OECD: China must do more to foster innovation, research

DATELINE: SHANGHAI China

China has made great progress in promoting scientific and technological innovation but must do more to succeed in building a modern, advanced economy, the Organization for Economic Cooperation and Development said in a report released Monday.

Better protection of patents and other intellectual property, more cooperation between the government and the private sector and reforms to foster competitive markets are among the top needs the Paris-based OECD outlined in the report, issued in collaboration with China's Ministry of Science and Technology.

The stakes are high for China. Despite its sizzling economic growth, the country relies mainly on low-tech industries manned by mostly unskilled labor.

"China has relied heavily on technology imported from abroad, and the development of its technological capability has until recently lagged behind its economic growth," said the OECD, which groups 30 industrialized countries.

"Developing the country's innovation capacity is a prerequisite for escaping from a pattern of specialization characterized by intensive use of low-skilled labor and natural resources and a low level of technological capabilities," it said.

The report noted that in the past decade, China has made significant progress, "mobilising resources for science and technology on an unprecedented scale and with exceptional speed, and is now a major R&D player."

High-tech products account for a fast-growing part of total exports, although most are still assembled from imported components.

China's spending on research and development has risen at an annual rate of 19 percent since 1995, reaching US$30 billion ([#x20ac]22 billion) by 2005, the sixth highest in the world.

After years of neglect, Beijing has also moved to increase support for general education as well as in technological expertise.

But the lack of adequate protection for patents and other innovations is a serious handicap, making foreign companies reluctant to share technology due to the huge risk of piracy. Chinese inventors tend to shy away from commercializing their own innovations for the same reason.

"Enforcement of the laws, especially at the local level, needs to be substantially improved," it said.

Intellectual property rights infringements, "combined with low standards of quality, may also affect the national and international reputation of Chinese firms," it said.

Although businesses account for two-thirds of all research and development, there is a severe lack of funding for financing new ventures, which tend to be among the most innovative in any economy.

"China's financial system does not meet the funding needs of private firms, notably SMEs (small and medium-size enterprises)," the report said. "The capital market is underdeveloped and SMEs find it difficult to secure loans since banks favor large companies, particularly state-owned enterprises," it said.

The report applauded a recent decision by the government to build up industry-research alliances in four key "backbone" sectors: steel, coal, chemicals and agricultural equipment.

Such alliances, aimed at upgrading industries that tend to lag behind foreign competitors, will get priority in funding and support from the Ministry of Science and Technology.

To further support progress in innovation, the report recommends that China improve corporate management and financing, enact antitrust legislation and promote competition through better, more open regulations.