Technology and Innovation

As China has reached the economic status of a middle-income society, markets begin to saturate, and the high-growth area of the 1980s and 1990s comes to an end. In order to avoid the middle income trap, into which many developing countries fall, China must advance a step further and develop an innovation-driven economy in which technology and productivity can both contribute to further, and long-lasting economic growth.

Further economic growth requires a well-balanced mix of factors of production and lay more stress on quality, high labour skills, and constant innovation. The two basic factors of the production function, labour (L) and capital (K), have to be multiplied by a third factor called total factor productivity (TFP). Productivity (P) is thus not just determined by the input of labour and capital, but also by technology and skills.

Technological knowledge (T) in turn is a function of research and development (R&D), the quality of human resources (HR) and their ability to innovate, and by incentives (I) or rewards for innovation (analogous to rewards for labour input).

Since 2000, the government of the PRC adopted a series of techno-industrial measures to enhance total factor productivity. In contrast to the economy as a whole, the government did not withdraw from, but rather engage in the fostering of technological development, for instance, by the creation of development zones, investment in raising the quality of human resources, providing incentives for innovation, and selectively stimulating private innovation.

Yet innovation is not easy to measure and shows its impact in terms of production only in a gradual way. Moreover, long-term innovation is very costly, for instance, in the field of basic research, and often relies on backing by state funds. The quality of institutions and the knowledge of personnel are hardly measurable parameters, but they, too, contribute to the growth of innovation.

While the change of technologies (like the transition from filament bulbs to gas-filled tubes or diodes, or the adaption of blockchain technology to replace electronic data interchange) is a novelty, some other technologies can be gradually refined, but remain basically the same (like the diesel engine, integrated circuits, or rechargeable batteries).

The usual means to measure technological advance are the numbers of patents and publications in (international, peer-reviewed) journals. China experience a huge increase in patent applications from 80.000 in 2000 to 1.35 millions in 2016 (Naughton 2018: 389), but many of them cannot be taken seriously. There is a share of just 30 per cent of patents of quality.

Figure 1. Relative gross domestic spending on R&D, China and the world

Gross domestic spending on R&D (in % of GDP, China and World). OECD Data Gross domestic spending on R&D. Black line is OECD average.

Developed countries spend a larger proportion of their economies on research and produce constantly innovations. Developing countries can thus selectively acquire technology (by purchase of foreign direct investment, FDI) from industrial countries in order to pursue a cath-up strategy. This can work for a certain time and under certain conditions (as could be seen in the case of Japan, South Korea, and Taiwan), but for a literal catch up, TFP must be brought into play.

The creation of native technological knowledge is all the more difficult for developing countries, as industrial drivers try to protect their intellectual property rights and avoid espionage. One concept of creating skills and knowledge is to invite FDI with the hope that these investments will result in a technolgical spill-over to the rest of the industrial sector or the economy as a whole. China opted for this chance in the 1980s and found herself quickly integrated into global production networks, particularly value-added chains. Today, China is in many sectors independent in ist efforts to create products of high technological value. Its investment rate in R&D stood at 0.7 % of the GDP in 1989 and at more than 2 % today which corresponds to that of other industrial states (Naughton 2018: 368; OECD Data Gross domestic spending on R&D). In 2017, China spent 444 million US$ on R&D (vs. 483 million US$ in the United States) and reached a quota of 2.24 (vs. 8.9 in the US) researchers per 1,000 employees (OECD Research and Development Statistics). In 2016, 3.85 million persons were engaged in R&D – a number also achieved because labour cost is still relatively low (Naughton 2018: 372).

The quick development of China's R&D is not last due to its early founding of the Chinese Academy of Sciences (Zhongguo Kexue Yuan 中国科学院, http://english.cas.cn/) in 1949, Soviet support in the 1950s, and the need for autarchy after the split with the Soviet Union and international isolation. During the 1980s, China imported technology for no less than 47 billion US$ (Naughton 2018: 374). As this would be too costly in the long run, the strategy of the 1990s was the acquisition of technology, knowledge and skills via FDI, mainly as investments from Greater China, i.e. Hong Kong, Taiwan and Singapore.

Yet China has yet some other advantages over other developing countries, namely an enormous market with a huge demand for innovative products; a broad basis in the manufacturing industries all over the country; cultural rootedness in a type of entrepreneurship ready to take risks; last but not least, the education system of China signs for a 32 per cent quota of tertiary degrees among urban Chinese workers (Naughton 2018: 371) which is an excellent base for the training of researchers.

