Michael Elliott: China can grow, but can it innovate? 

Fortune contributor and Time International editor Michael Elliott has a thoughtful piece today that looks at the other side of China's economic explosion and notes that most of the phenomenal growth is the result of government flooding the market with money and directing it to favored firms.

That approach can get growth in an economy in which there is a virtually unlimited supply of potential customers and the need to build virtually from scratch both an industrial base and key infrastructures in areas like communication and transportation. But Elliott points out that it remains to be seen whether China's economy can be innovative in the same way as a dynamic mostly free market like that found in the U.S.

Here's Elliott on looking beyond the surface of the Chinese economic miracle:

"At first sight, it seems a ridiculous question. China's universities are turning out hundreds of thousands of scientists and engineers; its computing wizards are legendary, and not just because they appear to be among the world's best hackers and copiers of others' intellectual property.

"Venture capitalists talk about the sheer thrill of watching Chinese startups, saying it reminds them of Silicon Valley in its garage-lab days. Yet it's worth remembering that China's recent supercharged economic growth has not been led by innovative private companies. It's mainly the consequence of a government-directed boom in bank lending, much of it to favored state-owned enterprises.

"If you ask management consultants to list the Chinese companies best known and admired in the outside world, many of them would be in basic industry and infrastructure -- the oil giants CNOOC and Sinopec, for example.

"Don't get me wrong; many of these businesses are world-class. I routinely get better mobile reception in rural China than I do in New York's Westchester County and this from a company, China Mobile, that regularly adds 4 million customers to its roster each month. But at least part of the companies' successes depend on privileged access to capital and their close relationships with China's power structure."

Definitely worth a full read, which you can do here.

HT: Politico's Tim Alberta

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Mark Tapscott

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