INTRODUCTION
Why is it that Portuguese ships appeared on the coast of China in the early 16th century and Chinese ships did not appear on the coast of Portugal? Why did the Industrial Revolution not begin in China? Why did China land on the moon decades after the former Soviet Union? Scientists in China were prolific inventors and world leaders in technological development until the middle of the Ming Dynasty (1368 AD–1644 AD). Why is it that they fell behind? Chinese society was responsible for, famously, four great inventions: the compass, gunpowder, paper, and printing. Less famously, Chinese inventors are attributed the sternpost for sailing ships and drilling for natural gas far inland (to boil water for its residual salt because it was too costly to ship salt from the sea). China was also early in developing a system of organized government, had a high level of agricultural and military advancement, and its use of iron was much greater than Europe's (Lin, Reference Lin2008). Not only in terms of inventions, but also in terms of organizations and applications did China have a head start.Footnote [1] The relative lack of technological development after the Ming Dynasty has been called the ‘Needham Puzzle’, after a British economist and historian who, with colleagues, conducted seminal work cataloguing Chinese contributions to science in the historical period and the sudden fall-off. How might this historical phenomenon affect modern Chinese innovation?
In this paper we discuss how understanding aspects of its history might illuminate how certain institutional, organizational, and psycho-cultural barriers may have affected China's national innovation system in technological innovation, and how China might overcome those barriers.Footnote [2] We do not address any of the grand governmental, institutional, or political issues China faces, but focus on its continuing quest for innovation (Rowen, Hancock, & Miller, Reference Rowen, Hancock and Miller2008). Innovation in modern China involves integrated efforts of the larger innovation ecosystem of business, academia, and government, and it has strengths and weaknesses just like other national innovation systems. Understanding those strengths and weaknesses in terms of their historical, organizational, psycho-cultural, and institutional aspects might help us understand China's future paths toward innovation.
There seems to be evidence that Chinese innovation is different from western innovation; recent work has suggested there are a variety of reasons, ranging from different approaches to R&D, to patent law and legal frameworks, to the role of research institutes in Western versus Chinese society (Gebhardt, Reference Gebhardt2013; Kristensen & Nielsen, Reference Kristensen and Nielsen2013; Liu, Simon, Sun, & Cao, Reference Liu, Simon, Sun and Cao2011; Plechero & Chaminade, Reference Plechero and Chaminade2013). Some suggest – implicitly or explicitly – that the modern Chinese style in innovation may emphasize imitation of existing technologies, at least at the product and process level over innovation (Dobson & Safarian, Reference Dobson and Safarian2008; Xie & Li-Hua, Reference Xie and Li-Hua2009; Xie & White, Reference Xie and White2006; Zhou, Reference Zhou2006). This may be in part due to higher R&D costs and long-term benefits (and short term costs) associated with innovation (Cheung & Lin, Reference Cheung and Lin2004). Doing so may be advantageous at present. But what might seem like doing ‘what seems right’ from a short-term perspective does not mean ‘doing the right thing’ from a long-term organizational and societal point of view. A strategy of imitation rather than innovation, or of exploitation rather than exploration, may have short term advantages in terms of saving on costs and risk taking (March, Reference March1991; Rowen et al., Reference Rowen, Hancock and Miller2008) – but only as long as others are willing and able to bear the costs of innovation.
If one accepts that Chinese organizations may in the short term be better in (and better off) imitating than innovating on a technological basis, it still raises questions: How and why did the Chinese lead in science and technology diminish? Are there historical explanations for the present style of innovation? Is China alone in practicing this style of technological ‘catch-up’? Will Chinese innovators, and the organizations of which they are a part, persist in the present style of innovation through inertia, or will they change their approach to cope with a globalized economic environment?
Efforts to cast light on China's past history of innovation have led to widely varied explanations for China's gap relative to Europe. Some argue that China's increased population and decreased man-to-land ratio led to a decline in the search for value-increasing technological innovations (Lin, Reference Lin2008). Others suggest that China got trapped in a legal structure of weak property rights and low appropriability regimes (Chen, Reference Chen2012; Landes, Reference Landes2006), or that the structural lack of capitalistic institutions and ideas did not provide incentives for continuing innovation (Baark, Reference Baark2007). Some have also pointed to the inherent conservatism in Confucian values to be an underlying force against reforms and economic development, and the structure of family and society providing a system that created and mentored administrators, not innovators (Landes, Reference Landes2006; Nguyen, Reference Nguyen2009; Pye, Reference Pye, Harrison and Huntington2000; Zhou, Reference Zhou2011). Over time, these (and other) factors may have led Chinese organizations to rely on routines for imitation rather than on routines for innovation. And as the routines literature has pointed out since at least March and Simon (Reference March and Simon1958) (Becker, Reference Becker2004), routines are powerful preservers of status quo and often-powerful barriers to change, negative or positive.
