Dances with the Wolf: the Process of Reforming China’s S&T system Lan Xue, Professor and Executive Associate Dean School of Public Policy and Management Tsinghua University March 29, 2006

Outline  I. The starting point and key challenges  II. The reform process-1980s  III. The reform process-1990s  IV. The reform process-2000s  V. Lessons learned

I. The starting point  1949-early 1980s--Establishment of a centralized system based on the Russian model: Separation of functions and mission orientation;  human resources=>universities & technical colleges;  basic research=>Chinese Academy of Sciences (CAS);  applied research=>ministerial/provincial Research Institutes  development=>in house services in enterprises. Assessments  Great achievements in selected missions (e.g. in defense);  Weak linkage to economic development.

The key challenges to the system  Changing roles How to balance among knowledge application, knowledge diffusion and knowledge production at different stages of economic development?  Reform strategy How to minimize resistance to the reform (the two wolfs- market, and outsiders) while make sure that there is no way to turn back? what is the balance between government and the market? How to change the culture and behavior of institutions that were used to missions set by the government instead of by the market?

The general approach  Changing roles Initially, the focus was on diffusion and application, but as China develops, knowledge generation becomes important.  Reform strategy Gradual reform with flexibilities; experiments, feedback, and expansion; competition mechanisms.

II. The reform process-1980s  The background Opening up in the coastal areas and FDI, and the growth of township enterprises=> Market demand for S&T; Success in agricultural reform led to reforms in other areas;=>Reform impetus;  The reform strategy Creating Incentive regime for R&D organizations to serve for the economic development.

 The reform measures: Gradual funding cuts to all research institutes; new R&D funding from competitive projects establishment of horizontal linkages creation of technology markets new approaches to the management of research organizations incentive for S&T personnel to “ jump into the sea (becoming entrepreneurs) ” ; (sending out visiting scholars); (allowing students to study abroad).

 Starting new S&T initiatives: Torch program (aimed at tech. diffusion in agriculture); 863 program (aimed at high-tech sectors) National Natural Science Foundation; Key bottleneck projects;  Creating platforms for high-tech enterprises: Establishing 53 new and high-tech development zones at the national level, and many more at the local level; Establishing over 40 economic and technical zones to attract foreign high-tech FDIs; Encouraging the formation of university-affiliated enterprises; High-tech incubators around universities (later many become university science parks).

The outcome: Changing pattern of R&D spending Year Organization 1986 (%)1997 (%)2001 (%) business Research Institutes Universities Other02.1

The outcome: Characteristics of R&D Work in Chinese R&D Organizations (2001, %) R&D work Organization Basic researchApplied Research Development Business Research Institutes Universities

III. The reform process-1990s  The background: International competitive pressures:  for Chinese industrial sectors to upgrade;  The emergency of knowledge economy; Need future directions for S&T system reform  The positioning of research institutions  Backlash on university-market links;  Slow growth of R&D capability in domestic industry

 The strategy — to clarify roles played by different institutions and strengthening the national innovation system Chinese Academy of Sciences (CAS): knowledge innovation program  Strategic planning process for CAS and for each institute in CAS;  Consolidation of research institutes (from a total of over 120 to about 80);  Establishment of innovation centers (lean and mean, with high pay and high pressure) within research institutes;  Attracting overseas talents;  ………….

Reforming Public Research Institutes － >pushing them into the market  By the end of 2003, 1050 research institutes were transformed into business since 1999 government reform;  99 others were merged into universities or transformed into NGOs. Strengthening universities ’ R&D capability  World class university (985) ” project Focused support for 2 (Tsinghua and Beida) +9 universities;  2 nd phase of 211program Focused support for selected centers of excellence in about 100 universities.

 Industrial R&D Supporting the establishment of R&D centers in major State Owned Enterprises:  Close to 300 centers were certified by the central government;  Over 2000 centers were certified by provincial governments; Supporting small business innovation  Small and Medium Enterprise innovation fund; Helping MNCs to establish R&D centers in China  Around 700 MNC R&D centers were established in Beijing, Shanghai, Guangzhou, Chengdu, etc by mid

 Higher education system reform Dramatic increase in university enrollment  Prior to 1998, over 3 million students taking national entrance exams, and one third selected (gross enrollment in 1990=3.7%);  In 1999 enrollment rate increased by 47.4% over 1998;double digit growth rate remained for the next three years, raising total enrollment in universities from 6.43 million in 1998 to million in 2001 (see graph below). Market-based reform on university infrastructure and service provision

Growth in college admission

 Structural change by consolidation of universities Merging specialized institutes=>comprehensive universities. In total, 637 universities merged to create 270 new universities; 317 universities signed cooperative agreement to form 270 learning conglomerates.

 Decentralization of the management of universities Before the reform:  367 universities administrated by different central ministries. After the reform:  120 by central ministries (including about 70 national universities by Ministry of Education);  The rest are jointly administrated by Central and local government, or simply administrated by local government;  The authority of issuing permit to start advanced professional college/associate college is decentralized to provincial government.

IV. The reform process-2000s  General Background pressure in environment and resource － > the need to change the growth pattern; pressure from entry to WTO － >the need to integrate with global markets; pressure from MNCs and other competitors － > the need for technological upgrading; Pressure from regional and income disparities － > the need for development with equality.

 Within the innovation system: Knowledge production increased, but quality remains to be a problem (see graphs below); Lack of integration among different sub-systems (such as Chinese Academy of Sciences, universities, Enterprises); Weak R&D capability in public health, environment, energy and other public domains; The over-reliance on foreign technology in many industrial sectors (such as semiconductors, home electronics and etc).

Knowledge Production has increased

The impact is limited

The response  Changes in development strategy-- from GDP focused growth to more coordinated development (scientific development approach): Growth based more on knowledge rather than material inputs; Balanced regional development--Western and Northeastern regional development, and the central regions; Balanced sectoral development--Investment in public health system, public safety, environment, and other areas; Balanced development between urban and rural areas.

 The median and long range S&T planning Started in the summer of 2003; Involving over 2000 of S&T experts, social scientists, industrial managers (and many of their assistants); Strategic research focused on over 20 specific topics; Public participation through the Internet; Consultation with international science community.

Outcome:  Proposed guidelines for future S&T development: promote indigenous innovation; work to make China an innovation-based country in 2020;  Identified a group of priority areas of applied research based on the societal needs; Energy, water resources, and environmental protection; ICT, bio-agriculture, new materials … transportation, public safety and etc.

 Identified priority areas in basic research; Basic areas; interdisciplinary areas.  Proposed guidelines and identified some mega projects; e.g. Space program (moon exploration);  Furthering the institutional reform and push forward the improvement of innovation system: Enterprise-centered technological innovation system; knowledge innovation system; regional innovation systems, defense innovation systems; and technical services system; A general infrastructure for S&T activities for the society.

V. Lessons learned  Practical, rather than ideological or orthodoxy; 1978 debates; 1992 debates; current debates;  Political stability and policy consistency; Policy changes in magnitude but not in major directions;  Gradual reform with determination: E.g. changing the status of public research institutes  Creating a learning cycle: opening up and reform: Opening up=>new ideas and new forces to push for reform=>more reform create more rooms for opening up; Never under estimate the positive externality generated by opening up.

Thank you!