China’s Quest for Technological Self-Sufficiency: Strategic Development and Global Integration

China, emerging as a technological powerhouse, has significantly reshaped the Sino-U.S. technological competition landscape. The once prevalent notion in the West that the People's Republic of China (PRC) was incapable of groundbreaking innovation due to its "illiberal" system has been proven wrong. A decade ago, scholars were doubtful of China's potential to become an innovative force (Abrami et al., 2014). However, the situation has changed. In 2023, the Australian Strategic Policy Institute (ASPI) published a report that tracks critical technology based on data. The report reveals that China is leading in 37 out of 44 critical technologies, spanning defence, space, robotics, energy, the environment, biotechnology, artificial intelligence, advanced materials, and critical quantum technology areas. This global impact of China's technological advancements is a testament to the country's strategic planning and long-term policies under Xi Jinping and his predecessors, which have laid a solid foundation for its technological self-sufficiency (Gaida et al., 2023). This remarkable progress is sure to captivate the attention of any reader.

This article explores China's approach to maintaining its technological self-sufficiency while integrating into the international capitalist economy. A striking contrast can be drawn with the Soviet Union's post-1945 attempt to maintain autarky, which resulted in a technological lag behind the West. Khrushchev's strategy of a highly controlled opening to the West to acquire advanced Western technology did not produce the desired outcomes. The acquired Western technology did not spread in the Soviet Union, nor did it narrow the Soviet Union's tech gap with the West. This stark contrast not only underlines the importance of China's approach but also underscores the strategic brilliance of China's leaders. The Soviet Union's inability to control the market led to its gradual decline into the periphery (Crawford, 1994). In contrast, China, after four decades of reform and opening up, is steadily advancing into the core of the global value chain, a testament to its strategic planning and long-term policies.

This article is structured as follows. Part II considers why China is seeking technological self-sufficiency. Part III is the central analysis of this article. Part III investigates how China can maintain technological self-sufficiency while integrating into the global capitalist economy from five aspects. The first is an overview of China's pre-1978 heavy industry development, establishing the foundation for subsequent reforms and the national innovation system. The second examines how China strategically attracted and utilized Foreign Direct Investment (FDI) to acquire advanced technology and foster economic growth. The third discusses China's innovation towards indigenous innovation through the Medium and Long-Term Plan for the Development of Science and Technology (2006-2020) (MLD) and Made in China 2025 (MIC). The fourth is an analysis of China's efforts to produce and attract talent in science, technology, engineering, and mathematics (STEM) for innovation and economic development. The fifth explores the role of Chinese state institutions and bureaucracy in shaping and implementing innovation policies.

Why Is China Pursuing Technological Self-Sufficiency?

China's top priority is economic development, primarily driven by innovation. In the short term, economic growth can be achieved through technological catching up by acquiring advanced technologies from developed countries. In the long term, as the economy approaches the technological frontier, a developing country must be innovative to achieve sustained economic growth. Foreign capital from technologically advanced countries can bring in technological spillover but not the innovation process itself. Arguably, China has passed the stage of industrialization, and its advantage of low-cost labour is diminishing. China must develop an innovation-oriented economy to produce more economic activities and increase the efficiency with which units of capital and labour are employed. In other words, to avoid the "middle-income trap," China must upgrade the technological sophistication of its economy to diminish its dependence on Western technology by strengthening indigenous innovation (Kennedy & Lim, 2018; Vernon, 1992; Vernengo, 2006). Otherwise, China would be trapped in the periphery of the international economy due to its dependency on Western technology, considering innovation dictates the relationship between the core and the periphery (Vernengo, 2006, pp. 552-553). For a country with 1.4 billion people to become a developed country, having a few technologically competitive sectors, e.g., electric cars and solar panels, is insufficient; instead, it must fully advance into the upper echelon of the global value chain to produce more high value-added products.

