Global Trend

For centuries, great powers have been looking over their shoulders, certain that somebody was gaining on them. In the late 1800s, Imperial Germany’s ascent unnerved Great Britain, the technology leader at the time. Today, alarm bells are ringing in Washington, D.C., where China’s rapid recovery from the coronavirus pandemic has cemented the notion that it will inevitably replace the United States as the world’s leading economic superpower. Some now speak of a “Beijing consensus” rather than a “Washington consensus.”

Both the Anglo-German and Sino-American rivalries emerged during periods of rapid globalization and technological progress, as many have observed. Both pit a rising autocracy against an established democracy - so, not surprisingly, much of the discussion of China’s surge has focused on the relative merits of a state-led economy U.S. a free market. However, arguments that China’s state-led economic policies are superior to the United States’ laissez-faire capitalism, or vice versa, tend to ignore several crucial contextual factors. Neither economic model emerged in a vacuum; they each evolved in societies with distinct cultural and psychological features.

Scholars have only recently begun to pay attention to the striking variation in psychology between societies. In his remarkable new book, The WEIRD-est People in the World, Harvard professor Joseph Henrich notes that people in the West evolved to become particularly individualistic and prosocial beginning in the Middle Ages. According to Henrich, their path to prosperity began with Christian family policies (including bans on cousin-to-cousin marriages), dictated by the Roman Catholic Church; these policies inadvertently dissolved kinship institutions and made Europeans increasingly free, both relationally and residentially. Released from family obligations, people in the West increasingly chose their own friends, spouses, and business partners. That, in turn, opened the door for the emergence of institutions such as voluntary associations, guilds, universities, and charter towns, which expanded social networks and acted as “collective brains.”

As Western societies scaled up, populations became more diverse and innovative, spurred by psychological developments like greater interpersonal trust, less conformity, and less reliance on authority, which helped facilitate the flow of ideas. Today, Westerners in general, and Anglo-Americans in particular, remain much more individualistic than people elsewhere. Research by IBM’s Geert Hofstede, a noted Dutch social psychologist, confirms this; he developed a widely recognized measure of individualism, based on questions about the importance of personal ambitions and achievements and his work also supports the idea that East Asian societies are more “collectivist.” Similarly, the psychologist Richard Nisbett found that Euro-Americans are more analytical, while East Asians think more holistically, focusing less on individuals and more on the larger web of relationships that bind them together.

These cultural differences have deep historical roots beyond the policies of the Catholic Church, of course. Many comparisons of herding societies to farming societies suggest that the mobility of herding makes people more independent whereas farming cultures are more collectivist. The legacy of rice farming, which required a high degree of collaboration, continues to affect the 21st century Chinese. Rice paddies require standing water, so people in rice-growing regions had to build elaborate irrigation systems. Suddenly, one family’s water use affected their neighbors, requiring society to think collectively.

Societies that sprang up around rice farming are still more interdependent and fiercely loyal; psychological testing confirms that China shares this characteristic with other rice-growing East Asian nations, such as Japan and Korea. But change the crop, and the society changes with it. Scholars have found that farmers in regions of China that historically specialized in wheat became more individualistic because wheat required less cooperation and allowed for more independent nuclear households. These places are still not as individualistic as their counterparts in the West. Importantly, those regions remain more innovative to this day, judging by the number of patents they produce.

So, what are the implications for the on-going Sino-American struggle for Techno-Economic and geopolitical dominance? Consider the facts.

As Oxford University’s Carl Benedikt Frey recently observed in MIT Sloan Management Review, “Celebrating and exploiting human diversity means recognizing that different societies have different advantages.” For instance, if a government is directing a coordinated response to a pandemic that depends on individuals prioritizing the health of their communities over, say, the discomfort of wearing a face mask, collectivist cultural traits are helpful - just as they are when it comes to mass production, which depends on command and control. Conformity, however, can be an obstacle to innovation, for the simple reason that innovation calls for breaking the rules, not abiding by them.

Numerous studies have demonstrated that innovation is more likely to occur in societies that reward unconventional thinking. Corporate hierarchies based on command and control are good at driving incremental improvements, such as making production processes more efficient. However, they are much less likely to foster disruptive innovations that challenge the status quo.

Collectivist societies do have an advantage in largescale production and commercialization due to workers’ willingness to comply with their managers’ instructions and work as a team: A factory assembly line cannot run properly if workers question every process. But discouraging deviant behavior has the unfortunate side effect of squelching creativity. Societies that emphasize personal freedom, broadly speaking, take out more patents. They lead when it comes to advancing innovation.

