Investing in innovation

China should divert foreign capital to core technologies and manufacturing activities with high added value

Globalization has made it impossible for any individual country to produce completely independent innovations or dominate innovations by monopolizing all resources and technologies for such activities.

Therefore, China should try to take advantage of the dividends brought about by globalization to facilitate its struggling transformation into an innovation-driven economy.

The ever-rising prices of China's factors of production in recent years, its tightened land supply and looming labor shortages, together with the weakened cost advantages enjoyed by traditional production activities, have put ever-growing pressure on China-based foreign-funded enterprises, especially export-oriented and labor-intensive ones. However, this has not crippled China's general advantages in attracting overseas capital.

The country's comparatively steady economic development, a series of policies it has adopted to spur domestic demand, as well as a steady increase in the quality of its labor and a relatively complete industrial auxiliary infrastructure, are sharpening China's edge in absorbing high-quality foreign investment. The adoption of an innovation-driven development strategy and measures aimed at encouraging the development of new industries of strategic significance have also offered policy props for China to improve the quality of inward foreign capital.

At the same time, different economic development stages among its regions and a multi-layer labor force supply model have made China attractive to different types of foreign investment. Its ever-improving investment environment, increased investment convenience, as well as a sound legal system and strengthened efforts for intellectual property rights protection also make China a tempting long-term investment destination for foreign investors.

China's low ratio of technological conversions is now undergoing some positive changes and this has benefited from expanded technological cooperation with the outside world and its absorption of foreign technological transfers. Data indicate that some foreign countries, especially developed ones, are spending more and more funds on scientific research in China and the number of technological transfers has been growing. These have offered China more chances for cooperation on joint research and development. In particular, developed countries' renewed efforts to promote re-industrialization, boost high-end manufacturing and expand their exports of services, moves aimed at realizing their economic rebalancing, have increased the opportunities for their technological cooperation with China.

The history of industrial technological innovations shows that high-tech products need enormous inputs of funds, but they usually only enjoy a short life cycle. This decides that developed countries, in the context of global market integration, have to share technological development costs with other countries and embark on an export-oriented road. Increasing exports and expanding their share of overseas markets are effective ways to help them gain a profit proportionate to their research inputs.

China now faces multi-directional and multi-layer international competition in terms of absorbing foreign investment. But the upward global transnational direct investment momentum, rising internationalization of transnational companies and their increased cash-holding volumes mean there are possibilities for a new round of cross-border investment in the future. This, if true, will bring more opportunities for the flow of increased foreign investment to China.

At the same time, China has also become a major market of global high-tech exports. Statistics from the Ministry of Commerce indicate that the value of China's high-tech imports rose to $463 billion in 2011 from $56 billion in 2001, with an average annual growth rate of 23.5 percent. It is estimated that the country's high-tech imports will grow 20 to 40 percent year-on-year in the coming decade, a pace that is expected to help China develop into a base for global industrial transfers and technological research and development. This, undoubtedly, will offer China an opportunity to make great leaps in innovation.

China also enjoys a wide space for more economic openness. According to the United Nations Conference on Trade and Development, the per capita foreign direct investment absorbed by China has long been below the world's average. In 2011, China's per capita foreign direct investment reached a record high, but it was still only 18 percent of the world's average. The low per capita FDI, however, also means the country still has space for it to expand in the years ahead. While trying to increase its FDI volumes, the country should also work hard to improve the quality of inward foreign investment. For example, it should try to divert foreign investment to manufacturing activities with high added value and expand the openness of domestic services to foreign investors.

Foreign capital should also be used to help facilitate the ongoing industrial transformation in China's booming eastern regions, its bid to promote industrial transfers to less developed central and western regions, help optimize its foreign capital structure and advance its innovation capability.

China should further lower domestic market barriers to foreign investors in a bid to narrow the gap with developed countries in financial openness. Its rising international economic status, deepened economic and trade links with surrounding countries mean China can push for regionalization and internationalization of the yuan. Besides, the country should also further lower the import tariffs on finished industrial products to attract high-tech imports and facilitate participation in the utilization of global resources and the research and development of some core technologies.

The author is an economics researcher with the State Information Center.

(China Daily 04/11/2013 page8)