Does China need to innovate?

The dismissal of a Chinese academic for falsifying chip research left the nations’ tech developers with a bit of egg on their face. After a new, domestically produced chip was revealed to be nothing more than a Freescale Semiconductor product with a slight makeover, China’s ability to innovate is being called into question.

I don’t care too much about China’s ability to innovate. My question is, does it need to innovate? Why bother?

Readers in Palo Alto and Mountain View just clicked away to read about Barry Bonds. Who doesn’t need to innovate, they snarl. But the fact is, we live in a different world now. When Queen Victoria’s East India Company was the paramount mercantile power in the world, the countries that supplied raw materials couldn’t afford to buy the finished products. But that time is long gone, and nations like China now have the ability to make products not only for export, but for domestic consumption also.

For those of you just emerging from a cave or convent, China is now the factory floor for a huge number of the world’s products, IT gear included. China’s done such a good job of learning how to make products to specification cheaply that consumers, especially in North America, take for granted that the jacket or CAT5 cable has a “made in China” label stuck on it somewhere. Where would Wal-Mart Stores be without inexpensive, durable goods from China? Where do you think that ridiculous trade deficit between China and the U.S. came from?

So is innovation an advantage China needs to have? Its attempts to create internationally accepted technology standards — either to avoid paying royalties to foreign patent holders or to gain a seat at the international standards bargaining table — have been mostly fruitless. If China were successful in creating its own chip, what would that really accomplish? A wholesale shift in worldwide semiconductor production and use?

This is really about whether advantage lies with the first- or second-mover. Look at Microsoft. When was the last time they were first to market with anything? Game consoles, social networking, instant messaging — they let someone else do it first, then relied on their financial might and promotional muscle to enter the market. Has it worked for them? Look at their market cap.

Before it bought IBM’s PC division, Lenovo Group did reasonably well shipping computers in China and Asia, but had little overseas presence. Now, they’re a contender. Rather than spend a ton of money on research and development, wouldn’t Chinese companies be better off saving their shekels and buying, rather than building?

Matters of national pride certainly enter into the discussion, and considering the number of top scientists and engineers who were born in China, wanting brainpower to blossom at home is entirely reasonable. Cashed up with North American sales, overseas public offerings, and guaranteed loans from state-run banks, the biggest challenge for Chinese companies with global aspirations may be identifying the right companies to buy, not innovating on home soil.