The U.S.-China divergence: Korea’s Schumpeterian Solution

Eun Jong-hak

The author is a professor of Chinese political economy at Kookmin University.

Joseph Schumpeter (1883—1950), born the year Karl Marx (1818—1883) passed away, is a towering figure in innovation economics. He integrated concepts such as creative destruction and technological innovation into economic thought, concepts that remain as relevant as ever.

Unlike Marxists, Schumpeter did not hastily interpret declining profit rates as an inevitable sign of capitalism’s collapse. Instead, he foresaw that such conditions could lead to creative destruction and spur innovation.

Schumpeter’s perspective evolved over time. In his early work “The Theory of Economic Development” (1911), he championed the daring and creative entrepreneur as the driving force of innovation. Later, in “Capitalism, Socialism, and Democracy” (1942), he argued that large corporate organizations with research and development (R&D) centers would spearhead innovation. His students labeled these phases ‘Schumpeter I’ and ‘Schumpeter II,’ respectively.

Many have selectively cited Schumpeter I and II to suit their arguments while ignoring an inconvenient truth—Schumpeter ultimately predicted capitalism’s demise. He warned that innovation would become routinized within bureaucratic structures, leading to automation, impersonality, and the diminishing role of the bold entrepreneur, culminating in capitalism’s eventual decline. While this was a bleak forecast for the United States, it was not necessarily a boon for China either, as Schumpeter envisioned socialism not as a vibrant system but as one devoid of dynamism and vitality.

Schumpeter’s blind spot: The platform economy

If there was one thing Schumpeter, who passed away 75 years ago, did not foresee, it was the advent of the platform economy. In addition to large corporations with powerful R&D centers, small startups have also emerged as key players in innovation. I have termed this phase ‘Schumpeter III’ (Eun Jong-hak, 2021). Today, both the United States and China face what I call the “Schumpeterian Challenge”: What kind of society will they evolve into after passing through the Schumpeter I, II, and III phases? How will they sustain dynamism and vitality?

With the maturity of the Schumpeter III phase—the platform economy—the United States and China have taken divergent paths in addressing monopoly issues inherent to platforms. Because platform economies benefit from economies of scale, monopolies are almost inevitable. This has forced both nations to decide how to regulate them.

Chinese President Xi Jinping has chosen to strengthen party-state control over platform companies and partially socialize these enterprises, absorbing monopolistic concerns within the system while advancing the transition to socialism. In contrast, the United States has struggled with a policy dilemma. From a market liberalist perspective, it is difficult to support monopolistic platform giants, yet from a national interest standpoint, these companies are indispensable, creating a policy conundrum. 

America’s bid to revive entrepreneurial spirit

However, Trump’s second-term administration has sought to reinvigorate the economy. The administration has launched large-scale projects such as the $500 billion “Stargate Project” to expand domestic artificial intelligence (AI) infrastructure and plans for Mars and space exploration, encouraging major corporations to embark on ambitious ventures. This approach seeks to merge Schumpeter II’s corporate R&D dominance with Schumpeter I’s entrepreneurial dynamism.

Yet, just days into this strategy, a surprise from China disrupted America’s footing. Hangzhou-based startup DeepSeek released lightweight AI models, V3 and R1, which proved nearly as capable as the high-cost AI models developed by American tech giants. DeepSeek also made its source codes publicly available, undermining the closed-source, high-profit strategy of American Big Tech.

DeepSeek’s 1985-born founder, Liang Wenfeng, was invited to a Politburo Standing Committee meeting chaired by Premier Li Qiang in late January. By mid-February, he was shaking hands with Xi Jinping at a private-sector roundtable at the Great Hall of the People, catapulting him to hero status in China. While reminiscent of the libertarian innovators who transformed the United States by opening up ARPANET to create the internet, Liang is a patriotic figure who operates within, rather than against, state control.

The role of platforms and the state in DeepSeek’s success

Founded in 2023, DeepSeek was able to counter U.S. Big Tech thanks to support from China’s platform giants like Alibaba and Tencent, as well as backing from the government. However, its significance lies in how it shattered the belief that only massive infrastructure investments and cutting-edge technology determine success. Instead, it demonstrated the power of “frugal innovation” (F.I.), which thrives on minimal input and delivers good enough solutions to the market. Amid U.S. technological restrictions, China has proven that even “appropriate technology” (A.T.)—not necessarily the best, but the most viable—can yield meaningful results. This challenges the United State’s premium innovation strategy with China’s FIAT (Frugal Innovation and Appropriate Technology) approach.

China will likely continue its push for “scientific and technological self-reliance and self-strengthening.” Facing U.S. technology restrictions, China sees homegrown technological solutions as essential for its future negotiating power with the United States.

Notably, China’s recent all-in approach to science and technology marks a departure from its decades-long Schumpeterian trajectory. In its place, China is reviving Karl Marx. The recently emphasized concept of “new quality productive forces” is infused with Marx’s historical materialism, which argues that the development of productive forces shapes the mode of production. Contrary to naive interpretations, this is not just about improving productivity; it signifies China’s aspiration to develop production relations that surpass capitalism—essentially, socialism. In this sense, China is regressing to a pre-Schumpeterian era.

Korea must chart its own course

As the United States and China diverge—one merging Schumpeter I and II, the other reverting to Marx—where should Korea position itself?

One thing is clear: Korea cannot and should not simply copy the U.S. or Chinese models. If Korea merely echoes calls for an all-in approach to science and technology in response to China’s advancements, it would be a sign that it has lost its own way.

Science and technology alone will no longer secure Korea’s competitive edge over China. China’s increasingly controlled society paradoxically offers unparalleled freedom for scientific research, attracting both capital and talent. Scientific progress does not inherently require democracy or freedom—Japan’s scientific boom during its imperial expansion proves this. Moreover, China’s R&D budget dwarfs Korea’s entire national budget, making it impossible for Korea’s science sector to compete alone.

Korea’s edge lies in its social, cultural, and ideological flexibility. Rather than chasing China’s technology spending, Korea should leverage its soft factors—creative design, service integration, and cultural ingenuity—to enhance its industries and foster new growth sectors. Just as Chinese startups now prioritize designers as co-founders, recognizing the model popularized by Steve Jobs and Xiaomi, Korea should integrate soft factors into national industrial policy, regional planning, and corporate strategy.

Schumpeter’s key concept was not just “innovation” but “new combinations.” He repeatedly emphasized that innovation is not solely driven by science and technology. In navigating this era of U.S.-China divergence and technological dominance, Korea must see beyond science and technology to carve out a distinct and competitive future. That is Korea’s Schumpeterian Challenge.

Translated using generative AI and edited by Korea JoongAng Daily staff.