China’s impressive economic growth over the last three decades and increasing political influence and military capabilities have caused people around the world to wonder or worry about how China will use its new-found power. More specifically, they wonder whether, and how, China might attempt to transform the international system that has enabled it to become the world’s second largest economy and potential contender for global leadership.

Thomas Fingar, the Oksenberg-Rohlen Distinguished Fellow at Stanford’s Freeman Spogli Institute for International Studies, addressed these and related questions during the Walter H. Shorenstein Asia-Pacific Research Center’s annual Oksenberg Lecture on May 22. 

After describing how China has benefitted from participation in the liberal order led and maintained by the United States, Fingar argued that China has neither the will nor the ability to lead or transform the existing system, and that its continued “rise” will increase its stake in the system and make it even less willing to seek changes that could jeopardize its own success. He also suggested that other nations benefitting from the existing order would constrain China from attempting radical change even if it wanted to.

Following Fingar’s remarks, Jia Qingguo, associate dean of the School of International Studies at Peking University, said it is important to recognize that China is in the midst of a major transition. It is both a developed and a developing country, he said.

Thomas Christensen, director of Princeton University’s China and the World Program, added that due to China’s weight in the world, it will be called on more and more to collaborate on critical global issues, such as climate change and disease.

Fingar’s keynote remarks drew on “China's Vision of World Order,” a chapter published in Strategic Asia 2012–13: China's Military Challenge (National Bureau for Asian Research), as well as Shorenstein APARC’s research initiative on China’s interactions with its neighbors.

Since 2002, Shorenstein APARC has held the Oksenberg Lecture Series as a tribute to the legacy of Michel Oksenberg, a pioneer in the field of Chinese politics and an important force in shaping American attitudes toward China.

An audio podcast of the May 22 event is available on the Shorenstein APARC website.

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Dr. Moretti's book, The New Geography of Jobs, was described by Forbes magazine as “easily the most important read of 2012.”

Americans frequently debate why wages are growing for the college-educated but declining for those with less education. What is less well-known is that communities and local labor markets are also diverging economically at an accelerating rate.

A closer look at the 300-plus metropolitan areas of the United States shows that Americans with high school degrees who work in communities dominated by innovative industries actually make more, on average, than the college graduates working in communities dominated by manufacturing industries, according to research by University of California, Berkeley economist Enrico Moretti, the author of The New Geography of Jobs, a book that Forbes magazine called “easily the most important read of 2012.” In the San Jose metropolitan area, for example, a high school graduate averages $68,009, compared with the $65,411 that is average for a college graduate in Bakersfield, Calif.

Some places have always been more prosperous than others, but these differences have increased more rapidly over the last 30 years as the gross domestic product and patents for new technologies have concentrated in two to three dozen communities that Moretti identifies as “brain hubs” or “innovation clusters.”

In these clusters, highly specialized innovation workers, such as engineers and designers, generate about three times as many local jobs for service workers ― such as doctors, carpenters, and waitresses ― as do manufacturing workers, Moretti said recently when speaking at Stanford Graduate School of Business. Here are edited excerpts from Moretti’s answers to questions from the Stanford audience.

What causes clusters to emerge?

This is a very active area of research, but I think fundamentally, there are three major reasons why clustering takes place. One is the thick labor market effect. If you are in a very highly specialized position, you want to be in a labor market where there are a lot of employers looking for workers, and a lot of workers looking for employers. The match between employer and employee tends to be more productive, more creative and innovative in thicker labor markets.

It is the same thing for the vendors, the providers of intermediate services. Companies in the Silicon Valley will find very specialized IP lawyers, lab services, and shipping services that focus on that niche of the industry. And because they are so specialized, they're particularly good at what they're doing.

The third factor is what economists call human capital spillovers ― the fact that people learn from their colleagues, random encounters in a coffee shop, at a party, from their children, and so on. There's a lot of sociological evidence that this is one of the attractions of Silicon Valley. You're always near other people who are at the frontier, so you tend to exchange information. Sometimes it's information about job openings. Sometimes it’s information about what you're doing, what type of technology you're adopting, what type of research you are doing. And this, as you can imagine, is important for R&D, for innovation.

So these three forces are crucial, and that means that localities that already have a lot of innovation tend to attract even more workers and even more employers. That further strengthens their virtuous circle.

