Development of the High-Tech Industry in China based on the Third Economic Census

On December 16, 2014, the National Bureau of Statistics of China published a communique about the key findings of the China Economic Census 2013. The purpose of the census this time was to shed light on the actual status of the economic activities of businesses and enterprises in the secondary and tertiary industries in 2013, the current status of the industry structure and industrial technologies, and the composition of production factors, as well as to understand the development situation of the service industry, strategic emerging industries, small businesses, and the high-tech industry. This column provides some perspective on the development of the high-tech industry by organizing the findings of the census, focusing on the high-tech industry.

According to the survey findings of the third economic census, the size of the high-tech industry expanded, research and development (R&D) spending increased significantly, and the percentage of sales comprised of new products rose due to an improvement in innovation capabilities over the five years after 2008 (when the second economic census was conducted). The table summarizes the performance indicators of the high-tech industry. The high-tech industry is comprised of sectors such as pharmaceuticals, aircraft and accessories, electronic communication equipment, computers and office equipment, medical apparatuses and instruments, and precision machines.

(1) Production activities

The number of enterprises belonging to the high-tech industry in the category of Enterprises of Above Designated Size (Note 1) was 26,894, the number of employees was 12.93 million people, and sales were 11,604.8 billion yuan, larger than in 2008. Although the value of exports increased, the export intensity appears to have declined due to the expansion of domestic demand. Labor productivity rose, and corporate earnings remained solid (the ratio of profits was 6.2% in 2013).

(2) Research and development (R&D)

R&D spending reached 203.4 billion yuan (25.6% of the total R&D spending in the manufacturing industry). R&D intensity (R&D spending/ sales) was 1.75%, rising by 0.44 percentage points. The accumulation of human capital also accelerated due to a sharp rise in R&D staff. Large-scale R&D activities appear to play a major role in promoting the indigenous innovation of Chinese enterprises (Note 2).

(3) Patents

The number of patent applications increased sharply to approximately 143,000 cases. In China, there are three kinds of patents, namely, for inventions, utility models, and designs. Patent applications for inventions accounted for 74,000 cases, of which 45,000 cases were concentrated on the manufacturing industry of electronic communication equipment.

(4) New products (Note 3)

The production scale of new products is expanding, and the percentage of sales made up of new products is also rising. What is interesting is that the ratio of new products to exports has risen by 4.7 percentage points to 24.8%, although the export intensity has declined. This suggests an improvement in the quality of export goods, or export sophistication. The fact that the ratio of the export of new products to sales of new products decreased implies that sales of new products in the domestic market increased, suggesting that domestic demand has increased as the income level in China has risen (Note 4).

It is believed that active R&D activities contribute to the growth of the high-tech industry. In this section, I will briefly discuss the effects of R&D using a scattering diagram. the figure shows the correlation between R&D and the ratio of profits, patents, and new products. In Panels A through D, the horizontal axis shows R&D intensity (Panel B, however, shows the logarithmic value of R&D spending), while the vertical axis shows the ratio of profits to sales, the logarithmic value of the number of patent applications, the ratio of new products to sales, and the ratio of new products to exports, respectively. The sectors in the figure are based on the small classification of the high-tech industry. In all of the panels, the regression line has a positive slope. The figure shows that as the R&D intensity of a sector rises, the ratio of profits, the number of patent applications, the amount of new products produced, and the quality of goods exported will all increase, although these vary depending on the sector. One could argue that these results support the findings of previous academic research. For detailed analysis, please refer to Jefferson et al. (2003, 2006), Hu and Jefferson (2009) and Zhang (2013).

Figure: Correlation between R&D and the Ratio of Profits, Patents and New Products

[Click to enlarge]

Note: For the sectors, data from 2013 are used.

Source: Compiled by the author based on "Communique on Major Data of the Third National Economic Census."

The main driving force that secured the development of the high-tech industry is not only the improvement of productivity and technologies. The establishment of the economy and a social system advantageous to creation is more important than the progress of technology itself (Wu, 2001).

The Chinese government has been implementing the "National Medium- and Long-Term Program for Science and Technology Development (2006-2020)" since 2006, with the aim of increasing the ratio of R&D spending to gross domestic product (GDP) by 2.5% or more by 2020 and promoting the indigenous innovation of Chinese enterprises. The supplementary policies for the implementation include an increase in the amount of deductions of income tax on R&D investments of high-tech firms, the reinforcement and guidance of support of policy finance and commercial finance for indigenous innovation, the cultivation and invitation of human resources for innovation, and the shortening of the review period of patents for invention, etc. Many think that this policy support played a considerable role in the rapid development of the high-tech industry.

However, China should not overvalue the role of the government and has to attach value to the market principle as well. In fact, the Chinese government appears to be aware of this. For example, upon the publication of the communique this time, Ma Jiantang, the director of the National Bureau of Statistics of China, presented his view on the high growth of the high-tech industry as follows: Although policy support plays an important role, even more important is the market mechanism that has come to work better along with progress in the market economy. In recent years, new types of business and business models and new products have been emerging profusely and quickly. Market competition also has been increasingly intense, and the innovative consciousness of business entrepreneurs has been even stronger. As just described, the functions of the market mechanism and policy support can go together, and we might say that China promoted the development of the high-tech industry by uniting the forces of both.

In addition, the Standing Committee of the State Council, which was held a week before the publication of the communique, decided to spread the six trial policies implemented beforehand in the Zhongguancun National Indigenous Innovation Model Zone in Beijing across the country. More specifically, these policies include the encouragement of stock options and dividends, tax deductions for the training costs of employees, and the use and income management reform of research findings, etc. These policies are aimed at increasing incentives for innovations of enterprises further by reducing the authority and profits of the government and developing the environment and conditions for human resources to exercise their creative abilities fully. If various reform measures are put surely into practice and an advantageous system for the development of the high-tech industry is established at the same time in the future, technological advancement and the further development of the high-tech industry are expected.