Digital Innovation

Innovation in digital industries is one of the key factors to building a country’s competitiveness. With a focus on the semiconductor industry and the software industry, this chapter mainly analyzes the path of innovation of China’s digital economy. Semiconductors are the cornerstone of the global information and communications technology (ICT) industry. The semiconductor industry has a global division of labor, with upstream and downstream players being interdependent and regional cooperation being indispensable. Although Chinese companies mainly focus on downstream intermediate products and end product assembly, we suggest China undertake a range of measures to promote innovation, especially those relating to semiconductor manufacturing. Software is also an important component of the digital economy. Currently, China’s supply of system and high-end application software may not be sufficient, and China relies heavily on imports. This current situation may lead to security risks, including import suspension and data leaks, and also may result in a lack of long-term drivers for industrial upgrades. We believe the security risk of the software value chain is rooted in inadequate technological innovation, and it is important to catch up in innovation in both system and application software. Regarding the path of innovation of China’s semiconductor industry, we think China can step up efforts in innovation in the following two directions: More Moore’s Law and More than Moore’s Law. The former indicates that China can leverage existing mature technologies and follow the path of leading global companies. China can increase capex on mature process capacity and step up R&D on semiconductor equipment, materials, and electronic design automation (EDA) tools, aiming to eliminate the supply chain bottlenecks and improve the command of core technologies. More than Moore’s Law, on the other hand, suggests that China can highlight catching up with global players more quickly in terms of advanced integrated circuit (IC) processes; deepen its presence in potentially disruptive technologies such as new semiconductor materials, new computing architectures, and chip integration; and increase investment in the wide band-gap semiconductor materials and advanced packaging markets, in which technology advancement is more visible and the gap between China and overseas economies is narrow. There are four major driving forces behind innovation in the semiconductor industry. Industrial policies have played a crucial role in stimulating technological innovation and driving industrial development. Many countries and regions have unveiled a variety of incentive policies to bolster the semiconductor industry, mostly consisting of fiscal and taxation measures. In addition to industrial policies, capital, talent, and technology are three indispensable elements for the semiconductor innovation. Regarding the path of innovation of China’s software industry, system software and application software take different forms. System software innovation is an aggressive process led by scientific R&D. Setting standards for system software tends to create monopolies. It promotes innovation and requires long-term input of funds and resources. Innovation of application software happens gradually, and it is rooted in the constant feedback exchanges between users and developers. Small new entrants find it difficult to compete with the low pricing of large players, making application software an ideal target for venture capital. Therefore, we believe that domestic software companies can innovate in the following ways. Almost all new-generation system software is open source, giving domestic companies a chance to participate in the setting of new standards. In fact, Chinese software developers are already an important part of the international open source community. We suggest that domestic companies increase independent innovation to keep up with global cutting-edge system software technology. In terms of application software, we think standardization is the key to success. Some companies in China are able to define local standards for application software, but only a few can set global standards. We believe opening up more application scenarios and clients is crucial for domestic companies to strengthen the competitiveness of their products.