Global Implications of China’s Policies on Indigenous Innovation
The first official political support for indigenous innovation by the Chinese government was launched at the Fifth Plenary Session of the 16th Central Committee in October 2005 (Shiliu 2005). Subsequently, the concept was used repeatedly in the announcement of the Medium and Long-term Program for Science & Technology (MLP) launched in 2006, which specifically announced that indigenous innovation products would receive preference in public procurement (State Council 2006: Section 8, point 3).
The MLP identified 11 priority areas and a number of key megaprojects in selected areas of engineering and science to be developed over the next decade and a half, and which were to be provided with substantial government funding (Cao et al. 2006; Serger and Breidne 2007). It also outlined a number of concrete policy instruments, including public procurement favouring indigenous innovation, and strategies for developing Chinese intellectual property rights (IPR) and Chinese technology standards. Such policy instruments reflect an international trend in innovation theory that underscores the vital importance of supporting the demand for innovation in society in addition to the traditional emphasis on the supply of new knowledge, such as funding public or private R&D (Bloom et al. 2019).
The Chinese literature on indigenous innovation developed rapidly after the concept was launched in the 2000s. A review of papers published during 2003–12 revealed that around 500 articles were concerned with the policies supporting indigenous innovation, while 150 addressed the ways in which indigenous innovation was implemented (Yang and Liu 2014). Chinese authors were mostly concerned with the balance between domestic and foreign sources of technology, and how policies could reduce the dependency on foreign technology transfer. Discussions of Chinese policies on indigenous innovation published in Western languages have also addressed such issues, but have been primarily concerned with the political and international implications, especially for the United States of America (US).
This chapter reviews the policy instruments introduced in China to promote indigenous innovation, considering international reactions and contexts (see also Baark 2019). This leads to two key arguments: Firstly, the promotion of indigenous innovation is an integral feature of China’s long-term ambitions for self-reliance; in this sense, it is not a “new” policy but rather a concretisation of the general principle, through policy instruments that have become more prominent internationally. Secondly, while Chinese ambitions to build national capabilities for indigenous innovation are likely to challenge other countries that fear technological competition, they may also provide an important platform for introducing new modes of innovation and perhaps offer innovations which are significant contributions to future global development.
The Definition of “Indigenous Innovation”
The terms “indigenous innovation” or “independent innovation” are the English translations of the Chinese term zizhu chuangxin, with the literal meaning independent, or autonomous, innovation. The literal meaning thus underscores sovereignty, that is, the need for China to be able to exert control and ownership over the innovation. The concept of indigenous innovation was defined in the MLP in the following terms (State Council 2015, “Guiding Principles” [Section 2, point 1]):
Indigenous innovation means strengthening original innovation, integrated innovation, and re-innovation based on the assimilation and further development of imported technology, in order to enhance national innovative capabilities.
The meaning of original innovation is similar to the concept of originality used when evaluating the patentable nature of an invention internationally, which is that the invention should be completely new in the world. However, in the MLP definition, originality also implied the sense of domestic Chinese origin. Integrated innovation relies on the innovative combination and enhancement of existing technological components in order to generate a new product or process (Sun and Jiang 2017). This type of innovation has a meaning that resembles what W. Brian Arthur has called the “combinatorial evolution of technology”, where new technologies are put together from parts, assemblies, modules, that are themselves already existing technologies (Arthur 2009). The MLP concept of re-innovation is closer to the international concepts of incremental innovation, that is, significant improvements that result in a new design or a more efficient production process.
The key requirement for all indigenous innovations is that a major part of the intellectual property should be owned by domestic Chinese organisations or people. Many publications simply designate technologies developed with a domestic research and development (R&D) input as indigenous innovation, in contrast to technology developed with overseas R&D and owned by overseas firms. The definition of indigenous innovation has thus been presented in somewhat ambiguous terms. In the following, the MLP definition represents a main reference point, but authors quoted may also have used a straightforward definition of indigenous innovation as innovation performed by Chinese actors on the basis of domestic R&D inputs.
At the same time, it is important to emphasise that the rationale for the MLP and other policies that promoted indigenous innovation was also to establish or enhance indigenous capability for innovation at the national and local levels. According to the State Council’s MLP guiding principles (State Council 2006: Section 2, point 1): “This calls for placing the strengthening of indigenous innovation capability at the core of S&T undertakings…. If our country wants to take the initiative in the fierce international competition, it has to enhance its indigenous innovation capability, master core technologies in some critical areas, own proprietary intellectual property rights, and build a number of internationally competitive enterprises”. In this view, it was at least as important for Chinese policies to build dynamic indigenous innovation capability—zizhu chuangxin nengli—as it was to create new Chinese products or processes. Such capability could secure continued innovation in China in the future and reduce dependency on overseas sources of technology.
