China's Vision for Promoting "New Quality Productive Forces"
－Integrating cutting-edge technology with industry

I. Introduction

The concept of "new quality productive forces," first proposed by General Secretary Xi Jinping during his inspection tour of Heilongjiang Province in September 2023, has emerged as a key element in China's economic policies. Following the Central Economic Work Conference in December 2023, the promotion of new quality productive forces was also positioned as a top priority for economic policy at the National People's Congress in March 2024.

"New quality productive forces" is characterized by advanced technology, high efficiency, and high quality, with "science and technology innovation," "industrial upgrading," and "improvements in the quality and allocation of production factors" as its driving forces (Figure 1). In order to promote new quality productive forces, China is first placing emphasis on "science and technology innovation," in particular original and disruptive innovation, and is aiming to become independent and strong in science and technology under a whole-nation system led by the Communist Party and the government. Additionally, with a view to "industrial upgrading," China is working to strengthen supply chains, transform and advance traditional industries, foster emerging and future industries, and promote the digital economy. Furthermore, in order to achieve "improvements in the quality and allocation of production factors," in addition to implementing market reform of production factors and a three-in-one reform of education, science and technology, and human resources, the government is promoting the use of "data" as a new production factor.

Source: Compiled by the author based on various sources, including "Xi Jinping emphasized accelerating the development of new quality productive forces and steadily promoting high-quality development at the 11th collective study session of the Central Committee Politburo of the Communist Party of China," Xinhua News Agency, February 1, 2024.

The three driving forces of new quality productive forces - "science and technology innovation," "industrial upgrading," and "improvements in the quality and allocation of production factors" - are not only having individual effects but are also expected to generate mutual synergies, such as developing new business models through the integration of cutting-edge technology with industry.

For China, promoting new quality productive forces is an important means of achieving "high-quality development" that embodies the "new development philosophy" consisting of innovation, coordination, green, openness, and sharing, and of responding to changes in the domestic and international environment, such as the progress of the Fourth Industrial Revolution, the protracted economic conflict between the United States and China, and the worsening labor shortage.

The promotion of new quality productive forces in China has already produced some results, as seen in the creation of many new business models through the integration of technology with industry. On the other hand, there are many challenges to overcome, such as the impact of U.S.-China decoupling and a shortage of human capital and basic research capabilities. In order to overcome these challenges, China must adhere to reform and opening up, and expedite the creation of a market environment in which private and foreign-affiliated enterprises can compete on equal footing with state-owned enterprises without suffering discrimination.

II. Timely presentation of the concept of "new quality productive forces"

China is shifting its growth engine from conventional productive forces to new quality productive forces. The goal is to achieve "high-quality development" rather than merely "high growth," while also addressing changes in the domestic and international environment.

1. Characteristics of new quality productive forces

"Productive forces" is originally a concept from Marxist economics, referring to the inputs used to produce goods and services, and corresponds to the elements that make up the input side of the "production function" in modern economics. Specifically, this includes the following:

1. 1) Labor force: The number of working people and their skill, education, and productivity level.
2. 2) Capital goods: Factories, machinery, tools, equipment, etc. used in production.
3. 3) Natural resources: Inputs of resources necessary for production, such as land, raw materials, and energy resources.
4. 4) Technology: The level of technology development, including production technology, automation, and innovation.
5. 5) Infrastructure: Transportation networks, communication systems, and other physical infrastructure that supports production activities
6. 6) Organization and management practices: Organizational efficiency, management practices, and division of labor within a company or industry

The level of productive forces increases as a result of quantitative increase or qualitative improvement (rising productivity) of these factors, leading to an increase in the output of goods and services. The rise in productivity through investment, education, progress in science and technology and efficient use of resources is the key to economic growth.

"New quality productive forces" refers to an advanced form of production that deviates from traditional economic growth models, emphasizing innovation as the driving force and characterized by advanced technology, high efficiency, and superior quality (Note 1).

First, "advanced technology" refers to the introduction of cutting-edge technologies such as information technology, artificial intelligence (AI), biotechnology, and new materials into industry to improve production efficiency and product quality.

Next, "high efficiency" means maximizing output relative to input, resulting in a significant increase in total factor productivity. The objective is to decrease production costs, enhance labor productivity, and minimize environmental effects through actions such as automating and robotizing systems, implementing demand forecasting and inventory management using data analysis to streamline the supply chain, and enhancing energy efficiency (Note 2).

Finally, "high quality" means providing high-quality products and services that meet consumer needs. Specifically, emphasis is placed on thorough quality control, after-sales service that ensures high customer satisfaction, continuous product development, and ensuring safety.

