This is the way it’s supposed to work: Israel (a tiny country with a world-renowned high-tech sector that isn’t especially competitive in manufacturing) teams up with China (a huge country that’s the world’s factory floor but is a technology laggard). Together we will become a global force, with Israel providing the innovation and China bringing the productive capacity.
It’s a little simplistic and perhaps even patronizing towards the Chinese, but both sides believed it. Not only has Chinese capital gone into Israeli startups: it seems China seemed intent on figuring out how to acquire Israel’s innovation mojo by building joint university campuses.
Now, however, we’re being told that the beautiful friendship isn’t what it was all cracked up to be.
On Thursday, the IVC Research Center released figures showing that China is a “relatively minor player” in Israel’s Startup Nation.
From 2013 to 2015, there was a sudden surge in Chinese investment in Israeli startups. Since then the surge has subsided.
The Chinese have not been major investors in Israeli venture funds, nor have they been big buyers of Israeli tech companies, with the notable exception of Playtika in 2016. Could it be that China realizes it doesn’t need us?
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There are certainly a lot of signs that China is becoming a global tech power using its own brain power. Its biggest tech companies, like Alibaba, Tencent, Baidu, ZTE and Huawei, are near the size of their American and Korean peers. Didi Chuxing administered a humiliating defeat to America’s supposedly unconquerable Uber in the Chinese ride-sharing market.
A cluster of cities in the Guangdong province are emerging as a “Silicon Delta” of innovative startups, venture capital funds and accelerators. A record 1.3 million patents were filed with the Chinese patent office in 2016, double the number filed by U.S. firms in their country. The New York Times recently lamented that China is catching up to the U.S. in artificial intelligence and could become the world’s pacesetter.
My guess is that China’s technology prowess isn’t all it’s cracked up to be.
Take patents. The government encourages Chinese to file with subsidies and incentives that are so attractive that they have even spawned a small industry that helps prisoners file so they can shorten their sentences under a law that takes into account “important technical innovations” for early release.
It’s not that jailbirds are behind surge of Chinese patent applications, but it does suggest that China is excelling at quantity rather than quality. The big revolutions in tech still originate in the United States and get copied by Chinese companies for their home market, which is big enough to make them into giants.
It’s not that China doesn’t have the brainpower. A telling factoid is that China’s population of AI researchers is just 6% the size of America’s, but that figure climbs to 16% if you also count Chinese researchers living and working abroad.
Outside the box, in the lab
Why are so many of China's best and brightest working overseas?
It couldn’t be because of a paucity of resources or lack of demand; the Chinese government is spending quite generously on technology. Rather it’s because the Chinese environment isn’t conducive to innovation. President Xi Jinping may be keen on moving his country up the value chain by encouraging home-grown technology, but he is even more anxious to rein in free thought and expression that could threaten Communist rule.
From Xi’s point of view, it would be nice to have Chinese scientists and engineers thinking out of the box in the lab or opposite their computer but willingly get back into it when it comes to forming and acting on their opinions about politics or other issues. It isn’t going to work and that leaves China with an unsolvable dilemma.
China’s economic achievements over the last 30 years are indisputable, but these were based on low labor costs, easy access to export markets and the rise of a successful entrepreneurial class. But the model is unsustainable, as China’s leaders know, because the pool of cheap labor is gradually running out and ordinary Chinese are coming to expect a middle class life, which you can’t achieve by assembling iPhones.
Moving to the next stage and turning yourself into a tech-led, knowledge-based economy requires a different foundation – particularly personal freedom – but it’s not clear China’s leaders can or will be able to provide it. It’s not so easy to create an environment where people routinely come up with new ideas and turn them into businesses. Even Japan, a more democratic and freer country than China by a wide margin, also struggles to innovate.
So here is where Israel comes in. It’s not as though we alone can become China’s R&D brains, but China certainly needs us. Jack Ma, the legendary founder of Alibaba, will be visiting Israel in May and it won’t be to see the sights