Enhancing China's Innovation Performance: The Policy Choices

• DOI: http://doi.org/10.1111/j.1749-124X.2014.12061.x
• Author: Xiaolan Fu,Rongping Mu
• Published date: 01 March 2014
• Date: 01 March 2014

42 China & World Economy / 42–60, Vol. 22, No. 2, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Enhancing China’s Innovation Performance:

The Policy Choices

Xiaolan Fu, Rongping Mu*

Abstract

Transforming China into an innovation-driven economy has been one of the top priorities of

the Chinese Government. This paper examines the policy choices involved in the extended

national innovation performance framework for creating an open innovation system.

Innovation capabilities, incentives and institutional frameworks are examined. The paper

argues that China should continue to increase its investment in R&D and in education, and

that there should also be an attempt to strengthen the incentive system at the macro, meso

and micro levels. This strengthening may include reforms to: release the power of competition

and guide resources towards innovative sectors; adopt appropriate human resource

management, such as appraisal and remuneration systems; create effective policies for

research funding management; and evaluate the efficiency of research to encourage the

creativity of researchers, managers and employees. The paper also discusses the space for

industrial policy in the 21st century.

Key words: China, innovation, policy

JEL codes: O2, O3, P4

I. Introduction

After more than 30 years of economic reforms and having transformed from a low to a

middle income country, China now faces significant challenges in moving from imitation

to innovation. The success of this transformation will be of crucial importance for China

to avoid the middle-income trap and sustain its long-term economic growth (Wu, 2013).

*Xiaolan Fu, Professor and Director, Technology and Management for Development Centre, Oxford University,

Oxford, UK. Email: xiaolan.fu@qeh.ox.ac.uk; Rongping Mu, Professor and Director, Institute for Policy and

Management, Chinese Academy of Sciences, Beijing, China. Email: mrp@casipm.ac.cn. The authors would like to

thank an anonymous referee, John Knight, Jinglian Wu, Wei Lv, Xin Fang, Mingjie Ma, Erniu Xuan, Guisheng Wu,

Jin Chen and Jizhen Li, as well as conference and seminar participants at the Oxford China Policy Forum, the

Academy of Innovation and Entrepreneurship Annual Conference, Tsinghua University and the Centre of

Development Research of the State Council for helpful and constructive comments.

43

Enhancing China’s Innovation Performance

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

The past decade has seen an exponential increase in research and development (R&D)

investment in China. Developing an innovation-driven economy in the coming decades is a

major objective for China. Although there are many research papers and government reports

concerning national innovation capabilities in China, most of them address this problem

using the national innovation system (NIS) approach (e.g. Chen and Liu, 2008; OECD, 2008;

MOST, 2010; Wu, 2010; Mu and Fan, 2011). The NIS framework is powerful in mapping out

the major players in the innovation system and allows policy-makers to identify the objects

for policy intervention, but it does not explain how to increase the capabilities of players and

strengthen the linkages between them. The question of how to enhance the innovation

capabilities and performance of the country requires in-depth and systematic analysis.

The present paper examines policy choices for the development of innovation

capabilities in China using the national innovation performance (NIP) framework developed

by the OECD (1987) and Lall (1992), and modified and extended by Fu (2014). The importance

of policy in enhancing national innovation performance vis-à-vis simply leaving it to the

market is validated by several factors. First, given the nature of knowledge as a public good

and the prevalence of externalities that may benefit other users of knowledge, government

intervention is required to protect R&D investors and to encourage innovation activities.

Second, innovation is risky and costly. Therefore, there is a need for government financial

support to enable active innovation activities, especially in basic research where uncertainty

is high, because it is difficult to control the direction of the development of a technology

and the cost of failure of an experiment is high. Third, the presence of market failure caused

by problems such as information asymmetries, externalities of knowledge and public

goods also calls for policy intervention in information and knowledge provision. Finally,

China is being forced towards a more skill-intensive and technology-intensive growth

path, with the amount of surplus unskilled labor in China falling. This transformation can

be realized through the operation of market forces, but long-sightedness by firms and

government intervention are also required because of the long gestation periods involved.

The present paper is organized as follows. Section II provides a brief overview of the

innovation performance of China. Section III discusses the theoretical framework concerning

the determinants of NIP. Section IV analyzes the policy choices for boosting innovation

performance in China. Section V examines the space for innovation policy in the 21st

century. Section VI concludes.

II. China’s Innovation Performance: An Overview

In the present paper innovation concerns not only novel innovations but also innovation