By comparing this to traditional productive forces, the distinctions of new quality productive forces become more evident in terms of their driving force, growth model, production and product delivery techniques, and impacts on resources and the environment. (Figure 2).

Source: Compiled by the author based on various materials

2. Achieving the goal of "high-quality development"

China is aiming for sustainable "high-quality development," and the promotion of new quality productive forces is seen as the most important means of achieving this. The concept of "high-quality development" was introduced by General Secretary Xi Jinping at the 19th National Congress of the Communist Party of China in 2017. It embodies the five elements of the "new development philosophy," which include "innovation," "coordination," "green," "openness," and "sharing."

1. 1) Innovation
   Innovation means fundamentally changing existing systems, habits, ways of thinking, etc. In addition to science and technology, innovations in the areas of institutions, society, culture, and other areas are also being promoted.
2. 2) Coordination
   Coordination means aiming for harmonious development between economic and social development, between cities and rural areas, and between people and nature. Towards this end, efforts are being made to improve the medical and education systems, redress income disparities, protect the environment, and promote sustainable development.
3. 3) Green
   Green means actively promoting the construction of an ecologically sound civilization and working to solve environmental problems. Towards this end, efforts are being made to promote the development and utilization of green energy, the nurturing of energy conservation and environmental protection industries, and to strengthen ecological and environmental conservation.
4. 4) Openness
   Openness means promoting a high level of opening up to the outside world and actively participating in economic globalization. These include promoting the Belt and Road Initiative, building free trade zones, and improving the investment environment.
5. 5) Sharing
   Sharing means aiming to achieve common prosperity in which the fruits of economic development are widely distributed among the people and the middle-income class expands. Towards this end, efforts are being made to strengthen the social security system, equalize educational opportunities, and improve income distribution.

When speaking about new quality productive forces, General Secretary Xi Jinping places as much emphasis on "green" as on "innovation" among these five elements of the “new development philosophy.” He also reiterates China’s determination to accelerate the green transformation of industry and support the peaking of carbon emissions and carbon neutrality (Note 3).

3. Responding to changes in the domestic and international environment

The development of new quality productive forces is expected to play a major role not only in achieving "high-quality development," but also in responding to changes in the domestic and international environments surrounding the Chinese economy, such as the progress of the Fourth Industrial Revolution, the protracted economic conflict between China and the United States, the worsening labor shortage, the challenge of sustainable development, and the intensification of international competition. In particular, China recognizes that in order to prepare for a protracted economic conflict with the United States, it needs to ride the wave of the Fourth Industrial Revolution and quickly catch up with the United States in terms of its science and technology capabilities.

1) The progress of the Fourth Industrial Revolution

In recent years, remarkable innovations in science and technology have led to a paradigm shift across economic, social, and industrial systems, rendering conventional production models obsolete. New technologies such as AI, big data, and robotics are enabling dramatic improvements in productivity and the creation of new value, but at the same time they are bringing about challenges such as changes in the employment structure and widening disparities. China is under pressure to develop new quality productive forces so as not to miss out on the wave of the Fourth Industrial Revolution.

2) The protracted U.S.-China economic conflict

In recent years, the protracted economic conflict between the United States and China has exposed the vulnerability of China's supply chain, which is heavily dependent on the United States. China is aiming to mitigate the impact of its economic conflict with the United States and to achieve economic independence by promoting science and technology innovation and upgrading domestic industries through the development of new quality productive forces while accelerating the development of high-tech industries.

3) The worsening labor shortage

China is facing a serious labor shortage due to its rapidly aging society and declining birth rate. The traditional labor-intensive economic growth model is reaching its limits, making it essential to shift to high value-added industries and improve labor productivity. New quality productive forces will utilize technologies such as automation, robotics, and smart technology, which will be the main means of achieving economic growth without relying on an expansion of labor input.

4) The challenge of sustainable development

As global environmental problems become more serious, sustainable development has become a common challenge for the international community. China is also accelerating its efforts to introduce green technologies that have a low environmental impact and to create a resource-circulating society. The promotion of new quality productive forces has the goal of sustainable economic development with an emphasis on improving resource efficiency, reducing environmental pollution and protecting the natural ecosystem.

5) The intensification of international competition

Amid intensifying international competition, China must shift its focus from producing low products towards high value-added industries. New quality productive forces can enhance the international competitiveness of Chinese industries by expanding investment in research and development, strengthening innovation capabilities, and improving brand power.

III. Three driving forces: 1) Science and technology innovation

Science and technology innovation is the most important driving force for promoting new quality productive forces. Under a whole-nation system led by the Communist Party and the government, China aims to become self-reliant and strong in science and technology, and is focusing on original and disruptive innovation.

