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Innovation acceleration during economic downturns in China

by: Xinting Shao, SPI

 

This document is targeted at the following audience: 

  • European SMEs and start-ups who provide innovative methods or ideas in key areas targeted by China’s innovation-centric strategic initiatives, such as new-generation information technology and aerospace technology. 

  • European SMEs and start-ups with technologically advanced features e.g., advanced materials, Artificial Intelligence (AI), ICT, Fintech, etc. who would like to enter the Chinese market 

 

Overview

There is no doubt that China’s economic progress has been remarkable. Since opening up to foreign trade and investment and implementing free-market reforms in 1979, the country has become one of the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.4% for 41 years (1979-2019). Such growth has enabled China to become the world’s second-largest economy since 2010 and meanwhile helped the country raise an estimated 800 million people out of abject poverty. 

However, as China’s economy has matured, its GDP growth rate has declined significantly, from 10.6% in 2010 to 6.1% in 2019, which is the slowest in nearly three decades. This deceleration is expected to continue and the economic growth was projected by the International Monetary Fund (IMF) to drop further to 5.5% by 2024. This growth has been driven mainly by labour-intensive, export-oriented manufacturing activities, and it slows down as the traditional drivers – favourable demographics, a relocation of labour from inefficient industries towards more productive activities, high rates of investment and rising exports – have begun to wane and are no longer likely to lead to rapid economic returns which are critical to raise incomes substantially.   

To sustain economic growth in the future, innovation has been made a top priority by the Chinese government to boost its role in the country’s economic development so that the economy will eventually be transformed into a knowledge-intensive one which is less dependent on external markets. The goal is clearly envisaged in a series of innovation-centric national strategic plans, such as the 13th 5-Year Plan, Made in China 2025, Medium and Long Term S&T Development Plan 2006-2020, and Belt and Road Initiative. For instance, it was outlined in the 13th 5-Year Plan (2015-2020) that is projected to hit an R&D expenditure-to-Gross Domestic Product (GDP) ratio of 2.5% by 2020 and Made in China 2025 is a plan announced in 2015 with the aim to upgrade and modernize China’s manufacturing in 10 key sectors, which include new-generation information technology, advanced numerical control machine tools and robotics, aerospace technology, and biopharmaceuticals and high-performance medical equipment. Over the period of China’s economic recession, the embrace of such emerging industries and technologies is viewed as a critical means to sustain and upgrade growth. 

At present, China is suffering its worst economic downturn since the mid-1960s, due to the Covid-19 outbreak. The world's second-largest economy shrank by 6.8% in the three months ending in March 2020, compared with that in 2019, according to official data released in April 2020. It comes after factories, offices, shopping malls and transport hubs were closed down for slowing down the spread of the deadly coronavirus which has sparked a pandemic. During this specific time, the country has continued to invest in innovation and deployed the latest technologies in order to mitigate the effect of the virus. For example, the Chinese government cooperated with tech giants Alibaba and Tencent to develop a colour-coded health rating system that is tracking millions of people daily on the basis of their travel and medical histories. 

On Level 2 you can find information about China’s innovation ecosystem and its characteristics, while Level 3 will tell you more about EU-China innovation collaboration.

 

This page will offer a brief overview of innovation development in China. 

China’s innovation ecosystem is thriving. As of 2019, China ranked 14th out of 129 countries in the Global Innovation Index (GII), having climbed from 26th in 2016. It is the only middle-income economy among the top 30. China has made significant progress in the fields of science, technology and innovation, ranking top in terms of patents by origin, industrial designs, trademarks by origin, high-tech net exports and creative goods exports. In addition, China ranks second in concentration of top Science & Technology clusters, after the United States.

The Chinese government is the key innovation driver as they attach great importance to the core position of innovation in national economic development. Collaborative innovation centres, technology parks, and innovation incubators have been created by the government to support businesses, research institutes and individual innovations by providing initiatives, policies and regulations and funding for research. In addition, China has put in place national plans to develop nine strategic emerging industries, including next-generation information technologies, high-end equipment, new materials, bio-industry, new energy vehicles, new energy, energy conservation and environmental protection, digital creativity and related service industry. As of the first half of 2018, these industries and service industry has grown 30% faster than the overall growth nationwide, which are leading economic development constantly. Their growth is driving GDP growth by over 1% annually in average, amounting to nearly 20% of total growth, higher than the share of these industries in total GDP. 