That’s important because innovation is fundamentally about exploration, which is why inventors benefit from urban settings that encourage spontaneous meetings and interactions. However, as a technology matures and moves into production, knowledge spillovers matter less. Consequently, maturing industries tend to relocate from cities to places where production costs are lower. This provides an opportunity for laggards to catch up without having to invest in the kind of exploration that pushes the technological frontier. By the same principle, lagging countries can take different paths to riches.

In his famous 1951 essay “Economic Backwardness in Historical Perspective,” economic historian Alexander Gerschenkron emphasized that less sophisticated economies can rapidly close the gap with more advanced nations by using the capacity of the state to make large investments and copying frontier technologies. That is precisely why great powers keep glancing over their shoulders.

In 1957, the Soviet Union capped two decades of extraordinary growth with the launch of Sputnik 1. Many observers took this as proof that the Communist regime would soon reign supreme, among them were two Nobel Prize-winning economists. In 1960, Wassily Leontief described the Soviet economy as one “directed with determined ruthless skill.”

Meanwhile, Paul Samuelson repeatedly predicted the economic dominance of the Soviet Union in the era’s most widely disseminated university economics textbook.

U.S. concerns about the Soviet Union’s economic power faded in the 1980s but were quickly replaced by fears of Japan’s ascent. A 1988 New York Times article raised the alarm that new supercomputers from Fujitsu, Hitachi, and NEC threatened the United States’ claim to technological leadership. Paul Kennedy’s 1987 bestseller The Rise and Fall of the Great Powers likewise predicted Japan’s ascent.

While Kennedy showed that differential growth rates invariably cause churn in economic leadership and political tensions, he largely ignored what actually causes growth, and that skewed his vision of the future. Countries lagging behind the world technology frontier don’t need to innovate to grow. They can simply adopt foreign technology. The Soviet Union’s advances, for example, were based on its willingness to save and sacrifice in order to invest in machinery for the future. As a country closes the technology gap, however, the ability to innovate becomes paramount. To put it simply, it doesn’t matter how quickly a race car can accelerate from zero to 60 mph if it will never be able to go 61, let alone 200.

Neoclassical growth theory predicts that differences in gross domestic product per capita across countries should converge over time. But in actual fact, the opposite has occurred. Since the Industrial Revolution, the West has pulled away from the rest of the world. Yes, there are notable success stories - Singapore, South Korea, and Taiwan have closed the gap with remarkable speed - but surprisingly few countries have managed to reach the technological frontier. It’s widely believed that Japan’s rapid industrialization, along with the economic growth of the other seven countries considered part of the 1960-1995 “East Asian miracle,” were based on aggressive industrial policies that required state capacity. But East Asian culture was arguably an enabler for those policies. In collectivist societies, where individual rights are seen as less important, there are fewer checks on the state to kick-start industrialization if it fears falling behind. Indeed, there is compelling evidence that people in individualistic countries don’t like government interventions.

What’s more, collectivism gave East Asia a comparative advantage in the commercialization of new technology. As is well known, teamwork and consensus-building have been defining features of business management in Japan. And, as we have seen, cultures that prioritize harmony, conformity, and team effort are likely to have the edge in manufacturing. IBM’s chief scientist noted in the 1980s that Japan’s greatest technological strength vis-à-vis the United States is “the speed with which developments are translated into improved products and processes.” Indeed, from the 1970s onward, many products invented in the West ended up being produced and commercialized in the East. The best color TV sets may have come from Japan, but the technology itself was created by the U.S.-based company RCA. Sony’s Walkman may have been one of the great consumer success stories of the 1980s, but it was a Dutch company, Philips, that invented the compact audio tape cassette that the Walkman was built to play. Similarly, Sony led the way in introducing the VCR, but the technology was invented by Ampex, a U.S. company. As Edwin Mansfield’s classic study showed in 1988, Japanese companies excelled at absorbing and improving foreign technology, but its indigenous innovations were mainly improvements in production processes. Two-thirds of Japanese R&D, Mansfield found, was process-oriented, while two-thirds of U.S. R&D was product-oriented.

Copying and improving upon efficiency can take a country a long way, and in East Asia, it clearly has. Still, incremental improvements in production methods and technology eventually produce diminishing returns. You can improve a cassette player in terms of design and functionality, but eventually, you need a radical innovation to create a CD player or you arrive at a dead end.

