Talking with authors about their work.
Talking with authors about their work.
The authors, both at the Georgia Institute of Technology — Mr. Breznitz as an associate professor of international affairs and strategic management, and Mr. Murphree as a doctoral candidate — say China has shown strength in process innovation and creating new manufacturing systems. Rather than trapping China in low-end manufacturing, they say, these capabilities will power the Chinese economy for years to come and eventually allow China to move up the value chain.
Indeed, they argue that the Chinese government’s push to compete with the United States and Europe on novel ideas and breakthrough products may be wasteful and inefficient, partly because of government interference but also and because China has not yet reached an advanced stage of development. Here are excerpts from an interview with the two authors.
Q. In “Run of the Red Queen,” you argue that China’s innovation drive is surprisingly strong, but not in the traditional way we think about innovation as novel technologies or products. How is that so?
Dan Breznitz: One thing truly important to understanding China is the defining characteristic of today’s globalization: the fragmentation of production. Today, places specialize not in specific industries but specific stages or activities within those industries.
In different places — Taiwan, the U.S., South Korea — there are different stages of production in each industry. The next logical step in thinking about innovation, since industries are fragmented, is that different places need different systems and different kinds of innovation. China excels in different kinds of process or manufacturing innovation. This includes design for manufacturing, organization of production, sourcing and logistics.
China’s companies are extremely efficient at creating new versions, often simpler, cheaper and more efficient, of technologies and products shortly after they are invented and marketed elsewhere in the world. For instance, I can’t think of any company in the world that can have over 200,000 people in one location producing a wide array of electronic gadgets for multiple companies other than Foxconn in China.
The American military, the best fighting machine in the world, can hardly move 200,000 people into the exact locations it wants them in months, but this company moves engineers and production workers from line to line and product to product with amazing efficiency. This is production innovation. China does innovate.
In novel-product innovation, China is very weak. There’s no way around it. The central government is the main antagonist in the process. The political economic institutions and system in China make it so entrepreneurs can’t make profit by developing novel innovation. But this same system makes process and second-generation innovation very profitable and successful.
China doesn’t need to crave novel innovation. For China’s stage of development, with the amount of people it has, the size of the labor force, and the skills developed by China’s education system, this is a vastly smarter utilization of its muscle and brain power.
Q. Mr. Murphree, is China’s innovation drive misunderstood?
Michael Murphree: There is a tendency in the business literature and discussions to equate innovation with invention, measured as the output of patents and peer-reviewed articles or new products. From this perspective, if you look at the metrics, it is believed that if you have high numbers then you are innovative and will have growth. If you don’t, you’ll fade. This leads to a tired dichotomy: either China is already innovating, or it’s on borrowed time and will stagnate like other middle income countries.
Innovation is not just invention; it’s the whole array of moving and improving inventions so consumers get better, newer, and cheaper products and services. For example, consider the case of Techfaith, a Beijing company that produces innovative products that sell under other brand names but is not a contract manufacturer. A lot of what we think of as innovation is what we notice in the final gizmo, but the innovation is actually in the guts that make the device work.
Mr. Breznitz: Another example might relate more to most people’s experiences. Do you own an Apple computer? There’s a white power supply box on the power cord. That box has been improved with continuous R.&D. so it doesn’t go up in smoke and so it will do what it does ever more efficiently. This is entirely done in China. The company that makes the power supplies is constantly doing research to make them smaller, more efficient, cooler, cheaper, and less energy intensive. This can only be done in China because firms can find high-quality engineers and tell them, ‘You will make power supplies better’ and the engineers will oblige. What are the chances you can hire someone from an elite U.S. university such as Carnegie Mellon to do that? This gives China power in the global production networks.
Q. But isn’t a lot of this simply China’s size and low wages, giving it a strong manufacturing and cost advantage? And is it sustainable?
Mr. Breznitz: As long as we have a fragmented global system of production, you will need places that specialize in different stages to make “inventions” into real things at a price that people can afford.
