Innovation and the Visible Hand: China, Indigenous Innovation, and the Role of Government Procurement

Innovation and the Visible Hand: China, Indigenous
Indigenous innovation has become the greatest immediate source of economic friction between the United States and China. Yet despite concerns over protectionism, the global trend toward “homegrown” innovation is a healthy, positive development.
Related Media and Tools

Indigenous innovation has become the greatest immediate source of economic friction between the United States and China. This trend is not unique to these two countries; policy makers globally are actively trying to stimulate domestic innovation. The burgeoning markets for biotech and environment-related products and services and, potentially even more important, countries’ efforts to emerge from the global economic slowdown all reinforce this trend. Mindful of this global scene, China has made indigenous innovation one of the core elements of its attempt to make a structural shift up the industrial value chain.

Recently, however, indigenous innovation has been tarred with a protectionist brush. In both China and the United States, there have been increasing calls for buy-local stipulations and the erection of tariffs and non-tariff barriers to trade. In China, these measures primarily take the shape of government “local content” mandates and through the preferential treatment given to products officially classified as “national indigenous innovation products” (NIIP) in the government procurement process. In the United States, they have taken the form of buy-local provisions and efforts to shut out foreign companies. The conflict has been escalating dangerously. In the run-up to the recent Strategic and Economic Dialogue, the U.S. business community ranked indigenous innovation in China as its number one policy concern, above even the currency issue. As of this writing, the key points of contention remain unresolved.

Yet despite the loud cries of protest against it, the global trend toward “homegrown” innovation is a healthy, positive development. Without innovation, countries cannot continually raise wages and living standards. Government procurement should play an important role in stimulating innovation, but maintaining open markets and international linkages is critical. But instead of following its current approach of short-term product substitution and picking winners by protecting them from competition, China should focus on proven, market-friendly ways of stimulating innovation. Government procurement’s primary roles should be market signaling, de-risking R&D, bridging the finance gap, and stimulating demand. The United States would also benefit by refocusing its government procurement policies along the lines indicated in the key findings of this paper, especially concentrating on facilitating more open markets and elevating the importance of sustainable procurement.

The following set of specific recommendations for China will stimulate innovation through open markets and the effective use of government procurement:

  • Become a signatory to the World Trade Organization’s Agreement on Government Procurement (GPA) in order to build a solid system that can legally incorporate certain mechanisms that stimulate indigenous innovation while keeping markets open. China should follow through on commitments made during the most recent Strategic and Economic Dialogue by submitting a revised application that is robust and in line with international best practices.
  • Clarify the scope of the government procurement law
  • Strengthen China’s intellectual property rights (IPR) regime so as to encourage innovative solutions being brought to the government
  • De-couple NIIP and government procurement, both nationally and locally.
  • Include in government procurement teams experts who know how to make the government an “intelligent customer”
  • Improve the governance and transparency of national and local procurement entities
  • Create national-level sustainable procurement guidelines (but not product lists) for key product areas (energy, transportation, construction, IT, chemicals) in order to mandate quality and performance levels connected with national goals in the areas of climate and sustainable development

Finally the United States and China could lead by example by working to form a joint sustainable procurement agreement. This will not only increase innovation in both countries; it will also increase overall technological progress worldwide.

End of document

About the Energy and Climate Program

The Carnegie Energy and Climate Program engages global experts working on issues relating to energy technology, environmental science, and political economy to develop practical solutions for policymakers around the world. The program aims to provide the leadership and the policy framework necessary to minimize the risks that stem from global climate change and to reduce competition for scarce resources.


In Fact



of the Chinese general public

believe their country should share a global leadership role.


of Indian parliamentarians

have criminal cases pending against them.


charter schools in the United States

are linked to Turkey’s Gülen movement.


thousand tons of chemical weapons

are in North Korea’s possession.


of import tariffs

among Chile, Colombia, Mexico, and Peru have been eliminated.


trillion a year

is unaccounted for in official Chinese income statistics.


of GDP in oil-exporting Arab countries

comes from the mining sector.


of Europeans and Turks

are opposed to intervention in Syria.


of Russian exports to China

are hydrocarbons; machinery accounts for less than 1%.


of undiscovered oil

is in the Arctic.


U.S. government shutdowns

occurred between 1976 and 1996.


of Ukrainians

want an “international economic union” with the EU.


million electric bicycles

are used in Chinese cities.


of the world’s energy supply

is consumed by cities.


of today’s oils

require unconventional extraction techniques.


of the world's population

will reside in cities by 2050.


of Syria’s population

is expected to be displaced by the end of 2013.


of the U.S. economy

is consumed by healthcare.


of Brazilian protesters

learned about a massive rally via Facebook or Twitter.


million cases pending

in India’s judicial system.

1 in 3


now needs urgent assistance.


political parties

contested India’s last national elections.


of Egypt's labor force

works in the private sector.


of oil consumed in the United States

is for the transportation sector.


of Chechnya’s pre-1994 population

has fled to different parts of the world.


of oil consumed in China

was from foreign sources in 2012.


billion in goods and services

traded between the United States and China in 2012.


billion in foreign investment and oil revenue

have been lost by Iran because of its nuclear program.


increase in China’s GDP per capita

between 1972 and today.


billion have been spent

to complete the Bushehr nuclear reactor in Iran.


of Iran’s electricity needs

is all the Bushehr nuclear reactor provides.



were imprisoned in Turkey as of August 2012 according to the OSCE.

Stay in the Know

Enter your email address to receive the latest Carnegie analysis in your inbox!

Personal Information
Carnegie Endowment for International Peace
1779 Massachusetts Avenue NW Washington, DC 20036-2103 Phone: 202 483 7600 Fax: 202 483 1840
Please note...

You are leaving the website for the Carnegie-Tsinghua Center for Global Policy and entering a website for another of Carnegie's global centers.