China's Innovation Challenge Explored by the Author of ‘Need, Speed, and Greed’

GUEST AUTHOR BLOG: Can China Innovate? by Vijay V. Vaitheeswaran, China Business Editor of the Economist and author of "Need, Speed, and Greed" (Harper Business, March 13, 2012)

Need, Speed, And Greed by Vijay V. Vaitheeswaran
Need, Speed, And Greed by Vijay V. Vaitheeswaran

The end of cheap China is at hand, but contrary to widespread predictions, this does not mean that Vietnam will be the next China—or even that the poor interior bits of China will replace coastal China as the workshop to the world. Rather, it looks like the world will simply be stuck with a more expensive China for a while. In time, though, its rivals will improve their infrastructure, regulations and supply chains, and China’s long and profitable run as the workshop to the world will come to an end.

China’s leaders are painfully aware of this, and so have decided that the future lies racing to the cutting edge of innovation. The current official five-year plan lays out the leadership’s plans, and lavishes the treasury’s billions, to create cutting-edge industries in everything from electric cars and clean energy to the next generation of the internet.

Alas, there are no shortcuts when it comes to building an innovation economy. Of course, China does innovate already, but it does so in ways common among developing economies playing catch up to the rich world’s innovators. Its frugal engineers are coming up with technologies that are cheaper and sometimes better than those of rich-world rivals, who tend to gold-plate technologies. Its manufacturers are brilliant at process innovations that given them unmatched scale and speed to market. And its internet startups, which typically copy western business models but add ingenious local variations, have shown that it has a knack for frenzied adaptation.

China has long prized invention--but innovation is about much more than mere technology, patents and gizmos. Properly defined, it is fresh thinking that creates market value. On that score, China still fares poorly. Though Chinese sweat produces most of the world’s goods, it is designers in Scandinavia and marketers in California that create and capture most of the value from such products.

If China wants to become a genuine innovation powerhouse, it needs to fix several serious problems that hold back the entrepreneurial and creative drive of its population. First, it needs to sort out its national system of research and development. The most important reform involves strengthening the patchy and politicized enforcement of its (fairly virtuous) laws on intellectual property. Also, the country pours in huge amounts of money, but too much of this is wasted. For one thing, most of the money goes into development and not enough into research. It is too difficult for new ideas in the lab to move to the marketplace. And even the pockets of excellence that exist—for example, in genomics—tend to be disconnected and politicized fiefdoms.

"If China wants to become a genuine innovation powerhouse, it needs to fix several serious problems that hold back the entrepreneurial and creative drive of its population." -Author, "Need, Speed, and Greed", Vijay V. Vaitheeswaran

That points to another big obstacle. The government must stop picking technology winners and cultivating national champions if innovation is to flourish. Official efforts to mandate its way to a world-beating electric car industry have produced meager results, for example. Subsidizing clean energy manufacturers has a mixed record, as its wind and solar manufacturers now face retaliatory trade measures. And China’s recently announced push to create a dozen well-funded clusters to build the next generation of the internet looks more likely to produce a herd of white elephants.

The biggest obstacle, though, is the stifling market power and grip on capital markets held by the country’s state-run enterprises. In the decade following the country’s accession to the WTO, China’s leaders have consolidated many “strategic” industries in the hands of favored firms, leaving them less competitive than before. The snag is that such dinosaurs suck in capital and crowd out both sparky entrepreneurs and nimbler private-sector companies. Only by introducing genuine competition to its cosseted domestic markets will China be able to move from imitation to innovation and escape the cheap China trap.

Tune In:

Vijay Vaitheeswaran will be a guest on CNBC's Squawk Box, Monday, March 13. The interview is scheduled for 6:40 AM/ET.

About the author: Vijay V. Vaitheeswaran, is the award-winning the China Business Editor of the Economist and now author of "Need, Speed, and Greed: How the New Rules of Innovation Can Transform Businesses, Propel Nations to Greatness, and Tame the World's Most Wicked Problems."He is a member of the Council on Foreign Relations, an adviser to the World Economic Forum, and an adjunct faculty member at NYU’s Stern School of Business. He is also the author of "Zoom" and "Power to the People" His op-eds have appeared in the New York Times and the Wall Street Journal, and he is a regular guest on NPR’s Marketplace, PBS’s NewsHour, ABC’s Nightline, and other leading programs.

Email me at bullishonbooks@cnbc.comAnd follow me on Twitter @BullishonBooks