China took some special measures to enhance the performance of technological innovation. In the field of human resources, the Chinese government made efforts to have students return to China after receiving a degree from foreign universities. Nearly two thirds of students do in fact return (Naughton 2018: 372), and if not, the others might help to create international networks of scienctists. In 2008, China launched the Thousand-Talents Programme (Qianren jihua 千人计划) and promised professorial chairs to senior returnees. At Chinese universities, the number of engineers graduating rose from 250,000 in 1999 to 1.45 million in 2015, with a share of 45 % in 7 million college graduates as of 2016 (Naughton 2018: 370-371).

Figure 2. Human and financial resources devoted to R&D, China and the world

Gross domestic spending on R&D (in % of GDP) in relation to the number of employees in R&D. OECD Research and Development Statistics (RDS).

The Chinese government launched several large programmes to promote technological innovation. In March 1983, the National High-Tech R&D Program was started (Guojia gao jishu yanjiu fazhan jihua 国家高技术研究发展计划), also called 863 Program (Ba-liu-san jihua ８６３计划, Ba-liu-san xiangmu ８６３項目, http://www.cas.cn/ky/kyxm/863xm/). It included government funding of R&D in ten priority areas, namely bio- and agrarian technology or life sciences (shengwu he yiyao jishu 生物和医药技术, shengwu jishu 生物技术), space technology (hangtian jishu 航天技术), information technology (xinxi jishu 信息技术), laser technology (jiguang jishu 激光技术), automation (zidonghua jishu 自动化技术) or advanced production technology (xianjin zhizao jishu 先进制造技术), advanced energy (xianjin nengyuan jishu 先进能源技术), new materials (xin cailiao jishu 新材料技术), ressources and environmental technology (ziyuan huanjing jishu 资源环境技术), modern telecommunications technology (xiandai jiaotong jishu 现代交通技术), marine technology (haiyang jishu 海洋技术), modern agricultural technology (xiandai nongye jishu 现代农业技术), rice gene sequencing (shuidao jiyin tupu 水稻基因图谱), supraconductor technology (chaoji jishu 超导技术), in indcluded the the creation of a GPS database processing system (hangkong yaogan shishi chuanshu xitong 航空遥感实时传输系统) and digital SPC exchange (shuzi chengkong jiaohuanji 数字程控交换机. The project was terminated in 2000.

In March 1997, the National Basic Research Program (Guojia zhongdian jichu yanjiu fazhan jihua 国家重点基础研究发展计划), also known as the 973 Program (Jiu-qi-san jihua ９７３计划), was started. It focused on the development of basic research, innovations and technologies aligned with national priorities in economic and social development. The programme was managed by the Ministry of Science and Technology (Kexue jishu bu 科学技术部), yet the Natural Science Foundation of China (Guojia ziran kexue jijin weiyuanhui 国家自然科学基金委员会) is also involved in coordinating the research with the program. It is funding research in agriculture, health, information, energy, environment, resources, population and materials, especially the advancement of the rare earth minerals industry.

The Torch Program (Huoju jihua 火炬计划, http://www.china.org.cn/english/2003/Sep/75302.htm, http://www.chinatorch.gov.cn/english/index.shtml) was intended to provide bank loans to technological start-ups. If was applied to the constructing and development of Science and Technology Industry Parks (STIP, Kexue gongye yuan 科技工业园), where research results were to be transformed into production projects. The Spark Program (Huoxing jihua 火星计划) was initiated to provide funds to township and villages enterprises of the high-tech sector throughout the country – hence the name of the programme. The government stimulated spin-offs from universities und der CAS, mainly such located in the Zhongguancun Zone (Zhongguancun keji yuanqu 中关村科技园区, http://zgcgw.beijing.gov.cn/) in Beijing. Zhongguancun developed a "complete ecology" (Naughton 2018: 377) of innovation-related institutions with incubators (qiye fuqihua 企业孵化器), many of them venture-capital firms and based on so-called "angel investors" (tianshi touzizhe 天使投資者). Yet private high-tech enterprises, too, were systematically promoted as "national players".

The 985 Program (Jiu-ba-wu gongcheng ９８５工程) from May 1998 aimed at promoting the eduction at first-class universities. A similar project is the 211 Program (Er-yi-yi gongcheng ２１１工程), the National Key Universities Program, which aims at raising the research standards of high-level universities and "cultivating strategies for socio-economic development". The name of this project is derived from the target to make ready 100 schools and universities for the 21st century. In 2014, the project was superseded by the Program of Introducing Talents of Discipline to Universities (Gaodeng xuexiao xiaoke chuangxin yinzhi jihua 高等学校学科创新引智计划) or Plan 111 (Yi-yi-yi jihua １１１计划) and in 2017 by the Double First Class University Plan (Shijie yiliu daxue he yiliu xueke jianshe 世界一流大学和一流学科建设), also known as Double First-Class (Shuang yiliu 双一流).