Probably, over time, due to its critical mass of production capabilities, China can command more and more of a premium on these activities. Over the next 15 years, we think that China’s model is not just sustainable, but that China’s power will actually grow. I don’t think China needs to worry about indigenous innovation right now.
Q. In your book, it appears the Chinese government often seems to constrain development and innovation, either by interfering in markets or trying to use its resources to affect outcomes. What, in your view, should be the Chinese government’s role in spurring innovation?
Mr. Breznitz: What you’re trying to do when you create industrial innovation policies is to create agents that produce innovation. Unlike the Japanese or Korean developmental state where they tried to create a car industry where the product, market, and technology is defined, when fostering innovation you don’t know what the products will be or what the markets will look like. This means planning has limited effectiveness but does not mean there is not a large role for the state.
Look at the cases of Israel and Taiwan. The state has a role first as financier and stimulator of innovation. This is not done by strategically choosing winners but, in the case of Israel, by making capital available to entrepreneurs and scientists to pursue their ideas. The second role is to create ventures by making an institutional and economic framework in which entrepreneurship is rewarded. In the case of Taiwan, even after new ideas were developed, most businessmen perceived technological entrepreneurship as too risky. Hence the state directly created the first ventures in new industries, creating the model and market. But these were not state-owned or controlled. They were state-created and quickly spun-off private and entrepreneurial ventures.
For the Chinese government to have large projects that are mostly copying ideas or industries already developed elsewhere is not the way to go. Hence megaprojects in building wide-body aircraft or supercomputers may just be costly diversions in terms of innovation.
However, encouraging the diffusion of technology in China is an area the state can and should encourage.
Choosing winners is a dead end. Look at how China has done in rolling out telecom technologies. By trying to develop new technologies by government fiat, there has been a tremendous holdup in adoption of 3G and 4G.
Q. Mr. Murphree, is the problem in China that the state has too much control? And won’t simply allowing private companies more space to thrive allow China to move up the value chain and develop great, innovative companies?
Mr. Murphree: There is a belief, accepted on faith, that markets are organic and dynamic, and that if the government steps away, innovation will blossom. But there is a really clear role the Chinese government should play. At the most basic level, they should clearly define and enforce rules and regulations because markets are created by rules and laws.
Mr. Breznitz: Becoming a regulator and law enforcer is one point. But the reality is more complex. If you are to look at major innovative countries, Finland, Taiwan, Israel, and even the U.S., almost all great new technologies came in large extent thanks to government funding and pushing. Hence, apart from being the regulator, the state often stimulates and steps in. In Taiwan, the government gave training and much more to the semiconductor companies, and taught them how to make a profit. In Israel, without the state channeling money toward R.&D., pushing innovations and lowering the risk that entrepreneurs needed to take in order to do R.&D., there wouldn’t have been the Israeli high-tech miracle with its hundreds of companies listed on Nasdaq. So there is an active role for the Chinese government to play.
Q. So, after reviewing China’s growth situation and its efforts to drive innovation, what advice would you have for the government? What can Beijing do to drive growth and innovation?
Mr. Breznitz: The things that will help China have strength, sustain growth and make the country more profitable are to focus on its existing activities in production and development. China should put more R.&D. around those activities and make itself a player in even more stages and activities.
The second problem to address is that the finance system is broken. Improving it would do a lot. Make it easier and more transparent for companies to get financing.
Third, every big company, including Lenovo, now needs to have multiple ownership structures to engage in new and different activities. Trying to balance foreign, state, and private ownership forms and structures within the same organization or group of companies in order to participate in different market segments or economic activities is a drain on resources. Equal treatment for different types of firms would be beneficial.
And then there’s the rule of law. Fix that part. Making laws and regulations clear will go a long way. Uncertainly means higher risks.
R.&D., especially novel-product R.&D., is expensive, time-consuming and inherently risky. Uncertainty over political and economic institutions makes it even more risky and discourages investment or entrepreneurship in this area. We’re not even talking about intellectual property rights. This is about basic rule of law. Even if laws appear restrictive, having clear and enforced laws will reduce uncertainty and immensely benefit R.&D.-intensive enterprises.
