Beijing's 're-innovation' strategy is key element of US-China competition – Brookings Institution

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Tomorrow’s tech policy conversations today
It wasn’t long ago that many U.S. government officials and China experts still clung to the idea that Chinese innovation was mostly based on copying U.S. methods and technology. To some extent, they weren’t entirely wrong. As the analyst Arthur Kroeber argues in China’s Economy, Chinese firms are good at “adaptive innovation”—the concept of “taking existing products, services, or processes and modifying them to make them more receptive to China’s economic and military needs.” So when China’s People’s Liberation Army unveiled its J-20 stealth fighter in 2011, it caused an uproar in U.S. defense circles because of its similarity to American equivalents and seemed to confirm the perception of China as reliant on copying the work of others. Indeed, whether by theft or forced transfer, the acquisition of foreign intellectual property has served as a key component of China’s technological forward march.
However, the legal, illegal, and extralegal appropriation of foreign technologies and products is only one part of the story. In fact, the Chinese government has been pushing its tech industry to move beyond copycat methods. Beijing has also leveraged overseas technology and knowledge—in conjunction with supporting reforms—to bolster its own innovation capabilities and adapt them to fit within the Chinese model. In essence, Chinese technological innovation is a system of “re-innovation”, or zaichuangxin; it does not mirror other global paradigms.
As my colleague at the Center for Security and Emerging Technology (CSET) Anna Puglisi has written, discussions surrounding China as a strategic competitor have been shaped by the notion that only democracy can promote innovation and creativity, that a market economy provides the only route to success, and that innovation derives from the private sector. Every day, China is disproving this line of thinking. From a U.S. policy perspective, a more holistic understanding of China’s innovation strategy—beyond a myopic focus on technology transfer—will be key to effectively competing with China in emerging and foundational technologies.
Rather than copying capitalist systems like that of the United States, the Chinese government has sought to create a system that, through various formal and informal channels, promotes connectivity between state-owned enterprises (SOEs) and nominally private Chinese enterprises. China’s leadership understands the challenges facing SOEs in being innovative and has built systems to address them. The push toward a state capitalist system—one in which ostensibly private Chinese firms compete alongside traditional SOEs—has put new and innovative Chinese companies on the global stage. The private firms Baidu, Alibaba, and Tencent have managed to compete globally with multinational corporations in new and emerging high-tech fields by balancing state backing with private sector innovation and resources. Similarly, biotech giant BGI has managed to dominate the genetic sequencing industry via private investment and government subsidies and support.
Indeed, the connections between the Chinese party-state, state-owned companies and banks, and technology firms gives China an unrivaled ability to provide what experts refer to as “the complete value package,” presenting non-Chinese companies with few options when it comes to competing. Government guidance funds (GGFs) are a perfect representation of this interconnectivity in action. These public-private investment funds aim to produce financial returns while furthering the Party-state’s industrial policy goals, many of which relate to emerging technologies and high-tech competition, according to a study by Ngor Luong, Zachary Arnold, and Ben Murphy. GGFs play a variety of roles: Some are designed to promote a strategic high-tech industry like semiconductors or AI; others aim to attract industry to a specific city or region within China. Formed at the behest of a central, provincial, or local government agency, GGFs have been known to either invest directly in companies or tangible projects, or invest indirectly through a funds-of-funds approach. GGFs provide a number of benefits, including by helping Chinese policymakers leverage market discipline and expertise and by offering long-term, stable investment capital to startups, helping them to cross the “valley of death,” the stage between discovery and commercialization.
Government backing and incentives for research have enhanced China’s innovation potential. On the research front, Beijing has attempted to improve both its basic research ecosystem and to bridge the gap between basic and applied research, spurring innovation in the process. Large government-sponsored initiatives like the National Basic Research Program (973 Program) launched in 1997, the National High-Tech R&D Program (863 Program) established in 1986, and others have helped to funnel finances and resources to Chinese scientists and entrepreneurs and streamline the innovation process. In 2009, the 973 Program supported 123 new scientific programs and 424 ongoing projects. According to the Ministry of Science and Technology (MOST), these programs led to the creation of the world’s first light quantum telephone network and advances in low-cost solar batteries. Funding from the 863 Program supported the development of China’s Tianhe-1A supercomputer, which overtook Oak Ridge National Laboratory’s Jaguar as the world’s fastest computer in October 2010.
