China has adopted an active technology development program since the foundation of the People’s Republic in 1949. But up until recently, the program has been overly biased towards defence-related sectors. The idea that science and technology are independent sources of economic growth has only just taken hold.
The chief program designed to facilitate technological development and innovation is the ‘National Medium and Long-term Program for Science and Technology Development (2006–2020)’ (the ‘2020 program’). This program was initiated by the central government and released in early 2006.
The aim of the 2020 program is to make China an innovation-oriented society by 2020 and one of the world’s leading innovators in the longer term. Key goals include improving the national intellectual property rights system and boosting China’s research and development expenditure to 2.5 per cent of the country’s GDP by 2020.
What has been the impact of the 2020 program, and what is the content of current development in the science and technology sector?
In recent years, Chinese enterprises have had an expanded role in innovation and have become important drivers for economic growth. Chinese firms are now the dominant investors in research and development in the country – by 2008 they accounted for more than 70 per cent of the country’s research and development investment and spending.
In terms of specific innovation activities and efforts, there is now heterogeneity across different sectors, firms, ownership forms and locations. Despite this, an analysis by this author found that SOEs perform much better than foreign-invested firms and privately owned Chinese firms. This finding is a policy dilemma for China because SOEs are under pressure to privatise from continued economic reforms.
The analysis also showed that non-SOEs (including foreign and indigenous private firms) are not ready to take risks associated with research and development activities. This situation calls for specific policies encouraging the participation of non-state firms in innovation and improvement of the legal system to provide effective protection of intellectual property rights in China.
Further, in international terms, China trails the world’s top-two leading research and development investors, the US and Japan. Despite this, the analysis showed that China is well ahead of major economies at a similar stage of development. If current growth in research and development spending is maintained, China will most likely follow the innovation paths of South Korea and Japan and become one of the most innovative countries in the world.
What remains to be done?
To close the gap between China and the world’s top investors and innovators, and to ensure that indigenous innovation continues to be a key driver of economic growth, Chinese policymakers should pay more attention to three issues.
First, notwithstanding China’s lead in exporting high-tech products and comparatively high research and development intensity in the high-tech sector when compared to countries at a similar stage of development—there are areas where China could improve. China is lagging behind the world’s major players in research and development intensity in four out of five high-tech sectors.
Second, as the role of enterprises in innovation is strengthened, the danger of neglecting basic and applied research, which is vital for the country’s innovation and capacity building in the longer term, becomes larger. In China, expenditure in these forms of research has declined in recent years. At the same time, in other major industrialised economies, investment in basic and applied research has risen or remained stable. China’s slow level of applied and basic research is reflected in its small share of domestic innovation patents. If this trend continues, China’s long-term capacity to innovate— a key determinant for sustainable future economic growth – could be compromised.
Third, in spite of China’s considerable comparative advantage in labour costs, the low amount of compensation paid to Chinese scientists and engineers represents a significant risk. Skilled labour is very mobile in today’s globalised world and low wages could make China less competitive in the international labour market.
In sum, the 2020 program has strengthened China’s future prospects. A foundation has been built for the possible transformation of China’s economic growth model from a resource-intensive one to an innovation-oriented model. Despite this, continued reforms are required to ensure that China’s future economic growth is sustained and driven by innovation.
Professor Yanrui Wu is an economist at the University of Western Australia’s Business School.
The above piece is a summary of an article published in Ross Garnaut, Jane Golley and Ligang Song (eds): ‘China, The Next 20 Years of Reform and Development.’