By Lv Wei, Department of Techno-Economics Research of DRC

Research Report No. 267, 2006

A national innovation system is composed of the interacting organizations participating in the innovation as well as the external environment (i.e., the financial system, educational system, competing modes and corporate operating mechanism) that has a bearing on the innovative activities; the interaction of the components and organizations decides the innovation activities of a country or region. Usually, an innovation system is not necessarily a system artificially designed and constructed, and has no definitive boundary. The interrelation between innovators and the external environment reflects the basic characteristics of the national innovation system.

I. Characteristics of the External Environment of China's Innovation System

Compared with the major innovative countries in the world, the external environment of China's innovation system has the following characteristics.

1. Different in the economic management system. China is in the transition period from a planned economy to a market economy, and the government plays an important role in distributing various resources; the proportion of state-owned economy is still fairly high, and the operating mechanism of state-owned enterprises (SOEs) and public institutions is different from that of the private enterprises under the market competition; the market mechanism is yet to mature, the capital market, in particular, is still in the initial stage of development, and the financing channel for innovation is not well-established. Although the national innovation system is still dependent on the original management system, the restructuring reform has a greater bearing on the innovation system and decides the driving force for innovation and the mode of the innovation system.

2. Different in the economic size and development stage. Generally speaking, China is a big country in terms of the size of economy and a small country in terms of per-capita economy. The size and structure of China's economy have the following characteristics: first, a big country in terms of the size of economy, but at middle or low level in terms of per-capita GDP. At present, China's size of GDP ranks the fourth in the world, and its per-capita level of income is very low, ranking below the 100th in the world. Second, the domestic market is huge, and its dependence on exports is high. China's commodity and investment markets are widely open. On the one hand, China has a population of 1.3 billion and the domestic market is enormous; on the other hand, China is the third largest trading power and its dependence on imports and exports exceeds 60% (with its dependence on exports being 30%～40%). China is also one of the countries in the world with the most inflow of direct foreign investment. In most industries, therefore, Chinese enterprises have to compete with their international counterparts in both the domestic and overseas markets. Third, the regional development is unbalanced. At present, the regional gap in development and income is huge with the fact that the developed, developing and underdeveloped regions coexist, and therefore, the transfer of technologies and industries may occur inside the country.

3. Different in the industrial technology structure. In China, the development of high, medium and low-tech industries is fairly balanced, and medium technologies take up the greatest percentage. In 2004, of the incremental value of the manufacturing industry, the added value from medium technology industries accounted for 60%, the value of low-tech industries accounted for about 25%, and the value of high-tech industries accounted for about 14%. The high-tech industries in the developed countries usually account for a higher percentage, while in the developing countries the proportion of medium- and low-tech industries is higher. Therefore, China's R&D input intensity is lower than those developed countries characterized by knowledge-intensive industries, but is higher than other developing countries.

4. Different in the development stage of technology. China is in an accelerating industrialization stage, and its technological development is characterized by the combination of self-directed R&D efforts and technology imports. In the past, however, most enterprises in China relied on imported or imitated technology. Since the late 1990s, thegrowth rate of China's R&D investment has been higher than the growth rate of GDP. The investment exceeded RMB 200 billion in 2005, accounting for 1.34% of its GDP, exceeding the average level of medium-income countries. In the R&D expenditure, the proportion of investment in basic research and applied research maintain a stable growth, and its supply capability of technology increases gradually. The high-tech industries maintain a fast growth. From 1995 to 2004, the annual average growth rate of the gross output value of high-tech industries was as high as 24%, and in 2004, the exports of high-tech products accounted for 28% of the total trade volume. At the same time, internationally competitive enterprises has emerged, whose growth has been fuelled by their innovations. Innovation is mainly characterized by imports of new technologies, assimilative/adaptive innovation and integrative innovation. Of the commodity export volume, the volume of processing exports exceeds 50%, and of the exports by high-tech industries, more than 90% have been enterprises with foreign investment.

II. Characteristics of China's Innovation System

1. The government plays an important role in the innovation system. The government plays a dominant role not only in system construction and innovation policies, but also in the field of direct investment. Fiscal investment in scientific and technologies activities has increased year by year. In 2004, financial allocation from the central finance for science and technology nearly doubled that in the year 2000, and the percentage in the total fiscal expenditure stood stably between 3.6% and 4% (See Table 1). The growth of fiscal allocation by local governments for science and technology was similar to that by the central government, and the total amount of allocation by local governments was about 60% of the allocation by the central government, and it was 65% in 2004.

Table 1　Composition of Expenses for Scientific and Technological Activities

In recent years, with the rising investment by enterprises, the percentage of government investment in R&D dropped from 33.4% in 2001 to 26% in 2004 (See Table 2). At present, government investment intensity in R&D is lower than European and American level, but is higher than Japan and the Republic of Korea. In 2003, the government's R&D input in the United Kingdom, 15 EU countries, OECD countries and the United States respectively accounted for 31.3%, 34.2%, 30.5% and 31.2% of the total R&D input, and the percentage in the Republic of Korea and Japan was 23.8% and 17.7%[1] respectively. In the developing countries, because the capability of enterprises is limited, the percentage of government input is even higher. For example, from 2000 to 2001, the R&D input by India accounted for 0.94 of its GNP, and of this amount, the investment by the central government accounted for 62.5%, local governments 8%, private enterprises 21.6% and state-owned enterprises 5%. In 2001, the government R&D investment in Mexico accounted for more than 50% of the country's total.

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[1]OECD Science, Technology and Industry Scoreboard 2005; the statistics were for the year 2003.