Future Developments in Innovation Systems in China

China is already a major world player in science and technology (S&T). It supplies funding for research and development (R&D) but, although these inputs are already very large and increasing, the outputs still fall short of the levels seen in OECD countries with similar levels of R&D expenditure. One of the reasons for that is because of the inefficiency of key actors and weak linkages. Sometimes, linkages are absent but, most of the time, they just haven't been sufficiently nurtured. There is a deficiency in current policy instruments as well. 

The Innovation Systems Conceptual Approach tries to identify the weaknesses and to make corrections to them. The government looks to international best practices. Some identified weaknesses were seen in other systems as they grew. The potential is there to develop an innovation system in China that will be an even more powerful engine for sustainable growth than it is today.

China has excelled at mobilizing resources for S&T on an unprecedented scale and at exceptional speed, from mid-1990s to late 1990s onwards. R&D spending has increased at a stunning annual rate of nearly 19% since 1995. R&D output has grown very rapidly. China's share in world scientific publications rose, for instance, from 2% to 6.5% over a decade, from about 1994 to 2004. Patent applications filed under the Cooperation Treaty of the World Intellectual Property rights (WIPO) have been doubling every two years. However, the impressive investment in resources has not yet translated into a proportionate increase in performance. China is still not associated with cutting-edge technologies and with the most advanced products and services in the world.

The business sector is the key organization in any successful, mature, efficient innovation system. Productive use of investments, human resources and the related infrastructure is still not optimal despite increasing contribution from foreign investment. Previously, foreign investment took advantage of cheap land, cheap labor and access to the large domestic market that China was able to provide. Nowadays, it’s the access to S&T, human resources, and support of export-oriented manufacturing operations that have become important drivers. The first wave of innovative Chinese firms, heavily invested in R&D, did expand their operations abroad. They are forging the way for other Chinese companies to become major players. In some cases, the larger companies can, through mergers and acquisitions, acquire cutting-edge R&D and set up overseas labs. It represents a very exciting change in the Chinese innovation system and it remains to be seen whether this trend can be continued over time. With better protections for intellectual property rights, indigenous innovation capabilities and R&D intensive foreign investment could be mutually reinforcing.

Except for some targeted areas, such as nanotechnology, there is still a wide gap between small, basic research sector and massive technology development activities. The OECD has used the metaphor of a collection of islands, pockets of excellence, to describe the functioning of the very large number of small-scale S&T parks in various regions within China, innovative islands with synergies insufficiently developed between them. Spreading the culture and means of innovation beyond the fences of the S&T parks, beyond the incubators, and promoting more market-based clusters and networks is now an important objective.

As China tries to move into the high-tech economy, some groups fear that China might be rising too quickly or in too many areas at once. There's sometimes a misconception that it might be dangerous for the world. Countries, including China itself, could revert to protectionist measures that impede trade and capital and knowledge flows but such measures would not be helpful to China or to its trading partners or to the global economy at large. Countries need to maintain a spirit of dialogue and cooperation and an open attitude.

from Coursera course, Science and Technology and Society in China. Week 3. by Naubahar Sharif, The Hong Kong University of Science and Technology
Other resources
http://www.oecd.org/china/
http://www.icc.se/policy/statements/2011/Open_Markets_Index_2011.pdf
http://www.doingbusiness.org/data/exploretopics/starting-a-business
http://www.transparency.org/cpi2012/results

Innovation Policy

Policy can be defined as a purposeful course of action designed to address a concern with, in this case, innovation. Public policies are generally developed by government officials. Innovation policy usually refers to a policy designed to raise the quantity and efficiency of innovative activities. Innovation systems-related policies emphasize a holistic view of policy making. The whole combined set of organizations and institutions that are related to one another and that have the possibility of impacting or influencing innovation is being considered. The whole is greater than the sum of the parts. The individuals, institutions, interactions, and ideology all matter. Innovation systems-related policy is an attempt to get all of the actors within an innovation system to work in unison. Naturally, different actors, different organizations, and different institutions have different goals but, to the extent possible, the aim is to get everyone synchronized.

Innovation policy depends on evaluations of how specific structures contribute to the overall functionality or efficiency of the innovation system. Innovation systems view performance as a result of how well sets of organizations, actors, and institutions’ framework conditions work in conjunction with one another. These actors and these institutions do not work in isolation. They are connected to one another and their connections are important. Policy issues, therefore, turn on the nature of the components and how well the links work. Innovation performance can be seen as a coordination problem because innovation systems components must work together coherently and that's the idea of policy to get them to work together coherently so they can improve innovation performance with compatible processes and compatible objectives.

