Business & Economics

Innovation is a Geographically Localized and Temporary Phenomenon

China may now be the most innovative place on earth, but India may soon replace it as the world’s innovation leader

Image Credit: Michele Marconi/Synergy

Innovation is the “main event” of the modern age. It’s the reason why after millennia of comparative stagnation, the last several hundred years featured sudden, dramatic improvements in technology and therefore living standards: from steam engines to search engines, from vaccines to vaping.

It’s also a strangely localized and temporary phenomenon. At any one time, there is usually one part of the world where innovation flourishes best, attracting talent from all over: California in 1960, the U.S. East Coast in 1920, Britain in 1800, Holland in 1650, Renaissance Italy in 1500, Song China in 1000, Abbasid Arabia in 800, ancient Greece in 500 B.C., the Ganges Valley before that. These were places that were relatively wealthy, free and open to trade at the time.

British inventor James Watt’s 1775 diagram of his first working steam engine. Image Credit: Wikimedia Commons

Today, the most innovative part of the world is probably China. The days when China was a smart copier, catching up with the West by emulating its products and processes, are over. China is leapfrogging into the future.

Chinese consumers are wholly mobile in their use of the internet, floating free of fixed computers. In cities at least they no longer use cash, or even credit cards: Mobile payments are universal. Digital money, controlled by Tencent and Alibaba, is evolving fast. You mostly no longer find menus in restaurants or cash registers in shops. QR codes are used to order and pay for everything. The cost of mobile data has plummeted there faster than anybody could have imagined. In five years, the price of a gigabyte of data plunged from 240 renminbi to just one.

Firms like WeChat started out as social media companies but are now providing everything consumers want: mobile wallets, apps for ordering taxis or meals, means of paying utility bills and much more. Things that require five different apps in the West can be done in China on one. Companies like Ant Financial are reinventing financial services, with 600 million users managing not just their money but their insurance and other financial services, all through a single app.

Paying with a smartphone in a Shanghai café. Image Credit: Asia-Pacific Images Studio/Getty Images.

As for discovery and invention, China is just as innovative, plunging into artificial intelligence, gene editing, and nuclear and solar energy with a gusto that the West can only dream of. The pace of development is breathtaking: 7,000 miles of new freeways a year over the past decade; train lines and metro networks that would take decades in the West appearing in a year or two; data networks bigger, faster and more comprehensive than anywhere else. This infrastructure spending is not innovation in itself, but it surely helps it happen.

What explains this speed and breadth of innovation fury? Partly, work. Chinese entrepreneurs and their employees are dedicated to the 9–9–6 week: 9 a.m. to 9 p.m., six days a week. That was what Americans were like too when they changed the world (Thomas Edison demanded inhuman hours from his employees); and Germans when they were among the most innovative people; and Britons in the 19th century; and the Dutch and Italians before that. Willingness to put in the hours, to experiment and play, to try new things, to take risks—these characteristics for some reason are found in young, newly prosperous societies and no longer in old, tired ones.

What Does This Mean?

China has been here before, of course. During the Song dynasty (960-1279) China experienced an unparalleled flourishing of science, technology and economic growth. Woodblock printing presses served a literate elite; compasses steered traders across the seas; craftsmen turned out porcelain and silk of unrivaled quality; windmills pumped water for rice irrigation; pound locks helped barges travel up rivers; gunpowder deterred barbarian invasions; metal workers forged new alloys; paper money came into circulation. Mathematics, cartography and astronomy all flourished. The population grew, but the food supply grew faster with new rice varieties and new methods of cultivation. Cities sprang up all over the empire.

Paper currency from the Song Dynasty. Image Credit: Wikimedia Commons

The Song emperors had hit upon a formula that worked. What was it? The secret sauce was freedom. To an extent unknown under previous Chinese emperors, Song-era merchants were free to do what they wanted. The government gradually withdrew from direct involvement in the economy, leaving administration and economic decisions to the local gentry, most of whom were closely involved in trade. Internal tariffs were largely absent, so long-distance trade flourished, along with the building of canals. Corruption was suppressed, taxes were fair and peasants were able to act as consumers. It was no paradise by today’s standards, but it was a highly inventive time.

This innovation fever came to a shuddering halt at the fall of the Song dynasty. Mongol rulers, followed by the first Ming emperors, reimposed central planning to an almost farcical degree. Merchants were told what they could and could not sell and where they could and could not go. They were forced to report their inventories regularly to mandarins. Overseas trade was restricted and eventually banned. More and more power was drawn to the center. Experiment and enterprise became impossible. China sank slowly into militarized poverty.

