DeepSeek part 2: An Outlier in China’s AI Innovation Ecosystem

DeepSeek's success shouldn't be understood as emerging because of China’s innovation system but in spite of it.

I didn't think I'd find myself writing about DeepSeek two weeks in a row (see part 1 here), but as someone studying innovation in China and the U.S. in comparative perspective, several colleagues have asked for my take on the company and how it is that China managed to produce such a competitive AI company—especially given export controls on GPUs and the fact that the company's small team is entirely local. So, I thought I'd use this week's post to write up some of my thoughts on this during CNY (Happy New Year!)

Jonah and the Whale (1621) by Pieter Lastman (also a good illustration of DeepSeek eating Sam Altman)

An Outlier in China's Innovation Landscape

I've seen many recent takes that frame DeepSeek as evidence that China's innovation system is thriving. If we count any innovation that originates from a Chinese firm as part of China's innovation system, then I suppose this is true.

However, I think this framing is a misreading of the situation. Unlike the rise of China's electric vehicles, batteries, or even solar PV, DeepSeek is neither a state-led project nor a direct beneficiary of China’s AI-focused industrial policies. In this way, it’s an outlier, not a representative case, within China’s innovation ecosystem. The fact that the company was self-funded by a former hedge fund manager and emerged from the periphery of China’s tech landscape rather than from the country’s established AI giants like Baidu or Tencent is a testament to this point.

Asking how China’s innovation system produced DeepSeek is, therefore, the wrong question. DeepSeek’s success arose not because of China’s innovation system but, in many ways, in spite of it. Here, I’ll highlight three important ways in which DeepSeek diverges from the innovation model of China's tech sector.

1. Human capital

The first way DeepSeek diverges from China’s conventional innovation model is through its approach to human capital. Unlike many of China’s tech giants, DeepSeek has built an all-local team, breaking from the industry's long-standing reliance on foreign talent and international networks to drive innovation.

Since the 2000s, China’s ICT sector has been heavily shaped by its ability to tap into global expertise. Many of the country’s early tech founders were educated or spent significant time in the U.S., and firms like Alibaba, ByteDance, and Tencent have recruited extensively from Silicon Valley, often prioritizing candidates with U.S. experience to fill key technical roles. In the generative AI era, this trend has only intensified, with these companies establishing R&D offices in Silicon Valley to attract top-tier talent.

By hiring only local talent, however, DeepSeek has taken a radically different approach. Moreover, the company’s all-local team was built by identifying and nurturing high-potential, young individuals rather than relying on established AI experts or big-name hires. This contrasts with state-backed firms like Zhipu, whose recruiting strategy has been to poach high-profile seasoned industry recruits—such as former Microsoft and Alibaba veteran Hu Yunhua—to bolster its credibility and increase the transfer of technical expertise from incumbents.

By betting on emerging talent rather than established stars, DeepSeek has demonstrated that innovation can thrive without relying on the traditional pathways of technology transfer through human capital.

2. Operating from the periphery

DeepSeek’s funding and corporate governance structure is equally unconventional. Unlike many of its peers, the company didn’t rely on state-backed initiatives or investments from tech incumbents. Instead, its former hedge fund founder personally bankrolled the company, allowing it to operate independently of the constraints often associated with state or corporate funding.

Once again, let's contrast this with the Chinese AI startup, Zhipu. Zhipu is not only state-backed but has also secured substantial funding from China’s tech giants, including Tencent and Alibaba—both of which are designated by China’s State Council as key members of the "national AI teams." In this way, Zhipu represents the mainstream of China’s innovation ecosystem—it is closely tied to both state institutions and industry heavyweights.

DeepSeek, by comparison, has remained on the periphery, carving out a path free from the institutional expectations and rigid frameworks that often accompany mainstream scrutiny. Its funding model—self-financed by its founder rather than reliant on state or corporate backing—has allowed the company to operate with a level of autonomy rarely seen in China’s tech sector.

3. Labor practices

Finally, DeepSeek’s divergence from the standard Chinese innovation model is perhaps most evident in its labor practices. China’s tech industry is infamous for its “996” work culture—9 a.m. to 9 p.m., six days a week—and hierarchical, top-down management systems that prioritize efficiency over creativity and leaves little room for individual autonomy.

Because of DeepSeek's periphery status, it has avoided the rigid structures and draconian practices that characterize many of its peers. Instead, the company fosters a culture of collaboration and innovation. Employees are encouraged to take ownership of their work and contribute ideas freely, creating a culture of innovation that thrives on agility and creativity. In last week's post, I explored DeepSeek's labor practices in more detail and explained how it has contributed to the company's ability to outpace the industry.

In these ways, DeepSeek’s success is not a testament to China’s broader innovation system but rather a result of its ability to break free from it—eschewing state support, foreign reliance, and rigid workplace hierarchies. Rather than serving as evidence that China’s broader innovation ecosystem is working, the company underscores the need for alternative models that challenge traditional innovation norms in China.

