WASHINGTON – Despite its emphasis on “indigenous innovation,” China’s real competitive edge remains in what China watchers call “second generation innovation” that combines existing technologies and products with growing manufacturing prowess.
At the same time, experts such as Dan Breznitz, a professor of international affairs at Georgia Tech, told a congressional panel that “core technologies and novel product innovations are still rare and difficult to achieve in China.”
Breznitz and other experts speaking at a hearing Thursday (May 10) on Chinese efforts to become an “Innovation Society” nevertheless warned that the perception that China eventually “will hit a wall” is misguided. China “can innovate. It may take them 20 or 30 years [to overcome barriers to innovation], but that doesn’t stop them from destroying us economically,” warned Daniel Slane, a member of the U.S.-China Economic and Security Review Commission. “China is coming, they are coming here to open up their factories here in the United States…so the hole just gets deeper.”
Some analysts also predicted that South Korea’s economy would eventually hit a wall. “The last time I checked, South Korea was still going strong,” Breznitz added. “We should not rely on China failing” in its innovation drive despite the “unbelievable” failures of its central government. One reason is that China’s provincial and municipal governments “are doing everything in their power to make the system work, sometimes against the wishes of the central government,” he told the commission.
Fundamental to understanding the way innovation works in China is its system of “structured uncertainty,” Breznitz said. “You never really know who is answering to whom, and yet you have constant innovation” in China, he argued. “It makes absolutely no sense for a Chinese company to think about producing a product that maybe will happen in ten years because they have no real sense of whether they will make it. Then, even if they ever make it, [there is uncertainty about] whether they will actually be allowed to retain the product or [whether] it will somehow reach a stable enterprise.”
Breznitz, the co-author of a new book on Chinese innovation and economic growth, identifies the “fragmentation of production” as the defining characteristic of globalization. “The rise of global fragmented production of both goods and services has led, for the first time in history, to true economic international interdependency,” he told the U.S.-China panel. “It is no longer only that we are dependent on trade in order to continue to be wealthy; we now cannot even produce ‘our’ products and services alone.”
For example, Chinese leaders understood that there were many U.S. solar panel startups “yet no one here is willing to [invest in] production facilities, and they grabbed it. It’s a classic market failure,” Breznitz said. “The financial system in the United States is not built any longer to do that” despite the fact that sectors like cleantech remain critical to U.S. national security.
Making matters worse, Breznitz warned, U.S. companies “are sitting on the biggest war chest [of cash] in history and yet they don’t invest” in U.S. manufacturing.
I agree with the way this article describes the situation wrt US manufacturing. And I also believe that this is the root cause of the divergence between the rich and the poor in the US. This divergence is not caused by "trickly down doesn't work," which sounds absurd on the face of it. It is caused instead by the fact that "trickle down" DOES work, except it's trickling down into the Chinese economy, and not the US economy.
The business strategists in the US make decisions whose objective is to maximize their companies' profits. To achieve their goals, they need to keep production costs as low as possible. So they export manufacturing, and they also export design. The investments of the venture capitalists and the corporate executives give them hansome returns (all we need to do is look at Apple), but the expected trickly down flow has been diverted way over to the East.
Danny Breznitz of Georgia Tech has an extremely clear-eyed view of what's happening on the ground in China and the real implications of globalization for American manufacturing and our evolving relationship with China. We will continue to follow him.
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