Monday, April 02, 2012

Why should China innovate when it can just steal?

Another day, another "Can China innovate?" story popping up in my Twitter feed. This is a beast of the same family as the "Prepare for a wave of Chinese innovation" article and the "America can only stay ahead if we innovate" article. But I never see anyone asking this question:

Why should China bother with innovation when it can just steal technology?

When I was but a lad, I used to play a game called Master of Orion II. In this game, as the leader of a star empire, you can research new technologies. You can also hire spies to go steal technologies from your competitors. Spies are cheap and quick. If your species has an advantage in spying, it almost doesn't make sense to pour your resources into research; instead, you can just steal everything you need, and put your people to work building warships instead of peering through microscopes. There's only one problem with this strategy - it makes all the other races of the galaxy declare war on you.

China is not in any danger of having the rich countries of the world declare war on it. It also has an advantage in spying, given its large and well-educated population (which results in many Chinese nationals in grad school or working as engineers in rich countries). So it's not surprising that life imitates Master of Orion II - China does a huge amount of spying and steals a huge amount of technology.

Does it make sense for China to do this? Given that it's not in danger of physical attack, the only downside to this strategy would be if A) rich countries retaliated by restricting trade with China, or B) Chinese espionage actually reduces the amount of innovation that goes on in the world. Are either of these downsides scary enough to make China stop its espionage?

Trade protectionism as retaliation for spying is probably not a danger. First of all, spying is hard to measure, making it hard to know when to end the punishment (maybe the spies just laid low until the tariffs were lifted!). Second of all, the protectionism would probably have to be coordinated among rich nations, and that is notoriously hard to do, especially given the collateral damage that might be inflicted on the economies of the rich countries.

So could Chinese espionage cause a global innovation slowdown? Innovations are a mostly nonrival good, so a company has no incentive to innovate if it can't partially monopolize its innovations. Hence, in a world where China just steals everything, companies might as well just not innovate. Since companies are responsible for a substantial portion of the innovation in the world, this would be bad for China, since it would slow global economic growth, reducing demand for China's exports, investment into China, etc. It would also "kill the goose," forcing China to either rely on domestic innovation or accept slower productivity growth.

(Now of course, in the real world, the question I've posed - "Should China innovate OR steal?" - is silly. It's not an either-or question. China faces an allocation decision - it has to decide how many of its smart people it wants to send overseas to steal stuff from rich countries, and how many it wants to put to work discovering new things. The costs of spying, which I described above, are in addition to the opportunity cost of research manpower that China incurs from its espionage activities. Spying probably has diminishing returns in the number of spies. Also, the return to spying probably falls as your country catches up technologically with the country you're ripping off; the fewer things there are to steal, the harder it is to steal each one.)

But is "killing the goose" really a cost for China? Remember, saying "China does this" and "China wants that" is really a misnomer, since China is not monolithic. If we're talking about the Chinese government, it may be that the government cares about China's relative power in addition to its absolute wealth. There are some indications that China's leaders have this mindset. In this case, spying becomes more attractive relative to research. Do you care if you cause a global innovation slowdown, if that slowdown hurts your rivals more than you? To the extent that rivalry matters to you, you don't care. You spy more and research less.

Another point: Espionage and innovation are not the only ways to acquire technology. China can also force foreign companies to give it technology in exchange for access to its huge domestic market. Even if U.S. and European companies end up losing out in the long run from this kind of deal, the short-term pressures of the stock market (which determines executive compensation) may force companies to do this. Unsurprisingly, China has been doing some of this too.

So, back to the beginning of the post. Instead of considering the question of Chinese innovation in isolation, we should consider the totality of ways that China can acquire technology to continue raising its productivity. We should not be asking "Can China innovate?", but rather "Can China innovate, steal, and/or force foreign companies to transfer technologies to China in exchange for market access?" Anyone who is rooting for China's economy should not be so worried by the innovation limitations discussed in articles like this one, unless they also believe that China's demonstrated capacity for forced tech transfer and espionage are also diminishing.

One more point. Economists are beginning to take seriously the idea that we are in a Great Stagnation. They should think about whether the rate of technological progress is being impacted by Chinese espionage and forced technology transfer.


