Sunday 25 Feb 2018 | 21:25 | SYDNEY
Sunday 25 Feb 2018 | 21:25 | SYDNEY

Is China competitive enough?



27 March 2015 09:52

Lei Jun reckons he has what customers really need. Xiaomi's flamboyant chairman has declared his ambition to overtake Apple at the top of the smartphone industry within ten years, by which time he expects 'Chinese companies to lead the world.' Whether he will succeed is, obviously, up in the air. For that matter, by then Apple may no longer be the benchmark, nor smartphones a sexy category. But his basic point must be right: China will wield a large number of globally competitive companies within a decade.

Two academics, economist Ricardo Hausmann and statistician Cesar Hidalgo, performed a famous and extraordinarily detailed data crunch, 'The Building Blocks of Economic Complexity', comparing the current and potential national incomes (GDP) of the world's economies, and their trade patterns. Their findings were intuitively sensible:

Economies that export many types of products are more likely to be sophisticated; products exported only by sophisticated economies are more likely to be complex. Sophistication and wealth do not always go hand in hand. China and India are more complex than their incomes would suggest; When economies are relatively sophisticated but relatively poor, they often have the potential for quick growth, as we have seen in China and India.

Economic complexity is a measure of both 'non-ubiquity' (or exclusivity), and diversity (or breadth). Wealthy exporters like Japan and Germany make a broad spread of hard-to-copy technologies. They 'go wide and deep', so to say. By contrast, countries heavily reliant on undifferentiated commodity products tend to struggle to grow incomes.

As Mark Buchanan at Bloomberg has highlighted, other academics applying powerful Big Data techniques have shown limitations to the Hausmann-Hidalgo framework as a predictor of income for lower-complexity nations (where, say, resource endowments or governance could be disproportionately influential). But it remains a useful guide for the countries that matter most, those with an 'ability to produce a wide range of products, as well as specialized things – think iPhones and rocket boosters – that few other nations can match.' Specifically, Buchanan is referring to India and China. 'The two have been building capabilities in a wide range of new products and skills, and have thus graduated into the group of countries for which complexity does predict growth.'

Still, there are a couple of wrinkles to using export classifications alone as a measure for complexity; on such a scale, Uganda (say) looks more advanced than soybean superpower America. China exports a lot of advanced goods (40% by some measures) but its own contribution is significantly lower, Apple's iPhone being the familiar example. Merchandise exports also ignore services (eg. IPR, branding, health care, consulting, financial and legal advisory) which are specialised, with high-entry barriers, and are therefore lucrative.

Chinese economists fully understand this. Zhang Monan has warned about the misleading signal of final exports. It is not enough simply to send abroad assembled 'high-tech' products and services if the most critical technologies and skills are already embedded in the components by others. In the recently concluded National People's Congress, Premier Li Keqiang delivered a workpaper re-prioritising domestic mastery of key capabilities – robots, high-end marine vessels, new-energy vehicles, high end medical devices, biologic pharmaceuticals, gas turbine aero-engines, integrated circuits, and advanced internet – within a decade.

Zhang lists her worries in a domestic opinion piece: China is 'big' but not efficient, innovation is still weak, the usual 'latecomer advantage' may not apply to its 'catch-up', the nation is losing talent to others, and the 'window of opportunity is closing rapidly.' This last argument is curious, made in an era of globalisation when the horizons for cross-border collaboration seem to be expanding. Yet Zhang sees other countries spurred (especially since 2009) to stimulate indigenous innovation programs, partly in response to China's ambitions. Beijing has long complained about Western technology export restrictions, and now it is playing rough itself: 'We just did what the Americans have already done; you can choose to leave, we have substitutes' seems to summarise the new line. Perhaps Zhang senses danger in such mercantilist industrial policy.

Xiaomi's chairman hopes to build a world-class Chinese enterprise. The question is not whether there will be such companies; it's whether there will be enough. China has only one path to getting rich: to have a very deep and very wide economy. I have noted before that China's rise to high complexity status must be disruptive. Trade isn't a zero-sum game; there can be more winners than losers. But there are losers, and they look like Detroit. The perpetual race for national power is, at its root, an economic contest. Rich, complex economies have many companies providing things that customers need, and can afford. From a developmental perspective, nothing else matters.

Photo by Flickr user David.

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