China in Transition

Shenzhen Emerging as China's Leading Innovation Hub: Private-sector companies as the driving force

Chi Hung KWAN
Consulting Fellow, RIETI

For a long time, the Pearl River Delta with Shenzhen at its core has played a key role in turning China into the workshop of the world. While the international competitiveness of its labor-intensive industries has been declining due to labor shortages and the resulting rise in wages, Shenzhen has been quite successful in upgrading its industrial structure through innovation. The process has been led by private-sector companies such as Huawei, ZTE, Tencent, BYD, BGI, DJI, and Royole. Shenzhen has surpassed Beijing to become China's leading innovation hub, taking advantage of the industrial clusters and technologies accumulated over the years, the high degree of openness of the labor market, and the ability of the local industrial system to adapt to changes in the environment.

Remarkable economic growth and progress in industrial upgrading

Shenzhen, adjacent to Hong Kong, was only a small fishing village up until the 1970s. However, since it was designated as one of the first special economic zones in 1980, it has become a gateway to the outside world and a testing ground for reforms in China. Over the last 30-some years, it has enjoyed a high rate of economic growth.

Shenzhen's real gross domestic product (GDP) growth rate from 1980 to 2015 reached an annual average of 23.0% (Table 1). This rate is not only much higher than the national average of 9.7%, but also the 10.1% in Beijing and 9.9% in Shanghai (all data stated hereinafter are based on that of the National Bureau of Statistics of China and the Statistics Bureau of each municipality unless otherwise stated). The population in Shenzhen also rose sharply from 330,000 people to 11.38 million people in the same period (Note 1), largely due to the inflow of labor. As a result, Shenzhen's GDP in 2015 (1,750.3 billion yuan) ranked fourth among major cities in China after Shanghai (2,496.5 billion yuan), Beijing (2,296.9 billion yuan), and Guangzhou (1,810.0 billion yuan), while its per-capita GDP (158,000 yuan) was the highest, exceeding that of Beijing (106,000 yuan), and Shanghai (103,000 yuan). Shenzhen has held the top position in exports since 1993. In 2015, Shenzhen ranked third in the list of the world's busiest container ports after Shanghai and Singapore (Marine Department, Hong Kong Special Administrative Region, People's Republic of China, "Port of Hong Kong in Figures," 2016 Edition).

Table 1: Key Economic Indicators of Shenzhen, Beijing, and Shanghai (2015)
Shenzhen Beijing Shanghai
GDP (billion yuan) 1,750.3 2,296.9 2,496.5
GDP per capita (thousand yuan) 158.0 106.0 103.0
Real GDP growth rate (%) 8.9 6.9 6.9
Real GDP growth rate (average, 1980-2015, %) 23.0 10.1 9.9
Population (thousand) 11,379 21,705 24,153
Actually utilized foreign capital (million $) 6,500 13,000 18,460
Exports (million $) 273,720 29,010 1797,30
Note: Exports are based on the place of origin of goods.
Source: Compiled by the author based on data of the Statistics Bureaus of Shenzhen, Beijing, and Shanghai municipalities.

During the 1980s, many Hong Kong companies transferred their factories to Shenzhen, taking advantage of the preferences it enjoys as a special economic zone. While most of the factories were later moved to neighboring areas such as Dongguan as wages and land prices rose, service industries, including finance and distribution, and high-tech industries have grown rapidly, leading to a more advanced industrial structure in Shenzhen.

To promote the development of new industries, since 2009, the municipal government of Shenzhen has announced development plans for seven strategic emerging industries: bio-pharmaceuticals, the Internet, new energy, new materials, next generation information and technology (IT), creative cultural industry, and energy-saving and environmental protection. The value-added created by these industries reached 700 billion yuan in 2015, accounting for 40.0% of its GDP (Statistics Bureau of Shenzhen Municipality, "Ongoing progress of the Shenzhen economy as it stabilizes and moves toward improvement each quarter in 2015," January 28, 2016).