  1. China plays Western companies for fools. Western companies need to stop being so gullible.

    "Someone" in China engaged in a ten year campaign of looting the intellectual property of Nortel - this is both a threat to national security and it may have contributed to Nortel's demise. Western companies need to guard better against theft of intellectual property.

    So far as the stagnation of ongoing innovation in the West - that is probably largely self inflicted with policies like the US government's deliberate destruction of Bell Labs and the insane patent laws that constitute a barrier to innovation rather than an incentive.

  2. IP theft isn't a real issue.

    Hollywood hates it, but property rights are based on the atomic principle of scarcity. If food or oil could be copied there would be riots in streets if we stopped it.

    Without scarcity there is no ownership. We shouldn't weaken property rights by pretending digital piracy is the same thing.

    On luxury goods and TM infringement - they are the best form of advertising. Until the knock off market came into being, high end fashion brands couldn't even go public. There was too much up and down.

    Now, the quickest way to make sure rich chicks want your $2K bag is to have all the poor women carrying the kick off. "It's REAL!" is the major selling feature.

    On real IP inventions its a mixed bag.

    Frankly, it'd be GREAT if China had the chops to invent, but they don't really harm us, and with all the excellent cheap labor they more than make up for any list of negatives.

    The facts are clear as day: China is a great US partner and India should be taking notes from them.

    1. Anonymous10:49 AM

      Sorry, I just cannot sign on. I'm an American product developer living in Hong Kong and have been developing/ working for about 20 years. The HK company I work for applies for a patent for every new innovation we apply for. Our company MS is to bring NEW ideas to market. We are aware of all the dirty thieves in China who have no moral code about what belongs to who. Companies like us are the exception and really part of the old world of product companies in China.

      This applies to movies, media or anything a group of people work hard to create. Yes, I had download media in the past and even bought illegal DVDs, but that was a point in my life where I ignored moral conviction. With time I saw if I buy something that added value or real amusement in my life, I actually felt better paying for it. Theres the argument if you purchased something you thought was sh*t or of poor quality, but that subjective argument. There just happens to be more sh*t out there than good.

      Our companies lawyer are plenty busy collecting on our competitors stealing our design. I don't know the figures, but my boss isn't complaining on the factories or trading companies who are settling out of court. That said, you really have to keep you eyes open some MF in stealing your work.

      BTW, I don't make that much $$. I do come up with original ideas that end up being trend ideas in the US. I would rather the company that supports my salary make the profit than the uncreative Chinese f*cks who steal my hard work.

  3. Noah, Jonathan Chait has a post on your great post on libertarianism and bullies. You'll want to read this:

  4. This comment has been removed by the author.

  5. Anonymous4:01 AM

    Okay Noah I think you're overemphasising the role of stealing in what is in many ways a pretty standard case of catch-up growth via the Asian-export-development model, and where does one even quantify the damage corporate espionage in the Developed world let alone China? Did you really need vast corporate espionage for that kind of development? (need is different from doing it)

    Your previous ideas of a factor input splurge (cheap labour) reducing incentives for innovation was probably more sound.

    Anyway both articles still follow the basic flaw of articles on innovation i.e. its only about the Microsoft's and Apple's of this world (a story that favours American status one might add). But if technological development is endogenous and related to actual existing specialisation and production then top of the line information technology is an unfair barometre to China (and pretty much everywhere else), nobody talks about a thousand minor technical improvements in production methods.

    1. This is a good point!

    2. China does not need to engage in corporate espionage to develop rapidly. There are huge amounts of publicly available technology available in the West. China has big problems with its domestic institutions. It is not an accident that the largest private sector employer in China (Foxconn)is a foreign company manufacturing foreign designs for sale in foreign markets.

      China's domestic institutional failings are a problem for China. However, China steals and they counterfeit and they produce unsafe products and those are problems for the West.

  6. Andrew6:09 AM

    Could you link the paper which talks about tech stagnation?

  7. I have some problems with your innovation versus stealing framing.

    Basically those two things operate at totally different take away point:

    "I would argue that there is no trade-off between spying and innovation at all: spying is a military expense and innovation is a political expense. You pay spies out of taxes or corporate profits, you pay for innovations by suffering the economic and political losers of creative destruction."

