The Chinese Model of Growth

From 1979 to the early 2000's, China’s entire economic system was undergoing fundamental and ongoing reform. It began with the Open Door Policy initiated by Deng Xiaoping to agriculture and later extended to industry, services, and China's innovation system. Reforms contributed to far-reaching deregulation and the creation of new framework conditions, helping to create a unified domestic market and improve the functioning of markets. China has been transformed into a more market-based economy with a thriving private sector.

This is important because S&T activity should ideally take place in the private sector. Creating a thriving private sector is important not just for economic reform but for development of S&T innovation within any nation. It creates incentives.

Also, reforms have also been directed at the state-owned enterprises (SOEs) to transform them into modern market-oriented corporate entities. This is difficult because SOEs are large and have long histories. This is an ongoing process. Structural change in ownership distribution has been more pronounced in manufacturing, where it accounts for over half of the value added. SOEs still record much lower levels of productivity, are less efficient knowledge producers, and often lack the basis for R&D, as compared to private firms.

Growth in China has also been underpinned by international openness to foreign trade and to foreign investment as the Open-Door policy resulted in China's accession to the World Trade Organization, a watershed moment in 2001. Through the acceptance of globalization, China has become one of the most open of the large developing countries. A large influx of foreign direct investment (FDI) facilitated China's integration to the global economy. China is not acting in isolation. It acts in competition with other major actors around the globe. Openness has helped China make better use of its comparative advantages and has helped it become a major trading nation. China is referred to as a workshop of the world, able to export many products that the rest of the world requires. Many analysts predict that very soon there will be large multinationals with origins in China which will become global actors throughout the international economy.

Openness has also led to a greater competition in product markets and services leading to better quality and a larger variety of goods. This also applies to science and S&T products. When companies and individuals are well aware that their efforts and activities are going to be suitably rewarded within the market economy framework, they're more likely to engage and innovate with activities.

Foreign enterprises contribute significantly to China's economic growth through high labor productivity. However, domestic enterprises within China are also beginning to become more and more productive. Finally, foreign direct investment (FDI)has provided access to technology know-how and skills. FDI has been important in allowing the actual technology to enter into China but also has helped bring in expertise, skills, techniques and related knowledge that is required to use, to repair, to improve, and further build upon the technologies that they have acquired from overseas. Technological knowledge can be transferred via imports of intermediate and capital goods from foreign-invested firms. They improved China's access to advanced technologies that have been created internationally, overseas. Management practices and skills in foreign-invested firms are also important because they serve as major channels of technology import. So, foreign-invested firms have a very important role to play, in terms of China's S&T development but their importance should not be exaggerated. Foreign invested firms have performed little technological innovation of product design in China. Many of the new products and scientific discoveries are made overseas and Chinese scientists, engineers and domestic indigenous Chinese manufacturers or creators of S&T do not benefit from foreign technology imported by foreign-invested firms from their home countries. Furthermore, core technologies remain controlled mostly by foreign partners and joint ventures by company headquarters abroad.

Many foreign-invested firms are reluctant to let go of their core technologies which are the most technologically sophisticated. Foreign-invested firms are also less R&D intensive than domestic firms in general whereas local firms are striving very hard to create their technologies domestically by themselves. Finally, the importance of foreign-invested firms should not be over-exaggerated because technology transfer and related spill-over to domestic economy could still be better.

There are other challenges which are not directly S&T related but have the potential. For instance, one of the challenges that China faces is that China's GDP is unevenly distributed between the coastal regions and the western provinces. Along the coast of China are the most prosperous, successful, and richest cities, towns and provinces whereas in the western part, provinces are lagging behind. In some rural areas, poverty remains a challenge.

Owing to the aging population and its One Child policy, China may age before getting rich. In terms of S&T, China's export growth has depended largely on expansion of low wage, resource intensive manufacturing. A move to high wage, capital intensive, knowledge-based manufacturing would follow what many of the advanced countries of the west have successfully done.

There are large migrations from the rural areas to the coastal provinces and this has lead to rapid urbanization with damages to the social fabric and the environment. Economic growth has brought a high demand for energy and raw materials and this has also resulted in environmental degradation. The health of the population has suffered. Beijing has recently seen very high levels of air pollution which has caused its residents to rise up and demand changes from the government.

China has made a reputation for exporting low cost manufactured products that it creates locally but has not yet made a name for itself in S&T and innovation. Since 2000, leaders have been striving to build a high-performing enterprise-based innovation system where private enterprises lead the way, rather than the government. Market forces determine and influence which science to invest in and which technological product to create. Some Chinese enterprises are developing their own innovation capabilities and introducing global Chinese brands. The ratio of R&D to imports of technology has increased considerably in the past decade. Particularly from 2006 onwards, large sums of money have been spent on R&D, much of it by the government. One tactic that Chinese companies have been using with mixed success is mergers and acquisitions in order to gain access to knowledge through overseas R&D and design labs. A Chinese company will try to buy out a company or merge with a company abroad that is very sophisticated technologically and thereby gain access to their knowledge and bring that back into China.
from Coursera course, Science and Technology and Society in China. Week 2. by Naubahar Sharif, The Hong Kong University of Science and Technology