So there's the root of the problem: because employers don't expect anything better, the true stars (and there are plenty) get paid the same as the useless trolls who sit at their desk and play warcraft, and are not given the freedom to express their considerable talents. And their hiring companies continue to churn out the same dumb crap until they're out-manoeuvred by China. Here's the funny thing: when we were describing our job offer to potential employees, we told them the position had great scope for self-improvement and they would be pretty much in charge of their own work. They were absolutely terrified. As our (Taiwanese) agent gently explained to me afterwards, what they really wanted was to settle into a comfy chair in a big anonymous office and learn nothing else for the rest of their lives.
I think you are spot on with almost all your observations. Lazy and less talented employees know they can coast in a noncompetitive environment, and so they do. It’s a very different work environment from the west because managers in Taiwan and China place a high emphasis on harmony in the workplace (I’d say they rate harmony as second place, behind profit but ahead of quality and safety.)
Western companies, of course are often very competitive and there’s nothing that cheers up a bored manager faster than a good catfight between two workers. Whereas a western manager would gain respect for intervening and settling a workplace dispute, Chinese-style management emphasizes never letting things get ugly in the first place. The only way Chinese managers can do this is to overlook perceived differences among employees and treat them the same, regardless of ability and work ethic.