Unpacking the puzzle of China's innovation

Anyone interested in how China is approaching her quest to become an innovation-driven economy should read this book. Since the then “paramount leader” Deng Xiaoping's open-door policy at the end of 1970s, China has developed rapidly as a mixed-economy that blends both hands – a semi-free market which operates under considerable “plans” and regulations by the central government. Such an approach has indeed helped China become a middle-income country within just forty years, with GDP per capita rising from merely 194.8 USD in 1980 to 8826.99 USD in 2017, according to the World Bank. While earlier in this century China was still labeled as a world factory specializing in low-value-added activities in global value chains, China's ambitions have gradually moved onto many emerging, high-tech industries such as electric vehicles and 5G mobile communication technologies over the past decade. On the one hand, this rapid catching-up derives from knowledge spill-overs brought about by opening its market (Mu and Lee, 2005) and learning and adaptation based on existing innovations (Wu et al., 2010). On the other hand, it also benefits from the unique institutional arrangements and policy instruments by the national and local authorities in China (Helveston et al., 2018; Rong et al., 2017).

While the effectiveness of China's approach in increasing GDP, reducing poverty, and transitioning to a middle-income country may still be accounted for with existing theories of economic development, classical Hayekian thinking would have doubted its ability to innovate, holding on to the proviso that an innovation-driven economy can only be built in a democratic society with a free market (p. 2). As such, China's quest for innovation presents a puzzle – how it has been marching through the muddles of innovation and whether the “best of both (market and planned) worlds” can be sustainable in the ever-changing environment brought about by new technological frontiers and grand challenges facing all human beings, such as the recent COVID-19 crisis. Unpacking this puzzle is not easy, but worthwhile. Such an attempt carries considerable implications not only for innovation scholars, but also for other emerging economies to learn, if anything, from China's path to innovation. Dai and Taube's edited volume takes an important step towards that direction.

The book includes twelve thought-provoking chapters that offer diverse perspectives vis-à-vis the state-of-the-art in innovation activities in China. One pitfall is that the book could have been structured into several sections, which would have enhanced its clarity and readability, as well as connected these thoughtful chapters with each other in a more explicit way. Nevertheless, I took the liberty to categorize the contributions into four themes that collectively attempt to unpack the puzzle of China's innovation: institutional change and heterogeneity (Chapters 1, 5, 7, 12), national innovation policies (Chapters 2, 8, 11), the evolution of China's innovation capabilities (Chapters 3, 4), and Chinese firms' innovation strategies (Chapters 6, 9, 10).

One of the most fascinating aspects of the national innovation system in China is the distinctive institutional arrangements that have emerged and shaped it. In Chapter 1, Elsner sets out to lay a theoretical foundation for an understanding of innovation and its associated institutional preconditions. Building on these preconditions, s/he points out how China, as an “entrepreneurial state” (p.38), has invested in infrastructure and enacted agile social and industrial policies, such as the Hukou system of residential registration to regulate domestic migration, for a rapid catch-up. Chapters 5 and 7 offer empirical evidence for the evolution of the socio-technical systems in China. In Chapter 5, Gunther and Sinnig provide an evolutionary account of the structural changes since the inception of China's open-door policy, and the economic transition and technological innovation facilitated by these changes in a shift towards knowledge-intensive sectors. In Chapter 7, Li reflects on the legitimacy issues in Chinese private firms who are struggling with the tensions between the new market economy and the old planned economy, and argues that these firms need to develop both political connections and moral capital to gain legitimacy. In Chapter 12, Song, Yao and Fan reveal the institutional heterogeneity within China by revisiting the paradoxical economic downturn of “Dongbei”, the Northeastern region of China, despite munificent resource endowments and infrastructure, and offer several resolutions for improving the innovation ecosystem there. I personally found this chapter to be the most interesting one as the phenomenon described was rarely elaborated in existing innovation studies. Indeed, most commentators often forget that China is a very large country with several dozen provinces with distinctive formal and informal institutional arrangements. Neglecting the institutional heterogeneity within China, as extant studies tend to do, is akin to generalizing about the United Kingdom as Europe. In this sense, Chapter 12 offers a sneak peek and provides an important corrective for readers not familiar with the regional heterogeneity in innovation and development in China.

