Wednesday, Apr 26, 2017, 5:47 PM CST – China

Editorial

Promoting innovation remains the key for China’s economy

The bulk of China’s scientific expertise and resources is located in State-controlled research institutions.

In the past year, in order to address a sustained economic slowdown and achieve much-desired economic restructuring, the Chinese government has launched quite a few initiatives, such as Made in China 2025, Internet Plus and the Innovation Development Strategy. More recently, the leadership has called for “supply-side” reforms to promote total factor productivity.

It is clear that the core concept underwriting all of these initiatives is increasing the incentives and ability to innovate, which the leadership has considered the key to whether or not China can escape the so-called “middle-income trap” and become a high-income country.

To achieve the goals of these initiatives, the government must center its policies around specific factors related to innovative industries. Firstly, as State-owned enterprises (SOEs) account for about 40 percent of the economy, and the bulk of China’s scientific expertise and resources is located in State-controlled research institutions, China should significantly reform both SOEs and State-controlled research institutions in order to unleash the spirit of creativity in those entrepreneurs, scientists and researchers who remain the country’s most valuable assets in regards to innovation capability.

While SOE reform – including allowing private capital to enter sectors previously controlled by SOEs and introducing multiple types of ownership into the State sector – has been underway, more efforts should be devoted to State-controlled research institutions.

Currently, most of China’s State-controlled research institutions are characterized by pyramidal organizational charts. Successful reforms should alter these institutions’ organizational structures so they become more horizontal and team-based, with more liberal motivation mechanisms.

Secondly, China needs to create a better policy environment for innovation. This should include strengthening legislative efforts to protect intellectual property, conducting structural tax cuts and providing subsidies in relevant fields to encourage the development of innovative industries. Moreover, the government should also open up its regulatory procedures to encourage and facilitate the acquisition of foreign enterprises by Chinese companies.

Thirdly, given the higher level of risk inherent in innovative industries, the Chinese government needs to establish an adequate financing platform to fund the sector’s sustainable development. Unfortunately, China’s plans to transform the Chinese stock market into just such a platform were seriously disrupted by market turbulence last July, which led to the securities regulator suspending IPOs, with market plunges in January once again dampening such efforts.

Despite these difficulties, the Chinese government should continue to actively seek means to attract more financial resources for its innovation initiatives.

Given its importance in China’s overall national strategy, promoting innovation should continue to be among the top priorities of the Chinese government. 

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