china ’ s path to indigenous innovation
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China ’ s Path to Indigenous Innovation. William Lazonick and Yin Li. Conference on Finance, Business Models, and Sustainable Prosperity New York City, NY December 7, 2012. Outline of the paper. Productive capabilities and economic development in China Infrastructure investment - PowerPoint PPT PresentationTRANSCRIPT
China’s Path to Indigenous Innovation
William Lazonick and Yin Li
Conference on Finance, Business Models, and Sustainable Prosperity
New York City, NYDecember 7, 2012
Outline of the paper
Productive capabilities and economic development in China
Infrastructure investment Physical infrastructure Human infrastructure
Technology transfer Sino-foreign joint ventures Reverse brain drain
Indigenous innovation Computers, Automobiles, Telecom Equipment,
Semiconductors
China in comparative economic development
The analysis of China’s path to indigenous innovation considers dynamic interaction among
China’s path: the framework
(State) investments in physical and
human infrastructure
Technology transfer from advanced
nations
The formation and growth of
indigenous companies
The Theory of Innovative Enterprise: Key concepts and questions
Strategic control• Who makes innovative strategy?
– importance of the abilities and incentives of those who exercise strategic control in the firm
Financial commitment• How is investment in the innovation process sustained?
– sources of financial commitment that sustain technological transformation and market access
Organizational integration• What types of innovative investments do they make?
– need for the organizational integration of skill bases that can generate collective and cumulative learning
China’s Path in Cross-National Historical Perspective
An understanding of China’s path to indigenous innovation is important
to China: Will China’s path result in equitable and stable economic growth, i.e., sustainable prosperity?
to developing economies: They can learn from China, and must seek to develop in the presence of China.
to advanced economies: The challenge for the advanced economies is how to remain innovative themselves. For example, major US corporations that are making ample profits in China are failing to reinvest them to upgrade their innovative capabilities in the United States
Outline
Productive capabilities and economic development in China
Infrastructure investment Physical infrastructure Human infrastructure
Technology transfer Sino-foreign joint ventures Reverse brain drain
Indigenous innovation Computers, Automobiles, Telecom Equipment,
Semiconductors
Comparative economic development
Physical Infrastructure Investment
Investment through government programs and state-owned enterprises (SOEs) The surge of infrastructure investment in China started in
1993 with the restructuring of ministries into state-owned enterprises
The case of the automobile industry: government investment in road construction and SOE’s capacity of steel production enabled the car industry The world’s largest steel producer is dominated by SOE steel
mills Highway expansion driven by government programs:
National Trunk Highway System (1990), National Expressway Network (2004)
Physical Infrastructure Investment
Increased automobile production enabled by investment in road infrastructure
Human Infrastructure Investment
Education A commitment of 2% of GDP in education since 1952 except
the years of Cultural Revolution (1966-1976) Compulsory nine years of schooling in the 1990s Rapid expansion of tertiary education in the 2000s,
particularly in engineering
Human Infrastructure InvestmentCountry Completed post-secondary Average years of school
% pop., 25yrs.+ 1960 1980 2000 2010 1960 1980 2000 2010
USA 9.4 18.1 30.6 31.6 8.9 11.9 13.0 13.3
Japan 3.0 8.9 19.0 23.9 7.2 8.9 10.7 11.5
Hong Kong 3.1 4.1 7.2 7.2 4.4 6.7 8.7 10.0
Singapore 0.9 2.1 7.8 12.3 2.8 3.7 7.6 8.8
South Korea 1.9 6.6 14.8 17.3 3.2 7.3 10.6 11.6
Taiwan 2.4 4.7 8.0 10.6 4.6 6.4 9.6 11.0
Indonesia 0.1 0.3 1.7 1.6 1.1 3.1 4.8 5.8
Malaysia 0.7 0.5 3.1 5.0 2.3 4.4 8.2 9.5
Philippines 4.5 9.8 19.8 22.4 3.7 6.1 8.0 8.7
Thailand 0.4 2.9 5.1 8.9 3.4 3.7 5.4 6.6
Brazil 1.1 3.7 5.3 5.2 1.8 2.6 5.6 7.2
Mexico 1.1 3.9 10.2 13.9 2.6 4.0 7.4 8.5
Chile 1.8 3.3 9.5 11.6 5.0 6.4 8.8 9.7
Costa Rica 2.1 5.2 12.9 13.2 3.7 5.4 8.0 8.4
China 0.4 0.6 2.8 4.0 1.4 3.7 6.6 7.5
India 0.4 1.5 3.2 3.7 0.9 1.9 3.6 4.4
Post-secondary school completion rates and average years of schooling, selected nations. Source: Barro and Lee 2010
Human Infrastructure Investment
