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Report

Made in China 2025 and the Belt and Road Initiative

August 10, 2018


Abstract : The industrial policy of “Made in China 2025” clearly focuses on innovation and the “Belt and Road Initiative” has begun to focus on a clear vision: a more ambitious standard of profitability.

Made in China 2025 and the Belt and Road Initiative

Abstract:

Joel Ruet, an expert at the Italian Institue for International Political Studies (ISPI), said in the article "Made in China 2025" and the "Belt and Road Initiative" that China is trying to redefine globalization with "Chinese characteristics" through the investment of the "Belt and Road initiative". In the current stage of globalization, although “developed countries” are still dominating financial and technological investment, a large amount of foreign investment flows to China. The industrial policy of “Made in China 2025” clearly focuses on innovation and the “Belt and Road Initiative” has begun to focus on a clear vision: a more ambitious standard of profitability.

The full text of the article is as follows:

The Belt and Road Initiative (BRI) is the investment arm of a larger Chinese attempt at redefining globalisation with “Chinese characteristics”. One of its open questions is the likely effect of BRI’s promised massive investment across geographies on global industry and global innovation. The current globalisation phase (with its massive foreign investment directed towards China) led to some concentration of industrial capacity, knowledge and jobs into the “factory of the world” even though the “developed world” retains primacy on financial and (at least for the time being) technology investment. While only time will tell if Western supremacy would last, it is worth trying to understand whether a more geographically distributed investment (but at the same time more Chinese-controlled) would correct (or not) the economic effects caused by the current flows of industrial-capacity related investments.

To start with, the effect of the last industrial investment globalisation on innovation is more debated than agreed upon. At the end of the Obama’s presidency, his Trade Secretary Mrs Pritzker expressed concern over the fact that Chinese subsidised/state-driven and long-term-focused catching-up had discouraged American capitalism - short-term driven and quarter-profit obsessed as it is - to invest and thus led it to under-innovate, ensuing a global under-innovation drive. The IMF conversely released figures stating the opposite: Chinese competition acted as a stinging needle to further competition to innovate. No surprise, this confrontation has been sustained by a broader academic debate over the years, between those who argue, like Paul Krugman (1994), that “countries do not compete with each other the way corporations do”, and others, like Paul Samuelson (2004), arguing instead that “invention abroad (...) gives to China some of the comparative advantage that had belonged to the United States (and) can induce for the United States permanent lost per capita real income”. Only further data can clinch the Krugman-IMF vs. Samuelson-Pritzker debate. So far, the only certain conclusion is that the form that investment will shape into within the BRI (geographical distribution, competition vs. value chain complementarity to local industry, degrees of technology and know-how transfer, maturity of technology, acceleration effects in local enterprises, etc.) does matter. These forms of investment within the BRI will be the key performance indicators (KPIs) on optimal level of global innovation as well as on territorial distribution of innovative industries.

In a world where trade slows down and may possibly recede, and in which investment can become a pillar of a new globalisation phase, the BRI is central to this question: will it spread the new, acquired, comparative advantages of China? Will it drive new/further Chinese innovation? Can it enable or conversely does it threaten innovation in the global South? These are practical questions that global and national leaders need to address and take a stand on, way before the academics clinch the above debate.

As Zhou Enlai once mentioned, the lasting impacts of the French Revolution are “too early to tell”, so is the whole variety of innovation far too vast to embrace. Let us here focus, far from the heights and hypes of fashionable subjects like Artificial Intelligence, on some forms of decisive incremental innovation that arise whenever a new technological ecosystem takes shape. For instance, new energies are not just a commodity replacing another, but a whole combination of skills and companies that further connect and specifically develop each zone, country or region. “The” solar industry includes a far stretched range of actors focusing on a range of aspects from grid optimisation like in Germany to completely new feeding mechanisms for new car/mobility industries like in urban China, or feeding services like semi-informal renting of mobile charging or cooling devices like in Africa. The point here is not the technological advancement, it is the intricacy of the techno-skills combination. In this new world of industry, “competitiveness” may not be addressed through the statics of costs but through the dynamic resilience of these ecosystems, their versatility into incremental innovation through a constant recombination of techno-skills. In short, rather than specialisation, what matters is the complexification/diversification of a national industrial base and its resilience, as argued in Ruet (2016), “Des capitalismes non alignés”.

The Chinese industrial policy for 2025 clearly focuses on sectoral innovations, since MIC2025 is supposed to arise through inter-sectoral coordination, including at the regional (intra- and inter-Chinese provinces) level. The BRI-“reloaded” (the recalibration of the project after those initial years when the policy was tested very pragmatically and somewhat arbitrarily around countries friendly to China which relied on Beijing’s foreign reserves), has recently started being implemented around a clearer vision: more ambitious profitability criteria but also impacting outcomes on diversifying the industry of those Chinese provinces near the neighbouring countries in the BRI.

BRI investment is to feed the long-term technology deployment around China, from innovation down to the rise of environmentally fit production units; many industrial sectors, including “old” industries like steel, metallurgy or fertilizers do show an increasing fine-tuning between modernisation/closing old production capacities and, spreading technological advantages abroad through the strategic use of BRI. Innovation the way we defined it looks granted for China.

Will it be so for the receiving end of the BRI investment, through the ability of these territories to diversify their national industry? While we believe this is the responsibility of national leaders, one can see optimistic signs from the “mother of all industries” (Peter Drucker): the automotive. The internationalisation of the Chinese car industry already has to address “domestic content” policies across the world, from Morocco setting stringent industry-technology localisation policies to the recent EU-China Summit some days ago where cooperation on new energies industry was reiterated as a key axis. The reality check will come from the ability of Beijing’s partners to constantly re-state their concerns and underline the areas of improvement through the use of key performance indicators.

The more these leaders will be wary of the Krugman-IMF argument and sensitized to the Samuelson-Pritzker concern, the more will this kind of system-innovation in ecosystems happen, from new energies to connected services, ranging through multi-scale consumer goods production adapted to local markets specificities or modernised, technologically integrated but more sovereign agricultures. If so, it will involve a clearer and more shared governance and could become what it is stated to be: an initiative for the whole world. If not, the BRI will remain what it now is, just a Chinese initiative.

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