Part one of this two-part series surveyed several metrics for assessing China’s capacity to innovate at the level of developed countries. Today’s post looks at China's progress in translating this potential into tangible outputs, and the possible global implications over the next few decades.

The results of China's changing R&D profile are evident in high-profile state-led projects such as China's space, fast rail and commercial airliner programs (which admittedly do face their share of problems). China is also now competing at the technological frontier in a number of defence-related fields, such as counterspace capabilities and hypersonic vehicles.

But the key issue for China's future place on the global technology ladder is how far and how fast its wider economy can embrace the 'fourth industrial revolution', characterised by the increasing integration of the physical, digital and biological worlds. An ageing population and stagnating growth model add urgency to the pursuit of economic transformation, to meet the official goal of turning China into a 'modern socialist country' by the middle of the century (or, in terms of development economics, escaping the middle-income trap).

Key to this transition is the digitised automation of production. China has become the world's largest market for industrial robots, and while foreign suppliers still dominate, domestic robot-makers are following the general path of incremental improvement and growing market share.

Chinese overseas investment is also increasingly targeting high-tech firms as a means of accelerating the shift towards intelligent manufacturing, with Germany in particular being courted at both the government and company level. While the extent of automation, let alone digitisation, in China remains very low compared to advanced economies, the cost efficiency of robots is growing and Chinese firms are starting to integrate 'fourth industrial revolution' technologies, notably 3D printing.

In sectors like internet services, consumer electronics and telecommunications, rapid technological change (arguably assisted by state policy) has enabled Chinese firms to catch up with or leapfrog foreign competitors. This also potentially the case in fields where industrial policy has previously failed to close the gap, such as semiconductors and automobiles. In the latter sector, for instance, a mix of state-owned enterprises and private Chinese firms is leveraging internet-enabled ride-sharing and automotive digitisation (backed by state policy) to develop an 'internet of vehicles' composed of self-driving electric cars. Because this prospective ecosystem will be based on Chinese technology standards and developed by domestic firms, it presents a challenge to the dominance of foreign automakers in the Chinese market, and perhaps even overseas.

Overall, China's technological level remains that of a middle income country. In high-tech sectors its firms remain downstream in the production process, and its R&D system is still burdened by academic fraud, administrative fiat and an incentive structure skewed towards quantity over quality. In three decades China has built (from almost nothing) the framework of a world-class innovation system, yet the pace of its technological catch-up with the developed world remains incremental rather than transformative.

But the foundations that have been laid allow us to envisage a future world economy (within a twenty-year time frame, not fifty) in which China is increasingly an equal player with Japan, the EU and the US. The key to this outcome is deep reform of the innovation system, which is bound up in the wider issue of reforming China's political economy.

Yet even if Chinese innovation remains secondary to that of more developed economies, China's size means that its global impact will be hard to ignore. While Chinese companies are far from replicating the foreign investment footprint and international supply chains of established multinationals, China's domestic market may be big enough to support the rise of globally competitive firms. Test cases are already present in Huawei, Lenovo, Ali Baba, Tencent and others.

An expanding role for Chinese firms and researchers in an integrated global economy would have political implications in an era of growing international tensions and 'secular stagnation'. It would undermine proposals to embargo China technologically, and would bolster China's economic influence, which is already a focus of US-China strategic competition. But it would also promote the rise of a more global civilisation, with increased tapping of mutual resources for wealth creation and scientific progress.

Photo: Getty Images/ChinaFotoPress