China's Technological Self-Sufficiency Trajectory

Pre-1978 Heavy Industry Development

Though little attention was received in the literature, China's pre-1978 heavy industry development established a solid foundation for China's reform and opening up and innovation system. The primary objective was to revive China's industrial system after the Second Sino-Japanese War and Civil War. To achieve this goal, China decided to replicate the Soviet style industrialization characterized by high centralization and complete state ownership. State ownership of research and development (R&D) featured prominently in the pre-1978 National Innovation System (NIS). State-owned enterprises (SOEs) led industrial development, while state-funded institutions and universities were the main contributors to science and technology. The State Planning Commission (SPC) served as the critical resource allocator, implementing strategic objectives through five-year plans. The NIS was robust yet fragmented due to this segmentation. The pre-reform NIS emphasized self-sufficiency and mission orientation due to diplomatic isolation by advanced Western countries, focusing heavily on defense and heavy industries. For instance, the National Science and Technology Long-Term Plan of 1956 aimed to enhance China's research and production capabilities in atomic energy, electronics, semiconductors, automation, computer technology, and rocket technology. This top-down approach effectively achieved specific tasks by assembling necessary components for critical missions, particularly in developing atomic and hydrogen bombs. However, it lacked the flexibility needed for cross-fertilization, which is crucial for innovation. The fragmentation of innovation elements hindered the promotion of R&D, as it created barriers to the flow of information, personnel, and resources. Hierarchical control removed incentives for primary actors to disseminate and diffuse innovation (Liu & White, 2001, pp. 1096-1097; Zhang et al., 2010, pp. 532-533). Sun (2002, p. 480) concludes, "such an institutional arrangement explained why China was relatively successful in developing weapons for the military, while industrial technologies were left behind." Nevertheless, the first thirty years of development established a comprehensive and independent industrial system. China built a network of public S&T organizations formed by more than 5,000 public research institutes with nearly 300,000 scientists and engineers by the early 1980s, which was indispensable for the subsequent reform and opening up (Baark, 2001, p. 1; Tsinghua, 2020).

Attracting and Utilizing FDI In a Smart Way

One of the main goals of reform and opening up was to attract FDI to introduce advanced technology. Until the early 1990s, FDI in Mainland China largely came from Hong Kong and Taiwan, and neither possessed the most advanced technology. Therefore, FDI of Chinese origin only narrowed China's gap with the West in the low and intermediate technology areas rather than the advanced ones. Until the mid-1990s, China was dependent on the advanced technology import. After Deng Xiaoping's southern tour in 1992, China started implementing more policies to attract FDI from technologically advanced countries (Chen et al., 1995, pp. 692-3, 700; Kim & Mah, 2009, p. 264).

China's market and cheap labour would not be enough to attract FDI inflows without the post-1992 reform (Chen et al., 1995, pp. 692-693). China implemented policies to create a business-friendly environment to channel FDI into technology-intensive industries (Kim & Mah, 2009). The government provided a preferential tax rate of 15% and 24% to foreign-invested enterprises (FIEs) under the Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises. Additionally, FIEs were eligible for a two-year tax exemption for those set up in China for more than ten years. Later, China reduced the tax rate to 50% (WTO, 2006, p. 61). In April 1995, China provided Interim Provisions on Guiding Foreign Direct Investment Direction that classified FDI into four categories from least restricted to most restricted: "encouraged," "permitted," "restricted," and "prohibited." Those involving the transfer or application of advanced technology to enhance product quality, increase technological efficiency, or create new equipment or materials that cannot be produced domestically are "encouraged." FDI that met domestic and export market demands or introduced new technology to conserve energy and raw materials were also included. Foreign investors in the "encouraged" category could import capital equipment duty-free. In contrast, FDI with outdated technologies was "prohibited." Restricted activities also included the production of various chemicals and pharmaceuticals, manufacturing specific electronics and machinery like cameras and car engines, and operating rail and freight companies (WTO, 2006, pp. 25-26; Jiang et al., 2018, p. 5). For example, the automotive industry was "encouraged," and FIEs composed about 80% of China's passenger car production from 2001 to 2004. By the early 2000s, top FDI inflows came from technologically advanced countries such as the U.S., Japan, and Germany (Kim & Mah, 2009, pp. 271-272).

Apart from attracting FDI, China was effective at leading technological spillovers from FDI by establishing special economic zones (SEZs) and joint ventures (JVs).

