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Innovative to the core
Release Time:2019-04-03 | Source:China Daily | Author:Shen Jiawen

Chinese companies must improve their R&D capabilities to end the country's reliance on imported technology

In 2017, China was ranked the world's 17th most-innovative economy, rising from the 20th in 2012, as the country's economic strength, investment in science and technology and personnel training have been catching up with that of the advanced nations.

To meet the demands of social and economic development, it is unrealistic to depend on imported technology. Instead, the focus should be on endogenous innovation, in particular, the innovation capability of domestic enterprises.

The Chinese government is encouraging a market-oriented innovation nurturing mechanism to synergize the efforts of enterprises, higher education and research institutes, with enterprises, especially small and medium-sized enterprises, being the main players.

There are a number of challenges standing in the way of growth driven by innovative Chinese companies.

To start with, the quality of technological innovation has to be improved in the key fields that are currently dominated by developed countries. China's invention patents applications have been ranked the highest worldwide since 2011, reaching 1.54 million in 2018. However, China's external payments for royalty payments for intellectual property rights soared from $1.9 billion in 2001 to $35.6 billion in 2018 with a deficit exceeding $30 billion.

In sharp contrast, the United States has an annual net income from IPR royalty payments of $80 billion.

In terms of core technologies, China imports more than 50 percent, over 80 percent for some crucial parts. In 2018, for example, China imported $312 billion worth of integrated circuits and exported $85 billion worth of IC products, creating a deficit of $227 billion. It is imperative that China increase its self-sufficiency in core technologies.

The role of enterprises as the main players in innovation should be strengthened. Although Chinese companies account for over 70 percent of the total investment made in R&D, research personnel and invention patents, only 23 percent of industrial enterprises above the designated size (which refers to those with annual main business revenue of 20 million yuan ($2.98 million) or more) have R&D institutes, and only 0.03 percent of them have IPR in core technologies.

And while China ranks second in the world for published sci-tech papers, only 10 percent of this research can be put into use, far lower than the rate of 40 percent in developed countries. A large amount of R&D results have no practical use; only 5 percent of patented technologies are traded and less than 5 percent of them are commercialized. So, synergy should be created through the joint efforts of enterprises, universities and research institutes, which means reforming China's current science and technology system.

Also, the overall efficiency of Chinese enterprises innovation systems should be improved. Only seven Chinese companies made it onto the Forbes 2018 list of the world's 100 most innovative companies, while the US topped the chart with 51 companies.

Chinese companies should concentrate the limited innovation resources to enhance the commercialization ratio of R&D results.

From this perspective, a group of innovation-focused entrepreneurs should be vigorously cultivated.

Over the past few years, an array of innovative startups have emerged in China, including some with global influence in sectors such as smart terminals, drones, e-commerce and artificial intelligence.

However, in the 2017 BrandZ Top 100 Most Valuable Global Brands ranking released by WPP, the world's largest communications services group, the US topped the list with 54 companies, whereas only 13 Chinese companies made the list.

Among over 80,000 high-tech firms in China, 97.3 percent of them have less than 100 valid patents while a mere 0.1 percent of them have over 1,000 valid patents. Also, with an average survival duration of only 3.9 years in the private sector, most SMEs prefer quick-yield technologies with less investment to shun uncertainties. An effective incentive system to stimulate innovation from entrepreneurs is urgently needed.

Finally, Chinese businesses should be encouraged to increase their input into R&D. In 2017, China's spending on R&D accounted for 2.12 percent of the country's GDP, 84.8 percent of the goal stated in the plan for building a moderately prosperous society.

And the average R&D intensity of Chinese industrial enterprises above the designated size of having annual main business revenue of 20 million yuan or more stands at 1.06 percent; that of manufacturing enterprises at 1.14 percent; mining firms at 0.59 percent and high-tech firms at 2 percent.

However, according to the international standard, companies with less than 1 percent of R&D intensity can barely survive in the market and can only be competitive with more than 2 percent of R&D intensity.

The R&D intensity of the manufacturing sector stands at 4 percent in the US; 3.4 percent in Japan; 2.6 percent in the United Kingdom and 2.3 percent in Germany.

Chinese companies' investment on R&D accounts for 7.2 percent of the global total, far lower than the 38.6 percent in the US; 27 percent in Europe and 14.4 percent in Japan.

After four decades of reform and opening-up, China has scored marked achievements in economic and social development, becoming the world's second-largest economy, the largest manufacturing powerhouse and the largest goods exporter.

Now Chinese companies' innovation capacity needs to be further improved, especially in terms of core technologies in key fields such as fundamental research and application, and high-quality original technologies.

The author is an associate research fellow with the China Center for International Economic Exchanges and director of the Editorial Department of Globalization. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

(China Daily 04/03/2019 page13)