Technological Innovation in China: Current State and Challenges

Technological progress and the substantial easing of international competition after the Cold War have jointly shaped the pattern of division of labor in the international industry chain over the past few decades. While serial production and network collaboration have improved production efficiency, industry chain security has gradually become a cause for concern. We believe the policy response should focus on enhancing irreplaceability domestically to address risks from international competition as countries deemed irreplaceable in the industry chain could resume production by establishing new network connections with other production partners, while countries that are less irreplaceable are at risk of being marginalized or even removed from the production network. According to our analysis of the global value chain, China as a whole is in the downstream. In our view, on one hand, China's advantages mainly lie in low-tech manufacturing industries, exposing the country to potential horizontal risks posed by trade frictions for the purpose of decentralization. On the other hand, China's disadvantages mainly lie in primary products such as oil and medium- and high-tech industries such as software, exposing the country to potential vertical risks posed by overseas supply bans. The key to coping with horizontal and vertical risks lies in technological progress. To clarify the future path of innovation, we believe it is crucial to examine the current state of China’s technological innovation and understand its major challenges. We take the perspective of a country’s innovation system to assess the status quo of China’s innovation activity. Regarding innovation input, China ranks only behind the US in terms of R&D spending, but still lags behind the world’s technology powerhouses in terms of R&D intensity. We think the country still needs to enhance its R&D intensity, especially in basic research that is vital for radical innovation. Talent is another crucial driver of innovation. China has a large talent base, but we believe there is room for improvement in the number of researchers per thousand people in the labor force as well as the quality of labor and structure of human capital. We believe the supply-side challenges constraining the education system and hindering the cultivation of innovators are three-fold: Uneven distribution of high-quality basic education resources, the intensified incentive system in exam-oriented education, and educational administration factors in research-oriented universities. In terms of technological outputs, we focus on academic publications and commercial patent applications to measure China’s achievements in knowledge innovation. We compare the 30-year history of China's knowledge innovation with international experience and highlight five patterns. First, as a latecomer to knowledge innovation, China has caught up with developed countries in terms of quantity, and the gap between China and developed countries in terms of quality is narrowing. Second, China’s contribution of core innovation to global output remains limited and it lags behind developed countries in terms of originality. Third, from the perspective of conversion of achievements in knowledge innovation, industries do a good job while conversion of academic research results is relatively weak. Fourth, China tends to post strong performance (in knowledge innovation) in areas in which it has comparative advantages in international trade. Fifth, the growth momentum of China’s cooperation with foreign entities in knowledge innovation has slowed in recent years, especially in the field of academic cooperation, which deviates from the global trend. Having examined China’s current position in the global value chain as well as its innovation inputs and performance, we use criteria of “systemic importance” and “promising development prospects” to identify three major areas for further analysis: The digital economy, the green economy, and the bioeconomy. We note that regardless of international competition, China still needs to increase R&D intensity and accelerate technological progress to achieve its medium- and long-term growth targets. Regardless of the perspective of either international competition or domestic growth, China needs to accelerate technological progress, in our view, and policy intervention is indispensable to accelerating technological innovation. In this book, we discuss the paths to accelerating technological innovation in two parts. Three macro chapters focus on the analysis of innovation economics including the status quo (this chapter), the scale effect (Chap. 2 ), and the innovation ecosystem (Chap. 7 ). We also include four industry-focused chapters, which examine the application of innovation economics in digital industries (Chap. 3 ), green energy (Chap. 4 ), the biotech industries (Chap. 5 ), and supporting industries such as manufacturing and logistics (Chap. 6 ).