From Technological Catch-up to Innovation Summary Income gaps among countries are largely explained by differences in productivity. By raising the capital/labor ratio and rapidly assimilating technologies across a wide range of activities, China has increased factor productivity manifold since 1980 and joined the ranks of middle income countries. With the launch of the 12th FYP, China has set its sights on becoming a high income country by 2030 through a strategy combining high levels of investment with rapid advances in technology comparable to that of Japan from the 1960s through the 1970s and Korea’s from the 1980s through the end of the century. During the next decade, more of the gains in productivity are likely to derive from technology absorption and adaptation supplemented by incremental innovation. By 2030, China expects to have pulled abreast technologically of the most advanced countries and increasingly, its growth will be paced by indigenous innovation which pushes outwards the technology frontier in areas of acquired comparative advantage. Both the first stage and the next will rest on the success of a number of policies focused on: competition and the evolution of the business sector; skill development; R&D; national and international networking to promote innovation; and the nurturing of innovation in major urban centers. A competitive market environment is the precondition for a steady improvement in productivity. Starting in the late 1980s, for example, market oriented reforms stimulated entry and competition in most manufacturing sub-sectors. Even in some “strategic” or “pillar” industries (for example, airlines and telecommunications) the
Figure 1: Product Space (1987) Source: Authors’ calculations based on UN Comtrade data Figure 2: Product Space (2006) Source: Authors’ calculations based on UN Comtrade data A closer inspection of the products in China’s export basket with the highest densities that are upgrades, underscores the fact of China’s rapid industrial progress. In 1987, the top 10 commodities with the highest densities, implying that they were more sophisticated than the average, were mainly low-tech items offering minimal opportunities for diversification (see Table 4). By 2006, the composition of the high density products had altered radically with many opening avenues for upgrading into more technologically advanced products with better market prospects (see Table 5). Thus China’s industrial capabilities are strengthening as is its competiveness relative to higher income countries. These findings are similar to those of Felipe et al (2010). Table 4: Top 10 “upscale” commodities with highest density (1987) Short description Density class Pyrotechnic articles 0.655046 MT2 451 Manufactured goods, nes 0.558615 LT2 1,325 Children's toys, indoor games, etc 0.474168 LT2 3,163 Travelling rugs, blankets (non electric), not knitted or crocheted 0.461357 LT1 1,934 Umbrellas, canes and similar articles and parts thereof 0.458874 LT2 891 Base metal domestic articles, nes, and parts thereof, nes 0.455813 LT2 981 Other materials of animal origin, nes 0.451113 PP 447 Fabrics, woven, of sheep's or lambs' wool or of fine hair, nes 0.449691 LT1 4,309 Soya beans 0.439272 PP 534 Hydrocarbons derivatives, non-halogenated 0.436489 RB2 4,983
the workforce, on encouraging applied research in firms, and on further reforming SOEs, may be appropriate. In the second decade (2021-2030), China will have to rely more on indigenous innovations requiring not just the generation of ideas through cutting edge basic research – with blue skies research supported by the state – but also the harnessing of these ideas by dynamic Chinese multi-national private firms which are technology leaders in their own particular areas and engage in high levels of research. As we indicate earlier in the chapter, policies for the first stage necessarily overlap with second. The difference is in emphasis. The policies listed below are frontloaded because the building of the innovation ecosystem is concentrated in the balance of the decade with the government playing a lead role. In the second stage, the burden of success will rest on the business sector, which is why the creating of a competitive business sector is of the greatest importance. National technology and innovation policies will need to be complemented by urban policies that recognize the vital role of cities in advancing ideas and technologies. The roles of the various entities involved are further spelled out in Annex Tables 16. 1. A competitive market environment is necessary condition for steady improvement in productivity. This entails the opening of product markets, and the fair and effective enforcement of laws regulating competition and protecting intellectual property as well as consumer rights. It also extends to competition and ease of mobility in factor markets. Starting in the late 1980s, for example, market oriented reforms stimulated entry and competition in most manufacturing sub-sectors. Even in some “strategic” or “pillar” industries (for example, airlines and telecommunications) the breaking up and corporatization of incumbent providers in 1990s released additional competitive pressures. More recently, the phasing out of tax incentives which had favored foreign investors stimulated competition by leveling the playing field with domestically-owned firms. China’s WTO accession in 2001 increased competition from imports and the large volume of FDI has led to a further intensification of competitive pressures. Sustaining
Source: China Statistics Yearbook on High Technology Industry 2010 Table 15: Innovation Inputs and Outputs of on Industrial Enterprises in High-tech Industry in China, 2009 (%) Percentage of Enterprises Having R&D Institutions Percentage of Enterprises Having R&D Activities R&D expenditure as percentage of sales revenue of core businesses R&D Personnel as a percentage of total employment Patent in force per 100 million Yuan of R&D expenditure Patents in force per 100 R&D Personnel Total 17.52 25.53 1.63 4.96 42.51 8.67 Domestic 18.32 27.11 2.97 7.32 48.21 9.82 #State-owned Enterprises 27.93 41.36 3.81 8.70 21.95 4.48 Enterprises with Funds from Hong Kong, Macau and Taiwan 16.30 22.92 1.13 3.29 35.25 6.70 Foreign Funded Enterprises 15.73 22.18 0.83 3.16 31.61 6.77 Source: China Statistics Yearbook on High Technology Industry 2010 Table 16: The role of various entities involved in innovation strategy Entities Objectives Incentive /constraint mechanisms The actions that the entities should and could adopts The policies and regimes that could influence the behaviors of the entities Enterprises Sustainable earning capacity; Long-term competitiveness Market competition as driving force for innovation (Schumpeter innovation) Improve management; Purchase of technology; R&D investment; Recruit talents Promote sufficient competition and market regimes; Protection of IPR; Enhance the supply of human resources; Encourage innovative entrepreneur; Provide tax exemption for enterprise R& D behavior; Demands-side induction Foreign funded enterprises Sustainable earning capacity; Long-term competitiveness Market competition as driving force for innovation (Schumpeter innovation) Purchase technology from the parent company; Launch local R&D activities Promote a fully completive environment; IPR protection system; Enhance the supply of human resources; Provide tax exemption for enterprise R& D behavior;