International Perspectives on China’s Indigenous
While there were initially few international reactions to the publication of the MLP, foreign businesses in China began to be concerned with the promotion of indigenous innovation in public procurement towards 2010. This happened after the adoption of a State Council circular on accreditation of indigenous innovation products in 2009, and promulgation of a range of provincial guidelines and catalogues on local government procurement of such products (Morrison 2018a). As a result, the US International Trade Commission launched a so-called 332 Investigation in 2010 of China’s indigenous innovation policies, including policies on IPR (USITC 2010). In an attempt to address US concerns, China pledged at the May 2011 session of the US-China Strategic and Economic Dialogue that the government would eliminate all its national catalogues for certification of indigenous innovation products. Nevertheless, many provincial and municipal governments continued to refer to local catalogues of accredited indigenous innovation products in their public procurement tender announcements.
US views on indigenous innovation emphasised that all policy initiatives launched under the MLP were in contravention of international practice. Thus, it was argued that the funding of scientific and engineering megaprojects, public procurement regulations, and subsidies for patenting by Chinese firms were simply examples of a “web of industrial policies” designed to favour national champions and disadvantage foreign firms (McGregor 2010). State funding for research and development projects is a common feature of innovation policies in virtually all countries, including the US, Europe and Japan. Therefore, the criticism levelled at China for its state-sponsored funding for large research and engineering development projects in various high-tech fields and energy systems quickly lost its momentum.
Instead, China’s priorities for procurement and support for Chinese intellectual property became the main focus of international criticism. The chief objection was that the criteria for including products in the indigenous innovation procurement catalogue stipulated a bias in favour of domestic Chinese products.
It is important to recognise that public procurement has been used by advanced industrialised nations as a policy instrument to promote innovation, and this policy instrument has been implemented largely in accordance with the guidelines and requirements of international conventions (Georghiou et al. 2014; Lember et al. 2014; Edquist et al. 2015; OECD 2017; Chicot and Matt 2018). In fact, government procurement by the US Defense Advanced Research Projects Agency (DARPA) was instrumental in the development of key advanced innovations in the Post-War period, including military and civilian aircraft, the Internet and the Global Positioning System (Mowery 2010; Weiss and Thurbon 2006). Thus, despite the fierce American rhetoric vis-à-vis China and other countries, the US continues to employ discriminatory government procurement in its own industrial policies and as a trade weapon (Block 2008). The role of the US as an entrepreneurial state, with its extensive government procurement of the results from public and private R&D, has been essential in the development of major advanced technologies and their commercial success. Many of the technologies utilised, for example, for the development of the iPhone launched by Apple in 2007 were created on the basis of such projects (Mazzucato 2013:113–38).
The Chinese system for public procurement was initiated in the 1990s, and legislation was accelerated in connection with negotiations related to China’s membership of the WTO in 2001, but this legislation did not address the issues of procurement for innovation until 2006 with the MLP and then in 2007 with an amendment of the Law of the People’s Republic of China on Progress of Science and Technology which explicitly favoured indigenous or independent innovation (Chen and Cheng 2014).
The Chinese criteria for including indigenous innovation products in these catalogues were that they should be produced by an enterprise with full ownership of the intellectual property in China; have a trademark that is owned by a Chinese company and is registered in the PRC; feature a “high degree” of innovation; and be of dependable quality (O’Brien 2010: 55). During the assessment of bids in a tender, a bid containing certified indigenous innovation products can be 5–10 per cent more expensive in a price competition, or should be provided with a 4–8 per cent higher score for a combined technical evaluation (Caizheng Bu 2007: Section 3).
Much of the US argument rested on an interpretation of Chinese commitments to the World Trade Organization (WTO) when China joined in 2001. Legal scholars have argued that the accreditation system for public procurement for central and local governments is potentially in conflict with the country’s WTO obligations (An and Peck 2011; Boumil 2012). Other legal scholars have argued that China has no technical obligation to provide open access to its government procurement market, since it has not acceded to the most relevant international regulation, the WTO Government Procurement Agreement (GPA). Nevertheless, even these scholars have argued that China should ensure that procurement measures are consistent with the WTO’s “fundamental principles of free trade and non-discrimination” (Ahrens 2010; Chow 2013). China has offered to join the GPA six times since 2007. An offer was rejected by members of the GPA in 2014, largely due to international objections to the role of state-owned enterprises in the Chinese economy, proposed Chinese exclusions related to military procurement and other concerns with preference for domestic firms.
