China is preparing to turn a nearly 40-year-old industrial development strategy on its head.
Since the early 1980s, Beijing’s approach to technological and industrial progress was to import it, mainly by entering into joint ventures with foreign firms that provided high technology and startup. Eventually, the Chinese would reverse-engineer the technology and make—and export—their own competitive products or services.
Examples of such an industrial approach are numerous: Huawei, Haier, Alibaba, and COMAC (China’s commercial aircraft company). Some of these ventures have been incredibly successful, transforming China into a leading subcontractor and even an original equipment manufacturer.
The success behind this strategy was an embrace of globalization and a generally hands-off policy on the part of the Chinese central government. Now, however, in line with Xi Jinping’s “president of everything” style of governing, Beijing is about to nationalize and centralize the country’s approach toward next-generation research and development (R&D).
In particular, Xi and the Chinese Communist Party (CCP) are pressing the development of so-called “fourth industrial revolution” (4IR) technologies such as artificial intelligence (AI), robotics, cloud computing, and automation, as well as semiconductors and software.
At the same time, Xi and the CCP are trying to shift high-tech R&D and manufacturing from the coastal cities to the interior, in keeping with Xi’s larger campaign of “common prosperity”—redistributing national wealth from the richer east to the poorer hinterlands. He will do so by nurturing the creation of a “loyal cadre” of startup companies that will carry out the government’s development policies.
The Economist rightly calls this strategy a “weighty bet” for China becoming the global center of innovation over the next decade. It is certainly an approach fraught with risk, especially given China’s earlier, failed attempts at top-down, state-centric efforts at innovation and cutting-edge manufacturing.
In contrast, both Taiwan and South Korea already build chips as small as 5 nm or less.
Commercial aerospace is another sector where China’s state-heavy approach to investment and innovation has resulted in less-than-stellar outcomes. China’s two largest civilian airliners, the ARJ21 and the C919, are years behind their development schedules, and both have failed to obtain western airworthiness certification. Likely, neither will ever sell outside of China.
Xi’s new top-down, state-driven approach to 4IR technology innovation may pay off in some instances. The Economist notes the apparently successful efforts of companies such as Baosight and Sangfor Technologies, which deliver high-tech solutions directly to the central government, as opposed to the “soft tech” of the consumer-internet sector such as TikTok or Tencent. These firms are either directly state-owned or closely linked to the CCP.
However, the more the state controls investments in 4IR R&D programs, and the more it directly picks “winners and losers,” the more chances there are for waste, abuse, and just plain bad decision-making.
In the first place, giving the CCP more control over the economy will suppress entrepreneurialism and foreign investment. Moreover, it will permit zealous party officials to regain power over economic decisions that had been previously decentralized and privatized.
In sum, the same article asserts that “a tech industry where the incentives are subsidies and fear, and which is separated from an increasingly globalized system of venture capital, is likely to fall behind the frontier of innovation.”
Compounding this problem is the fact that authoritarian governments, particularly ones run by increasingly personalistic dictatorships such as Xi’s, generally find it difficult to admit mistakes and change course. This tendency to double down on bad policy only further risks China’s dream of becoming the world’s center for 4IR technological innovation.