This paper examines possible psycho-cultural, organizational, economic, societal, and institutional enablers and barriers to innovation in Chinese organizations, and how they may have changed over time. For innovation – like any other complex organizational issue – is rarely (if ever) the result of just one or two features, but rather a result of complex adaptive processes between institutions, individuals, cultures, societies, and ideas. In particular, the paper will discuss some aspects of what is sometimes called ‘the Needham Puzzle’ and how it relates China's historical and current quest to strengthen its national innovation system.
The hope is not to provide grand answers for how Chinese organizations can become more innovative overnight, but to raise awareness of some of the important historical, psycho-cultural, organizational, societal, and organizational issues which shape an organization's or country's long-term ability to adapt and innovate. These could be easily overlooked if one is too focused on studying the short-term ‘success’ of innovations. The darker side – the importance of failure and the role of creativity – must be encouraged, too, even if its short-term costs often outweigh its benefits (March, Reference March2010). In that sense, we try and integrate insights from organization theory, studies of Chinese business innovation, and insights into the psycho-cultural aspects of Chinese behavior, and how those may influence organizational behaviors (Crozier, Reference Crozier1967).Footnote [3]
The rest of the paper is organized as follows: Section 2 looks into explanations for the Needham puzzle to contextualize the analysis of modern Chinese innovation. Section 3 discusses how the technological gap may influence the modern innovation system. Section 4 discusses the modern Chinese innovation system. Section 5 concludes.
THE NEEDHAM PUZZLE IN CONTEXT
The . . . campaigns being waged in China today are a page in history that has no precedent. Their influence will be confined not solely to China in her present . . . struggle, but will be world wide (Mao, Reference Mao1937).
China led the world in new technological development up through the middle of the Ming Dynasty (mid-17th century). Chinese civilization has been lauded for the ‘four great inventions’: the compass, gunpowder, papermaking, and printing. Chinese scientists not only developed new technologies, but crucial for innovation, applied them in useful ways. For instance, Chinese scientists not only invented gunpowder, but also applied it to warfare: ‘we can trace a rational development of gunpowder from the humble firecracker (known in the sixth century of our era) which was originally employed in religious ceremonies, to the launching of fiery projectiles in warfare as early as the twelfth century, and the full development of fire weapons under the Mongols in the thirteenth and fourteenth centuries’ (Laufer, Reference Laufer1917: x). Chinese utilization of iron was higher than Europe's contemporaneously (Lin, Reference Lin2008). Chinese merchants were involved early in overseas trade and commercial pursuits, which provided imported goods and increased wealth. The Chinese educational system was strong and had diversity, with scholars coming from Confucian, Taoist, and Buddhist traditions serving as tutors in more than 100 private academies, which admitted outstanding students even if they could not pay, promoting intellectual development and scholarship.
With such a strong foundation, why did China fall behind in the development and application of new technology? Why did the Industrial Revolution not begin in China before it began in Europe? China's relative lack of technological progress as compared to Europe has been termed the ‘Needham Puzzle’ after Joseph Needham, a British scientist and historian active in the mid-20th century who conducted significant research on the history of Chinese science. According to Lin (Reference Lin2008), ‘[e]vidence documented in the monumental works of Joseph Needham and his collaborators show that, except in the past 2 or 3 centuries, China had a considerable lead over the Western world in most of the major areas of science and technology’. Needham was a British biochemist who served in the Sino-British Science Cooperation Office in Chongqing, where the Chinese government had withdrawn during the Second World War. While there, he addressed the question posed above: Why, given the great accomplishments of historical China, did the scientific and industrial revolutions occur in Europe? To help answer this question, he sent out teams to collect materials on Chinese inventions and from these have come many volumes written by Needham and his students documenting the many inventions made.
Needham documented his work with a number of Chinese collaborators in a book series called Science and Civilisation in China (Needham, Reference Needham1980). The volumes in this series each had a theme covering a broad scientific area – for example, Volume 4, Part 3 described Civil Engineering and Nautics, while Volume 5, Part 7 described Military Technology: The Gunpowder Epic. Needham and his colleagues’ interests spanned the entire breadth of Chinese technological achievement. What is remarkable is not that Chinese civilization produced such a variety of innovation; but rather, that at some point, the pace of innovation started lagging behind that of Europe, despite China's endowments in human capital and in natural resources. The Chinese great inventions appeared before the era of rapid European technological progress; and for a while, Chinese development and application of technology was at least at parity with Europe.