A recent analysis (Li and Georghiou 2016) of the use of procurement in connection with Chinese policies on indigenous innovation indicated that the role of procurement guides in signalling future demand for innovations was at least as effective in benefitting Chinese firms as the local government’s efforts to certify indigenous innovation products in catalogues. Although the Chinese framework for procurement represented a maze of legal documents and government actors, several case studies demonstrated that Chinese firms had responded successfully to develop innovations that fulfilled a local demand. An issue has been that local protectionism has tended to reduce the coherence of policy initiatives to promote indigenous innovation through procurement (Li 2017: 441–2). Nevertheless, the Chinese experience has fostered new efforts among Chinese firms to enhance innovation much in the same way that this policy instrument functions in advanced economies (Uyarra et al. 2020).
A study based on interviews in 2011 with R&D executives and US officials in the information and communication technology industry furthermore indicated that US multinational corporations’ R&D strategies in China had not been significantly affected by the indigenous innovation policies. According to the respondents, policy implementation varies among central ministries and especially local governments, making it necessary for the corporations to work with many actors in order to thread a path through the complex innovation policies, but they remained committed to doing business in China (Dedrick et al. 2012: 77).
b. Made in China 2025
After the controversies related to procurement of indigenous innovation products receded somewhat following the Chinese government’s revision of its national guidelines and certification of indigenous innovation products in 2011, a new international uproar subsequently developed over the “Made in China 2025” (MIC 2025) plan that was announced in 2015 (Wübbeke et al. 2016). The MIC 2025 policy was inspired by the German initiative “Industry 4.0” aiming at advanced digitalisation and manufacturing technologies, but the MIC 2025 addressed a much broader scope in terms of industrial upgrading (State Council 2015; Li 2018). The announcement outlined strategic priorities for ten industrial sectors including aerospace, robotics and power equipment, together with various support mechanisms that would ensure the development of smart manufacturing and a digitised economy towards 2035 and make China a leading industrial superpower by 2049. In addition, a technical roadmap proposed specific market share percentages for Chinese products in several sectors (Zenglein and Holzmann 2019: 9).
The US administration perceived Made in China 2025 as a state-directed and state-sponsored top-down policy for import substitution, intended to reduce China’s dependence on foreign technology while supporting Chinese firms to become dominant global players and creating unfair competition for incumbent overseas firms (Morrison 2018b). To a considerable extent, this assessment of MIC 2025 has been shared by European Union analysts and commercial associations (European Union Chamber of Commerce in China 2017). While European concerns regarding Chinese restrictions on foreign investment and market access, protection of intellectual property rights and subsidies for state-owned corporations were similar to those of the US, the actual European strategies vis-à-vis China have focused more on using multilateral frameworks such as reformed WTO rules and bodies that govern the global trading system to counter China’s initiatives (Buysse and Essers 2019: 18).
US criticism of MIC 2025 provided a launching pad for the US-China trade war in 2018. MIC 2025 was seen as a key component of a portfolio of Chinese policies alleged to support state-sponsored IP theft, forced technology transfer from foreign companies, economic coercion through export restraints on critical raw materials, information harvesting, and state-backed, technology-seeking overseas Chinese investment (White House Office of Trade and Manufacturing Policy 2018). Such policies were the essential point of the “technology for market access” approach used in developing joint ventures with multinational corporations in the 1990s. At present, China is employing a range of policies to support access to advanced foreign technology. The implementation of these policies in strategic emerging industries has been seen as helping Chinese firms to gain unfair advantages vis-à-vis international business (Prud’homme et al. 2018). The debate about these assertions regarding theft of intellectual property became highly politicised and dominated by myths propagated in both Chinese and overseas media, as discussed in Dan Prud’homme’s chapter in this volume.
The implementation of the MIC 2025 initiatives has been steered by a large number of individual action plans, roadmaps, opinions, guidelines, notices, etc. issued by Chinese authorities and think tanks (Wang et al. 2020). Nevertheless, the Chinese leadership has emphasised the need for public-private partnerships and the important role of private entrepreneurship in achieving a new level of technological sophistication. The experience already gained in the fields of artificial intelligence (AI) and cloud computing demonstrates the success of mobilising private firms such as Alibaba, Tencent, Baidu and others in building indigenous R&D strength. This development reflects a longer-term trend for Chinese innovation policies to position the government as a facilitator rather than as an active participant in the commercialisation of new technology (Băzăvan 2019). MIC 2025 also takes into account the emergence of advanced digitalised services and manufacturing in the Chinese economy and the extent to which supply chains are being transformed by platform economics, in which private sector firms have become dominant (Lüthje 2019).
