The Innovation Economy: China aims to spark indigenous innovation

In a series of six articles, Science|Business looks at how the G-20’s $200 billion of stimulus money will be spent. This week, China.

The State Council of China in November 2008 announced a $586 billion (RMB4 trillion, €425.6 billion) stimulus plan, the largest in the country’s history and second in size to that of the United States. The money will be spent in ten areas by the end of 2010, including innovation. While many of the plan’s details have yet to be revealed, it is part of a larger, 15-year strategy to put China centre stage globally in science and technology.

Chinese Vice Premier Keqiang Li, speaking at the Global Think Tank Summit in Beijing on 2 July, told delegates that every time there is a global crisis, it seems to be followed by a period of technological innovation.

“The Chinese are hoping to catch that wave,” said Denis Simon, a Pennsylvania State University professor and China expert, who was at the Beijing meeting. “That’s part of their stimulus package thinking, that as the world comes out of this downturn, with it will come a whole wave of new innovations probably built around new energy, new materials. The Chinese want to make sure that they’re at the forefront of this and aren’t laggards.”

Among the ten investment areas in the stimulus package are:

• health, culture, and education;

• ecological environment;

• science and technology innovation and industrial structure adjustment;

• and value-added tax reform and other measures to reduce the burden on enterprises by $17.6 billion (RMB120 billion).

Some RMB160 billion (4 per cent of total stimulus) is to fund R&D and innovation projects. RMB40 billion (1 per cent) is for medical care and education. RMB350 billion (9 per cent) is for ecological and environmental projects, according to Ping Zhang, minister of the National Development and Reform Commission (NRDC), China’s economic planning agency. The RMB4 trillion will come from the central government, local governments, and societal investment, according to the State Council announcement.

Some $14.6 billion (RMB100 billion) is for the last quarter of 2008. In February 2009, the central government was reported to have launched a second stimulus round of $19 billion (RMB130 billion). A commercial news agency, the 21st Century Business Herald, noted that RMB17 billion of that second release of funds would go to health and education, RMB11 billion to environmental protection, and RMB15 billion to industrial structure adjustment such as upgrading technology. At the end of May, the NRDC said it had spent RMB230 billion of the stimulus, including monies toward some 6,500 health service projects, according to Chinese news reports.

Kick start

Some of the stimulus money is new, and some of it will be deployed into existing programmes, such as China’s 15-year S&T plan, to give them a kick start.

 “Some of the money will be channelled into the Medium- and Long-term National Plan for Science and Technology Development 2006-2020, which was issued in 2006,” said Cong Cao, a senior research associate with the State University of New York’s Levin Graduate Institute of International Relations and Commerce. He says about RMB140 billion of the science and technology stimulus monies will go toward that RMB600 billion, 15-year plan, which comprises three five-year plans with science and technology projects including in hydraulics, medicine, agriculture, microchips, and energy.

“One component of the 15-year plan is mega science and mega engineering programs. Because of the economic stimulus, the government is trying to start some of the programmes ahead of the original schedule,” Cao said. The current five-year plan is the 11th one running from 2006-2010. Its priority programmes for science and technology include core electronic devices, nuclear energy, a high-resolution earth observing system, and key infrastructure for science and technology.

As in the United States, building infrastructure is key to economic growth. Much of the S&T money, as in the United States case, is expected to be for the purchase of equipment to modernise national and other labs, according to Cao and Simon. But in China’s case, the lab build-up will be more dramatic, because the country will be building and equipping new labs with the latest equipment, rather than having to upgrade, much as it did with its sparkling new airline industry.

“China, by the end of this 15-year plan if not before – because of the stimulus package – will have some of the newest, best-equipped research facilities in the world,” said Simon. “And just like Singapore, which has been able to attract scientific talent by virtue of building laboratories and world-class facilities for foreign biologists and other scientists in areas they want to get strong in, the Chinese will be able to leverage their position globally by virtue of having this new scientific infrastructure.”

Such infrastructure could lure overseas Chinese back to head labs rather than be middle managers at labs in the United States or Europe. “There’s a saying in Chinese that ‘I’d rather be the head of the chicken rather than the tail of the ox.’ That’s luring some people back,” Simon said. Some returnees are heading for one of the more than 1,200 foreign R&D centres in China, where there is much less peer pressure than working in a Chinese lab, he said.

He added that China’s labs will be focused in five areas: new energy technologies including fuel cell technology; environmental and environmental abatement technologies; life sciences and biotech; new materials and nanotech; and electronics/ information communications technologies that also could build on nanobiotechnology and nanoIT.

“Because of the ‘indigenous innovation’ emphasis, there’s a premium placed on buying or procuring know-how domestically,” said Simon. “So China is trying to create more IP from its own sources. It wants more commercially relevant and usable technologies out of the labs, and to translate them into products and services. China would like to know if it could make the next iPhone or something akin to it. That’s what their hope is.” He said China already is into catch-up mode, and ultimately wants to be more proactive than reactive.

Other key measures outlined by the NDRC include relieving the tax burden on enterprises, launching projects to reform enterprise technology, develop rural markets, and encourage industry consolidation via mergers and acquisitions, according to the February 2009 report “China’s Economic Stimulus: Analyzing Opportunities for Foreign Companies in China” by consultancy APCO Worldwide.

In addition, in early June, the Ministry of Science and Technology, Ministry of Industry and Information Technology, China Banking Regulatory Commission, China Association of Small and Medium Enterprises, and others, held an international forum in Beijing on how to overcome the financing difficulties of small and medium-sized enterprises (SMEs). In his address at the meeting, Minister of Science and Technology Gang Wan said that over the past three decades, SMEs have accounted for 99 per cent of all enterprises in China, contributed more than 60 per cent to its GDP, had 66 per cent of patented inventions, and 82 per cent of new product development. The meeting aimed to stimulate discussion among banks and the ministries and other parties to help SMEs . 

Academy road map

Another push in June came when the Chinese Academy of Sciences (CAS) announced its “Technological Revolution and China’s Future-Innovation 2050” road map as a counterpart to the 15-year Science and Technology plan. It took 300 Academy researchers and experts more than a year to draft the report. According to the report, “a new technological and industrial revolution centred on green energy, artificial intelligence, and sustainable development is most likely to take place in the next 10 to 20 years. China must prepare itself for the new revolution in order to build a well-off society and realise China's modernisation.”

The report highlights 22 strategic technology issues that are keys to China's modernisation, including: sustainable manufacture of high-quality elementary raw materials, a project to explore 4,000 metres below the Earth's surface, a new nuclear energy system, a sea power extension plan, exploration of dark matter and dark energy, artificial life and synthetic biology, nanotechnology, space science, and satellite projects.

Along with the various plans, China is using the stimulus monies to develop a middle class that can consume the results of its new innovation and production.

There still are challenges in innovation, however. “The problem for China now isn’t money. The problem is the utilisation of the talent, setting up monitoring and management systems to make sure there is more effective utilisation of the money being put into the system, and performance-based measures that will incentivise people to take risk and attempt to think out of the box,” said Simon.

“Foreign R&D centres help with this, as scientists don’t feel the types of peer pressures they feel inside their own domestic institutions. This culture of creativity problem lies at the core of what I think is the main shortcoming of the system. It’s improving at the margins, but it’s not improved to the degree that Chinese leaders are getting more for their money and more output.”

Cao added that it’s too early to say what the impact of the stimulus will be. “You don’t expect science and innovation to quickly have an effect on the economy. You cannot put money in today and expect economic consequences tomorrow.”