At some point, there was a divergence. Some scholars have measured divergence in terms of wages and prices and find that China began diverging from Europe on a productivity basis by the 1500s (Broadberry & Gupta, Reference Broadberry and Gupta2006). European scientific advancement arising from the Scientific Revolution (itself a product of the late Renaissance), the proliferation of knowledge through the advent of movable type, and demographic and economic changes arising from the Black Death may have contributed to Europe's scientific advances. These were factors that contributed to the Industrial Revolution and with it, the western world's continued pre-eminence in innovation.
Because most histories of innovations are focused on successes, and on the innovations themselves, it is easy to forget that they do not take place in a vacuum, nor do the hubs of innovations remain the same over time. Before Silicon Valley, there was a hub of innovative activity around New York's IBM, as well as the Boston area (Rosegrant & Lampe, Reference Rosegrant and Lampe1993). The changes that led to the shift towards Silicon Valley as hub for innovation included changes in the markets, technologies, governance, and educational structures conducive to the particular industries. And just as the larger innovation ecosystems are an important factor in modern innovation, so did they play a role in earlier times.
Why Did China Fall Behind in Technological Innovation?
Why did China fall behind in technological innovation relative to western Europe? We identify three possible answers that speak to parts of the Needham Puzzle.
First, we argue that the Chinese did not develop a scientific method like that in the West (Buck, Reference Buck1975; Needham & Wang, Reference Needham and Wang1954; Sivin, Reference Sivin1982). Scientists in the West have historically used deductive logic to spur thinking, but the culture and psychology of Chinese innovators may be different. The notion of efficacy is important. Francois Jullien argues the Chinese definition of efficacy relates more to transformation, inertia, and manipulation than direct action as in the Western context (Jullien, Reference Jullien2004). Chinese innovation leaders may not recognize that radical innovation is truly valuable. Thinking styles may also differ. Weimin argues that a lack of deductive logic led to Chinese emphasis on analogical inference, and because of the emphasis on analogy in logic, there was no basis for the development of theoretical sciences, only ‘purely empirical sciences without theoretical elements’ (Weimin, Reference Weimin2009: 414).
A second characteristic that may have given the West an advantage in technological innovation was its educational diversity. Following are two examples. First, Germany made many scientific contributions during the 19th century, notably in chemistry. However, until 1871 there was no unified Germany; what is now Germany was instead organized as many separate duchies or principalities. Each had a need for ‘ministers’ (of two kinds: clergymen and bureaucrats) and many set up organizations to educate them. It was a competitive environment, and students and scholars could shop around for the best offers (McClelland, Reference McClelland1980). Political diversity therefore led to a proliferation of competing educational institutions. Another example is the system of tertiary education in the United States. It is a highly decentralized system, with strong competition for faculty and students. US tertiary education began with private universities, often established for religious purposes (e.g., Harvard College in 1636), and then the addition of publically-funded state universities. The Land-Grant movement was a key step in this evolution, with the passage of the Morrill Act in 1862 that allocated a portion of public lands in each state for the purpose of higher education (Ross, Reference Ross1969).
In China, by contrast, the culture of state centralized control, originating with the beginning of the Qin dynasty, may have created a barrier to economic, scientific and educational progress (Landes, Reference Landes2006). It included a ‘monopoly on education, jealously guarded’ (Landes, Reference Landes2006: 7), suffocating individual initiative. Authoritarian leadership and, later, Maoist planning emphasized egalitarianism and deemphasized individualism and pluralism at all levels (ranging from cultural to economic). It is hard to see how there could be much room for ‘creativity’ (or any kind of different or deviant thinking necessary for creativity) in the Schumpeterian sense so central for innovation, in a system intended to break down and repress diversity, differentiation, and individual incentives at all levels.Footnote [4]
The organizational tendency towards increasing centralization of government and governance became an inhibitor to innovation, in no small part due to the influence of the Chinese imperial government, which was highly influenced by Confucian philosophy.Footnote [5] The most talented individuals in the system became scholar-officials, taking exams based on Confucian classics in order to obtain appointments to government positions. Although this led to an efficient government comprised of talented scholar-officials, ‘the incentive structure of the system diverted the intelligentsia away from scientific endeavors, especially from the mathematization of hypotheses about nature and controlled experimentation’ (Lin, Reference Lin1995: 284). Freedom to think was discouraged: ‘The imperial order left little space for creativity and innovation, even if it remained favorable to the rapid adoption of techniques developed elsewhere. In order to maintain stability and unity in the Chinese empire, the dominant values were intolerant of “creative destruction” and its attendant principles of free competition’ (Baark, Reference Baark2007: 394).