Superiority in innovation

The Pearl River Delta where Shenzhen is located is the home of some of the world's largest industrial clusters, which enables it to handle all parts of the supply chains of major industries such as electronics and automobile—from the research and development of products to the manufacturing and assembly of components. The suppliers of various components and materials are mostly located within a one-hour drive from Shenzhen. New ideas can be quickly transformed into marketable products and services in a short period by taking advantage of economies of scale and scope available here. Thanks to these characteristics, Shenzhen has come to be known as the "Silicon Valley of hardware."

Indeed, Shenzhen is now the world's largest manufacturing base for smartphones. Two companies headquartered in Shenzhen—Huawei Technologies and ZTE—ranked among the top 10 smartphone vendors in the world in 2015. The products of many other major manufacturers such as Apple and Xiaomi are also produced in Shenzhen (Table 2).

Table 2: Top 10 Smartphone Vendors Based on Market Share in 2015
Ranking Company Market Share (%) HQ Location
1 Samsung 24.8 South Korea
2 Apple 17.5 United States
3 Huawei 8.4 China (Shenzhen)
4 Xiaomi 5.6 China (Beijing)
5 Lenovo 5.4 China (Beijing)
6 LG 5.3 South Korea
7 TCL 4.0 China (Huizhou, Guangdong)
8 OPPO 3.8 China (Dongguan, Guangdong)
9 BBK/VIVO 3.3 China (Dongguan, Guangdong)
10 ZTE 3.1 China (Shenzhen)
Note: Based on total shipment. 1,292.7 million smartphones in 2015
Source: Compiled by the author based on Trendforce

Innovation and industrial advances in Shenzhen began with original equipment manufacturers (OEM: manufacturing products for the brand of another company), and then later evolved into the creation of original products through original design manufacturer (ODM)-based innovation (designing and manufacturing products in the brand of another company). This was followed by the digestion and absorption of technologies from abroad, and finally indigenous innovation. China as a whole has followed a similar process, with imitation playing a major role. It is well-known that counterfeit versions of the latest models of PCs and smartphones sold overseas often become available in Shenzhen within a few days. However, the experience of Shenzhen most clearly demonstrates that imitation is part of the process of learning by doing, and the mother of innovation. With the indigenous R&D capabilities of companies there improving sharply, Shenzhen is casting off its negative image as a "knock-off paradise" and emerging as China's leading "innovation hub."

The migrant population in Shenzhen is large and consists mainly of young people. This has become a factor favoring economic growth and innovation.

Residents with local household registration makes up only 31.2% of the population in Shenzhen, with the remaining 68.8% comprised of migrants from other areas without household registration in Shenzhen (Statistics Bureau of Shenzhen Municipality, "Statistics Communique of Shenzhen on the National Economy and Social Development in 2015." April 26, 2016). However, because many migrants born elsewhere have already acquired household registration in Shenzhen, the actual share of migrants should be even higher (probably over 90%). There are many young people from Hong Kong, Taiwan, Macau, and countries around the world who come to Shenzhen in hopes of getting a job and starting a business. With its population dominated by migrants, Shenzhen has formed a culture that places great value on diversity, openness, and broad-mindedness, and migrants coming here can feel at home.

Looking at the age structure, the working-age population (15 years old to 64 years old) makes up 88.4% of the population in Shenzhen, which is much higher than the national average of 74.5% as well as that of Beijing (82.7%) and Shanghai (81.3%), two cities that also accept a large number of migrant workers (based on the 6th National Population Census conducted in 2010). Shenzhen's ability to attract many young would-be startup founders is no doubt a factor favoring innovation.

On the other hand, there are few traditional research institutes and universities in Shenzhen, reflecting a history of industrial development that is much shorter than that of Beijing and Shanghai. In this regard, the Shenzhen government is working hard to attract human resources from home and abroad by enhancing the level of collaboration with prestigious universities and research institutes around the country. The Shenzhen Institutes of Advanced Technology (of the Chinese Academy of Sciences) and the National Supercomputing Center in Shenzhen have been established in Shenzhen, in addition to the graduate schools of Peking University and Tsinghua University. The Peacock Plan, which was launched in 2011 to attract high-level and innovative individuals and teams from abroad, is also bearing fruit (Note 2). Many of the companies in Shenzhen that have achieved high growth—DJI, the Royole, and the Kuang-Chi Institute of Advanced Technology—have received support from the project from the business launch stage.