1. From importing technology to self-reliance and strengths

In the course of China’s reform and opening up, science and technology policy has steadily evolved from "importing technology from overseas" to "indigenous innovation" and then to "self-reliance and strengths."

In the early days of reform and opening up, China actively introduced advanced technologies from overseas. Particularly since 1978, the country has promoted the upgrading of domestic industries and economic development by introducing foreign technology and management know-how through the establishment of special economic zones, the introduction of foreign capital, and by sending students abroad to study. At this stage, the focus was on learning and absorbing foreign technology, with the goal of improving the technology level and international competitiveness of domestic industries.

Entering the 21st century, China began to aim not just at introducing technology from overseas, but also at building its own innovative capabilities. The "Outline of the National Medium- to Long-Term Science and Technology Development Plan" published by the State Council in February 2006 promoted indigenous innovation, consisting of three elements: "original innovation," "innovation through technology integration," and "introduction, digestion, absorption, and improvement," as a national strategy. In response to this, efforts were devoted to boosting investment in research and development, implementing national key projects, and developing the intellectual property rights system.

In the second half of the 2010s, China went a step further, aiming to become self-reliant and strong in science and technology. At the 19th Party Congress in October 2017, the goal was set to make China one of the most innovative nations in the world by 2035. In response to this, at the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China (Fifth Plenum) in October 2020, which presented the party's proposal for the 14th Five-Year Plan, innovation focused on self-reliance and strengths in science and technology was positioned as a cornerstone of the national development strategy towards modernization.

Compared with the stage of indigenous innovation, in the stage of self-reliance and strengths, China has placed greater emphasis on strategic, holistic and forward-looking approaches to promoting science and technology and aims to build a strong and self-reliant national innovation system. This policy shift was influenced by external factors, such as the technology blockade by the United States and other Western countries, and internal factors, such as the improvement of China's research and development capabilities.

2. Efforts towards self-reliance and strengths in science and technology

In a speech at the 20th Academician Conference of the Chinese Academy of Sciences, the 15th Academician Conference of the Chinese Academy of Engineering, and the 10th National Congress of the China Association for Science and Technology held on May 28, 2021, General Secretary Xi Jinping set out the following policies for China to become self-reliant and strong in science and technology: (Note 4)

1. 1) Original and cutting-edge science and technology breakthroughs
   • Focus on basic research and develop a 10-year action plan.
   • Explore unknown realms such as space, consciousness, materials, and life.
   • Promote research and development of technologies that address economic, social and national security challenges.
   • Aim for technology breakthroughs in areas such as oil and natural gas, basic materials, semiconductors, industrial software, agricultural seeds, science laboratory equipment, and chemicals.
   • Develop strategic technology research and development projects in cutting-edge fields such as AI, quantum information, integrated circuits, advanced manufacturing, life and health, brain science, biological breeding, aerospace, and deep sea and earth sciences.
2. 2) Strengthen the nation's strategic science and technology capabilities
   • National laboratories, national science research institutes, key research universities and leading science and technology enterprises will become important components of the nation's strategic science and technology capabilities.
   • National laboratories produce important science and technology achievements in line with the nation's strategic needs.
   • National science research institutions shall endeavor to solve major science and technology issues concerning the overall and long-term interests of the nation's development.
   • Priority research universities will promote basic research, human resource development, and innovation in an integrated manner.
   • Leading technology companies will take advantage of their ability to grasp market trends and become the driving force behind the industrialization of technology.
3. 3) Promote reform of science and technology systems
   • Create a system for effective cooperation between the market and government.
   • Reform the assessment system to accurately reflect the quality of results, performance, and contributions.
   • Establish an assessment system for science and technology talent and establish a reward system that reflects innovation value, abilities, and contributions.
   • Relax regulations to allow research institutions to operate more independently.
4. 4) Build an open innovation ecosystem
   • Actively participate in global innovation networks and strengthen collaborative research with science researchers from around the world, focusing on issues such as climate change and human health.
5. 5) Stimulate the innovative vitality of talent
   • Attract talent from all over the world and achieve self-reliance and strengths in science and technology through top innovative talent.

Next, at the 11th Collective Study Session of the Politburo of the Communist Party of China Central Committee (January 31, 2024), General Secretary Xi Jinping positioned science and technology innovation as a core element of the development of new quality productive forces, and reiterated the need to focus on original and disruptive innovation, accelerate the realization of a high level of self-reliance and strengths in science and technology, and work toward breakthroughs in core technologies.

3. A new whole-nation system for self-reliance and strengths in science and technology

China is establishing a whole-nation system to achieve self-reliance and strengths in science and technology.

