Can China’s Model of State-Led Economic Development Pick Life Science Winners?

Can China's Model of State-Led Economic Development Pick Life Science Winners?

Interview with Joseph Wong
May 20, 2014

NBR’s research project on the Globalization of China’s Life Sciences Sector examines the impact of Chinese government support for the life sciences on international scientific competition and innovation, as well as on U.S.-China political and economic relations. In this expert interview, project scholar Joseph Wong (University of Toronto) analyzes the advantages and disadvantages of China’s model of state-led economic development for the evolution of the country’s domestic life sciences sector. He describes relevant precedents from the development of other industrial sectors in China as well as lessons Beijing might draw from the experiences of neighboring countries. Dr. Wong argues that its postwar developmental state model may hinder China from becoming a global leader in life sciences innovation, but he also points out that the potential size of China’s domestic consumer market could make Chinese firms and consumers global standard setters.

China’s domestic life sciences sector is growing rapidly, bolstered by significant investment and incentives from the country’s government. What precedents exist in China for this kind of state-led economic development in specific industries?

The Chinese government has most decidedly turned its attention to industrial upgrading. Over the past decade or so, the government has created several state-led initiatives and programs, including efforts to develop China’s basic research capacity, facilitate downstream knowledge transfer and translation, build hard infrastructure such as industrial R&D parks, and invest in star researchers. In the government’s most recent plans, life sciences and biotech innovation have been targeted as high priorities as China looks to move up the global value chain.

These kinds of large-scale industrial development projects are nothing new to China. Since opening up its economy during the late 1970s, Chinese economic planners have strategically chosen key sectors to develop. The country enjoys three distinct advantages when it comes to industrial upgrading and economic development. First, the Chinese have proved to be very quick learners. Take the auto sector: through strategic joint ventures and partnerships with firms like Volkswagen, China’s capabilities in assembling cars have grown immensely, such that the country now has a robust indigenous auto sector.

Second, China’s size and scale allow it to continually diversify its economic activities up and down the value chain. Chinese firms are able to capture value in low-end manufacturing and upstream R&D at the same time. The prospect of these firms vertically integrating what are otherwise globally scaled value chains is very real. In the solar energy sector, for example, China’s core strengths at the moment are in panel manufacturing, but there is no reason to think that Chinese firms will not soon enter into the higher-end design and software segments of the value chain. I wouldn’t bet against China.

Third, China’s size and potentially huge domestic consumer market mean that it can create viable firms through selling in the domestic market first, without having to immediately rely on export revenues to generate returns. The incredible success of Chinese firms in the mobile handset and telecommunications sector, such as Huawei and ZTE, is an example of this advantage; these are gigantic domestically successful firms that are only now starting to enter global markets. Indeed, with the potential size of China’s domestic consumer market, one should expect that Chinese firms and consumers will become global standard setters in the future.

Do precedents exist in China for the kinds of innovation critical to success in biotechnology?

I would have to say no. Until now, China has been in the position of catching up. In my 2011 book Betting on Biotech: Innovation and the Limits of Asia’s Developmental State I argue that developmental state-led programs can be effective in catch-up industrial development and technology assimilation, but that they do not have a proven track record in real innovation. Dan Breznitz and Michael Murphree’s book Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China (2011) explicitly makes the argument that China should aim to innovate just behind the leading edge, as that is where Chinese firms are positioned, at least right now, to generate value. I think they are right. I am not convinced that the postwar developmental state model—first perfected by the Japanese and so astutely copied by the Asian tigers—is a good way to go when it comes to life sciences innovation.

What are some of the advantages and disadvantages of the state-led economic development model, and how might these apply to the life sciences sector?

Massive government support for targeted industrial sectors, such as we see in China, helps mitigate the risks of industrial upgrading. This is the argument I and others have made with respect to the developmental state model. Government funding, the provision of upstream and downstream incentives, and the creation of R&D infrastructure all help to underwrite the innovation process. China’s scale similarly distributes risk among actors. We have also seen that the Chinese government, through the control of economic levers, can reshape industrial sectors such as commercial aviation, with the fragmentation and concentration of firms.

Simply put, this kind of government intervention can bring many advantages; and frankly, they are not unique to China. Consider, for instance, how the U.S. government invests huge amounts of public funds into upstream life sciences R&D through the National Institutes of Health and the National Science Foundation. Innovation is an expensive bet, and life sciences innovation is a particularly high-risk bet, one with potentially huge returns but that nonetheless requires a massive ante to play.

Therein is the disadvantage of such a system. Governments do not know how to bet particularly well. The developmental state is technocratic. Policymakers are good at following the market, but it is debatable how effective they are at staying in front of the market, ahead of the innovation curve. They are very capable, for sure, of allocating public resources in proven winning sectors. But they are not, as I argue in my research, very good at betting on winners under conditions of tremendous uncertainty. Private-sector firms, on the other hand, fare much better in this regard in the long run because they are attuned to the market and are able to quickly move to generate value when opportunities arise and diversify to mitigate risk. They also know when to bail on a bet when the risk appears too high. That is how U.S. industries and firms have remained so innovative and competitive—they move fast, but they also fail fast and move on. The Chinese system may be a bit too top-heavy at the moment, too bureaucratic. The government can underwrite risky ventures, but it cannot pick winners, meaning this top-heavy approach is probably unsustainable over the longer term.

