Betting on Artificial Intelligence

China’s AI plan originated at the highest levels of the central government, but China’s ambitious mayors are where the real action takes place.

Following the release of the State Council’s plan, local officials angling for promotion threw themselves into the goal of turning their cities into hubs for AI development. They offered subsidies for research, directed venture-capital “guiding funds” toward AI, purchased the products and services of local AI startups, and set up dozens of special development zones and incubators.

We can see the intricacy of these support policies by zooming in on one city, Nanjing. The capital of Jiangsu province on China’s eastern seaboard, Nanjing is not among the top tier of Chinese cities for startups—those honors go to Beijing, Shenzhen, and Hangzhou. But in a bid to transform Nanjing into an AI hotspot, the city government is pouring vast sums of money and policy resources into attracting AI companies and top talent.

Between 2017 and 2020, the Nanjing Economic and Technological Development Zone plans to put at least 3 billion RMB (around $450 million) into AI development. That money will go toward a dizzying array of AI subsidies and perks, including investments of up to 15 million RMB in local companies, grants of 1 million RMB per company to attract talent, rebates on research expenses of up to 5 million RMB, creation of an AI training institute, government contracts for facial recognition and autonomous robot technology, simplified procedures for registering a company, seed funding and office space for military veterans, free company shuttles, coveted spots at local schools for the children of company executives, and special apartments for employees of AI startups.

And that is all in just one city. Nanjing’s population of 7 million ranks just tenth in China, a country with a hundred cities of more than a million people. This blizzard of government incentives is going on across many of those cities right now, all competing to attract, fund, and empower AI companies. It’s a process of government-accelerated technological development that I’ve witnessed twice in the past decade. Between 2007 and 2017, China went from having zero high-speed rail lines to having more miles of high-speed rail operational than the rest of the world combined. During the “mass innovation and mass entrepreneurship” campaign that began in 2015, a similar flurry of incentives created 6,600 new startup incubators and shifted the national culture around technology startups.

Of course, it’s too early to know the exact results of China’s AI campaign, but if Chinese history is any guide, it is likely to be somewhat inefficient but extremely effective. The sheer scope of financing and speed of deployment almost guarantees that there will be inefficiencies. Government bureaucracies cannot rapidly deploy billions of dollars in investments and subsidies without some amount of waste. There will be dorms for AI employees that will never be inhabited, and investments in startups that will never get off the ground. There will be traditional technology companies that merely rebrand themselves as “AI companies” to rake in subsidies, and AI equipment purchases that simply gather dust in government offices.

But that’s a risk these Chinese government officials are willing to take, a loss they’re willing to absorb in pursuit of a larger goal: brute-forcing the economic and technological upgrading of their cities. The potential upside of that transformation is large enough to warrant making expensive bets on the next big thing. And if the bet doesn’t pan out, the mayors won’t be endlessly pilloried by their opponents for attempting to act on the central government’s wishes.

Contrast that with the political firestorm following big bets gone bad in the United States. After the 2008 financial crisis, President Obama’s stimulus program included plans for government loan guarantees on promising renewable energy projects. It was a program designed to stimulate a stagnant economy but also to facilitate a broader economic and environmental shift toward green energy.

One of the recipients of those loan guarantees was Solyndra, a California solar panel company that initially looked promising but then went bankrupt in 2011. President Obama’s critics quickly turned that failure into one of the most potent political bludgeons of the 2012 presidential election. They hammered the president with millions of dollars in attack ads, criticizing the “wasteful” spending as a symptom of “crony capitalism” and “venture socialism.” Never mind that, on the whole, the loan guarantee program is projected to earn money for the federal government—one high-profile failure was enough to tar the entire enterprise of technological upgrading.

Obama survived the negative onslaught to win another term, but the lessons for American politicians were clear: using government funding to invest in economic and technological upgrades is a risky business. Successes are often ignored, and every misfire becomes fodder for attack ads. It’s far safer to stay out of the messy business of upgrading an economy.

Posted by Dr. Kai-Fu Lee on Jan 08, 2019 in All Posts AI & China

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