These trends towards the Chinese state as a facilitator and the private sector as the main driving force behind the creation of indigenous innovation capabilities tend to weaken the argument that the MIC 2025 initiatives are unfair international competition generated by state-owned enterprises. There is no doubt that Chinese government authorities at both the national and local levels are eagerly pursuing opportunities to support R&D and innovation, but the nature of industrial policy in an era of a digital economy, Internet Plus and Industry 4.0 has shifted the emphasis to facilitation and building infrastructure, rather than direct participation by the state in production. In addition, given the importance of MIC 2025 as a vital element of China’s effort to avoid the “middle-income trap” through reforms of the economic structure and new gains in productivity, it appears unlikely that the current government will abandon the initiative (Liu 2018: 320).
c. Intellectual Property Rights
Promotion of indigenous Chinese innovation and the development of domestic intellectual property were core priorities for MIC 2025 ((Jiang and Huang 2011)). Accordingly, the technical roadmaps published as a follow-up included more substantial objectives concerning the extent to which production should come to rely on Chinese indigenous intellectual property. In essence, MIC 2025 represents an extensive effort to upgrade Chinese industry on the basis of commercialisation of intangible assets such as strategic Chinese patents, as discussed in Anton Malkin’s chapter in this volume.
At the core of the indigenous innovation policies lie the Chinese priorities linked to intellectual property rights (IPR), in particular, the extent to which patented innovations are owned by Chinese actors. China has indeed witnessed a surge in patenting, but the evidence available indicates that much of the surge is related to new patentees and is not directly correlated with strong innovation results ((Hu et al. 2017)). In particular, the extensive subsidies offered by the Chinese state encourage applications for patent rights on a questionable basis; approximately 30 per cent of new patents granted in China are estimated to be low quality patents connected to subsidies ((Dang and Motohashi 2015: 151)). The quantitative growth of patents in China is thus generally an outcome of extensive public incentives and support, and a study of the impressive Chinese nanotechnology patent record shows that few of these patents actually result in commercial innovations (Huang and Wu 2012: 979–80). Nevertheless, the issues with ensuring higher quality of Chinese patents remain a systemic feature of IPR in China (Prud’homme 2012).
China has continued to improve its system for protection of intellectual property rights, including several updates of the patent law and the establishment of specialised IPR courts in major cities (Huang 2017). Prud’homme and Zhang (2019) found that China’s IP regime for innovation has improved notably over time, and therefore is more conducive to innovation than many believe, but that it still poses a range of risks. The presence of these risks may, to varying degrees, negatively influence the innovation activities of both foreign and domestic firms, as well as of other actors participating in the innovation process. In turn, this poses a larger set of risks to China’s national development. It has been argued that China is only following the path that the US led when it was catching up with European technology in the late 19th century (Peng et al. 2017: 32). On the other hand, an argument has been made that, at that time, the US had not signed international agreements, while today China has acceded to the TRIPS agreement (Brander et al. 2017: 914).
d. Technical Standards
A major objective of China’s indigenous innovation activities has been to develop standards that will create a technological platform beneficial to Chinese interests (Ernst 2011). In a sense, the Chinese government has wished to transform the country from a “standards taker’” to a “standards maker’’ through the development of unique Chinese technology standards. Standards are increasingly recognised as crucial components to innovation and competitiveness (Blind 2016). Accordingly, Chinese industries in the information and communications technology (ICT) sectors have felt compelled to follow international standards which are increasingly built on intellectual property. This is related to the problem that Chinese ICT manufacturers have witnessed: the cost of licences to foreign IP cutting into their slim profits. The Chinese leadership has also wished to obtain “secure and controllable” networks of communication, and the role of standards for achieving this objective has only increased in recent years.
A prime example of efforts to engage in international standards setting and to capture significant shares of the intellectual property related to the platform is China’s attempt to develop and commercialise its indigenous 3rd generation mobile communication standard TD-SCDMA (Gao et al. 2014). This standard was based on R&D carried out in 1997 by the Datang Group—a commercial offshoot of the China Academy of Telecommunications Technology—together with a consortium of foreign equipment producers including Siemens (Gao 2014). Chinese producers have been estimated to own almost 50 per cent of the patents related to TD-SCDMA. This has apparently helped Chinese mobile communications vendors to negotiate lower licence fees for the use of ICT standards in their systems (Breznitz and Murphree 2013: 2). TD-SCDMA was recognised as one of three 3G international standards by the International Telecommunications Union in 1999 and was adopted by China Mobile in 2008. Although it has not been deployed commercially outside China, the indigenous innovation capabilities derived from participation in its development have provided major Chinese telecommunications firms with a basis for their development of successful 4th generation (LTE) systems.