Confucianism provided the backdrop for much of China's elite education, but ‘when China realized its need to modernize, Confucianism acted as a negative inhibiting China's progression. One of China's attempts of reform was the Self-Strengthening movement in the 1860s. It was based on the notion of preserving the Chinese essence, the Confucian order, while incorporating Western technology’ (Nguyen, Reference Nguyen2009: 33). The inherent conservatism of Confucianism – its desire to maintain stability – could have acted as a disincentive for reform.
Maoist ideas continue to be praised and cited among modern Chinese; courses on Maoist philosophy are a regular requirement in Chinese universities. One of President Xi Jinping's first speeches to the media in 2012 referenced the strength of the Chinese people: ‘It is the people who create history. The masses are the real heroes. . .We deeply understand that the capability of any individual is limited, but as long as we unite as one, there is no difficulty we cannot overcome’.Footnote [6] A society that celebrates the thinking of a leader who opposed individualism may face important additional barriers to nurture creativity and innovation, often the results of deviance. In an evolutionary system, a group needs to have new ideas flowing in to sustain its capabilities and ability to adapt in the long run (Cohen, March, & Olsen, Reference Cohen, March and Olsen1976; March, Reference March1991).
Third, we argue China's relationships with other world powers during the 20th century may have played a role in creating a culture of intellectual isolationism that reinforced the historical and political factors described above. Herbert Simon and an early delegation of Western scientists visiting China in the 1970s mentioned the withdrawal of scientific and technical support by the Soviet Union in the 1960s having led to a strong ‘do it alone’ mentality. Prior to the Chinese-Soviet break, many Chinese engineers and scientists were trained in the Soviet Union at technical universities, with Soviet advisers on-site in many Chinese industrial, scientific, and military facilities. The Soviet withdrawal engendered Chinese feelings of self-reliance and reinforced close links between the Chinese government, industry, and academic institutions like the Chinese Academy of Sciences.Footnote [7] Chinese self-reliance has been well documented in military technologies (e.g., Reed & Stillman, 2009).
THE NEEDHAM PUZZLE AS CAUSE AND EFFECT
Culture, psychology, and technology are related and often embedded in the organizational context. It is not a society or a country that initiates innovation, but the individuals within a society; individuals who are often ‘intellectual outliers’ whose ideas do not fit established disciplinary, functional, or bureaucratic boxes, but whose vision can produce important intellectual and organizational changes. Broad psychological, organizational, and cultural forces that pervade their society condition those individuals. We have identified three historical factors that may have affected individuals’ ability to innovate in China: a different way of approaching scientific thought, a lack of educational diversity and structural inertia, and a lack of openness to the outside world.
Resulting at least in part from these differences, the Chinese approach to the construction and value of knowledge diverges from notions in the West. There are two important points. First, it is likely that these factors, to some extent, persist today. These are not factors that disappear with political or even technological change; they are psycho-cultural factors embedded in all aspects of the Chinese innovation system. Second, these factors may have placed China on a path, early on, toward the exploitation of existing knowledge rather than the exploration for new knowledge. Baark (Reference Baark2007) has argued how learning and knowledge in historical China was associated with ‘exploitation’, in March's (Reference March1991) terminology. Organizations, groups, countries, and societies all face a tradeoff between exploration and exploitation. Exploration involves the discovery of new knowledge, to take risks and defer potential benefits in the interest of exploratory research. Exploitation involves the refinement and elaboration of existing routines and existing knowledge. It is lower risk, may cost less, and can result in more immediate returns. If Chinese society emphasizes exploitation at the expense of exploration, there will be less of an emphasis on technological innovation in the sense of new idea, product, or technology development and implementation. There will be more of a focus on the elaboration of existing ideas (refinement of existing technology) or on conducting low cost search to imitate and implement existing technologies developed by others. Without exploration routines that produce new ideas, there is little opportunity for creative destruction in Schumpeter's sense.
Using March's (Reference March1991) exploration and exploitation framework as inspiration, we summarize some of the implications of innovation and imitation when it comes to key elements in organizations:
If, as we argue above, Chinese scientists approach the creation of knowledge from an exploitation perspective, we would expect Chinese scientific output to be judged to be less innovative. Chinese scientists would spend more time developing technology that would work immediately – in the refinement of existing knowledge. It would be no surprise that Chinese scientists would emphasize imitation; it is low-cost, low-risk, and faster to acquire existing technology and to refine it through an exploitation process, rather than develop an exploration routine to generate truly new knowledge. As a result, China, however successful on the economic front, has not been able to be at the forefront of innovation – despite the national priority innovation has become.
Innovations, Economic Growth, and Organizations
The fundamental impulse that sets and keeps the capitalist engine in motion comes from the consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates (Schumpeter, Reference Schumpeter1942: 83).
