Why China’s Economy Lacks True Innovation

China needs social and political reform for innovation to flourish and fuel economic growth
February 29, 2016 11:20 am Last Updated: March 1, 2016 3:44 pm

In the past several hundred years human society has experienced a cycle of globalization. It began when Columbus sailed to the Americas 500 years ago. Since then the market has kept expanding, the division of labor deepening, technology progressing, and wealth increasing. At the core of this cycle are entrepreneurs. The market does not come about all by itself. The market is composed of entrepreneurs. For instance, without WeChat (a popular chatting application), there would be no WeChat market. Without cell phones, there would be no cell phone market. All markets are created by entrepreneurs, who also created the division of labor. Innovation is the basic function of entrepreneurs. It brings economic growth and increases wealth. Transforming and developing new markets is the job of entrepreneurs.

Today, China has widespread overcapacity. It means Chinese entrepreneurs have not developed any new markets. Despite our increased wealth, we are still doing repetitive production, although the market is already saturated.

I see two reasons for the absence of innovation in China: counterfeit products and social-political restraints.

Counterfeit Products

For almost three decades, beginning in the 1980s, when Chinese entrepreneurs experienced their first financial successes, there were many uneven markets in China. At that time, the “low-hanging fruit” was plucked by simply copying other countries’ existing products. In other words, they made money with counterfeit products. Over time, they did not think about creating something new to meet market needs.

Social Restraints

Another factor is China’s social-political system. The social system decides whether entrepreneurs are inclined toward innovation or regulation. Regulation does not involve much risk or uncertainty. As long as one dares to take some risks, one can make money. Innovation, however, is completely uncertain. One has to see things that no one else can see, and some people might even consider the idea crazy. In a system that does not tolerate freedom, nor the basic guarantee of rights, including the right to own the returns of innovation, most entrepreneurs simply won’t focus on innovating.

If a country does not have a sound legal system, there will be a lot of regulation-type economic activity. In a country with no rule of law, no transparent policies, where rules keep changing and people’s rights are not effectively guaranteed, entrepreneurs cannot be innovative. Innovation takes time. It may take three, five, or even ten or twenty years to develop a product.

A good example is the Gillette razor. King C. Gillette was a small door-to-door merchant in the late 1800s. His initial idea for developing a cheaper, safer, disposable razor blade was sparked by his annoyance of always getting cuts on his face when shaving. He talked to numerous experts who told him that it was not possible, and that there was no way to make steel so thin and cheaply. But Gillette did not believe that, and kept pursuing his idea until he finally succeeded six years later. Six years is actually quite a short time for developing a new product compared with the challenges and failure many inventors have faced.

If China really transforms from its past growth model of resource allocation to innovation, then entrepreneurs must also change from being regulated to becoming innovative. To encourage innovation, China’s economic and political systems must undergo radical changes. To quote Tyler Cowen in “The Great Stagnation”: Only through a rule of law which strictly restrains government power can entrepreneurs have the ability and confidence to make reasonable predictions and invest in the future.

China, therefore, also needs reform in other areas, including reform of the education system. When the Chinese people’s minds, especially students’ and scholars’, are freed, new ideas will come. All innovation starts from an idea, a new and different idea that most people do not embrace. Only then can China expect higher economic growth in the future. Innovation, in fact, equals freedom.

Zhang Weiying is a prominent Chinese economist and former head of the Guanghua School of Management at Beijing University.