Academic journal article Innovation: Organization & Management

China's Innovation System: Ten Years On

Academic journal article Innovation: Organization & Management

China's Innovation System: Ten Years On

Article excerpt

Since we published our article in this journal in 2006 (Gu & Lundvall, 2006), a number of shifts and changes, both domestic and global, have had a substantial impact on the direction and character of development in China. First, the financial crisis in 2008 had serious repercussions on global trade and economic growth, and particularly on the strongly export-oriented Chinese economy. Exports from China fell by 20% in 2009.1 Second, the past decade has been characterized by China reaching the end of 'surplus labour', particularly among China's rural population. According to Das and N'Diaye (2013), China's labour glut peaked around 2010. The effects of an increasing overall scarcity of labour can be seen in the increasing shortages of less-skilled labour in various provinces, and rapid increases in wages in general, particularly for assembly workers and employees in household services, among others, starting around 2009 to 2010. As a result, China is reaching what is referred to as the 'Lewis Turning Point', where growth is likely to slow down unless new sources of growth can be mobilized, such as innovation and technological development (Das and N'Diaye 2013). It should be pointed out, however, that there are large differences among regions when it comes to scarcity or surplus of labour.

A third factor is the strategic decision by China's government to promote endogenous innovation (zizhu chuangxin) or innovation-driven development, first announced in the 2006 National Conference on Science and Technology. Since then, the Chinese government has continuously emphasized the importance and priority given to innovation as a driver of economic and social development. As we have argued elsewhere, as a result of the concurrence of the changing international trade environment, the different domestic labour market structure, and the shifting policy focus towards innovation, China is in the process of a fundamental adjustment of its development orientation (Gu, Lundvall, Liu, Malerba, & Schwaag Serger, 2009).

Turning to some limits to growth that we identified in the 2006 paper, it can certainly be argued that growth has been hampered by trade disputes. In recent years, the trade dependence of the Chinese economy has been declining, from a peak of around 60% in 2005-2007 to 41% in 2014, making it less vulnerable to global economic downturns or trade disputes.2

With the declining role of trade as a driver of growth, the service sector has become increasingly important in employment and national output. This trend has also been encouraged by government efforts to promote domestic private consumption, consumer services and ICT software development. As a result, employment in the tertiary sector increased from 29% in 2003 to 40% in 2014.3 Service industries tend to have a higher ratio of labour to capital and some of them are more intensive in their use of well-educated labour. This is important since enrolment in tertiary education has increased dramatically in the past decade and it has been very difficult for many university graduates to find jobs that match their qualifications. The Chinese economy is still incapable of fully absorbing higher educated new labour, but this also happened in South Korea in the earlier years of development, before more skilled labour was required for economic activities. Overall, the employment effect of the economic growth in China in the past decade seems to be better than during the period of export-led growth.

Labour productivity has increased across most sectors in the past decade, but is still significantly below the average in OECD countries (McKinsey, 2016). In particular, labour productivity is very unevenly distributed across companies, with a small number displaying high labour productivity - also in international comparison - while productivity remains very low in the large majority of companies (McKinsey, 2016). There is great potential for job creation in knowledge-intensive services in China, given both the rapidly rising level of educational attainment and the increasing demand for such services due to a rapidly growing middle class and the growing number of knowledge-intensive companies, particularly in the manufacturing sector. …

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