In the early days of reform and opening up, China concentrated its limited resources in the coastal provinces. For example, Shenzhen, next to Hong Kong, was the first SEZ and attracted massive amounts of FDI with the inflow of advanced technologies. The SEZs expanded gradually into other kinds of zones, notably Economic and Technological Development Zones (ETDZs) and High-Tech Industrial Development Zones (HIDZs), which specialized in advanced technologies. In the first two years of operation, the high-tech enterprises in ETDZs and HIDZs enjoyed reduced corporate income tax rates and income tax exemptions. Many multinational corporations (MNCs) established R&D centres in these zones because of tax benefits and cheap R&D resources. The Chinese government integrated research and education with production by situating universities and high-tech enterprises in the same areas. Additionally, it fostered an optimal environment for applying R&D achievements in production by offering essential infrastructure and preferential tax and financial support in these zones. The collaboration between foreign companies, universities, and R&D institutes facilitated the rapid diffusion of technologies. Domestic enterprises could employ the scientists' and engineers' technologies from the FIEs (Sigurdson, 2005, p. 74; Kim & Mah, 2009, pp. 272-274; WTO, 2006, p. 63).

JVs are an instrument of FDI policy. The transfer of advanced technology and management expertise to host country partners is typically expected by creating JVs between foreign investors and local firms (Lu et al., 2017). The knowledge transferred to the JV by the foreign investor inevitably spreads to other firms through formal channels like joint patenting between the foreign investor and the local partner, as well as through informal channels such as social gatherings, labor mobility, or even IP theft (Jiang et al., 2018, pp. 6-7). JVs are prominent in China. In 2015, China established over 6,000 new international JVs amounting to 27.8 billion USD in investment (National Bureau of Economic Research, 2018). Based on administrative data from 1998 to 2007, Jiang et al. (2018, p. 2) conclude that the most significant spillovers on domestic partners' performance usually come from JVs originating from countries at the forefront of global technological innovation, such as the U.S., Germany, and the UK. However, such spillovers diminish the incentives to transfer technology know-how to the JVs because they dilute the technological advantage of the foreign investor in the long run. The situation improved after China's WTO accession in 2001. Though China dropped the requirement of JVs for foreign investments in most activities, the spillovers increased in magnitude. In fact, China's liberalization of foreign investment rules, including stronger IP protection and the abandonment of quid pro quo market access policies, encouraged investors to transfer technology to Chinese partners because the risks of appropriation and IP theft were reduced. However, the share of international JVs did drop significantly and was replaced by wholly foreign-owned FDI. The development of Huawei, China's top telecommunications equipment provider, is a good case of technology transfer via JVs. In 2003, Huawei established a JV Huawei-3Com with 3Com, a leader in internet protocol services, allowing 3Com's IP licenses to be used. In the following year, Huawei partnered with Siemens AG to form a JV for the TD-SCDMA mobile standard, benefiting from Siemens' $170 million investment in the technology. In 2007, Huawei and Symantec formed JV Huawei Symantec Technologies to distribute security and storage software products (Jiang et al., 2018, pp. 3-7).

Indigenous Innovation

In the catching-up stage, the Chinese economy grew by absorbing imported or transferred technologies. This strategy successfully transformed China into the world's manufacturing center and drove the growth of China's high-technology exports. However, such an approach will be unsustainable once China reaches the technological frontier. Although these technological spillovers from FDI contributed to China's development of indigenous technologies, they did not transfer the most advanced technologies to China. To overcome the "middle-income" trap, China must develop indigenous innovation to have a voice in setting up technical standards. By the early 21st century, China was still heavily dependent on advanced Western technologies and had a weak record of innovation in commercial technologies. Chinese manufacturing sector R&D expenditure was far behind that of technologically advanced countries. Moreover, China was disappointed that foreign firms charged unduly high license fees for their patents, reducing Chinese companies to producers with low-profit margins. More importantly, Beijing was no longer satisfied with gains from its position in the international political economy (Serger & Breidne, 2007; Li et al., 2020; Cao et al., 2006). To strengthen China's indigenous innovation, China implemented the MLD in 2006 and MIC 2025 in 2015.

