by Paul Shetler and Marcelo Silva

Less well-known than their Silicon Valley counterparts, China’s digital disruptors are no less ambitious. To help businesses better understand the size of the opportunity, Which-50 is publishing the China Digital Playbook, an ongoing series authored by digital transformation experts Marcelo Silva and Paul Shetler.

No discussion of the differences between Chinese and American innovation would be complete without considering the role of government.

In the West, Silicon Valley’s history is strongly intertwined with government. High levels of military spending on research and development, with a focus on innovative programmes through DARPA, were key to establishing tech innovation as an area of American focus.

Over the last decade, though, Western governments’ readiness for tech disruption has declined significantly. Often, start-ups’ most ambitious request of government is usually to get out of start-ups’ way, and allow them to innovate in the way that they know best. As Transport for London’s recent decision not to re-issue Uber’s licence shows, sometimes even that is a bridge too far for government.

The Chinese Government has taken the cause of innovation seriously, at the highest levels. Just last year, President Xi Jinping announced a set of initiatives to make China a leading innovator by 2030 and a world-leading science and technology power by 2049, the 100-year anniversary of the founding of the People’s Republic of China.

All action, no talk

In part, that means China doing what the West does, more radically and more comprehensively.

While Australia has talked the talk on digital skills, action has been less forthcoming: reports this year indicated that the proportion of school students choosing STEM electives in school had reached a 20-year low.

In China, aggressive policy has led the proportion of graduates who studied engineering to skyrocket to 31 per cent — more than six times the figure in the United States. Even over the last year, Alphabet and Amazon have flocked to hire hundreds of high-skilled Chinese tech workers, because they know that an immense and untapped talent pool is emerging there.

From the Chinese Government’s perspective, it’s an opportunity to pivot its workforce from low-skilled labour to highly-specialised and well-remunerated professionals, who can expect to receive a healthy share of the spoils from the digital industries they’re helping create.

Industrial policy in China

More generally, the Chinese Government’s dedicated to a growing start-up sector has meant taking on a set of industrial policies that, in most parts of the West, have been considered unacceptable since the dawn of the 20th century. Through large, state-controlled venture capital funds, China has eagerly taken the opportunity to direct investment into initial-stage start-ups.

While helping to grow its own firms, the Chinese Government has also been willing to handicap their rivals: Google is blocked in China, as are Facebook, YouTube and Twitter. Ostensibly, the reason for the sites being included in the Great Firewall of China is the political risk that their content could pose to the Chinese Government; but one consequence of the ban has been to protect a nascent ecosystem of tech companies from global competition, until they’ve reached the size and scale of today, which has allowed them to look to expand to other markets.

Even Didi Chuxing’s successful expulsion of Uber, which has been championed by some in China as a vindication of the claim that Chinese start-ups can defeat their overseas rivals, has been tainted by the suggestion that the threat of Chinese government regulations was a key reason behind Uber’s withdrawal from the Chinese market.

Just as the United States Government under Hamilton, Washington and later, Lincoln, aggressively protected its infant industries from worldwide competition, so too is China ensuring its domestic firms reach the size and scale to allow them to look to expand to other markets. The effects of the ‘American System’ of nationalist protectionism are written deeply into American history, as conflict between a protectionist North and a laissez-fair South became one cause of the American Civil War. Its economic legacy is still very much alive today: companies like DuPont (chemicals), Colgate (health care) and Wiley (publishing) are still mainstays of their respective industries.

Western governments of today have become more and more interested in liberalising their markets, and aggressively using anti-trust law to protect consumers from tech companies’ monopoly power. China has been content to squeeze out foreign competition and foster domestic monopolies that can then be unleashed on the rest of the world.

This is because the Chinese Government knows that the long-run return on its investment will be massive. Economically, as the HBR has reported, China needs to wean itself off low-cost manufacturing, if it wants to continue to grow China’s middle class during an era of aggressive automation. The nature of platform economics and network effects means that Chinese companies that have already developed highly efficient, scalable platforms will be well-positioned for global expansion.

Politically, the geopolitical spoils of becoming the world’s innovation leader are massive. Russian President Vladimir Putin was mocked for saying that whoever develops an AI advantage “will become the ruler of the world,” but it’s a point that’s been roundly echoed globally; Barack Obama observed in 2014 that “the nation that goes all-in on innovation today will own the global economy tomorrow”. In a digitised world, where market size is the entire addressable network, rather than being constrained by geographical boundaries, there is a huge benefit to being the nation that captures digital dominance — and China is rapidly on its way to claiming that prize.

About the authors

With over 20 years of online experience, Marcelo is considered to be one of the most experienced and knowledgeable digital practitioners within the Australian digital space and has recently relocated to Singapore. He is the founder of Digital Transformation Scores, invests in innovative companies and consults to emerging digital businesses across the Asia Pacific.

Paul Shetler is Expert in Residence at Stone & Chalk and an adviser to governments and organisations around the world who are transforming their business. He is a speaker on digital transformation and organisational change. Paul was the CEO of the Digital Transformation Office and the Chief Digital Officer of the Australian Government’s Digital Transformation Agency.

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