Introduction

Observers around the world are impressed by the rapid growth of China's economy, some with hope and others with fear. Some hope that China will offer the unique experience of successful economic growth and catch-up; some see the rise of China as a threat to the current world order and to the powers that currently dominate the world in terms of economy, technology and politics.

While outside observers tend to focus on the success story of unprecedented growth, policy documents and recent domestic debates in China have pointed to the need for a shift in the growth trajectory with stronger emphasis on ‘endogenous innovation’ and ‘harmonious development’. In this chapter, we make an attempt to capture the current characteristics of China's production and innovation system; how they were shaped by history and what major challenges they raise for the future.

In section 10.2 we present data on China's postwar growth experience. We show how the shift in policy towards decentralization, privatization and openness around 1980 established an institutional setting that, together with other factors such as the presence of a wide ‘Chinese Diaspora’, has resulted in extremely high rates of capital accumulation especially in manufacturing. The section ends with pointing to some inherent contradictions in the current growth pattern.

In section 10.3 we take a closer look at how the policy shift in the 1980s affected the institutional framework shaping R&D activities, in particular, and learning and innovation, in general. The attempt to break down the barrier between the science and technology infrastructure, on the one hand, and the production sphere, on the other, was highly successful as compared to the development in the former Soviet Union. But the original intentions were not fully realized. Rather than establishing markets for science and technology, the reforms led knowledge producers to engage in mergers or forward vertical integration, and they became to a large extent involved in production activities.

Referring back to the analysis of the sustainability of the growth model and the unfinished reform of the innovation system section 10.4 introduces the recent decision by China's government to promote endogenous innovation and harmonious development.