INDIGENOUS INNOVATION AND ECONOMIC DEVELOPMENT: LESSONS FROM CHINA'S LEAP INTO THE INFORMATION AGE1

Industry and Innovation, Dec 2004 by Lazonick, William

INDIGENOUS INNOVATION

Economic development depends on the innovative capability of a society to generate goods and services that, at prevailing factor prices, are higher quality and lower cost than those that were previously available. So defined, innovation makes it possible, although by no means inevitable, to improve the economic positions of many different groups of people-workers, managers, financiers, consumers, and governments-who participate in the economy. Social institutions will determine how the gains from innovation are distributed among participants in the economy, while the distribution of the gains from innovation will influence the incentives of participants in the economy to contribute their skills and efforts to innovation. From this perspective, the process of economic development needs to be analyzed within a framework that captures the dynamic interaction between social institutions and the innovation process (Lazonick 2002).

The process of innovation entails learning about how to transform technologies and access markets, and what is learned in one innovative activity can be subsequently applied to other innovative activities. The cumulative character of the process of economic development poses a profound problem for less developed nations. Given the lead of the advanced economies, how can the less developed nations accumulate the innovative capability that will enable them to embark on a cumulative development path so that they can eventually join the ranks of the more advanced nations? Is it necessary for them to follow the learning path that the advanced economies took, and hence forever lag behind? Or, by choosing a different path, can they catch up and perhaps even forge ahead? Do they have to accept a permanently subservient role in the international division of labor? Or can they engage, as have all of the advanced economies at certain times and in certain sectors, in "indigenous innovation", a process of making use of technologies transferred from the advanced economies to develop superior technologies at home?

Put this way, it is obvious that less developed economies want to choose a strategy of indigenous innovation. But what does indigenous innovation entail and how, within a national environment, is such a process put in place? These are the larger questions that Qiwen Lu poses in his book, China's Leap into the Information Age: Innovation and Organization in the Computer Industry (Oxford University Press 2000). The book contains detailed business histories of four leading Chinese computer electronics enterprises from their founding in the mid-1980s to the late 1990s when Lu completed the manuscript. Lu shows how, through reform of the nation's science and technology (S&T) institutions and the organization of industrial enterprises related to them, China engaged in indigenous innovation in the computer industry. Based on in-depth, fieldbased analyses of strategy, finance, and organization in the four companies-Stone, Legend, Founder, and Great Wall-Lu shows how, in becoming self-sustaining enterprises, they emerged out of and drew upon the technological resources of China's S&T infrastructure, itself a legacy of the era of central planning. At critical points, these enterprises also absorbed technology from abroad through a variety of organizational arrangements. Lu demonstrates, however, that these enterprises did not merely engage in learning from the advanced economies. Rather they integrated foreign technology into their indigenous innovation strategies.

Lu did this work as part of a research project on indigenous innovation and economic development that I was directing during the mid-1990s. His research built upon and helped to inform a "theory of innovative enterprise" that Mary O'Sullivan (then, like Lu, a graduate student at Harvard University) and I were developing at the time, and which, individually and jointly, remains a central focus of our research (see Lazonick and O'Sullivan 2000b; O'Sullivan 2000, 2004; Lazonick 2004). Lu explicitly employed this theory, with its focus on what we would now call the "social conditions of innovative enterprise", as an analytical framework for the case studies in his book.

As is recounted in my Foreword to China's Leap into the Inforamtion Age, Lu started working with me on these issues almost immediately after he had come from China to Harvard University in 1990 to do a PhD in sociology. His research on the evolution of the Chinese computer industry, that formed the basis for his PhD dissertation completed in 1997, was funded by, and done in collaboration with me at, the UMass Lowell Center for Industrial Competitiveness. Upon completion of his PhD, Lu joined O'Sullivan and me at our new posts at INSEAD, the international business school located in France, and it was as an assistant professor of Asian Business that he completed the volume. Qiwen Lu submitted the finished manuscript to Oxford University Press in June 1999, with none of us suspecting that he would not live to see the actual publication of the book.