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Monday, Nov. 21, 2005

China far way from becoming global technology powerhouse

Weak software, entrepreneurship stifling innovation: expert


Staff writer

China has come a long way to show "pockets of excellence" in some fields of science and technology, but it still has a long way to go before it can become a full-blown innovative power, a China expert at a U.S. think tank told a recent symposium in Tokyo.

News photo
Adam Segal

"It's clear that we've seen China's rise as a manufacturing power. It's clear that we're beginning to see pockets of technological excellence, especially in telecoms, cell phones and some areas of chip design," said Adam Segal, senior research fellow at the Council on Foreign Relations. "But are we reaching a point where China is going to be a more broad-based innovator?"

At a symposium Nov. 10 organized by the Keizai Koho Center under the theme "The challenge of China as a technological competitor," Segal said that China faces a set of challenges, including weaknesses in its software, lack of technological entrepreneurship, and the need to secure capital for startups.

The acquisition in December 2004 of IBM Corp.'s personal computer unit by Lenovo Group Ltd., China's largest computer maker, symbolized China's growing presence in the global high-tech industry.

China today is the world's second-largest Internet-wired country with 98 million users, and its telecommunications industry has witnessed a massive expansion over a short time -- with cellular phone users rising from 85 million in 2000 to 335 million last year, according to Segal.

The nation occupies a large share of the global market in many high-tech fields, including laptop computers and printers -- areas that didn't even exist in the country a decade ago, he said.

Strategic strengths

Where do China's strengths lie? Of course China has a huge domestic market -- with increasingly demanding consumers -- for its high-tech firms, Segal said.

The massive foreign direct investments that continue to flow into China are also providing transfers of technology, access to global distribution networks, and sophisticated management skills, he said.

Another strength is the huge number of returnees. Somewhere between 150,000 to 200,000 are estimated to have returned to China over the last five years after studying or working in the United States, Europe and Japan, Segal said.

And while most of the first wave of returnees came back in the late 1990s after obtaining MBAs and one or two years of experience in American firms, "now you have people that had been working at Silicon Valley for 10 or 15 years . . . bringing a much richer set of skills and management abilities," Segal said.

He also cited Chinese leaders' strategic view of technology. "It's clear that Chinese leadership has embraced technology as a mechanism . . . for pushing China forward and moving to the next stage of development," he said.

This means strategic funding. China now spends 1.3 to 1.4 percent of its gross domestic product on basic research and development -- compared with 0.6 percent a decade ago -- and Segal predicted that its total R&D spending will likely pass Japan's in either 2006 or 2007.

China has come a long way from its prereform days -- when it had adopted a Soviet-style, highly hierarchical and stratified system of science and technology innovation where state-run research institutes never spoke to each other and industry and universities never had any communication, according to Segal.

As it embarked on reforming its technology development system in 1978, Beijing focused on:

1) Importing foreign direct investment and technology;

2) Breaking down barriers between research and development and production units and between academics and industries;

3) Spinning off new firms from state-run institutions like the Chinese Academy of Sciences, which could then benefit from the scientific and technological resources of the institutes and government connections, he said.

Lenovo is a spinoff of the academy.

Prerequisites for evolution

What needs to happen for China to move to the next stage -- from pockets of excellence to a more broad-based system of innovation?

One of the major challenges, Segal said, is to shift more to software from hardware. Today, hardware production accounts for 71 percent of China's information technology output, with software accounting for a mere 12 percent. This is the opposite of India, where software accounts for about 60 percent of its IT industry.

While many Chinese high-tech firms have become highly competitive domestically, the export markets are almost entirely dominated by foreign-invested companies, he said.

China's high-tech exports to the U.S., Japanese and European markets remain dominated by the Chinese branches of foreign manufacturers, he observed.

"Chinese firms are still not globally competitive. They are not the firms that are competing with the Koreans and Japanese and Americans. They may, eventually, but right now they are not there yet," he said.

For example, Lenovo's sales outside China accounted for only 7 percent of its total sales in 2003, and the company is not likely to achieve its goal of raising that to 25 percent in 2005, Segal said. He said its purchase of IBM's PC unit was "a way to try and develop a global presence and brand" and skills it was having a hard time acquiring on its own.

Furthermore, Segal said China needs to create a better environment for fostering technological entrepreneurship, instead of merely pursuing a top-down strategy on science and technology development by rewarding techno-savvy individuals who leave their employers or institutions, create their own companies and take them public.

While China's R&D spending as a percentage of GDP has risen sharply, many small and medium-size companies are still starved of capital, Segal said, citing a number of hurdles Chinese startups face. Although Beijing has encouraged state-run banks to lend more to small companies, the banks are not yet willing to take the risk, he said.

'Techno-nationalism'

Segal said it is clear that China's ultimate goal is "autonomy and independence" from American or Japanese technologies. And this type of "techno-nationalism" has led the United States to debate its implications for American interests, he said.

Some argue that if China attracts increased U.S. high-tech investment -- particularly in semiconductors -- it will lead to the hollowing out of America's high-tech base. On the other hand, the fact that many startups in Silicon Valley are being launched by Chinese and Indian entrepreneurs is considered a "brain gain" for America, he said.

As for security, the increased technological capabilities of Chinese firms has led to worries over greater military capabilities for the People's Liberation Army, because the military is relying more and more on dual-use technologies, he said.

According to Segal, there are two parallel debates in the United States -- one focused on the "threat" from China as a technology power, and the other embracing China as a new member in global networks of innovation and production chains.

And right now, the "threat" argument appears to be gaining ground among U.S. policymaking circles, he said.

Proposals being considered by the commerce and defense departments have raised the idea of restricting Chinese access -- even by those who have acquired Canadian citizenship, for example -- to technology developed by American universities and businesses, Segal said.

"They are beginning to think about how do we prevent the transfer of technology, and the U.S. is increasingly concerned about (transfer of) software skills . . . which are very hard to control," he said.

Another panelist at the symposium, Atsushi Tsunami, associate professor at the National Graduate Institute for Policy Studies, noted that such a U.S. policy may in fact provide an opportunity for Japan.

Tsunami said Japan should create a national strategy to take advantage of the abundant Chinese resources -- on how to link up with Chinese scientists in ways to boost Japan's technological competitiveness.

Japan is in fact the No. 2 destination of Chinese studying overseas -- accounting for 23 percent of the total, compared with 34 percent for the U.S., Tsunami said, adding that greater efforts must be made to invite as many talented students as possible.

If the United States is in fact moving to close its doors to Chinese students and scientists, Japan should seize the opportunity to encourage more Chinese to come, he said, adding that countries like Australia are already doing just that.

Richard Samuels, a professor of political science at the Massachusetts Institute of Technology and one of a moderators at the symposium, said current debate about China's rise as technological power is "filled with the echoes" of what was debated in the U.S. back in the 1980s about what was then perceived as the economic threat of Japan.

"It's very striking (that) conversations and discussions about dual-use technology, opening the (American) universities, direct foreign investment, techno-nationalism, export controls . . . All of this, from an American perspective, is an old conversation," Samuels said.



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