Seven steps to Success in MIC 2025

China has targeted a leadership position in the key technologies and industries of the future, from artificial intelligence to biotech and robotics. Its “Made in China 2025” strategy hits the right notes: it aims at mastering design, software and production; and it targets a combination of high-tech sectors and infrastructure.

Seven key steps will determine whether the strategy succeeds or fails:

First: building the right pool of talent—scientists, engineers, entrepreneurs, creatives. China has poured massive resources into education and training; it accounted for over one-fifth of all science and engineering bachelor’s degrees awarded globally in 2014, more than double the U.S. share, according to a National Science Board report released earlier this year. The number of students graduating in science and engineering in China has quadrupled between 2002 and 2014. China has become a close second to the U.S. in the overall number of science and engineering doctorates, and has surpassed the U.S. in natural sciences and engineering doctorates (including physics, mathematics and computer science). The quality matters more than the numbers, and the U.S. maintains a clear lead in scientific breakthroughs and their industrial applications. But the number of Chinese students admitted to U.S. colleges and universities has climbed steadily to about 351,000 for the past academic year, and many go back to work in China with U.S.-quality degrees. This first step is well on track.

Second: building know-how. China has doubled R&D investment between 2000 and 2016, to a bit over 2% of GDP, pulling ahead of the EU. But know-how also depends on foreign investment and international trade, which facilitate access to global knowledge and technology. Here China’s heavy-handed approach of forcing foreign companies into joint ventures with domestic players, with very weak protection for intellectual property (IP), is backfiring. Trade tensions with the U.S. could curb China’s trade, and make the U.S. and other foreign companies more reluctant to invest in China. Isolation hampers innovation.

Third: ensuring the right mix of competition and collaboration in the ideas marketplace. China’s poor IP protection undermines healthy R&D competition—though this might change as more Chinese companies develop original IP. Collaboration across companies is still limited, and mostly mandated or encouraged by the government. Today’s industrial innovations tend to cross traditional expertise boundaries, and require more open collaboration than in the past. Here China has a lot of work to do.

Fourth: Allowing failure and creative destruction. China’s 2025 strategy focuses on the constructive aspect, on building powerful and competitive industries. That’s very attractive. But innovation disrupts existing industries at a rapid pace. So far, China has carefully phased out some state-owned companies to make room for the nascent private sector. That’s been painful enough, displacing workers and causing ripples in the financial sector. Will China allow a similar and broader disruptive process to unfold spontaneously?

Fifth: Building stable legal and economic institutions. The innovation battle unfolds best in a context of clear and predictable rules and institutions. Not just IP protection, but the role of courts, labor legislation, environmental and healthcare regulations and more. That is very different from the current all-powerful rule of the Communist Party. Completing this step will require a profound restructuring of China’s institutional setup.

Sixth: Maintaining a sustainable macro environment. Economic and financial crises inflict severe and lasting damage on industry. The Bank for International Settlements has noted that financial bubbles and the ensuing recessions cause a misallocation of resources, drawing talent and capital away from their most productive uses; this contributed to the productivity growth slowdown in advanced economies after the 2009 recession—compounded by a collapse and slow recovery in investment. China’s macro environment dances on the knife-edge of sustainability. China’s policymakers have been pursuing the right strategy, a gradual bolstering of domestic consumption and private industry. But they need to reduce a burgeoning corporate debt stock and further shrink the state-owned companies’ sector while modernizing the still tightly state-managed financial sector. China’s shift to a more sustainable economic model is a difficult balancing act, on an unprecedented scale.

Seventh: Establishing the right partnership and division of responsibilities between the private and public sector. China has pulled off a phenomenal economic performance, expanding its economy at an average rate of close to 10% for nearly forty years. It has achieved this remarkable feat through a meritocratic and tightly disciplined economic management, running the country’s economy much like a top-ranked company is run. To get to the next stage, though, the private sector will need to play a much stronger part. Advanced economies like the U.S. and Europe will also need to rethink the way in which private and public sector collaborate, including on scientific research, education and training and social safety nets. For China though, this will be a much bigger challenge.

China has designed the right strategy to take the lead in the global industry race, but implementing this seven-step program to execute it will be its toughest challenge yet.

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