Every few years a heated topic resurfaces around the question “Is China innovative?” The bulls tout three data points, concluding yeah. While the bears sneer nay, citing an equally convincing if one-sided narratives. Both are right. Both are wrong.

In an economy this large and diverse, it is possible to find a fact set that can prove or disprove this conundrum, but the reality is illusive, and the truth is unsatisfying. The answer is yes China is innovative but not how one normally thinks about innovation. Let us explain.

China has made great strides in bringing innovative solutions to bear on many problems. Whether or not one considers these solutions innovative will depend upon definitions. For example, Huawei virtually recreated the server market with a product and service offering which was a better value than Cisco, the market leader. Huawei did not invent the network switch just like firms like Luxshare did not invent the processes that built Foxconn. Chinese firms lead the world in low cost, high value consistency in manufactured products. DJI in the drone market is one more example of this. China Rail for high-speed rail…and the list goes on.

The Harvard Business Review had an interesting comment on China’s growth miracle when it stated:

Innovation didn’t drive the manufacturing miracle that has unfolded in China over the past half century, during which some 700 million people have been raised—or lifted themselves—out of desperate poverty. Instead, the driver has in large part been what might be called brute-force imitation. Relying on a seemingly limitless supply of cheap labor, provided by the hundreds of millions of ambitious workers born during the postwar baby boom, China devoted itself prodigiously to the production of other countries’ innovations. The effort enabled a country that missed the Industrial Revolution to absorb the world’s most modern manufacturing advances in just a decade or two. Fittingly, China earned a reputation as a global copycat.[1]

Is this the innovation that one has in mind? In broad general terms, China’s innovations move at the margin. There is less paradigm-shifting invention and more marginal improvements. But even here, we are on shaky ground. No one can reject the premise that AliPay and WeChat are a revolutionary. Just ask any Facebook or Twitter employee to confront their WeChat envy.

But the naysayers however are right in the sense that China’s innovation seems to be limited to walled gardens within the consumer space. The claim to invention resembles Peter Thiel’s comment regarding the lack of inventiveness today. Where he stated: “We wanted flying cars, and we got 140 characters”. In a Fast Company list of China most innovative companies, 80% of the companies are consumer focused and not earth shattering in terms of inventiveness. Clearly something must be awry if the top ten list leads with Luckin Coffee, Meituan, and Alibaba (retail coffee, food delivery and digital yellow pages, respectively) ! Some may say it is outdated or old fashioned to be underwhelmed by ingenuity to harness huge data sets to sell low brow coffee.

China may lead the world in walled garden markets where huge data sets drive complex algorithms to harness mass market behavior. Most recently, Shein has proven this in fast fashion, while Tik Tok dominates on short video. But look beyond this space and one is hard pressed to find the world-beating technologies that are innovating their way to globally dominant positions that command outsized profits. Sinochem is not Bayer; Sinopharm is not Moderna; Zhongce Rubber is not Michelin; and the list goes on.

One key challenge is that China’s values and institutional infrastructure stifle innovation. The desire to control is antithetical to what is required. China is governed by a system that strives for stability and control. Ant Financial probably had a good shot at coming up with some unique innovations in consumer finance. But their recent stay in the penalty box for the last 24 months while their guiding light Jack Ma is no longer guiding bodes ill for their prospects.

As Mark P. Mills noted, “Regulatory interventions tend to lock in yesterday’s technology”. And in some ways China is an over regulated economy in the sense that apparatchiks seem to think that they have the vision to determine what and who should rule the markets. The reality is that if Bell Labs still had a monopoly on the US communications market, we would have never had cell phones and the internet as quickly, cheaply and efficiently as we do today in the US.

“China is largely a land of rule-bound rote learners—a place where R&D is diligently pursued but breakthroughs are rare...[2]

The Chinese entrepreneurs have learned and are leading where cloud computing is applied to primarily the Chinese consumer markets. Some apps and business models will be leading in the world but unfortunately most will not make it out of China 1) due to the size of the China market and 2) the inability and/or unwillingness for Chinese companies to go global.

We conclude that while China has so many of the ingredients for innovation, that development is arrested by culture, values and institutions that lead to underperformance given the time, effort and investment in R&D. The ROI is low and the future less than ideal.

Eventually China like Korea and Japan will create some truly innovative companies. Mostly because with such levels of investment it is impossible to do otherwise. China will be inventive in spite of itself!

[1]China’s New Innovation Advantage. Zak Dychtwald. Harvard Business Review May-June 2021

[2]Why China Can't Innovate. By Regina M. Abrami, William C. Kirby and F. Warren McFarlan. Harvard Business Review. March 2014.