University of South Carolina Business Professor Michael Murphree discussed China’s potential to innovate as part of a economics seminar series on Friday.

The series is hosted by the economics departments at both the Virginia Military Institute and Washington and Lee University.

Murphree said that after moving to China in 2004 as an unemployed graduate student, he was offered an opportunity to go back to China to answer the question, “Can China innovate?”

“Of course they cannot,” Murphree said he initially answered.

Murphree studied the city of Dongguan in China’s Guangdong Province to start to look beyond his initial answer.

“Dongguan was the fastest growing city, in the fastest growing region, of the fastest growing province, in the fastest growing country in the world,” Murphree said.

Murphree said he knew that if he could better understand what the city was doing wrong and what they are doing right, he could determine if China could innovate.

During its boom era, the Dongguan economy flourished and created a government that was flushed with cash. However, in 2008, 10,000 factories went bankrupt.

“Three million workers were made redundant in three months,” Murphree said. “People assumed that China has had ups and downs before and believed that they could recover.”

After interviewing Chinese businesses, Murphree recognized that the industrial economy seemed to be contracting severely.

“Young Chinese your age are voracious consumers, [but] they are also very picky consumers,” Murphree said.

Murphree said this generation has created a strong market today. China knows now they cannot rely on other countries to juice their growth. Currently, imports are down which shows that domestically they are producing more and are becoming stronger.

“What can Dongguan teach us?” Murphree asked.

Murphree said the city of Dongguan relies on electronics and exporting. Cellphone provider Nokia was centered in Dongguan and helped fortify the city’s economy.

When Nokia crashed, Dongguan crashed. Murphree said the city was able to overcome the crash by learning the importance of automation, industrial clustering, managerial adaption and innovation.

Murphree gave an example of automation through the production of laptops which once used workers to screw in its screws now uses robots.

He showed an image of what appeared to be apartment buildings, but was instead clustered factories, to explain industrial clustering. He said industrial cleaning can be highly beneficial to an economy.

“It allows you to call another factory and find all the pieces you need so that anything can be built,”

Murphree said. Managerial adaptation allows the country to adapt to company’s going out of business and keeps costs low even as labor prices rise.

Finally, Dongguan has been able to use its innovation to lower barriers to entry for businesses.

As far as where China should go from its current state, Murphree said the country should look toward Dongguan.

“If they follow the Dongguan model, there is hope through clustering and research and development targeting,” Murphree said.