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Innovation
How China’s innovation system really works
As debate grows over whether China is winning the technology race, executives should focus instead on how its innovation system is designed – and what that means for competition.
As US–China rivalry has sharpened, the discussion around China’s innovation has hardened into a simple yardstick. Is China winning the technology race against the United States? It’s an easy question to ask – but it’s the wrong one.
The more useful question for business is not who leads innovation globally, but how innovation systems are structured. China’s system is designed for speed and scale, giving companies a clear edge in execution. The trade-off is that they have less space to experiment or change course when circumstances change.
That choice determines where Chinese companies perform well, where they struggle, and how foreign firms should compete with – or work alongside – them. It also explains why much of the conventional debate about China’s innovation misses the point. There are five core myths to unpack.
Myth 1: China just copies
China has long been viewed as a technology copycat, a reputation shaped by years of lookalike products and business models, from Apple-style smartphones to pirate DVDs.
But that debate focuses on where ideas originate. What matters more for competitive advantage is how quickly companies can turn ideas into products. On that measure, China has a commanding lead.
On the ground, Chinese groups have developed what I call ‘integration velocity’: the ability to move ideas to market quickly because the people who design products, build them, and respond to customer reactions work closely together. In practice, this means efficient coordination between research and development, engineering, manufacturing, and product and sales teams.
One example is BYD, now the world’s top seller of electric vehicles. It controls key parts of the supply chain – including access to raw materials, batteries, and chips. This level of integration means it can bring new models to market quickly and keep production costs low, enabling it to price vehicles more competitively.
What matters less is originality. Founded in 1995, BYD was initially written off by some key figures in the industry. What matters more is how quickly ideas are executed at scale.
“China has created Government Guidance Funds, state-backed venture capital vehicles. By 2024, more than 1,700 such funds were in place, with roughly $670bn raised.”
Myth 2: It’s all subsidies
Another common argument is that China’s edge in innovation is artificial, the result of plentiful government subsidies. Electric vehicles are usually held up as a prime example. In Europe, the argument has already shaped policy. Late last year, the EU raised tariffs on Chinese-made EVs after finding evidence of unfair state support.
There is a reason this argument resonates in Western capitals. China has created Government Guidance Funds, state-backed venture capital vehicles. By 2024, more than 1,700 such funds were in place, with roughly $670bn raised.
But these funds, which are typically paid as one-off grants, do more than hand out subsidies. They invest in companies early and stay involved as projects grow. They then reinvest the returns in the next wave of ventures.
This is not a shortcut to competitiveness, but a different way of financing innovation in industries like EVs, where development takes time and vast amounts of capital.
China’s system is built to scale priorities agreed between the state, local governments, and industry, and to do so quickly.
Myth 3: China’s system is frictionless
A third assumption is that China’s innovation system is an efficient machine, with scant friction.
That description is not wrong. China’s system is built to scale priorities agreed between the state, local governments, and industry, and to do so quickly. It tends to deliver steady, incremental improvements in targeted areas, such as EVs, battery technology, and solar and wind power, because resources and incentives are coupled.
The trade-off is straightforward: reducing friction helps companies carry out agreed priorities far quicker – but it also curbs their ability to learn and adjust, because out-of-the-box ideas are filtered out. That makes it a great deal harder to change course or pursue unexpected breakthroughs.
However, this is not a weakness; it is a deliberate design choice. One that favors speed and scale over experimentation.
If China’s success were cultural or purely state-driven, failure would be rare.
Myth 4: It’s cultural
A fourth assumption is that China’s success with innovation is rooted in something uniquely Chinese. However, this kind of thinking pulls policymakers and executives away from what actually matters: how innovation is organized in practice.
If China’s success were cultural or purely state-driven, failure would be rare. Instead, competition in some sectors has been brutal. In EVs, firms have been allowed to undercut each other, absorb losses, and fail, with price wars, falling margins, and dozens of weaker players pushed out – the result of policy and market design, not national character.
Cut-throat competition weeds out weaker firms and sharpens the survivors. BYD’s rise reflects that selection process. Having emerged from intense domestic competition, it now produces EVs at price points Western manufacturers struggle to match and has recently leapfrogged Tesla as the top EV seller globally.
The lesson for Western executives is not to copy a Chinese model, but to understand how competition and investment are structured – and whether similar conditions exist in their own markets.
Myth 5: Innovation is zero-sum
Perhaps the most persistent misconception is that innovation has become a zero-sum race between the US and China, the world’s largest economies. But that framing misunderstands how innovation actually works.
Innovation ecosystems are networks, not fortresses, sometimes linking firms, talent, and capital across borders, even when geopolitical tension is high. The fact that Western multinationals continue to set up R&D centers in China bears this out. They do so not out of naivety about intellectual property risk, but because they need engineering talent, local insight, and the ability to bring ideas to market quickly.
The executives who get this right are not those trying to choose sides, but those who can work across different innovation systems. That means scaling in some markets, experimenting in others, and partnering across borders while managing the risks.
This is not naivety about geopolitics, but a recognition that innovation advantage now comes from dealing with complexity, not reducing it to binaries.
One of China’s core advantages is collapsing the distance between R&D, engineering, production, and the customer.
What this means in practice
The five myths point to one core mistake: treating China’s innovation system as something to admire or fear, rather than as a set of deliberate design choices with clear trade-offs. This means five things in practice.
First, know where China has a structural advantage. The country performs best in industries that reward speed, scale, and tight manufacturing integration, such as consumer electronics and industrial hardware. It is weaker at producing major scientific breakthroughs and deep research with no short-term payoff.
Second, focus on the organizational lesson. One of China’s core advantages is collapsing the distance between R&D, engineering, production, and the customer. Companies that operate in silos or separate development from manufacturing are choosing slower execution.
Third, avoid binary thinking. The most effective executives treat China as one node in a global innovation network, using its strengths in scale and execution while building complementary capabilities elsewhere.
China is not “winning” innovation. It is executing a specific model of it exceptionally well. Understanding that model – and its limits – is what leads to better strategic decisions.
Authors
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