Keyu Jin’s Twitter biography concludes with an unconventional role: “Bridge for China.” To build that bridge for Western audiences, Jin employs a number of approaches. She does so through her teaching, as an Associate Professor of Economics at the London School of Economics; she does so through her writing, which regularly appears in outlets such as the Financial Times and Project Syndicate; and she does so through the interviews she gives — the American financial publication Barron’s dubbed her “The China Whisperer” ¹ — and the speeches she delivers, which cover topics ranging from trade policy to technological innovation.

Raised in Beijing and a graduate of Harvard, Jin spoke recently with Governance Matters about how China encourages innovation, and how other governments might learn from its approach. 

Governance Matters: What are the most common misperceptions people have about the innovation taking place in China today? 

Keyu Jin: There are two extreme views about Chinese technology. One is that China is spearheading leading-edge technology and is an equal rival to the U.S. The other is that China cannot innovate because its education system rewards rote memorisation and learning. Neither is true. China is one of the most innovative nations in the world, especially in creating new business models and adapting existing technologies to make them better and cheaper. It is also very strong on data-driven applications, particularly perception-based or consumer-based artificial intelligence (AI), and it is catching up in high-tech and leading-tech areas. But there are still high-tech sectors where it is lagging, including chips, materials, and equipment. 

So on the one hand, China is fully embracing technology. It is a technology-forward society, a technology-driven economy, and a techno-nationalistic country. On the other, it is not yet ready to make fundamental technological breakthroughs. 

You have talked about China’s shift from “imitator” to “innovator” — what powered that shift?

There is a time when imitation ceases to be profitable — and that era came in the 1990s and early 2000s for China. When that happens, you start to see “creative destruction”: markets reward firms that innovate, while those that do not are ousted. Consumer demand also drives innovation, producing products that are more sophisticated, refined, and tailored to local consumers. And, of course, China has an unbelievable advantage when it comes to its outsized market, where commercial applications are tested and adjusted quickly in a vast marketplace. 

Another reason for China’s rise, paradoxically, was its economic backwardness. This is most evident in the financial sector. When the traditional financial sector cannot adequately serve companies and households, new forms of finance will race to fill that role. The huge success of digital payments in China, for instance, is the direct result of the country lagging in the availability and convenience of credit cards. While America was busy transitioning from stripes to chips, China came up with something much more powerful and convenient. 

What are some key government policies, regulations, and programmes that helped to drive innovation-led growth?

You are right to ask this question because the market was not the sole factor in driving Chinese technology. The state also played an important, though complementary, role. 

The first is setting the tone. The state was clear: China needs to be an innovation nation. With that, policy and resources are geared towards supporting innovative firms. That is important because otherwise, the funds can flow to sectors such as real estate or resources, which promise short-term gains. But when that tone is set, the local government starts to implement the strategic vision. It does so by showering potentially innovative firms, or firms in tech-oriented sectors, with privileges such as cheaper land, funding, and tax breaks. These have played a crucial role in helping tech firms do everything from coordinating supply chains to hiring highly skilled workers. Just look at the high-tech industrial zones, which allow the companies to focus on innovation, while the local government essentially takes care of the rest. 

The Government also has vast resources at the national level to subsidise research and development, to fund important sectors such as semi-conductors or the industrial internet of things. In 2019, the Government initiated a new infrastructure fiscal stimulus that promised to invest about US$ 1.6 trillion in 5G, cloud computing, AI, and other kinds of digital infrastructure by 2026. Deep pockets help, even if the Government cannot identify specific winners. 

Beyond funds, the Government can help build innovation systems that link universities, tech incubators, and industries into a horizontal network much like the Apollo space programme in the U.S. in the 1960s and 1970s. Governments can also be early procurers of nascent technology. Still, it is important to recognise that they can only contribute to the overall macro-environment — governments cannot pick winners or cultivate technology giants by simply subsidising them to success. Ultimately, the technological achievements are still market-driven. 

Can you give other examples of specific investments or policies that are distinctive to China that might be equivalent to the Apollo project you mentioned?

China has launched a juguo initiative, the kind that used to reap Olympic gold medals and develop nuclear capabilities in the 1960s — and now they are applying the best practices to becoming a world-leader in technology. 

