A Rising Innovation-oriented Country

Coordination between the Government and Market

Good coordination between the government and market supports China’s innovation-driven development.

China’s efficient government is one of the country’s main advantages. Under its leadership the country can attain leapfrog development in certain key areas. Through taking the late-mover advantage, and thanks to supportive policies, China has gradually risen from tech-trend follower to leader via enhancement of its comprehensive innovation capability. Today, China continues to increase its investment in fundamental, strategic, and cutting-edge technology, to focus on the development of key technologies, and to make breakthroughs and catch up with competitors in the global market. The development of aerospace industry is one example. In the early days, relevant government departments and scientific research institutions were responsible for organizing technology studies and accumulating technical expertise. Later, based on key national-level projects, relevant tests and applications were made. Now the mode has evolved into one featuring cooperation between military and civil institutions, and large-scale applications and commercial operations. Over the past half-century, China has established a relatively complete aerospace industry and become influential in aerospace science and technology. China is now able to provide multiple series of aerospace products such as carrier rockets, satellites, manned spacecraft and ground equipment and a package of services involving launch service and construction of ground facilities. The country’s progress in aerospace industry has also boosted industrial upgrading and innovation in various fields of the national economy. Under the current background of keen international competition and the new round of scientific and technological revolution, as well as of an imminent industrial revolution, China will enhance its R&D input in fundamental research and make breakthroughs in certain key and strategic technologies that boost long-term development. The Chinese government also aims to improve efficient use of scientific and technological resources through promoting reforms to the scientific and technological system.

Workers with Y&C Engine Co., Ltd. in Wuhu City of Anhui Province install on November 2, 2016 their independently developed engine, which features lower fuel consumption and lower emissions.

The Chinese government said in 2015, with the aim of inspiring the creativity of its 1.3 billion people, that it encouraged mass entrepreneurship and innovation. By relying on the market – the “invisible hand” – China sought to explore potential from the grassroots level and cultivate the new driving force of its economy. As Nobel Prize laureate Edmund Phelps observed in his book Mass Flourishing: Innovation is not confined to government, scientific and technological institutions, and the R&D centers of large enterprises. More and more individuals, start-ups, new organizations and social platforms have played a crucial role in this regard. An open course at Massachusetts Institute of Technology (MIT) identified the equation, “innovation=invention×commercialization.” It shows that both creation (new ideas and inventions) and commercialization are indispensable to realizing innovation. Technological achievements that cannot be commercialized are not innovations. Realizing commercialization relies on the market mechanism. Achieving innovation requires the broadest social participation possible, a market featuring fair competition, and a social atmosphere wherein innovation is encouraged and failure tolerated. Since 2015 when the State Council issued the Opinion on Boosting Mass Entrepreneurship and Innovation, China has made significant headway in expanding new market players, meeting the labor demand of startups, and creating more platforms to support mass entrepreneurship and innovation. It has also expanded the technology market’s trading volume, added enterprises to its New Third Board (the pilot national share transfer system for small and medium-sized enterprises), and fostered strategic emerging industries. The strategy has played a crucial role in structural adjustments, shoring up weak spots, and boosting employment.

China’s economy having entered the “new normal” stage, the Chinese government aims to coordinate more closely with the market to create a benign mechanism and system that promotes innovation. The government should enact its role when market failure occurs in certain areas. It should especially live up to its responsibility to develop fundamental and strategic technologies, protect intellectual property, encourage circulation of innovative factors, and create a fair environment for competition. The government should avoid improper actions such as allocating excessive subsidies and interfering with companies by outlining their technology roadmaps or making other major decisions. The government should bear in mind its reliance on the market mechanism when allocating innovative resources and stimulating the innovative vitality of society as a whole.

Honing Enterprises’ Innovation Capabilities

To achieve innovation-driven development, more efforts must be made to create new impetus for enterprises in this respect and to hone their innovative capabilities.

In the coming 20 to 30 years, more of China’s scientific and technological fields will ascend to a globally advanced level. The country will gradually progress from following and imitating advanced technology to catching up and even leading its development. In future, China will rely more on indigenous innovation. Meanwhile China will, along with other countries around the world, meet the challenges generated by the new technological and industrial revolution. Countries whose enterprises excel at innovation will not only gain first mover competitive advantages but also lead the development of various emerging industries, and have a say in rule-making. A strong economy consists in more than just a large economic aggregate; it must also display a high level of innovation and an optimized economic structure. Therefore, the urgent task that China faces in accelerating innovation-driven development during the new round of economic transformation is to hone its enterprises’ innovative capabilities and cultivate more high-tech enterprises.

Efforts should be made to help enterprises generate the intrinsic impetus to innovate, invest more in innovation, and enhance capabilities in this regard. They may then reap more economic profits and gain the upper competitive hand. The government should, on the one hand, improve the efficiency of its system to encourage innovation. On the other hand, it should enhance supervision and improve regulations in order for enterprises to achieve sustainable development through innovations. A favorable environment should be established to facilitate the development of new technology, new products, and new industries. In a word, the Chinese government has been working hard to improve its system, build an incentive mechanism, improve the national innovation system, and raise the efficiency of factor allocation.

As an emerging innovative country, China has seen its economy grow at medium to high speed and transform into one whose growth is less factor- and investment-driven, but rather led by efficiency and innovation. The country has played an influential role in promoting the global economic recovery, globalization, and upgrading global governance. Under the new circumstances, China’s innovation-driven development is expected to undergo systematic transformation. This will exert far-reaching influence on the emerging economies, and the world as a whole.

XIONG HONGRU is associate research fellow with the Innovation-Driven Development Research Department of the Development Research Center of the State Council, and a postdoctoral fellow at China (Hainan) Institute for Reform and Development.