The leadership has formulated a comprehensive plan for science and technology development and is implementing it through all available means. The government is proactively investing in and supporting science and technology innovation and the development of new industries. As part of this, it has implemented initiatives such as "Made in China 2025" (May 2015) and is making large-scale investments in priority industries. In addition, the government is supporting science and technology innovation through injecting funds into targeted state-owned enterprises and leading private companies, tax incentives, infrastructure development, and other measures.

Furthermore, the government concentrates resources such as human capital, funds, and infrastructure toward specific goals. For example, China is actively cultivating talent in science and technology and inviting overseas talent to the country. Furthermore, through focused investment in universities and research institutes, it is establishing a comprehensive research system that covers everything from basic research to applied research.

In order to encourage science and technology innovation among companies, the government is also actively working on institutional reforms, such as easing restrictions on entry into industries and strengthening protection of intellectual property rights.

The government also aims to increase international competitiveness in the field of cutting-edge technology by fully mobilizing the nation's resources. Specifically, China is absorbing foreign technology and know-how through international economic cooperation. In addition, the country is strengthening global science and technology collaboration by participating in international standardization activities and encouraging foreign companies to enter the Chinese market.

During the era of planned economy, China also sought to develop science and technology by adopting a whole-nation system. Under this "old whole-nation system," the government centrally decided on science and technology development goals, priority areas, and funding allocations, and each region and institution then carried out those plans. Priority was given to areas such as national defense, heavy industry, and core infrastructure, and human and material resources were concentrated in these areas. A typical example is the "Two Bombs, One Satellite (Atomic Bomb, Hydrogen Bomb, Satellite)" plan. From the perspective of national security, many science and technology projects were placed under military control, required strict secrecy, and had limited dissemination of their results to civilian use.

Compared to the "old whole-nation system," the currently implemented "new whole-nation system" differs significantly in the following respects:

1. 1) Diversification of goals
   In the 1960s, the main goal was to break through military blockade and ensure autonomy in science and technology related to national defense. In contrast, broad goals have now been set in cutting-edge fields such as AI, new energy, biotechnology, and aerospace.
2. 2) Marketization of policy tools
   Under the old system, the government allocated resources, but under the new system, the power of business and society is mobilized through market-based mechanism such as tax incentives and policy support.
3. 3) Diversification of participants
   Under the old system, participants were dominated by government agencies, but under the new system, companies, universities, private capital and other entities are widely involved.
4. 4) Promotion of international cooperation
   Whereas the old system was relatively closed, the new system promotes participation in large-scale international science projects and openness and cooperation in science and technology.

IV. Three driving forces: 2) Industrial upgrading

General Secretary Xi Jinping pointed out that "to develop new quality productive forces, we must quickly apply the results of science and technology innovation to specific industries and supply chains, transform and advance traditional industries, nurture and strengthen emerging industries, build and deploy future industries, and improve the modern industrial system. We must also vigorously develop the digital economy, promote the in-depth integration of the digital economy with the real economy, and build internationally competitive, digital industrial clusters (Note 5)."

1. Strengthening supply chains

In recent years, China has been adversely affected by trade friction with the United States and the COVID-19 pandemic, exposing the vulnerabilities in its supply chains. In light of this situation, the government is promoting measures to strengthen the supply chains by "compensating for weaknesses and enhancing strengths," as well as focusing on improving infrastructure and diversifying sources of procurement for raw materials and parts.

First, China is trying to address its shortcomings in terms of core technologies, core parts, and raw materials, and is improving its ability to independently control its supply chains. For example, in order to improve self-sufficiency in areas such as semiconductors, where the United States holds chokepoints, the government is investing substantial public funds in nurturing companies and promoting research and development.

Meanwhile, China is improving the technology level, product quality, brand power, and ultimately international competitiveness in industrial sectors in which it has advantages. For example, China is the world's largest market for electric vehicles (EVs) with a well-developed supply chain. Chinese EV companies source most of their key components, such as batteries, motors and electronics domestically and are also focusing on research and development. The Chinese government has also positioned the development of the EV industry as a strategic priority and is implementing various support measures, including subsidies, tax incentives, and infrastructure development.

In addition to traditional infrastructure such as ports, roads, and railways, the government is also promoting the development of new infrastructure that will primarily support the development of the digital economy. This includes communication network infrastructure, such as the fifth-generation mobile communication system (5G), the Internet of Things (IoT), the industrial internet, and satellite internet; infrastructure for new technologies, such as AI, cloud computing, and blockchain; and infrastructure for increasing computing power, such as data centers and smart computing centers (Note 6).

Additionally, in order to avoid an overreliance on specific countries or regions for its supply chains, China is diversifying its sources of procurement of raw materials and parts. Specifically, it is taking advantage of the Belt and Road Initiative to strengthen economic ties with Southeast Asian and other countries.

