1 Activity-based analysis of innovation system of China Xielin LIU Ph.D Research professor National Research Center for Science and Technology for Development Beijing, China P.O.3814,

2 Outline Activity-based on framework Chinese NIS in plan era Chinese NIS in transition era Characteristics, challenge and the future of innovation of China

3 1: Activity-based innovation system In 2001 paper (LIU and Steven, Research Policy, 2001), we proposed a methodology of an activity-based innovation to go to catch the system-level of innovation factors. The traditional actor-based innovation system approach describes actors such as government, research institution and firms and their interaction but missing system level of analysis...

4 Framework Institutions are the keys to a country’s innovation system. there are primary and secondary actors to coordinate the innovation process. We listed five activities in the innovation process as fundamental. We try to see how they are organized, distributed and coordinated. This five activities are: (1) research (2) implementation (manufacturing) (3) end-use (customers of the product and process outputs), (4) Linkages (bringing together complementary knowledge) (5) education. These activities extend beyond the R&D system, including inputs to research activity as well as the use of research outputs.

5 Structure-dynamics- performance Evaluation of NIS. Based on traditional structure-conduct-performance framework. we proposed a structure-dynamics- performance framework to see how a country’s innovation system works in a country.

6 2: Structure, dynamics and performance of Chinese NIS under central planning Structure R&D ----mainly by research institutions, university second, little R&D in enterprises level. Implementation----factory End-use----SOE, individual consumers Dynamics Coordination: state planning committee to decide how and how much to produce for a period. Government as secondary actors had the powers and obligation to introduce new technologies to the economic system. For example, in 1950s,1960s, and 1970s, China had imported lot of technologies from former Soviet Union, Germany, Japan and other countries. Those technologies laid down the foundation for the Chinese chemical, automobile, steel, textile and other industries.

7 The government also used five-year and annual plans to form national-wide R&D teams. The success of nuclear bomb, artificial insulin and other major discovery were the result of that. These projects would involve thousands of scientists, engineers in different research institution, university, factories and hospitals across the country with labor of division to join and collaborate. Incentive: output-based, no efficient and profit, no IPR. So, the efficiency of innovation in China is limited. Performance: there were lots of reverse engineering works, limited innovation, And little linkages among actors other than government ordered. Lot of industry started around the same year as Korea, such as automobile industry, IC industry, steel industry, but lagged behind Korea decades later. “Import, lag behind, import again, lag behind once more”.

8 3: China’s Transition-era national innovation system Institution creation: Introducing market performance evaluation system to the whole system.. The decentralization of decision-making over both resource allocation and operation decisions. Regions have some autonomy to do what they think right. Open to the outside and enter WTO. China now is for FDI.

9 (1) structure R&D Public research institutes loss their dominant role as main research actor since 1999 after packages of reform. Enterprises have taken their losing role instead.

10 Table 1 Enterprises takes the role of research institute as major R&D actor In China Research institute University Enterprises Others

11 enterprises Enterprises is not just a factory anymore, they have strengthened their R&D capability quickly, though their R&D/sales for large and middle sized enterprises is only 0.83% in 2002

12. Table 2 Ratio of R&D/sales in Large and medium sized companies Year R&D/sales Source: China Science and Technology Statistics Yearbook, , Beijing.

13 Multinationals Multinationals have becoming an important R&D player in China. They set up lots of R&D lab in China in order to make R&D close to the end user and to better use of Chinese cheap human resource (about ten percentage of the USA price). It is said that multinational have already set about more than 600 R&D labs in China, most of them in Beijing and Shanghai.In some regions, they are now the largest players in Shanghai, Fujian..

14 Figure 1 The setup of Multinationals’ R&D centers in China

15 Figure 2 The share of foreign company R&D in the regional industrial R&D

16 implementation SME: a new actor was born following the market based reform. Some cluster in traditional industry, some clustered in high tech zone. They have accounted about one third of the GDP, more than 90% of job creation. SOE: still important in basic industry, such as electricity, telecommunication, chemical petroleum industry. University and Research institution: spin-off Cluster of high tech business Multinationals: key player for high-tech export.

17 Table 3 University’s spin-off Number of spin-off revenue （ billion RMB ） Profit （ billion RMB ） 净利润 （亿元） 上缴税金 （亿元） 对学校的回 报（亿 元） 资料来源 : 《 2004 中国高等学校校办产业统计报告》，教育部科技发展中心，中国高校校办产业协会。

18 Table 4 Foreign companies play an important role in High-Tech Exports (billion Yuan) share Total State-owned enterprises Foreign joint ventures Note: Since foreign-invested enterprises have established joint ventures with state-owned enterprises, the sum-up of the two could involve double counting and therefore exceed 100. Source ： 2002 China Statistics Yearbook on High-technology industry, National Bureau of Statistics, Ministry of Science and technology, China Statistics Publishing House, 2003, p55.

19 (2)Dynamics Government: both as coordination and innovation actors: local government official has the obligation to attract FDI in certain period and certain quota. Incentive: market competition becomes the dominant power to shape the direction of Chinese science and technology and innovation. For example, in university system, in 2003, 5.6%of all budgets are for overhead. Other fund including government and business are competitive based. For comparison, Japan is about 10% of funding from competitive source, USA is about 20-30%. So, though the total fund for R%D have been increasing in China, but the pressure of scientists is not less, but more. This is good for short term research, but not good for long term or radical innovation. The most competitive industries are the most dynamic industry, such as IT, automobile, machinery, house electrical appliance industry. FDI add one element of competition for local company to improve their performance.

20 4: Three characteristics of Chinese NIS Learning economy (Lundvall): Vast investment in (1) education, especially in family level, government continuously spend more on education, (2) information technology, China offer the cheapest internet access fees in the world. (3) Open to the world to learn best practice in every level: from government to business. Most of best management practices have been diffused in China quickly. Entrepreneurship-based economy: local entrepreneurs, reversed brain drain, government officials, graduate students. Booming of clusters in south of China. Using global knowledge and resources. Outsourcing technology globally; making FDI embedded into Chinese innovation system( meaning most of Chinese local innovations are the results of rich networking and collaboration with multinationals in China). SUND as case.

21 SUND: A Chinese solar energy company list in NY a model of globalized innovation in China R&D First in Australia second in China Firstly local governmental officials support with forms of VC Secondly in NY main board Entrepreneurship Overseas Chinese Implantation: a technology- based company Wuxi, a city in South of China End-use: German and other countries not China

22 Problems in Chinese NIS Structural hole: strong government in the top and strong market-based unit. Little coordination between them. In China, the role of scientific community or industrial associations is limited, all organizations in China are under tight control from top to bottom hierarchically. Education: we offered a highest number of science and engineering degree in the world. But score- based performance killed the curiosity of kids and young students.

23 Big trends for next fifteen years Balanced developed strategy between economic and social value: traditional more on GDP-driven strategy, but with the wider regional gap. Later on, we will move from a purely market based performance system to a balanced economic via social value system: more attention to the easing of disparity of region, development S&T for the needs of people. Not just GDP. Balanced development of domestic technology via foreign technology: nationalism and globalization: two forces in China. As technology is the key for a big country like China, relying too much on multinationals in technology is not a good thing, so, developing indigenous technologies becomes the future’s top agenda. It means China will spend more on R&D from currently 1.34% in 2004 to 1.5 in 2010 and 2.5% in 2020.

24 Better use of resource: government will give more weight on energy saving or clear technology development, more care about environmental protection. More on industrial innovation rather than just imitation and technology import. Try to be the innovative country by Capability building in the company level will be the main policy tool.