Among various institutional arrangements, China's national innovation policies have undoubtedly shaped the ecosystem, both positively and negatively. In Chapter 2, Dai, Davydova and Liu begin with this thread of discussion by offering a comprehensive analysis of the key policies at the national level to promote technological innovation in China. They argue that the evolution of China's innovation system since the end of 1970s is characterised by extended openness and resource sharing, that is, gradual opening up to FDI and improvement of resource accessibility to private firms in China. They also suggest a more indirect approach, as opposed to the conventional direct investment, should be enacted by the central government for creating a more innovation-friendly environment. In Chapter 8, Hou models the bottlenecks of innovation in the context of Chinese manufacturing firms, especially skill gaps, high taxation and lack of financial capital. S/he further offers policy instruments for mitigating these obstacles in a systematic way, as policies aiming at eliminating one bottleneck may exacerbate the problems generated by other obstacles. In Chapter 11, Liu and Liu provide a case study of a cable and wire manufacturing cluster in Guangdong Province to showcase a unique approach under the conditions of resource constraints, that is, a collaborative upgrading approach together with key actors in the regional innovation system including local government and universities. This chapter also highlights openness as a key strategy for local innovation systems to upgrade from low-value-added manufacturing to high-end products, which concurs with existing observations that such openness is especially favourable for local governments as a major means to attract external innovation resources (Shi and Shi, 2017).

Under the above institutional conditions, Chapters 3 and 4 offer an overview of how China's innovation and R&D capabilities have evolved over time. Specifically, in Chapter 3, Wu provides rich data regarding the R&D intensity and patents granted since the beginning of 21st century. S/he also points out the key sectors for China's R&D spending, which are computers, transport and electrical equipment. The OFDI to other Asian countries and Europe has also signalled the expansion of Chinese firms in an attempt to capture more advanced technological capabilities. In the same vein, Lacasa and Shubbak, in Chapter 4, examine “the evolution of technological capabilities in China since 1980 using patent indicators” (p. 90). They observe that China has been accumulating far greater technological capabilities compared to other emerging economies. Interestingly, they also find that China lags behind the likes of India and Brazil in patents in technological sectors that have emerged since 2012, suggesting a slowing down of the pace of structural change. Although the authors do not provide an explanation for this situation, one may speculate that this may be because progress in traditional sectors that China has already established may be swifter for latecomer countries as technological roadmaps are clearly set out by early movers (Cho et al., 1998). As China progresses further into emerging, high-tech industries, where the blueprints of technological innovation are not entirely clear, the Chinese government may need to rethink their strategies in promoting new technological breakthroughs. It may well be that market mechanisms prove more effective than direct government involvement for the allocation of resources in these emerging industries that are marked with considerable uncertainty.

Chinese firms' distinctive innovation strategies are the focus in the remaining three chapters, with emphasis on the tactics that have been effectively implemented under the resource constraints of a transitional economy. In Chapter 6, Conle offers an “architectural innovation” account of China's innovation pattern. With this perspective, s/he illustrates how the Chinese automobile industry has enacted a “mix and match” strategy to build domestic automobile products using existing models as reference designs, hence reducing R&D costs and lowering entry barriers. Such an architectural approach may be a more feasible way for similar low- to mid-income economies in nurturing similar industries as a means to fulfill “bottom of the pyramid” demands (p. 143). Chapter 9 revisits the “windows of opportunity” (Lee and Ki, 2017) in the recent trend of digitalization. Wu and Ji identify virtual assets (e.g. big data), online platforms, rapid industry clock speed, and the new “wave curve” (p.207) as the most salient features of the structural change to value appropriation in the digital age. In Chapter 10, Zhou, Li and Yang further investigate how Chinese entrepreneurial firms enact “exploratory bricolage” (Baker and Nelson, 2005) to overcome the initial resource-constrained stage where start-ups lack the sufficient resources and capabilities needed for new market entry and the like. They illustrate how these firms exploit unprivileged resources and combine them in innovative ways to gain advantage and achieve stretch goals. Such an “exploratory bricolage” is attributed to the ambidextrous mindsets of Chinese managers stemming from the Chinese “Yin-Yang” philosophy, which addresses the balance between Yin (darkness and passiveness) and Yang (light and activeness) and is applied in their day-to-day operations and decision-making (Jing and Van de Ven, 2014; Li, 2012).

Overall, this edited volume offers a timely discussion of China's catching-up in innovation and the ecosystems underlying this catching-up process. With themes spanning from institutions and policies to Chinese firms' innovation capabilities and strategies, the book makes an important extension to extant innovation studies in unpacking the puzzle of how China has exploited its unique institutional arrangements and diverse ecosystem actors to fulfill the ambitions of moving up the value chains to high-end R&D and advanced technological innovation. One shortcoming, besides the issue of the lack of a thematic structure tying the chapters together more clearly, would be the lack of a summary chapter providing an outlook for the future of China's innovation and what that might mean for the rest of the world. For developed economies, the future of innovation in China poses questions about how they may accommodate the challenges of new competitors, and for emerging economies it prompts a discussion of what might be learned from the Chinese approach. These are difficult questions to tackle, but it is time to contemplate these tensions in a volatile world.