China’s ruling Communist Party wants to build a more innovative economy. But it’s used to governing through fiats and five-year plans, and that’s kind of how it’s proceeding here. Over the past decade, it’s spent billions of dollars creating science parks and research labs, and giving researchers tight deadlines to come up with new ideas. Not surprisingly, results in the state sector have been a bit lackluster. Since this push started a decade ago, China has yet to release a new killer app, an invention or innovation so compelling that those outside of China can’t wait to use it. Some say – give it time; China’s come quite far, quite fast. Others say, there are still structural roadblocks on China’s path to innovation, and the government would do well to remove them, if it really wants innovation to take off. In the second part of our series, “Created in China,” The World’s Mary Kay Magistad reports from Beijing.

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Magistad: One of the success stories of China’s push for greater innovation is a company called CapitalBio. Framed patents line the walls of the company’s reception hall. A glass display case shows off its biochip products for use in medical care:

Magistad on location: “There’s a sperm viability assessment chip, electromagnetic cell chip, cell network electrophysiological monitoring chip, lab on a chip.”

Keith Mitchelson: “See, it’s using these advanced tools for manipulating cells.”

Magistad: Keith Mitchelson is CapitalBio’s vice president for marketing and the company’s sole non-Chinese employee. He says CapitalBio is working on a technology that would allow doctors to use these biochips – in their clinics, to conduct tests normally done by large machines, with long waiting times for results. The idea is to assemble the chips on the spot into a custom testing device:

Mitchelson: “If you can reduce all those steps down a series of components that can be put together in one small device, and that can be put next to the patient in the doctor’s office, then you take a blood sample, and you can have an analysis carried out in a short period of time, and the data provided at the point of care.”

Magistad: That technology is still a work in progress. But since CapitalBio’s launch as a private company nine years ago, it’s been granted 92 new patents, and most have been commercialized.

CapitalBio is located in the government-built Zhongguancun Science Park. Z-Park, as it’s known, is in the same leafy corner of Beijing where some of China’s top universities are based. In fact, CapitalBio is a private company spin-off from one of them…Tsinghua University. Xia Yangqi is a Beijing municipal government official and the deputy director of this science park. He says the kind of innovation you see at CapitalBio is what the government had in mind when it created the Zhongguancun Science Park:

Xia: “Z-park is the hi-tech concentration, and serves as an incubator area for Chinese hi-tech businesses. Z-park has been leading force to drive China to the information age.”

Magistad: Xia hopes that China’s version of Bill Gates comes out of this park. He says many companies, Chinese and foreign, have opened research and development centers here, and total production value has increased 15-fold, to $150 billion, during the past decade.

Magistad:There’s no denying that China has made sizzling economic progress in recent years. Most Chinese now have mobile phones, and that includes farmers living in caves. More Chinese are online than Americans. And when new technologies come up elsewhere, Chinese are quick to copy them or tweak them for the home market, and get them out to the masses. It happens so quickly, that some Chinese can get confused about who created the technology in the first place. Here’s what Chinese Academy of Sciences official Lu Yonglong said when I asked him what major inventions have come out of China in the past couple of decades:

Lu: “DVD. Yeah the first generation of DVD was developed in China. CDMA. And flash disk.”

Magistad: Actually, the DVD was invented by a consortium of Japanese, European and US companies,. An Israeli developed the flashdisk. But the Chinese did embrace both technologies early and enthusiastically. And Chinese innovators have found ways to improve many such technologies for the Chinese market. That’s reflected in the fact that China had more than 800,000 patent applications last year, and granted almost 200,000 patents. The problem is that very few of those patents are for breakthrough inventions. Yin Xintian heads the legal affairs department of the Chinese patent office:

Yin: “In American history, Thomas Edison invented the light bulb and changed how people live. Morse invented the telegraph. You don’t really see inventions of that magnitude today in China. Here, it’s more about improving already-existing technologies, which is also important to scientific development.”

Magistad: Yin says, modern Chinese innovation has come a long way since he started working in the patent office 30 years ago as a young engineer. He believes more important inventions will come, as more Chinese get up to speed with international knowledge, and international standards. He says, it helps that the government is committed, at the highest levels, to making this happen. Premier Wen Jiabao said as much just this month, when he spoke at the World Economic Forum in the northern Chinese city of Dalian:

Wen: “We should see scientific and technological innovation as a powerful engine of economic growth, and rely on it more to make economic progress. We will transform China into an innovative nation.”

