Innovation in China: Finding the Balance between Short-Term Viability and Long-Term Success

Abstract: This paper traces the role of innovation in China, a developing economy striving for developed status. China has enjoyed blockbuster economic growth over the past three decades thanks to economic reforms which have allowed it to utilize its comparative advantages as a low cost center of manufacturing and become the so called ‘workshop of the world’. But much of China’s growth to date has stemmed from its ability to reduce and maintain low costs—a position which is increasingly challenged as its continued economic growth places increasing pressure on prices. In order for China to sustain its economic growth on a long term basis it must begin to put a focus on innovation in order to be capable of generating new sources of economic growth. But investing in innovation places firms in a contradictory situation where they must try to continue to reduce costs to ensure short term growth while at the same time invest increasing resources in innovation in order to ensure long term viability. Through analysis of what innovation means both to a nation and its firms, this paper takes a critical look at the path China must follow in its pursuit of innovation. Using empirical evidence this paper will show how firms that are pursuing innovation in China’s still nascent economic development actually face economic hardships in the short term as the costs of innovation are immediate while its benefits take time to develop. Through an outline of the role of innovation in an economy and tracing China’s economic growth to date this paper argues that China is currently caught in a paradoxical situation where it must continue to focus on cost-efficiencies while at the same time investing in innovation for future sustained economic growth. In order to help firms, the government will need to strengthen institutions, primarily ensuring the free flow of capital and a stronger legal system to both allow firms to have the resources to invest into innovation and then to protect those investments. However, the government will need to do this in a manner which will still continue to allow market forces to operate. This paper will show however that while firms in China are incurring profit loss in their pursuit of innovation, if China is to truly become the economic superpower of the 21st century its firms must learn to maintain a balance focusing on short-term viability with long-term growth.