Can China Innovate

By Benjamin Shobert*

Over the last decade, I have found one of the most interesting questions to ask executives and policymakers about China is “can China innovate?” Biases come forth once the question is answered, both from those who tend to be over-optimistic about China, as well as those who are perennially bearish. Let the conversation unspool itself long enough, and you almost always find the group talking about deep culture, educational institutions, and hierarchy in China. Inevitably, the response lands on the role of government and its capability to actually incubate innovative industries.

Whether you agree with the idea that government in any form – whether autocratic or democratic – has a role fostering innovation, the Chinese government clearly believes it can be successful doing so. Admittedly, “success” as defined by the Chinese government on this topic is measured not purely by a conventional return on invested capital, but also through a number of intangibles such as political stability, moving the Chinese economy up the high-technology manufacturing curve, and what the “made in China” brand means to both domestic and foreign consumers.

The point often lost in discussions about whether or not China can innovate is that when China brings its attention to a particular innovative sector, it disrupts where R&D takes place, it creates a new geographic locale where commercialization can be attempted, and it sets in motion a host of policies that complicate everything from market access to global trade accords. The best example of this in recent memory would be clean-technology; however, the culmination of a nearly two year long research project at the Seattle and Washington DC based think tank the National Bureau of Asian Research (NBR) shows that the life science sector could also face similar disruptions.

In fairness, our research also showed that many of the structural challenges that inhibit higher quality bench science activities in China specific to life sciences remain chronic. Xiaoru Fei and Joseph Wong, who contributed a significant part of our final research project note, “technology transfer among China’s universities equals less than 10% the rate of foreign universities. In general, Chinese universities are not lacking in star scientists who publish in first-rate academic journals; however, they do lag significantly in technology transfer.”  (page 10) This will come as no surprise for those familiar with the unique fixation Chinese academic institutions have on publishing papers as the primary metric that ensures promotion.

The life science sector needs a unique ecosystem to succeed. Other national economies have struggled to achieve their own success in similar pursuits, in large part because they equated investment capital and infrastructure with successful outcomes.  The painful reality is that success in the life sciences requires strong investment in more than just infrastructure coupled to a long time horizon. China’s various life science incubator parks around the country are, like so much that defines China today, bright, shiny and new. They are also under-utilized, in part because they lack the type of robust connections to academic institutions, access to a transparent and scientifically robust CFDA approval process, an immature venture capital sector, and perhaps most critically, a chronically under-funded domestic drug reimbursement scheme that would reward innovation.

China’s attention on the life science sector may prove fleeting: China’s party cadres are initially motivated to follow through on the central government’s policies especially when these policies require digging holes and pouring concrete. This is why so much has been made of all the new biotech park capacity that has sprouted up across the country. But, the mid-term attention span of these same party cadres evaporates if the sectors in question do not become tax-paying entities. When you have both, the provincial and municipal governments will pay particular attention to fostering the sector in question. Life sciences does not map onto this objective as cleanly as other sectors such as telecom or clean-technology. The payoff for investments in bench science for biotech is much longer, and the risk to reward ratio is much greater than other industries that have a more obvious manufacturing component where China’s top-down approach has proven to be both disruptive and successful.

The challenge in all of this is to recognize that our politicians and policy makers are not always as adept as their counterparts in business when it comes to thinking about China. Yes, China’s pursuit of a domestic life science industry constitutes a threat to some established interests, but only if this sector’s needs in the US are neglected and key reforms required here are allowed to go unaddressed. As I write towards the end of my section in the analysis, “The United States’ current political environment for economic planning struggles to adapt to the realities of the globalized world that the country’s businesses and entrepreneurs must compete within, which contrast sharply with how politicians wish the world would be….Rather than look for the ways in which the Chinese model of fostering innovation may have lessons for U.S. policymakers, the current political climate in the United States has made recrimination the path of least resistance.”

High technology sectors such as the life sciences are only marginally safer from Chinese competition than other parts of the global economy where China has proven to be a disruptive force, for both good and bad.  As western businesses rightfully chase the market opportunity in China, so too must western politicians and policymakers aggressively develop and implement policies design to ensure their domestic markets remain competitive as the globalized world begins to level yet another playing field western stakeholders had long assumed was safe from competition.

* Ben is my go-to person on big issues relating to China health care and life sciences and when I saw that he had just completed his work on a two year in the making report on China’s life sciences sector, I asked him to write something on that report for us. He graciously agreed. When not writing deep-think life sciences reports, Ben engages in health care consulting through Rubicon Strategy and writes on Asia health care for Health Intel Asia.

  • Mark Cohen

    Not sure if the question is can China innovate, but rather how will China innovate. I also think the type of innovation may depend considerably on what role the market will play, since an active interventionist role for the government is a given. Disruptive technologies, rather than add-on technologies or clinical research support for innovative economies, will require host of changes in China’s R&D environment, including pulling back on aggressive service invention rules, allowing for effective data exclusivity, developing a linkage system to promote both generics and innovative companies, less risk adverse R&D support – including restrictive provisions in the trade secret law, etc. Government metrics may not line up well with Pharma R&D since in the “single molecule” world of pharma innovation, metrics that are invariably quantitative not qualitative are difficult to sustain. Also, there are no planning metrics for trade secret protection. China has the human talent, which should help. Also, long development times were difficult to sustain when yearly growth rates exceeded double digits – it wasn’t worth the return on investment to develop a risky and expensive new pharmaceutical compound….

  • I believe China is already innovating. With China’s current world status today..there is no doubt that in the next 5 or 10 years they might overtake United States in terms market and economy. Or should I say we have already been overtaken.