In this respect, the South East Asian developmental states of Taiwan, South Korea and China have been relatively successful in their attempts to build strong biopharmaceutical industries. Likewise, the Brazilian state has undertaken significant drives to promote the development of their semiconductor chip production capabilities and India has also achieved notable success in the technology industries. However, many of these developmental states have secured their place in global value chains by offering highly-skilled yet inexpensive labour that can affordably imitate technological innovations as opposed to being market leaders capable of producing cutting-edge products and services.
Some authors argue that this might be due to the fact that the nature of a developmental state is too restrictive to allow for leadership in technological innovation, and that a shift to an entrepreneurial state is required in order to innovate and invent as opposed to just imitating latest trends. With specific reference to the global innovation race between China and America, it is worth examining whether the approach taken by a developmental state in terms of promoting and governing technological innovation lends itself to technological success and whether developmental states have not only been able to optimise the benefits of technological innovation within their domestic economies, but also take the lead globally and compete with more advanced countries.
RECAP: WHAT IS A ‘DEVELOPMENTAL STATE’?
The concept of a developmental state emerged from the successful and rapid growth of the East Asian economies from the 1960s, including Japan and the ‘four Asian tigers’ – Singapore, Hong Kong, South Korea and Taiwan (Abe, 2006). Chalmers Johnson was the first to coin the term in his book entitled ‘MITI and the Japanese Miracle’ (Johnson, 1982), wherein he emphasised that a ‘developmental state’ is distinguished from other governance models by its motivations for market intervention.
Other authors, such as Castells (1992) and Chang (2010) have broadened this definition by contending that a developmental state is one that focuses on generating high economic growth rates, promoting structural change in production patterns and implementing welfare policies to achieve social equity. It is, in essence, a governing model whereby the state takes responsibility for driving a country’s economic growth through its own structures and institutions. For more on the concept, please refer to my previous blog entry.
INVENTION VERSUS INNOVATION
It is also necessary to define innovation and distinguish it from the idea of an invention. According to Friedberg (2013), ‘invention is the first occurrence of an idea for a new product or process, while innovation is the first attempt to carry it out in practice.’ Invention is an original, creative process whilst imitation is a replication process – the means by which innovative ideas are brought to life and diffused throughout an economy (Friedberg, 2013).
Schumpeter, one of the most influential innovation scholars, emphasises the importance of innovation for economic prosperity. He advocated for “the disruption of general equilibrium of markets by entrepreneurial activity,” whereby economic resources are continually combined in new ways so as to yield more output for every unit of input (Lazonick, 2008).
A key argument levelled against China is that the country is incredibly adept at ‘Copy to China’ (imitation) but has not yet been able to transition to ‘Created in China,’ (invention). That is, the Chinese are able to rapidly reverse engineer the latest technology and create large economies of scale via efficient hubs of production to mass-produce their own versions at low cost, but they have not yet been majorly successful at producing unique cutting edge inventions. Certainly, this has been the case for the last few decades. However, since 2015, there appears to be slight changes in this trend, renewing global debates as to which out of China and America are truly the world’s leading innovators.
WHY HAVE DEVELOPING COUNTRIES EMBRACED INNOVATION?
The increasing level of worldwide innovation activity is a consequence of the movement of the global economy towards knowledge and services (Arora et al, 2002). According to Kuznets, ‘the distinguishing characteristic of modern economic growth has been the systematic application of science to economic ends’ where knowledge is traded as a commodity (Arora et al, 2002). Previously, the accumulation of physical and financial capital, together with a well skilled labour force, were seen as the key elements behind economic growth. More recently, technical capabilities and adaptive institutions are highlighted as being essential (Freeman, 2002).
Consequently, markets for technology have emerged. These have enabled the spread of innovation instruments and services, in particular to developing countries. The competitive nature of technology markets, with few barriers to entry and easily transferable ideas, levels the playing field by enabling less productive firms (or countries) to obtain new innovations and catch up to their peers (Arora et al, 2002).
This is a significant advantage for developing countries as for many of them, relying on catch-up strategies to achieve economic growth is not a long-term solution. Furthermore, the marginal benefits of using established innovative technologies are beginning to diminish. Therefore, countries intending to grow at rapid rates and leapfrog their advanced counterparts must find sources of growth elsewhere – such as in their own ability to innovate and create knowledge (Freeman, 2002).
CHINA’S SHIFT TOWARDS A KNOWLEDGE-BASED ECONOMY
In line with the increase in global innovation activity and despite traditionally being proponents of industrial policy and export-led manufacturing strategies, developmental states are increasingly turning to knowledge-based sectors in search of new opportunities for growth. According to Kaplinsky (2011), there has been a shift in terms of the location of cutting-edge, global innovation activity away from the developed countries towards developmental states such as China.