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Dr. Enrico Moretti leading a seminar organized by the Stanford Program on Regions of Innovation and Entrepreneurship (SPRIE) of the Stanford Graduate School of Business as part of its Silicon Valley Project.

Are these clusters sustainable forever?

Probably not. Previous clusters have collapsed in spectacular ways. The Silicon Valley of the 1950s was Detroit. People have researched the rise of Detroit, and it mimics very well the rise of Silicon Valley in terms of the amount of innovation, the type of engineering, the type of salaries they were paying. In the 1950s, if you were a car engineer, there wasn't any better place in the world to be, and if you were a car company, you had to be there. But then, of course, it collapsed.

In my book, I have a chapter on the difference between Detroit and Silicon Valley. This region has kept reinventing itself in ways that are remarkable. It was all orchards, and then it became all hardware, and then it became all software. And now it's becoming something else: social media and biotech and clean tech. Some types of clusters don't survive big negative shocks, and other clusters are able to leverage themselves into the next thing.

Is there a clean energy cluster that is structurally different from an internet or an IT or a biotech cluster? Or are they all intermingled?

Typically, clusters are very specialized. Silicon Valley is the exception in the sense that there are so many different technologies. More typical examples are Boise, Idaho, for radio technology or Portland, Oregon, for semiconductors. Seattle has a combination of software and now a growing body of life sciences. Boston is mostly life science. D.C. is a remarkable story. It's very diversified now in terms of private-sector innovation, but most clusters are going to be small pockets of one industry.

Does your argument hold for high-paid but non-high-tech sectors? I was thinking of New York being a financial sector or L.A. being entertainment, and Houston being oil and gas. Then you mentioned Washington, D.C. That's government.

I would argue that three you mentioned would belong to what I define as innovation sectors in the following sense: Finance in New York is not bank tellers; it’s people who invent new products, new technology, and new ways of making things. They are unique, and you can't easily reproduce the cluster somewhere else. That certainly applies to entertainment, especially the digital part of entertainment that is the fastest-growing part of entertainment jobs.

It also applies to the D.C. cluster. The growth of D.C. over the last 20 years is mostly driven by private-sector headquarters moving there, and an educated labor force. Some of the companies are military contractors. Some companies are life science. They're anchored by the National Institutes of Health being there, and other government agencies. But most of the growth actually comes from the private sector.

Now oil, Houston, I'm not sure. I don't know how strong these clustering forces are for these type of jobs. I would imagine ― and we're not talking about the guy who drills, but it's more like the guy who plans where to drill ― to the extent that there is a high component of innovation that makes something that is unique, I would say it applies.

If I'm a high-tech worker, how am I responsible for creating five other jobs? It’s hard for me to accept there are five.

The way to interpret the multiplier is to imagine dropping 1,000 innovation jobs in one city but not in another, and then going back 10 years later to measure how many additional local service jobs there are in the city that experienced that innovation-sector drop of jobs. So it's a long-run effect, but it’s not impossible for three reasons.

One is that the average high-tech worker tends to do very, very well, and people who are wealthy tend to spend a large fraction of their salary on personal and local services. They tend to go to restaurants and movies, and to use taxis and therapists and doctors on average more than people who are paid less.

The second reason is high-tech companies themselves employ a lot of local services; everything from security guards to IP lawyers, from the janitor to the very specialized consultant. High-tech companies tend to use more services than manufacturing companies.

The third reason is the clustering effect. Once you attract one of those high-tech workers, then in the medium to long run, you're going to be attracting even more of those high-tech workers and companies, which will further increase your multiplier. So it's a long-run number, measured over a 10-year period.

You pointed out that the salaries of the less-educated part of the local population are higher in those places that do have a lot of the innovation. How is that reconciled with the drastic drop over 30 years in their national average compensation?

We don't have enough brain hubs where innovation is concentrated. We have 320 metro areas in the U.S., and probably, by my definition, we have 15 to 20 brain hubs. In those places, you have brisk job creation outside the innovation sector, and you have decent wages for people outside. But we also have a big chunk of the country producing not very much, in part because manufacturing jobs have been shrinking, and innovation hasn't really taken place.

So what hope is there for these areas?

That's a million-dollar question. It's tough because, in some sense, if this clustering effect is particularly strong, it's good news for places like here, but it's terrible news for places like Flint or Detroit. A successful local labor market has a very nice equilibrium, where you have a lot of skilled workers who want to go there and a lot of innovative employers who want to go there. It's really hard to re-create somewhere else.