The government has also been offering support to innovative start-ups by creating a favourable environment. As early as in 2014, the concept of “mass entrepreneurship and innovation” was put forward by Premier Li Keqiang to support the development of innovative start-ups and the government has created positive conditions for start-ups in terms of financial investment, tax preferences and talent attraction. Later in 2017, the State Tax Administration released the Guidelines on Tax Incentives for Mass Entrepreneurship and Innovation, which intends to cut corporate income tax of small low-profit businesses by half and it was updated in 2019 to raise the threshold for the reduction from RMB 300,000 in annual taxable income to a maximum of RMB 3 million. In the same year, a new immigration and exit-entry facilitation policy has been issued by the Ministry of Public Security to attract more top foreign talents to start businesses and invest in China. 

China has been increasingly investing in R&D, which has helped to accelerate innovation. Its R&D spending hit RMB 2.17 trillion in 2019, accounting for 2.19% of GDP. As a result, the research strength of Chinese scientific institutions has been significantly improved, and six mainland universities rank among the top 100 global universities in the QS World University Ranking 2020, increased from four in 2017. The country is in the top position globally in the number of most-cited papers, the absolute number of researchers, scientific and technological publications and domestic patent applications. The advances in science and technology contributed to 59.5% of economic growth in 2019. Chinese companies have also started to stand out worldwide in terms of their R&D investment in innovation. The Economics of Industrial Research and Innovation (IRI), a research institution under the European Commission, publishes annually a list of top 2500 companies across the globe by the amount of their R&D investment, and there is an increasing number of Chinese companies appearing in the list every year. According to the 14th edition of the Global Innovation 1000 Study report, Chinese companies’ spending on R&D increased by 34.4%, reaching EUR 53.86 billion in 2018, with a total of 145 Chinese companies entering the Global Innovation 1000 list.

 

This section will focus on relevant stakeholders and their actions contributing to innovation acceleration in China. 

Presence of local and global companies contributing to innovation acceleration 

The Chinese tech platform Meituan-Dianping was named by the US business media outlet Fast Company as the world's most innovative company in 2019, followed by China’s e-commerce giant Alibaba’s social shopping application – Little Red Book, The Chinese electric vehicle startup- Nio, Information and Communication company -Sougou, and robotics and AI startup based in Shenzhen - GJS Robot, etc. Meituan-Dianping’s application connects consumers with local businesses for food takeout, hotel bookings, and movie tickets, among many other services. In the first half of 2018, it facilitated 27.7 billion transactions (worth US $33.8 billion) for more than 350 million people in 2,800 cities. 

Additionally, global corporations such as Microsoft, IBM, Ericsson, Siemens and Airbus have been engaged in innovative activities in China. For instance, in February 2019, Airbus inaugurated an aerospace technology innovation Centre in Shenzhen, which is its first disruptive innovation Centre in Asia and second worldwide. The Airbus China Innovation Centre (ACIC) is designed to design, test and certify new technologies related to five different areas - Hardware Lab, Cabin Experience, Connectivity, Manufacturing Innovation and Urban Air Mobility (UAM).

China-EU S&T Collaboration 

The China-EU S&T cooperation is governed by a Science & Technology Cooperation Agreement signed in December 1998 and renewed for the third time in December 2014. The implementation of the Agreement is overseen by a Joint Steering Committee. Recently, the two partners exchanged views on framework conditions for cooperation, the implementation of the Co-Funding Mechanism (CFM), and thematic areas including aviation, Food, Agriculture and Biotechnologies (FAB), biotechnologies and biomaterials, environment, sustainable urbanisation and Mission Innovation. Topics of potential future collaboration include water, artificial intelligence (in particular ethical aspects), health, marine, and space. There were also discussions on personnel exchange and mobility and an agreement to develop a common cooperation roadmap.

In addition, a dedicated High-Level Innovation Cooperation Dialogue (ICD) has been set up through a joint declaration signed in September 2012. The ICD aims at raising the level and intensity of research and innovation relations with China by providing a forum for discussion respective innovation policies and systems, addressing framework conditions and launching new joint research and innovation initiatives. The 4th China-EU Innovation Cooperation Dialogue was held in Brussels on April 9, 2019, and the two sides confirmed their intention to renew the China-EU S&T Cooperation Agreement. Later in December 2019, both sides discussed the way forward for the preparation of the joint EU-China roadmap for R&I cooperation and exchanged views regarding the importance of climate change, and SDGs in general in the bilateral cooperation, and how the Roadmap could serve as a support to the Green Deal.

 

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