Why a book on China's innovation challenge?
Over the past four decades, China has evolved from being largely isolated and irrelevant to the world economy to having the world's second-largest economy, and it is widely expected to have the largest economy in the near future. In the process, China went from having a largely agricultural economy, with over 80 percent of population in the countryside, to becoming a major industrial economy, with less than 30 percent of population working in agriculture. Without repeating well-known historical details, the economic liberalization that began in 1978 was accompanied by a national policy that created surplus labor in the rural economy and unleashed a migration to the free-trade economic zones, which became hubs of low-cost, labor-intensive manufacturing for exports. In this respect, China followed the strategy of Japan after World War II, of South Korea under President Park Chung Hee, and of Taiwan under the Kuomintang. Exports were the source of national income that financed massive investment in infrastructure (roads, railroads, electric power, hydropower, flood control, nuclear power, airports, etc.), new cities, housing, and supporting supplier industries. China also attracted and encouraged unprecedented foreign direct investment (FDI) combined with policies that required sharing and transferring needed technologies. Even as exports increased, a new consumer society was being created that needed almost every imaginable amenity. As a result, it built a foundation for sophisticated industrial capabilities in mature industries that has given rise to globally competitive firms in areas such as construction, high-speed rail, heavy engineering, shipbuilding, and steel making, to name a few important sectors.
Even as consumption increased, China also continued to benefit from very high savings rates. In 1981 (three years after the liberalization of the economy), the savings rate was about 20 percent of the gross domestic product (GDP). In 1988, it increased to 30 percent, and since 1988 it has averaged 40 percent. The high savings rate has been ascribed variously to the social, political, and financial uncertainties felt by households in China due to economic liberalization, the decreasing state ownership that reduced the government's participation in providing social welfare such as health care and pensions, and the one-child policy. Chinese people could no longer count on the government for social welfare, in particular retirement benefits.