What will make China an innovation-oriented country?
The Authors
Wei Xie, School of Economics and Management, Tsinghua University, Beijing, People's Republic of China
Richard Li-Hua, Salford Business School, Salford University, Manchester, UK
Acknowledgements
The research for this paper was financially supported by the National Science Foundation of China (NSFC Research Project Reference: 70573060, 70773067).
Abstract
Purpose – “China phenomena” is changing the knowledge balance of the world. Many countries, in particular, Western countries, are carefully following the development and change of China's technology system and innovation policy. After turning itself into the world's manufacturing powerhouse, China aims to be an innovation-oriented country. The purpose of this paper is to list some of the key factors which favor or hinder China's efforts to build an innovative economy.
Design/methodology/approach – The paper lists some of the key factors, which favor or hinder China's efforts to build an innovation-oriented country. The factors identified are summarized from a literature review on studies about China's efforts to build innovation capabilities.
Findings – The paper finds that three key factors favor China's efforts to build an innovation-oriented country, including escalating R&D spending, the upgrading of technological capabilities and global linkages. Four central challenges are facing China, such as how to build human resources, innovative cultures and incentive systems appropriate for innovation and how to strength intellectual property rights protection.
Originality/value – Today, China is, by and large, a follower rather than an innovator in technology. The question whether China will become a real innovative economy in the next 13 years is hard to answer. This paper lists some of the key factors which favor or hinder China's effort to build an innovation-oriented economy, all of which should be of interest to China's scholars, government officials and practicing managers.
Article Type:
Conceptual paper
Keyword(s):
China; Innovation; Technology led strategy; National cultures.
Journal:
Journal of Knowledge-based Innovation in China
Volume:
1
Number:
1
Year:
2009
pp:
8-15
Copyright ©
Emerald Group Publishing Limited
ISSN:
1756-1418
Introduction
China's ambition of becoming “an innovation-oriented country” by 2020 and a “world's leading science power” by 2050 has drawn world attention. Put simply, China's leaders wish to see the country transformed into an innovation-oriented society in the not too distant future. After heated debate on whether China's technology strategy of obtaining technology by sacrificing its market partly failed, Chinese enterprises are to become less reliant on foreign technology (Li-Hua, 2008). As a matter of fact, technology transfer between developed and developing countries possesses strategic significance in science and technology capacity building. China's leaders have made “indigenous innovation” a cornerstone of the country's future development. Many indicators and statistics, such as number of science and engineering papers that Chinese researchers publish in international journals, the amount of investments made in research and development (R&D), and the number of patents, indicate that China's science and technology capacities have been developing quickly.
Nonetheless, China's legacy is that it has currently become second only to the USA in GDP, as expressed in purchasing power parity. Such a remarkable global economic impact presents outstanding and interesting innovation. How could a small village like Shenzhen become a large city of 10 million people in a mere 28 years time?
After turning itself into the world's manufacturing powerhouse, China now aims to be a technologically innovative economy. In January 2006, President Hu Jintao pledged to build China into “an innovation-oriented country” by 2020. The question of whether China will become a real innovative country in the next 13 years has drawn world attention. Such a question is hard to answer, but should be of great interest to watch. Success means that China becomes a global leader in certain areas of technology where China will be innovative. Failure implies that China continues its dependence on foreign knowledge and technology. Clearly, the task of making China an innovative society goes beyond the scope of any one industry or one firm and ultimately associates with business across the board and public policy. Moreover, there are too many uncertain variables affecting China's innovative and economic performance. Therefore, what we can do here is to list some of the key factors which favor or hinder China's effort to build an innovation-oriented country. The factors identified by this article are summarized from a literature review on studies about China's efforts to build innovation capabilities.
The opportunities available
Latecomer firms in developing countries have two major disadvantages, including distance from main sources of technology, and distance from major markets (Hobday, 1995). However, backwardness has its disadvantages. Latecomers motivated to catch up may have following advantages such as cheap and well-trained labor, subcontracting opportunities based on cost-advantages, training by foreign buyers, a large and easily accessible pool of public knowledge and low sunk costs in earlier technology. In addition to the advantages mentioned above, three important factors exist which favor China's effort to build an innovation-oriented country that, when appropriately leveraged, can be used to offset the disadvantages.
Escalating R&D spending
Productive R&D spending enhances a country's capacity to innovate and assimilate foreign technologies (Cohen and Levinthal, 1989). As Table I shows, currently, total R&D expenditure in China has grown from 0.6 percent of GDP in 1995, to 0.9 percent in 2000 and 1.42 percent in 2006. China's near-term goal is to boost that percentage to 2 percent by 2010 and 2.5 percent by 2020. Leshner and Turekian (2007) highlight the fact that in 2006, “China had moved to third place in the world in national R&D funding, closing fast on Japan which was number two behind the United States” (Leshner and Turekian, 2007). Moreover, as one of the world's fast-growing economies, China is also “the world's fastest-growing supporter of Scientific R&D”. Over the past five years, China's expenditure on R&D grew rapidly, “with an annual growth rate of 18 percent (the USA, Japan, and the European Union at a combined average rate of about 2.9 percent)” (Leshner and Turekian, 2007).
