Chinese innovative growth good for world

The Central Committee of the Communist Party of China and the State Council, China's cabinet, jointly issued an important document recently encouraging people to overcome all institutional and psychological barriers to accelerate innovation-driven development, coupled with appropriate institutional and legal framework by 2020.

These changes mean free movement of talents, capital, technologies and knowledge, expediting the protection of intellectual property rights, and opening up industries to market competition and enhancing anti-monopoly enforcement to support small and medium-sized enterprises.

Sooner than even informed observers expect, China's will change from being the "world's factory" to the "world's hub of innovation". And the consequences will be global.

In the most recent global innovation index, China has been ranked 35th - even behind Malaysia, Latvia and Portugal. But comparing a country of 1.37 billion people with those of 2-30 million results in flawed interpretations. In China, the level of innovation is different in different regions. First-tier Chinese cities already compete for foreign investments in research and development and business services, whereas manufacturing-led investment is moving to third-and fourth-tier cities.

Indeed, since the early 1990s, Chinese growth has been fueled by increasing R&D investment. This year, China's R&D as percentage of GDP is expected to increase to almost 2.2 percent.

Today, China is eroding even the pre-eminent position of the risk-taking Silicon Valley as the home of the world's largest internet businesses, with two companies (Tencent and Baidu) making the top 10 by digital media revenue and four among the fastest-growing (for example, Qihoo and Sina).

Initial public offerings tell a similar story. In 2012, Facebook raised $16 billion of the total $21.5 billion. That pales in comparison with the historic $25 billion IPO of Alibaba, whose market value was estimated at $231 billion.

On average, China's innovation capabilities are catching up with advanced nations such as the Netherlands and Belgium and, more recently, the core euro economies, including France. Over the past decade, China's share of R&D spending has grown by a factor of 15, while spending has decreased in Europe (-1 percent) and North America (-6 percent).

In substance, there are precedents to China's innovation efforts, starting with Japan and the Asian "tiger economies". But in scale, there are none. China's effort is thus historical.

In his memoirs, From Third World to First, Lee Kuan Yew, former Singapore prime minister who died recently, recalls how the tiny city-state managed to leapfrog from being a colonial backwater to an advanced world-class economy from 1965 to 2000. Today, Singapore has 5.3 million people. Despite its population of 1.37 billion, China hopes to achieve the same in one generation. The potential spillover effects are of an entirely different magnitude.

If the current rates of R&D investment and economic growth are any indicator, China is likely to surpass Europe in total spending on R&D by the late 2010s and the US by 2020.

China has now chosen a development path that underscores investment in innovation. But the context of innovation-led development in China will remain different from that in the West. In large emerging economies, such as China, living standards are far lower than in advanced economies. Consequently, the purpose of innovation, through "popular entrepreneurship and mass innovation" is to raise ordinary living standards - the faster, the better.

In advanced economies, the most important waves of innovation occurred in the 19th and early 20th centuries, when the first and second Industrial Revolutions dramatically altered living standards in the West. In contrast, the post-1970s "third industrial revolution" has not been able to reverse the decline of productivity and growth in the advanced economies.

When living standards are lower, innovation tends to focus more on practical innovations that help to lift people out of poverty rather than on luxurious innovations that offer distraction for the privileged few.

And that's precisely why Chinese innovation holds potential for far more than just new technologies and new industries. It offers a promise of a better world for all of us - not only to some of us.

The author is research director of international business at the India China and America Institute (USA) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).