The World’s Innovation Fire-Breathing Dragon

Perhaps the most critical question for the United States vis-à-vis the economic and technology challenge it faces from China is whether China can become a real innovator. As Rob Atkinson writes in The International Economy, if China remains largely a copier of others’ innovations, and if the United States can maintain or increase its rate of innovation, the United States has a better chance of maintaining its lead over China. But if China can develop new-to-the-world innovations faster or even at the nearly the same rate as the United States and other allied nations, then it is much more likely that China will be able to take significant market share from OECD nations’ technology companies.

As things now stand, China is on course to achieve that ambition across a range of advanced technology industries, especially as Chinese firms benefit from a large protected domestic market and a vastly more supportive government.

For the most part, scholars studying the Chinese economy have argued that China is incapable of “true” innovation, at least at the global frontier of science and technology. The prevailing view is that China is constrained by an education system that encourages rote memorization and represses creative expression, a risk-averse culture centered around a reverence for authority, weak intellectual property protections, and inefficient state involvement in markets. Proponents of these arguments believe that while China’s economic rise is impressive, it is bound to be at best a fast follower of Western innovators.

Examples of such arguments abound. Emblematic is an article in Foreign Affairs by China scholar George Magnus, who wrote in May 2024 that China

cannot create a true climate of economic innovation so long as its rigid politics and governance and exclusionary approach to institution building remain in place. In fact, an innovation-based industrial strategy may not be transformative if the government is unable to address basic systemic weaknesses such as youth unemployment, frailties in China’s banking and financial systems, and weak consumer demand.

These kinds of rationales for why China can’t innovate repeat past assumptions about other Asian “tiger” economies, including South Korea, Taiwan, and Singapore. Moreover, they reflect a very narrow view of innovation—the archetype of the lone inventor working away in a garage until an aha! moment occurs, producing a new-to-the-world idea. But that is invention, something the United States is quite good at, not innovation. Innovation is the process of turning inventions into useful new products and commercializing them globally. And the rationales for why China can’t innovate really do not hold water. They are based on an ideological assumption that only market capitalism, and not state capitalism, can produce leading firms in advanced industries.

In reality, China is proving it can innovate by making rapid progress in many industries, both advanced and emerging. The Chinese Communist Party began that process with its 2006 Medium and Long-Term Plan on Science and Technology, followed by the 2015 Made in China 2025 plan, released under President Xi Jinping. MIC2025 has been followed by many specific action plans directed at individual technologies and industries, including semiconductors and biotechnology. This all should serve as a wakeup call for the West, because were China to achieve these capabilities, combined with its lower costs, Chinese firms could dominate global markets in many if not most advanced industries. The implications for national economic and military power would be significant.

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