Promoting Innovation in China: Lessons from International Good Practice
Over the last decade, China has become one of the rising stars of global innovation. It spends more than 2.2 percent of GDP on R&D, above the average for the European Union, is a global leader in domestic patents, and has developed ground-breaking advances in key sectors such as high-speed trains, e-commerce and mobile payments. An increasing number of Chinese firms are at the global technology frontier. The Chinese government considers innovation to be one of the key drivers of its future growth and convergence with more developed countries.
But will this be enough for China to become a global innovation champion and join the ranks of a narrow group of countries, which are the principal contributors to the world’s technological knowledge? And will increased investment in science, technology and innovation help stem the decline in the growth of total factor productivity (TFP), which fell sharply from 2.7 percent in the early 2000s to only 1.1 percent in 2008–2017, and promote the post-Covid-19 economic recovery?
To achieve this, as argued in a new paper on “Promoting Innovation in China: Lessons from International Good Practice”, China might need to undertake additional reforms to address the existing shortfalls in its national innovation system and ensure that innovation enhances productivity. There is a need to improve the quality of patents, invest more in basic research and ensure that public support to innovation is better targeted, based on strong performance incentives and monitoring. In addition, China could make greater efforts to support technology diffusion and accelerate upgrading of management practices. Lastly, China would do well to continue to support an open innovation system which has contributed to its economic and technological successes over the past decades.
An open innovation system is indeed key to promote the absorption diffusion and development of new technologies. By restoring the earlier rates of high productivity growth, China could more easily meet its two centenary goals and offset the diminishing returns from additional public investment and the gradual decline in the size of the labor force.
In many ways China seems to have come to a crossroads in its development based on absorbing foreign technology and participating in the open global innovation system. It could be argued that to date, China has been able to gain from the open global innovation system, while protecting its key strategic industries, progressing with indigenization of technologies and taking steps toward becoming technologically autonomous. These two goals may become increasingly incompatible, especially as China is no longer perceived as a “developing country” and as many of its industries, companies and regions (especially at the coast) are seen to be closing in on the global technology frontier. By dismantling the barriers that shelter some domestic firms from foreign multinationals, China would in one stroke stimulate the incentive to innovate on the part of Chinese enterprises, boost their productivity by enhancing market competition and eliminate a major source of friction with its trading partners. Developments during the past few years indicate that China’s partial opening has outlived its utility. An industrially mature China, which recognizes the advantages globalization confers, can confidently match the openness of the advanced economies.
What can China do to keep the global innovation system open and continue to benefit from the global technological progress? While some developments are driven by exogenous factors that China cannot control, there is much that China could do on its own.
First, it would be in China’s interest to continue to strengthen international norms that govern international economic relationships and promote dialogue. China could help these efforts by fully aligning itself with WTO rules and other international norms such as the OECD competitive neutrality principles on treatment of SOEs, reducing non-tariff barriers to trade and strengthening enforcement mechanisms.
Second, China could “lead the world by example” by fully opening its markets, ensuring a level-playing field for all companies, including for private and foreign-owned companies, strengthening effective IP protection, and making public support policies transparent. All these measures would not only help reinvigorate the growth of the domestic economy, including that of the private sector, but at the same time also lessen other nations’ fears of an “unequal playing field” and thus help keep the global innovation system open.
Third, China could further promote global cooperation on science and innovation. This could include mechanisms to increase investment in international collaboration in basic research on global public goods (such a green technologies, medicines and others), open Chinese research projects to foreign applicants and expand support for interfirm, business–science, and international cooperation in research and patents. The recent decision of the government to allow foreign researchers to lead publicly funded R&D programs is a step in the right direction.
Finally, China might reconsider its indigenizing policies to capture as much of the manufacturing value chain as possible. Some technological autonomy is desirable for a major economic power, as with technology development catering to major infrastructure projects heavily oriented to a large domestic market, such as high-speed rail. But much like import substitution carried to an extreme, it can rapidly become counterproductive, a waste of resources spent in rediscovering known technologies, and break down trust and collaboration with other countries—aside from potentially triggering trade disputes and discouraging FDI. A win-win solution could be to engage other countries in China’s efforts to develop new technologies, including core technologies, and ensure that other countries do not see China as a country that aims to monopolize the commanding heights of global innovation.
Will China become a global innovation champion? It is too early to tell but taking decisive measures to mitigate the existing challenges to the national innovation system, including by learning from international good practices, and keeping the global innovation system open would be a right way to start.
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