In trying to develop its own indigenous standards, however, China faces many challenges, both internationally from powerful multinational corporations and from domestic enterprises that have vested interests in supplying the international markets (Wang et al. 2014: 860–1). In any case, a closer link between standards in ICT and other high technology fields, patenting and economic development makes it imperative for latecomer countries to engage in international standardisation (Ernst et al. 2014: 855–6).
China’s leadership has been equally concerned with security issues related to standardisation. For example, the Chinese encryption Wireless LAN Authentication and Privacy Infrastructure (WAPI) standard for wireless Internet connections was developed to ensure secure access for the Chinese authorities to all wireless communication, normally compliant with the international 802.11 standard (Kim et al. 2014). The decision to make this standard mandatory for all Wi-Fi equipment forced both Chinese and overseas producers to obtain licences from the developers of WAPI. The decision encountered strong objections from US producers of Wi-Fi related chips. After the US government officially protested to the Chinese authorities, China agreed in 2004 to postpone the implementation of the standard indefinitely. Nevertheless, most of the equipment sold in China today has been made WAPI compatible. Still, from a US point of view, the standard has been introduced as one of many Chinese efforts at trade protectionism (Cromer 2005). The issues of standards in Chinese cyber security priorities are still the basis for many international concerns and appear to have intensified during recent years (Gierow 2014: 6).
During the last decade, the Chinese leadership has been eager to reform and rationalise the national and local governance of standardisation, reorganising the formulation and implementation of technical standards, centralising decisions on mandatory standards and introducing a new category of “market-based” standards set by industrial associations, similar to the procedures practised in advanced industrialised countries (Seaman 2020: 16–7). This reform is motivated by the needs both to address some contradictions between national and local standards, removing some superfluous existing standards, and to facilitate trade internally in China. As mentioned above, the Chinese efforts at standardisation have also increasingly been directed by the need to support the development of indigenous innovation and influence over the process of development of international standards. These efforts would reduce payment of licence fees to foreign owners of IP embedded in international standards and hopefully embed Chinese IP in international standards for advanced technologies. This has increased the Chinese participation in international standardisation organisations, together with an effort to internationalise Chinese standards through the Belt and Road Initiative (Rühlig 2020: 24–7).
This culminated in the launch of a major research programme carried out by the Standards Administration of China and the Chinese Academy of Engineering in 2018 with the aim to formulate a national China Standards 2035 Strategy by the end of 2020. This strategy will strengthen the system for developing Chinese standards in advanced, high value-added manufacturing and service industries like 5G communications, the Internet of Things (IoT), and artificial intelligence. Furthermore, the strategy will coordinate standardisation efforts between civil and military sectors and will enhance China’s role in international standards setting and the internationalisation of Chinese standards (Seaman 2020: 20–3). To a large extent, the use of standardisation to promote innovation can be considered a continuation of the policies for improving indigenous innovation and the Made in China 2025 Plan.
Consequently, the China Standards 2035 initiative has raised concern among international observers (Morrissey and Givens 2020; Arcesati 2019). Chinese efforts have been particularly aimed at generating new IP for standards in advanced technologies such as 5G and artificial intelligence, where competition for new innovations is particularly strong (Ding 2020). Ultimately, the Chinese ambition through state-supported efforts to reshape the international standardisation order is a challenge to existing systems such as that of the US, which depend to a much larger degree on private self-regulation (Rühlig 2020). This challenge has led to calls for the US to work with its allies to counter the Chinese initiatives envisaged under China Standards 2035 (Gorman 2020).
e. Challenges of Technological Competition with the United States
The emergence of China as a nation with growing technological capabilities and ambitious policies to promote further development of domestic ownership of innovations raises important questions about the country’s global role. There is little doubt that international actors, such as the United States, see it as a challenge to their own role on the global stage of advanced innovation. Some emphasise the mercantilist aspect of China’s indigenous innovation policies as an expression of techno-nationalism (for example Segal 2008: 425; Kennedy 2013).
Perhaps it is more fruitful to see the current issues as a result of technological imperatives and their consequences for innovation competition on the global level (Kennedy and Lim 2018). In this view, China and other nations are responding to technological imperatives to secure sustainable economic development. The consequence of such imperatives is to encounter a rivalry for prominence in innovation between a dominant and rising state. The technological imperative that drives the need to acquire and develop new technology in the rising state challenges the dominant state with two negative externalities. The dominant state experiences negative security externalities where its strategic global position is challenged by, for instance, the transfer of dual-use technologies with potential military applications; in addition, the dominant state can experience negative order externalities when the rising state challenges an international system and rules, such as the international IPR regime, that reflect the interests of the dominant state.
