Mark Greeven: Innovation Policy Reform

Changing China’s Innovation Ecosystem?

Mark Greeven is Associate Professor at the Management Science and Engineering Department of Zhejiang University’s School of Management and a research fellow at the National Institute for Innovation Management (China).

Mark Greeven

A sustainable economic development of China depends on innovation. Moving from an unsustainable export- and investment-led growth towards sustainable economic development based on domestic consumption requires catching up in terms of productivity and living conditions. The Chinese government is well aware of the fact that the ecosystem for innovation in China is still immature and in need of significant changes. Well before the Communist Party’s Third Plenum in November 2013, the “National medium- and long-term plan for the development of science and technology (2006-2020)”, issued by the State Council, outlined China’s broad ambition to enhance innovation with around 100 supporting policies and the goal to increase R&D spending to $113 billion by 2020. The Third Plenum addressed the issues around creating a favorable environment for innovation in four main ways.

First, the Chinese government is in a difficult position. Which tools does it have left to stimulate economic growth? Tools such as investment in real estate, large scale infrastructure and state bank support have been utilized and created a series of problems. One thing that the government can do is to deal with the stifling national and local bureaucratic hurdles for companies. In particular, entrepreneurs — the driving force of China’s economic growth — are often hindered by troublesome and lengthy procedures for licenses and permits, limited access to bank loans and weak positions in competing for state resources. During the Third Plenum the government made explicit and clear commitments to lower bureaucratic hurdles. Key words in the Third Plenum: Move from basic to decisive role for the market; increasing vitality and creativity of the non-public sector; building an innovative and service-oriented industry. I have hope that the government will actually follow up on these promises as there is a clear interest for the Xi administration to improve the efficiency of the government apparatus.

Second, the Third Plenum suggested a stronger drive of the government to promote consumption. However, the government still needs to make the next step on how to increase purchasing power, given a high inflation rate, and further improve social security. Clearly, stronger domestic consumption in combination with increasing incomes and a higher average level of education will lead to a more sophisticated consumer market with more diverging needs and requirements, which will boost the need for innovation by Chinese companies. An example is the emergence of innovative technology and Internet sectors which are mostly driven by consumer demand, not by policy and subsidy.

Third, innovation does not come from guidelines or subsidies; it comes from creativity, entrepreneurial spirit and experimentation with allowance of mistakes and failures. The government needs to set basic framework conditions, such as a functioning legal system, protection of intellectual property, a strong educational system and access to financial support. These topics have always been part of the government’s agenda for the past decades, and we see some improvements. Perhaps the recent decisions and directions of the State Council on reforming and improving entrepreneurship education by universities will have more consequences in terms of promoting and facilitating an entrepreneurial spirit.

Lastly, China is a large country to govern and its decentralized approach, which some may call de facto federalism, has proven successful at least in terms of the past decades’ double-digit GDP growth. This also means that some of the most important changes and reforms will not have been dictated during the Third Plenum but will come from the provincial and local levels, where the implementation of reforms often follows and aligns local interest and conditions. While the Third Plenum will remain an important indicator for the government’s attitude, actual change and reform will depend on local adoption and adaptation over the next few years.