Sustaining Innovation in China

Last year, China replaced the U.S. as the most popular destination for foreign direct investment (FDI). The creation of an IBM Research Innovation Center as an extension of its China Research Lab near Beijing University provides a recent example of U.S. interest in capitalizing on China's emergence as the planet's hottest economy.

As the world's most populous nation looks beyond providing cheap labor for manufacturers, a recent working paper suggests three regions of China are particularly well suited to support the growth of an innovation-based economy.

In Regional Innovation Systems in China, Jon Sigurdson of the European Institute of Japanese studies singles out the Yangtze River Delta, the Pearl River Delta and the Bo-Hai Rim as leading examples for forging various elements of a national innovation system. The regions encompass 5 percent of China’s total land area and nearly 20 percent of the total national population. Combined, the three regions could account for two-thirds of China’s total gross domestic product by 2025, which would likely attract large-scale migration, the author says.

As a result of China’s acceptance into a global innovation system in the early 1980s by allowing FDI, wholly-owned foreign enterprises now play a significant role in high-tech development, the author explains. Foreign enterprises are dominating China’s high-tech exports, for which functional industrial clusters along the coastline are now essential.

The government’s role in establishing various industrial and technological zones also has contributed to Chinese regional development. According to the author, the government selected a number of intelligent-intensive regions and adopted policies to gradually transform them into high-tech development zones with different characteristics. There are currently 53 of these zones expected to become bases for China’s high-tech industrialization.

The initial success of regional innovation systems along China’s coastal areas, Sigurdson finds, is based on having created favorable conditions for a large number of clusters. Many of them require functional proximity, the author explains, for which FDI has offered great possibilities by linking local clusters into global production networks. Long-term success, however, has its roots in the following three areas:

• The central government has strongly supported the regions by providing a framework and resources for various zones, industrial parks, science parks and incubators where national science and technology programs have often evolved;
• FDI and the increasingly closer industrial and technological links with neighboring countries have given strong impetus to regional development through technology transfer, management skills and extensive links to the global market; and,
• The directed but also spontaneous development of technological and industrial clusters has provided the basis for further development.

The author contends that China’s long-term perspective is massive inflow of FDI will significantly contribute to extensive export earnings followed by new employment in local areas. Policymakers, according to the author, also predict a large number of technological clusters will form and become self-generating in their support for future innovations in the country.

Regional Innovation Systems in China is available at: http://ideas.repec.org/p/hhs/eijswp/0195.html