Supporting Innovation: Unquenchable Flames

Innovation is the source of economic growth on a per capita basis and an essential way to improve standards of living. Thus, developing innovation capabilities is fundamental for modern economies. The innovation system of a country includes market-based cooperation and interaction between enterprises, universities and government, as well as innovation-related framework conditions such as infrastructure, policy framework, and macroeconomic environment. In this way, a complete ecosystem nurtures innovation. China has been establishing an innovation system that conforms to its national conditions. The country’s innovation system shows notable competitive advantages given its enormous domestic market system and world-leading physical infrastructure. China has also established innovation-related systems and policies, including those for anti-trust and IP protection. It is able to provide a macroeconomic environment that encourages overall innovation. For example, it has established a modern enterprise system, and continues to strengthen the provision of financial support for technological innovation. Facing changing situations at home and abroad, China continually upgrades its approach to integrating into the global innovation framework, and the country is shifting from a latecomer in traditional segments to a frontrunner in new fields. Regional innovation centers are also an important part of China’s national innovation system. They are essential for implementing national innovation policies. Regional innovation centers in different areas have their respective advantages, and we expect them to improve further, with Silicon Valley and Germany providing valuable models. We should not neglect the government’s role in coordinating and supporting technological innovation. In China, the government emphasizes its role in promoting innovation, especially during key periods and for core industries. It can make targeted use of market resources and policy measures when supporting corporate R&D, and improve the efficiency of its financial support to innovations in the private sector. We also believe that it is important for the government to make reasoned decisions, to increase the flexibility of R&D management system, and ultimately, to make full use of the new system for mobilizing resources. The government also plays a vital role in financing innovation. While innovation needs external financial support, the financial industry does not always spontaneously invest in it. We attribute this to the constraint from financial cycles, a high risk of failure, and an innovation paradox. The government could correct such failures to enable the financial system to better support innovations, including allocating appropriate financial resources to different types of innovations. For example, the private equity market has limited financial resources, but it is better positioned to support smaller firms, which have a stronger desire to promote “radical innovation”. The stock market could create a divesting channel for venture capital to make the private equity market more active. Large firms tend to rely on “incremental innovation”, which could be supported by banks that naturally prefer stable cash flows and ample collateral. Currently, China is catching up with advanced economies, and we expect the country to become a global frontrunner in technology in the long term. A number of domestic industries (e.g., semiconductors) are facing vertical risks. In such sectors, the “catching up” innovation financing model in which large banks offer ample credit resources to big companies may need to play an important role. As such, China should improve the “leading” innovation financing model where medium-and-small firms rely on capital markets to raise money to fund innovation. Thus, the financing models for both radical and incremental innovations are key to China.