A typical example is the Tata Nano, an inexpensive, rear-engined and four-passenger city car built by the Indian company, Tata. The Nano is the cheapest vehicle of its kind in the world. Some Chinese enterprises, such as Huawei, a leading global telecommunications solutions provider, and the Alibaba Group, China's largest e-commerce company, have had similar successful experiences in terms of technological innovation.

Because of the high fixed-cost investment, innovation produces some "spillover effects" and is of high risk. Some typical "market dysfunctions", such as monopolies, lack of coordination and information asymmetry, are likely to emerge. However, given the market's lack of an automatic ability to promote enough innovation, the government should play its full part in China's bid to build an innovative nation.

That does not mean that the government should directly get involved in some large projects, it should refrain from replacing enterprises as the innovator. What it should try to do instead is to create a good policy and infrastructure environment to motivate domestic enterprises to participate in innovation. For example, it should play a guiding and propulsive role in this process, from improving the quality of the labor force and promoting free information exchanges, to improving intellectual property rights (IPR) protection.

As a high-risk investment activity, innovation also needs an effective financial market to share its risks. In China, small and medium-sized enterprises (SMEs) are the main innovators but they have long faced difficulty in securing financing. This has extremely restricted the development and buildup of those SMEs with innovation potential and hampered the country's development in this regard.

To promote and encourage more innovation, China should try to improve its financial environment. To this end, the banking system badly needs to cater to the needs of domestic SMEs. As the catalyst and incubator of innovation, risk investment offers these companies not only the necessary funds, but also knowledge and technological support for the marketization of new products and services.

However, risk investment badly needs a well-developed stock market to ensure that it can exit at will and gain considerable returns. In this regard, China's banking system and capital market are yet to make the improvements needed to help the country further promote and push forward innovation.

The country should try to improve its innovation competition environment to promote more such activities among domestic enterprises. The administrative monopoly and restrictive barriers in those upper-stream industry or service sectors should be removed to ensure their free entry and exit.

In addition, a comprehensive policy framework should be institutionalized to ensure that the creative spirit and entrepreneurship be given full play.

The author is chairman of China Investment Corp and the article was first published in the Comparative Studies magazine.