We're not talking about efficient functioning of markets. We're talking about problems related to coordination that come before the marketplace. We're talking about policy that creates a space for economic behavior. How to get these actors to engage in innovative activities in the first place? How to get them to engage in S&T or R&D in the first place? That's what we're talking about when we're talking about innovation systems policies.

Specific problems that innovation policy needs to address:

1.       Infrastructure provision and investment problem. It’s necessary for governments to provide the necessary physical infrastructure such as transport or communications infrastructure in order to create an environment in which the innovation system can function efficiently. Scientific infrastructure is another type of infrastructure for example high quality universities, research labs, and technical institutes, and so forth are also important components of infrastructure that the public sector can provide in order to enhance innovation problem innovation activity.

2.       Path-dependency-related problems derived from socio-technological inertia. When we engage in a certain path, as a society and we depend on certain technologies to the extent that our dependence on those technologies hamper our ability or our openness to the emergence or dissemination of more efficient technologies. A classic example is our over-dependency on fossil fuels which creates obstacles for the emergence of new types of technologies. Focus on existing technologies might blind companies to the emergence of new technological opportunities.

3.       Institutional or framework condition problems cover both formal and informal rules.  In terms of formal, we're talking about regulations, laws, technical standards, and public procurement policies. In terms of the informal, we're talking about tacit rules such as cultural norms, preferences, and social rules. The ability of policy to impact the first type, formal rules is much greater.

4.       Network problems arise with linkages that are too strong. Weak linkages can have a negative effect but overly strong linkages can create blindness to what happens outside of the network. It is very difficult to assess the adequate degree of strength. It is very subjective, context -dependent, and only answerable on a case-by-case basis.

5.       Capability and learning problems is related to the idea of absorptive capacity so it includes human, organizational, and technological competencies.

6.       Complementary problems occur when components are not connected to one another so that the positive effects of the connection are adequately exploited.

To help solve these types of problems, there are different policies that can be enacted by government. The formulation of policy should be based on theory, on indicators, plus subjective judgement. Innovation system theory and indicators are still relatively limited so judgment is required, based on common sense. This makes it necessary for policy makers to experiment, to tinker, when it comes to creating and enacting innovation policy. Mistakes are likely. As in the innovation process itself, there should be room for experimentation. We should learn from our mistakes when we're engaging innovative, scientific, and technological development. In order for this to be successful, evaluation is important. That information informs future policy making.

from Coursera course, Science and Technology and Society in China. Week 3. by Naubahar Sharif, The Hong Kong University of Science and Technology

The Importance of Linkages in Innovation Systems

The various components in an innovation system are the actors and the institutions. The actors are the businesses, governments, public and private research organizations, and universities. Sometimes, actors are known as organizations. Institutions are the framework conditions within which the actors function: the laws, regulations, cultural norms, preferences, social rules, technical standards, education, competition, corporate governance, finance, intellectual property rights, and public procurement.

Linkages are not included in the linear model of innovation. However, they are the key ingredients of the interactive model of innovation that provides connections between each of the different steps of the linear model.

The Innovation Systems Conceptual Approach assumes that growth in linkages leads to improved performance and the quantity of interaction is important but so is the quality. The more knowledge and technology flow that there is in the linkages, the better.

Linkages between actors and institutions can take various forms, including joint research, personnel exchanges, cross-patenting, purchasing of equipment, etc.

Four specific types of linkages are: 1. Joint industry activities. 2. Public and private partnerships. 3. Diffusion of knowledge and technology to firms. 4. Personnel mobility.

1.       If businesses are linked, either formally or informally and do collaborate, it raises the efficiency and effectiveness of the innovations system. This may seem counter-intuitive because they are competitors. However, many firms do indeed collaborate but more in emerging fields with high development costs such biotechnology, nanotechnology and material science. They pool technical resources to achieve economies of scale and to gain synergies from complementary human and technical assets. An employee from company A is not shared with company B but rather, the technician who was employed in a laboratory that is used by company A and company B can give ideas and advice to both.

2.       Government- funded research institutes, government-funded universities and private business firms collaborating with one another is another important type of linkage which has the potential of enhancing innovative systems efficiency and strength. The quality of public research infrastructure and its links to industry is an important asset for strengthening an innovation system. Universities produce basic knowledge for industry and are a source of new methods, instrumentation and skills. Industry-supported university research is now becoming increasingly common as are strengthening university/industry linkages because business firms realize that they can have access to cutting-edge knowledge, cutting-edge technology and tools by cooperating with universities. On the other hand, universities, by cooperating with industry, are better able to demonstrate their worth or their usefulness to society at large.