And it's not like we're not trying. We're spending $15 to $18 billion annually in what economists call place-based policies, which are essentially subsidies to try to attract employers to these areas. The idea being: “They're not coming, so if we just break this vicious circle, if we just bring some, then the clustering effect starts taking off. We can effectively create innovation hubs where they don't exist.”

I haven't found one example of an innovation hub in the U.S. that has been created by deliberate policy that says, "We're going to create an innovation hub here." Taiwan might be a good success story. It’s hard to get data, but Taiwan was an agricultural economy in the 1960s that had very little innovation. Then in the 1970s, it created enormous government subsidies for semiconductors and a lot of other technologies. All the others didn't pan out, but semiconductors worked. Taiwan is still putting money in, so it's not exactly clear whether it's a perfect example. Picking the next big thing is very hard for the venture capitalist. It's virtually impossible for the government worker.

What's the situation in other regions around the world ?

Obviously, India and China are major success stories, but that doesn't mean that this clustering effect is not at play within those countries. A different example is Italy, where I am from. Italy has been the Detroit in this story. It had a very strong pharmaceutical sector in the 1980s, and a smaller computer cluster. Once the pharmaceutical industry started becoming global, you saw mergers and a concentration of the industry’s R&D in a few places. I know because my dad was employed there, and his lab was first moved to Sweden and then to New Jersey.

I think the same is happening throughout many countries in continental Europe, and even in places like China and India, which have success stories but enormous regional differences. The innovative part of the Chinese economy is concentrated in a handful of megalopolises.

This is an interesting paradox of the current economy. Probably the best news of the last 20 years globally is the vast increase in the standard of living in places like China and India and Brazil, so there's certainly been a convergence in the standard of living when you compare nations. But when you look within those developing nations, you see the same great divergence that you see here.

Professor Enrico Moretti

Kathleen O'Toole is a journalist who frequently writes about social science. She is currently assistant editorial director of marketing and communications at the Stanford Graduate School of Business.

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REAP Co-Director Scott Rozelle recently spoke at a Lung Yingtai Cultural Foundation (龍應台文化基金會) event about China and the middle income trap. Using the contrasting experiences of South Korea and Mexico as a guide, Rozelle provided a glimpse into the economic ramifications of allowing the gap between rural and urban education in China to grow wider. Read the CommonWealth Magazine article in Chinese here.

Universities in China have been urged to enroll more students from rural areas in a major effort to close the gap between rural and urban higher education. The Chinese government announced at a State Council Standing Committee meeting on May 15th, the decision to increase the quota of students from poor rural areas attending key universities from 10,000 to 30,000 this year. The Rural Education Action Program has submitted official policy briefs to the State Council in support of this and other long-term policies to improve the education level of rural students, and continues to partner with policymakers across China to close the rural-urban education gap. Read more about the announcement on the Pheonix New Media website in Chinese here.

Jack Ma, the founder of Alibaba Group,made his last public speech before stepping down as CEO at an event co-hosted by Alibaba Group and the Stanford Program on Regions of Innovation and Entrepreneurship (SPRIE) of the Graduate School of Business at Stanford University on May 4. Dr. Jian Wang, the company’s chief technology officer, was also a featured speaker at the event, which was put on in partnership with the Greater China Business Club of the Stanford Graduate School of Business.

“No Silicon Valley, No Alibaba”

Ma began his talk by acknowledging how his Silicon Valley days encouraged him to pursue a career as an internet entrepreneur: “The street lights in Silicon Valley and the late night conversations in restaurants energized me.” Inspired by the tech boom, Ma returned to his hometown of Hangzhou to follow his dream in the mid-1990s.

At first Ma faced lots of skepticism, as people did not believe that e-commerce would be successful in China where a credit system had not been developed so consumers didn’t have access to the credit cards that made conducting transactions online so easy in the U.S. Despite the initial setbacks, Ma built Alibaba into one of the largest internet companies in China.

“No Money, No Technology, and No Plan”

These are the three reasons that Ma offered for Alibaba’s success. When he first arrived in Hangzhou, Ma was an English teacher with limited wealth and resources, but he had a vision of creating a company that would “make it easy to do business anywhere in the world.” He and his cash-strapped team thought carefully about the most innovative and cost-effective ways to build the business of their dreams.

