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Issue 25, August 2010

This newsletter is a monthly supplement to ChinaAnalysis.Com, a new website that aims to promote knowledge sharing in China-related analysis. This newsletter contains original content and may not be reproduced without exclusive written permission. If you have any questions, comments and suggestions, please email support@chinaanalysis.com.

ChinaCompass - Innovative enterprise and the historical transformation of China

In his Economic Manuscripts of 1861-63, Karl Marx wrote, “Gunpowder, the compass, and the printing press were the three great inventions which ushered in bourgeois society.” Marx may not have realized that the origins of these great inventions can be traced back to Ancient China, which he viewed as a stagnant peasant society. Indeed, despite generating numerous inventions of historical significance, Ancient China failed to evolve into a dynamic socioeconomic system. To this day academics ponder the “Needham Puzzle”: the question of why the economic prosperity of ancient Chinese empires did not lead to the rise of capitalism.

But the sentimental age of craftsmen’s ingenuity is now long gone. After centuries of decline and impoverishment, China has emerged in the last decade as a budding economic superpower. Much of China’s current growth is built, however, upon exploiting its large population base and consuming scarce natural resources. The Chinese economy is booming, but its growth model is creating new risks. If the ongoing Dalian oil spill is just another warning of the huge environmental costs of China’s stunning GDP growth, the recent widespread labor unrest (see our July issue) is seriously questioning the sustainability of its model of inequitable growth. Once again, the country is facing an old problem: How to transform the economy so that it generates sustainable prosperity?

The only way out is innovation, as we have advocated in the previous issues. Innovation, by definition, generates more and better goods and services with fewer costs of resources; by increasing productivity it creates more value that can be distributed among a larger population to raise living standards. The challenge is how to engage in innovation in the age of information.

As elsewhere, China relies on business enterprises to allocate resources to innovative activities, either through large industrial conglomerates or clusters of smaller, specialized firms. It is rarely the case today that a small isolated company, not to mention an isolated individual, is capable of innovation. Modern innovation is a collective and cumulative process that requires the integration of a wide range of capabilities over a long period of time, with an uncertain chance of success. Even a small improvement on a single industrial product may require teams of specialists from different areas to work together for months. An example is the recent “Antenna gate”, in which it took approximately three months for Apple, one of the most innovative companies on this planet, to fix a small design flaw in its latest iPhone 4.

The analysis of the innovation process requires, as Professor William Lazonick, a founder of ChinaAnalysis.com, has shown, a theory of innovative enterprise. The transformation of China into an innovative economy depends on how its business enterprises engage in the uncertain, collective, and cumulative process of innovation. For example, one might ask how some Chinese companies became innovative players even in the most competitive sectors without being privatized, as many economists would advocate. The theory of innovative enterprise would argue that it is the control over the allocation of resources, and not necessarily the form of ownership, that determines successful industrial performance. Groups of professional managers with the incentives and abilities to allocate resources to innovation gained strategic control of these enterprises. They implemented incentives to ensure organizational integration so that people engaged in the enterprise’s hierarchal and functional division of labor would expend their efforts and apply their skills to the collective processes of transforming technology and accessing markets. They also ensured that the enterprise would have the financial commitment required to sustain the cumulative innovation process until it could generate financial returns. As Qiwen Lu showed in his pioneering book, China’s Leap into the Information Age (Oxford University Press 2000), strategic control, organizational integration, and financial commitment underpinned the innovative success of minying (people-run) companies such as Legend (Lenovo) and Founder.

Ancient China demonstrated how a nation could lose its wealth and status when it failed to transform the ingenuity of invention into the collective and cumulative process of innovation. Modern China now has the chance to show the world how it can engage in innovative enterprise and transform innovation into equitable and stable economic growth.

Beginning with this issue, we have renamed this monthly column ChinaCompass. We hope that our readers will find it useful for navigating the world shaped by China’s rising economic power, particularly its industrial upgrading and innovation and the implications for sustainable prosperity.

Top News of Last Month
July 02 China's Cabinet seeks more mergers, reorganizations among nation's businesses
July 04 China's urban dwellers to exceed rural population
July 08 China prepares for UN combat role
July 13 Salary increase guidelines seek to narrow income gap
July 19 China passes U.S. as world's biggest energy consumer
July 22 China to start domestic carbon trading
July 22 China may calculate yuan exchange rate against basket of currencies, not just USD: PBOC
July 28 China to invest $120 bn in high-speed rail
July 29 China Commerce Ministry approves Geely purchase of Volvo
July 30 China overtakes Japan as No.2 economy: FX chief
New Books
Great Migration: Rural-urban Migration in China and Indonesia

By Xin Meng (Editor)

"`After a quarter century of double-digit growth, 135 million rural migrants were living in China's cities by 2007. This massive migration exceeds anything else recorded in human history. Based on new survey data, The Great Migration explores cause and effect while comparing China's restrictive with Indonesia's liberal migration policies. The result is the best book on rural-urban migration thus far.' - Jeffrey G. Williamson, Harvard University and University of Wisconsin, US" - from Amazon.com


By Simon S. C. Tay

"The past relationship between the US and Asia has been one of domination and almost blind emulation. This cannot and should not continue into the future as Asia rises and America is no longer the sole superpower. There is a need to re-imagine this vital relationship and to work together towards achieving a shared future between the US, chastened but revitalized after the crisis, and a rising Asia." - from Amazon.com

Seizing Power: The Grab for Global Oil Wealth

By Robert Slater

"'In Seizing Power, Robert Slater takes a whole new slant on the oil issue, offering for the first time an analysis of how the ongoing oil crisis could trigger increased turbulence, even violence between the new breed of petroaggressors. He explains in clear language with lots of powerful anecdotes how a wide range of 'second tier' countries in Africa and Asia are suddenly competing for and acquiring vast oil wealth and power. A must-read for those wondering how these new oil actors are reacting to a much tougher oil environment.' - Matthew R. Simmons, Chairman Emeritus, Simmons & Company International; author of Twilight in the Desert" - from Amazon.com
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Latest addition to ChinaAnalysis.Com

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