Paradigm Shift: A series that highlights the disconnect between old paradigms and the new reality of economic statecraft.
On January 2, 2021, The Wall Street Journal published an article titled “China’s State Capitalism Collides With Its Technological Ambitions” that fails to comprehend the fundamental drivers of the People’s Republic of China (PRC) government’s technological ambitions as well as its unique strategy to achieve them.
Three excerpts capture the thrust of the article’s argument:
The Chinese economy inefficiently allocates capital.
“Can China’s hybrid state-capitalist economy learn to worship—or at least genuflect a bit deeper—at the altar of efficiency?”
This inefficiency will thwart its technological ambitions.
“If key internal Chinese markets remain unfairly tilted toward companies with good political connections, rather than the best products, China may struggle to birth many new companies truly pushing the technological frontier.”
So, China should continue to rely on the import of strategic components.
“Beijing is essentially now engaged in a massive, long-shot attempt to build from the ground up an advanced semiconductor manufacturing capability that doesn’t depend on foreign suppliers—churning through gargantuan amounts of the Chinese people’s money in the process. Rather than trying to reinvent the wheel, a better economic strategy would be to mend its relations with the West and reform China’s dysfunctional credit system—then import chips and let Chinese markets and Chinese companies decide what China is really good at.”
The article fails to grasp two important things:
First, in this new era of economic statecraft, great powers are willing to sacrifice economic efficiency at the altar of national security. The article fails to consider the fundamental drivers of the PRC’s technological ambitions. The control of cutting-edge technology is a key factor in geopolitical competition and so reliance on imports for core components in strategic sectors is unwise.
Ironically, the article was published as the CHIPS for America Act and the Endless Frontiers Act made their way through the US Congress. Both aim to invest billions of dollars in domestic US semiconductor manufacturing and R&D, respectively, and reflect the same fundamental drivers in US technological ambitions.
Second, the PRC has spent decades building a “composite innovation system” that allows it to quickly digest original innovation at the global technological frontier while maintaining a state-dominated institutional structure not dissimilar from China’s traditional norms. The PRC is highly efficient at extracting original innovation from advanced economies around the globe and then relocating it back to the PRC for commercialization and ongoing process innovation.
Therefore, the PRC’s state-dominated institutional structure does not need to excel at the efficient allocation of capital to risky ventures at the technological frontier. Instead, the PRC marshals massive resources to cultivate dominant domestic companies in strategic sectors that are fed by original innovation systematically acquired from overseas.
Forty years of rapid technological ascent and historically unprecedented economic growth suggests it is working.
 See Chapter 1 of China’s Quest for Foreign Technology: Beyond Espionage for a description of China’s “composite innovation system.”