China's economic growth has spurred the development of a literature examining the development of innovation systems in Chinese organizations. Innovation is a means to generate growth; innovative firms take market leadership, leaving competitor firms to catch up (Koellinger, Reference Koellinger2008; Klomp & van Leeuwen, Reference Klomp and van Leeuwen2001; Winter, Reference Winter2003). They capture early market share and drive the direction of product or service development. In the organizational and management literature, it is assumed that an advanced economy will become driven largely by innovation. And in the economics literature, (technological) innovation has been recognized as the primer of economic growth since the classical economists such as Alfred Marshall, Adam Smith, and Karl Marx. Marshall, for instance, wrote about inventions and improvements leading to innovations and further new ideas underlying the ‘mysteries of the trade’ (Marshall, Reference Marshall1890).
Table 1. Exploration and exploration and aspects of organizational learning

It has been argued that in China, imitation has been important because ‘relative to utility model and external design, successful discovery of inventions require higher R&D costs and a longer period of time’ (Cheung & Lin, Reference Cheung and Lin2004: 32). For China to sustain economic growth, business organizations will need to develop stronger domestic innovation capacity, unless Chinese firms can continue exploiting the knowledge of innovative firms through knowledge transfer processes, refinement, and exploitation routines.
Innovation, the search for and discovery, development, improvement, adaptation and commercialization of new products, processes and organizational structures, involves uncertainty, trial and error, experimentation, and failures. It is often embedded in organizational, economic, societal structures, and ecosystems, enabling connections between universities, scientific communities, and capital. In the history of most (if not all) modern American innovations, research – basic as well as applied – has been at the core. Abraham Flexner's quest for the ‘usefulness of useless knowledge’ (Flexner, Reference Flexner1939) was not just rhetorical; the pursuit of basic knowledge for its own sake, not for the instrumentalist search for immediate applications, underlies many intellectual and organizational innovations in the context of US research institutions and organizations. Innovation capability, in other words, is not something that a country or an organization can pursue or acquire without attention to the institutional, educational, and socio-cultural factors in which it is embedded – R&D being the driver of at least Schumpeterian-driven innovation. There are elements of chance, luck and even randomness, too.

Figure 1. Illustration: Some factors influencing innovation capability
We have discussed some of the structural factors that serve as barriers to Chinese innovation. These barriers arise from both cultural and structural characteristics of the Chinese innovation system, as well as legacies of China's experience with the Needham paradox and political turmoil during the 20th century. To what extent, however, are these challenges unique to China? Examining how other national innovation systems responded to the same challenges could inform how the Chinese innovation system will address these challenges.
How did the United States’ innovation system develop? As much has been written about this, we focus just on a few aspects.
During the early years of the 20th century, the number of research labs grew dramatically. By World War I there were as many as 100 industrial laboratories in the US and the number tripled during the war. Industrial R&D maintained its growth even during the Depression. R&D activity conducted in laboratories of US businesses and governments increased even further during the Second World War and postwar years – and its important breakthrough included satellites, nuclear weapons, the transistor, electronic computing, and lasers. The innovations were often results of basic research and contributions to knowledge, rather than search for profits – although the desire to win the war and take a national advantage during the Cold War was certainly contributing factors. As Gertner points out with regards to Bell Labs, the creativity and large numbers of innovations were results of the nature of the research there, not pursuit of relevance: ‘Bell Labs cared only about academic research excellence. Bell Labs respected and valued its researchers for their innovation and their contributions to science. Nobody in Bell Labs cared whether or not a research topic was motivated by a business need or was relevant’ (Gertner, Reference Gertner2003: 50).Footnote [8]
Initiatives during the Second World War helped strengthen the role of science in R&D, and ties between science, engineering, and R&D (including projects such as the Manhattan Project, the MIT Radiation Lab, and the Office of Scientific Research and Development). The postwar years also saw further strengthening of the collaboration between scientists, engineers, and social scientists, creating a culture and belief of ‘optimistic urgency’ (Augier, March, & Marshall, Reference Augier, March and Marshall2015) that science and R&D could, and should, help understand important societal problems, such as those related to the Cold War. The RAND Corporation was the exemplar of this type of organization, and it initiated many intellectual developments significant to economics, organization studies and other areas (Augier & March, Reference Augier and March2011; Fortun & Schweber, Reference Fortun and Schweber1993; Geiger, Reference Geiger2004; Ware, Reference Ware2008). It also did pioneering research on the distributed communication networks (leading to the early ARPAnet). The RAND approach – like Bell Labs and others – combined a high degree of intellectual and institutional freedom (and lack of bureaucracy) with a problem-driven and interdisciplinary approach, and a decentralized vision for projects. DARPA also built on this vision, developing also organizational design mechanisms for avoiding the kind of organizational and bureaucratic controls that can hinder intellectual innovations, such as term limits for program managers – to avoid attracting career bureaucrats.
