Moving Forward: China’s Plan to Innovation

One of China’s key objectives is to transit the economy from “Made in China” to “Created in China” . As costs increase and the Yuan strengthens, moving up the value chain will be of utmost importance in balancing the export-driven economy and securing China’s global competitiveness.
Progress is already visible: R&D spending and patent applications have risen significantly (although some critics attribute much of the latter to “junk” patents). China has already created the seeds of 22 Silicon Valley-like innovation hubs within the life sciences and biotech industries. One of the most impressive of these lies in Zhongguancun in northwestern Beijing – an innovative hotspot populated with countless research centers, tech super-companies, and start-ups.
Leadership has set clear, but challenging targets, which may prove difficult to achieve: to spend 2.5% of China’s GDP on R&D by 2020; to be among the top five countries with regard to number of inventions patented; and to have Chinese-authored scientific papers among the world’s most cited. In contrast to the market based innovation approach of other countries, where R&D is encouraged by taxation benefits and the market determines the winning technology options, the Chinese government has taken an active role in allocating funding to specific industrial segments and technologies. It has implemented a range of policies to enhance innovation,…


China 2.0

China transformed from a peasant society to the world’s second largest global economy within a single generation. With the opening of the economy and market reforms, entrepreneurial spirit has flourished: State-Owned Enterprises (SOEs) have been privatized, millions of Chinese have started new ventures, and China has taken advantage of its large labor force through low-cost manufacturing. But the PRC has come to a crucial juncture in its economic and social development. The current growth model is unbalanced towards exports and not sustainable in an environment of rising input costs. Thus, China’s growth in the next decade will depend on the country’s ability to move to the next stage of production through innovation and enhanced productivity and higher consumption through social stability.

Reform via a step-by-step approach

In order to maintain close control over this economic development, Chinese leadership first invoked a step-by-step approach to reforms, or as often summarized by the famous expression, “cross the river by feeling the stones”. On a trial and error basis, special regions were chosen for reform. If the reforms worked, they would be applied to new areas; if they failed they would be abandoned. This approach continues to this day.

The first economic changes, begun in the late 1970s, consisted of agricultural decollectivization by dismantling rural communes and giving entrepreneurs permission to start up businesses. Shortly thereafter, the area around Shenzhen (Guangdong province) was granted the status of a Special Economic Zone (SEZ) and thereby given favorable policies allowing for foreign trade and investments.

These reform approaches were almost instantly successful: China’s agricultural production soared, and Shenzhen became an economic powerhouse. Consequently,…


Domination of State-Owned Enterprises

China runs a bifurcated economy. While a robust and competitive private sector dominates industries like clothing, food, and factory-assembled exports, sectors of strategic importance such as railways, financial services, utilities, energy, telecommunications, education services, and health care are generally not open to private investment. These protected sectors are extensively controlled through government interventions and often dominated by large SOEs.
The 1990s saw big changes for SOEs, as the government forced companies not making a profit to either merge into larger corporations or to file bankruptcy. Many of these remaining SOEs have since become private companies. They have emerged as modern, restructured, share-holding firms listed on the domestic stock market. But even though the Chinese government has legally separated itself from these companies or sold a minority of their shares, either the state or local governments or SOEs often retain the majority of the shares.
The Chinese National Bureau of Statistics uses a very strict definition and views SOEs as only those economic units where 100 percent of the shares are owned by the state. The most important of these SOEs (currently 117 corporations) report directly to a special commission under the State Council…