In 1979, Ezra Vogel’s book Japan as Number One became an instant bestseller. He argued that Japan’s consensus-driven culture, centralized authority, long-term planning, and large conglomerates gave the country a leg up in industrial policy and the exploitation of new technologies.

After World War II, Japan proceeded with the model of state-led development that it had relied on since the Meiji Restoration in 1868. In particular, as Chalmers Johnson has shown in some detail, the Japan’s Ministry of International Trade and Industry (or MITI) was heavily involved in the modernization of Japanese industry. It scanned the horizon for new technologies, imported foreign technology, and facilitated the sharing of knowledge and resources across the country’s industries. It pressed Japanese companies to enter expanding industries - and to exit declining ones. And it made certain that companies conformed to its policies. Banks could refuse to give loans to companies that ignored the MITI dictates. In a more individualistic society, such as the U.S., that kind of activist government intervention would almost certainly have been impossible to operate during peacetime.

However, as Japan approached the world’s technological frontier, its conformist attitudes arguably hindered radical innovation and structural change. While companies like Fujitsu, Hitachi, and NEC had leaped ahead in supercomputing hardware, Japan fell short in the move into software. Research shows that Japanese companies produced significantly fewer software inventions than their U.S. counterparts, beginning in the 1980s. As author Joe Studwell put it, “MITI was unable to ‘plan’ the geeky university dropout who starts a software firm or an internet business in his parents’ garage.”.

In part, Japan also failed to make the transition because of its lack of openness to outsiders, a common characteristic of collectivist societies. For example, Japan’s restrictive immigration policies and its long history as an ethnically homogenous society made it difficult to import talent to compensate for its shortage of skilled software engineers. The U.S., meanwhile, benefited from being open to immigration. A recent study published by the National Bureau of Economic Research credits the positive impact immigration has had on innovation in the United States, as measured by the number of patents granted.

Japan also suffered because MITI tried to spark modernization in the postwar years by consolidating many smaller businesses into more sprawling but less innovative companies. One association, Keidanren, represented several hundred of the largest companies in Japan and was without peer in the world. Because small companies couldn’t begin to compete and because their interests were so diverse that they couldn’t easily be aggregated, the country favored large incumbents at the expense of entrepreneurs, who were more likely to come up with radical innovations.

What’s more, Japan’s collectivist cultural traits were strongly reflected in the country’s corporate culture, which was predicated on loyal employees remaining with a company throughout their entire careers. This, too, had a deleterious effect. The kind of job-hopping that drives innovation and enables the free flow of ideas rarely occurred, especially compared with Silicon Valley, where much of the U.S. software industry clusters today. Silicon Valley has seen so much success, and such renewal, in part because worker mobility is so much greater there than it is in the computer industry elsewhere in the United States. When Gordon Moore and Robert Noyce left Fairchild Semiconductor to found Intel in 1968, it wasn’t just a career move: It was a pivotal moment in the area’s history.

Companies in Silicon Valley were also much less hierarchical than their Japanese counterparts. Hewlett-Packard, one of the area’s early success stories, took a decentralized approach to management from the start. The so-called “HP Way,” consisted of “management by wandering around.” People moved freely around the workplace, leading to spontaneous interactions across the company. The open environment, fused with a change-the-world mentality, became the blueprint for many Silicon Valley companies to come.

China has drawn much inspiration from Japan. After Deng Xiaoping visited Japan in October 1978, he set up a Japanese advisory group that continued to meet with Chinese economic officials until 1992. Two Chinese organizations - the Quality Control Association and the Enterprise Management Association - were directly modeled on Japan’s modernization experience. Both bodies trained regional officials and factory managers, introducing them to ideas brought from Japan.

Moreover, in the 1980s, the Japanese gave more aid to and built more factories in China than anywhere else. To be sure, the Chinese went to the United States for the latest science, but new machinery and production techniques were introduced by Japan. Chinese officials were particularly impressed with how the MITI had modernized industry.

Just as many observers worried that Japan would overtake the United States in the 1980s, many now believe that China will soon eclipse the U.S. But to overtake the United States, Beijing must leap even higher hurdles than Japan attempted to. China has not democratized and is yet to escape the middle-income trap, where many fast-growing upstarts often stall out. After a period of rapid catch-up, middle-income countries often fail to make the transition from imitation to innovation and never join the world’s most advanced economies in GDP per-capita terms. The recent culling of the manufacturing workforce, as advanced robots have entered factories, makes China’s transition to innovation all the more vital.