2. Transforming and advancing traditional industries, and nurturing emerging and future industries

The Chinese government is taking advantage of science and technology innovation to transform and advance traditional industries and nurture emerging and future industries.

First, Made in China 2025 sets the transformation and advancement of traditional industries as one of its strategic priorities, and presents the following major policy measures:

1. 1) Promote the transformation and advancement of traditional industries
   Support the adoption of new technologies, new production methods and new materials to improve product quality and grade and promote the development of high value-added products.
2. 2) Accelerate the transformation of traditional industries into smart manufacturing
   Support the introduction of smart manufacturing technologies to improve production efficiency and flexibility.
3. 3) Green transformation of traditional industries
   Support the adoption of green manufacturing technologies, reduce polluting emissions and improve resource efficiency.
4. 4) Cultivate industrial clusters for traditional industries
   Strengthen cooperation between companies, leverage complementarity, and support joint development and the fostering of competitive industrial clusters.

Next, the 14th Five-Year Plan for National Economic and Social Development and Outline of Long-Term Goals to 2035 (March 2021) lists next-generation information technology, biotechnology, new energy, new materials, high-end equipment, new energy automobiles, environmental protection, aerospace, and marine equipment as strategic emerging industries that the government will focus on supporting. In particular, emphasis is placed on promoting the integration and innovation of biotechnology and information technology, accelerating the development of industries such as biomedicine, biological breeding, biomaterials, and bioenergy, expanding and strengthening the bioeconomy, as well as deepening the popularization and application of the BeiDou Navigation Satellite System (China's version of GPS). In addition, the plan includes a policy to implement incubation projects for future industries in cutting-edge technology fields such as brain-based artificial intelligence, quantum information, genetic technology, new-generation networks, deep sea and aerospace development, hydrogen energy and energy storage.

Furthermore, the "Implementation Opinions on Promoting the Innovative Development of Future Industries" (January 2024) issued by seven departments including the Ministry of Industry and Information Technology and the Ministry of Science and Technology of China clarified the policy of promoting science and technology innovation and industrial development, focusing on six major areas: manufacturing, information, materials, energy, space, and healthcare (Figure 3).

Note: 1. A technology that digitally reproduces physical objects and spaces and allows for their simulation and management.
          2. A technology that connects the brain to machines to utilize information transmitted by brain waves, or by stimulating the brain.
Source: Seven Departments Including China's Ministry of Industry and Information Technology and Ministry of Science and Technology, "Implementation Opinions on Promoting the Innovative Development of Future Industries," January 29, 2024.

Regardless of whether the industry is traditional or emerging, the integration of science and technology innovation with industry often results in new business models and types of business. Typical examples include the platform economy (Alibaba's e-commerce), the sharing economy (DiDi's ride-sharing), and fintech (Ant Group's Alipay) (Figure 4).

Source: Compiled by the author based on various materials

3. Promoting the digital economy

The digital economy refers to all economic activity that utilizes information and communications technologies such as the Internet, AI, and big data. The digital economy contributes significantly to economic growth by creating new businesses and added value, improving productivity and cost efficiency, providing innovative products and services, and encouraging new entrants by lowering barriers to starting a business.

The "Internet+" action plan, introduced at the National People's Congress in March 2015, accelerated the development of China's digital economy. The aim was to use the power of the Internet to transform traditional industries, increase economic efficiency, and improve people's lives. During this stage, e-commerce, mobile payments and digital platforms saw rapid growth.

The 14th Five-Year Plan for National Economic and Social Development and Outline of Long-Term Goals to 2035, approved at the National People's Congress held in March 2021, set goals such as increasing the value added of core industries of the digital economy as a percentage of GDP from 7.8% in 2020 to 10% by 2025, and realizing the world’s best infrastructure and industrial system for the digital economy by 2035.

To achieve this, the "Notice of the 14th Five-Year (2021-2025) Plan for Digital Economy Development" (State Council, January 2022) states that China will work to: (1) optimize and enhance digital infrastructure, (2) fully utilize the role of data as a production factor, (3) promote the digital transformation of industry, (4) promote the development of the digital industry, (5) improve the level of digitalized public services, (6) develop a digital economy governance system, (7) strengthen the digital economy security system, and (8) expand international cooperation in the digital economy.

The Government Work Report delivered by Premier Li Qiang to the National People’s Congress in March 2024 committed to implementing measures that support the high-quality development of the digital economy. This includes promoting the digital industry, facilitating the digital transformation of traditional industries, and fostering the in-depth integration of digital technology with the real economy. As part of this, an "AI+" action plan was proposed, modelled on the "Internet+" action plan, focusing on the use of artificial intelligence in various industries.

