WASHINGTON, July 8—China’s policies favoring local industries have led to a growing perception that China is becoming less conducive to foreign businesses. Beijing’s approach raises serious concerns in the global business community, spurring increasingly protectionist calls in the United States and Europe.

In a new paper, however, Nathaniel Ahrens challenges conventional wisdom and suggests that Beijing’s focus on domestically developed products and services—if executed correctly—is a positive development. Adopting market-friendly policies that foster innovation could move China beyond its current policies, which stifle rather than encourage innovation. This will lead to an increase in wages and living standards in China and help build technological progress worldwide. 

Key Conclusions:

  • Domestic innovation is a positive development and should be encouraged. Local innovation is critical to increasing productivity and moving countries up the industrial value chain. Free markets alone are not enough. Government policies have special roles to play in encouraging this development by stimulating innovation while not restricting competition. This will keep markets open and maintain international relationships, which are critical to innovation.
  • Government procurement can play a key role in stimulating innovation. China’s current use of domestic product catalogs is a negative trend that stifles innovation. The primary roles of government procurement in stimulating innovation include signaling its needs to markets, making research and development less risky for companies, and stimulating demand.
  • China should reform its procurement policies and decouple domestic innovation policies from government procurement. Protecting local companies from international competition will actually reduce Chinese innovation by limiting international relationships and incentives to compete. Joining the World Trade Organization’s Agreement on Government Procurement would also provide a solid foundation for China to build a procurement system that stimulates innovation and keeps markets open.

“Government procurement should play an important role in stimulating innovation, but keeping open markets and international linkages is critical,” writes Ahrens. “Instead of following its current approach of short-term product substitution and picking winners by protecting them from competition, China should focus on proven, market-friendly ways of stimulating innovation.”

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NOTES

  • Nathaniel Ahrens is a visiting scholar in the Carnegie Energy and Climate Program, where his research focuses on climate, energy, and sustainable development issues in China. He is the president of Golden Road Ventures Ltd., a business development and strategic advisory firm that provides expertise and support for critical projects in China, including sustainable development, government procurement, agriculture, and media. Ahrens is a member of the National Committee on U.S.–China Relations, the Asia Society, and serves as an honorary ambassador for the State of Maine.
  • The Carnegie Energy and Climate Program aims to provide leadership in global energy and climate policy. The Program integrates thinking on energy technology, environmental science, and political economy to reduce risks stemming from global change and competition for scarce resources.
  • The Carnegie Asia Program in Beijing and Washington provides clear and precise analysis to policy makers on the complex economic, security, and political developments in the Asia-Pacific region.
  • The Carnegie–Tsinghua Center for Global Policy is a joint U.S.–China research center based at Tsinghua University in Beijing, China. The Center brings together senior scholars and experts from the United States and China for collaborative research on common global challenges that face the United States and China.