Many larger societal and institutional transformations occurred in the 1960s that would initiate movements and ‘counter cultures’ at different levels. And while some of these counter cultures did lead to other innovations – Steve Jobs is often cited as a product of the 1960s counter culture – it also led to changes in the organization of R&D. A new model of R&D evolved in the 1980s and 1990s with R&D activity becoming decentralized within large organizations themselves. At the same time, transformations in industry structures were also influenced by venture capital-funded start-ups, which depended on R&D and began to fund its development. Larger national, societal and global trends also contributed, leading to the modern example of a prime innovation culture in Silicon Valley (Adams, Reference Adams2011; Etzkowitz, Reference Etzkowitz2013; Klepper Reference Klepper2010). Innovations do not result just from scientific and technological progress, but from a complex interaction of ideas, institutions, and individuals. Key early people in SV include Frederick Terman (engineer and Provost of Stanford), Hewlett and Packard, and William Shockley; institutions include HP, Xerox Park, Stanford, and Apple; and ideas include technologies and products such as semiconductors, printers, and the Internet. A culture of tolerating, even appreciating, failure, and enthusiasm for hard work and sharing new ideas helped produce positive feedback, idea spillovers and other fruitful knowledge sharing exploits and practices. And an industry structure or architecture accommodating these emerged. In the United States, it was a combination of decentralization, cultural willingness to accept failure, and strong innovation ecosystems allowed for individual scientists to pursue their research priorities with support mechanisms, openness to experimentation, and in the context of competition.
In Japan, it was opening that played a key role in revitalizing a nation closed off to the outside world for hundreds of years. The Japanese didn't choose to adopt Western civilization and science. Japan isolated itself in the 1600s when the Tokugawa Shogunate took control. No Europeans, who were seen as potential threats, were allowed into Japan except the Dutch who were permitted one ship a year.
The American Commodore Matthew Perry first visited Japan in 1853, went to the capital, Edo (now Tokyo), and demanded that ports be opened to Americans, that prisoners be treated well and given back, and more. The Japanese rejected his demands and Perry withdrew. Perry returned several months later and told the Japanese that trade must begin soon and that all further negotiations were to be in Edo. The Japanese objected but Perry told them that he would move to Edo and shell the city if necessary.
The Japanese signed the Treaty of Kanagawa in 1854, in which the Japanese promised to save shipwrecked Americans, to provide food, coal, water, and other provisions for the American ships that docked in Nagasaki and then later at Shimoda and Hakodate. It also gave the US permission to build a consulate in Shimoda. They eventually agreed to trade. This ended Japan's two-hundred-year isolation.
The treaty brought in so much foreign money that the currency was disrupted and the inability of the Shogun to end the resulting inflation led to its fall and to the Meiji Restoration with the emperor the daimyo (warlords) returning to power in 1867.
The Treaty of Kanagawa led to Great Britain, Russia, France and the Netherlands signing ‘unequal treaties’ with Japan which granted to foreign nations more rights than to Japan and led to the overthrow of the Shogun. Economic revitalization came at the expense of a reclusive political regime; although both the Japanese and the United States were able to institute an economy based in large part on innovative activity, they were able to use decentralization and openness to do so.
THE ROLE OF COMPETITION AND THE LARGER INSTITUTIONAL CONTEXT
Chinese National Innovation Systems versus Distributed Competition and R&D
As the examples of innovation system evolution indicate, success or failure in innovation is not just about the product and processes being invented. The societal and institutional context for innovation matters a great deal too, as do ideas and individuals. In competitive economies, people and ideas can fail. R&D efforts are less coordinated; there is no sorting out of unpromising projects by a central planner. Markets (within or between organizations) give some screening and natural selection of ideas and of matching people with ideas and projects, but in the process of trial and error, many fail. Charles Hitch, former head of the RAND Economics Department and President of the University of California system, noted how R&D processes lead to ‘occasionally happy and frequent unhappy surprises’ (Hitch, Reference Hitch1958: 4). He mentions how organizations noted for their (post war) innovative research capabilities, such as Bell Labs and Dupont, intentionally decentralized control of research to laboratory levels (Hitch, Reference Hitch1958). Often, he found, innovative research grew out of spontaneous efforts in a very decentralized organizational structure. More recently, Silicon Valley ideas borne out of individual or small group efforts have also had characteristically decentralized aspects.Footnote [9] Accepting such distributed efforts as a framework for encouraging innovation at the national / organizational level necessitates at the individual level an acceptance and tolerance (even embracing) of failure. Thus a necessary, but not sufficient, aspect of the US innovation system is at the individual / psycho-cultural level, a tolerance of failure; at the organizational level, encouraging experimentation and acceptance of deviant ideas; and at the institutional / societal level, decentralization of R&D and basic research with emphasis more on competition than coordination. The larger institutional system and government has set the rules of the road to facilitate decentralization and competition – from education, to immigration and labor laws, to accounting, to business governance, to taxes and securities listings requirements – has been one that nurtured differences, trial and error learning, and hard work.