V. Three driving forces: 3) Improvements in the quality and allocation of production factors

To enhance new quality productive forces, in addition to science and technology innovation and industrial upgrading, improvements in the quality and allocation of production factors are required. Towards this end, China is accelerating the market reform of production factors and promoting a three-in-one reform of education, science and technology, and human resources, while also encouraging the utilization of data as a new production factor.

1. Accelerating market reform of production factors

China has been transitioning to a market economy since the late 1970s, but the marketization of production factors has lagged behind that of goods and services. Specifically, the mobility of major production factors such as land, labor, capital, technology, and data is still limited, which is hindering improvements in economic efficiency. To address this issue, the "Opinions of the Central Committee of the Communist Party of China and the State Council on Establishing a More Perfect Market-Based Factor Allocation System and Mechanism" issued in April 2020 positioned market-based reform of production factors as the top priority in economic system reform. The aim is to promote factor mobility and market-driven determination of factor prices, thereby achieving the following effects: 1) improved productivity through the efficient allocation of production factors, 2) industrial upgrading through the rapid diffusion of new technologies and ideas, and 3) enhanced economic vitality through the effective functioning of market mechanisms.

The specific contents of the reforms are as follows:

1. 1) Land market: Clarification of land ownership, relaxation of land use regulations, promotion of land transactions, etc.
2. 2) Labor market: Reform of the family registration system, removal of barriers to labor mobility, development of job placement systems, etc.
3. 3) Capital markets: Relaxation of financial regulations, expansion of corporate fund procurement channels, internationalization of capital markets, etc.
4. 4) Technology market: Strengthening of intellectual property rights protection, promoting technology transfer, and encouraging open innovation.
5. 5) Data market: Establishment of rules for data trading, promotion of data distribution, and encouraging data utilization.

In order to enhance the mobility of production factors, obstacles to their movement need to be eliminated, not only among companies and other economic entities, but also across different ownership systems (state-owned and non-state-owned enterprises), between urban and rural areas, among regions, and across industries (Note 7).

2. Promoting a three-in-one reform of education, science and technology, and human resources

The three elements of education, science and technology, and human resources are interconnected and reinforce each other. Reform of the education system can cultivate high-level talent, reform of the talent system can enable human resources to demonstrate their capabilities, and reform of the science and technology system can promote the transfer of technology to industry. In order to take advantage of the virtuous cycle of these three elements, the 20th Party Congress in October 2022 proposed promoting a three-in-one reform of education, science and technology, and human resources. This means that the development of science, technology and high-tech industries has become the main goal of education and human resource development. In order to develop and utilize the human resources that will support innovation in science and technology, the government is promoting the following reforms in the education system and human resources system (for science and technology system reform, see Section III).

1. 1) Educational system reform
   • Strengthening science and technology education: From primary school to higher education, the focus will be on enhancing education in areas such as science, technology, engineering, mathematics, and information science, while nurturing logical thinking, problem-solving skills, and creativity.
   • Enhancing vocational education: To cultivate a workforce that aligns with the needs of industry, efforts will be made to enhance the quality of vocational education and foster collaboration between academia and industry.
   • Encouraging lifelong learning: Programs for adult learners will be improved to create an environment conducive to ongoing learning of the latest technologies and knowledge.
2. 2) Human resources system reform
   • Promoting human resource mobility: Relaxing labor market regulations will facilitate increased mobility of human resources, ensuring the smooth flow of talented individuals towards innovative companies.
   • Modernizing the assessment system: Shifting from traditional assessments based on academic and work experience to evaluations focused on abilities and outcomes will establish a framework for assessing and developing human resources capable of driving science and technology innovation.
   • Facilitating international human resource exchanges: Actively promoting study abroad opportunities and attracting overseas talent aims to stimulate international interactions within Chinese educational institutions and companies, fostering the development of global human resources.

3. Utilizing "data" as a new production factor

Historically, the main factors of production have shifted along with changes in the industrial structure. In the agricultural economy, labor and land were the main factors; in the industrial economy, it is capital; and in the information economy, technology is the main player. In recent years, thanks to the digital revolution, data has become increasingly important as a new factor of production. In China, the "Opinions of the Central Committee of the Communist Party of China and the State Council on Establishing a More Perfect Market-Based Factor Allocation System and Mechanism" published in April 2020 treats data as a production factor, alongside land, labor, capital, and technology.