    More here. /shameless plug

  8. patents expire: All technology is "stolen," eventually. (if its done after the patents expire we call it "adoption."). Non-disclosure agreements and patents are unenforceable in the sense that once the idea is out (because people leave the firm) its nearly impossible to get it back. Plus, there are many ways to "copy" an idea that don't involve, strictly speaking, "stealing."

    Thats why first-mover advantage is a crucial competitive advantage in a lot of technology industries.

  9. also, i think you are taking too narrow a view: the history of mankind is invent, adopt, improve, repeat. ive always been intrigued by the idea that technology has increasing returns and network/critical mass effects. we should not be so concerned with monopoly rents (or the lack thereof when its stolen). do i pay royalties to the person who invented indoor plumbing?

    if there is any productivity slowdown its because bright people are being lured by Goldman sachs to write algorithms to nanosecond trade.

  10. Why would you use a screencap of the Alkari when the Darlocks are clearly the example species here? :P

  11. I would be pleasantly impressed by good ways to measure rates of technological progress. But I don't think any economists have any: they would be worthy of a Nobel Prize.

    Without such measures, "Great Stagnations" are speculation, when they are not outright bullshit. Cowan has attempted the latter in his book, IMHO. His "measure" is median family income, which has stagnated because growth has gone to the rich: but average income has not stagnated. I view his work as just more conservative/libertarian fodder for justifying their policies.

    I have a small web page on the subject.

  12. Noah, what helps maintain my optimism towards you is your policy of not deleting comments. I just posted this in some forum...I'll share it here as're open minded enough to see the big picture...

    In order to understand how we can become number's essential to understand exactly how and why China caught up to us so quickly.

    Back in the day there was a Chinese leader by the name of Mao Zedong. He was well-meaning but conceited. In order to try and help China develop...he had a committee determine how all the resources in China were used. What he failed to understand was that committees cannot determine the "best" use of resources. Therefore, 20-30 million people starved to death as a direct result of state induced famine.

    Then along came my hero...Deng Xiaoping. In the late 70s he convinced the Chinese leaders to open China up to foreign investment and allow individuals to have more of a choice how they used their own limited resources. In other words...he allowed markets, rather than committees, to determine how most of the nation's resources were used. This is how China so quickly caught up to the United States.

    For some reason...what Americans don't really seem to that we have a committee determining how a huge portion of our nation's resources are distributed. We allow a committee of 538 congresspeople to determine the "best" use of 150 million people's taxes. In other words...if there is a tax rate of 25%...then we allow a committee to determine the "best" use of 1/4 of our nation's resources. As all the socialist failures have demonstrated...committees cannot determine the "best" use of limited resources.

    If we want to generate more revenue...then we have to put our resources to their most productive use possible. It's really important to understand that only you can determine the "best" possible use of your limited time/money. Therefore...if we want to beat China...then we should simply give taxpayers the freedom to choose which government organizations they give their taxes to. This would allow markets...and not a determine the most productive use of resources in the public sector.

    It wasn't easy for communist China to open their country up to foreign investment. won't be easy for our socialist public sector to open up to taxpayer insight. But the combined insights of 150 million of our most productive citizens are infinitely x infinitely more valuable than the combined insights of 538 congresspeople.

    In other words...our most valuable resource isn't any material resource...nope. Our most valuable resource is simply all our unique perspectives which allow us to see how resources can be used in new, valuable and productive ways. Taxpayers, our most productive citizens, are our country's most valuable resource. By not giving them the freedom to choose how they use their limited resources in the public sector...we are wasting our most valuable resource. You'll never generate more revenue by wasting your most valuable resource.

  13. Kevin4:44 PM

    My favorite race, the Psilons, were forever attempting (mostly unsucessfully) to keep the Darlocks from stealing my Death Ray and Invulnerability Shield plans. They were always my #1 target when I discovered them.

  14. Xerographica, you are perpetually funny. A landlord determines the "best use" of roughly 1/4 of the tenants resources, rather than allowing the tenants to decide when to heat, how to clean, what to decorate and when to repair themselves. But somehow you don't have a problem with that.

