By Wang Zhonghong, Research Department of Industrial Economy of DRC

Research Report No 216, 2011

I. Break down Difficulty in Innovation and Improve the Mechanism for Accelerating and Motivating the Industrial Transformation in Coastal Regions of Southeast China

As vanguards of economic development in China, provinces and municipalities in costal regions of Southeast China have attached great importance in recent years to the role of innovation in advancing industrial transformation and upgrading in order to meet such challenges as resource and environmental constraints, downturn of economic growth and intensifying competition. Jiangsu, a coastal province of China, has put forward the "Innovation-driven Strategy" in its 12th Five-Year Plan and has made it a core strategy for its economic and social development. Shanghai regards innovation-driven development through transformation as a must for advancing scientific development at a higher starting point. Guangdong vows to strengthen the core roles of independent innovation in expediting transformation and upgrading and building a happy Guangdong. In 2010, the land area of five provinces and municipalities in costal regions of Southeast China accounted for 5% or so of the national total and their aggregate GDP and R&D expenditures made up 36% and 40% respectively of the national total. In terms of the money spent on R&D, Jiangsu, Guangdong, Zhejiang and Shanghai ranked first, third, fifth and sixth in the national total. The intensity of money spent by Shanghai and Jiangsu on R&D reached 2.81% and 2.07% respectively, being evidently higher than the national average of 1.76% (Table 1).

However, we have found from the relevant survey that some policies, formulated to fight against the financial crisis, revitalize the industries and stimulate demand, have escalated dependence of some regions and enterprises on outward expansion when boosting economic resurgence. Quite a number of regions still wish to rely on the increase of land use to realize the economic growth. Some enterprises still expect that the State could prolong the subsidy policies to maintain their production and operation. Even a small number of sectors and enterprises have turned State policies into chances to exploit loopholes and vie for subsidies and resources, which has instead impaired the motivation of the regions and enterprises for innovation and is not beneficial to the enhancement of the innovation ability, thus forming the predicament for both encouraging and restraining innovation.

Table 1 Basic Economic Conditions of Coastal Regions of Southeast China in 2010

	Aggregate Population (person)	Population Proportion (%)	Land Area (10,000 square kilometers)	Area Proportion (% )	Economic Aggregate (100 million yuan)	Economic Proportion in National Total (%)	R&D Expenditure (100 million yuan)	R&D Proportion (%)
Shanghai	23019148	1.7	0.63	0.06	16872	4.2	481.7	6.8
Jiangsu	78659903	5.7	10.26	1.07	40903	10.2	857.9	12.1
Zhejiang	54426891	4	10.18	1.06	27227	6.8	494.2	7
Fujian	36894216	2.7	12.4	1.29	14357	3.6	170.9	2.4
Guangdong	104303132	7.6	17.79	1.85	45473	11.3	808.7	11.5
Total	297303290	22	51.26	5.3	144832	36	2813.4	40
National Total	1370536875	100	960	100	401202	100	7062.6	100

Source: Statistical bulletins of the State and relevant provinces, the 6th Population Census.

We should, when giving due consideration for economic performance and development trends at home and abroad, act in a right way to properly handle the relationships between the short-term growth and the improvement of the long-term competitive power and ameliorate the mechanism for accelerating and motivating industrial transformation and upgrading. We should by no means degrade the strict policy toward utilization of resources, scale of land use, environmental protection, product quality, safety production, industrial relations and social responsibility of enterprises. A strict environmental policy will stimulate enterprises to seek new paths of innovation so as to bring down production cost and reduce pollution and to finally realize the industrial transformation and upgrading (Gardiar, 1994). We should take precautions against the use of subsidies and demand-stimulant policies unfavorable to the enhancement of the industrial development capabilities or discontinue the subsidies and policies in time. At the same time, on the premise of giving play to the roles of enterprises as the mainstay, we should construct systematic innovation-incentive policies, institutional environments and atmospheres of public opinion, encourage the improvement of technical innovation, management innovation, marketing innovation, business pattern innovation and institutional innovation, guide low-end production sectors to step up technical transformation, efficiency enhancement or transfer to lower-cost regions, develop mid- and high-end links and industries generating higher added value, form reasonable division of labor among industrial chains, properly handle economic and social issues brought about by enterprise clusters and withdrawal of backward capacities, break down road blocks and transfer the focus of development truly on the improvement of supply competencies.

We should analyze the objective reasons for the management straits currently facing enterprises in coastal regions in southeast China and take different approaches toward them. We must adhere to the policies with high demands on resource environments, quality and social responsibility. We should keep a proper frequency of the management pressures produced by such external factors as adjustment of exchange rates and reduction of overseas demand, widen channels of both domestic and overseas demand and stabilize expectations. We should devote major efforts to properly solving the social problems brought about by enterprises with management difficulties or bankrupt enterprises as a result of speculation or even gambling. We should actively set up service platforms for enterprises involved in production and business operation and guide them to improve their business management and innovation capabilities and stride on a path of endogenous and intensive development.

II. Get Over Three Extrusions and Form a Force of Equilibrium Facilitating the Industrial Transformation and Upgrading in Coastal Regions of Southeast China

In light of the field surveys in the coastal regions of southeast China, it can be judged that there exist "three extrusions" in the present growth of industries. The first is the virtual economy extruding the space of development of the real economy. In recent 10 years, many manufacturing enterprises have invested in the real estate and financial sectors. Due to slimming profits of the manufacturing industry and the growth of the real estate market by leaps and bounds, many enterprises no longer make investment in various industries and have turned "sidelines" into "majors". Thus, a great deal of nongovernmental capital has aggregated in the field of the virtual economy and the industry hollowing has even appeared in very few regions. Capital seeks benefit by nature. Excess capital aggregation, however, is apt to cause the bubble economy and will also produce serious impact on the real economy.

The study of the incremental capital output ratios of some industries finds that among 7 industries, such as the manufacturing industry, the mining industry, the construction industry, the financial industry, the real estate industry, the communications and transportation industry, the warehousing and postal service, the power industry and the production and supply of gas and water, the manufacturing industry maintained a maximum of the return of capital during 1993~1997, while the return of capital of the real estate industry and the financial industry surpassed that of the manufacturing industry after 1998. The real estate industry, in particular, has maintained a highest return of capital since 2003 (Figure 1). This is why quite a number of enterprises and capital have been put into the financial and the real estate industries.

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