How then can one explain the flourishing of innovation in China today? It is after all a communist country run by an unelected nomenklatura of apparatchiks, to borrow some Russian words for the mandarinate. The answer lies beneath the surface. So long as they are not trying to invent democracy, or a new political party, innovators are surprisingly free to try anything. A Chinese entrepreneur faces almost none of the delays and restrictions that a Western one does. He is not required to get permits, licences and go-aheads from multiple beadles and bureaucrats of the state. He just gets on with it: hires new researchers, builds a new production line, sets up a new company. The speed with which business decisions are taken amazes Western visitors.

The deal that Deng Xiaoping did, and his successors mostly honored, was that in exchange for a monopoly on political power, the party would leave enterprise alone. Turns out that’s all enterprise needs: a hint of freedom and off it goes. Three decades of starvation, re-education and repression under Mao Zedong had not extinguished the spirit of the Chinese innovator.

But the party may now be over. Not because the West is sick of seeing its manufacturers undercut, its intellectual property undermined and its appetite for free trade sated, but because Xi Jinping, president for life, is a different type of ruler from those who went before him. The Ming are back. You can see it in the increasingly dictatorial powers and arbitrary decisions of his henchmen. The goose that lays the golden eggs is being throttled.

Chinese citizens are increasingly subject to arbitrary and authoritarian restraints. Ask the people of Hong Kong. Democracy does not exist in China and free speech is impossible, but in smaller ways too, the trap is closing. Surveillance apps deliver mandarins a kind of power to interfere that their Ming predecessors would have envied. Innovation happens when ideas can meet and mate, when experiment is encouraged, when people and goods can move freely, when money can flow rapidly toward fresh concepts directed by the consumer, and when those who invest can be sure their rewards will not be stolen. In other words, in places like Hong Kong as it was.

The West may be slowly forgetting to allow this to happen through bureaucratic strangulation, but China will surely stifle it through political authoritarianism. Xi wants to (in his own words) “consolidate the shared ideological foundation underpinning the concerted efforts of the entire party and all the Chinese people,” which basically means telling people what to think. In an authoritarian system it will be all too easy for incumbent businesses, even those that started out as plucky outsiders, to raise barriers to entry against innovation. China’s spell at the top of the leader board for innovation will come to an end. Maybe not this decade, but soon.

What Next?

Who then will pick up the challenge? My money is on India. If it can sort out its rickety infrastructure, corrupt administration and chaotic communal relations, India has enormous potential: a vast country that speaks English, allows a measure of freedom, values education, and has a long tradition of enterprise and spontaneous, bottom-up development. Then the innovation will have come full circle, back to where it first started.

For it was in India, 1,400 years ago, that the decimal system of counting, together with the crucial innovation of zero as a number in its own right, was first used. In 628, we find Brahmagupta, an astronomer living in a kingdom of western India called Gurjaradesa, known for its scholarship and enterprise. He published a book called the Brahma-sphuta-siddhanta, or the “opening of the universe.” Though mostly about astronomy, it had chapters on mathematics and is the first known work to treat zero as an actual number, rather than as a symbol for nothing as the Babylonians had done.

Indian astronomer Brahmagupta. Image Credit: Wikimedia Commons

In simple and easily understood statements, Brahmagupta set out the significance of zero and considered negative numbers for the first time, driving the point home in plain terms: “A debt minus zero is a debt. A fortune minus zero is a fortune. Zero minus zero is a zero. A debt subtracted from zero is a fortune. A fortune subtracted from zero is a debt. The product of zero multiplied by a debt or fortune is zero.”

Gurjaradesa was the Silicon Valley of its day, the place where innovation thrived. Don’t rule out the possibility that it could be again. Gujarat, which covers part of it, is one of India’s most entrepreneurial regions.

But it is only a possibility. The innovation engine may roar into action somewhere else. Brazil, perhaps, a country that increasingly has the infrastructure and education to match its ambitions. Or parts of Africa, a continent that was written off as permanently poor by many people just a decade ago but is now rapidly abolishing the combination of warfare, malaria and malnutrition that has held its people back. Or maybe the Anglosphere of America, Britain, Canada and Australasia will have another chance.

Having left the cumbersome and stifling bureaucracy of the European Union’s Ming Empire, Britain is not only looking outward across the oceans again, with over 60 new trade deals, but is discovering with delight that it can take quicker decisions about vaccines and genetic technologies, about artificial intelligence and fusion energy, while its former partners bicker and delay. The prosperity of our grandchildren depends on somebody discovering the magic of innovation, not just with pixels but with molecules and gadgets too.

This article is fourth in a series on the future of innovation. The first piece in the series is a dialogue between Adam Thierer and Matt Ridley on the proper role of government in promoting innovation. The second article in the series concerns the future of permissionless innovation. The third article examines technological innovation in Europe.

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