As indicated by McKinsey’s latest 2015 report on the state of Chinese innovation, if China wishes to maintain its aim of growing at 5.5%-6.5% each year for the next ten years, innovation will have to account for approximately 2%-3% of its GDP growth (McKinsey, 2015). It is thus not surprising that the OECD’s Research and Development statistics demonstrate a significant increase in Gross Domestic Expenditure on R&D (GERD) in China and neighbouring Asian developmental states.
GDP expenditure on R&D by Asian developmental states has increased notably since 2000, contrasting with the constant levels of expenditure by the United Kingdom, the United States and also South Africa. China’s expenditure is second only to the United States in terms of absolute expenditure in 2015.
As indicated by McKinsey’s latest 2015 report on the state of Chinese innovation, if China wishes to maintain its aim of growing at 5.5%-6.5% each year for the next ten years, innovation will have to account for approximately 2%-3% of its GDP growth (McKinsey, 2015). It is thus not surprising that the OECD’s Research and Development statistics demonstrate a significant increase in Gross Domestic Expenditure on R&D (GERD) in China and neighbouring Asian developmental states.
the share of GDP expenditure on R&D by Asian developmental states has increased notably since 2000, contrasting with the constant levels of expenditure by the United Kingdom, the United States and also South Africa. As seen in Table 3 China’s expenditure is second only to the United States in terms of absolute expenditure in 2015.
Table 1: GERD Expenditure Trends
Source: OECD, 2017
Some of the areas that China has prioritised and therefore targeted through state funding and support, are nanotechnology, reproductive biology, protein science and quantum research (Appelbaum, 2011). This reflects China’s explicit expression of interest in “leapfrogging development,” by which it means skipping the traditional route of slowly working its way up production value chains and instead “move directly into high-impact emerging technologies” (Appelbaum, 2011).
With this in mind, China has done well to build up a national innovation system which incubates “indigenous innovation capability in leading-edge areas of science and technology, seen to be key to national prosperity” (Appelbaum, 2011). It has to-date relied upon state-led initiatives and programmes that aim to develop “research capacity, facilitate downstream knowledge transfer and translation, build hard infrastructure such as industrial R&D parks, and invest in star researchers” (Topal, 2014).
The country has benefited from its ability to rapidly learn and adopt new technologies. It’s large domestic market has enabled it to simultaneously participate in activities all along the value chain (from low-end manufacturing to upstream R&D), incubating new firms and products, and alleviating reliance on global export markets (Topal, 2014). The lethargic performance of large state-owned entities and public companies has also driven consumers to faster and more efficient services being offered by new businesses and entrepreneurs (The Economist, 2017). In addition, China has available a significant and growing pool of affordable talent from which to draw scientists and engineers (Appelbaum, 2011).
Chinese efforts to develop innovative capabilities have been likened to those of the United States, in that both countries have made significant public investments into research and development activities. However, one could argue that China has been more extensive in this regard as its investments extend beyond just R&D to also fund commercialisation efforts at the retail end of the innovation value chain (Appelbaum, 2011). Emphasis has been placed upon the production of tangible as opposed to solely research outputs, particularly within the Chinese local government arena where investments are directed towards “nanomaterials and nanodevices that promise to yield the quickest payoff in addressing immediate problems” (Appelbaum, 2011).
BUT CAN DEVELOPMENTAL STATES INNOVATE?
That there has been a significant increase in the amount of technological adoption and progress taking place in numerous developmental states, such as China, cannot be disputed. But the really challenging question facing them is not whether they can promote technological development to reach higher rates of growth – they have already demonstrated an ability to do so. It is instead whether they can adapt existing innovations to overtake advanced nations as leaders in original innovation. Whether they can innovate as opposed to merely imitate.
Joseph Wong, in his book “Betting on Biotech: Innovation and the Limits of Asia’s Developmental State,” doesn’t think they can. According to Wong, “developmental state-led programs can be effective in catch-up industrial development and technology assimilation, but they do not have a proven track record in real innovation” (Topal, 2014). Their strength lies in “innovating just behind the leading edge,” as opposed to defining that edge internationally (Topal, 2014). Countries like China have, to date, been “reverse-engineering existing technologies developed elsewhere” and then mitigating the risks associated with this process via subsidies and market protection (Wong, 2012).
The evidence in Figure 1 supports this. Drawn from the European Commission’s Innovation Union Scoreboard for 2015, this figure shows that China has had strong innovation growth rates but has not done as well in terms of global innovation performance.
Figure 1 SEQ Figure * ARABIC 1: European Commission’s Innovation Union Scoreboard 2015.
Source: (EU Publications, 2015)
SO WHAT IS GOING WRONG?
More advanced nations, in striving to create “frontier technologies that do not yet exist in the market” (Wang, 2005), make space in their economies for new knowledge and technologies to be developed. They are adept at handling the ambiguous and risky nature of the innovation process and, where necessary, take a step back to provide the private sector with the room they need to create. For example, they often have to relinquish control over their financial sectors and instead allow for strong relationships between banks and private firms to be built or open up sources of debt/equity financing, so that they can access finance when and as they need it to develop and innovate (Wang, 2005). This is part of an “innovation system approach,” whereby technological progress is the “result of complex interactions among all innovation actors, policies and institutions” (Dutta, 2015) and not just a product of government intervention.
