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Does China need to learn how to innovate? Does it need to enact better intellectual property protection and protection of property rights? The answer, it seems, is no. Whilst I’ve never been a fan of headlines which pose questions to which the answer is ‘no’ (Is Evolution wrong?), I think its a pertinent question to answer because it goes against every economist’s gut instinct. Of course you need to innovate to prosper!

Have no doubt, China will eventually need to build up its ability to innovate new business models and technological solutions. But that time is nowhere close. Why is that? The answer lies in standard macroeconomic theory.

In the long run, growth is driven by increases in productivity, by which I mean improvements in technological processes and industrial methods. It might be something big like the invention of the production line or ‘Just In Time’ manufacturing or it might be a slightly more efficient way to paint cars. It might be the invention of a new product, or an adaptation of a new product. It might be diversifying a new product – as long as it improves the economic well-being of the people, it is an innovation that increases productivity.

In highly developed countries, such productivity can only come from innovation. That is why the United States invests so much in R&D and in its universities. But in developing nations like China, productivity growth can come from emulating the innovations of other nations. In fact, economic growth will actually be faster (since its faster to copy than to do your own work; haven’t you ever cheated on a test before?)

Won’t these benefits run out? They will eventually, but that time is a long way off. China’s GDP per capita (after a decade of pure 10% economic growth) is still only 1/5 as big as the US (20%). China may overtake the US as the world’s biggest economy as soon as 2013, but it will still be a developing nation. According to the best projections (by the Economist Intelligence Unit, Goldman Sachs and Global Insight), China will grow between 4-7%pa until around 2025. Even then, its GDP per person will still only sit at around 42.3% of the US (according to the most optimistic forecast for China by Global Insight. Global Insight projects 6% growth against 4% by the Economist Intelligence Unit and Goldman Sach).

That last paragraph contains faulty logic – you can’t look at averages and make broad generalisations in that way. Many industries will fully converge with developed nations and will require innovation. In other areas, China simply cannot grow because there is no market for them. Take manufacturing – when China is the world’s largest economy, can it still be the factory of the world when its incomes are going to start rising?

An excellent illustration is the online sector. This article by the Economist highlights how Chinese companies are simply appropriating Western innovations. They are adapting them to the Chinese market and even improving upon them – but ultimately, Chinese growth is not innovation-led. It’s just a matter of technological convergence. It’s also a good example of an industry that must learn to innovate since its approaching full convergence pretty quickly.

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