Increasing innovation capabilities of companies

Attracted by these favorable conditions, many high-tech companies from a wide range of industries have gathered in Shenzhen. Most of them are private-sector companies.

In the area of communication equipment, Huawei Technologies and ZTE are among the world leaders in both sales and technology. These two companies are increasing their share of not only the domestic market but also overseas markets.

In the computer industry, many leading companies in China, such as Renovo, TCL, and Foxconn, are operating in Shenzhen. These companies, together with many parts suppliers in Shenzhen and neighboring areas, have established a value chain covering all of the downstream and upstream processes.

In the software and mobile network areas, Tencent, which has already established itself as the top company in the industry, is headquartered in Shenzhen. Many emerging and fast-growing companies, such as Xunlei Networking Technologies, are also there.

In the bio-pharmaceutical industry, companies including BGI, Beike Biotechnology, Hepalink Pharmaceutical, and Mindray play active roles in a wide range of areas, such as reagents, biotechnology-based vaccines, biochips, bio-pharmaceuticals, gene therapy, and medical equipment. They have gained notice both in China and around the world.

Furthermore, Shenzhen is home to some of the world's leading companies with proprietary technology, such as the Kuang-Chi Institute of Advanced Technology in the area of meta-materials, DJI in drones, Royole Corporation in next generation displays, and Han's Laser Technology Industry in laser equipment.

In addition to private-sector companies, many foreign-affiliated companies are also drawn to Shenzhen. In fact, about 270 Fortune Global 500 companies have already invested in Shenzhen (Invest Shenzhen, "Invest Shenzhen Summary of Activities in 2015 and Investment Plans for 2016," March 14, 2016). Their aims are shifting from production to research and development, and global companies such as Microsoft, Intel, Oracle, and Samsung have already established research institutes in Shenzhen.

Symbolizing the rising innovation capabilities of the city, the number of Patent Cooperation Treaty (PCT) applications submitted by Shenzhen-based companies reached 13,308 in 2015, accounting for 46.9% of all applications in the country. It has held the top position in the city ranking for 12 consecutive years, maintaining a wide lead over second place Beijing (4,490), third place Shanghai (1,060), and fourth place Guangzhou (623) (Table 3). Of the top 10 PCT applicants in China in 2015, six were headquartered in Shenzhen: Huawei Technologies, ZTE, China Star Optoelectronics Technology, Tencent, Yulong Computer Telecommunication Scientific, and DJI (Table 4). According to the World Intellectual Property Organization (WIPO), Huawei Technologies and ZTE were ranked first and third in the number of international PCT applications published in 2015 (Table 5).

Table 3: China's Top 10 PCT Applicants (Number of Filed Applications, by city, 2015)
Ranking City Number Share (%)
1 Shenzhen 13,308 46.9
2 Beijing 4,490 15.8
3 Shanghai 1,060 3.7
4 Guangdong 623 2.2
5 Hangzhou 426 1.5
6 Wuhan 387 1.4
7 Qingdao 339 1.2
8 Chengdu 300 1.1
9 Nanjing 269 0.9
10 Amoy 178 0.6
Total (including other areas) 28,399 100.0
Source: Compiled by the author based on the "Monthly Report on Patent Business Activities and General Administrative Statistics of the SIPO" of the State Intellectual Property Office (SIPO) of the P.R.C
Table 4: China's Top 10 PCT Applicants (Number of Filed Applications, 2015)
Ranking Company Number HQ Location
1 Huawei Technologies 3,538 Shenzhen
2 ZTE 3,150 Shenzhen
3 BOE Technology Group 1,414 Beijing
4 China Star Optoelectronics Technology 1,185 Shenzhen
5 Xiaomi 546 Beijing
6 Tencent Holdings 365 Shenzhen
7 Yulong Computer Telecommunication Scientific 269 Shenzhen
8 Baidu Online Network Technology 220 Beijing
9 Beijing Qihoo Technology 218 Beijing
10 DJI 210 Shenzhen
Source: Compiled based on documents distributed at the press conference hosted by the SIPO on January 14, 2016
Table 5: World Top 10 PCT Applicants (Number of Published Applications, 2015)
Ranking Company Number HQ Location
1 Huawei Technologies 3,898 China (Shenzhen)
2 Qualcomm 2,442 United States
3 ZTE 2,155 China (Shenzhen)
4 Samsung Electronics 1,683 South Korea
5 Mitsubishi Electric 1,593 Japan
6 Ericsson 1,481 Sweden
7 LG Electronics 1,457 South Korea
8 Sony 1,381 Japan
9 Philips Electronics 1,378 Netherland
10 Hewlett-Packard 1,310 United States
Source: Compiled by the author based on WIPO, "Who Filed the Most PCT Patent Applications in 2015?"

