China Prompting Western Creativity

• Author: Nick Bloom, Mirko Draca, and John Van Reenen
• Position: a Professor of Economics at Stanford University and a Research Associate at the Centre for Economic Performance (CEP). is a Research Economist in CEP's productivity and innovation program. is Director of CEP and a professor of economics at the London School of Economics.

When the California high-tech company Eye-Fi introduced a new memory chip in 2005 with built-in wi-fi capability it faced a challenge common to many technology firms: how to take a promising prototype and turn it into a mass-market, low-cost product—and get it to market before its rivals.

Eye-Fi’s solution was an approach that Western firms increasingly are taking in response to the emergence of China as a manufacturing superpower. It used a local California boutique manufacturer to develop prototypes, which Eye-Fi’s engineers refined on an almost daily basis. As demand took off and the product was widely marketed, Eye-Fi moved from low-volume boutique production in the United States to high-volume, low-cost production in China. The high-skill innovation and development took place in the United States, but the lower-skill mass production was moved offshore. As Chinese mass manufacturing increasingly dominates global production, this story is being repeated across the United States, Europe, and Japan.

The stories of Apple’s iPhone and iPad are similar. Both were designed and prototyped in California, then produced in China. Chinese manufacturing competition is increasingly capturing low-skill production while simultaneously fostering high-skill innovation in the West.

This reflects how many Western firms are successfully facing the growing economic power of China. The tenfold increase in China’s share of imports to the United States and Europe between 1987 and 2007 may have cost many low-skilled workers their jobs (see Chart 1). That is the bad news. But as Eye-Fi illustrates, the dramatic surge in Chinese exports to Europe and the United States is good news for the economic prospects of Western economies, which must be based on innovation. Chinese exports have encouraged the best firms in advanced economies to get better, powering the innovations that will provide future growth. Of course not everyone will gain—low-skilled workers in Europe and the United States are suffering as employers switch to more highly skilled employees.

Take footwear, a classic low-tech sector. Under conventional wisdom, shoe production would be totally offshored to a low-cost producer like China or Vietnam. Indeed, many shoe manufacturers in the United States and Europe have disappeared. But some are innovating with designs that serve parts of the market in which China is less able to compete.

For example, Masai Barefoot Technology (MBT), which makes posture-correcting shoes, began when Karl Müller, a Swiss engineer...