China has worked to restructure its higher education system to develop universities capable of conducting research and competing at an international level through the 985 Project, the 211 Project, and now the Double First-Class Plan. Thanks to these efforts, Chinese universities are climbing global rankings, with Peking University and Tsinghua University among U.S. News and World Report’s top 100 global universities in 2021. Although recent estimates suggest that China is still behind the United States in terms of quality of its universities, China’s significant progress over the last two decades should not be discounted.
Taken together, the growing success of Chinese universities and companies discredits the idea that only democracies are amenable to innovation. Chinese leadership appears to have recognized the potential constraints early on and has worked to adapt the Chinese system to combine the innovative aspects of capitalism with more rigid, traditional socialist features.
Since his early days as leader, Xi Jinping has emphasized the need to “unswervingly follow the path of independent innovation with Chinese characteristics.” This push is beginning to deliver results. According to the 2020 Global Innovation Index, China is now the 14th most innovative country in the world, a major improvement on its 43rd ranking just 10 years ago. Even before Xi, the Medium- to Long-Term Plan for Science and Technology Development (MLP), released in 2006, states that building an innovation-oriented country is a “major strategic choice” for China’s future development. Other planning documents of the Xi-era, such as the 2015 Innovation-Driven Development Strategy (IDDS), describe the capability to innovate technologically as a source of national strength and links this concept to the dream of the great rejuvenation of the Chinese nation.
Perhaps the most important example of China’s efforts to innovate technologically—and in key ways surpass the United States—is WeChat. What began as a messaging app no different than WhatsApp or Skype has evolved into a high-tech Swiss Army knife of sorts. Individuals are able to do almost anything using the app, from ordering food and paying bills to filing for divorce and applying for visas. The proliferation of WeChat throughout Chinese society—spanning generations and across the urban-rural divide—is a monumental feat and demonstrates WeChat’s adaptability.
Beyond WeChat, China is now home to many of the world’s leading fintech companies, including Ant Financial and JD Finance, among others. The management scholar Nir Kshetri attributes this success to a handful of factors, including a high degree of technological savvy among Chinese consumers, a fintech-friendly regulatory environment, and China’s improving science and technology prowess. Western technology firms have observed China’s digital payments success and are trying to play catch-up, but no one has been able to replicate the wide variety of services offered by China’s most important “super app.” Survey data from 2019 found that 95% of Chinese online consumers had used mobile payments at least once in a three-month period, and the average user made four transactions per day. In comparison, as of 2018, only one-fifth of the U.S. population had ever used mobile payments.
Chinese smart cities provide another example of China’s ability to derive something innovative from pre-existing technologies. Defined by the United Nations as a city that uses information and communication technology (ICT) to improve quality of life and efficiency of urban operations and services, smart cities are not new, nor are they uniquely Chinese. In Portland, Oregon, smart city technologies are being deployed to collect and share data across public and private industry to increase efficiency and promote transparency. In Berlin, the government is working to use ICTs to make the city more efficient, healthier, cleaner, and more sustainable.  
Beijing has gone a step further in building smart cities by incorporating surveillance and population monitoring technologies into the broader smart city ecosystem. The initial idea came from outside China. According to a 2020 report from SOS International, IBM initially helped to advance the smart city concept in China. Now, Chinese smart cities make use of an integrated system of “physical, information, social, and commercial infrastructure” to allow a given city to monitor its citizens and report back through a vast connected network. A 2019 report from China’s National Development and Reform Commission (NDRC) even attempts to differentiate Chinese smart cities from foreign ones; the latter focus on the “management of ‘things,’” while the Chinese version focuses on people.