The Chinese context for innovation is very different at all these levels. At the societal and organizational level, the Chinese government supports its national innovation system through central S&T plans and close work with relevant research institutes, as well as other initiatives, such as funding graduate education for Chinese students abroad. In addition to the emphasis on coordination and central plan, a key architectural or institutional difference compared to the US is the role of the national research institutes and the Chinese Academy of Sciences as a key player in the national research system (and hence, the national efforts to become an innovation nation), especially as universities and society sought to recover after the 1960s and 1970s social upheaval.
The Cultural Revolution influenced and changed dramatically all aspects of society in China. Intellectuals were labeled capitalist roaders and removed from their positions, while a large number of young people were sent to countryside (the ‘rusticated youth’), their education disrupted. Major universities, such as Tsinghua, were for all purposes closed and even after reopening in the 1970s, enrollments stayed low and priorities were changed from emphasis on research and scholarship to practical experience. Even faculty were sent for ‘re-education’ to factories and farms (Cheatham et al., Reference Cheatham, Clark, Holt, Ornstein, Perlis and Simon1973). Emphasis on practical, not academic/scholarly training, together with a strong belief in the values of the revolution (and hence, a larger national goal) led to scientific competencies reached not so much by university education but by workers being involved in ‘sink-or-swim practical effort in relation to well understood and believed-in social goal’ (Cheatham et al., Reference Cheatham, Clark, Holt, Ornstein, Perlis and Simon1973: 12).
Although universities suffered during the revolution, the institutes of the Chinese Academy of Sciences were less affected. Founded in the late 1940s, the Chinese Academy of Sciences survived the Cultural Revolution and other upheavals of the 20th century to become the leader in China's scientific research – government-run labs administered by CAS conducted significant weapons research (including testing nuclear devices) and developed close linkages with civilian universities (Reed & Stillman, 2009).
Herbert Simon, one of the first American scientists to visit China after the Communist government took power, observed in the 1970s that a key to China's development of research in general, and computer science in particular, was precisely the close cooperation between the Chinese academics and the universities (Simon, 1973; Cheatham et al., Reference Cheatham, Clark, Holt, Ornstein, Perlis and Simon1973). They even found that when it came to computer development in China, the universities played a secondary role compared to the institutes of the Chinese Academy of Sciences, many of which were established after the formulation of the 1956 12-year plan for the ‘Development of Science and Technology’ on China (with priority given to fields such as computer technology, automation and remote control), leading to ‘the pattern of combining industrial enterprises with the research and development processes of the institutes and universities’ (Cheatham et al., Reference Cheatham, Clark, Holt, Ornstein, Perlis and Simon1973: 11).
Government also supports the creation of innovation districts. It often develops central S&T plans for the country and then uses those plans as a platform to decide on the allocation of resources to the research institutes (Chang & Shih, Reference Chang and Shih2004: 531). Lu and Lazonick (Reference Lu and Lazonick2001: 56) point to an even more active role of the government in supporting the ‘institutionalization of organizational relations among programs, institutes and enterprises’, effectively injecting the government directly in the development of organizational capabilities as well as their applications. A possible benefit of this from the point of view of the Chinese as a whole is that it may lead to a greater sense of loyalty or what Herbert Simon called ‘organizational identification’ (Simon, Reference Simon1991) – but on a national level. Simon used the term to emphasize that not all individuals are motivated by opportunism or minimizing transaction costs; humans can (and do) have motives that are more altruistic in purpose. Organizations can sometimes cultivate and encourage a higher degree of organizational loyalty and identification that make them more sustainable and less vulnerable to organizational fragmentation. Simon's insights hold true for nations, too. Alexander George observed in his analysis of the organization of the Chinese Army how one of the advantages of the Chinese way of organizing was the greater emphasis on interpersonal ties (guanxi) and that the creation of similar ties within different organizational structures might help group morale, coherence and loyalty (George, Reference George1969). An organization that greatly benefits from national policies and priorities may be more inclined to identify with the values and priorities of that nation, which helps create a greater sense of coherence and common goals. Simon notes that such group loyalty can serve as a ‘powerful altruistic force’, shaping ‘both participants’ goals and the cognitive models they form of their situations’ (Simon, Reference Simon1993: 160).