In contrast, there are certain characteristics and flaws of a developmental state model that make it more difficult for a country like China to innovate. Whilst developmental states do encourage industrial upgrading through the provision of finances, incentives and infrastructure, they are not always adept at handling the uncertainty and ambiguity that is inherent in the innovation process. Developmental states also tend to follow market signals and back industry ‘winners,’ but it’s a different challenge when they need to pick winning horses before an uncertain race has begun, particularly in comparison to the more agile and responsive private sector firms (Topal, 2014). Such firms are adept at mitigation risks and ‘failing forward,’ where as Wong is of the opinion that developmental states such as China are too bureaucratic and top-heavy to adopt such an experimental approach, despite having the financial resources to carry large risks. (Topal, 2014).
To foster innovation-based growth, developmental states need to be willing to support the entire, lengthy process, from “scientific breakthrough or idea to a successfully commercialised innovation,” and put in place “complementary measures that will bring product, process, marketing and organisational innovation to fruition” (Dutta, 2015). This has not historically been their strong point.
WHAT SHOULD DEVELOPMENTAL STATES DO?
Wong (2012) has numerous recommendations for developmental states wanting to successfully pursue innovative growth paths, with particular reference to China and its attempt to enter the biotech market. Firstly, he emphasizes the importance of cultivating a culture of patience and embracing failure, which are essential if it is to give organisations in its economy the leeway and support to innovate. Developmental states need to promote patient capital and celebrate learnings from failures as opposed to reacting negatively when start-ups fail and money is lost (Wong, 2012). It is very important that developmental states create opportunities for learnings to be shared amongst innovation stakeholders and foster a collaborative environment in which firms can learn from one another.
Secondly, developmental states need to be prepared to respond appropriately to their constituencies and be able to justify the large expenditure on innovation which, in resource constrained environments where poverty levels require investment into public services such as health care and education, is likely to be frowned upon (Wong, 2012). This is particularly true in light of the high-risk nature of innovation and the large amounts of money that can be lost in its pursuit.
In addition, developmental states need to trust their own abilities to innovate, as opposed to allowing more advanced nations to make the first move. For example, Chinese scientists had to first justify the case for nanotechnology development to their government by highlighting the efforts the United States was making in this regard, before they were given permission to pursue it as an area of innovation (Appelbaum, 2011). This speaks to the inherent tension in a controlling and dominant development state attempting to promote innovation, which requires relatively free markets and space for firms to pursue new avenues of development.
A CHANGE IN THE NATURE OF THE DEVELOPMENTAL STATE – TRANSITIONS TO AN ENTREPRENEURIAL STATE?
Ultimately, it can be argued that to become leaders in innovation, developmental states will have to become more reliant on their markets, which need increasing amounts of freedom and autonomy to truly innovate well (Simon, 2012). The development of commercial legal frameworks that provide secure intellectual property rights are also going to be necessary, whilst developmental states will have to move away from emphasis on large, state owned enterprises and begin to support smaller entrepreneurs who are best able to drive their innovation agenda (Simon, 2012). They need to “transform into the platform builder, rather than the leader, to facilitate interactions among stakeholders”.
Consequently, it has been argued that developmental states are transitioning into or demonstrating the emergence of new governing models which have been given various labels – ‘entrepreneurial states,’ ‘neo-developmental states,’ ‘transitional developmental states’ and ‘revamped developmental states’ (Ebner, 2014). All of these models entail a shift away from the traditional developmental state stronghold over economies towards more flexible, decentralized and co-operative models of governance with an emphasis on promoting technological progress and innovation (Ebner, 2014). The final form that this government will take depends on the specific context of each developmental state.
Transitioning into an entrepreneurial state does require certain trade-offs though, particularly in terms of the level of influence a state has over an economy. Hence, the question of whether developmental states can become global innovation leaders ultimately depends on how much of a compromise they are willing to make in terms of relinquishing control and political power over their economy to allow for freer, more dynamic markets. Whether they can effectively strike a good balance without having to move away from a developmental state model entirely remains to be seen.
As for China? The country is making rapid technological progress and many believe it will soon overtake the United States as the world leader in innovation. Indeed, the role the government has played as a market-creator and the sheer size of its domestic economy has enabled many Chinese entrepreneurs to catch up to their western counterparts, reproducing a wide array of products and adapting them to the Asian context. It has made impressive improvement in terms of building a local knowledge ecosystem, producing many young engineers and scientists and filing an increasing number of patents (Lee, 2016).
And yet, China is still “the world’s preferred subcontractor,” occupying a “subordinate role in the global knowledge economy” (Lee, 2016). Thus, it remains to be seen whether the top-down policies and restrictive state environment will trap the country in the realm of imitation only, necessitating that the government relinquish some of its control over the economy to enable China to take the global innovation lead, or whether the state can strong-arm its way to the cutting edge with its current structures and policies.
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