In light of these developments, Shenzhen is now regarded as possessing innovation capabilities on par with Beijing. In the "Innovation Index of Chinese Cities" (March 2016) published by the Guangdong Academy of Social Sciences and Nanfang Media Group, Shenzhen has overtaken Beijing and is now ranked first in China. In the three major evaluation criteria of "foundation for development," "science, technology/research, and development," and "industrialization," Shenzhen lags behind Beijing in "science, technology/research, and development," but it is rated higher in "foundation for development" and "industrialization." In the "China Cities Competitiveness Report No 13" (Social Sciences Academic Press, May 2015)—a survey published by the Chinese Academy of Social Science that also covers Hong Kong, Macau, and Taiwan—Shenzhen is highly regarded for its innovation capabilities and ranked first among the most competitive cities in China, overtaking Hong Kong. In addition, Shenzhen has been chosen by Forbes (Chinese edition) as the city with the highest innovation capabilities in mainland China for five consecutive years since 2011.

Can Shenzhen surpass Zhongguancun?

Beijing's Zhongguancun has led innovation in China for a long time, taking advantage of academic-industrial alliances and its proximity to Peking University and Tsinghua University. However, in recent years, it has been losing ground to Shenzhen. This phenomenon looks similar to the rise of Silicon Valley and the decline of Boston Route 128 in the United States.

After the Second World War, Silicon Valley led by Stanford University on the West Coast and Boston Route 128 led by MIT on the East Coast developed into centers of hi-tech industries. However, both regions lost momentum in the first half of the 1980s following the rise of Japanese companies. In the 1990s, Silicon Valley made a big comeback, while Route 128 continued to struggle. Saxenian (1994) postulates that the diverging performance between these two regions lies in the differences in their local industrial systems consisting of 1) regional organization practices and culture, 2) industrial structure, and 3) internal organization of firms. Local networks in Silicon Valley are organized around learning through an open labor market and informal communication and correspondence with outside suppliers and customers. In contrast, Route 128 is an aggregate of self-contained independent companies led by a small number of highly independent companies that reinforces the practices of secrecy and corporate loyalty through the vertical integration of research, design, production, and sales. Silicon Valley is considered to be more able to adapt to changes in the industrial structure and to provide an environment favorable to technological development.

A comparison between the industrial systems in Zhongguancun and Shenzhen shows that the former, with its close-knit relations with the old system, resembles Route 128, while the latter, which started from scratch, looks more like Silicon Valley. Thanks also to its strength in hardware, the superiority of Shenzhen over Zhongguancun has become more and more apparent.

The original text in Japanese was posted on June 8, 2016.

  1. ^ In 1980, part of Shenzhen composing the four districts of Louhu, Futian, Nanshan, and Yantian (a total of 327.5 square km) was designated as a special economic zone. On July 1, 2010, the districts of Bao'an and Longgang were added, and the scope of the special economic zone was expanded to include all districts of Shenzhen (1,948 square km). The population of 330,000 people in 1980 covers all of the districts, but when limited to districts included in the special economic zone at that time, the population was less than 100,000 people.
  2. ^ In the Peacock Project, individuals who satisfy the set criteria are eligible to receive special treatment, such as an allowance of 800,000 to 1,500,000 yuan, resident status (in the case of foreigners), and a family register. For teams, a project subsidy of up to 80 million yuan will be granted.
  • Saxenian, AnnaLee (1994) Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Harvard University Press.
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