Independent innovation has been highlighted as a strategy in the Chinese government's national economic development plan. But obstacles still stand in the way of the country's making any marked progress in that field; obstacles that require reforms from the inside out.
Feeding off Others
There is a lack of homegrown core and key technologies, which in turn greatly limits any development of independent innovation in the country.
Han Zhongchao, member of the National Committee of the Chinese People's Political Consultative Conference (CPPCC), presented the following data to the 3rd Plenary Session of the 10th CPPCC in March: Of the invention patents granted in China, three quarters are owned by foreigners; and the total number of patents registered in the last five years by the top ten Chinese IT enterprises was only as many as the number of patents registered by IBM in one year.
Wei Huacheng, chairman of the Beijing Pharmaceutical Group, echoed Han's comment that China lacks homegrown innovation, making it extremely reliant on others. Speaking at the "2005 High-level Forum on China's Independent Innovations and Brands" held from November 5 to 6, Wei said that in the pharmaceutical industry, research and development (R&D) standards are 50 years behind world-class levels.
Wei added that the investment involved in the invention of a new medicine is heavy -- about 10 years and US$1 billion on average. This is why the pharmaceutical industry is dominated by established players, the "pioneers," or companies with cutting-edge technologies and other competitive advantages. It is difficult for newcomers to get a foot in.
Newcomers to any industry tend to ride on the technologies and best practices of predecessors. Whilst this might work in the short term, Wei stressed: "No pain, no gain."
"You cannot just always buy technologies. Many developed countries and international companies are paying more attention to the protection of their technologies," Wei added.
Wei suggested that the government contribute resources to the R&D of key technologies in certain key areas and fields if a big breakthrough is to be achieved.
A Break in the Chain
According to Liang Gui, director of the China Torch Program of the Ministry of Science and Technology, the transfer process from scientific research to practical application in China is irrational. Many enterprises, even universities, do everything by themselves from research to production. This "small and all-inclusive" model is not a prudent use of social resources, making it difficult to have big breakthroughs in research or to develop large-scale production. In some developed countries, institutions at different levels focus on the different phases of R&D. A clear division of labor makes their work more professional.
Wei also gave an example of an international pharmaceutical company. The company sold large quantities of new medicines, but 40 percent of the new medicines were made by other companies, most of which were small-scale enterprises. Most of these medicines were the ones that this big company had tried but failed or had not yet completed the R&D. This successful cooperation among the companies saved a lot of money for the large company in research and provided a better sales channel for the small companies because they operated under the big company's umbrella. Resources were more effectively integrated for the value chain and the transfer of new innovations became more efficient.
Liang Gui pointed out that it has also become evident that small-to-medium sized enterprises (SMEs) are generally better at R&D innovation than larger enterprises. But taking it a step further is the hard part.
According to a survey, innovations are started from the very beginning by small enterprises, but a well-organized industrial chain with a rational division of work is the best foundation for technology innovation. Cooperation with competitors, purchasers and suppliers, and among producers, academic institutions and research organizations is more efficient than working alone.
The innovation chains of many industries in China are not well linked, Wei said. But the answer doesn't lie in "blind investments" either, Wei reiterated.
"Independent innovation cannot be achieved by impulse or by 'burning money'," he said. "The enterprises have to know what they can and cannot do; they should be fully aware of their own abilities and advantages, so as to be able to make scientific plans and rational arrangements."
Financing System in Need of Reform
The lack of funds is the biggest complaint among many non state-owned enterprises that want to innovate, according to Guo Lihong, director of the Technological and Economic Research Department of the Development Research Center of the State Council, in an interview.
Enterprises urgently need funds for independent innovation but they are unable to get loans from legal financing organizations. This drives some non state-owned enterprises to turn to "underground" financiers, which is a wrong way to go.
It's impossible for non state-owned enterprises to develop independent innovation without a reform of the financing system, Guo added.
According to Guo, over half of the risk investments in China are from overseas financiers. China does not have enough risk investments simply because it has not yet formed its own fund system. The "limited partnership," the most efficient vehicle for investment, does not exist in China. In a limited partnership, some partners might only have limited liabilities calculated based on their investments, although one partner might have enterprise liabilities attached to his share.
Share swaps are a basic withdrawal system used overseas, but we do not have such a practice in China, Guo added. "What we have is only a stock transaction board for SMEs. However, most of the small enterprises have assets below 40 million yuan (US$5 million), lower than the limit of 50 million yuan (US$6.25 million) for listed companies. No other country in the world uses this method."
With regard to problems with financing, Fan Hengshan, director of the System Reform Department of the National Development and Reform Commission (NDRC), has urged for a reduction in the amount of indirect financing for enterprises, promoting direct financing instead.
Jia Kang, director of the policy research institute of the Ministry of Finance, suggested building a multi-level finance system that includes a risk compensation mechanism for technology R&D and independent innovation provided by commercial banks; and a better use of government non-interest loans and government credit guarantees supported by the government coffers.
Unfair Playing Field
When Li Shufu, CEO of Geely Automobile, was asked what kind of support the non state-owned enterprises most need for independent innovation, he replied: "Fairness."
Li said what he is dissatisfied with is the discrimination against non state-owned enterprises. "For example," he said, "some state-owned automobile enterprises get large amounts of funding from the government to develop new automobiles. When the money is used up, however, the new automobiles aren't even near the production stage. Finally, they came to ask help from non state-owned enterprises to develop Hybrid Electric & Gasoline Vehicles (HEV). None state-owned enterprises rarely get such support."
How to construct a fair market competition environment was what Yu Hongyi, vice major of Ningbo City, mostly concerned about. She said: "The unfair income tax policy for domestic-funded enterprises and foreign-funded enterprises is one of the biggest obstacles for Chinese enterprises to develop independent innovation."
To construct a fair environment for innovation, Jia Kang suggested that preferential policies be applied according to the scientific and technological content of the innovations, and not according to whether the company is domestic or foreign-funded.
Yu also said: "The most important thing that the government can do is to create a favorable environment for enterprises to develop their independent innovations, and reduce direct interference in the economic activities of the enterprises."
(China.org.cn by Xu Lin November 15, 2005)
