Road ahead: China needs to rethink innovation

The compass, paper money, moveable type printing, gunpowder and silk. These are a few of the inventions that until the early modern era put China ahead of the West as an innovator. But past glories are insufficient to address current and future challenges.

What should China do to support its transition to a more innovative economy? Lessons from other countries point to three key steps.

The first is education. It needs to be amply funded and accessible to all regions and social groups.

China currently spends 4 percent of GDP on education, which is lower than other middle-income countries. Developed economies generally spend 5-7 percent.

China has made enormous progress in educational development, and there are pockets of educational excellence, for example in Shanghai. To ensure that high-quality basic education is available throughout the country, including poor and remote areas, spending on education needs to increase further.

China should move from rote- and exam-based learning to student-centered learning, with an emphasis on problem solving and creativity.

Advanced economies have high-quality tertiary education systems that are independent and well resourced. China's higher education system has expanded rapidly, but quality improvements have not kept pace. Relative to its size and population, China still has few top-tier universities.

Second, innovative economies spend a lot on research and development. China adopted a comprehensive R&D policy in 2006 and expected to spend 2.2 percent of GDP on R&D in 2015. This is higher than European economies' 2 percent but less than Singapore's 2.3 percent or South Korea's 4 percent.

Cutting-edge companies need to transform R&D into innovative production. China has some highly innovative companies, particularly in telecommunications and consumer electronics, such as Huawei and Lenovo. But most Chinese companies focus on process and production improvements rather than breakthrough innovation.

And third, innovative companies need a dynamic financial sector and policy environment. Innovation is driven by the private sector. Policies and incentives should encourage companies to innovate. The marketplace should offer innovative companies financing options.

In China, small and medium-sized enterprises generate 65 percent of patented inventions and 80 percent of innovative products. Limited access to capital, in turn, restricts their access to skills and technology. Encouraging banks to lend to SMEs, and providing policies to support entrepreneurship, would unleash their dynamism.

Robert Wihtol is adjunct faculty at the Asian Institute of Management and former Asian Development Bank country director for China; and Robert Koepp is a consultant and author of Betting on China: Chinese Stocks, American Stocks and the Wagers on a New Dynamic in Global Capitalism.