We might think we have all heard enough about innovation, but it is an essential subject that all of us need to understand better. And it is a relevant subject to raise in the context of China’s 40th anniversary of reform and opening-up which has led to significant achievements – mainly, the privatization of much of the commercial sector and the welcoming of new firms with new ways of producing and new products to produce. As reforms have continued, China’s economic development has accelerated.

It has long been understood that sustained growth and development requires sustained “innovation”. Without that, capital investment will run into diminishing returns and both growth and development will slow and vanish. But what exactly do economists mean by this term?

An “innovation” is not a discovery or invention. The term refers to a new product or method that is adopted – adopted for use in production by the developer or marketed to others who adopt it for use in their production or consumption

And innovation requires “innovators”, both ordinary people employed in commercial enterprises who, in the course of their work, hit upon a better way to produce something or a better product to make as well as extraordinary people who conceive and evaluate a new enterprise for producing something new and very different.

A city or even a whole nation might be vibrant with innovative developments in the production of existing goods and in the development of new goods. Think of London in the 1850s, Berlin in the 1890s, Paris in the 1920s, Hollywood in the 1930s and New York in the 1950s. A large part of the innovations there were indigenous to the city.

In the present age, we speak of the innovation that is indigenous to a nation and the innovation that is imported, or “copied”, from other nations – although an increasing amount of innovating is international or global – involving collaboration of contributors in two or more nations.

Following the reforms and openingup, it was not surprising that China’s innovation was predominantly imported, though at some point in the present decade indigenous innovation became significant. But, as China runs out of foreign innovations it can import at acceptable cost, its focus is swinging toward indigenous innovation.

The “shift” in recent years from “made in China” to “created in China” is essential. Unquestionably, outstanding innovations by such pioneers as Jack Ma shined a bright light on the path for China to take. Alibaba, Baidu, and Tencent are stellar examples of China’s tech innovation. Such technical progress is required for rising productivity and thus rising wages as well. No one can foresee the magnitude of their contribution to the world’s economy, but I feel sure it will make a significant contribution to the global economy.

To continue this progress and transformation, China will require leaders in government that continue to recognize the importance, both for indigenous innovation and entrepreneurship, and in turn this will require a people with imagination and creativity.

In his speech to the Boao Forum this year, President Xi Jinping talked of China entering a new era of openness. Under his leadership, initiatives aimed at boosting entrepreneurship and innovation in the business sector have been taken. Premier Li Keqiang has spearheaded a movement to encourage the massive formation of new firms and Vice-Premier. Liu He has got behind a policy to refrain from rescuing moribund enterprises, which are not a few in the State sector.

The process for forming a new company has been shortened, leading to an increase in the number of enterprises. The Belt and Road Initiative has also opened China to Eurasia and — and even more so opened Eurasia to China. I would also note the huge increase in the participation of foreign experts in the Chinese economy.

All of this is fine but there are still several more reforms China should make to continue economic development. For example, the development of a financial sector oriented toward business investment by private enterprises will be necessary.

There are other areas in which China as well as parts of the West can continue to make reforms, such as coming up with ways to boost inclusion. Women, for example, are underutilized. They have an intuition that men do not have and they have a different perspective on the nation and the world. Women can add their intelligence and pragmatism to the pool of innovators. In an early paper on innovation, I showed that adding them to the economy adds new ideas, new productivity gains. As Chairman Mao said, women hold up half of the sky.

In addition to further reforms, thoughtful people have questions and worries about cooperation within the global economy. While the admission of China to the World Trade Organization was an important development, there has been much talk about tariffs.

The recent trade dispute is about the high tariffs and other hurdles that US firms feel they are faced with as they contemplate attempting to enter Chinese markets. China can reply that the European Union also has some pretty high tariffs but it may be that the non-tariff obstacles are not as daunting in Europe as they are in China. Furthermore, US President Donald Trump is wrong to believe that China’s trade surplus hurts America and that the US and China ought to have balance in their trade accounts.

I questioned economists’ call for free trade in my 1985 textbook. The real underlying problem is that free trade is uncomfortable, because some sectors of the nation are hurt more than they are helped. So, all countries engage in protectionism. And China’s protectionism hurts American special interests, just as American protectionism hurts Chinese interests. In the US, it is low-skill labor that is hurt.

If the US-China trade conflicts continue, I do not see a large impact on aggregate production, or GDP, in the United States, the eurozone and China. The Chinese economy is not nearly as open as we are accustomed to supposing it is. And US exports and to some extent European Union exports, are mostly foodstuffs, wine and the rest; and these goods will go on being produced even if the suppliers are hit by higher tariffs. But prices will be depressed, of course.

Yet another concern is that the innovation achieved in the economy may very well steer the economy in the direction that is not what is wanted by society. President Xi Jinping has spoken of “quality growth”. Others speak of addressing inequality. Still others talk about the quality of life. I have argued in China for more attention to the experience of work. My dear friend (Nobel laureate) Amartya Sen emphasizes that people need to “do things”.

I have been arguing that people in their working lives badly want to have the experience of succeeding at something. People also want careers that unfold in rewarding ways: Many people are thrilled by a voyage into the unknown. They enjoy the excitement of challenges and find it very gratifying to overcome obstacles. Lastly, people take satisfaction in having a sense of “acting on the world” (sociologists like the term “agency”) and, with luck, “making a mark”. This is what my book Mass Flourishing is all about. I have been overjoyed to see that some of these ideas of mine have been very well-received in China.

My position is that, for a good life, people need a degree of agency in their work. They want to be able to take the initiative and do work that is engaging. People value room to express themselves – to voice their thoughts or show their talents.

In other words, people value attainment through their own efforts. I have used the word “prospering” (from the Old Latin prospere, meaning “as hoped, or expected”). Success comes in many forms: an office worker winning a promotion for her achievement, a craftsman seeing his hard-earned mastery result in a better product, a merchant's satisfaction at seeing “his ship come in”.

People also value the personal growth that may come from their career. I use the word “flourishing” to refer to the satisfaction from a journey into the unknown – the excitement of the challenges and the appeal of overcoming obstacles. Indeed, attaining, prospering, and flourishing all refer to experiential rewards, not to money.

What sort of economy – more precisely, what kind of society – could offer this good life? History suggests that it would be one of entrepreneurial people, alert to unnoticed opportunities and exercising their initiative to try out new things; but also innovative people, imagining new things and developing new concepts into commercial products and methods, and marketing them to potential users. The participants in such a good economy would range from the grassroots of society to the most advantaged and talented.

This is the China that I hope will emerge. It would also help the rest of the world. The fact is that there is much less innovation coming out of the US than there once was – and hardly any coming out of Europe. So China could become a major source of innovation for the global economy, equaling or exceeding the US. To my mind, this is an invaluable opportunity for China – and a development to be welcomed in the rest of the world.

The author is the 2006 Nobel Laureate in Economics, author of Mass Flourishing, and recipient of the 2014 China Friendship Award. 

This article is selected from a book, The Sleeping Giant Awakes, jointly published by China Daily’s communication-led think tank China Watch and Guangdong People's Publishing House.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.