Upgrading technological capabilities
Based on cheap labor costs, China-based firms have plugged into global production networks. As qualified subcontractors and mass producers, some Chinese firms dream of saturating the world with their own brands. For example, in order to become a world-class company, Lenovo acquired the PC business of IBM in 2004. Such ambitions require an emphasis on technological capability building. Over the years, to move further up the technological ladder and thereby capturing more of value-added, Chinese firms have advanced technological learning to accumulate technological capabilities to innovate. Some of them have approached technology frontiers. An interesting case study is Huawei Technologies who rose up from the low-end market of network equipment. However, after it built a beachhead in the marketplace, Huawei invested 10 percent of its sales in R&D to build its technological capability. Today, Huawei has established 14 research centers around the world to develop leading-edge technologies in telecom equipment. Taking the number of patents as an indicator, Table II shows the upgrading of technological capabilities in China. The first patent law in China was enacted in 1984. To extend the scope of protection and comply with the Trade-related Aspects of Intellectual Property Rights, it has been amended twice, respectively, in 1992 and 2000. Since the patent law was enacted, patents in China have been growing very rapidly. Total patent grants, including both domestic and foreign patents, increased from 138 in 1985 to 214,003 in 2005.
Strengthening global linkages
Today, China is still by and large a follower rather than an innovator in technology and innovation. The firms that lead in innovation still remain in the developed countries (Li-Hua and Khalil, 2006). However, there is much low-hanging fruit that China can pick. In this respect, Chinese firms should be open minded whilst going through their learning processes to build technological capability, which should be of help to their future innovation. At national level, China “has long encouraged young researchers to go abroad for training”, and now “the Chinese government is working hard to recruit the brightest and best-educated back to their homeland with job opportunities and state-of-the-art facilities and equipment” (Leshner and Turekian, 2007). Over past five years, the number of returnees has grown rapidly, as Table III shows.
In order to successfully compete with multinationals firm presence in China, Chinese practicing managers look for technologies available from anywhere in the world and then mix them together at competitive pricing to create value to customers (Xie and Wu, 2003; Xie and White, 2006). Additionally, more and more multinational companies have established their R&D facilities in China. On the one hand, multinationals seek R&D in close proximity to their production bases in China; on the other hand, they tap China's pool of lower-cost and highly skilled R&D personnel. These R&D centers in China are hiring primarily local scientists and engineers. Many of them conducing R&D in foreign R&D centers will bring the skills they learned there to Chinese firms.
The challenges ahead
Assuming China can fully exploit the technological advantages available, it faces immense challenges. Although there is tremendous variance among industries and even among firms with the same industry, there are four central challenges facing all Chinese industries, regions, and firms.
Developing human resources for innovation
Any nation aiming to become a hub of innovation must develop its human resources. In this regard, universities will be fundamental. Over the past two decades, China's universities have experienced dramatic changes. As Table IV shows, the enrollment in higher education entities has increased very rapidly, from 3.02 million in 1996, to 18.85 million in 2007. In 1993, China implemented the 211 Plan (the strategy of building 100 universities and research subjects in the twenty-first century), which is expected to strengthen these universities' research capabilities. Supported by this plan, a number of universities were merged to realize resource optimizing, increase the visibility of these universities internationally and upgrade the universities' reputations. On May 4, 1998, the 985 Plan was initiated by China's former President, Jiang Zemin, (when he made a speech on the occasion of the 100th anniversary of Beijing University), which emphasized the financial support to be given to several Chinese universities in an attempt to enable them to be internationally recognized world-class universities.
To be a hub of innovation, China requires a large number of qualified university graduates. Although the sudden increase of university training has offered an increasing pool of educated universities graduates, Chinese firms often mention the particular shortage of people specializing in creativity. For instance, McKinsey's research in 2005 shows that only a small proportion of Chinese university graduates have the appropriate skills required for creative work. Meanwhile, China's research environment has often been criticized as being detrimental to individual creativity. Accusations include claims of corruption, overbearing science and technology policy makers, strong political leaning, and the numerous hurdles facing China's researchers. It should be noted that the education system in China is very much based on rote learning, where students tend not to be critical thinkers, in contrast to a Western educational system, where students are encouraged to challenge professors and develop independent thinking, as such as at Yale and Harvard, in the USA.
Compared with foreign education practices in Europe and North America, China's higher education entities heavily emphasize theoretical, conceptual and examination-oriented learning at the expense of problem-solving skills and practical experience in projects. Human creativity is at the heart of innovation. How to educate innovative capabilities of university students is still a great challenge facing China's education system, when quantity shortage has been smoothed.
