China’s Innovation and Competitiveness Policies

Over the past few decades, China’s rapid economic transformation into a global manufacturing hub has attracted billions of dollars in foreign direct investment, and lifted hundreds of millions out of poverty.  The growth of the Chinese economy is astonishing. In 2000, China’s GDP was just a quarter of Japan’s but in 2010 China became the second largest economy in the world. In comparison with the U.S. GDP, China’s GDP was a little more than a tenth in 2000 but reached two fifths in 2010. Standard Chartered Bank issued a report in November 2010 stating that China would likely overtake the U.S. to become the world’s largest economy by 2020.

Chinese companies have competitiveness in producing low-value, labor-intensive goods. Today, Chinese competitiveness is not confined to traditional areas. China successfully absorbed foreign technologies and has become a strong competitor to companies of the developed countries. The Chinese leadership is trying to upgrade Chinese innovative capabilities; Beijing has set clear objectives to promote indigenous innovations with the recently approved 12th Five Year Plan (2011-2015), which calls for bolder steps in reform and innovation.

The rise of China and the relative declines of the U.S. and Japan cause a risk of strategic miscalculation among Beijing, Washington, and Tokyo. Hubris on its competitiveness and future prospects of economic growth as well as strong nationalism serve as a basis of Chinese sentiments, policies, and actions. On the other hand, as shown in several public opinion polls, the U.S. and Japan overestimate Chinese strength and have excessive fears of decline. We should avoid the “déjà vu” of U.S.-Japan trade frictions in the late 1980s; an opinion poll in the U.S. showed Japanese economic strength was a greater threat to the U.S. than Soviet’s military strength. Miscalculations among the three are likely to produce serious obstacles to developing sound relationships among them.

The U.S., Japan, and China need a positive-sum game. Today, there is no need to explain how China is important to U.S. and Japanese economies. At the same time, Chinese economic development, which is a key to domestic political stability, has critical stakes in its relations with the U.S. and Japan. Chinese companies still owe their innovative capabilities to U.S. and Japanese companies. Given India’s rapid economic development, future decline of working-age population in China, and increasing Chinese domestic attention to environment, there are many reasons for Chinese companies to strengthen their ties with U.S. and Japanese companies.

It is imperative that the U.S. and Japan establish better understanding of the true nature and scope of China’s competitiveness in key technology areas, as well as current state of Chinese competitiveness policies. Objective assessments of Chinese reliance on U.S. and Japanese capabilities (such as FDI, technology and service trade, global business operation network, and so forth) will reduce a risk of the miscalculation and serve as a basis of future development of their sound relations. Moreover, identifying relevant U.S. and Japanese policies or strategies to encourage China to integrate into the liberal and open market economies could enlarge possibilities of the world.

This project will focus primarily on the nature of Chinese competitiveness in key technology areas, as well as lessons for the United States and Japan.  Our work aims to assess Chinese competitiveness, understand Chinese policy making on competitiveness issues, identify areas in which Chinese competitiveness relies on U.S. and Japanese companies as well as U.S. and Japanese policies that might affect Chinese competitiveness, and provide future direction for U.S. and Japanese policies to keep their competitiveness in face of the rise of China.