72 share of GDP to 2 percent and beyond. It is also likely that R&D spending will be better and more extensively applied in the future, since the share of such spending financed by enterprises (rather than by the government) recently seems to have increased considerably.<sup>139</sup> This may help explain why R&D spending and innovation in China during the last decade have become more labor-intensive and less capital- and energyusing than earlier (Jefferson, 2005; Jefferson, Su and Zhang, 2004).<sup>140</sup> There is, however, a large regional concentration of such spending, predominantly to eastern regions (about 70 percent of total spending) and, indeed, to four large cities (Beijing, Guangdong, Jiangsu and Shanghai). This will contribute to preserve the large regional differences in per capita GDP.

Clearly, non-mainland firms have contributed substantially to the technological and organizational progress in China in recent decades. It seems, however, that this has taken place through direct import of technology rather than through R&D activities by these firms in mainland China.<sup>141</sup> However, non-mainland firms seem to stimulate domestic R&D spending indirectly.<sup>142</sup> One mechanism may be that they contribute to competitive pressure, another that they simplify the access to foreign technology for domestic firms through various types of spillovers, for which there is clear evidence.<sup>143</sup> In spite of fast technological progress in some sectors and region, China has, of course, a long way to go with regard both to the production and the actual implementation of R&D.

# **_B. Health Care_**

As a result of the earlier mentioned stagnation of public-sector health services during the period of economic reform (section II:1) – indeed a regress in many rural areas – the

> 139 According to Jefferson (2005), thiX Ziaoyun (2004).

> 140 Moreover, for a vast and heterogeneous country like China, modern information and communication technology (ICT) is like manna from heaven. Indeed, China has already started to exploit this source of productivity growth. For instance, while the country’s telecom system had 10 million fixed-line subscribers in 1985, there are now more than 300 million fixed lines and close to 400 million mobile phones in operation (Ljunggren, 2006). ITC opportunities could also be more efficiently exploited by opening up and allowing free (non-censored) information flows in the new information channels.

> 141 Jefferson (2005) reports that such firms contribute no more than a quarter of total R&D spending within mainland China.

> 142 R&D spending intensity of domestic (mainland) firms has recently increased most quickly in industries with much foreign (non-mainland) investment (Jefferson , Su and Zhang, 2004). “In-house” R&D activities of domestic firms also seem to be highly complementary to technology transfers (Hu et al., 2004). 143 Using provincial data, Cheung and Lin (2004) report positive effects of FDI on the number of domestic patent applications in the same province. Liu (2002) finds evidence of technological spillovers of foreign firms in the Shenzhen Special Economic Zone in the period 1993-1998.