3.       The third type of important linkage is technology diffusion. Diffusion of innovation is usually a slow-moving process that plays out over years. However, because businesses have to report quarterly, semi-annually, and annually about their performance, they put technology to work fast by adopting and using innovations on products developed elsewhere. They have an incentive to use, to market, and to commercialize the technology as quickly as possible so they can increase the profits. Technology diffusion can be speeded up by introducing private business firms into the arena. Knowledge about technologies may come from customers and suppliers, as well as competitors and public institutions. Technology diffusion is particularly important for sectors and industry that may not have R&D themselves. Public research institutes and public universities may not commercialize and market the technology but they're creating it and, in that case, technology diffusion is important.

4.       Movement of people and the knowledge that they carry with them is important in any innovation system. Personal interactions, once again, can be formal or informal and represent a significant channel of knowledge transfer within industry and between public and private sector. The ability to locate and identify information and to access networks of researchers and personnel is a valuable knowledge asset. Having the knowledge is one thing but having the ability to find out who has that tacit knowledge is also an essential asset. Absorptive capacity refers to the extent to which the receiver can make sense of the knowledge transfer. Tacit knowledge refers to those aspects of knowledge that can be that cannot be easily codified and cannot be transmitted or shared via writing. It can only be transmitted through other means like training, through experience, by experimentation or from observation. Tacit knowledge involves learning and skill. The classic example of tacit knowledge is how to ride a bicycle. It would be extremely difficult to write in a manual all the processes, all the procedures, all the steps that are necessary in order to have you understand how to ride a bicycle. Rather, it's much easier for someone who is learning how to ride a bicycle to do so through training, experience, experimentation, and from observing someone else do it.

 Generally speaking, it is more desirable to have stronger linkages between components of innovation system. It is, however, possible for linkages to become too strong. They become so overwhelming that the two actors or the components that are linked to one another are unable to see beyond their specific narrow connection, neglecting other links and the overall performance of the more general innovation system.  Otherwise, linkages are known to be effective means of improving or strengthening any given economy's innovation system.
from Coursera course, Science and Technology and Society in China. Week 3. by Naubahar Sharif, The Hong Kong University of Science and Technology

Main Actors in an Innovation System

Businesses have a relatively large role to play in the innovation system. Other key players are local, regional and federal governments, private and public research organizations and the education system. In the most developed countries in the world (Japan, the USA, the UK, France, and Germany, etc), businesses are predominantly responsible for generating innovation. The activities of the other actors in the system are aligned to what they are doing. Market forces provide the necessary and sufficient incentives for businesses to innovate because they stand to benefit the most. However, businesses do not act alone. They are at their most efficient when they are able to innovate in cooperation with other actors.

Domestic and foreign businesses are the dominant research and development (R&D) players in China's innovation system even though it is not as advanced as these economies. The business sector performs up to 2/3 of total R&D, up from < 40% at the beginning of 1990. However, firms do not yet form the backbone of the national innovation system. The rapid increases are due to the conversion of some public research institutes into business entities. This was done without creating the necessary conditions to enable them to become innovation-oriented firms. However, as the innovation system further develops and matures, the relative role played by government should ideally decrease.

Innovation is an activity that is characterized by the following three characteristics: 1. A long time horizon 2. High cost 3. Uncertainty. Because of these three characteristics, private businesses may be reluctant to invest in innovation. Economists characterize this situation as market failure. It is often used as a justification for government intervention in a particular market. It should only be a justification at the early stages of an innovation systems development.

Research organizations, if they're public in nature, are established by national governments to enhance the competitiveness of national sectors. If they're private, they're established by trade bodies, by companies, or by private citizens in order to achieve the same goal. National governments often establish research organizations in sectors of agriculture, industry, and services. The role of these organizations is to conduct R&D and to transfer the results to potential users who then commercialize and market innovations for lay people or specialized bodies. In some innovation systems, research organizations play an important role in performing R&D alongside academia and industry. In other systems, research organizations play a more peripheral role. The role played depends on the relative role played by other innovation systems actors.

The Chinese Academy of Science is a major research organization in China which plays a relatively significant role. Increasingly, research organizations are becoming compelled to commercialize their research in order to justify the funding. This helps them generate new sources of income for their activities and it demonstrates a relevance to social and economic development and justifies the expenditure of public funds.

