Professor Song CHEN, Ph.D. Deputy Dean, School of Economics & Management Tongji University Oct. 7, 2013 The Changing National Innovation System in China: Policies and Challenges

2 Agenda 1.Introduction and NIS in China 2. The Changing Innovation Policy in China 3.The Challenges of Innovation for China 4.Implications for Developing Countries

1. Introduction and NIS in China China’s Position in Global Technology Competition 3  A Rising Technology Exporter

4 1. Introduction and NIS in China China’s Position in Global Technology Competition

 In 2004, China became the world’s largest exporter of IT products (US$180 billion, vs US$149 billion for the US)  This shift has occurred entirely within the foreign invested companies  Some component manufacturing networks have shifted to China 5 1. Introduction and NIS in China China’s Position in Global Technology Competition

 The huge Chinese market  Low labor costs of R&D engineers  Improved innovation and policy environment Feb. 2003Jun Introduction and NIS in China Growing MNCs’ R&D Centers in China

 Major MNC R&D Centers in China focus on product localization or develop new products for China market while some start shifting towards global innovation 1. Introduction and NIS in China Growing MNCs’ R&D Centers in China

Government  Coordinator Companies  Development Universities  Basic Research Research Institutes  Applied Research 1.Introduction and NIS in China Major Players of National Innovation System  Innovation network, with functional division of lalour in innovation.

9  2012, China ranked 34 according to GII 2013 WIPO  2013, China ranked 35 out of 142 countries and economies 1.Introduction and NIS in China Global Innovation Index Ranking

 Institutions –Political Environment –Regulatory Environment –Business Environment 10 1.Introduction and NIS in China Global Innovation Index Ranking

 2 Human Capital & Research 11 1.Introduction and NIS in China Global Innovation Index Ranking

 3 Infrastructure 12 1.Introduction and NIS in China Global Innovation Index Ranking

 Market Sophistication 13 1.Introduction and NIS in China Global Innovation Index Ranking

 Business Sophistication 14 1.Introduction and NIS in China Global Innovation Index Ranking

 Knowledge & Technology Outputs 15 1.Introduction and NIS in China Global Innovation Index Ranking

 Creative Outputs 16 1.Introduction and NIS in China Global Innovation Index Ranking

2.1 National Strategy and Deregulation Policy –National strategy is to build an innovation-driven country by 2020 –Further Economic Reform Market oriented Reform Deregulation by new Prime Minister LI Keqiang –“Open Door” Policy pilot Free Trade Zone in Shanghai in 2013 Special Economic Zone at Shenzhen near Hong Kong in 1980 –Local Governments Competition technology upgrading Competing to become a “Innovative City” –Better Government Service The Changing Innovation Policy in China

2.2 Education Policy –Growing Government Expenditures on Education: 4% of GDP in 2012, 2 Billion RMB a year, meeting the target of Education Law for the first time in 19 years. –Culture tradition: “Knowledge changes your life” –Internationalization GMAT Scores: Ranked 7 th in the world, while USA ranked 51 st GMAT takers: No. 1 in the world in term of numbers –More than 6 million university graduates, most majored in engineering and technology in 2013 Stronger Science Base The Changing Innovation Policy in China

2.3 Science and Technology Policy –Increased Fund for National Natural Science Foundation –Stronger Government Support in Public Research Institutes Chinese Academy of Sciences –Public R&D Platform Generic technology Enabling technology The Changing Innovation Policy in China

2.4 Policy for Innovation in Businesses –Preferential Policy for MNC’s R&D Centers in China Lower land price Tariff free for R&D testing equipment Local government incentives –Tax Incentives 150% of R&D expenditure as cost deduction in business income tax since 2008 Accelerated depreciation for R&D equipment High-tech businesses in National High-tech Zones may enjoy two year tax-free after becoming profitable The Changing Innovation Policy in China

2.4 Policy for Innovation in Businesses –IPR Protection Policy Clear Strategy on IPR protection Incentives to Patent Application: local government subsidies for patent application China ranked the 4 th in the world in patents application, with cases, 13.6% higher than ZTE, A Chinese ICT company based in Shenzhen, ranked No.1 in PCT patent application ( 3906) in 2012, the next is Panasonic and Sharp The Changing Innovation Policy in China

2.4 Innovation Financing Policy –Private Banking To finance innovative SMEs and Start-ups –Internet-based Financing –Venture Capital and Equity Investment –Government emerging Industry Development Fund Joint investment with private equity fund The Changing Innovation Policy in China

3.1 Rising labour costs –Stricter Enforcement of Labour Law –Competition of MNCs 3.2 Higher Living Costs –Soaring Real Estate Price, preventing overseas Chinese scholars from returning back to China –Air pollution 3.3 Constraints of Talents –Technology –Management talents with global perspectives The Challenges of Innovation for China

3.4 Infrastructures –Better Education system Student Loan Higher education costs for children –Mass Transportation System to ease high price of real estate –ICT infrastructure 3.5 Impartial Enforcement of Law –Pollution and Food Security –IP Infringement in some rural areas The Challenges of Innovation for China

4.1 Stable and Open Economic Policy –FDI Policy Joint Ventures –MNCs’ R&D Centers –Holistic Economic Policy –Stable Environment for Investment Implications for Developing Countries

4.2 Education Policy –Human Capital for Innovation More graduates in science and technology Technology Management and Entrepreneurship education –Build up Science Base and Absorption Capability –Global Sourcing for Talents, including technology and management talents Application of business model for local market –International links: Global Innovation Networks Implications for Developing Countries

4.3 Better Infrastructures –ICT Infrastructure IT Gap Winner-take-all –Transportation and Communication Infrastructure Physical Infrastructure –Social Security for better FDI environment 4.4 A Clear Government Innovation Policy –Strong support for innovation activities in universities, research institutes and businesses Implications for Developing Countries

28 Thank You ！ Q & A Further Reading: OECD Reviews of Innovation Policy: China, 2007