Because production and innovation require different capabilities and thrive in different environments, switching from one to the other is difficult, as one can see in parts of even advanced economies. Once-prosperous industrial centers, like the Rust Belt in the United States, the Midlands in the United Kingdom, and the Ruhr valley in Germany, are now in despair. Industries oriented around mass production fostered obedience, which hindered innovation. As economic historian Oded Galor has found, even second-generation migrants whose mothers and fathers hailed from industrial regions are less likely to become entrepreneurs.

This is the double-edged sword of cultural transmission: Parents teach their children the attitudes and behaviors they think will help them thrive as workers, but often the old ways lead only to stasis. China is no exception: Workers producing iPhones on Foxconn’s assembly line describe the company’s labor discipline as management “through the principle of obedience, obedience, and absolute obedience.” The same conformist cultural traits that facilitate mass production can make progress through innovation difficult, which some have termed the obedience trap.

Extrapolating on the past 40 years it seems that China is on a path set to surpass the United States just as Japan seemed to be in the 1980s. But as with Japan, the question is, “Will the strengths that got them here , get them there ?” Answering that question will largely determine geopolitical realities in the 2020s.

Given this trend, we offer the following forecasts for your consideration.

First, with rare exceptions, China’s centrally controlled management mindset will prevent it from producing globally dominant technology companies.

As automation erodes China’s comparative advantage in production, the country will be forced to move quickly from exploitation to innovation. Much like 1970s Japan, China’s “Made in China 2025” initiative is enabling it to pursue ambitious industrial policies. In many of its designated strategic areas, such as advanced robotics and artificial intelligence, it is closing the gap between itself and the United States. However, while U.S. technology companies like Alphabet, Amazon, Facebook, and Microsoft are truly global, their Chinese competitors, such as Alibaba, Baidu, Sina Weibo, and Tencent, have struggled to grow beyond China’s borders. True, Huawei has done better. But if China wants to lead in innovation, the real question is not why Huawei emerged but why China doesn’t have a dozen Huaweis. Thirty years into Korea’s industrial take-off and with only a fraction of China’s population and resources, the country already had two tech giants - Samsung and Hyundai, which had taken them to the technological frontier in memory semiconductors.

Second, China will be unable to make the crucial leap from leadership to commercialization to leadership in innovation.

Overall, Chinese companies excel at commercialization rather than innovation. According to the think tank, MacroPolo, 18 of the world’s 25 leading AI research institutions (which includes corporate research centers) are in the United States. And while China has seen an explosion of patents in recent years, most are of low value. As a result, according to International Monetary Fund, China remains a major global importer of intellectual property, with a $30.2 billion deficit in 2018, much of it with the U.S.

Third, when we look back on the 2020s, we will see the CCP’s collectivist values undermined the innovative capability that China needed to catch up with the United States.

China, of course, is a huge country, and some regions are more innovative than others. However, under Xi Jinping, China’s leadership has signaled a strong commitment to reinforcing collectivist values while clamping down on the flow of ideas. China’s surveillance state and censored internet, together with a social credit system that promotes conformity, make it unlikely that the country will take the lead in innovation. Xi’s decision to let state-owned enterprises (or SOEs) exert more control over the economy will also slow them down: Chinese businesses, particularly SOEs, are lagging foreign-owned companies in terms of returns on R&D spending. Xi also wants even greater control of the private sector. As China observer Lingling Wei wrote, “The government is installing more Communist Party officials inside private firms, starving some of credit and demanding executives tailor their businesses to achieve state goals.” But as the Japanese case illustrates, there are limits to what state capacity and industrial policy can achieve.

Fourth, when it comes to innovation, China’s obsession with “control” will inevitably mean that it falls behind western countries that encourage diversity and exalt “freedom”.

How the Chinese Communist Party controls the innovation process is perhaps most clearly seen in the development of autonomous vehicles. China’s cybersecurity law, which classifies vehicle data as “critical information infrastructure,” makes it a less attractive destination for testing and limits experimentation. In addition, the centralization of data collection is creating a model where companies are becoming dependent on instructions from municipality hubs that control routing choices and traffic flows. If history is any guide, a more decentralized system that favors experimentation is more likely to push the technological frontier. And,

Fifth, as China’s leadership comes face-to-face with its innovation dilemma, it is likely to become more desperate and dangerous.

In last month’s issue, we compared the current Sino-American competition to the early 20th-century Anglo-German competition which triggered in World War I. The world must be prepared to de-escalate Chinese aggression triggered by a lack of attractive options. Only time will tell us whether this is possible.

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