Although the immediate conclusion of this analysis is that China and the United States are destined to get caught in Thucydides’s Trap (Allison 2017), the question remains whether it will benefit the US if China’s efforts at indigenous innovation are confined to China alone. Given the possibility that China may become a leading innovation nation in the future, it can be argued that there will be opportunities for foreign firms in strategic coupling, or recoupling, with emerging Chinese leading innovative firms (He et al. 2017). In many ways, the new environment of Chinese innovation is already reflected in the strategies that the multinational corporations are adopting for their R&D and business in China (Prud’homme and von Zedtwitz 2018).
Indigenous Innovation: Legacies and Contemporary Role
The preceding discussion of the policies devoted to indigenous innovation represents initiatives introduced after 2006, but these policies represent a continued Chinese ambition to become less dependent on foreign sources of technological development. Thus, indigenous innovation in the sense of competitive assets based on domestic R&D, intellectual property rights and standards was pursued long before the policies launched with the MLP. In fact, this priority can be traced back to self-reliance campaigns during the 1950s and the Cultural Revolution in the 1960s (Sigurdson 1980). Studies that have analysed the outcome of indigenous innovation often predate the launch of the explicit policy of the MLP in 2006 and generally contrast the differences between relying on either domestic innovation or foreign technology transfer.
For example, Xiaolan Fu shows that the consistent policy emphasis in China on the development of indigenous innovation capabilities has resulted broadly in substantial total factor productivity (TFP) growth during more than a decade in industries of low- and middle-level technology, while helping a number of firms in the high technology sectors to reach innovation frontiers (Fu 2015: 135–6). One of the key reasons for this is that indigenous R&D is complementary to foreign technology transfer, raising a domestic firm’s absorptive capacity, and because indigenous technology often is more appropriate in a middle-income country (Fu et al. 2011). Indigenous innovation is enhanced in the long run by complementary assets provided through cooperation with foreign partners and sources of technology (Tian and Li 2017: 1287–8). Fu’s study (2015: 135–6), based on data from the 10th Five-Year Plan (2001–05), argues that government-sponsored high technology industrialisation projects had significant positive impacts on private small and medium-sized private enterprises in terms of approved patents and new technologies, while there was no impact on large, state-owned enterprises (Zheng and Zhou 2015). A UNIDO study using data from the same period examined the effects of knowledge derived from in-house R&D, foreign technology imports and purchasing domestic technology, respectively, on the innovation capability of Chinese state-owned enterprises in high tech industries. The results show that foreign technology imports alone did not improve innovation performance in terms of new patents, but had a positive effect when combined with indigenous R&D, especially in more advanced firms. In contrast, technology transfer from domestic R&D institutes had a significant impact only on less advanced firms (Li 2008: 20–1).
Another interesting report analyses the process of indigenous innovation through four stages of learning and output to arrive at its impact on private firm performance (Howell 2018). The study finds that learning-by-doing is an important element of capturing learning spillovers throughout the process of innovation. During the later stages of innovation, learning spillovers positively increase firms’ innovation output as well as their performance; this is especially so for firms with high absorptive capacity (that is, indigenous R&D efforts). A similar point has been made in a paper that analysed whether international technology in-licensing by Chinese firms, compared with domestic technology in-licensing, contributed to indigenous innovation in the 2000s. It found that Chinese firms that in-licensed international technologies performed better with regard to indigenous innovation than those that mainly in-licensed domestic technologies, even though the national innovation policy suggests otherwise (Li-Ying and Wang 2015: 131–2).
The role of indigenous innovation and foreign technology transfer has also played out differently in different regions of China. Thus, indigenous innovation has played a positive and significant role in improving the economic growth of the eastern and central regions, but it has not shown a significant role in promoting the western region. In contrast, foreign technology imports and domestic technology transfer contributed to the economic growth efficiency of the central and western regions, but had little effect on the efficiency improvement in the eastern region (Ding 2018). In a similar manner, foreign direct investment had a significant spillover effect on indigenous innovation in the inland provinces, but less effect in coastal areas with access to factor inputs such as finance and high quality human resources (Ren and Ding 2020).
An analysis based on China’s provincial panel data (Huang et al. 2019: 282–3), covering 30 provinces over the period of 2000–2014, indicated that the impacts of indigenous R&D on TFP are larger than those of technology spillovers coming from FDI. This study also indicated that the imports had increased TFP, while exports tended to decrease it, thereby indicating that China’s indigenous R&D inputs play a more important role in increasing TFP compared to the technology spillovers coming from openness. This study observed that a larger share of SOEs was improving TFP up to a certain threshold, but there was a negative effect beyond this threshold.
