The Rise of China's Innovation Economy: 'Opening Up' Policy to Manufacturing Maturity, and on to Innovation Based Economic Growth and Labor Market Dynamics?

Abstract

China has long wanted and envisioned the development of self-innovation as a means to drive its economy to one of the most productive in the world. Adopting this goal is a clear sign that China understands the Adam Smith and Schumpeterian argument that innovation is the primary way that increasing economic returns are achieved and that this is what drives economic growth. There is a long trail of attempts to build an innovation based economy in China but until quite recently the progress was at best limited to growth driven mostly by imitation innovation and more recently by technology (also acquired from others) driven manufacturing. This paper examines China's long term self-innovation policies and program initiatives, and the barriers to achieving self-innovation outcomes. Not the least of these barriers has been, until recently, the extraordinary success of the transformation of its agriculture based economy into the largest manufacturing economy in the world. Successful manufacturing driven economic growth was possible because China could channel large masses of low skilled and low cost labor into manufacturing. this success made the urgency of developing self-innovation capability not so urgent until recently. But now the urgency of achieving greater self-innovation capability is increasing significantly due to rising labor costs that are forcing a transformation to higher skilled manufacturing and service production, and in turn are make the acquisition of the required higher level technology increasingly difficult. At the same time, in this context, considerable evidence has emerged since 2010 indicating that there are many strong signs that the innovation economy in China is emerging. Despite China's continued effort to reduce the effect of the barriers in its society and economy to self-innovation, progress is being made. However, China will need to continue to implement policies and practices that soften the effect of the barriers to self-innovation if it is to fully achieve economic growth meaningfully driven by innovation. While science and technical education graduation rates have increased enormously over the past 10 years, acquiring the know how and skills to innovate are only now beginning to appear in China. The paper views innovation developments in China as exceptional given that only 35 years ago China was at best a developing economy. The transformation from agriculture dominance to a manufacturing and trade-centric economy and now on to an innovation driven economy is exceptional. The pace and nature of the change suggests that China's governance model used since Opening Up may lie at the foundation of a new or leap frogging model for national economic growth and development.