    1. You're a pretty funny guy yourself if that is the best argument that you could come up with. Clearly if the tenants aren't happy with their landlord then they can vote with their feet and move into the apartment building next door. If Americans aren't happy with how the government is spending their taxes...then asking them to vote with their feet and move to another country is asking a bit much.

      If you're happy with how congress is spending your taxes then in a pragmatarian system you would still be able to give your taxes to congress. I wouldn't want to try and dissuade you of your belief in congress any more than I would want to dissuade you of your belief in God, Santa Claus or Chairman Mao.

      So how about a little religious tolerance on your end? Noah has yet to offer a single shred of evidence that supports the belief that resources can be efficiently allocated by proxy. We only allow congress to allocate our taxes because 1000 years ago some Barons weren't happy with how the king was spending their taxes so they took the power of the purse from him. The King only had the power of the purse in the first place because people believed that he had divine authority.

      So it's fine if you believe that congress is divinely inspired...but in my shouldn't take more than 30 minutes of watching C-Span for the average taxpayer to fully appreciate that this is definitely not the case.

    2. People vote with their feet all the time emigrating from countries: in case you don't know, the US was founded by such emigres. And thousands emigrate from the US every year.

      We don't need efficient allocation by Congress: we allocate through Congress because it does better allocation than the other second-best solutions. Your superstitious belief that there could be a first-best solution is just silly. And it is silly for the exact same reason you don't demand landlords have their tenants individually decide best use.

    3. If there was even the tiniest bit of economic logic to your argument then we would see an abundance of personal shoppers in the private sector. The fact is that we don't. This is simply because nobody can spend your money better than you can. I know you hate it but it's really true that you are a unique and special snowflake. The supply of goods should conform to your priorities, values, tastes, preferences, concerns...not the other way around.

      Your analogy of the landlords doesn't work because your landlord isn't your personal shopper for private goods. A better analogy would be to elect 538 people to be responsible for purchasing all our Christmas gifts. We would all give our Christmas money to these 538 personal Christmas shoppers and they would buy us all the same highly generic Christmas presents that we would give to each other on Christmas. What would the outcome be? Christmas would be as joyless as Tax Day and our personal shoppers for Christmas gifts would be wined and dined by a gazillion different companies that wanted their products to be selected as gifts.

      Why do you want to be a grinch? Why do you want to suck all the joy out of tax day? Tax day should be a joyous occasion. It should be a happy holiday where we have the opportunity to purchase needed, valuable and beneficial gifts for our entire country. How could 538 congresspeople possibly know what the American public needs better than the American public itself does?

    4. What sort of grinch could fail to see the resonance between the public sector and Christmas presents???

    5. C'mon mattski...I've seen libertarians formulate better arguments than that. Are you intentionally trying to make liberals look bad? Either put together a half decent argument or go back to the drawing board.

    6. Either put together a half decent argument or go back to the drawing board.

      My burden isn't to put together a highly crafted argument, though I can do that when appropriate. My burden is merely to be more persuasive than you.

      And I'm sorry to say but that's a pretty low bar.

    7. Speaking of low are 67 responses to pragmatarianism...Unglamorous but Important Things. It's basically a list of people who have no idea how resources are efficiently allocated. Guess what? I added you to that list a while ago!

      Understanding basic economics is a really low bar. Let's see if you've managed to learn a thing or two since then. What would happen if taxpayers had the freedom to choose which government organizations they gave their taxes to?

    8. What would happen if taxpayers had the freedom to choose which government organizations they gave their taxes to?

      OK, now I'm responding for the fun of it. (Thank you, Mike Huben!)

      Xero, one of the reasons you're such a whack-a-doodle (and why your comments so often get deleted at other sites) is that you simply ignore substantive criticism. Months ago I gave you specific answers to your utterly absurd ideas. Let's try again a little, shall we?

      If the legislative body cannot allocate funds then it can't provide adequate funds for a project. Why write a law to build the Hoover dam if there's no guarantee the money will be there to build it?