China’s investments in smart cities have yielded a major windfall. China’s smart cities market is estimated to be worth more than $1 trillion, and three Chinese entities dominate smart city patents. These entities include Huawei, the Chinese Academy of Sciences, and the State Grid Corporation, which holds the number one spot. Although Japanese and South Korean firms also sit within the top ten holders of smart city patents, State Grid Corporation’s 7,156 patents in November 2020 was more than double second-ranked Samsung’s mere 3,148 patents. Chinese firms have also successfully marketed the Chinese version of smart cities to countries around the world, many of which share similar, non-liberal governance structures.
However, despite successes in fintech and smart cities, China continues to struggle to innovate in key areas, particularly advanced computer chips and the expensive machines that make them. Despite the huge amount of capital (estimated to be upwards of $150 billion USD from 2014 through 2030) and resources that Beijing has poured into bolstering China’s domestic semiconductor manufacturing capacity, many of the country’s leading firms are struggling to realize the government’s goals. After being added to the U.S. Department of Commerce’s Entity List in 2020, China’s most advanced chip foundry, Semiconductor Manufacturing International Corporation (SMIC), has struggled to meet its goals. Despite promising to produce thin and modern 7-nanometer chips, SMIC lacks the machine tools to make them. U.S. export controls on chip design software and foundry machine tools have also crippled Huawei’s HiSilicon, effectively curbing its only potential rival to U.S. advanced chips. 
To be sure, Beijing’s reliance on imported technologies goes well beyond foreign-designed semiconductors. According to a 2018 article from the Ministry of Education, China relies on imports for 35 key technologies that it is unable to produce domestically in sufficient quality or quantity. These technologies include heavy-duty gas turbines, high-pressure piston pumps, steel for high-end bearings, photolithography machines, core industrial software, and more. With U.S.-China bilateral technology investment seeing a steep 96 percent decline since 2016, Beijing has been forced to look for new ways to source key technologies, turning to shell companies and intermediary agents to source foreign components, reagents, and other relevant equipment.
In short, China has demonstrated its capacity to indigenously innovate, but this capacity has not yet proliferated across all key sectors. What initially began as a strategy to import and copy the technology and innovations of other nations has changed to reflect China’s growing ability to take foreign ideas and concepts and mold them with respect to China’s domestic requirements.
In 2014, the scholars John Delury and Orville Schell opined that the Chinese party-state had continued to shock the world with its ability to “change course and prevail,” despite its rigidities and constraints. Regardless of the skepticism that it could do so, China has demonstrated its capacity to innovate and compete technologically on a global scale. Without understanding this, the United States will struggle to craft effective policies and get ahead in the U.S.-China tech competition.
If U.S. policymakers operate under the supposition that China will merely continue to copy American technologies, strategies, and processes, they will fundamentally misunderstand China’s strategic intentions. Beijing’s move to establish a comprehensive technology transfer system is founded on the assumption that these strategic technologies will make their way to China in order to be re-innovated, not just copied. China has developed mechanisms through which institutions, companies, and individuals can learn from foreign technologies, processes, or other individuals, and adapt these lessons to fill strategic gaps in China’s innovation base. For U.S. policymakers, understanding the end-state of China’s technology transfer system is critical to crafting effective policy. It is hard to design policies to counter something you don’t understand.
U.S. policymakers have increasingly done away with the largely debunked notion that non-free market countries cannot innovate. Assessments of innovative capacity by regime type, while interesting in theory, have not held up in practice. A better path forward involves developing an understanding of how the Chinese government draws on free market principles to advance its goals without surrendering control of the private sector, and identifying areas where such policies make it more vulnerable rather than more resilient. As we watch the Chinese Communist Party celebrate its centennial anniversary in 2021, many observers have noted that China has moved away from traditional communism and more towards a system that fits its modern needs—Socialism with Chinese Characteristics for the New Era, as designated by Xi Jinping himself.
For the United States, strategic competition with China will be a defining feature of the 21st century. Technology is a huge component of this rivalry, particularly as both China and the United States push to set the standards in key emerging technology fields like 5G, quantum computing, and more. U.S. experts and policymakers cannot operate under the flawed and debunked assumption that China cannot innovate in these emerging technologies. Successful and efficacious policy will come about only if we avoid mirror imaging and assess China within the confines of its own capabilities and limitations.
Emily Weinstein is a research analyst with the Center for Security and Emerging Technology at Georgetown University.
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