This brief survey of some of the evidence of China’s achievements in promoting indigenous innovation reveals that: (1) the official recognition of indigenous innovation in 2006, and the explicit national policies promoting it were, in fact, only enhancements of a decade-long ambition by both state and private actors to gain their own innovative capabilities; (2) while state-owned enterprises were important in some of the Chinese efforts, the entrepreneurship of private firms was frequently decisive, especially in the high tech sectors; and (3) foreign technology sources remain important for the absorption, integration and re-invention elements of the process contributing to Chinese indigenous innovation, but these overseas inputs were particularly significant in the inland regions.
Elements of New Innovation Trajectories
If China continues to invest heavily in R&D and innovation and pursues strategies for indigenous innovation that address some of the country’s most pressing issues, its diverging path of innovation is likely to be able to contribute significantly to progress at the global technological frontier (Schmitz and Altenburg 2015: 461). Such contributions could include innovations that have not been adequately pursued by other nations, governments or industries, such as new technologies to reduce climate change or to develop applications using biotechnology and/or artificial intelligence that enhance human health.
Indeed, China has been expanding investments in low-carbon innovations, including renewable energy from wind and solar power, together with new generations of nuclear power. So far, most of these areas have generally demonstrated the capabilities of Chinese producers to catch up with existing technological systems through assimilation and incremental innovation, with few examples of Chinese indigenous innovation that would move the technological frontiers forward. It may be too early to declare China a clean-tech superpower, but data from 2019 shows the country now produces most of the world’s solar panels, wind turbines, electric vehicles and lithium-ion batteries (Temple 2020). The Chinese leadership has expressed a firm commitment to achieving a transition to a low-carbon economy. China’s Doubling Plan aimed to double the governmental and/or state-directed investment in clean energy research and development as part of its contribution to Mission Innovation from RMB25 billion in 2015 to RMB50 billion (roughly 7.6 billion dollars) by 2020 (Zhang et al. 2018). Nevertheless, a major transition to low-carbon energy supply will require major shifts in public and private investments in new technology and R&D, together with a massive reform of the institutions regulating and providing incentives for cleaner technology—a process that is likely to take many years to complete (Andrews-Speed and Zhang 2019: 266–70). China has also increasingly recognised the potential benefits of intellectual property protection and has embarked on a drive to utilise the national and international IPR systems to protect its technologies to the greatest extent possible. This process would ensure that the results of Chinese indigenous innovation will become available for worldwide benefit.
A momentous aspect of China’s emergence on the global innovation frontiers through indigenous innovation is that Chinese firms have made new progress in innovating the process of innovation itself. In particular, Chinese producers have taken important steps forward in terms of achieving greater efficiency and effectiveness in the discovery and development of potential new technologies and—perhaps most significantly—in implementing these quickly in society. Observers have already noted that Chinese firms have advanced their capabilities to develop and implement process and management innovations to cut costs in production and value chains. It seems likely that Chinese innovators and entrepreneurs will continue to excel in these aspects of innovation, and perhaps be able to enhance their approach with more advanced R&D and/or artificial intelligence, creating a powerful Chinese mode of innovation that could come to dominate international competitiveness.
Chinese researchers of indigenous innovation focus mostly on the role of the state as the key component of a Chinese model of innovation. In particular, the support for strategic emerging industries has been seen as providing substantial policy benefit, raising the technological levels and innovative capabilities of industries such as high-speed railways, aeronautics and nuclear power (Wei et al. 2017). The development of high-speed railways has been considered one of the key successes in the development of indigenous technology, combining the stringent procurement criteria of the Ministry of Railways with the establishment of technological alliances with multinational producers of high-speed rail, and strengthened by scores of R&D projects under the MLP (Sun 2015). Case studies of specific industrial sectors or particular technologies in China also provide greater insight into the achievements of the Chinese efforts to promote indigenous innovation. These efforts have generally been more successful than the policy on “technology for market access” that guided much of the government’s interaction with multinational corporations during the 1990s and early 2000s (Zhou et al. 2016).
However, it may be more interesting to look for the features of a Chinese mode of innovation beyond the confines of state support and explore the behaviour of Chinese firms that have succeeded in disruptive innovation by moderating, integrating or reforming the process of innovation. It is here, in the strategies pursued by firms regardless of top-down state support or interference, that the strengths of a Chinese mode of innovation are most likely to be found. Moreover, given that the most dynamic firms that contribute significantly to value-added in the Chinese economy belong to what may be called the private sector and function in a market economy, Chinese authors have increasingly argued that policies should shift from “selective industrial policy” to “strategic industrial policy” (Zheng and Shen 2018: 50).