      Here's another problem you don't seem to have thought of. If you have the right to send your tax money to "The Dept of Defense" then does that mean you could be more specific? "My check is for the Anti-Ballistic Missile program at the Dept of Defense." You could get really heartfelt with this too: "The anti-ballistic missile program is VERY important to me, I really believe this is a crucial component our our national defense!" Is that OK too? If so, why not more specific still? My check is for the GOOBER Corporation which is sub-contracting on the guidance software for the Anti-Ballistic Missile program at the DOD. But wait! Why stop there?

      "My check is for my cousin Roxanne who works for the GOOBER corporation, which is working for the DOD."


    9. Not at all surprised that you haven't learned anything about economics since your previous attempt to disprove pragmatarianism. But I am a bit surprised that you at least made enough effort to put together the semblance of an argument. And the "whack-a-doodle" part was pretty funny.

      "If the legislative body cannot allocate funds then it can't provide adequate funds for a project."

      LOL...LMAO. Sigh.

      A. taxpayers would still have to pay taxes
      B. why wouldn't they allocate enough taxes to build the next Hoover Dam?
      C. I don't know? Why wouldn't you just ask them yourself?

      A. people have to buy private goods/services anyways
      B. why wouldn't they spend enough money to support a Magna Carta movement?
      C. I don't know? Why don't you paypal me $200 to support the Magna Carta movement?

      No no no...I know the answer! Because you have BETTER things that you could spend your $200 on! But from MY limited perspective you do not. But why should your perspective matter? I'm pretty sure that I know better than you do.

      And there, in a nutshell, we see how resources are efficiently allocated...or not. What do organizations have to do to change your spending priorities? They have to advertise! They have to persuade you, using relevant information, that their services/goods/products are of value to you.

      They have to convince you to give up one thing that you value in exchange for another thing that you value even more. The outcome of exchanges is measured in utility. Everybody wants to maximize their utility. In other words...we all make sacrifices to maximize our utility.

      In a pragmatarian system...taxpayers would be given the opportunity to maximize their utility in the public sector. Is this a good thing?'s a ridiculously absurdly awesome thing.

      "Here's another problem you don't seem to have thought of."

      Not in this case...The Granularity of Congress in a Pragmatarian System.

      Yeah, this is fun isn't it!? Well...unless you have BETTER things you could be doing with your time. From MY limited perspective you do not.

      Why do I sacrifice MY time to try and teach you about basic economics? Because eventually you, or somebody else, probably somebody else, will realize that their limited time/money is just as valuable in the public sector as it is in the private sector. As a society we all stand to benefit...exceedingly benefit...when taxpayers are given the freedom to maximize the value they receive for the money that they spend in the public sector.

      It truly is an economic fact. And if you don't believe me then just paypal me your $200 contribution to the Magna Carta movement. Your sacrifice will not be wasted. Well...unless it is wasted. In that case...feel free not to send me any more money.

    10. I have a question for you. Why do you provide me a link to a post which contains this admission on the subject of "granularity" or specificity (the issue I raised above):

      anybody's guess is as good as mine.

      Don't you have any self-esteem at all?

    11. It has nothing to do with self-esteem and everything to do with conceit vs humility.

      Here's what a liberal had to say about pragmatarianism...

      "I’d love to be able to allocate my taxes. Seriously, I would. It’d be difficult to organize this on a high granularity level, though; I imagine everything would get of whack, as I probably have no information on how other people allocated theirs. So, to start with, I would suggest just a couple of categories, like, say, ‘the military’ and ‘everything else’." - Henri Vieuxtemps

      Do you think that I would oppose his suggestion?

    12. If you were humble you wouldn't spam up other peoples blogs with your foolhardy nonsense.

      If you had any idea what you are talking about you would not address a serious problem with the words, "anybody's guess is as good as mine."

  15. If Americans aren't happy with how the government is spending their taxes...

    There's these things called "elections". Perhaps you've heard of them?

    The King only had the power of the purse in the first place because people believed that he had divine authority.

    Are you showing off your robust grasp of history, in particular political history? It's marvelous that Mike Huben finds you funny. To me, your inimitable combination of ignorance and cheek is as dismal as hell.