MLD (2006-2020) marked China's first time specifically highlighting indigenous innovation and the goal of developing China into an innovation-based economy. MLD targeted technologies related to energy and water resources as well as environmental protection. It aimed to grasp core technologies in IT and production technology, reach the technologically most advanced nations in certain areas of biotechnology, increase development in space and aviation technology and oceanology, and improve basic and strategic research. The first principal component of increasing indigenous innovation was the significant increase in R&D expenditure. By 2020, R&D expenditure was projected to grow from 1.4% of GDP to 2.5% (Serger & Breidne, 2007, p. 145). The second principal component of pursuing indigenous innovation was through business sectors. MLD increased the role of business sectors in dictating the strategic areas for R&D investment. It encouraged Chinese companies to establish R&D activities abroad by introducing tax incentives for small and medium-sized enterprises (SMEs). The plan also directed government agencies to support innovative Chinese companies by purchasing their goods or services (pp. 148-149, 158-159). MLD aimed to decrease China's dependency on foreign technology from 60% to 30% (p. 162).

MIC 2025 aims to transform China into a global leader in advanced manufacturing, raising concerns in countries that dominate the high value-added part of the global value chain. It aims to achieve self-sufficiency in 70% of core components and materials by 2025. MIC 2025 emphasizes the importance of innovation, technology, green development, and quality over quantity. To fulfill these goals, China is implementing a series of policies. China promotes advanced manufacturing by focusing on sectors like robotics, aerospace, and biopharmaceuticals. China is boosting R&D investment to foster homegrown technologies. China has provided SMEs with financial incentives, such as subsidies and low-interest loans. China is developing a skilled workforce in high-tech industries and is strengthening IP protection and encouraging patent development (Agarwala & Chaudhary, 2021).

Producing and Attracting STEM Talents

Possessing enough STEM talent is vital for a country to become innovative, as these individuals are carriers of knowledge and skills. China has proven successful not only in producing STEM talent but also in attracting it, though it is not perfect in this regard and also faces a "brain drain" problem.

China prioritizes education in subjects related to science and technology. The state perceives STEM education as an instrument to boost the economy through technological means (Ma, 2021). China has the largest pool of STEM talent and is the number one producer of STEM graduates. The number of undergraduate engineering graduates has rapidly risen (Statista, 2024). In 2020, China produced 3.57 million STEM graduates, whereas the U.S. produced around 82,000 STEM graduates. Regarding the percentage of total graduates in STEM fields, China was still number one with 41%, while the U.S. was at 20% (Brendan et al., 2023). STEM education has been elevated to a strategic national policy supported by a series of educational policies and initiatives as China advances into the upper echelon of the global value chain. In 2016, the Ministry of Education issued "The 13th Fifth Year Plan for Education in the Information Age," which promoted interdisciplinary STEM education (Ministry of Education, 2016). In the following year, STEM was added to the curriculum of elementary and secondary schools (Ministry of Education, 2017).

Since the reform and opening up, China has invested significantly in leading to a "brain gain." China has progressively developed a national financial aid system for high-end overseas talent through various programs, including the One Hundred Talents Program by the Chinese Academy of Sciences, the Distinguished Young Scholars Program by the National Natural Science Foundation of China, and the Chunhui and Cheung Kong Scholar Program by the Ministry of Education, among others (Sun et al., 2017, p. 275; Zweig, 2006). China's "brain gain" policies are working to a certain extent. The number of overseas-trained Chinese talents who returned to China between 1978 and 2011 was 818,400 (Guo, 2012). Since 2008, China has attracted thousands of leading talents (Sun et al., 2017, pp. 275-276). However, some scholars have cast doubt on whether China is attracting first-rate academics. Cao (2008) concluded that top-tier scholars had not yet returned to China. Tian (2013) found that China attracted few emigrant scientists from the top 200 global universities, with most returnees being domestic scientists who gained overseas experience through short-term programs. Zweig and Wang (2013) found that the majority of returnees did not even relinquish their positions abroad. Based on a sample of 736 scientists, Sun et al. (2017, pp. 291-292) concluded that academics with high academic ability were less likely to return than those with less academic ability, and it was also hard to determine the effect of China's talent programs on "brain gain." Though China has transitioned from a talent mover to a talent champion, it still has a long way to go, being ranked 40th (Lanvin & Monteiro, 2023).

