“The Greatest Show on Earth”: The US-China competition for technology leadership

“A short while ago, I had an opportunity to talk with the governor of one of China’s poorest, agricultural provinces. I asked him about his top economic priorities. He replied that semiconductors, software, biotechnology, robotics, aerospace, batteries, and new energy vehicles were his key priorities – neatly reciting all the key industries under the Made in China 2025 plan. I would have thought that addressing the immediate needs of his overwhelmingly rural constituents, such as improving agricultural harvests, might be at the top of his economic priorities list. But I was mistaken,” Craig Allen said in the opening of his address to the Stanford University’s Center on China’s Economy last year.

First, China benefits from the sheer size of its consumer market, which helps companies to commercialize new ideas quickly and at scale. Chinese consumers are exacting. Many consumer-oriented companies that thrive in China will do well elsewhere. We should not be surprised at the success of TikTok or Temu. There are many more companies like them.

Second, China has an ecosystem that is optimized for efficiency-driven innovation in manufacturing at scale. These manufacturers use lots of agile manufacturing, modular design, and flexible automation. Shein and Xiaomi are examples. Shenzhen is the world capital of fast prototyping.

Third, do not under-estimate China’s capabilities at engineering-based innovation. They have millions of engineers and STEM workers. Huawei may be reviled; however, they have demonstrated some of the world’s top engineering capabilities. Tencent, DJI, and BYD are other outstanding Shenzhen-based examples.

Fourth, do not under-estimate China’s rapidly expanding capabilities in science-based innovation. In the most recent budget, R&D spending has been increased 10% – more than any other budget item. China has surpassed the EU in R&D spending. They may catch up to the US soon – unless we up our game.

This innovative ecosystem is different to Silicon Valley’s. In some ways it is synergistic with Silicon Valley, but that will not necessarily be the case in the future.

What exactly is the Chinese government doing from a policy perspective to create a technology lead over the US and the rest of the world? In China, this is being broadly discussed in terms that the Chinese call the New Productive Forces.

At the recent National People’s Congress, on March 8, 2024, Xi Jinping gave a speech on this. Let me quote him. He said, “it is essential to promote the integration between scientific and technological innovation and industrial innovation in a coordinated way to develop strategic emerging industries, and to arrange the development of industries for the future as well as to accelerate the development of a modern industrial system.”

While Xi clearly outlined the objectives of Chinese industrial policy, we need to get more granular. There are five things about the New Productive Forces that are new to the mix and may distinguish Shenzhen from Silicon Valley.

First, New Productive Forces implicitly recognizes that China is facing an acute labor shortage at the factory level. Thus, government-guided efforts focus on factory automation and efficient production in mature industries. They want to rapidly move up the value chain with robotics, precision manufacturing, and mass customization.

Second, they want to spur innovation and create new industries at almost any cost. In a manner that is not constrained by the market, they are willing to throw vast sums of capital and unlimited numbers of engineers into developing the products of the future.

Third, there is an overwhelming preference for self-reliance and import substitution. The role that foreign companies can play has been described in official media as follows, “China should continue to import cutting edge technologies from outside, without over-reliance to provide experiences for breakthroughs in original technologies.” One can summarize this by saying foreign technology should be allowed in to spur domestic technology development. This is in accordance with the Chinese practice of re-innovation (or zai chuanxin).

Fourth, there is plenty of government support. On the financing side, there is a huge sum of public money to support the New Productive Forces. Barry Naughton of the University of California San Diego has calculated that about 11% of GDP is available over 5 years. Scott Kennedy of Center for Strategic and International Studies calculates that China uses about 1.8% of GDP annually for this purpose. These numbers are about 4 times larger than the next highest incentive supplier – South Korea. Fifth, we should all watch China’s plans to turn “data” into the “fifth factor of production”, behind land, capital, labor, and entrepreneurship. The National Development and Reform Commission has developed a “Data Division” which is to work hand in hand with the Cyber Administration of China.

In short, the New Productive Forces represent a doubling-down of the Made in China 2025 type policies – implemented with yet more information, attention, vigor, and resources.”

Download Craig Allen's full speech here, republished by the Hinrich Foundation with the author's kind permission.

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