaft gap!” Fear is always a great motivator.
Another fear comes from monopolistic domination by leading companies, wherever their loyalties lie. The largest companies in the highest tech industries are able to act like monopolists, particularly if their supply chains are loyal only to them. The current fear is over rare earth metals, used in all computers and cell phones and electric vehicle batteries. Chinese companies, loyal to CCP, have a distinct advantage in this regard. This is the civilization state concept that China observers from Lucian Pye to Christopher Wray have warned us about. All individuals, all businesses are expected to work for CCP.
It is acknowledged that much of China’s technological savvy is due to purchase or IP theft from western companies. A good example is that of designs for military planes and ground vehicles. The exterior physical similarities are surprising. Pictures are available at the US Naval Institute. But IP consists less and less of individual technique and more cooperative effort, whether at a bench, in a lab or shop. That cooperative effort must be documented. Given that documentation is always available online somewhere, one wonders how long any western advantage could be maintained when tech transfer happens with a couple of clicks. Most researchers and scientists are honest. But threats to family back home can elicit surprising cooperation. The surreptitious Chinese police stations located in cities in the US and Europe work pretty hard to obtain cooperation with CCP, voluntary or not.
Innovation in any industry is not a smooth process over time. There are fits and starts, attributable to scientific knowledge frontiers or sometimes government meddling. Right now, China is experiencing a problem with meddling. National tax or regulatory policies can freeze development, and Xi has done that. Real estate and construction, after-school tutoring, social media and online purchasing have been directly affected. The Xi era has been particularly bad for assessing risk, contrary to the Hu Jintao era.
Francis Fukuyama suggests that lack of any respected succession mechanism in China gives rise to a "bad emperor" problem. A stupid or misguided leader who cannot be removed spells the end of a dynasty. In the US we now see that a democracy is able to recover, however tentatively and wounded, from bad emperors. In the current Chinese case, Xi will have to die or be replaced in some dangerously confused way. Its quite clear that Xi will not be good for innovation. He may slow China development substantially, unless IP theft can replace it.
But there is far more to research and innovation than these high profile industries. In advanced materials, composites and nanoscale materials, AI algorithms, electric batteries and fuel sources, hypersonic engines, photovoltaics, biotech and gene technology, critical metal processing – among other industries – China is said to have a significant advantage over the US, per a 2023 detailed analysis from the Australia Strategic Policy Institute. Much of the work in these fields is still in the basic science stage. CCP does not really intrude there.
(N.B. – the ASPI report is worth exploring in some detail. Available at https://www.aspi.org.au/report/critical-technology-tracker)
The pace of innovation can become a totalizing scare concept in the US, much like GDP. For some of us, all other elements of the economy, all values, must bow to innovation and furtherance of GDP. This is a version of the McKinsey “you-must-do-everything now, now, now” screech. Nothing must be permitted to diminish innovation or GDP. A more astute thinker than I suggests that we have become accustomed to placing value only on those things we can measure. CCP is not immune to that sort of feverish pressure.
Even though CCP promotes a rational, measurable approach to governing – everything should be scored numerically and GDP growth is still the most honored goal – China takes a more holistic perspective in practice. CCP allows for values greater than innovation or GDP growth, as we see with the recent crackdowns on several of the largest industries in China – online tech, tutoring, and real estate. The greatest goal is to remain in power.
Crackdowns in those industries address CCP fears of alternative sources of power and fears of excessive debt. Others parts of the economy can remain unaffected directly. If CCP wants to restrict the flow of ideas from outside the country, that is a government preference. Restrictions help maintain internal stability, perhaps at the cost of less or slower innovation or GDP growth.
Let us suppose that China begins to fail at innovation. What can this mean? Will investment in medicine or technology cease? No. Perhaps patents will not come as quickly, or patents in China will not be honored so much outside China. This latter is already true. Most patents are of no commercial value.
We know GDP and pace of innovation are poor proxies for societal health. Paul Krugman makes the critical argument in a short NYT piece High GDP is great, but a vacation might be nice, too. He considers Japanese GDP growth since 1990, when we all thought Japan was going to outperform the US.
He notes that neither Japan nor France feel “behind” even though US GDP has grown much faster. And, pointedly, neither Japanese nor European societies feel as if they are in decline, while American society certainly feels that way. Productivity per worker is higher in the US, but not by that much. The French take vacations, he notes, and work-life balance is important as well. The European social democracies spend much more on people-oriented policies than do the US or China. Government spending in the US – and in China – on education and health care and pension reform would help people, even at the short term cost in GDP.
