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China’s New Innovation Advantage

China’s New Innovation Advantage

Zak Dychtwald, the author of Young China: How the Restless Generation Will Change Their Country and the World (St. Martin’s Press, 2018) and the founder of Young China Group, considers that China is achieving a new level of global competitiveness, thanks to its hyper-adaptive population.

The future of the Chinese economy lies in innovation, and everyone in China knows it. But that hasn’t always been true. Innovation didn’t drive the manufacturing miracle that has unfolded in China over the past half century, during which some 700 million people have been raised—or lifted themselves—out of desperate poverty.

Instead the driver has in large part been what might be called brute-force imitation. Relying on a seemingly limitless supply of cheap labor, provided by the hundreds of millions of ambitious workers born during the postwar baby boom, China devoted itself prodigiously to the production of other countries’ innovations. The effort enabled a country that missed the Industrial Revolution to absorb the world’s most modern manufacturing advances in just a decade or two. Fittingly, China earned a reputation as a global copycat.

Now times are changing. China’s Baby Boomers are being replaced by its Millennials, born under the country’s one-child policy that created a new demographic reality. China today doesn’t have enough people in its rising Millennial and Gen Z workforce to replenish the ranks of its disappearing Baby Boomers. According to its National Bureau of Statistics, China will have 81 million fewer working-age people in 2030 than in 2015; after 2030 that population is projected to decline by an average of 7.6 million annually. This has profound implications. With its pool of younger workers shrinking, China can no longer rely on imitation if it hopes to grow and support its aging population. It will have to rely on innovation instead.

But can China innovate? Can it compete at a global level with developed nations that have built their economies on innovation for decades? Many observers are doubtful. In recent years, they note, the West has steadily produced an abundance of innovations and innovators, while China has produced relatively few. In March 2014 this magazine published “Why China Can’t Innovate,” by Regina M. Abrami, William C. Kirby, and F. Warren McFarlan, an article that captured the conventional wisdom. The authors’ arguments were sound and well supported at the time. But just two years later eight of the 10 companies that had reached a $1 billion valuation in the shortest time ever were Chinese—and six of those eight were founded the year that article was published.

Those are startling numbers for a country that in 2020 ranked only 14th on the Global Innovation Index. Something clearly propelled those Chinese companies to the top, but the metrics we use to evaluate innovation have missed it. We tend to focus on people and companies that generate big new ideas—charismatic heroes with dash, daring, and dynamic thinking. By that measure the U.S. innovation ecosystem stands apart. But in the past five years, as an “innovation cold war” has taken shape between world powers, China has achieved a kind of parity with the United States—and the driving force behind its success may not be its innovators at all.
To understand what’s powering the global rise of Chinese companies, we need to recognize that China now has at its disposal a resource that no other country has: a vast population that has lived through unprecedented amounts of change and, consequently, has developed an astonishing propensity for adopting and adapting to innovations, at a speed and scale that is unmatched elsewhere on earth.

It’s that aspect of China’s innovation ecosystem—its hundreds of millions of hyper-adoptive and hyper-adaptive consumers—that makes China so globally competitive today. In the end, innovations must be judged by people’s willingness to use them. And on that front China has no peer.