S&T system A small elite S&T system established in the 1950s In the 1980s, establishing national R&D programs Allowing spin-offs from PROs since 1984 Transformation of research institutions to business entities
(1980 - 1995) Reorganizing S&T programs and increasing funding (1997- )
Human Infrastructure Investment
Human Infrastructure Investment
Outline
Productive capabilities and economic development in China
Infrastructure investment Physical infrastructure Human infrastructure
Technology transfer Sino-foreign joint ventures Reverse brain drain
Indigenous innovation Computers, Automobiles, Telecom Equipment,
Semiconductors
Comparative economic development
Technology Transfer through JV
“Trading Markets for Technology” (1980-2001) Goal: import substitution and technological learning Method: foreign companies were invited to invest in JVs with
Chinese SOEs in exchange for market access to China
First JV in telecom equipment manufacture approved in 1984
Heavy investment from the Chinese government in terms of financial and human resources put in
Technology transfer via Product localization Training engineers
Technology Transfer through Reverse Brain Drain
Technology Transfer through Reverse Brain Drain
As an outcome of economic development, the inflow of returnees sharply increased in the 2000s
Internet boom in late 1990s brought back the first wave of returnee entrepreneurs
Government strategy of competing for returnees Liberalization of migration control in the 1990s Central government’s investment in S&T system created
demands for returnee scientists and engineers starting in 1997
Local governments compete for high-tech ventures founded by returnees
On the path to indigenous innovation China now dominates US Advanced
Technology Product imports China’s share of US ATP imports increased from 5.5%
in 2000 to 33.5% in 2011, primarily because of China’s position in US-dominated global value chains
In 2011 China absorbed 7.0% of US ATP exports, after NAFTA nations Mexico (11.1%) and Canada (10.6%)
In 2011 China accounted for 54.0% of ICT imports,30.3% of opto-electronic imports, and 17.1% of weapons imports to the United States
In 2011, ICT represented 88.4% of US ATP imports from China, followed by opto-electronics at 6.1%
2000 2002 2004 2006 2008 2010 2011
Total US ATP imports $m. 195,660 196,100 238,478 290,848 331,170 354,195 386,005
China 5.5 10.2 19.2 25.0 27.6 32.6 33.5
Mexico 6.6 8.3 9.3 10.6 12.2 13.8 12.4
Japan 17.8 12.1 10.0 8.9 8.1 6.6 6.6
Ireland 3.4 6.7 5.6 4.9 5.3 4.9 5.6
Taiwan 7.6 6.8 5.4 4.8 4.2 4.3 4.8
South Korea 7.0 7.1 7.5 4.7 4.9 4.9 4.5
Malaysia 6.5 7.7 7.6 8.6 6.1 4.3 3.7
Canada 10.4 7.0 5.8 5.1 5.0 3.6 3.5
Germany 4.5 4.1 4.0 3.9 3.5 2.9 3.3
France 4.8 4.9 3.7 3.4 3.6 2.9 2.9
China central to globalization of US high-techUS ATP Imports, 2000-2011: % shares, top 10 nations, 2011
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2000 2002 2004 2006 2008 2010 2011
Total US ATP exports $m. 225,415 180,629 201,454 252,569 270,072 273,344 286,718
Mexico 6.7 7.0 8.2 7.4 7.3 10.0 11.1
Canada 11.4 9.6 10.1 9.3 10.0 10.1 10.6
China 2.4 4.6 4.7 7.0 6.4 7.8 7.0
Japan 9.8 9.3 9.0 7.7 6.5 5.7 5.5
UK 7.4 5.9 6.0 5.0 5.2 4.4 4.9
Germany 5.5 5.2 4.6 5.1 6.4 6.1 4.7
Brazil 2.6 2.2 2.2 2.8 4.0 4.0 4.1
South Korea 6.0 5.4 5.1 5.6 3.8 4.0 3.9
France 4.1 4.7 4.6 4.0 4.0 3.9 3.6
Singapore 3.9 4.5 5.0 4.8 4.3 4.0 3.6
China absorbs US high-tech exportsUS ATP Exports, 2000-2011: % shares, top 10 nations, 2011
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Source: www.census.gov/foreign-trade/statistics
2011 2010 2009
Advanced Technology Products Exports Imports Exports Imports Exports Imports
US ATP trade, $m 286,718 386,005 273.343 354,196 244,708 300,892
China as % of US ATP Category
Biotechnology 2.3 0.4 1.4 0.8 1.0 0.8
Life Science 7.9 3.9 7.1 3.6 6.3 3.3
Opto-Electronics 5.4 30.3 7.5 29.1 4.5 28.0
ICT 4.3 54.0 5.2 49.9 5.4 46.6
Electronics 11.1 9.9 14.1 10.0 14.2 8.1
Flexible Manufacturing 14.5 5.3 14.4 7.1 9.4 6.9
Advanced Materials 10.1 8.0 9.9 8.3 14.9 7.3
Aerospace 7.2 1.8 7.1 1.7 6.4 1.4
Weapons 0.1 17.3 0.0 15.7 0.0 14.0
Nuclear Technology 3.7 6.9 1.8 0.0 1.4 0.0
TOTAL 7.0 33.5 7.8 32.6 7.0 29.8
Importance of US ATP imports from China, especially ICT and Opto-Electronics
Source: www.census.gov/foreign-trade/statistics
2011 2010 2009
Advanced Technology Products Exports Imports Exports Imports Exports Imports
US ATP trade with China, $m 20,134 129,486 21,445 115,632 17,202 89,674
% Distribution of US Trade with China by ATP Category
Biotechnology 1.0 0.0 0.8 0.1 0.7 0.1
Life Science 11.5 1.4 9.2 1.3 9.3 1.4
Opto-Electronics 1.6 6.1 2.2 6.5 1.2 7.3
ICT 18.9 88.4 18.8 88.4 20.8 88.1
Electronics 23.4 2.5 30.3 2.4 30.7 1.9
Flexible Manufacturing 10.2 0.6 10.7 0.6 4.6 0.5