Research organizations play an especially important role in the catch-up phase of an economy’s development, as the innovation system is developing and strengthening. Research organizations tend to play a more important role as compared to their role played in the most advanced innovation systems. They act as facilitators and intermediaries in generating learning that firms and other actors in the innovation system need to pursue in order to engage in technological innovation. Strong linkages between research organizations and other actors can improve innovation system performance. Such linkages are not limited to a nation's own innovation system. They can be international in nature. Research organizations in different countries can learn from one another in order to enhance their own performance.

Universities are critical because they contribute to the production of a learned work force. They also engage in advanced basic or applied research. Their third mission is to engage in knowledge transfer, their contribution to society. If we were to use a linear model of innovation, which is widely used despite its shortcomings, universities are the most appropriate institution for basic research. Theoretically, the norms of academic research are different from industry. The goal is professional recognition and advancement not profit making. In practice, of course, we see an overlap. Also, there is a notion of academic freedom which allows researchers to engage or to pursue any question of intellectual significance without outside interference. University/industry linkages enhance innovation system performance and universities themselves are becoming more entrepreneurial. They are starting to provide incentives to faculty members to commercialize their research, bringing new products and services to the market by themselves, bypassing industry.

from Coursera course, Science and Technology and Society in China. Week 3. by Naubahar Sharif, The Hong Kong University of Science and Technology

Using the Systems Approach in Policy Making

The Innovation Systems Conceptual Approach goes beyond research and development (R&D) to explain innovation dynamics. Newness does not have to be predicated upon R&D alone. It encompasses the institutional elements that strongly influence the growth dynamics; standards, norms, rules, regulations and customs. The organization is not the sole vector of technological innovation.
There is a framework for innovation to be a collective achievement. It can be used by international organizations and by various countries because draws attention to the systemic features of the process and the variation across countries. It cautions against simple policy prescriptions that don’t account for national differences among competing systems. There is not a one-size-fits-all model which can be applied to all countries. Innovation systems policy is dependent upon historical trajectories and path dependencies associated with any given country although another country at a similar level of technological and innovative development can be used as a model.

The correct level of analysis may be difficult to establish. Many times, the National Innovation Systems Approach (NIS) is used but, in large countries, there are regions that are distinctly different from one another. For instance, in China, the southern region is particularly innovative compared to the western region. In that case, it may be preferable to use a regional level of delineation rather than the national level. In other contexts, it might be better to use a technological level of analysis. Some technologies share more commonalities compared to regions and they would be more worthy of study as group. Many analysts have suggested that multinational corporations control much of the science and technology (S&T) and innovative activity that we see emerging throughout the world. For this reason, it doesn’t always make sense to look at the national level as a delimiting criterion. A multi-national corporation, where and how it's conducting its S&T activities, could be the focus of study.

The Innovation Systems Conceptual Approach is still just a concept rather than a formal theory. A theory has powers associated with it and can predict outcomes. This particular approach has not been proven to accurately forecast the result of corrective measures. Some argue that it's too broad, ambiguous, and conceptually diffuse. Also, with so many factors playing a role, assigning relative weights to particular relationships is clearly difficult. It's not very neatly operationalizeable. In practice, when policy makers use this approach, they look at specific components and linkages within a system and the specifics can actually be more easily fine-tuned than by looking at the total system.

Another disadvantage is because this approach is applied to individual countries on a case-by-case basis, elements of one system may have little in common across geographic boundaries yet the way in which it prescribes corrective measures is to use an advanced economy as a model. Carrying out effective trans-national comparisons is quite difficult. Sources of diversity between countries are size and population. Larger countries have different regions that may or may not be strong, in terms of innovation. Level of development is another source of diversity. Developing economies are not comparable to the most advanced and most mature economies of the world. Furthermore, given the uniqueness of each country, the respective role of each actor in an innovation process is not comparable to another. In underdeveloped countries, the government tends to play a larger role in terms of innovating. Businesses, public and private research organizations, and the government all play differing roles depending on the country's level of development. Similarly, the quality and intensity of the linkages between the various actors are different depending on country.

In spite of these disadvantages, The Innovation Systems Conceptual Approach provides a tool for analyzing country-specific features of the innovation process. It offers a very good guide for formulating innovation and technology policy. It highlights interactions among various actors and the workings of the whole system rather than the performance of each individual component. It recognizes that a business, although it is the locus of innovation, does not function in isolation. The entire system influences the effectiveness with which businesses innovate.
from Coursera course, Science and Technology and Society in China. Week 3. by Naubahar Sharif, The Hong Kong University of Science and Technology

The Innovation Systems Conceptual Approach

The Innovation Systems Conceptual Approach is used to study systems of innovation and to inform innovation policy making. This approach grew out of the field of innovation studies in the 1980s. It's widely used by a number of organizations such as the OECD, the European Union, the World Bank, the IMF and other UN agencies and by individual countries such as Finland, Sweden, Canada, New Zealand, UK, and China. Finland was the first country to use this national innovation systems approach in 1992. Sweden also embraced this approach in a fairly significant way with a Systems of Innovation Authority, a government department dedicated to studying innovation using this perspective.