From 2000 on, the skills of Chinese workers had so much progressed that foreign enterprises of the high-tech sector began to transfer the complete production of their products to China. In this way, high-tech clusters emerged in the coastal regions of China (like Shenzhen or the Yangtze Delta) in which all assembly parts of high-tech products were produced in the same area. A good example for such clusters is the supply chain of Huawei (Huawei Jishu Gongsi 华为技术公司) products. Many producers competed with each other, and kind of "hypercompetitive" industry emerged (Naughton 2018: 376) not just with products of high quality, but also in imitations (shanzhai 山寨). Original products and imitations found better entrance into the market by the rise of distributors like Alibaba 阿里巴巴, which first operated in the Yangtze River Delta.

In 2005, China was the largest exporter of high-tech products of the word, with products valuing more than 500 billion US$ today, while the US and other exporters of technology products remained at between 100 and 200 billion US$ (Naughton 2018: 376). The investment in human resources, strengthening of universities and favourable treatment of technological start-ups (chuchuang qiye 初创企业) bore fruits in the 2000s. China has moved out of communist backwardness and played already a crucial role in the global development of technology.

Yet by then, the importance of foreign direct investment in the high-tech sector was still high, and Chinese firms still relied on foreign knowledge in many fields. The entry into the World Trade Organization (WTO) in 2001 furthermore required the abolishment of local-content requirements to multinationals. Aside from that, even if China had escaped the low-return stage of the production network (assembly), it had not yet reached the high-return stage, which is characterised by research, design, and intellectual property issues.

Hu Jintao therefore launched a new wave of techno-industrial policies after 2006. These included government interventions targeting specific industries for promotion. They strongly emphasize the creation of independent technological capabilites and of "national champions" (guojia longtou qiye 国家龙头企业) which produce indigenous innovation (zizhu chuangxin 自主創新). The 15-year Medium-Long Range Plan for Science and Technology (MLP, Guojia zhong-changqi kexue he jishu fazhan guihua 国家中长期科学和技术发展规划) designated 16 megaprojects funded by the government. The innovations created by these large state-sponsored enterprises would have the most immediate and widespread spill-over effects. Apart from financial subsidies, rising technological industries and firms are boosted by tax breaks or tax exemptions and procurement preference. The tag "high-technology enterprise" qualifies for lower taxes of 15 % and lower land and utility prices (Naughton 2018: 384).

A direct outcome of the financial crisis of 2008 was the policy for Strategic Emerging Industries (SEI, Zhanlüexing xinxing chanye 战略性新兴产业) which was initiated in 2010. Even if there were overlappings in industrial sectors between the MLP and the SEI projects, the former project focused on direct funding, while the latter was characterized by a set of techno-industrial policies. In addition to this procedural difference, the SEI project aimed at creating novel technologies providing to China opportunities to compete with industrial countries, for instance, in the field of solar panels (Fischer 2014) or electric cars.

Not as a replacement of former projects, but as an additional track of a multi-stranded technology policy, China created in 2015 the projects "Made in China 2025" (Zhongguo zhizao 中国制造２０２５) and the "Internet Plus" (Hulianwang Plus 互联网+). The former aims at ensuring China's central position as the world's largest manufacturer in the facing of rising labour cost, mainly by application of robots and the "internet of things" (wuliangwang 物联网; Internet 4.0) where equipment is completely produced in China. The Internet Plus programm is an extension of this aspect to all aspects of society and economy, such as the financial technologies (fintech) offered by Alibaba (Alipay, Zhifubao 支付宝).

The great importance of these programmes for the future development of the Chinese economy is reflected in the Five-Year Plans.

The promotion of domestic enterprises while preventing market access to foreign companies like Microsoft, Google, or Facebook stands in contrast to the rules of the WTO, of which China is a member. Also by the creation of domestic technological standards, China prevented foreign firms to take advantage from the huge Chinese market. A third aspect of protectionism is the tendency of Chinese courts to reject claims of foreign enterprises concering intellectual property.

The huge amounts of government money transferred to the high-tech sector in China undoubtedly fostered the creation of innovative firms and products. Yet as in many developing countries, the question must be asked when too much support by the state prevents the healthy and autonomous development of the high-tech sector and obstructs competitiveness.