2010-11-10 16:18

China needs to improve its investment mechanism in science and technology and promote more research and development

Last month a report published by Thomson Reuters claimed that China is poised to slip seamlessly into the vanguard of global innovation in 2011, outpacing both the United States and Japan in the number of patents filed.

If only the transition from a labor-intensive, energy-hungry economy, reliant on manufacturing exports, to a modern, high-tech society with an abundant capacity to innovate was that simple.

There is increasing urgency for China to make significant progress up the technological ladder. Labor costs are rising and in many regions an acute labor shortage is beginning to bite. The low-level processing industry has become less and less profitable and margins are being squeezed further as China faces continued pressure to allow the renminbi to appreciate.

Whether or not China can succeed in upgrading its economy in the coming years will be the central theme of the third annual conference of the Globalization and Economy Policy Center, which begins on Tuesday at the University of Nottingham's campus in Ningbo.

At present there are several barriers to China's ability to transform itself into an innovative nation that is internationally competitive. The nature of China's economic structure is a major obstacle to innovation. The profits enjoyed by large State-owned enterprises (SOEs) are primarily due to their monopoly status. The country's two most profitable SOEs, PetroChina and China Mobile, recorded a combined profit for 2009 that was equal to the total profits of the country's top 500 private companies.

Yes, these SOEs do make technological progress, but with guaranteed profits of that magnitude it is hardly surprising that the incentive to innovate is low, which decreases their prospect of being internationally competitive.

Motivation is greater in small and medium enterprises (SMEs) but, even then, many SMEs rely on cheap labor costs for the bulk of their profits. They lack the capital and simply do not possess the scale of economy to sustain innovation over the long term.

Worryingly, there is strong evidence that academic research is out of touch with industry in China. Debates have raged in the UK recently over the amount of government funding that should be allocated to universities' research activities.

Chinese academia has no such concerns. Chinese government investment has increased 20 percent every year for the last decade. The government has poured money into the first two phases of its Project 985, which focuses funding on the country's top 39 universities with the aim of making them world-class institutions.

As the third phase of Project 985 gets underway, the government has pledged 39 billion yuan (about $5.8 billion) of additional investment. Tsinghua and Peking universities have each received 4.7 billion yuan ($700 million), and Shanghai Jiaotong and Xi'an Jiaotong universities were each given 1.25 billion yuan ($186 million).

Yet there remain doubts that such huge investment is being properly channeled into innovation. In China, research output - published papers, patents and evidence of knowledge transfer - is fairly low. By way of comparison, academic research in the UK is eight times more efficient than that in China, measured in terms of the relationship between input and output.

Another obstruction to innovation is the continued inadequacy of China's laws governing intellectual property rights (IPR). Domestic research institutions and enterprises fear their innovations will be copied and the cost of IPR protection is prohibitive. Patents registered by Chinese universities have increased markedly in the last year, but they tend not to be related to new inventions, but rather improvements made to existing designs.

There are several areas the Chinese government can address to spur innovation. The central government should give more autonomy to universities, and these in turn should grant more independence to researchers. It could also encourage more collaboration between researchers and industry.

The method used to assess research output also needs to be reformed. Assessments are too regular and too vague. Chinese academics are forced to spend valuable time fighting for individual research funding, or competing for prestigious prizes that will boost their careers, instead of concentrating on conducting original research.

As well as tightening up laws on IPR, the government should consider the introduction of a taxation system that rewards innovation. Higher taxes on SOEs would force them to seek profits through a more innovative business approach, rather than relying on monopoly. A tax incentive scheme could be offered to SMEs to increase research and development.

China would be wise to learn from Japan and South Korea who have offered substantial financial support to a few key industrial champions in each sector. The support should not be viewed as easy credit, but as an opportunity to develop cutting-edge technology that would improve China's brand image. China is set to become the second largest economy in the world and is already the world's leading exporter, but it lacks recognizable brand names such as Toyota and Samsung.

Development of human resources is crucial. The government has to ensure its "Thousand People Plan", which is designed to attract skilled personnel from overseas, translates into concrete examples of innovation.

Li Yuanchao, a member of the Political Bureau of the Communist Party of China Central Committee, has spoken of the need for "the internationalization of the mind". If the government recruits the right people from overseas and makes full use of their skills and experience, then the technological gap between China and the West can begin to narrow.

The author is head of the University of Nottingham's School of Contemporary Chinese Studies and program director for China at the Globalization and Economic Policy Center.