Advanced Materials 1.1 0.1 1.0 0.1 1.5 0.1
Aerospace 31.9 0.5 27.0 0.4 31.1 0.5
Weapons 0.0 0.1 0.0 0.1 0.0 0.1
Nuclear Technology 0.4 0.2 0.2 0.0 0.2 0.0
TOTAL 100.0 100.0 100.0 100.0 100.0 100.0
Concentration of US ATP imports from China in ICT
Outline
Productive capabilities and economic development in China
Infrastructure investment Physical infrastructure Human infrastructure
Technology transfer Sino-foreign joint ventures Reverse brain drain
Indigenous innovation Computers, Automobiles, Telecom Equipment,
Semiconductors
Comparative economic development
Indigenous innovation in China
Pioneering study of China’s emerging ICT sector, published in 2000 by the late Qiwen Lu
Studies of Stone Group,
Legend Computer (Lenovo), Founder Group,
China Great Wall Computer
See the summary of Lu’s work in W. Lazonick, “Indigenous Innovation and Economic Development,” Industry & Innovation, 11, 4, 2004.
In 2006, “indigenous innovation” became the centerpiece of China’s Medium and Long-Term Plan for Science and Technology
Indigenous Innovation in the 1980s-- Computer Electronics
The cases of Stone, Legend, and Founder Non-government S&T companies were autonomous business
enterprises allowed by early reform Availability of S&T infrastructure provides technological
resources for indigenous innovation Stone: electronic printers with Chinese-character output capability Legend: Chinese word-processing add-on card Founder: EPS with Chinese-character capability
Restraint from the state in extracting rents from enterprises Strategic control over revenue allowed firms to invest in
R&D and organizational capabilities, while luring key employees from the state sector
Indigenous Innovation in the 1990s-- Automobiles
The cases of SOE and JV automakers The goal of technological learning in auto JVs was practiced
as product localization. Massive expansion in capacity as a result of this strategy Neglecting product development resulted in ceding strategic
control to foreign partners
All the cars in China
• In 2010 China produced 13.9 million cars, 23.8% of the world total, about 37,000 cars greater than the combined production of Japan (8.3 million) as number two and Germany (5.6 million) as number three.
• In 2010 no indigenous Chinese companies were represented among the top 16 car producers in the world, although combined the top 16 companies (six Japanese, three each German and American, two French, and one each South Korean and Italian) produced 8.6 million cars in China.
• Of the next 27 largest car producers in the world, however, 19 were Chinese, with a total output of 5.9 million cars, or 42% of China’s car production. (Note: There is some double-counting between foreign and indigenous producers because of JVs.) (www.oica.net)
Indigenous Innovation in the 1990s-- Telecommunications Equipment
The cases of Huawei and ZTE Huawei and ZTE were non-governmental companies
excluded by TMFT, but which stressed an indigenous innovation strategy
The indigenous discovery of “HJD-04 ” digital telecom switch model in 1991
Tapped into technological resources provided by JV investments as well
They grew by committing to technological learning as well as investing in organizational capabilities neglected by MNCs and JVs to cater to the growing Chinese market.
Innovation and competition in the communication technology industy
Rankings 2008 2009 2010 2011
1 Nokia NokiaNokia-
SiemensEricsson
2 Ericsson Ericsson Ericsson Huawei
3Alcatel-Lucent
Motorola HuaweiAlcatel-Lucent
4 MotorolaAlcatel-Lucent
ZTENokia
Siemens
5 Nortel HuaweiAlcatel-Lucent
ZTE
Source: iSuppli
Indigenous Innovation in the 2000s--Semiconductors
The case of SMIC Returnee entrepreneurs and technologists
were allowed to take strategic control of domestic firms
Through the returnee entrepreneurs’ global contacts, such firms are able to tap into a very large pool of engineering and management talent – the expatriate community
Global recruiting accelerates the process of absorption of foreign technologies
Competing local governments are major early investors
Conclusions
China’s Path as an Unfolding Phenomenon: Catching up with History A case of the success of the developmental
state in fostering a dynamic of growth depends on the emergence of innovative enterprises
Future studies should integrate the case of China into cross-national comparative-historical analysis of the process of economic development and changes in international economic leadership
With the framework that we have presented, informed by a theory of innovative enterprise, we can follow China’s development in real time, a process that we call “catching up with history”
Thank you!