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Cooperative Nudging or Emerging Power Struggle? State-Business Relations in China’s AI Development

Updated: Jul 9, 2021

Baidu Headquarters © simone.brunozzi / CC BY-SA 2.0 / Wikimedia Commons

Emerging technologies will play a major role in great power competitions in the 21st century. As a consequence, countries across the globe are engaging in efforts to speed up their domestic development of artificial intelligence (AI). In 2017, China showed its ambition to become a world leader in AI technology through the “New Generation Artificial Intelligence Plan'' (henceforth: 2017 AI Plan). Long-term industrial policies and innovation plans of this kind are by no means something new in China. However, what makes this plan especially interesting is that the key players in AI research and development (R&D) are actually mostly non-state-owned enterprises. Given these novel circumstances, which role does the state play in China’s AI development and how does it relate to the business actors in the field? This piece will briefly introduce the academic literature on the role of the state in Chinese industrial policy planning over the previous decades. It will then use a range of evidence from academia, media reports, and think tanks to show that new frameworks are needed to understand the relationship between business and state in China’s AI innovation in more recent years.

Since adopting the economic reform policy in 1978, industrial upgrading has always been at the core of China’s political and economic agenda. However, the methods adopted to achieve innovation have changed over the years. While most technology was acquired from foreign investors in the first period of economic reform, focus shifted towards domestic R&D in the 2000s, resulting in a more nationalist outlook of industrial policy (Naughton, 2018, pp. 344-56). Since then, Chinese R&D intensity (R&D expenditure as percentage of GDP) has increased steadily and is now on par with the EU average of around 2.1% (Eurostat 2020). Not only is the amount of investment in R&D noteworthy, but also its specific target: the so-called strategic emerging technologies. The rationale behind this is the belief that new technologies offer an opportunity for sudden, “leapfrog” catch-up with leading countries that would not be possible with conventional technology (Roberts et al., 2020, p. 5).

The extent to which the Chinese state directly controlled the development of these technologies depended on the strategic importance of the industry in question. Mattlin (2009) provides a framework based on three different categories of strategic relevance. Firstly, there are “strategic and key industries” that entail all industries with direct connection to national security. R&D in these industries would be executed by enterprises that are 100% state-owned and supervised by the “State-Owned Assets Supervision and Administration Commission” (SASAC). Secondly, there are “basic and pillar industries” that entail industries with implications for the wider economy, such as base metals or chemicals. State ownership in these industries would be reduced, but nevertheless substantial. All other industries belong to the third category. These “other industries” would generally be left to the private sector, although there would obviously still be some degree of surveillance by the state.

Mattlin (2009) himself considered IT and software to belong to the category of ‘Basic and Pillar Industries’. However, there is plenty of evidence that nowadays China sees IT and artificial intelligence as having key national security implications. For example, Allen (2019, p. 3) demonstrates that the CCP leadership unanimously considers AI to be crucial for great power competition. This is also directly reflected in the 2017 AI Plan which contains the term “national security” a total of eight times (Chinese State Council, 2017). The reason why AI plays such an important role in China’s grand strategy is again the idea of “leapfrog” development. It may be hard for China to catch up with the US army in terms of conventional military capabilities, yet, in areas like espionage or cyber-attacks, a sudden breakthrough might lead to a quick catch-up (Fritz, 2008). Apart from international competition, the Chinese state also sees AI as an important tool for securing social stability and surveillance at home (Roberts et al., 2020, p. 7). In Mattlin’s framework, this would mean that AI develo