Market Watch No.12，2015

　　OPINION

　　Innovation Has Never Been So Important for China

　　This year’s government work report gives unprecedented priority to innovation. The global economic system is undergoing its most significant restructuring ever， and economic ties have moved from global production networks to global innovation networks. Innovation is becoming a strategic option to reshape the world economic landscape other than a policy option to avoid crisis.

　　China is now entering an economic “new normal，” where the new characteristics of development are becoming increasingly prominent. The model of quantitative expansion is unable to support high growth in such a huge economy， particularly when the demographic dividend is decreasing， production costs are rising and resource allocation efficiency is declining. Today， more than ever， China needs innovation to improve its competitiveness.

　　China’s road to the implementation of innovation strategy， however， has never been smooth. There are not only internal pressures but also challenges outside the country. A comparison of total factor productivity (TFP) shows that developed countries of more robust innovation capabilities have achieved a recovery of TFP， which has made considerable contributions to their economic growth.

　　The international economic order is now in a new era of transformation， and innovation has been a core strategy for major world economies. While these economies make significant readjustments in innovation strategies， emerging economies such as South Korea， Russia， India and Brazil are also putting forward their own plans for cultivating innovation.

　　The United States passed the America Creating Opportunities to Meaningfully Promote Excellence in Technology， Education， and Science Act in 2007， launched A Strategy for American Innovation： Driving Towards Sustainable Growth and Quality Jobs in 2009 and released an updated Strategy for American Innovation in 2011. The EU formulated the European Roadmap for Research Infrastructures in 2006 and Europe 2020 Strategy in 2010. Japan raised new growth strategies in April 2009， planning to develop industries such as the manufacturing of environment-friendly automobiles， electric vehicles and solar power generation. South Korea proposed to develop prospects in the fields of energy and the environment， new information technologies， the bio-industry， production of solar panels， marine biofuel and green cars， as well as other emerging industries.

　　All countries are trying to gain ground in the new round of global competition， and the battlefields have diversified， including the war for talented professionals， control of high technologies and invisible trade barriers.

　　First， almost all countries have formulated plans to introduce and nurture talents to meet future demand， and the war for talent， especially among high-end technology professionals， has intensified. The United States has revised its immigration law several times to attract well-educated migrants worldwide， and the EU adopted the European Blue Card system in May 2009 to attract high-skilled non-EU citizens.

　　The globalization of science and technology has resulted in the formation of a global innovation network. International science and technology cooperation has extended from scientific to industrial cooperation， and research and development (R&D) globalization led by multinationals has been further intensified. For U.S. and European multinationals， input in overseas R&D has accounted for over 70 percent of their total R&D input. Meanwhile， developed countries have also strengthened control of high technologies. The United States and the EU have both formulated strict technology supervision systems.

　　Under these circumstances， China must lay out its innovation chains surrounding the industrial chains. It should attempt to make breakthroughs in some key technological areas in strategic emerging industries. It can also enhance the capability of traditionally competitive industries to innovate independently and accelerate the upgrading and transformation of these industries.

　　China must also promote open innovation and accelerate its integration into the global innovation networks. The allocation of innovation resources tends to be heading in a direction that is increasingly global， and the flow of technologies worldwide is particularly dynamic. The growth of technology trade is faster than the trade in goods and services.

　　In the next decade， it is projected that China’s hi-tech market will see an annual growth of 20-40 percent. This means China is likely to become an emerging base of industrial transfer and center for R&D through open innovation and cooperative innovation.

　　Against the backdrop of innovation globalization， China must establish a platform for transnational technology transfer and connect Chinese companies to global resources and markets. With the opportunity to open up further， China should accelerate integration into the global innovation networks and establish a policy system to support innovation.

　　This is an edited excerpt of an article by Zhang Monan， an associate research fellow at the China Center for International Economic Exchanges， published in Securities Times

　　NUMBERS

　　4.8 tln yuan

　　China’s retail sales in the first two months of the year， up 10.7 percent year on year， slowing down from the 12-percent whole-year growth seen in 2014

　　6.8%

　　Year-on-year increase of China’s industrial output in the first two months of the year

　　0.2%

　　Year-on-year decrease of China’s auto sales in February

　　$160 bln

　　Trade volume target between China and Malaysia in 2017

　　10.6 gigawatts

　　Solar power capacity that China generated in 2014， accounting for one fifth of the world total

　　13.9%

　　Year-on-year increase of China’s fixed-asset investment in the first two months of the year

　　10.4%

　　Year-on-year increase of property investment in China in the first two months of the year

　　107%

　　Revenue growth of Qihoo 360 Technology Co. Ltd.， a leading Internet company listed on the New York Stock Exchange， in 2014