Two good new articles--Evan Osnos in the New Yorker and Shai Oster in Wall Street Journal-- address the question of China’s innovative capabilities in green technologies. Both come out at about the same point, one that I am highly sympathetic to (and, shameless plug, make in my forthcoming book). Essentially, China is excelling at bringing the price down of a number of important technologies used for solar, coal, and wind, but breakthrough, cutting-edge innovations are rare.
This is not to say that they are not coming, though I think that it is several decades off and is in many ways more a political and cultural issue than an economic one. But China right now is doing very well at process innovation, bringing the price down on given designs, and not so well at product innovation, or new-to-the-world products. For China, economically that may not matter very much. China has had a historic run of growth the last three decades with very little science-based innovation. And as Osnos and Oster note, in 2004, Chinese wind-turbine firms only had 20 percent of the domestic market, and now they have 75 percent. This puts a great deal of pressure on Western firms since they have to keep moving up the value chain at a much higher speed than they have in the past.
The threat to China, and one that conflicts with the goal of "indigenous innovation" (discussed here), is, again noted by Osnos and by Dan Rosen in Oster’s article, ruthless price competition and oversupply. This is what seems to have happened in the motorcycle industry. The Chinese lowered the price on Japanese designs, but profits and R&D expenditures dropped precipitously in tandem with prices, according to research done by scholars at the Manufacturing Management Research Center at the University of Tokyo . The large Chinese motorcycle manufactures have been unable to develop their own engines and or new models and therefore have not been able to move into the higher value markets.