Innovation must go beyond tech into institutional space

Digital technologies have come to characterize the new era in development. Data are an even more significant factor of production now than in the past for socioeconomic development, where information technology and data science are playing key roles. The digital economy not only promotes the transformation and upgrade of traditional industries, accelerates the rise of emerging industries and changes lifestyles, but also helps reorganize the global factors of production, reshaping the global economic structure and changing the global competition landscape.

The strength of China's digital economy brings it opportunities to overtake its peers in corners in some sectors. However, huge challenges also exist, as many key technologies of the digital economy, such as high-end chips, industrial software, core components and algorithms, are controlled by some developed countries. Worse, some of these countries are weaponizing their technological advantages to suppress China's digital economy.

Given this context, the ability to innovate is very important and worthy of wholehearted efforts. As Joseph Schumpeter, an Austrian political economist who served as the country's finance minister in 1919, once said, innovation is the realization of a new set of factors or conditions of production. So, how can innovation play its role in driving the development of the digital economy?

More than tech

Innovation is generally associated with technology, as ordinary people tend to discuss innovation in terms of technology. However, technological innovation alone cannot overcome developmental bottlenecks in the digital economy, especially vexatious issues like politically motivated export controls on high-end chips, software and algorithms.

China, therefore, needs innovation not only at the technological level, but also at the institutional level, which we think should matter more to the nation.

Here, it's worth noting that the breakout event of the industrial revolution of the 19th century was the development of the steam engine. But it's also important to note that the steam engine was not some act of magic that happened during that specific period. Such equipment had been widely used in the mining industry decades before.

The more important reason for the industrial revolution was the advancement of the bourgeois revolution, which promoted the steam engine for the transformation of the entire industrial system in the following century.

So, China, which is facing challenges in developing its digital economy, should also consider innovation at the institutional level, as the digital economy has brand new requirements and calls for solutions different from those applicable to the traditional industrial model.

For example, take the issue of data rights confirmation. Data property rights vary a lot from property rights under industrial conditions — they are not completely exclusive, and are renewable, making the confirmation a dilemma involving both the initial data provider and the subsequent data processors who add value.

Such tricky issues will likely arise going forward, making security and privacy of data, monopoly regulations and special arrangements critical to the digital economy, underlining the need to re-examine the complex relationship between antitrust vigilance and innovation.

All of these require fundamental changes to the legal system related to property rights and government regulations.

However, the current set of property rights protection systems and related regulatory systems are mostly based on the conditions of traditional industrialization, which is, to some extent, not suitable for an economy led by digits and cutting-edge high-tech like artificial intelligence.

Mainstay of innovation

There have been discussions over who should play the main role in pushing forward innovation. The mainstream view is that the role is supposed to be played by enterprises, because innovation will always trigger turmoil in the market first and make the market economy appear as if it is in the process of creative destruction, where market players are the ones to blame.

Some people, however, think otherwise. They argue that whoever is striving to achieve innovation in technologies should always shoulder a huge risk, not to mention playing catch-up, which requires continuous investment capacity in research and development.

In addition, in terms of technological innovation in sectors with strong public goods supply characteristics, the market won't function as per some people's wishes. This seems especially true of the digital economy, where breakthrough innovation of some key technologies is by no means easy for individual companies to achieve.

People holding this view consider it clearly out of bounds for market players, as has been evidenced by the technical sanctions imposed by the United States on China to restrict its high-tech development, such as that related to lithography machines and high-end chips, where national strength, supported by not only government units but also research institutions, plays a very important role. This view, however, is still subject to a lot of skepticism.

In our view, the government and market players should play different roles, and do well in different aspects. It is a bad strategy to simply have either side shoulder innovation exclusively, because innovation itself has different stages. The government and market players should perform their respective duties accordingly, actively yet prudently.

With clarity on the features of each stage of innovation, the government and enterprises should be given proper roles based on their respective leading advantages. In the processes of basic R&D and application, the government and nonprofit bodies such as universities, scientific research institutions and laboratories should play the main role.

The subsequent experimental stage, before promotion, should be completed under joint cooperation between the government and enterprises. In this context, Shenzhen in Guangdong province and Suzhou in Jiangsu province are two cases worthy of study, as they both have established government-market cooperation laboratories.

When it comes to the stages of commercialization and large-scale industrialization, enterprises are definitely the mainstay.

Push for entrepreneurship

There is no doubt that innovation requires entrepreneurs, but when it comes to understanding entrepreneurs, we tend to emphasize the research nature of technology. Innovation is the nature of entrepreneurs, which is, of course, very important, but the particularity of innovation in the era of the digital economy makes institutional innovation an even more important factor.

In China, there have been efforts to this end, like those to regulate the behavior of market players, and adjust organizational structures and governance frameworks. But we think this is still not enough.

Institutional innovation should also be carried out to change the approach to property rights protection and industrial regulation under the traditional industrial system. Promoting institutional innovation depends not only on entrepreneurs in the market, but more importantly on the government. That's because, with the effect of economies of scale, the government should play its role as a third party to define and protect property rights. We need not only corporate innovators in the market, but also institutional innovators, so as to incentivize and protect technological innovation through institutional innovation.

Institutional innovation should be a process of cooperation between entrepreneurs in the market and institutional entrepreneurs in the government — and both are indispensable.

This article is a translation of a Chinese piece published on the WeChat account of the China Macroeconomy Forum, a think tank.

The views do not necessarily reflect those of China Daily.

The writer is a professor at Renmin University of China in Beijing.