China's Innovation System and the Move Towards Harmonious Growth and Endogenous Innovation

Abstract

Observers around the world are impressed by the rapid growth of China’s economy, some with hope and others with fear. Some hope that China will offer the unique experience of successful economic growth and catch-up under the new WTO regime; some see the rise of China as a threat to the current world order and to the powers that currently dominate the world in terms of economy, technology and politics. While outside observers tend to focus on the success story of unprecedented growth policy documents and recent domestic debates in China have pointed to the need for a shift in the growth trajectory with stronger emphasis on ‘endogenous innovation’ and ‘harmonious development’. In this paper we make an attempt to capture the current characteristics of China’s production and innovation system; how they were shaped by history and what major challenges they raise for the future. In section 2 we present data on China’s post-war growth experience. We show how the shift in policy toward decentralization, privatization and openness around 1980 established an institutional setting that, together with other factors such as the presence of a wide ‘Chinese Diaspora’, has resulted in extremely high rates of capital accumulation especially in manufacturing. The section ends with pointing to some inherent contradictions in the current growth pattern. In section 3 we take a closer look at how the policy shift in the eighties affected the institutional framework shaping R&D activities in particular, and learning and innovation in general. The attempt to break down the barrier between the science and technology infrastructure on the one hand and the production sphere on the other was highly successful as compared to the development in the former Soviet Union. But the original intentions were not fully realized. Rather than establishing markets for science and technology, the reforms led knowledge producers to engage in mergers or forward vertical integration and they became to a large extent involved in production activities. Referring back to the analysis of the sustainability of the growth model and the unfinished reform of the innovation system Section 4 introduces the recent decision by China’s government to promote endogenous innovation and harmonious development. Applying the innovation system perspective we argue that these broadly defined objectives can be realized only through a strategic adjustment towards ‘innovation driven growth and learning based development’ and we discuss what important policy elements such a strategic adjustment needs to encompass. In section 5 we conclude that imperfections in the division of labour and in the interaction between users and producers of knowledge and innovation that was behind the reforms of the eighties remain central concerns. In order to raise the long-term efficiency of the massive accumulation of production capital it is necessary to promote the formation of social capital and to be more considerate when exploiting natural capital.