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Two Principles of Developing Proprietary Technologies

Jan 22-2021   



China will inevitably rely more on innovation and proprietary technologies for growth, yet it must avoid pitting the development of proprietary technologies against opening up and market, said Prof. Yao Yang in the fifth edition of the National Development Forum on December 20th, 2020. He’s dean of the NSD and PKU Bo Ya Distinguished Professor. The National Development Forum is a signature event by the NSD in which scholars share insights into national development through speeches and public discussions.

 

One observation of the fifth plenary session of the 19th CPC Central Committee showsa that developing proprietary technologies is designated as an especially important part of the Dual Circulation. Moreover, the documents of the plenum adopt the term ‘import substitution’ for the first time.

 

Import substitution was given by the World Bank as policy advice to developing countries in the 1950s and has been widely adopted by Latin American countries, India, and China. The pace of import substitution has quickened in China since its reform and opening up. A paper by Prof. Yao and his then Ph.D. student Zhang Ye, written a decade ago, found that the added value of processing trade tended to follow a V shape: go down for years, hit the bottom, and gradually move up. That partly explains China’s bountiful trade surplus. Furthermore, the processing trade has enabled Chinese firms to learn and accumulate knowledge and technological capital, which leads to more and better machineries and industrial upgrade.

 

China’s processing trade also benefits global consumers through cost advantage. The exchanges between Chinese firms and their foreign counterparts contribute to global technological advancement and economic integration. Therefore, opening up facilitates import substitution, which remains the best and most cost-effective way for China to upgrade its industries; in the meantime, the world gains.

 

In developing proprietary technologies, two issues stand out. One is the relationship between Plan A and Plan B. The latter aims to develop all technologies internally, which is tempting but unviable and may give rise to frictions with more countries. The sheer size of the Chinese economy means that domestic economic policies are bound to impact on foreign relations, which in turn affect the former. China should remain clear-headed and refrain from seeking de-coupling with the rest of the world.

 

The second issue concerns the relationship between the government and the market. As governments at all levels vie to set up all kinds of funds to develop proprietary technologies, it should be asked if this is the optimal way. The rising role of the government and the correspondingly decreasing role of private firms are likely to drive efficiency down, but such negative result might only surface in five to ten years’ time. Therefore, the government should restrict its role to certain strategic domains and leave the rest to the market.

Two Principles of Developing Proprietary Technologies

Jan 22-2021   



China will inevitably rely more on innovation and proprietary technologies for growth, yet it must avoid pitting the development of proprietary technologies against opening up and market, said Prof. Yao Yang in the fifth edition of the National Development Forum on December 20th, 2020. He’s dean of the NSD and PKU Bo Ya Distinguished Professor. The National Development Forum is a signature event by the NSD in which scholars share insights into national development through speeches and public discussions.

 

One observation of the fifth plenary session of the 19th CPC Central Committee showsa that developing proprietary technologies is designated as an especially important part of the Dual Circulation. Moreover, the documents of the plenum adopt the term ‘import substitution’ for the first time.

 

Import substitution was given by the World Bank as policy advice to developing countries in the 1950s and has been widely adopted by Latin American countries, India, and China. The pace of import substitution has quickened in China since its reform and opening up. A paper by Prof. Yao and his then Ph.D. student Zhang Ye, written a decade ago, found that the added value of processing trade tended to follow a V shape: go down for years, hit the bottom, and gradually move up. That partly explains China’s bountiful trade surplus. Furthermore, the processing trade has enabled Chinese firms to learn and accumulate knowledge and technological capital, which leads to more and better machineries and industrial upgrade.

 

China’s processing trade also benefits global consumers through cost advantage. The exchanges between Chinese firms and their foreign counterparts contribute to global technological advancement and economic integration. Therefore, opening up facilitates import substitution, which remains the best and most cost-effective way for China to upgrade its industries; in the meantime, the world gains.

 

In developing proprietary technologies, two issues stand out. One is the relationship between Plan A and Plan B. The latter aims to develop all technologies internally, which is tempting but unviable and may give rise to frictions with more countries. The sheer size of the Chinese economy means that domestic economic policies are bound to impact on foreign relations, which in turn affect the former. China should remain clear-headed and refrain from seeking de-coupling with the rest of the world.

 

The second issue concerns the relationship between the government and the market. As governments at all levels vie to set up all kinds of funds to develop proprietary technologies, it should be asked if this is the optimal way. The rising role of the government and the correspondingly decreasing role of private firms are likely to drive efficiency down, but such negative result might only surface in five to ten years’ time. Therefore, the government should restrict its role to certain strategic domains and leave the rest to the market.