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Ma stated that “he doesn’t make plans,” explaining Alibaba's constant readiness to adapt to technological advances. Since Alibaba’s inception, Ma always encouraged his employees to embrace change. Ma advised business students not to stick to their business plans, as the world is fast changing and effective global leaders must know how to manage the fast turnover of technology and the turn of events.

China in the Next 30 Years

China will experience tremendous changes in the next 30 years. The Chinese economy will transition from the selling to the world to selling to a major domestic consumer market. Technology will play an even more important role as it continues to touch almost every aspect of people’s lives. Additionally, mobile will potentially become a bigger market than PCs in China. The next wave of mobile penetration will come from the second and third-tier cities that have relatively low computer penetration rates.

“But change creates opportunities for ordinary people like you and me,” noted Ma. The significant changes in China will offer young people opportunities to shine as technology has leveled the playing field.

Once in your life, try something. Work hard at something. Try to change. Nothing bad can happen.
    -- Jack Ma, Founder & Executive Chairman, Alibaba GroupIt is against this transformative context that Alibaba will continue to stay true to its original mission— making doing businesses easy anywhere in the world, Ma stated. For example, Alibaba’s SME-loans business aims to finance private enterprises that historically faced difficulties raising capital. Alibaba cloud computing service (AliCloud) is another example of the company’s products that will influence China’s digitization, according to CTO Jian Wang. AliCloud has already made contributions to the broadcasts of 2012 London Olympics and the official digital catalogue of drugs in China, Wang noted.

“In the industrial age, winning was determined by size and depth; in the information and technology era, it is ruled by innovation and individualism,” Ma argued.

As Ma concluded his talk, he shared his final insights with the assembled Stanford students and Silicon Valley professionals: “Once in your life, try something. Work hard at something. Try to change. Nothing bad can happen.”

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Dr. Jian Wang, Alibaba’s CTO and the first keynote speaker, opened his speech with a discussion of Alibaba’s technology. Alibaba Group currently operates one of China’s largest online marketplaces, a payment network, and is also producing a mobile OS. Due to its scale, the company faces challenges few others do: Alibaba has processed over 100 million transactions and nearly 60% of the internet’s fraudulent websites have been discovered through the company’s tools. Alibaba also maintains a cloud computing service. What makes Dr. Wang most excited, however, is Aliloans—the company’s foray into finance. “The smallest loan made has been one yuan,” he announced excitedly, “and we do it on credit!” This is a big step in a country where it has traditionally been difficult for ordinary people to secure a loan.

After Dr. Wang’s speech, Founder and CEO Jack Ma took to the stage to discuss Alibaba from a less technical perspective. “Why did we survive the internet bubble and grow to become the company we are today?” he asked the audience. His answer: “Because first, we didn’t have money; second, I don’t understand technology; and finally, I never planned.” Elaborating on his management style, he explained that a lack of money forced the company to be scrappy in its early days; because he couldn’t understand technology, Mr. Ma wasn’t prone to micromanaging his engineers; and finally, because he never confined himself to business plans, Mr. Ma was able to take advantage of unforeseen changes. As he put it, a business plan for a website in 1999 that connected Chinese manufacturers with Western buyers would never have included starting China’s equivalent to eBay or creating a financial-services unit.

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Dr. Jian Wang, Alibaba Group's CTO, spoke at the event.

“We live in an epic era, both the best of times and the worst of times,” he commented. “In order to change the world, one needs an idea and the ability to execute on it; but execution isn’t enough, and competition is harsh. Success comes from living at the right time, having good friends, and luck.” Responding to the question of how to build a good company culture, he responded that there’s no such thing as a “good” culture; only a culture that fits certain kinds of people. “It’s like the relationship between a husband and wife.” That said, he mentioned his belief that Alibaba is different from other big-name technology companies because of an emphasis on learning. Alibaba doesn’t necessarily hire the best and brightest, but those most willing to learn about things outside their area of expertise.

In the week after securing a US $8 billion loan and announcing a US $586 million investment in Sina Weibo, Mr. Ma came across as relaxed and optimistic. Though he claimed to be “too old for the internet” and will step down from his role as CEO shortly, Mr. Ma ended his speech by inviting the audience to consider working in China, even if it’s not at Alibaba, and most importantly, to “enjoy life and be healthy.”