Evaluating the conditions for China’s 4th Industrial Revolution plan: A neo-Schumpeterian analysis

Hing Lee Henry CHAN, Singapore Management University

Abstract

After 33 years (1979-2011) of close to double digit average annual economic growth, the Chinese economy decelerated to a mid-high single digit growth of approximately 7% per year since 2012. The country is currently facing the typical economic transition challenge of moving from being a high-middle income to high income economy. In response to this economic transition, the government launched an industrial innovation program that corresponds to the 4th Industrial Revolution in 2015-Made in China 2025, hoping to stabilize and rejuvenate China’s growth momentum through innovation. This thesis examines the pre-conditions for the successful implementation of this plan using the three levels analysis framework of neo-Schumpeterian Economics -micro, meso, and macro.

The thesis examines the rationale of using neo-Schumpeterian Economics in the study, rather than the conventional Solow Model or any of its variants. It also discusses the advantages of using neo-Schumpeterian framework over the New Structural school promoted by prominent Chinese economist, Justin Lin.

At the micro-level, the thesis looks at whether the country possesses the necessary human capital, entrepreneurship, innovation, and execution capabilities to implement the plan. For any new industries to succeed in a country, these factors are the necessary micro-level pre-conditions under neo-Schumpeterian Economics. ii The thesis uses various proxies to demonstrate that these factors are available in China for its Made in China 2025.

At the meso-level, the thesis uses the technological regime developed in 2000 by neo-Schumpeterian economists, Stefano Breschi, Franco Malerba and Luigi Orsenigo to study China’s high speed train industry. The thesis identifies two basic factors behind the success in building China’s new high speed rail industry base on the model. Firstly, China has an existing ecosystem with good innovation and absorption capabilities. Secondly, it has a strong, innovative institution that provides critical supports to nascent industries. The thesis builds a model on the technology and market innovation on high speed rail in China at the meso-level. It argues that the model remains valid today and the Chinese government has demonstrated the ability to mobilize the necessary linkages in the model to make it work. The ability to execute industrial policy provides the necessary preconditions for success under meso-level neo-Schumpeterian framework.

At the macro-level, the thesis examines the various government programs in building national capacity at micro-level and building innovative industries under the 4th Industrial Revolution Plan, Made in China 2025. The government had demonstrated the ability to play the role of a strong, innovative institution that is critical in the success on the meso-level’s new high speed rail industry. Under neo-Schumpeterian Economics, the presence of an “effective” government at microlevel and meso-level is the pre-condition of success at the macro-level. Based on the analyses, the thesis draws the conclusion that China does possess the necessary pre-conditions to succeed in its transformation journey into an innovation-driven economy under its 4th Industrial Revolution Plan.