The Major Characteristics of China's Innovation System

*As per the author's request, this transcript is not for quotation.

Under the guidelines on the national medium- and long-term program for science and technology development issued in 2006, China set up the goal of becoming an innovation-based country by 2020.

Basic characteristics of China's national innovation system

Since the late 1990s, research and development (R&D) spending has rapidly increased at a rate faster than the growth of gross domestic product (GDP), and the ratio of R&D expenditure to GDP has hit 1.4% and reached a level matching that of middle-income countries. However, the average R&D spending per-capita still remains low; about $29 as of 2005.

Currently, China is in a period of transition from a planned economy to a market-based economy. In particular, China is carrying out the two-step reform of "the promotion of the linkage between science and technology and economy" and "the promotion of the linkage between government's research institutes and the market and enterprises." In the first step, the central government was reducing budget allocations for research institutes while transferring the decision-making authority to them. In the second step, since 1999, the applied research institutes of the central and regional governments had become independent bodies from the governments, in which some applied research institutes were reorganized to be managed and operated as firms. The research scene has also been characterized by profound changes, with R&D entities becoming diverse and global, enterprises become the main body of R&D expenditure, and the R&D role of research institutes outweighing that of universities.

While R&D spending by enterprises is showing a rapid increase, R&D spending by independent research institutes has been declining substantially. The total academic R&D spending is increasing, but its share in total R&D is less than the average levels of advanced market economies. Though enterprises are trying to strengthen the linkage with universities and independent research institutes, cooperative relationships still remain weak. Nevertheless, the proportion of R&D assistance or subsidiaries provided by enterprises to universities and independent research institutes is higher than the average levels of the member states of the Organisation for Economic Co-operation and Development (OECD).

Though in China, the source of industrial technology is shifting from "the introduction of foreign technology and me-too production" to "a combination of the introduction of foreign technology and independent R&D," the ratio of technology imports still remains high. Furthermore, R&D activities are led by experimental development, with basic research and original technologies lagging behind. Thus, the current status of China's innovation is characterized by the innovation of improvement by means of absorbing foreign technologies introduced and integrated innovation by combining mature technologies.

The Chinese government is encouraging the establishment of R&D organizations by foreign enterprises, as well as their R&D activities in China. Currently, the R&D expenditures of FDI firms (not including Taiwan, Hong Kong, and Macao) occupied 18%-19% of large and middle-sized (L&M) industrial firms' R&D; R&D investment directly from overseas accounts for 6% of total R&D spending in China.

There also has been major progress in innovation financing for small- and medium-sized enterprises (SMEs). The investment in venture capital in China totaled $1.8 billion in 2006, making China the second-largest recipient of investment in the world. The government has provided active support for innovation financing, establishing a state fund for innovation at innovation-oriented SMEs and facilitating financing for innovative enterprises using credit facilities without collateral for SMEs. Regarding stock markets, a market tailored to the listing of SMEs has been established in Shenzhen, and there is a pilot of the trust pricing system for exchanges of private collect stocks in Zhongguanchun of Beijing.

Led by the central government, focused efforts are also under way to establish multifaceted innovation service systems mostly at regional levels, including incubators, productivity promotion centers, technology transfer centers, and technological innovation service systems for SMEs. In 2005, incubators for science and technology-oriented enterprises were created at 548 locations across China, and a cumulative total of 19,896 enterprises grew out of these incubators. In 2004, there were 1,218 productivity promotion centers in the country. Technology transfer centers and the technological innovation service centers for SMEs are also contributing to the realization of multifaceted service systems.

China has 53 state-level high-technology development zones in total, with 50% of high-tech enterprises and innovation-based small firm incubators concentrated in these zones. China's high-technology industry has been growing rapidly, with gross output by the high-technology sector accounting for over 15% of the country's total industrial production.

The total numbers of science and technology professionals and R&D professionals in China are now the largest and second-largest, respectively, in the world, but the number of R&D professionals per 10,000 members of the labor force is still low at 17.5 (as of 2005), indicating a shortage of human capital with high-level expertise. Amid the rapid spread of higher education, one of the challenges China currently faces is how to enhance the innovation capability of students and how to increase public education expenditures relative to its GDP.

Allocation and management of science and technology resources by the government

The allocation of resources by the government has two features. The first is the management of resources by stages (basic research stage, applied research stage, and experimental development/industrialization stage) based on the innovation chain. The second is the allocation of resources led by science and technology program projects, where experts are required to provide proof of R&D projects' feasibility, and the government sectors or its agencies screen and finally approve the projects.

The National Natural Science Foundation of China (NSFC) supports basic research by universities and science research institutes, while the Ministry of Science and Technology (MOST) mainly provides support for basic applied research and important frontier technologies. MOST also helps incubate high-technology enterprises and innovative enterprises, and implements some programs to promote the commercialization of the results of research activities. The National Development and Reform Commission (NDEC) provides mainly support for industrial technology development and innovation projects at enterprises, promotes the commercialization of research results and the absorption of imported technologies, and assists technology development centers for enterprises. The Chinese Academy of Sciences (CAS) carries out intellectual innovation engineering, and promotes scientific research, research for important projects in frontier fields, and applied research. The Ministry of Education manages technology transfer centers of universities in cooperation with the NDEC, and also manages key state laboratories and national project technology research centers in cooperation with MOST.

