Beginning in the late 1970s, China’s economy produced the largest growth spurt in recorded history. This striking departure from the economic experience of the previous 200 years encourages onlookers to view recent economic success as a “miracle” that requires neither economic nor historical explanation. Such thinking ignores common elements that have shaped China’s long-term economic trajectory: forces propelling spurts of innovation and growth, restrictions that often impede these dynamic forces, and enduring features of China’s polity that generate tensions between centralized authoritarian power and economic growth. Neglect of these historical legacies invites misconceptions about the current boom’s origin and the economy’s likely future path. History and economics figure prominently in our analysis of both.

China represents a new chapter in ongoing controversy over the use of state intervention to promote innovation and upgrading. This book analyzes the nature and outcome of recent Chinese efforts to accelerate progress toward global technology frontiers in electricity, telecommunications and semiconductors.

Our contributors document impressive absorption and upgrading of a wide array of technologies as well as individual instances of path-breaking innovation. Notable advances include achievement and even extension of global technical standards in particular segments of electricity transmission and thermal power generation along with rising competitive strength in global markets for conventional and nuclear electricity, telecom equipment and software.

We also observe instances – notably semiconductors and wind turbine equipment - in which government efforts to promote innovation have encountered difficulty in penetrating overseas (wind equipment) and even domestic (semiconductors) markets. In addition, we observe consistently high levels of excess capacity and operational inefficiency – for example, the average cost of generating and delivering each unit of electricity is at least 30 percent higher in China than in the United States

Recent initiatives center on the Made in China 2025 plan to develop an extensive array of advanced manufacturing industries. Current strategy emphasizes instruments – self-reliance, channeling resources toward state enterprises, top-down selection of strategic products and technologies and Party control – that have retarded productivity growth in the past, while moving away from openness, competition, private-sector expansion and other measures strongly associated with past increases in productivity.

Telecommunication equipment, a sector that has thrived in an environment of openness and competition, offers a strong contrast to the recent decline in productivity outcomes visible at the industry-wide level and in several electricity-related product categories. Current policies reinforce distorted incentives that can only expand the massive costs associated with excess investment, misallocation and corruption. These costs will act as a powerful counterweight to the extraordinary human, financial and policy resources that China’s leaders are now directing toward innovation and upgrading across a broad spectrum of industries.

Nuclear power epitomizes the unusual combination of quantitative expansion, rapid upgrading of technological, managerial and regulatory capabilities, growing competitiveness, burgeoning global involvement, and also potential economic, environmental and security risk surrounding Chinese innovative efforts. A combination of domestic upgrading and international cooperation has delivered a rapid buildup of capabilities in design, construction, operation, equipment manufacture and regulatory capacity alongside ambitious nuclear investment. Surprising features of China’s nuclear buildup include the centrality of enterprise initiative in an industry seemingly dominated by government controls; the strength of nuclear safety oversight in an economy with limited institutional capacity for prudential regulation; and China’s sudden and unexpected emergence as a major player in the global market for nuclear power installations – an apparent instance of Christensen’s theory of “new market disruption.” Despite its impressive advance, China’s nuclear sector faces multiple challenges arising from institutional limitations, corruption, conflicts between supply-chain inadequacies and pressure for import substitution, and an ironic confluence of overseas market success with a sudden erosion in the financial underpinnings of nuclear electricity production in China itself.

China’s electricity industry has recorded immense achievements in many areas: growth, technical upgrading and innovation, improved reliability, and universal service. This record of excellence coexists with massive inefficiency. Despite multiple cost advantages, the unit cost of producing, transmitting and delivering electricity is at least 30 percent higher in China than in the United States. Latent potential for cost reduction clusters in coal-fired generation that supplies about two-thirds of total output. New reforms that deepen the influence of market forces will strengthen financial pressures and thus increase the likelihood of achieving potential cost reductions, perhaps increasing the output and share of coal-fired thermal plants.