Yet China, however haltingly, has begun to develop its own innovative companies, particularly in industries the government has targeted as critical for future growth. CapitalBio Corp., the anchor tenant in the science park outside Beijing, is but one example. Its CEO is Jing Cheng, a 42-year-old returnee from the U.S. who used to run a small biotech firm in San Diego. Started five years ago as a government-funded research organization at Beijing's Tsinghua University, CapitalBio has since morphed into a holding company that has already raised $30 million from domestic venture capitalists and is now raising more from foreign investors. Among other things, it produces biochips, whose applications range from food safety to drug testing. Earlier this year, the government gave CapitalBio the high-profile assignment of screening athletes at the 2008 Beijing Olympics for prohibited substances such as steroids. Corner-cutting athletes beware: in the past, drug testing at the Olympics was random partly because it's a slow and expensive process. But CapitalBio has developed chips containing 16 prohibited substances, which can be overlaid with the samples to be tested. A banned substance in a sample shows up immediately on the chip. As a result, just 25 of CapitalBio's chips are needed to screen 10,000 samples a day. The U.S. scientific journal Nature Methods recently hailed this innovation as "a first step" toward "the advent of systematic and reliable screening for every athlete."

CapitalBio also produces sophisticated laser scanners that can read the results of tests using biochips. Already it has begun selling these scanners abroad—so far, in the U.S. and South Korea, with Europe to follow later this year. Overall, CapitalBio, which employs nearly 300 life-science engineers, expects its revenues to reach $12 million by 2007—up from less than $250,000 in 2003.

What's striking is that, far from ripping off another company's groundbreaking technology, CapitalBio has done all of its R&D in-house and has come up with products and processes that are both innovative and competitively priced. Cheng says its laser scanner undercuts its rivals by 50%. In many ways, CapitalBio represents a template for China's R&D future: just as companies have used China's huge pools of labor to turn the country into the workshop of the world, so too can they take advantage of the nation's enormous supply of cheap but talented engineers and scientists.

And take advantage they are. About half an hour from the science park where CapitalBio's headquarters is located, the scene at the Beijing Genomics Institute could hardly be more different. Instead of working out of a gleaming, glass-sheathed building, Beijing Genomics sits in a dingy, badly lit structure in a 5-year-old industrial park. Nonetheless, it houses 400 researchers, and one of the most powerful nonmilitary supercomputing centers in China. Like CapitalBio, Beijing Genomics started as a pure research organization—it was one of the key players in China's 2001 decoding of the rice genome. Since then, it too has veered into the commercial world, and it's also now poised to benefit from the next big change in medical diagnostics: the rollout of small-scale genetic sequencing kits to hospitals all over the developed world. Industry experts, such as former Harvard director Enriquez, expect gene sequencing to experience a revolution akin to what the PC meant to the computer industry: as the cost of computing drops, more powerful machines will end up in the hands of millions of medical professionals at hospitals, so that they can, for example, "find the genetic background of certain hereditary diseases in a patient, or even infectious diseases like HIV," says Darren Cai, a former Booz Allen Hamilton consultant who is a vice president at Beijing Genomics. "We think this gives us a great opportunity."

Life sciences are not the only area where Chinese research is leading to commercial success. Telecommunications is another, and it's not Chinese companies doing the heavy R&D lifting here but foreign multinationals. In the late 1990s, fear of IP theft in China seemed an insuperable stumbling block. But the explosive growth of China's telecom market and the success of foreign companies like Nokia in tapping it forced their hand. Or rather, the Chinese government forced it. According to Nokia China president David Ho, the government "came to us and said, 'You've been so successful manufacturing in China that it would be good if you increased your R&D effort here.'" Nokia got the message that it should view the country not just as a cheap manufacturing site but as a source of technological expertise. The firm now does 40% of its global R&D for the cell-phone business in its Beijing research center. Just last month, its researchers there unveiled a new system that significantly boosts the speed and capacity of Nokia's cell-phone network to handle huge chunks of data. "In two to three years this market may be Nokia's biggest overall," says Ho. "For us it wouldn't make sense not to do real R&D here."

Because of persistent piracy worries, that's not a faith yet shared by many multinationals. Piracy, skeptics believe, may be the one thing that could derail—or, at least, dent—the economic miracle. Perhaps so, says CapitalBio's Jing Cheng, but not in his industry. Eating his lunch in a cafeteria overlooking the liver-shaped lake, Cheng is the picture of optimism. Because of what's going on in life sciences, he says, "it's very possible that in our lifetimes we'll find a cure for cancer." He pauses, then smiles. "And maybe we'll do it right here in China."

With reporting by Sonja Steptoe/Los Angeles

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