As China continues to build up its life sciences sector, what lessons might it draw from its own experiences—for example, in the clean-tech sector—as well as from the experiences of other countries in Asia?

The most important lesson China is learning and will continue to learn as it moves closer and closer to the cutting edge of life sciences innovation is patience. Failures are bound to occur along the way, and the truly innovative economies are the ones that can absorb these failures over the longer term. This means that governments not only need to be patient before pulling the plug on a particular technology or industrial sector but also need to create the right environment for firms and labs to fail as well. The terribly negative reaction in China to the bankruptcy of Wuxi Suntech Power, once thought to be an emerging global firm in the solar energy sector and the beneficiary of massive state support, suggests that China is still learning the virtues of patience.

In learning from other countries’ experiences, it is clear that there remain many challenges in the development of China’s life sciences sector. First, there is a dearth of top-notch basic science researchers in China. Though the government has attempted to raise the international and national profile of basic research scientists and the role of universities more generally inside China, there is still a long way to go.

Second, and related to that point, China continues to lag behind its competitors in terms of R&D with an emphasis on development, technology transfer, and knowledge translation from upstream research into commercial applications downstream. Observers of the Chinese life sciences sector note that R&D units in China continue to function like islands, unable or unwilling to share knowledge with other labs and firms. The core issue here is one of ownership of knowledge, and China clearly lacks a tradition of R&D collaboration.

Third, the Chinese government must continue to strengthen its regulatory framework in the life sciences. Biotechnology is an extremely regulated sector in other countries, with stringently enforced research ethics and commercial consumer protection. China is far behind in this regard. The country’s poor protection of intellectual property and weak rule of law are often criticized by foreign researchers. Research ethics have been brought into question with cases of academic plagiarism, while high-profile examples of corruption mar the regulatory efficacy and legitimacy of the State Food and Drug Administration. China needs to reduce the regulatory uncertainty of the biotech sector if it is to have any success in attracting foreign investment and creating firms.

And fourth, private-sector financing in China’s life sciences and biotech sector remains relatively insignificant. Because the government has taken the lead in the sector, private firms are risk averse. Whereas about two-thirds of R&D spending overall in China is private, the share of R&D expenditures in the life sciences from the private sector is much lower. Other countries, such as India and Korea, have enjoyed considerable success in biotech innovation because, though the governments there have played important leadership roles, private firms have by and large led the way in terms of R&D investment.

Does China have the bench science and innovation culture to effectively transform the government’s investments in biotechnology and life sciences into products and services?

China has invested a great deal of sweat equity and resources in its universities and research infrastructure. Its universities continue to climb in global rankings and have made great strides in collaborating with research institutes around the world. I thus expect good science to emerge in China.

I once had a conversation with a senior executive of a global pharmaceutical company during which he explained to me why his firm had begun to move some of its R&D operations into China, despite prevailing concerns over ineffective intellectual property protection, the weak rule of law, and so forth. He explained that because biotech innovation ultimately requires a great number of large-scale bets, the more leads that could be worked up, the better the odds a winner would emerge. Hence, this senior executive felt that China was a place where many bets could be made by virtue of its size and scale, and I expect Chinese scientists will benefit from this huge advantage.

Does China have an innovation culture? I am not sure. After all, what is an innovation culture? There are many who will argue that China is an Asian society and that its so-called collectivist orientation is bad for creativity. I don’t know if I agree with this view, given the large share of innovations that Chinese society has contributed to world history. But in the current technological age, it seems to me that very few truly innovative societies exist. Instead, the innovation industries, and especially the life sciences, are concentrated in a handful of countries. So it is unclear to me what would constitute an innovative culture.

That said, I believe that certain incentives—be they formal governmental ones or informal social incentives—are more conducive to innovation. A political economy, for example, that encourages risk-taking by mitigating the effects (both social and economic) of failure is more likely to support innovation. On that score, China has a ways to go. But as I said at the beginning of this interview, despite China’s economic preponderance, its high-profile entry into innovation industries, and life sciences specifically, is very recent and indeed unprecedented. I have no reason to expect that the country cannot or will not develop the norms, institutions, and incentives that foster a culture of innovation.

Joseph Wong is a Professor in the Department of Political Science at the University of Toronto, where he holds the Canada Research Chair in Democratization, Health and Development, as well as being the Halbert Professor of Innovation Policy at the Munk School of Global Affairs. He is also the Director of the university’s Asian Institute at the Munk School.

This interview was conducted by Claire Topal, a Senior Advisor for International Health at NBR.