Table 2. Levels / characteristics of organizational innovation

CONCLUSION
In this paper we have discussed some aspects of innovation and innovative capabilities in China, aspects of Chinese history and some institutional, organizational, and psycho-cultural enablers and barriers to innovation. The Chinese style of innovation has strengths and weaknesses just as most (if not all) other systems do. Understanding those strengths and weaknesses in terms of their organizational, psycho-cultural and institutional aspects may be a step towards understanding the Chinese efforts towards long-term sustainable growth in the future. For students and scholars of organizations and the management of organizational processes, an understanding of Chinese (and other emerging economies) efforts and styles of innovation requires thinking not just through different disciplines or aspects of the innovation process, but also how differences at the cultural and psychological level may influence their organizations and their innovation efforts (Crozier, Reference Crozier1967).
We suggest there are some important aspects of Chinese history and culture that may have led to Chinese scientists emphasizing exploitation over exploration, and that these factors may persist today. Namely, we suggest the lack of a scientific method like that in the west (due to emphasis on analogical versus deductive reasoning), a relative lack of educational diversity or competition, and a lack of openness to the outside world, contributed to creating a relatively myopic worldview where innovation was deemphasized over the refinement of existing knowledge. In contrast to the United States, which developed a thriving innovation ecosystem, China's centralized innovation system may be inhibiting progress.
One thing to keep in mind is that Chinese scientists may not need to become technological innovators. It is possible that the style of imitation is one that fits better culturally and organizationally, at least for the foreseeable future, for several reasons. First, Chinese scientists may not want to ‘prove’ themselves as innovators again; a more incremental approach may be more consistent with the Chinese emphasis on embracing the forces external to them (Jullien, Reference Jullien2004). Pye and Leites noted on the differences between China and the West:
In the West, one's sense of power is linked more to one's capabilities, to the resources one commands, and to one's internal organization, whether physically as an individual or administratively as a group. Desires for benefits from power beyond the control of any actor is seen as faith in the supernatural and as inappropriate in worldly activity. . . . The Chinese method is to do little things so as to benefit from being in tune with big forces, as in the Taoist principle of triumphing by ‘non-effort.’ This Taoist concept of the weak self conquering by being in harmony with the external force, the Tao, is matched by the Confucian notion that if one adheres completely to the ‘right rules of conduct’ one gains infinite power. The locus of power in both cases is external to self. (Pye & Leites, Reference Pye and Leites1982: 1149–1150)
Applied to Chinese style in innovation, this insight into the psycho-cultural differences in perceptions of power may help understand why some Chinese businesses differ in how they engage in foreign direct investment, for instance.
Second, as organization scholars have pointed out, innovation usually involves many failures, or at least an embrace of the idea of failure. March has even appealed to seeing innovation as resulting from the kind of ‘teenage delinquency’ or ‘disobedience’ that can also easily lead to trouble (March, 2014); but the point is, innovators need to break free from existing structures, try new things, fail, and learn from failures. Organizationally and psychologically, the centrality of failure may be less appealing to the Chinese researcher that – although embracing of ambiguity – emphasizes a desire for perfection and low tolerance for failures especially amongst its youth (Pye & Leites, Reference Pye and Leites1982).
As a society, if China does not embrace some element of tolerance for failure or playfulness in ideas, it will have a hard time cultivating the kind of creativity underlying innovations (successful or not). From Picasso to Michelangelo to Steve Jobs, one has to keep trying in the face of failure, to experiment and be foolish. Although failing is not in itself fun and it takes tenacity to move on in the face of failure, Western children often learn humor as a way of coping with failures. Humor can encourage one to keep trying, and give some perspective on things, but some Chinese view ‘silliness’ as something to be laughed at, not learned from (Pye & Leites, Reference Pye and Leites1982: 1151–1152). In the West, people learn through experimentation and trial and error; even the mistakes and unintended results are parts of the process of creating long-term variation. In China, practice is means to eliminate mistakes and to achieve perfection (Pye & Leites, Reference Pye and Leites1982: 1153).
Finally, at the societal level, there is still a larger structural and political argument that looms and that may influence some of the elements discussed above. As has been debated since at least Lipset (Reference Lipset1959), some degree of political pluralism seems to be a necessary, although not sufficient, ingredient in long-term economic growth. We may modify that to say that some degree of political pluralism, in addition to organizational and institutional decentralization, economic competition, and a psycho-cultural acceptance of failures and trial and error learning, may be necessary if China seeks to achieve the kind of innovation-driven growth that US and many democracies have experienced. If not, China's march toward becoming an innovation nation and to ‘solve’ the Needham paradox may be even longer, and require China itself to imitate not just inventions, processes and products, but societal organizing principles too.Footnote [10]