China’s Innovation Approach to Growth

China’s Innovation Approach to Growth

By Yixiao Zhou, Jian Ding, Sudyumna Dahal and Junling Huang

China’s per capita income reached US$10,000 in 2019 – an important milestone in measuring the significant improvement in wellbeing for 1.4 billion Chinese people resulting from the decades-long program of reform and development. In the same year, China’s total gross domestic product (GDP) reached US$14.3 trillion, accounting for 16.4 per cent of global GDP according to World Bank estimates, which matches closely to China’s share of about 18 per cent of global population. Along with the rise in per capita income and total GDP, the Chinese economy witnessed some fundamental changes in the pattern of industrialization, continuing to move towards high value-added production, trade, investment, and progress on innovation and technological change.

The catch-up phase of China’s economic development saw significant progress in innovation and technological change, underpinned by its human capital and increased capacity for innovative activities. China’s spending on R&D climbed 10.3 per cent to US$378 billion in 2020, as reported by China’s National Bureau of Statistics (NBS). According to the NBS, R&D spending accounted for 2.4 per cent of China’s GDP in 2020 (Figure 1). The report shows that, by the end of 2020, China had 522 ‘national key laboratories’ and 350 ‘national engineering research centres’ in operation; some 457,000 projects had been funded by the National Natural Science Foundation of China in 2020 and 3.6 million patents had been granted – up by 40 per cent from 2019. These developments have allowed China to leapfrog its technological capabilities in several key areas such as artificial intelligence, space, medicine and digital technologies, as well as compelling it to pay more attention to the protection of intellectual property rights in the transition from technological imitation to innovation.

figure 1
Source: OECD Data

According to the Global Innovation Index, which provides detailed metrics about the innovation performance of 131 countries and economies around the world, China was ranked first in innovation performance for middle-income countries and fourteenth globally. The World Intellectual Property Organization (WIPO) reported that its China office received a record total of 1.54 million patent applications in 2018, ahead of the United States, Japan, South Korea and the European Patent Office (EPO). China accounted for more than 40 per cent of the world total.

The country has experimented different approaches of innovation over the years. Earlier approach was mostly technology absorption but now there is more attention placed on domestic innovation. As many Chinese high-tech companies such as Huawei, Tencent, Dajiang and ZTE start to emerge in international markets, technology competition between China and other technologically advanced economies has escalated, and international willingness to allow technology diffusion to China has significantly declined. As technology diffusion opportunities wane, China will need to rely more on domestic innovation to sustain its technological progress. Even without a deliberate slowdown in technology diffusion by advanced countries, China would need to boost domestic innovation because room for technological catch-up shrinks as it moves closer towards the global technology frontier

As technology diffusion opportunities wane, China will need to rely more on domestic innovation to sustain its technological progress.

Since the 18th National Congress of the Communist Party of China (CPC), the CPC Central Committee and the State Council have placed scientific and technological innovation at the core of the overall national development plan and made a series of major arrangements around the implementation of the innovation-driven development strategies. One of the strategies is to implement technological innovation projects performed mainly by enterprises, and this strategy started from the “Ninth Five-Year” National Technological Innovation Program in 1996. The experience of the city of Shenzhen provides some valuable insights on innovation led by Chinese firms. This Southern city is where the headquarters of Huawei, ZTE, Dajiang and Tencent are located and is a leader in innovation outputs (Table 1). One unique characteristics of Shenzhen is that private firms are responsible for the majority of R&D investment. The comparative advantage of Shenzhen in innovation activities comes from two main sources. The first advantage is its unique economic geography. As one of the financial centers in China, Shenzhen possesses the venture capitals that are crucial to high-tech businesses, especially in the start-up period. In addition, the manufacturing industry in Guangdong province is leading in China, which facilitates the transformation of knowledge to products. The second advantage is the business environment in Shenzhen. As Shenzhen is as a newly developed city, there are fewer policy interventions and economic distortions in Shenzhen compared with another city like Shanghai, which has similar geographical advantages. Thus, firms in Shenzhen operate in markets that are more freely competitive and the core competence of Shenzhen lies in its business environment.   

table 1
Source: China Statistical Yearbook on Science and Technology.

Besides private firms, as an important pillar supporting China’s economic development, state-owned enterprises (SOEs) are the national team to implement the deployment of major national scientific and technological innovation. By the end of 2016, SOEs had 1.566 million scientific and technological research staff and 226 academicians of the Chinese Academy of Science and the Chinese Academy of Engineering. During the 13th Five Year Plan period, the cumulative R&D investment of SOEs exceeded 3.4 trillion-yuan, accounting for a quarter of the national R&D. Promoting SOEs to improve their scientific and technological innovation ability is an inevitable requirement for China to keep in touch with the world’s scientific and technological frontier, to compete in the global market, and to serve China’s major national needs. During the 14th Five Year Plan period, SASAC took scientific and technological innovation as the “number one task”, concentrated resources and forces, accelerated the building of a number of leading enterprises in scientific and technological innovation, and resolutely built SOEs into national strategic scientific and technological forces.

While R&D spending is important for creating innovation, it is not necessarily sufficient for improving productivity and growth. One key puzzle has been the declining trend of productivity growth in China since early 2000s despite massive investment in R&D. Hence, policy makers need to think hard about this. For R&D to have positive impact on productivity and growth, there is a growing evidence that various factors including ‘innovation ecosystem’ will be extremely important rather than just expenditure on R&D or patent registration. Institutions, infrastructure, human capital, business sophistication, civil service, intellectual property rights, transparency, creative outputs, civil liberty and political rights all play crucial role in enhancing impact of R&D on growth and productivity.

About the Authors

Yixiao Zhou

Yixiao Zhou is a Senior Lecturer at the Arndt-Corden Department of Economics and Deputy Director of China Economy Program, Crawford School of Public Policy. Her research focuses on international macroeconomics and policies, the economics of innovation and industrial upgrading, and issues and policies for development and growth.

Jian Ding

Jian Ding, PhD graduate from Australian National University. Research interests include law and economics, labor economics, trasanction cost, contract theory, innovation, business model. Jian is currently working as a researcher in Institute of Advanced Science Facilities (IASF), Shenzhen.

Sudyumna Dahal

Sudyumna Dahal is a PhD candidate in economics at the Centre for Applied Macroeconomic Analysis (CAMA), Australian National University. Previously, he worked at the World Bank in Washington DC, Africa and South Asia. His research interests are at the intersection of macroeconomics, growth and development with a focus on the public policy of developing countries.

Junling Huang

Junling Huang is Director of the International Clean Energy Research Office at the China Three Gorges Corporation (CTG), a state-owned enterprise that focuses on large-scale hydropower and renewable energy development and operation. His current research interests include power market, carbon market, renewable energy policy and energy technology innovation policy.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.