China should pave the way for its own Steve Jobs

by William Pesek

Bloomberg

As Communist Party leaders begin a four-day retreat to decide where to take China’s economy, they would be wise to think about Steve Jobs. Their country’s economic well-being may be at risk if they don’t.

It’s true that China boasts what so many politicians around the globe surely dream about: growth of more 7 percent; armies of laborers who stomach low wages and sketchy work conditions; legions of foreign executives who value profits at the expense of environmental calamity; and the kind of monopoly on power that lets officials snap their fingers and do what they want.

Here’s what China lacks: young citizens with a dream and a laptop getting ready to create the next game-changing company. In other words, the next Apple, Google, Rovio or Samsung.

Making the yuan a viable international currency, changing property rights and tweaking household-registration laws are all well and good. But nothing would redirect China’s economy for the better like a surge of entrepreneurship. China may make just about everything people buy these days, including iPhones and iPads, but it creates almost nothing.

The good news is that China is taking steps in that direction. Details might get fleshed out at the party’s weekend conclave. Among the ideas are plans to support asset-backed lending and cut borrowing costs for smaller firms to boost job creation. This might help achieve Premier Li Keqiang’s goal of cultivating small- and midsize enterprises. That would accelerate a re-balancing away from state-owned export manufacturers and their pollution.

The idea also is to reduce reliance on the shadow-banking system, which potentially poses systemic risks to the economy. Right now, the smaller companies that China needs to maintain employment growth are forced to turn to financiers who are little more than loan sharks in ties. That’s a significant constraint on start-up enterprises.

Beijing also needs to think much bigger than just changing how firms gain access to capital. An obvious problem is China’s obsessive Internet censorship. How, exactly, can the young tap into the global exchange of ideas if they are walled off from — or only getting the abridged version — of some of the biggest debates of our day? It’s fascinating to see how China’s most respected innovators, be they Jack Ma of Alibaba or Robin Li of Baidu, try to wiggle away from this question in interviews. They, more than anyone, know that China’s censorship is an economic millstone.

Just as important, China needs to create a stronger legal and regulatory environment. Why would someone invent, design or brand a product when intellectual-property rights are lacking and pirates make all the money?

Corruption is at the core of one of China’s greatest paradoxes. Small firms generate about 60 percent of gross domestic product, 75 percent of the new jobs, half of all tax revenue and yet have almost no sway in Beijing. The real influence lies with the huge state-owned enterprises that enrich politicians and support the graft that ensure their dominance. To continue thriving, though, China must reverse today’s pecking order.

Unfortunately, China is reinforcing the status quo. Consider the acquisitions strategy of its state-owned businesses, which make deals designed to leapfrog the years needed for organic growth. It’s easier to buy a chunk of IBM than to create new business and product lines. Why fear Google, the thinking goes, when the chance may come to buy it?

Yet China needs more of the opposite. Officials in Beijing say stay tuned and refer skeptics to Shanghai’s new enterprise zone.

That’s fine, but until China figures out how to make room for innovation the odds will be against the emergence of a Chinese Steve Jobs. Apple wasn’t always the iPod-making game-changer, remember. There was a time when IBM, Microsoft, Nokia or Dell might have eclipsed it.

Jobs never could have changed the world the way he did had he lived and worked in China. China’s leaders should think about that when they gather to map out its economic future.

William Pesek is a Bloomberg View columnist.

  • Osaka48

    Innovation can only be achieved through a more Democratic political system and privatizing of state-controlled business, industry. I doubt that the PRC/CCP is prepared to let go. IP theft is more profitable.