What China's innovation gap tells us

Earlier this week I posted to Light Reading about the almost total absence of telecom start-ups in China, despite it being the world’s largest supplier of telecom gear.

It’s the one high-tech sector where the country can claim leadership, and the lack of start-ups is a significant gap in what Chinese call the 'industry chain’. Not that start-ups are the sole engine of innovation – far from it – but they are a great way of concentrating resources and attention on specific issues and technologies.

The industry structure is at the heart of the problem. The oligopoly in the services market means operators have little incentive to innovate, and this in turn puts market power in the hands of vendors, who make sure small vendors stay small.

Other factors also come into play, such as the weak research sector and corruption and plagiarism in science, compounded by the government's ham-fisted attempts to micro-manage innovation.

There’s an interesting analogy in the aviation sector, another vertical where China has great ambitions. Citing a new Rand Corp report, the Wall Street Journal points to the tension between the airlines, who want the most efficient aircraft possible, and the state-owned manufacturer trying to find buyers for its dud planes. (For those interested, James Fallows’ excellent China Airborne examines China’s innovation and wider economic potential through the lens of aviation.)

China’s telecom sector of course works far better than that, benefiting from a genuinely competitive supplier market, but similar strains between vendors, operators and government ambitions exist, as demonstrated by the mandating of TD-SCDMA and TD-LTE.

In the short-term this hardly matters for the telecom sector. Start-ups aren't the be-all and end-all of innovation, and there is plenty of global competition both to challenge the vendors and ensure operators get the technology they need.

But it's a problem for China, which aims to refashion its economy through science and innovation. Its inability to extract more innovation out of its massive telecom industry reminds that it is still a developing country and that achieving manufacturing scale is not the same as achieving thought or technology leadership.