On China: Technology, Innovation and Growth

Source: Dan Wang, Jan 2020

The main ideas can be summed up in two broad strokes.

  1. First, China’s technology foundations are fragile, which the trade war has made evident.
  2. Second, over the longer term, I expect that China will stiffen those foundations and develop firms capable of pushing forward the technological frontier.

It’s not obvious to me that apps like WeChat, Facebook, or Snap are doing the most important work pushing forward our technologically-accelerating civilization. To me, it’s entirely plausible that Facebook and Tencent might be net-negative for technological developments. The apps they develop offer fun, productivity-dragging distractions; and the companies pull smart kids from R&D-intensive fields like materials science or semiconductor manufacturing, into ad optimization and game development.

The internet companies in San Francisco and Beijing are highly skilled at business model innovation and leveraging network effects, not necessarily R&D and the creation of new IP. (That’s why, I think, that the companies in Beijing work so hard. Since no one has any real, defensible IP, the only path to success is to brutally outwork the competition.)

I wish we would drop the notion that China is leading in technology because it has a vibrant consumer internet. A large population of people who play games, buy household goods online, and order food delivery does not make a country a technological or scientific leader.

How about emerging technologies like AI, quantum computing, biotechnology, and hypersonics, and other buzzing areas? I think there’s no scientific consensus on China’s position on any of these technologies, but let’s consider it at least a plausible claim that Chinese firms might lead in them.

So far however these fields are closer to being speculative science projects than real, commercial industries. AI is mostly a vague product or an add-on service whose total industry revenue is difficult to determine, and that goes for many of the other items.

In my view, focusing the discussion on the Chinese position in emerging technologies distracts from its weaknesses in established technologies. Take semiconductors, machine tools, and commercial aviation, which are measured by clearer technical and commercial benchmarks. They are considerably more difficult than making steel and solar panels, and Chinese firms have a poor track record of breaking into these industries.

The focus on speculative science projects brings to light another issue around discussions of China and technology: an emphasis on quantifying inputs. So much of the commentary focuses on its growth in patent registrations, R&D spending, journal publications, and other types of inputs.

One can find data on these metrics, which is why measures of “innovation” are often constructed around them. But these inputs are irrelevant if they don’t deliver output, and it’s not clear that they often do, neither in China nor anywhere else. Wonderfully asymptoting charts on Chinese patent registrations and R&D spending suggest that Chinese firms might overrun the rest of the world any day now. So far however the commercial outputs are not so impressive.

Learning by doing

I think however that long-term prospects are bright. In my view, Chinese firms face favorable odds first in reaching the technological frontier and next in pushing it forward. I consider two advantages to be important. First, Chinese workers produce most of the world’s goods, which means that they’re capturing most of the knowledge that comes from the production process. Second, China is a large and dynamic market. On top of these structural factors, Chinese firms have stiffened their resolve to master important technologies after repeated US sanctions.

My essay How Technology Grows argues that technological capabilities ought to be represented in the form of an experienced workforce. We should distinguish technology in three forms: tools, direct instructions (like blueprints and IP), and process knowledge.

The third is most important: “Process knowledge is hard to write down as an instruction: you can give someone a well-equipped kitchen and an extraordinarily detailed recipe, but absent cooking experience, it’s hard to make a great dish.”

We should think of technology as a living product, which has to be practiced for knowledge even to be maintained at its current level. I offered the example of the Ise Grand Shrine, which Japanese caretakers tear down and rebuild anew every generation so that they don’t lose its production knowledge.

Here’s an example I came across more recently: Mother Jones reported in 2009 that the US government forgot how to produce “Fogbank,” a classified material essential to the production of the nuclear bomb, because relevant experts had retired. The government then had to spend millions of dollars to recover that production knowledge.

I believe that the hard-to-measure process knowledge is more important more easily observable tools and IP. We would be capable of making few meaningful advancements if a civilization from 2,000 years in the future were able to dump blueprints on us, just as the Pharaohs and Caesars from 2,000 years in the past would have been able to do nothing with the blueprints of today.

Today, Chinese workers produce most of the world’s goods, which means that they engage more than anyone else in the technological learning process. Few Chinese firms are world-leading brands. But workers in China are using the latest tools to manufacture many of the most sophisticated products in the world.

They’re capturing the marginal process knowledge, and my hypothesis is that puts them in a better place than anyone else to develop the next technological advancements. To be more concrete, Chinese workers will be able to replicate the mostly-foreign capital equipment they currently use, make more of their own IP, and build globally-competitive final products.







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