Chinese innovation

China can rekindle its great innovative past, though some reforms may be needed first.

Click here for larger graph ©OECD Observer

The great 20th century sinologist, Joseph Needham, once drew up a list of 24 technical innovations brought from China to the West. They ranged from gunpowder and the wheelbarrow to printing, cast iron, the magnetic compass and the chain suspension bridge. By 1600 the torch of innovation had passed to the West.

Could it now be returning? In 2003 China became the third nation to put a man into space, and has busily launched satellites since. On the ground, communications companies such as Huawei and ZTE now compete head-on with the likes of Ericsson and Nokia.

Against this background, it is no wonder that China is one of the world’s largest investors in research and development. Spending on R&D has climbed by 19% per year since 1995 to reach US$30 billion in 2005, putting China sixth in world ranking. That is at current exchange rates; if these were adjusted for purchasing power parity between different countries, then China would rank third!

However, according to a new report examining Chinese innovation, some of this progress flatters to deceive: R&D spending is still low as a share of GDP per capita and far lower than the OECD average. Consider also the number of researchers in China, which while second in the world only to the US, is still very low for China compared to OECD countries, given the size of the country’s labour force. Chinese researchers may have contributed 6.5% of research articles to scientific publications in 2004, up from just 2% a decade earlier, and are second after the US in nanotechnology research publishing, for instance, but their innovation system still shoots below potential.

More fundamentally, there is a difference between being a leader in R&D and leading a truly innovative, modern society. It is a gap China must now bridge.

The reasons are simple. China’s remarkable economic resurgence has made it one of the largest economies in the world, but its momentum cannot be sustained without destabilising the “harmonious society” promulgated by the nation’s leaders. Already there are signs of strain on natural resources and massive migration to cities, with deep inequalities between the provinces and between urban and rural populations. It is largely because of such pressures that the Chinese authorities are turning towards innovation, both to address the problems that rapid economic progress generates and to raise the economy higher up the value chain towards a more sustainable growth model. China needs innovation more than ever.

In a nutshell, basic research is the bedrock of innovation and the authorities must strike a better balance between this reality and their policy emphasis on investment-intensive high-technology output. Between the early 1990s and 2005, the country’s high-technology exports ballooned from 5% to 30% of the total, mostly in television, radio and communications equipment, and office machinery. In the main, these are low value-added activities led mostly by firms outsourcing from OECD countries. Technology and management skills did not spill over widely or deeply enough into local firms, partly because China lacked the innovation system to allow this transfer to take place. The TV screens got bigger and flatter, but the picture for Chinese industry innovation did not greatly improve.

Not that transfers of knowledge and technology are not important, they are. That is one reason why the Chinese now insist on knowledge sharing as part of major new inward investment contracts, in aviation and energy for instance. However, the full benefit can only be tapped by improving underlying systemic issues and rebuilding China’s innovation infrastructure. This demands a patient and coherent long-term strategy.

Part of China’s innovation stodginess reflects history: the Chinese R&D system has evolved from a Soviet-style mission approach, slowing the transition to a more market-led approach. Geography is also a factor, with many pockets of excellence living separate lives–more an archipelago than an interlinked whole. A glance at the map also reveals that the hot spots of innovation lie along the east coast. In bleak contrast stands the number of R&D facilities in the western and central provinces. Again, history comes in to play, since many of these sites were chosen during the Cold War because their remoteness from busy economic hubs was considered as a “third frontier” in defending Chinese intelligence.

Today they reflect China’s uneven economic growth. In the central Yunnan and Guizhou provinces, where GDP per capita is well below average, R&D expenditures were as low as 0.7% and 0.5% respectively of the national total, whereas in Beijing, where GDP per capita exceeds $2,500, the R&D share stands at over 16%. Rebalancing this would not only help innovation but, as the authorities emphasise, society’s harmoniousness too.

Then there is the job of ironing out inefficiencies within the R&D centres themselves, particularly in traditional state-owned enterprises. Rather than running them from the top down by issuing bureaucratic instructions, the authorities would do well to allow more market-oriented innovators to grow. In a modern innovation system, the government can still influence research by becoming a major client of R&D, as in the US for instance, but it must also get the enabling infrastructure right.

Those innovative “islands” have to be linked together for a start, and the gates of thousands of science and technology parks opened up through the promotion of networks for sharing human and capital resources. A greater national and regional concordance would avoid wasteful research duplication, such as by issuing guidelines or creating an independent co-ordinating agency. The authorities could inspire themselves from OECD-style “competence centres” for long-term co-ordination between public research organisations, businesses and universities.

The role of universities needs attention, too. These account for a tenth of S&T firms and apply for a fifth of total patents, but since 2000, enrolments for science and engineering degrees have fallen. Populations are ageing, and without action, fewer science graduates could eventually handicap China’s position on the R&D scene.

Underlying all of this are the institutional props of R&D, from banks and legal frameworks to industry/university interfaces, which must be updated to cater for an evolving market-based innovation environment. It is about coaxing more small and medium-sized firms to invest in innovation, about better corporate governance so that managers rather than political masters lead their own research, and it is about providing secure environments for scientific entrepreneurs to operate in.

Safeguarding intellectual property rights is the soft belly here. China is well in line with international regulations as a signatory of TRIPS (the Agreement on Trade-Related Aspects of Intellectual Property Rights), but despite clearer and tighter regulation, infringement still dogs the system. The difficulty is enforcement. This discourages domestic investors as much as investors from abroad. Worse, IPR infringement poses health and safety risks for consumers, and damages the reputation of Chinese firms. The government, as well as the Chinese Patent Office, is toughening up on IPR, though fixing the system will take time and effort.

For many historians and scientists, what makes Chinese civilisation so brilliant is that it had “another way” of doing science. According to Joseph Needham, Chinese innovators simply did not translate their knowledge into mathematics. This left them remote from ensuing scientific dialogue. Whether or not this is true, the global economy has now changed and so has China. In the end, the Chinese are set to reinforce the country’s innovative capabilities both by trying out their own approach and looking to advanced OECD countries for inspiration. If the underlying systemic shortfalls are also corrected, then China may soon be in a position not only to push to the heart of scientific discussion, but to lead the world to new frontiers of knowledge as well.



OECD (2007), Reviews of Innovation Policy: China, Paris.

See summary report at or contact the lead authors of the report,, and

©OECD Observer No 263, October 2007

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