In their study of the development of electronic industries in three Chinese cities, Breznitz and Murphree (2013) identified rapid commercialisation as crucial for the approach to innovation. They found that Chinese firms are concentrating on the D in R&D, and remain better at developing and improving existing products than at inventing new ones. The competitive edge of these firms is achieved by developing quickly enough to remain at the cusp of the global technology frontier without actually advancing the frontier itself. Similar points were made in McKinsey’s study of the strength of Chinese performance in four archetypes of innovation: customer-focused, efficiency-driven, engineering-based and science-based. The study found that Chinese industries have established strength in efficiency-driven and customer-focused innovation, based on the extensive manufacturing ecosystem with networks of suppliers and availability of labour and infrastructure. China still lags in science- and engineering-based innovation, although advantages in Government-created local demand and rapidly increasing, low-cost R&D capabilities are creating new opportunities to catch up with international levels (Woetzel et al. 2015).
The Chinese knack for cost innovation has also been emphasised by Zeng and Williamson (2007), who provide case studies of Chinese firms that indicate creative ways which deliver high technology, variety and customisation at minimal price premiums, and which redirect niche offerings towards volume segments. Another study points to the ways that Chinese firms have been able to reengineer established innovation processes to further speed up the completion of projects, exploiting modularisation and simultaneous engineering, cycling rapidly through “Launch-Test-Improve” in pilot markets, and combining vertical hierarchy with horizontal flexibility (Williamson and Yin 2014: 29–30).
Similar points emerge from the study conducted by Greeven and Yip (2021), which shows that Chinese enterprises have often followed several different paths of innovation, sequentially or in combination. For example, they have ascended from incremental improvements based on basic technological capabilities in the early years, gradually arriving at a level of more radical product innovations, predominantly focusing on what the customer wants rather than what the technology could potentially provide. Chinese companies used the competitive process to continuously upgrade technological capability, relying on experimentation and learning from failures, facilitated by an agile and responsive organisational structure, and leveraging resources outside the company as much as possible to embed themselves in local ecosystems. In addition, Shen et al. (2020: 6–9) argue that, in the new economic era, a Chinese-style innovation has emerged with characteristics that include striving for simplicity, attention to speed, focus on low cost and “learning from failure”, and they believe that this will have beneficial implications internationally. The consensus is emerging that new developments provide a China model in the development of strategic emerging industries (Wei et al. 2017).
The key point is that there may be both positive and negative implications of the Chinese ambition to promote indigenous innovation. On the one hand, Chinese technologies may become available globally to address global problems, for example in priority areas such as low-carbon innovation or advanced digital processing and communication; and Chinese innovations in the management of innovation have already demonstrated new abilities to cut costs and reduce time to market. On the other hand, these innovations may challenge foreign competitors and incumbents in global markets, with potential negative consequences for competitiveness in overseas economies and for their national security.
An important purpose of this chapter has been to review some controversial aspects of the Chinese policy on indigenous innovation and international reactions to it. The MLP definition of indigenous innovation (sometimes translated “independent innovation”) in a Chinese context is rather broad, covering both original innovation, the integration of various technologies in a new way and what has been called re-innovation of assimilated technology from overseas. All these forms should include Chinese ownership of intellectual property. Moreover, it is emphasised that Chinese policies aim to strengthen the capabilities of Chinese organisations to develop indigenous innovations. The policies are implemented by a range of policy instruments that are familiar to observers of innovation policy elsewhere, such as financial support for high priority R&D projects, public procurement of innovative products, promotion of national technical standards and the securing of nationally-owned intellectual property. At the same time, such policy instruments have appeared questionable in an international context, primarily because they are pursued in a country with strong state control and with economic institutions and structures that aim to support Chinese self-reliance and indigenous innovation capabilities.
The policies have been pursued in various forms, including the Made in China 2025 initiative, since the concept of indigenous innovation was launched officially in 2006. It is important to note, however, that the roots of this latest Chinese effort to become autonomous derive from a decade-long, or perhaps more accurately century-long, ambition to increase Chinese independent ownership and control over new technologies. The results of this continued endeavour have been mixed, where the best outcomes have materialised after the Open-Door Policy, and in particular after China joined the WTO in 2001. Recent research has thus shown that it is most often the combined inputs of domestic and foreign R&D which have provided competitive new technologies for Chinese business. In fact, spillovers from FDI and international linkages are vital for indigenous innovation: the country’s own R&D and foreign knowledge inputs are complementary. In other words, Chinese participation in the global networks of technological innovation is essential, and it would be a mistake to hold on to a dogmatic belief that the purpose of the indigenous innovation policy is to achieve complete Chinese technological autonomy, a belief that paradoxically sometimes is voiced by observers in both China and the US.
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