Juguo is a whole-of-the-nation system that connects industries, universities, national laboratories, and the public sector to develop, commercialise, and procure nascent technology. The Government has plans, for instance, to build 100 tech centres and 100 high-tech industrial parks across the country. The Politburo, the decision-making body of the Chinese Communist Party, collectively learns about and discusses the latest technological trends regularly. The theme was Big Data in 2017, AI in 2018, blockchain in 2019, quantum technology in 2020, and the digital economy in 2021. China’s 14th Five-Year Plan proposes that China’s research and development spending should grow at an average annual rate of more than 7% in the next five years.

Now that China has seen some success in innovation, how has the Government’s strategy adapted and evolved?

For one, it is now trying to steer efforts and resources into certain types of technology — away from consumer-oriented internet platforms that have enjoyed huge success both in terms of venture funding and valuation, and towards leading-edge technology areas, especially those where China is lagging, such as chip-making. 

Second, and paradoxically, regulating technology companies is not tantamount to trying to limit their success — quite the opposite. Regulations target the massive problems accumulated throughout the years of relative free rein — such as data privacy issues or monopolistic power — that can suppress innovation in small- and medium-sized firms. The Government’s intention is to allow more competition in order to foster greater innovation, not less, and to re-direct resources towards high-tech areas and general-purpose technologies that can catapult China into technological supremacy. That is true of biotech, quantum, AI, and military technologies, all of which will shape its future and that of the world. It is certainly a very ambitious endeavour. 

Using China’s experience as a lens, what are some lessons about the nature of innovation that high-income countries should pay attention to? 

The size of the market matters. Europe’s institutions lead basic research and fundamental knowledge, but its segmented markets reduce the scope and speed of commercial applications and their testing. 

Policy also matters. This is true whether it is an environment that fosters entrepreneurship; one that allows some degree of freedom for companies, laboratories, and research institutes to conduct experiments without being bogged down by stifling rules and limitations; or even one that includes a certain amount of protectionism that prevents the markets from being carved up by leading foreign competitors. These are all useful in the beginning stages of innovation. 

If European economies, for instance, had not flung their doors wide open for Uber, Facebook, and Amazon, they might have cultivated their own giants. There is no reason why India, a very different culture, could not have had its own version of Facebook or YouTube had the Government given local entrepreneurs a chance to develop their own. 

A handful of other countries, such as those in Southeast Asia, Russia, and particularly China, have been hugely successful in creating their own technology companies tailored to their populations. Protectionism in the early stages of development is not always a bad thing — every successful economy engaged in it during the process of industrialisation, including Great Britain, the U.S., Japan, and South Korea. The Chinese Government’s approach was to let them innovate first, observe them, and then regulate them if there are problems.

P2P [peer-to-peer] software is a case in point — yes, the companies were innovative, but at some point they threatened financial stability and consumer well-being, so many were shut down. This approach gives innovative companies a chance to come up with something truly great instead of nipping these opportunities in the bud. 

Fundamentally, human capital is the most important piece of the puzzle. Focusing on education and university basic research is a long-term solution to the problem of productivity growth. - Keyu Jin

What are some lessons that governments in lower-income countries can take from China’s development journey — how might they unleash creative and innovative market forces? 

Absorb as much technology as possible from advanced economies. This can be done through welcoming foreign direct investment (FDI), or by collaborating with foreign companies and foreign capital as much as possible to learn, absorb, and adapt. Attaining one’s own technological proficiency takes time and requires a huge amount of resources. Until domestic demand and entrepreneurship naturally push technology forward, it is the fastest and most pragmatic way to learn. 

The sooner these countries can use existing advanced technologies to make better products and improve daily lives, the sooner they will be able to grow their economies — something that is good for advanced economies as well. 

Technological rivalry only becomes a concern for the leading nation when the follower is in the rear-view mirror. For most developing countries, there is a big gap to close and advanced economies can do their share to help those far behind to catch up. Knowledge, technology, and innovation should be shared around the world, not treated solely as products of intellectual property that make companies more profitable. 

These countries should also create a hospitable environment for business. Innovation and technology do not operate on their own. A misallocation of resources — investment and human capital in the wrong place — can deter entrepreneurs and their innovative efforts. A good investment climate is similarly crucial. 

Governments can also allocate more resources to innovation and R&D, rather than encourage greater consumption. 

How would you advise governments that want to make those investments, but find their balance sheets strained by the pandemic?

Giving tax credit to R&D goes a long way. I should add that, obviously, having a large market is helpful. Growing the economy and making sure that “creative destruction” forces are at play will naturally push companies to invest in technology and innovate. 

Fundamentally, human capital is the most important piece of the puzzle. Focusing on education and university basic research is a long-term solution to the problem of productivity growth.