Recent Books on China

2022

How can SOEs create radical innovation?

Introduction of the book, Xielin LIU et al “Catch-Up and Radical Innovation in Chinese State-Owned Enterprises” (Edward Elgar, 2021)

Xielin LIU, School of Economics and Management, University of Chinese Academy of Sciences

See Prof. Lius’s bio and CDA-affiliation here.

Correspondence with the author: liuxielin@ucas.ac.cn.

This original book, Catch-Up and Radical Innovation in Chinese State-Owned Enterprises, is a unique and original in-depth study on how, in the past decade, Chinese State-Owned Enterprises (SOEs) have achieved technological innovation in the large infrastructure sectors. It reveals a ‘new world’ of Chinese innovation, showing that SOEs are willing to innovate and more than capable of doing so.

 

Overall, the Chinese SOEs’ radical infrastructure innovation projects were triggered by various demands at the different stages, supported by the whole-nation system led by the government, driven by entrepreneurship, and gradually realized and advanced by the formation and development of innovation ecosystems.

 

Breznitz and Murphree (2011) argued that nationalism played an important role in Chinese governmental support for industrial development. In the cases of high-speed rail, UHV power transmission, and nuclear power plants, this argument seemed to be true. However, it was the distinctive national conditions instead of the nationalism which caused the domestic collaborative innovations. For example, the advanced high-speed rail technology suitable for highly complex operation environments and the UHV power transmission over extremely long distance were not urgently needed in overseas markets back then and foreign companies did not have the complete solutions. For nuclear power, due to the huge territory and population of China as well as its fast development, the shortage of power supply became an increasingly serious issue. Nevertheless, purely importing foreign final products or technologies would be quite expensive due to the larger and larger scale of demand and constant technology upgrading. Developing those technologies thus had to depend on domestic collaborative innovation. Comparatively, the 4G mobile telecommunication was a universally needed technology and it did not depend on specific contexts so heavily, collaborating with international partners, rather than merely domestic partners like the development of 3G, was thus a better option. We believe that with the increase of international demand for Chinese technologies, collaborating with international partners will become more and more common, and the ecosystems of SOEs will be expanded internationally.

 

The international product life cycle theory (IPLC) suggests that the latecomer countries should just follow the development process of the matured industries in developed countries (Lee, 2013). However, with the emergence of new technologies and continuous technological development, matured technologies controlled by developed countries may be outdated and less fit for the changing global market. That is to say, late-coming countries will have equal opportunities compared with developed countries when new windows of opportunities open. The success of East Asian countries such as Japan and South Korea are good examples, and the Chinese SOEs’ innovations shared in this book further challenge the IPLC approach. It seems that the Chinese SOEs can and will innovate, which will be proved by more and more remarkable technical achievements in the future. Based on the Beijing Mode suggested by Keun Lee (2013), we argue that technology import or development based on multi-demand, quick learning and iteration with upgraded or new technical standard systems, and collaborative R&D and open innovation ecosystem, might be a common process of Chinese SOEs’ innovation in the next decades.

 

In developed countries, market and governmental activities are regarded as paradoxical forces in economic development, and the government should intervene the market as little as possible (Pigou, 2017). However, the cases shared in this book imply that in developing countries, especially at the industrialization stage, the government can significantly promote economic development not only by building infrastructure, but also by stimulating SOEs’ sustainable innovation for upgrading the infrastructure and meeting the market demands of quasi-public goods.

 

Actually, Chinese government was rather concerned about the huge-scale of unmet domestic market demands in infrastructure industries due to their huge potential national impacts. In sectors with large infrastructure projects, the government acted as an entrepreneur taking more risks to encourage the SOEs to engage in the process of meeting the evolving and huge-scale domestic market demands with technological innovations. It turned out that the SOEs can sustainably innovate by establishing and coordinating the respective innovation ecosystems. Since all of the centrally managed SOEs’ businesses are closely related to infrastructure sectors, the governmental actions have substantially driven the infrastructure’s rapid evolution with the SOEs’ technological innovations. This in turn paved a broad way for the flourishing of all the ecosystem participants’ businesses based on the focused technologies of the innovation ecosystems, leading to subsequent market prosperity and sustainable economic development. With China’s fast development, we can foresee that there will be further huge market demand of quasi-public goods based on more advanced technologies such as big data and artificial intelligence, which in turn calls upon the governmental initiatives on incubating more open and international innovation ecosystems.

 

In this book, we analyse four radical innovation projects done by Chinese SOEs, and we argue these cases demonstrate a China model. Yet, though the shared cases are success stories, the China model has its own limitations.

 

Firstly, the model only works in the area with clear market target and technological directions. Otherwise, the model will fail when the innovation project is based on much uncertain technologies and market conditions. Moreover, even with a clear target market, the China model can only be viable when respective SOEs have a strong foot in the targeted market. For example, the Chinese government tried hard to lead the innovation in the automobile industry in terms of indigenous technological breakthroughs in core technologies. However, such intention for many years, never worked out.

 

Secondly, efficiency is a big challenge for the China model. All those innovations discussed in this book are to some extent with public goods features, meaning that these projects have positive externalities and spillover. Therefore, the society will welcome and support these innovation initiatives although the efficiency is questionable. For example, the high-speed railway system is not an economically efficient investment from the return rate of investment.

 

Thirdly, SOEs' crucial role in innovation ecosystems and the China model may not succeed in those highly dynamic sectors with strong competition. For example, in internet-based business, SOEs don’t earn their footholds, and in China we see the dominance of giants such as Alibaba and Tencent. The absence of SOEs may be due to: first SOEs cannot make quick investment decisions as these decisions are under supervision from various governmental institutions;  second, SOEs cannot attract talents with incentive methods such as equity share widely adopted by private enterprises.

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