There are two variations to this approach. The first variation is using it as a descriptive tool, listing the institutions and organizations that contribute to the development and diffusion of new technologies. The second variation is to use it as a focusing device, identifying all the factors that influence the development, diffusion and use of innovations and allowing for the analysis of the nature and intensity of the linkages. After identifying the weaker parts of the system, one would be able to prescribe corrections to strengthen these areas primarily based on comparison with other economies of a similar (or slightly higher) level of innovative and economic development.

In the initial descriptive dimension, we have a clearer and more methodical understanding of the system and in the prescriptive dimension; we are able to generate policy recommendations for government and related agencies. 

The Innovation Systems Conceptual Approach  recognizes that innovations can be the center of focus, attention, and analysis. It recognizes that individuals, firms, and economies can further enhance their economic growth through the generation and the diffusion of innovations. Innovation is central to the whole idea of economic competitiveness. It includes, but it is broader than, the R&D system alone. Innovations can be non-scientific and non-technological and develop from non-economic factors such as institutions, politics, and culture. This approach is concerned with history and recognizes path dependency and the evolutionary nature of innovations.

For instance, Japan is a very advanced economy but people there are still more comfortable using fax machines as compared to emails. This is an example of past dependency. Apparently, many Japanese people feel that email can be hacked into, can be written by anyone, they're more anonymous and much more impersonal as compared to a hand-written fax. Japanese society as a whole is reluctant to let go of this older technology.

Institutions and organizations develop over time and the mindset of the individuals within an economy influence the degree to which innovations occur. Process innovations are not always based on S&T. This approach also emphasizes that business firms are influenced by not only codified materials such as laws, regulations, and technical standards but also cultural norms, preferences and social rule.
from Coursera course, Science and Technology and Society in China. Week 3. by Naubahar Sharif, The Hong Kong University of Science and Technology

Innovation Systems

An innovation is a purposeful combination of market and non-market mechanisms to optimize production deployment and use of new knowledge for sustainable growth or institutionalized processes in the public and private sector.

Innovations do not happen in isolation. They come about as a result of a collective effort or achievement. Manufacturers come up with new ideas through a number of sources. Other manufacturers might produce better, cheaper and more quickly and the competition causes some changes in the process. They also learn from consumers’ feedback and have new ideas as a result. Suppliers get new products and these could change the manufacturers’ practice. The government may fund R&D and university professors might contribute some new information. Innovation is not solely an independent activity conducted by businesses on their own so it makes sense to consider the entire system rather than a business in isolation.
By employing a systems perspective, we are able to include other relevant factors that contribute to firms’ performance. This includes the skill of the workforce available, the political climate of supporting change (or restricting it), and financial institutions willing to extend the capital. A system perspective allows other relevant factors to be included in the analysis.

Systems exhibit complementarities, constituent components within a system that are linked to one another. The presence of linkages is crucial for the effective functioning of the system. The absence of a critical link or a component could block or slow down the growth of the system. These components could be technical or social.

An innovation systems perspective is useful for understanding the interaction between an innovator and the environment. The innovator is usually a business which depends on links to components of the system which either makes it more efficient or slows things down. Components are product market conditions, the education and training system, the macroeconomic and regulatory context and communications infrastructure. A system of innovation has the capacity or the potential to affect a country’s performance in economic growth, job creation, and competitiveness. It is why policy makers try to enhance innovation systems.

The first definition of innovation systems concerned the combination of market and non-market mechanisms for the production of new knowledge. Now we're defining an innovation system as a set of institutions that jointly and individually contributes to the development and diffusion of new technologies. We are focusing on a framework within which governments form and implement policies. We're focusing more on the policy-making dimension that the innovation systems conceptual approach can highlight.

In other words, an innovation system is a system of interconnected institutions that collectively create, store, and transfer the knowledge, skill, and artifacts which define new technologies. This definition is from the OECD. The interconnectedness refers to the linkages between different components within a system that collectively combine to help define the emergence of new technologies within a society.
from Coursera course, Science and Technology and Society in China. Week 3. by Naubahar Sharif, The Hong Kong University of Science and Technology