Compared to traditional production factors such as labor, capital, and land, data has the following characteristics: 1) it is non-excludable, easy to replicate, and can be used simultaneously by multiple entities; 2) it can be integrated with other production factors, such as labor, capital, and technology, to create synergies; and 3) it has economies of scale, meaning that the more data there is, the greater the value. As a production factor, data is expected to contribute to improving productivity through the following routes:

1. 1) Achieving increasing returns to scale
   Companies can reduce production costs and improve production efficiency by realizing the economies of scale that come with using data.
2. 2) Promoting science and technology innovation
   Data can provide enormous information and knowledge resources for science and technology innovation, accelerating the research, development and application of emerging technologies such as AI, big data and IoT.
3. 3) Creation of new industries and new business models
   The use of data enables the rapid development of business models such as the platform economy and sharing economy, bringing about major changes in production methods and lifestyles.
4. 4) Optimization of resource allocation
   Using data, companies can better understand market demand and allocate resources accordingly.
5. 5) Improvement of total factor productivity
   The integration of data with other production factors can significantly increase total factor productivity.

Recognizing the importance of data as a production factor, the Chinese government is actively promoting its use through various policies and initiatives. First, in terms of systems and legal arrangements, following the Cybersecurity Law of June 2017, China implemented the Data Security Law in September 2021 and the Personal Information Protection Law in November of the same year. Next, in December 2022, the "Opinions of the Central Committee of the Communist Party of China and the State Council on Establishing a Data Infrastructure and Enhancing the Role of Data Factors" was formulated, providing specific guidelines for promoting the market-based allocation of data.

VI. Synergy among the three driving forces

Science and technology innovation, industrial upgrading, and improvements in the quality and allocation of production factors are complementary and act as the driving forces behind the implementation of new quality productive forces. To maximize this synergy, it is essential to create an innovation ecosystem through industry-academia collaboration and to promote industrial clusters that encompass more than one of these forces.

1. Formation of an innovation ecosystem through industry-academia collaboration

The Chinese government is actively promoting industry-academia collaboration with the aim of further developing science and technology and revitalizing the economy. Specifically, tax incentives and financial assistance systems have been established to promote industry-academia collaboration, and institutions and platforms are being developed to support technology transfer and joint research between universities and companies.

Through collaboration between industry and academia to establish an innovation ecosystem, the promotion of the generation and implementation of science and technology innovations can be facilitated. First, joint research between universities, research institutes and companies promotes the creation of new ideas and technologies. An innovation ecosystem will also enable technologies developed at universities and research institutes to be transferred quickly to companies. Furthermore, universities, research institutes and companies can work together to develop the necessary human resources.

Specifically, industry-academia collaboration in China takes the following forms:

1. 1) Joint research between universities and companies
   • Joint research on 5G network technology between Tsinghua University and China Mobile Communications Group.
   • Joint development of new energy vehicles by Shanghai Jiao Tong University and SAIC Motor Corporation.
2. 2) Establishment of university laboratories by companies
   • Huawei has established research laboratories at many universities to support human resource development and technology development in the communications field.
   • Xiaomi has established an AI research institute at Peking University and is investing in basic research and human resources development in the field of artificial intelligence.
3. 3) Nurturing university-based venture companies
   • Tsinghua University established "X-lab" to foster venture companies by utilizing the technology of faculty and students.
   • The University of Chinese Academy of Sciences is developing a science park and supporting the establishment of high-tech ventures.
4. 4) Interaction between companies and students
   • Major IT companies such as Tencent and Alibaba have established internship programs with universities to attract talented students.
   • Corporate executives and engineers deliver lectures at universities.

2. Industrial clustering

Industrial clusters, which are areas where companies and research institutes related to a particular industry are located in close proximity, foster synergy among science and technology innovation, industrial upgrading, and improvements in the quality and allocation of production factors. Close interaction between companies and research institutions promotes information sharing, leading to the creation of new ideas and technologies. Clusters also promote labor mobility and foster competition and cooperation between companies. Furthermore, they make it easier to develop the necessary specialized human resources and for necessary infrastructure to be developed. Since the reform and opening up of China, world-class industrial clusters have been formed in such places as the Pearl River Delta, the Yangtze River Delta, and Beijing Zhongguancun.