Technology Transfer vs. Indigenous Innovation: Where Does DeepSeek Fit?

This brings us to a larger question: how does DeepSeek’s success fit into ongoing debates about Chinese innovation? And how must we update our perspectives on Chinese innovation to account for DeepSeek?

The debate around Chinese innovation often flip-flops between two starkly opposing views: China is doomed versus China is the next technology superpower. This back and forth, which we often see play out in popular media, can make understanding Chinese innovation utterly opaque to the casual reader. As I see it, this divide is about a fundamental disagreement on the source of China’s growth—whether it relies on technology transfer from advanced economies or thrives on its indigenous ability to innovate and upgrade.

Those who believe China’s success depends on access to foreign technology would argue that in today’s fragmented, nationalist economic climate—especially under a Trump administration willing to disrupt global value chains—China faces an existential risk of being cut off from critical modern technologies. From this perspective, China’s growth is driven by an innovation system designed to maximize the absorption of foreign technical know-how. So, isolation from the West would deal a devastating blow to the country's ability to innovate.

On the other hand, those who believe Chinese growth stems from the country’s ability to cultivate indigenous capabilities would see Trump's technology bans, sanctions, tariffs, and other barriers as accelerants rather than obstacles to Chinese growth. In this view, such restrictions compel Chinese firms to innovate, upgrade, and develop homegrown technological solutions, ultimately strengthening China’s self-reliance and long-term competitiveness.

So far, this debate has primarily unfolded in the context of advanced manufacturing sectors, from solar PV to batteries and, most recently, electric vehicles (EVs). In the early stages, particularly during the U.S.-China trade wars of Trump’s first presidency, the technology transfer perspective was dominant. The prevailing theory was that Chinese firms needed to first acquire fundamental technologies from the West, leveraging this know-how to scale up production and outcompete global rivals. And so, the initial restrictions placed on Chinese firms were seen as a major blow to China's trajectory. However, China’s dominance in both batteries and EV production has shifted the narrative to the indigenous innovation perspective, with local R&D and homegrown technological advancements now seen as the primary drivers of Chinese competitiveness.

When it comes to China’s tech industry, most scholarship still portrays the success of its tech sector as a result of technology transfer rather than indigenous innovation. Part of the reason is that tech and AI are highly technical and require vastly different types of input: human capital and (in the case of AI) compute infrastructure—two factors in which China has historically been weaker. Accordingly, China’s ICT sector has since the 2000s been shaped by its ability to tap into global networks, with firms like Alibaba, Tencent, and Baidu building their success on the back of foreign technical know-how. MIT Professor Huang Yasheng makes a similar point, attributing the rise of China's tech sector to the many collaborations it has had with other countries. This reliance on international networks has been especially pronounced in the generative AI era, where Chinese tech giants have lagged behind their Western counterparts and depended on foreign talent to catch up.

This is where DeepSeek diverges from the traditional technology transfer model that has long defined China's tech sector. Instead of relying on foreign-trained experts or international R&D networks, DeepSeek’s exclusive use of local talent signifies that China now has the indigenous capacity to innovate in this domain. Much like its advancements in solar PV manufacturing, batteries, and electric vehicles, DeepSeek symbolizes a critical turning point in tech/AI: China is no longer merely playing catch-up but is now competing on equal footing with the leading innovators in the West.

The exception or the rule?

While I hope this contrasting perspective of technology transfer vs indigenous innovation is a helpful way to think about China's innovation system, I must admit that it is also a bit of a false dichotomy. As development economists would remind us, virtually all technology is transferred to latecomers rather than reinvented from scratch each time. This transferred technology then serves as the foundation for further innovation. In this way, technology transfer and indigenous innovation are not mutually exclusive but parts of the same sequential progression. First, technology must be transferred to and absorbed by latecomers; only then can they innovate and create breakthroughs of their own.

This brings me to my last point. If we are to claim that China has the indigenous capabilities to develop frontier AI models, then China's innovation model must be able to replicate the conditions underlying DeepSeek's success. Yet, as I've already established, DeepSeek is an outlier of China's innovation model. Unlike solar PV manufacturers, EV makers, or Zhipu, the company also received no direct state support. In fact, its success was facilitated, in large part, by operating on the periphery, free from the draconian labor practices, hierarchical management structures, and state-driven priorities that define China’s mainstream innovation ecosystem.

Whether China’s tech industry can overhaul its approach to labor relations, corporate governance, and management practices to enable more firms to innovate in AI remains an open question. While DeepSeek makes it look like China has secured a solid foothold in the future of AI, it would be premature to claim that DeepSeek’s success validates China’s innovation system as a whole. The real test lies in whether the mainstream, state-supported ecosystem can evolve to nurture more companies like DeepSeek—or whether such firms will remain rare exceptions. The answer to this will define the long-term competitiveness of China’s AI firms.