China Rising: Competition: But Can China Innovate?

So far, China's economic miracle has come on familiar terrain: low wages and a charge up the manufacturing food chain, resulting in surging exports and rising incomes. But to meet the growing expectations of the Chinese people, the government will need to move from an economy that makes goods more cheaply for the rest of the world to one that makes goods the world hasn't even thought of.

Jing Cheng, 42, is at the cusp of that effort. Like an increasing number of other Chinese scientists and engineers, the CEO of CapitalBio Corp. has returned from the U.S., where he ran a small biotech company in San Diego, to pursue opportunities at home. An offshoot of Beijing's Tsinghua University (often called the M.I.T. of China), CapitalBio is among an élite group of Chinese life-sciences companies and research institutes. At the Beijing Genomics Institute researchers have decoded the rice genome and worked to find a cure for SARS. CapitalBio has already shown it also plays on the world stage. Awarded the contract to test athletes for banned substances at the 2008 Beijing Olympics, CapitalBio has designed a new chip that can screen as many as 10,000 samples a day (compared with just a few hundred under current methods). The scientific journal Nature Methods has hailed that as "a first step [toward] the advent of systematic, reliable screening for every athlete."

Given such success, it may seem ludicrous to ask, Can China innovate? The country produces four times as many engineers as the U.S., and its spending on basic R&D is accelerating smartly. What's to stop innovation from breaking out all over? Skeptics have a ready answer: theft of intellectual property. Innovation depends on the value of ideas being protected, so the entrepreneur with a technological breakthrough reaps the rewards--not "six guys down the street who've stolen it," says Jim Hemerling, senior vice president of Boston Consulting Group in Shanghai. In the past two years, companies from General Motors to Sony to Cisco have complained about intellectual-property theft. China's State Intellectual Property Office invalidated Pfizer's patent protection on Viagra last summer, arguing that the drug failed to fulfill the novelty requirement under Chinese law. Like many other multinationals, Pfizer is now cautious about expanding its R&D work in China. Unless Beijing gets a grip on "ownership issues," says Anne Stevenson-Yang, director of the U.S. Information Technology Office in Beijing, China's ability to become a technological superpower will be limited.

Perhaps so, says Jing Cheng, but not in his industry. Eating lunch by a man-made lake in the shape of a human liver, Cheng says the potential in his business is boundless: "It's very possible that in our lifetimes we'll find a cure for cancer." He pauses and then smiles. "And maybe we'll do it right here in China." --By Bill Powell/Beijing and Sonja Steptoe/Los Angeles