While China’s unprecedented late-20th century growth was fueled by low labor costs and an enormous labor force, that easy growth is ending, argues a new article in the Journal of Economic Perspectives. “From ‘Made in China’ to ‘Innovated in China:’ Necessity, Prospect, and Challenges” makes the case that China’s old business model will no longer produce the same gains.

The news last month that China’s 2016 annual economic growth was the lowest it has been in more than a quarter century provides further evidence a change is needed.

“China now has higher wages than a majority of non-OECD countries and its working-age population has been shrinking since 2012, so the country cannot expect to see similar levels of growth without transitioning its economy,” says article author Xiaobo Zhang, Senior Research Fellow at the International Food Policy Research Institute and professor of economics at Peking University. “Future gains will depend more on domestic innovation; fortunately, we show that China has made strides in innovations in terms both of quantity and quality.”

The article analyzes several different dimensions for evidence of growing innovation in China, including research and development expenditures, approved patents, patent citations, and export product quality. Growth in patents provided the clearest indication of increased innovation, with patent applications in China growing 19 percent annually from 1995 to 2014. The number of Chinese patents approved by the United States Patent and Trademark Office – which are presumably of higher quality – grew even more rapidly, at 38 percent from 2005 to 2015.

The authors cautioned that while China has increased its innovative capacity compared with the past, their analyses found evidence of resource misallocation. “State-owned firms are currently receiving more subsidies than private firms, but they produce fewer results,” warned Zhang. “Innovation will be faster if those subsidies are more efficiently allocated.”

This article was first published in IFPRI.

Photo: Eustaquio SantimanoCC BY-NC-ND 2.0