China Has a Chasm to Cross Before Claiming Itself an Innovative Power

China’s innovation capacity moved up to 17th place from last year’s 22nd place according to the latest ranking of the Global Innovation Index 2018 (GII), co-published by Cornell University, INSEAD, and the World Intellectual Property Organization. It was the first time that China broke into the world’s top 20 most-innovative countries as the only middle-income economy in the GII.

In areas such as research and development expenditures and the number of researchers, patents and publications, China is now first or second in the world, with volumes that overshadow most high-income economies, as commended by the GII report.
                            
Francis Gurry, director general of the World Intellectual Property Organization, attributed the huge progress made by China to its top-down driven policy setting which is a whole of state effort, involving all the institutions and all of the enterprises in response to the strategic direction taken by the leadership. And he suggested other countries can learn from having strategic directions set at the top level because he believed there was a direction in the movement of science and technology which was inexorable.

China is leapfrogging to build up its innovation capacity

As the world’s most populous country, China is mining its immense bonanza of talents for its tech development. In 2017, a record 8 million students graduated from Chinese universities, doubling the number in the US. Among those graduates, one in six of them majored in natural sciences and engineering majors surpassing that ratio of the US. China was also making a pitch to woo overseas talents with attractive financial rewards, career options, research facilities and funding under various schemes, such as the central government’s Thousand Talents Plan.

The merit of China’s top-down strategy is not only laying out a direction but more importantly, it substantially boosts the state support for R&D both financially and fiscally. R&D spending grew by 18 per cent per year from 2006 to 2017, to account for 20 per cent of total R&D expenditure (PPP-adjusted) worldwide. The national target for R&D spending is 2.5 per cent of GDP by 2020. Favorable fiscal policies are also implemented to support R&D by providing tax holidays to hi-tech enterprises and directly subsidizing selected research projects.

The size of China’s market is another important factor. There is a huge market for start-ups to quickly ramp up scale. Chinese innovators used the country’s massive consumer market to commercialize new ideas and inventions quickly, and its consumers are more willing to adopt innovation by accepting early iterations of products and services and providing feedback. Such a huge market base will produce a large amount of data, which is a critical competitive edge for technological innovations, particularly artificial intelligence.

The picture is being painted too rosy?

A recent case of Chinese tech giant ZTE being denied import of key component from the US can serve as a warning signal. As soon as the ban came into effect, the company’s operation came to a halt due to China’s incompetence to produce its own processing chips, which prompted the Chinese government and its public into a frenzied discussion and reflection on its lack of tech competitiveness and too much reliance on foreign suppliers.  

Highlighted by the GII report as the world’s number one in filing patents and product research publications, China’s aura is eclipsed by the fact most of those patents and research papers are of low quality. Glaring statistics which underline these challenges are the comparatively low number of patent applications China files overseas and low average citation of research paper. Only 4 % of Chinese applications are filed outside of the country, whereas 45 per cent of global foreign filings are from companies in Japan and the US, according to the WIPO report. Average citations per paper published by China between 2007 and 2017 is also at a relatively low of 9.4 % compared with 17.47% of the US and Japan’s 11.97%, as tracked by the Web of Science database.

Although China’s private sector is brilliant at efficiency-driven and customer-focused innovations, it’s fair to say the country still needs to catch up in science- and engineering-based research work. One major detractor of a top-down strategy means science-based innovations had been dominated by the government and remained an administrative task, instead of driven by the market. That had led to the awkward situation of corporations desperately looking for innovative and feasible technology while a great deal of scientific research, which failed to meet their demands, lay idle in government-owned universities and academies.

Reforming way of governance and SOE is crucial

To create favorable environment for innovation requires innovating the way of governance by government itself. Right now, China is in bad need of setting up an effective intellectual property protection mechanism, creating a fair play atmosphere and reforming its state-owned enterprises.

According to a survey by the American Chamber of Commerce (AmCham) in Shanghai, fewer than 4 per cent of American businesses said China was their most important research and development (R&D) center owing to the lack of intellectual property rights (IPR) protection. 

Chinese companies have benefited tremendously from copying and innovating engineering products of their foreign counterparts. This may bring rapid monetization but it will erode their willingness and ability to develop their own core technology and eventually make them an easy prey to dominance of foreign powers as epitomized by ZTE’s case.

Chinese companies also benefited from unfair protection in the Chinese market. Unequal treatment has, for many years, forced foreign players to compete on an uneven playing field. This approach also has a large detrimental effect – by starving domestic companies of international competition, it blunts their capacity to innovate.

Last but not the least, innovation is also the creative reform of inefficient enterprises. In China’s sense, the inefficient enterprises normally refer to state-owned enterprises. China’s state-owned enterprises are half as efficient as their private counterparts. Fixing China’s state giants is just as important as if not more important than supporting mass start-ups, most of which will fail. And reforming the state-controlled telecoms and banking sectors is of particular importance in China’s quest of innovation. Efficient, cheap and quality services in banking and telecommunications are the prerequisite for innovation to bloom given the magnitude and backbone status of these sectors in the national economy.