State-Led Innovation

Lastly, the role of Chinese bureaucracy cannot be neglected. State institutions are indispensable to national technological development. In Latin America, FDI did not lead to efficient technological spillovers due to corrupted and unstable local institutions (Gereffi, 1989). While the market is gradually becoming the driving force in China's technological development, the state still plays an overarching role in making policies and distributing resources. As discussed above, the "visible hand" is present in every stage of development and in issuing all policies.

PRC has a sophisticated bureaucracy that formulates and implements economic and technological policies. The Ministry of Science and Technology (MOST) is arguably China's most crucial state institute in technological development. MOST oversees China's national S&T programs, which include basic and applied research, R&D, and the commercialization of S&T achievements. It supports enterprise innovation in collaboration with the National Development and Reform Commission (NDRC) and manages science parks and incubators. It also collaborates with the Ministries of Education, Agriculture, Health, and Industry and Information Technology in designing and implementing S&T and innovation policies. Moreover, it allocates resources and assists in policy execution. The NDRC assumes responsibility for advancing Chinese technology from an economic perspective. One of the roles the NDRC plays is to formulate policies related to enterprise innovation and high-tech within China's economic and social development. It also manages and implements major S&T programs. The Chinese Academy of Sciences (CAS) plays a crucial advisory role in S&T policymaking through its academicians and the Chinese Academy of Engineering (CAE), which support national decision-making in engineering and technology. CAS serves multiple functions, including research, high-tech development, technology transfer, and training. Nevertheless, the Chinese Communist Party (CCP) has the final say as China is a party state. The CCP Central Committee (CCPCC) not only directly formulates innovation policies but also exerts influence through the "leading group" (领导小组, lingdao xiaozu) mechanism. Usually chaired by the premier or vice premier, these groups address issues involving multiple government agencies and coordinate efforts across the bureaucracy. While the CCP does not directly enact laws, it maintains significant influence in policymaking through indirect means, ensuring that all major initiatives are reviewed by senior party officials before proceeding to the National People's Congress for legislative consideration or to the State Council for execution (Liu et al., 2011, pp. 919-920).

Conclusion

China's journey toward technological self-sufficiency can be traced through various stages of development. The pre-1978 era focused on heavy industry development under a highly centralized, state-owned system that laid the groundwork for future innovation. This period established a comprehensive industrial base, although it was limited by rigid structures that hindered the cross-fertilization of ideas and technologies.

In the subsequent reform era, China strategically utilized FDI to introduce advanced technologies and foster economic growth. SEZs and JVs were crucial in facilitating technological spillovers, allowing domestic firms to benefit from foreign expertise and innovation. Policies favouring technology-intensive industries and creating a business-friendly environment attracted FDI from technologically advanced countries, contributing significantly to China's technological advancements.

As China approached the technological frontier, the focus shifted toward indigenous innovation. Initiatives such as the MLD and MIC underscored the importance of self-reliance in core technologies and aimed to transform China into a global leader in advanced manufacturing.

Cultivating STEM talent has been another critical component of China's strategy. China's educational policies prioritize STEM education, resulting in a large pool of graduates in science and engineering fields. Additionally, efforts to attract overseas talent through various financial aid programs have bolstered China's capacity for innovation, although challenges remain in retaining top-tier talent.

Lastly, the state's role in China's technological development cannot be overstated. State institutions, such as the MOST and the NDRC, play pivotal roles in formulating and implementing innovation policies. The CCP exerts significant influence over these processes, ensuring coordinated efforts across various government agencies to achieve national strategic objectives.

In conclusion, China's pursuit of technological self-sufficiency is a multifaceted strategy to foster long-term economic growth and enhance its global competitiveness. By transitioning from technology importation to indigenous innovation, China seeks to improve its position in the global supply chain. The success of these efforts will determine China's ability to navigate the complexities of the global technological landscape and achieve its ambitious development goals. China's technological self-sufficiency strategy is worth learning from for other developing countries to avoid falling into the "middle-income trap."

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About the author: Shiqing Xiao holds a Master's degree in International Relations from Leiden University and a Bachelor's degree in Political Science and International Relations from the University of Auckland. Apart from being a research assistant at ChinaGeopolitics, he is doing a research internship at China Policy.