Developments in the innovation system in China

By the year 2020, China aims to achieve the following targets toward building an innovation-based country:

• Ratio of R&D investment to GDP: 2.5% or higher
• Dependence on foreign technologies: 30% or less
• Rate of technological progress (total factor productivity): about 60%
• Number of patents granted to domestic inventions: world's top five
• Number of citations in scientific papers internationally: world's top five

The aim of establishing innovation in China is to adapt economic globalization and international competition. Along these lines, China will also make efforts to prevent a hollowing-out of industrial technologies in manufacturing through the optimization of industrial structure and upgrading of technologies. China finds that it is necessary to transform production systems in order to maintain its cost competitiveness with lower-cost countries, for example Southeast Asian countries and India. In this respect, technological advancement and innovation are being called for. Furthermore, the realization of an innovation-based country is necessary from the standpoints of establishing an environmentally friendly, energy-saving society and achieving sustainable development.

China will establish an innovation system through five approaches:

• Constructing an technological innovation system through a collaboration mechanism of industries, universities, and institutes, led by enterprises
• Promoting organic linkage between scientific research and higher education and enhancing the ability of original innovation
• Coordinating military research and civilian research institutes, transforming military technology into civilian by using and developing joint technology for civilians and defense
• Building regional innovation systems with regional characteristics and advantages
• Developing a socialized, networked science and technology service system

Prioritized policies and measures are listed below:

• Strengthening of efforts to build a science and technology fundamental platform by expanding funding for the science and technology sector
• Implementation of tax and fiscal policies to encourage technological innovation by enterprises
• Strengthening of the absorption of imported technologies and their re-innovation
• Promotion of innovation through government purchases
• Protecting intellectual property rights (IPR), implementation of IPR strategy, and technical standards strategy
• Adoption of preferential financial policies for promoting innovation and the starting up of businesses
• Acceleration of high-technology industrialization and the spread of advanced applied technologies
• Development of military-civilian cooperation mechanism
• Creating social environment suitable to innovation
• Strengthening international cooperation in S&T

Toward the formation of an innovation-based country - problems to be solved

Currently, China is confronted with the following major problems:

• Enhancing efficiency in innovation and government S&T resource allocation;
• Enhancement of innovation capabilities of enterprises and the establishment of a multi-level capital market system for innovation financing are also needed
• A market needs to be developed for innovative products and technologies in order to diversify innovation risks and secure profits that surpass costs
• How to reasonably play the role of universities and research institutes. In this sense, it is time for Chinese scientific research institutes to undergo reorganization
• Foster human resources that ignite innovation
• Improving industrial technology service organizations, especially government-affiliated research institutes should perform their roles

Tomoo Marukawa:
People in the low- and middle-income brackets need cheap products more than ultrahigh-technology products. Given the market's current stage of development, the introduction of foreign technologies seems to be a logical consequence. The second point, it seems to me, is that in China, an environment for the promotion of innovation has not yet been in place. In particular, efforts to protect intellectual property rights are far from adequate. These circumstances may lead to thinking that copyism and imitation are more efficient than pouring massive amounts of funds into the development of new products. In the area of environmental protection, efforts of enterprises are not making much headway due to weak law enforcement.

I think China is seeking innovation because of four particular reasons: (1) for development of military technologies or military-civilian dual technologies that cannot be imported from foreign countries; (2) as countermeasures against restrictions and technological blockages under the Wassenaar Arrangement (on Export Controls for Conventional Arms and Dual-Use Goods and Technologies) and others; (3) for reduction of patent royalties; and (4) in response to unique needs in China.

Lu Wei:
Innovation should be considered in the context of a country's level of development. For developing countries like China, the introduction of technologies never used before represents innovation. We do not necessarily regard the development of totally new technologies and products as innovation. In view of this point, lowering the costs of some products which are inaccessible for ordinary people and making them affordable to low-middle income people may also be considered a certain process of innovation.

I acknowledge that the protection of intellectual property rights is still inadequate in China. At the same time, however, China has been taking steps toward harmonization with international institutions and systems. The problems, as I see them, are weak law enforcement and lack of knowledge about institutions and regulations (including the ability of handle them). Behind the inadequate law enforcement, I see such problems as lack of legal knowledge and protectionism in regions. We also have the problem that there is a shortage of professionals well-versed in laws and regulations related to IPR protection in China, especially in the less economically developed regions.

To deal with these problems, China has taken several measures, including the formulation and promotion of a strategy for protecting intellectual property rights, establishment of government offices for the protection of intellectual property rights, and joint efforts among relevant government agencies to crack down on violations. On the other hand, China may be able to boast greater efficiency in some areas, such as legal provisions to close court proceedings for intellectual property rights disputes within 1.5 years and much lower cost of litigation in China than in Europe and the U.S.

China is attaching importance to the "scientific outlook on development." Japan and China should be able to enhance their cooperation in such areas as energy-saving and environment-protecting technologies.

Q: Who originated the "scientific outlook on development" and when was it introduced? What is the Chinese government trying to project with this idea?

A: The scientific outlook on development was put forward as a national strategy under the government of President Hu Jintao and Prime Minister Wen Jiabao. This is the idea of allocating and utilizing resources for social development in a scientific and reasonable manner. It also calls for focused efforts to correct imbalances such as regional disparities and income gaps that arise in the process of development, as well as the imbalance between the environment and development. In particular, sustainable technological progress forms the core approach of the scientific outlook on development.

Q: The higher proportion of enterprise funding for universities may be, in large part, traced to internal reasons on the part of universities, such as reduced budgetary allocations from the government. I also suspect that enterprises are contributing funds to universities because they tend to give importance to application aspects of science and technology.

A: First of all, since 1995, China has set out on the strategy of State Development through Promoting Science and Technology, Education. Under this policy, development of research-oriented universities has been encouraged, and R&D budgets of universities increased substantially. Next, R&D capabilities of Chinese enterprises are still relatively weak, primarily because they were required only to produce under the planned economy system. Thus, enterprises' needs for R&D capabilities coincided with universities' needs for R&D funds. I think this is a main reason for the current structure where enterprises provide universities with research funding.