Most observers see the China miracle as studious copying of inventions made elsewhere. This has happened rather too often with IP theft, as with development of the high speed trains and its first commercial airplane. Even the big tech companies, Alibaba, Baidu and Tencent are modeled closely on the original American counterparts. China has been superb at taking inventions made elsewhere and adapting and improving them for the Chinese market. A critical idea – at some point, the ability to adapt and improve becomes the basis for indigenous innovation. In a different context, that is what Japan did about 115 years ago. It took bicycle technology and developed a motor bike and then automobiles. It is what the young US did, copying British methods and adapting them, and then innovating from there.
The book on Chinese development is that China is a catching-up economy, based on adaptation of thing invented elsewhere. What is needed next, it is argued, is long term thinking based on “academic curiosity and freedom” (Marina Yue Zhang in Demystifying China’s Innovation Machine. Cited in Nature, Is China Open to Adopting a Culture of Innovation? December 21, 2022).
Once you become adept at adapting, future invention becomes much easier. No country has deeper tech supply chains than China, thousands of small businesses looking for a break or a new thing. To suggest that these thousands of small businesses or scientists in labs are incapable of thinking outside somebody else’s box is to ignore the long Chinese history of tech dominance and ignore the PhDs and methods learned by thousands of Chinese researchers in the US.
Sea turtles and finance
China has a major success story in getting researchers once in the US or elsewhere in the west to return to China. The anti-China rhetoric from our former dear leader and the “China Initiative” of the Department of Justice served as a push to get researchers out of the US. Now the Organization for Economic Cooperation and Development (OECD) has published data show the US losing scientific talent to China and other countries, reported in Modern Diplomacy. In 2021, the US lost research scientists to other countries, mostly China, which gained more than 2,408 scientific authors. This was a remarkable turnaround from as recently as 2017 when the United States picked up 4,292 scientists and China picked up just 116. The trend began before the pandemic.
It is not just the push from the US. For more than a decade, a few Chinese cities have been building rather fabulous office and lab complexes to attract “sea turtles” – Chinese researchers living and working overseas - back to China. Offers are tantalizing - very large salaries, promises of lab assistants, fully equipped labs. This is good long term thinking. There have been quite a few successes with this policy, particularly as Chinese in the US come under suspicion of surreptitious cooperation with CCP.
In 2015, plans were being made in Ningbo and its nearby island of Zhoushan for back-office finance buildings, to be used when Shanghai replaced Hong Kong as a global financial center. This was following the 2014 Hong Kong protests. In Hangzhou, there are at least two new office high-rises built to accommodate startups or research related to Alibaba.
Real estate development does not imply scientific or tech breakthroughs. But China is willing to invest in people and their research needs. The Thousand Talents Program is the term for these “reverse brain-drain” efforts in China.
There is, of course, plenty of writing about China tech and innovation. For me, it is telling that none – none - of the research I have read sees moral or political freedom as a constraint. Censorship and political influence are sometimes cited. But within China censorship does not extend to colleagues discussing ways to improve a product, or a different way to isolate a protein or a molecule. True, they can’t get so much information directly from the west. But it can always be stolen or obtained via a Thousand Talents researcher. CCP doesn’t mind those ways of getting around the censorship.
Free to speak, associate, write, form groups as you wish - not
It seems to me Xi’s crackdowns have little to do necessarily with free speech, etc. The current environment is particularly hostile. But tech people, inventors, small business owners are intensely focused on their work, not on freedom to criticize the government. In 2016, my Chinese government friends likened the Xi regime to the early Cultural Revolution. Successful businessmen are at personal risk if they fail to pay sufficient homage to CCP – once they get large enough to matter to CCP. Wang Jianlin, founder of Dalian Wanda, and Jack Ma, founder of Alibaba are two prominent examples.
But at a much lower level of public visibility Chinese researchers and academics could get outside access if Xi wanted to allow that. Censorship can be as localized as a part of a university campus, leaving access free for particular buildings. When the crackdowns were beginning, Xi's baby - the Wenzhou-Kean University in Wenzhou - had access to Youtube and Google and the NYT. I used them myself.
Censorship has always been as particular, or not, as senior leaders wish. For about two months in 2010, internet access at the foreign student dorms and the foreign teacher dorm was severely restricted at my school in Hangzhou. There was no problem at all anywhere else on campus. In 2014 and 2015 one of my computers in China was blocked from any internet access at all. My other computer worked fine. Censorship can be fine-tuned.
