Hangzhou, China

One of the standard lines about China’s economy is that the Chinese are good at copying, but they could never invent a Hula-Hoop. It’s not in their DNA, we are told, and their rote education system reinforces that tendency. I’m wondering about that: How is it that a people who invented papermaking, gunpowder, fireworks and the magnetic compass suddenly only became capable of assembling iPods? I’m wondering if what’s missing in China today is not a culture of innovation but something more basic: trust.

When there is trust in society, sustainable innovation happens because people feel safe and enabled to take risks and make the long-term commitments needed to innovate. When there is trust, people are willing to share their ideas and collaborate on each other’s inventions without fear of having their creations stolen. The biggest thing preventing modern China from becoming an innovation society, which is imperative if it hopes to keep raising incomes, is that it remains a very low-trust society.
I’ve been struck at how many Chinese businesspeople and investors have volunteered that point to me this week. China is caught in a gap between its old social structure of villages and families, which created its own form of trust, and a new system based on the rule of law and an independent judiciary. The Communist Party destroyed the first but has yet to build the second because it would mean ceding the party’s arbitrary powers. So China has a huge trust deficit.

To see what happens when you introduce just a little more trust in this society, spend a day, as I just did, participating in the “AliFest” — the annual gathering of thousands of Chinese entrepreneurs who are linked together in the giant Chinese e-commerce Web site Alibaba.com. Founded in 1999, Alibaba says its sales this year could top eBay and Amazon.com combined. This happened, in part, because it has built trusted, credible markets of buyers and sellers inside China, connecting consumers, inventors and manufacturers who would have found it hard to do transactions before.

Alibaba has three major businesses: Taobao.com and Tmall.com, which together constitute a giant online marketplace where anyone in the world can go to buy or sell anything — from Procter & Gamble selling toothpaste to Chinese companies offering their engineering prowess. The Tao companies this year are expected to move some $150 billion in merchandise between buyers and sellers, mostly in China.

The second is Alibaba.com, where, if you want to make rubber sandals that play “The Star Spangled Banner,” you click on Alibaba and it will link you with dozens of Chinese shoemakers that will compete for your business.

And, lastly, there is Alipay, a Chinese version of PayPal that can enable, for example, a small Chinese manufacturer in the hinterland to sell its goods to a Chinese consumer in Shanghai. The buyer puts his money in escrow with Alibaba and it is released to the seller only when the buyer says he got the goods he ordered. Presto: trust. What has been the impact? There are more than 500 million Chinese Taobao users and 600 million Alipay accounts.

While here in Hangzhou, I visited the workshop of Robert Luo, the president of Classic-Maxim, a firm he started to make kitschy wall art for hotels, using foreign designs. Luo used to drum up sales by flying to trade shows, but, in 2006, he got a huge American order through the Alibaba platform, enabling him to greatly expand his business. He has since shifted from doing outsourced artwork for others to hiring Chinese and foreign artists to produce his own original designs. “We design so much now” — outdoor art, solar art — and “we’ve applied for so many U.S. patents,” he said.

There are two trends to watch from all this: One, argued Ming Zeng, Alibaba’s chief strategist, is that Alibaba — which now serves more than 100 million consumers daily, through 6.5 million retail shops connected to 20 million manufacturers — is, in effect, creating “a virtual combination industrial park and online marketplace,” where anyone in China or abroad can come to invent, collaborate or buy and sell goods or services.

Alibaba, Zeng predicted, will eventually connect in some way with Facebook, Amazon, eBay, Apple, Baidu, LinkedIn and others to create a giant trusted virtual “global commercial grid,” where individuals and companies will offer their talents and buy and sell products, designs and inventions.

Eventually, Zeng argued, “every individual will have to find a way to succeed” on this global grid. “National boundaries will offer you no protection.”

The other trend is that the Chinese will be big players on this grid. The creation of global trusted business frameworks like Alibaba is starting to enable a new generation of Chinese innovators — who are low cost, but high skilled — to extend their reach. We’ve seen cheap labor out of China; now we’re going to see more cheap genius.

Which is why Phillip Brown and Hugh Lauder, in a recent essay on Eurozine.com, argued that a big shift of the global labor market is under way, in which “many of the things we thought could only be done in the West can now be done anywhere in the world, not only more cheaply but sometimes better.”