Innovation: New Driver of China’s Economy

The government work report delivered by Premier Li Keqiang at this year’s annual session of China’s National People’s Congress mentioned “innovation” many times. The report reviewed the successful results of innovation-driven development over the past five years. It attributed the social and economic achievements since the 18th National Congress of the Communist Party of China (CPC) partly to a commitment to innovation-driven development. The report proposed moving even faster to make China a country of innovators and stay abreast of trends of the latest global revolution in science and technology and industrial transformation, implement innovation-driven development strategy, and continue making the Chinese economy more innovative and competitive.

Innovation: A Widespread Phenomenon

Innovation is the prime and foremost driver for development. Since the 18th CPC National Congress, China has committed to the principle of innovative development, implemented innovation-driven development strategy and promoted the construction of an innovative country. Achievements in innovative development can be seen in a number of areas:

First, achievements in innovation are frequent. In recent years, fruitful outcomes on major science and technology missions concerning manned space flight, manned submersible operation, super computer, earth observation satellite, BeiDou Navigation Satellite System, and large passenger aircraft have emerged one by one. China is in a leading position in some areas affecting people’s wellbeing, such as high-speed rail, e-commerce, mobile payments and the shared economy. China has also made considerable progress in developing some cutting-edge technologies. According to Research Fronts 2017 released by the Chinese Academy of Sciences, China holds a leading position globally in 25 of 143 research fields, accounting for 18 percent and ranking second only to the United States.

Second, China has nurtured numerous innovative enterprises. China has placed special emphasis on strengthening the role of enterprises as principal innovators so that they can play a major role in the formulation of strategies related to innovation, investment in R&D, and transfer of scientific and technological achievements. A large number of Chinese innovative enterprises have emerged as strong global players. A “unicorn” is what venture capitalists call a startup valued at over US$1 billion. Statistics released by CB Insights, an American venture capital research firm, showed a total of 230 unicorns in 23 countries by February 2018, of which 113 are located in the United States and 62 are in China.

Third, innovation has become a social phenomenon. The Chinese government regards innovation as the primary force driving development and human capital as the most important resource, placing innovation on the core position in national development. It has constantly promoted innovation in theoretical, institutional, technological and cultural realms. Every market entity now considers innovation its key mission rather than a chore. Chinese enterprises have become more aware of the significance of innovation and more competent in innovating. Innovation has become the strategic choice for enterprises. It is a widespread phenomenon.

China’s Economy in Profound Change

Driven by innovation, China’s economy is undergoing a series of major changes.

First, innovation has led to a fundamental change in the growth model. In China’s case, its economy is shifting from driven by investment and factors to driven by innovation. With progress in innovation, especially technological innovation, investment’s contribution to economic growth is decreasing while science and technology are gaining an increasingly larger portion. In February 2018, Wan Gang, then Chinese Minister of Science and Technology, briefed reporters on the fact that the contribution rate of scientific and technological progress to economic growth has reached 57.5 percent, compared to 52.2 percent in 2012.

Second, innovation has promoted the optimization of economic structure. China’s economic structure has undergone historical changes since the 18th CPC National Congress in 2012. Consumption has replaced investment to become the largest driving force for growth. The tertiary industry has surpassed the primary and secondary industries to gain the biggest portion in the economy, which could not have been achieved without contributions from innovation. Upgrading consumption modes promotes faster growth of emerging consumption in communications, education, culture, entertainment, medical care, and more realms. The upgrade has contributed to the growth of consumption in emerging service industries such as e-commerce, mobile payments, the shared economy, big data and cloud computing. According to numbers from China’s National Bureau of Statistics, emerging service industries of strategic importance have increased by 17.3 percent, much higher than the growth rate of traditional industries, which is 6.4 percent. The growth of emerging service industries has propelled industrial restructuring.

Third, innovation has quickened the evolution of growth engines. In recent years, some significant technological results have been quickly transferred into products or the productive force of strategically important industries, injecting new impetus into economic growth. For instance, China’s latest generation of high-speed rail technology now leads the world and fosters an advanced high-speed railway industry. China’s fourth generation of mobile communications technology, known as TD-LTE, has formed a complete industrial chain with users numbering more than 650 million. Sales of new energy vehicles neared 700,000 in 2017, with a year-on-year growth rate of 51.2 percent.

Driven by innovation, China’s economy is casting off old modes characterized as high input, high consumption and heavy pollution. The country is on track towards innovative, green, quality, lucrative and sustainable development.

Drivers for Innovation: Competition and Reform

Although China has made remarkable achievements in innovation, it hasn’t yet met the standards to become a leading innovative country and a science and technology giant. It is still dwarfed by developed countries in comprehensive strength for innovation. Due to a weak foundation for research, relatively low ability to produce original innovation, a lack of innovative human capital, especially high-end human capital, and many scientific and technological developments awaiting application, it is imperative for China to accelerate implementation of the innovation-driven development strategy.

Implementation of this strategy concerns two fundamental questions: First, who should drive innovation? To develop by innovating, we need innovators, which should be the market entities willing to innovate. The power to innovate comes mainly from competition and reform. First and foremost, competition should be introduced to drive innovation. Xi Jinping, general secretary of the CPC Central Committee, once pointed out that under the background of increasingly complex relations between supply and demand, many new technologies, new industries and new products are not discovered or fostered by the government, but through market competition. Restrictions on market access should be further removed, and monopolistic and protectionist behaviors should be eliminated to build an environment for fair competition. Then, reform policies should be introduced to spark innovation. Xi once remarked that scientific and technological innovation is the new engine for China’s development, and reform is the ignition system for the engine. Reform of institutions related to science and technology should continue, and old-fashioned regulations that handicap the encouragement of innovation should be abolished. Systems covering intellectual property should be improved to provide better protection. Researchers should be allowed to do their work more independently.

The second basic question concerns how innovation can drive development. Results of innovation shouldn’t be locked in drawers, but applied to core economic development. Only by putting it into action can innovation drive development. In recent years, more and more resources invested in scientific and technological development have produced desirable results. However, many research papers are yet to be transformed into technologies, nor have many technologies become products. The separation between economics and technology remains a difficult problem. According to a survey conducted by the Chinese Academy of Sciences, only 2.03 percent of valid patents developed by Chinese universities have been assigned or licensed. A market for transfer of scientific and technological achievements should be pioneered so market forces can play a decisive role in the transfer. Reform of management of rights and interests concerning scientific and technological achievements should be deepened. Researchers should be given ownership of scientific and technological fruits and long-term rights to use them, thus encouraging inventors to innovate and transfer their achievements to the market more actively.

This year marks the 40th anniversary of China’s reform and opening up. China has achieved high-speed growth through reform, which is widely considered a “Chinese miracle” in the economic history of the world. Four decades later, China’s economic development has entered a new era in which innovation is gradually becoming the primary force driving economic growth. We are eager to create another “Chinese miracle”—a “miracle” of high-quality development.

The author is a professor with the Division of Science of Economics at the Party School of the Central Committee of the CPC.