Israeli model holds the answers to China’s quest for technology and innovation

Yasheng Huang says having learned from Singapore’s development experience, China should turn to a more tech-savvy nation for inspiration for its next stage of growth

PUBLISHED : Friday, 04 March, 2016, 11:53am
UPDATED : Friday, 04 March, 2016, 11:53am

It is widely understood that China needs to move from an investment-intensive growth model to one based on science, technology and innovation. But before I take up this subject, let me take a detour to tell a tale of two countries.

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Both countries are small. One has a population of 5.5 million people; the other has a population of 8 million. In both countries, the dominant ethnic group is about 75 per cent of the population and minority groups make up the rest.

Both countries are rich. One country has a per capita gross domestic product of US$52,000 and the other country has a per capita GDP of US$35,000.

Both countries have faced existential security threats from the outside and armies in both countries have mandatory conscriptions. One country was actually kicked out and evicted by its now much larger neighbour, because the union would have threatened the political dominance of the main ethnic group. The second country is located in a region surrounded by hostile nations.

You may be able to guess the names of these two countries: Singapore and Israel.

But why should I write about Singapore and Israel in a piece about China’s growth model? And why these two countries, whose size and levels of economic development would presumably not offer anything useful about a country the size of China?

The answer to the second question is easy: despite the fact that China often insists on following its own unique development model, it has never shied away from its professed desire to learn from Singapore. In this case at least, Singapore’s small size has never deterred Chinese officialdom from viewing it as a model.

The Singaporean way of doing things may well be suited for a growth model that builds highways and airports, but the Israeli model represents where China needs to go next

As of 2013, according to Chinese press reports, over 30,000 Chinese officials had gone to Singapore to learn from the Singapore model. Its way of controlling corruption is often identified as the way for China to control its own corruption problems, and Chinese officials have often held up Temasek, Singapore’s government-run investment company, as a model to manage state-owned assets.

Singapore is a model of using top-down political controls to achieve growth and a clean government. It does not believe in democracy but in bureaucratic meritocracy. It does not believe that vibrant political competition, an independent judiciary and public disclosure are key to controlling corruption and providing good governance. Instead, it uses a combination of stiff punishment and market-competitive compensation schemes to deter wrongdoing and attract talent to the public sector.

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By contrast, Israel is a multi-party democracy. In fact, Israel is as innovative in inventing new political parties as it is in inventing new technologies. Israel is also a living testimony that democracy can survive and even prosper under some of the most challenging geopolitical conditions and hostile international environments. Its politics is often chaotic, fast changing and unpredictable. Its private sector is large and quite independent of government. Its university system enjoys academic freedom and autonomy.

Israel is as innovative in inventing new political parties as it is in inventing new technologies

For official China, the small country to emulate has clearly been Singapore. For entrepreneurial China, then, the model country is Israel. While 30,000 Chinese officials have visited Singapore on a study trip, China’s technologists and private equity investors have been going to Israel in droves. Despite a much shorter history of Israeli-Chinese diplomatic relations, the volume of Chinese investments in Israel is rising rapidly.

According to IVC Research Centre, since 2012, more than 30 Chinese private and venture capital entities have invested in Israel. In 2015, the amount of the Chinese investments in Israel reached US$500 million. According to the Infinity Group, this year is expected to see between 20 and 40 deals by Chinese investors in Israel.

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While Singapore still attracts the old-fashioned, state-owned behemoths, Chinese technological companies, such as Alibaba, Baidu, Fosun, Lenovo and Xiaomi, have opened or are about to open research and development centres in Israel. The tale of Singapore and Israel is also a tale of top-down control vis-à-vis bottom-up dynamism, of contrived order vis-à-vis spontaneous order, and of imposed visions vis-à-vis the wisdom of crowds. The Singaporean way of doing things may well be suited for a growth model that builds highways and airports, but the Israeli model represents where China needs to go next.

For China to embrace technology-driven growth, it has to change its institutions, embrace the rule of law, strengthen intellectual property rights, honour contracts and respect academic freedom and autonomy

Chinese officialdom frequently proclaims the goals of innovation and technology but the thinking is very much along the line that change involves only the policy goals, rather than including policy methods.

This is simply wrong. Changing the growth model to one driven by technology is not like turning on a switch and then suddenly getting technology-driven growth. This is where the political differences between Singapore and Israel are extremely meaningful.

For China to embrace technology-driven growth, it has to change its institutions, embrace the rule of law, strengthen intellectual property rights, honour contracts and respect academic freedom and autonomy. Above all, it must reduce and constrain the role of the government in the economy and society.

Entrepreneurial China has already spoken – it is willing to embrace Israeli technologies and invention. Is official China willing to embrace Israeli institutions that have provided a nurturing environment for these technologies and inventions?

Yasheng Huang is a professor at MIT’s Sloan School of Management, where he founded and heads the China Lab and India Lab that provide low-cost consulting services to SMEs in China and India. He is a co-author of MIT’s Innovations and Innovating Innovations (both in Chinese)