1. 1) Pearl River Delta
   The Pearl River Delta in Guangdong Province, adjacent to Hong Kong, is home to a concentration of companies, mainly in light industries such as home appliances, electronic devices, toys, and clothing, which supports China as the world's factory. A system of division of labor and collaboration is in place, and efficiency improvements are being made throughout the supply chain. In addition, the region has all the elements necessary for production, including an abundant labor force, vast factory sites, and well-developed infrastructure. Thus companies are able to produce high-quality products at low cost. In recent years, thanks to proactive government support, there has been an increase in investment in training highly skilled workers and in research and development. In particular, Shenzhen, which was established as a special economic zone in 1980, has emerged as a cradle of venture companies and established itself as a high-tech center in China.
2. 2) Yangtze River Delta
   The Yangtze River Delta, located in eastern China encompassing Shanghai, the Zhejiang Province and the Jiangsu Province, is home to large companies in heavy industries such as automobiles, steel, shipbuilding, and chemicals. These companies actively collaborate with universities and research institutes and are actively conducting research and development in areas such as next-generation automobiles and AI. In particular, Shanghai has developed into a center of financial and information services in China, and it plays an additional role as a base of innovation. Many companies in the Yangtze Delta have advanced manufacturing technology and are focusing on producing high value-added products. In recent years, there has been progress in creating smart factories that incorporate cutting-edge technologies such as robots and AI. Furthermore, the region is blessed with talented human resources, abundant funding, and well-developed infrastructure.
3. 3) Beijing Zhongguancun
   Zhongguancun is a high-tech industrial cluster in Beijing. With close ties with universities and research institutes such as Peking University and Tsinghua University, it has produced some of China's leading IT companies, including Lenovo, Baidu, and Xiaomi. Zhongguancun is home to many companies that provide advanced IT services, such as software development, system integration, and service outsourcing, and in recent years, areas such as AI and big data have also grown rapidly. In addition, the region is endowed with elements favorable to innovation, such as talented IT personnel, abundant funding, and active government support.

Each region is leveraging its respective advantages, with the Yangtze River Delta aiming to develop smart manufacturing, fintech and biomedicine, the Pearl River Delta aiming to develop 5G communications, artificial intelligence and robotics, and Beijing Zhongguancun aiming to develop quantum computing, big data and space technology. By complementing one another, these three regions are expected to take the lead in promoting new quality productive forces in China.

VII. Current status and challenges of the development of new quality productive forces in China

The development of new quality productive forces in China has produced many results, especially in the integration of technology and industry. On the other hand, there are many challenges that must be overcome, such as the impact of the U.S. attempting to decouple from China and a shortage of human capital and basic research capabilities.

1. New quality productive forces as the engine of growth

China is making progress in developing new quality productive forces.

First, China is emerging as a science and technology power. R&D expenditure in China is increasing rapidly, reaching 3.3 trillion yuan (approximately $470 billion) by 2023, equivalent to 2.64% of GDP, making it the second largest figure in the world after the United States (Figure 5). In addition, cutting-edge technology development is progressing in fields such as AI, robotics, 5G, new energy, and biotechnology. Reflecting this, in the Global Innovation Index published by the World Intellectual Property Organization (WIPO), China has risen from 35th place in 2013 to 12th place as of 2023, surpassing Japan (13th place) (Figure 6). In addition, led by Huawei, four Chinese companies are among the top 10 companies in the world in terms of the number of applications under the International Patent System as of 2023 (Figure 7).

Source: Compiled by the author based on data from the National Bureau of Statistics of China

Source: Compiled by the author based on WIPO, Global Innovation Index (various editions)

Source: Compiled by the author based on WIPO, “Huawei, Samsung and Qualcomm are Top Users of WIPO's International Patent System; India, Türkiye and Republic of Korea are Standouts Amid Softening Global Demand,” March 7, 2024

Secondly, with the development of new quality productive forces, China's industrial structure is becoming more advanced and the proportion of high-tech industries is expanding rapidly. In particular, among new business models such as the rapidly developing platform economy and fintech, China is taking the lead globally, demonstrating its advantages in science and technology (new knowledge, theories, technologies), industry (production activities, service provision), markets (customer needs, competitive environment), and policies (government support, regulations). This is being driven by innovative private enterprises such as Alibaba, Tencent, ByteDance, and Ant Group.

In this way, the development of new quality productive forces has already become an engine of growth for the Chinese economy.

2. Remaining issues

While China has achieved great success in developing new quality productive forces, many challenges remain, including the impact of the U.S-China decoupling, vulnerabilities in the supply chain, limitations of the whole-nation system, a lack of basic research capabilities, a shortage of human capital, deficiencies in systems and mechanisms, and a lack of funding for companies (Figure 8).

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Figure 8. Issues That Must Be Overcome to Develop New Quality Productive Forces

Source: Compiled by the author based on various materials

Source: Compiled by the author based on various materials

To resolve these issues, China must not only make efforts in the areas of "science and technology innovation," "industrial upgrading," and "improvements in the quality and allocation of production factors" and adhere to the "new development philosophy," but also strive to improve the business environment through institutional reforms such as promoting market reforms and opening up to the outside world, and strengthening the rule of law and protection of private property. In particular, there is a pressing need to expedite the creation of a market environment in which private and foreign-affiliated companies, which have made significant contributions to science technology innovation, can compete fairly with state-owned enterprises without discrimination (Note 8).