Building innovative culture
An innovation-oriented country draws much of its energy from innovative culture, which lies with rewarding creativity, encouraging entrepreneurship and tolerating risk. This is another challenge because China's traditional philosophy and culture do not encourage being innovative. The Chinese tradition of deferring to authority is not conducive to innovation either (Jakobson, 2007). Under such entrenched conventions, how realistic is the ambition to make China an innovative nation by 2020?
In the first place, the cultural characteristics of “saving face” in Chinese society constrains the emergence of break-through ideas; Second, in the Chinese cultural context, the distinction between “in-groups” and “out-groups” is strong (Leung and Bond, 1984); “in-group” cultures imply that employees in organizations are usually intolerant of diversity and tend to work only with those they know. In-group cultures tend to resist new or innovative ideas and impede cross-groups cooperation. Innovation requires information sharing, collaboration and coordination across groups. To be an innovative economy, Chinese managers must recognize that they need to give intellectual freedom and encourages free exchange of ideas. Moreover, they must work closely with many units or organizations to launch new products and services.
Strengthening intellectual property rights protection
Appropriate awareness and monitoring of IPR is widely recognized as a strategic approach in boosting science and technology innovation. IP strategy is the key in ensuring smooth technology and knowledge transfer. It assumes great importance in the ability of countries, companies and individuals to embrace technological strategies and changes in order to advance their competitive advantages in a global marketplace. There is no doubt that appropriate IP strategy and policy implementation represent a solid foundation on which the knowledge economy can be built. It leverages the economic growth and development in both the developed and developing world. It charts the strategic and operational guidance to economic development, not only for the developing countries, but also for the advanced and developed countries.
Innovation requires a supportive environment in which innovators will benefit from increasing returns on their investments. It is therefore necessary for Chinese governments to push for greater protection of intellectual property rights. China has formulated comprehensive IPR laws and regulations which mainly consist of China's patent law, China's trademark law, China's copyright law, and China's Unfair Competition Law. Protection of IPR in China is provided by a two-track system. The first is the administrative track, whereby those who have developed their own IPR file a complaint at the local administrative agency. The second is the judicial track, whereby complaints are filed through specialized IP panels in China's civil court system.
However, China's law enforcement system needs further improvement to deter IPR infringements effectively and therefore encourage innovation. In the first place, more resources and enforcement officials are required to put an end to counterfeiters and pirates; second, more criminal rather than administrative measures are required to combat IPR infringements.
Building new incentive systems appropriate for innovation
China's traditional incentive systems might be suitable for imitation, but not appropriate for innovation. For example, the top managers in state-owned or state-controlled firms are appointed by the Organization Bureau of China's Central Communist Party, or their sub-organizations at provincial/municipal level. Their terms usually last for three to four years, after which they are rotated either to the firm's board of directors, or to positions in other firms or related government bureaus (Xie and White, 2004). This would seem to not encourage managers to have a long-term strategy but instead, only be an incentive for short-term expedience rather than long-term interests.
Innovation is different from imitation, the former being time-consuming and requiring forward thinking. Sometimes, innovation also requires organizations to sacrifice short-term expedience in exchange for long-term interests. In other words, innovation requires incentive mechanisms oriented towards “the day after tomorrow” rather than “tomorrow or today”. This will pose great challenges for Chinese firms if they want to realize the transition from imitators to innovators. In an innovation-oriented society, competition is mainly based on capabilities and innovation, which require longer-term plans from the firms (Li-Hua, 2007). Unfortunately, Chinese firms are still market opportunists. Their competitive strategies are price-based, mostly motivated by short-term considerations. Building a new incentive mechanism is therefore necessary.
Table IGross domestic expenditure on R&D
Table IIPatent applications filed and patents granted by State Intellectual Property Office of the People's Republic of China (unit: case)
Table IIIOverseas Chinese students and returnees (unit: 1,000 persons)
Table IVNational students in regular institutions of higher education by field of study (unit: 1,000 persons)
References
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About the authors
Wei Xie is Professor at the School of Economics and Management, Tsinghua University, Beijing, China, and has held visiting scholar positions at MIT/Sloan and United Nations University (INTECH). His research focuses on technological learning and competitive dynamics, with two projects currently underway in the auto and electronics industries. Prior work includes his contribution to China's Innovation and Learning Capabilities before It Joins the WTO, a background paper for UNIDO's the annual World Industrial Development Report; articles in Research Policy, R&D Management, Journal of Technology Management in China, Technovation, International Journal of Technology Management, Technovation, and Industry and Innovation. Wei Xie is the corresponding author and can be contacted at: xiew@sem.tsinghua.edu.cn
Richard Li-Hua, PhD, is currently China Business and Technology Transfer Director at Newcastle Business School of Northumbria University, UK. He is the Editor of Journal of Technology Management in China. He is also the Founder and current President of the China Association for Management of Technology. He is an internationally recognized authority on international technology transfer with many academic papers and books published internationally.