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China needs to put innovation on right track

2017-01-12     Global Times     visits:0

By Cheng Hong

The spirit of innovation being a new economic driver has been established as a social consensus among Chinese citizens, but practices of innovation somehow have deviated from the right track, a situation that, in some areas, shows signs of bubbles. Being capable of innovation is a decisive choice for China and a fight that it cannot afford to lose. And only by analyzing the challenges China faces in innovation can we offer better solutions for the Chinese economy. 

First, China's innovation has failed to grasp that the most important fundamental factor is the real economy. Innovation in the real economy serves as the foundation for other sectors, and can spread to and accelerate development in other industries. However, the real economy is having a hard time prospering. People tend to believe that conducting business in the services sector requires innovation, while manufacturing businesses are considered more traditional. However, without innovation in the real economy there wouldn't be any economic transitioning or upgrading, as determined by China's economic characteristics.

Despite its huge economic volume, the Chinese economy lacks strength, which has rendered its overall quality less satisfactory. What's worse, some enterprises have only pushed their innovative efforts toward intelligence and technology rather than devote effort to elevating product quality. A crucial factor of innovation in the real economy is to return to the fundamentals via truly creative techniques so as to enhance the competitiveness of Chinese products. Without solving this problem first, all other efforts are like putting the cart before the horse.

Second, while confronting innovation hurdles, Chinese entrepreneurs, who are the main body of innovation, do not have a sense of crisis. Our survey shows that Chinese entrepreneurs listed the issue of a lack of innovative ability far behind problems of market demand and rising labor costs. In other words, most of them still attribute their existing difficulties to external factors, but have ignored the fact that under the same market conditions some of their competitors have had extraordinary business performances. Entrepreneurs need to take the initiative to create and invent, otherwise innovation in the whole of society will lack a sturdy foundation.

Third, many people have equated innovation to the application of the Internet. Currently all innovative undertakings are heavily concentrated on the Internet sector, in which mobile application development is taking the lead. It seems that in the Internet sector innovation can just be described as a combination of a business story and venture capital. In fact, much "innovation" in the sector is simply copycat or even plagiarism which has nothing to do with innovation. A deepening question is: Can the Internet truly overturn the traditional economy, apart from offering reduced transaction costs and enhanced information transparency? We need to embrace the precious opportunities the Internet has brought about, but shouldn't deify it. 

Fourth, a mismatch of resources has persisted in technological innovation. In recent years, fiscal commitment to technological development has sped up at all government levels, and such fiscal commitment as a percentage of local GDP has almost become the most crucial factor in evaluating a region's innovative capability. Since governments' technological investments come from public finances, this means investment needs to be guaranteed, which is contradictory to the nature of technological innovation. The solution to the conflict is to let market forces allocate capital toward technological innovation, except for rare cases of fundamental research investment that comes from the government.

Fifth, we need to be cautious about the accumulation of risks generated by financial innovation, as many banks' financial innovative activities target the capital market, not the real economy. To achieve greater market scale, interbank businesses have overlooked financial hazards, in particular in the growing scale of off-balance sheet activities. With expansion without effective supervision from the authorities, such financial activities are not longer truly innovative but only lead to enlarged market risks. 

Last, we need to realize that China's demographic dividend is wearing out and that a key solution to this problem is through the fostering of innovation to enhance the strength of human capital, in particular in transforming China's unskilled workers into skilled ones. So far, innovation in human capital has largely focused on a select elite in certain places and industries in which a series of administrative top-notch talent projects are only focused on attracting those at the top. However, we need to realize that innovation in the real economy will be greatly affected by the shortage of skilled talent who work in the country's manufacturing base. As for elite professionals, their value is recognized by the market, and doesn't require administrative methods.

The author is director of the Wuhan University Institute of Quality Development Strategy.

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