The Breakdown

Explaining Southern California's economy

China: Where's the innovation?

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26952 full

It's not a trivial question. This is Douglas Hervey, from the Harvard Business Review blog:

In the United States, disruptive innovation has harmed a few but benefited many. In China, top-down capitalism has benefited a few but harmed many. An absence of disruptive innovation and entrepreneurship is suffocating China's future growth potential. The future of that growth potential will depend in large part on whether China suppresses or unleashes its would-be disruptive entrepreneurs.

Hervey says that the Chinese are facing a "middle income trap — losing their competitive edge in labor-intensive industries and not yet gaining new sources of growth from innovation." So does this mean that China won't become the economic powerhouse we might once have expected?

It depends on how much faith you place in innovation. And here's why you should place a lot in it: because innovation really has no upper limit. More traditional contributors to GDP do. When an economy extracts as much growth as it can from some established process, it starts to outsource that process to a region where labor costs are cheaper. Or it fires up the innovation engine to make the process better — or replace the product in question with something better.

The Chinese development model is enviable. In a short period of time, the country has become the global not-quite-superpower to watch. But it's always had an innovation weakness. And it might find that fixing that takes much longer than it did to become a manufacturing giant.

Follow Matthew DeBord and the DeBord Report on Twitter.

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