China’s Lack of Technology Innovation Hurts Growth

Potential for revolution grows unless reforms are made, says economist Gupta.

Even if China’s growth slows, it still will surpass the United States’ GDP leadership in the next 10 to 12 years, but don’t expect the same with its technology innovation, says Anil Gupta, professor at the Smith School of Business at University of Maryland, in remarks made during a discussion about innovation and the economy at the EuroFinance International Cash and Treasury Management conference in Miami, Fla. early this month.

Gupta, a leading expert on strategy, globalization and emerging markets, says that “sometime in the next 10 to 12 years, it is certain China’s GDP as a percent of global share will overtake the U.S. [GDP]. But technologically, it will not overtake [the U.S.] for at least two decades.”

As evidence, Gupta notes although China now has 20% of the world’s population, 9% of global GDP and 13% of world spending on research and development, it holds only 1% of the world’s patents. In biotech publications, only 3% of articles are by Chinese authors, while 60% are by U.S. authors. “This is a huge gap,” he says.

China’s involvement in new energy further points out the lapse: it has 50% of the world’s investment in new energy, but only 5% of the patents. “China’s strengths are investment and manufacturing, not innovation,” Gupta told the audience of corporate finance executives in Miami.

Most finance executives polled at the meeting believe China’s growth will slow. Gupta agrees, noting that in the past 30 years, China saw average annual growth of 10%, while this decade it will grow between 6% and 7%. The reasons include strains in the labor force, capital investment and total factor productivity (TFP). He notes that China’s one-child policy has finally caught up with it, so the labor pool will shrink. Capital investment also will slow, while TFP has peaked, Gupta says, noting for example auto purchasing. He sees the market penetration in autos already has hit a near-term high, which appears to be the case for housing as well.

Gupta also argues that in the next five years, China could see a revolution—possibly violent—if political reforms don’t happen faster. “At the very top of the leadership of China, there are serious ideological conflicts…reformers vs. conservatives,” he says. “Reformers want economic and political reform.”

Political reform means moving toward a freer society, while economic reform means reducing the number of state-owned industries. “It seems very clear the reformers are gaining,” Gupta says, citing the recent release of Chinese dissident Chen Guangcheng. Both rural and urban populations are increasingly unwilling to put up with the current political situation, he says, and high literacy rates and access to technology, as well as being better off economically, allow people to be more assertive. And most likely the renminbi will become convertible in next five to 10 years, allowing Shanghai to become a true global financial center, a key goal of the Chinese government.

With Chinese growth slowing, although it remains high compared to mature economies, and the potential for a volatile political situation, should U.S. companies still expand into China? In consumer goods, “China already is an open market, and state-owned companies don’t play a role,” he says. But when it comes to industries that largely are state-controlled, like steel production or banking, expansion into China is still a question mark.