Magistad: China’s made innovation a priority for a simple reason – it provides more sustainable growth than manufacturing innovations from other countries. Duncan Clark is chairman of BDA, a hi-tech investment advisory firm in Beijing. He points out that iPods are made in China, but China doesn’t make money from them:

Clark: “For example, on the $200 sale of an iPod perhaps $5 of value is left for China. Most of the value goes to Apple for the brand, for the distribution, some of it goes to the component suppliers who mostly are Japanese in the case of iPod. So China rightly I think has been saying we don’t want just be the manufacturing workshop where, you know, pollution is left behind, and labor unrest, when the economy and the rest turns down. So China is struggling to move up to the value chain and they are absolutely right to be focusing on greater value add.”

Magistad: But Clark thinks they’re less right in how they’re going about it. The governmetn throws lots of money at science parks, and researchers are ordered to innovate on deadline, and file patent applications and journal articles if they want to keep getting funding. That leads to quantity – but not necessarily quality. The pressure has led some researchers to plagiarize, fabricate data and generally cut corners.

Another problem is that government-run research labs have a hard time staying current with what consumers want. On top of that, some of the government-led effort is infused with a nationalistic “Chinese innovation for China” approach. Clark says, that’s self-defeating. He cites the Chinese government’s costly effort to come up with a new high-speed mobile broadband standard:

Clark: “China, about 10 years ago, was frustrated with the dominance of companies like Ericson, Alketel and Motorola in the Chinese market and thought that we can never compete, head on in western technology. We need to create our own indigenous standard and by effectively walling off the Chinese market; we will be able to create a big enough market for national champion or champions to emerge, and then they could export based on the size of Chinese market. This was the plan.”

Magistad: The reality, Clark says, is that the plan has failed miserably – because nobody outside of China has made phones that use the Chinese standard. Liu Jiren is the chairman and CEO of China’s largest software development and IT company, Neusoft. He told an audience at the World Economic Forum in Dalian that it’s time for China to change its approach:

Liu: “That is what’s most important, is we have to change innovation way. Especially for Chinese company, we always want to create something by ourselves. I don’t think you have enough resources, you have enough time, you have enough talent. If you can integrate your global resources with others, you also can share success, share risk with others.”

Magistad: Entrepreneurs like Liu say there’s a better way forward than just pouring money into infrastructure and staking national prestige on whether China comes up with its own exclusive standard. They say the government should focus on improving the climate for innovation. Ramp up intellectual property protection, so the inventors reap the rewards for what they create, rather than the pirates. Improve how the stock market functions, so start-ups can get the cash they need. And put more effort into understanding the needs and the strengths of the private sector. A gap in that understanding became apparent when a Chinese journalist asked China’s Minister of Science and Technology Wang Gang a question at the World Economic Forum:

Journalist: “Small private companies don’t have as much capacity for innovation as big companies. So what are you doing to help them?”

Wang: “Well, we’re encouraging them to work with universities, and we’re encouraging the universities to receive them with open arms. We pay special attention to the smaller private enterprises, because their capacity for innovation is lower. “

Magistad: That prompted this reaction from James Turley, the chairman and CEO of Ernst & Young:

Turley: “My experience around the world is not consistent with the premise of the question.”

Magistad: Turley said, from what he’s seen, it’s the small private businesses that innovate more than the big bureaucratic ones.

Turley: “So the magic of progress is when we can bring together the vision that comes from nimble entrepreneurs with the power in both the academic community and the state sector.”

Magistad: Minister Wang nodded politely, but he didn’t look convinced. After all, when China’s one-party state decides it’s going to do something, things generally happen – like now, when the government is throwing its energy into building renewable energy as a leading industry. China’s Communist Party has come a long way since its hardline Maoist past, but some habits die hard, like a lack of faith in the private sector, and a preference to let the state sector lead. For China to become the innovative leader its leaders want it to be, it will have to do more than build infrastructure and graduate engineers. China will have to rethink old assumptions, and find new ways to fertilize the roots of innovation.

For The World, I’m Mary Kay Magistad in Beijing.