Can China be an innovation powerhouse?

China has made great strides toward innovation and technology-driven economy in recent years. There are many firms that are emerging as global players in the technology arena, especially in the ICT sector, such as Lenovo, Huawei, ZTE, Tencent and Xiaomi (which has shaken the legendary smart phone makers – Apple and Samsung – through its disruptive innovation). There are even some world-class competitors in the automotive sector, such as BYD and Geely. China has also become one of the few global players in such technologies as high-speed trains and passenger aircraft: China recently won several international bids for high-speed train projects, and on November 2 in Shanghai it demonstrated its first home-grown large passenger jet, the C919.
 
China’s R&D spending had risen to more than 2 percent of GDP by 2013 (see Table 1) and 2.1 percent in 2014 by estimation, which is above the average of the European Union countries, and China’s target is 2.5 percent by 2020. Its patent applications (both for residents and for non-residents) exceeded 825,000 in 2013 and ranked No.1 globally. China’s number of published scientific and technical journal articles exceeds that of Germany, Japan and the UK, and China now publishes about two-thirds as many as the United States. As a latecomer, China has made some remarkable achievements.
 
To strengthen its innovation efforts still further, China has launched the “Made in China 2025” initiative. In its recently published 13^th Five-Year Plan, China has positioned “innovation” as one of its key objectives.

 

On the other hand, while China is catching up with the global leaders in certain sectors and is rapidly shrinking the distance with them in overall R&D inputs and outputs in terms of quantity, compared with global innovation frontier, China still faces great challenges in terms of achieving R&D quality and making its scientific results commercially relevant.
 
Although China is making the transition from “Made in China” to “Invented in China” in an economy that is slowing, its vast manufacturing sectors (especially SMEs in labor-intensive sectors) are facing difficulties moving up the global value chain. Some of them have moved overseas. Despite its impressive growth of patent applications, China’s total number of patents that were granted by the USPTO was 7,921 in 2014 – less than half of Korea’s or Germany’s number. Many of China’s successful patent applications were actually owned by multinationals. Universities generate a large volume of patents, but their utilization rate is only about 5 percent, with the bulk of the research not relevant for business.
 
Overall in 2013, China invested relatively little of its R&D spending (just 4 percent) in basic research compared to most OECD economies (17 percent), and its R&D spending is still heavily oriented toward developing S&T infrastructure, i.e. buildings and equipment. With regard to top-cited scientific publications, China may seem to be converging with the United States in terms of volume, but the same does not hold true in terms of quality, if measured by the percentage of domestic documents in the top 10 percent of most-cited publications.
 
Figure 1 shows that China is far behind the United States and Germany in terms of “firm-level technology absorption,” the rule of law, regulatory quality, private-sector spending on R&D and quality of management schools, among other priorities. The recent Global Competitiveness Report 2015 from the World Economic Forum underscored these weaknesses by ranking China at No. 68, out of 140 countries, for “higher education and training” and at 74 for “technological readiness.” Although China has the world’s largest pool of human resources for science and technology, the share of tertiary graduates in general, and of doctoral graduates in science and engineering in particular, are still low. These have prevented China from fully reaping the benefits from its rapidly increasing S&T inputs.



However, it should be noted that, despite these weaknesses, China’s situation is quite commensurate to its current upper-middle income country status, and is in fact among the most competitive among the BRICS countries. Process innovation and technology diffusion are still quite relevant for China.

In a longer run, for China to move up the global value chain faster and truly become a global innovation powerhouse – and thus make a successful transition from a labor-intensive manufacturing economy to a knowledge- and technology-intensive economy – the country may need to further improve its innovation ecosystem. Among other priorities, China will greatly benefit from the following:
 

• Strengthen its intellectual property rights (IPR) protection, especially the enforcement of the laws. This is important not only for attracting foreign high-tech firms and R&D centers, but also for encouraging firms to increase their spending on R&D and technology innovation.
• Encourage competition through a more level playing field. This requires further opening up many sectors now dominated by state-owned enterprises, and to provide more opportunities for SMEs. Government and the banking and financial sectors will also need to help SMEs to enhance their access to finance. Certain programs such as innovation vouchers could be applied for technology-type SMEs.
• Strengthen the effectiveness and quality of R&D. The current research evaluation system at universities needs to be revised to put a greater focus on utilization, and needs to strike a balance between quantity and quality, especially in the applicability of research. This will also require some institutional reforms, such as reforming the curriculum and pedagogies, increasing the autonomy of researchers, encouraging business-academia linkages, and creating better incentives for market-driven R&D and entrepreneurial activities.
• Further promote process, organizational and management innovation. The current system puts too much emphasis on the technological aspects, and does not devote enough attention to the organizational and management aspects, including business and innovation management. Many firms still need process innovation, including business process reengineering. There is a great shortage of talent in the areas of business consulting, especially knowledge of how to link technologies to the market.
• Strengthen technology diffusion. To effectively let technologies migrate from high-tech parks, universities and research labs to industries and firms, China needs to further strengthen its various technology incubators, engineering and productivity centers; its sectoral extension services, which need a market-driven approach; and its technology norms and standards, especially those related to quality, safety and green production.

In sum, China has come a long way in a short time and has become one of the key players in many high-tech arenas, building on its economic success. On the other hand, it still faces many challenges in moving up to the global knowledge and technology frontiers. Further structural reforms and well targeted measures will help China to accelerate its transition towards a truly global innovation powerhouse.    


Recent publications on innovation and competitiveness by Douglas Zeng (including co-authored or co-edited):

1. Innovation for Development and the Role of Government (https://openknowledge.worldbank.org/handle/10986/6310)
2. Promoting Enterprise-led Innovation in China (https://openknowledge.worldbank.org/handle/10986/2619)
3. Promoting SME Innovation in China (https://www.econbiz.de/Record/promoting-sme-innovation-in-china-zeng-dou...)
4. Knowledge, Technology and Cluster-based Growth in Africa (https://openknowledge.worldbank.org/handle/10986/6918)
5. Enhancing China's Competitiveness through Lifelong Learning (http://elibrary.worldbank.org/doi/abs/10.1596/978-0-8213-6943-2)