Chen Xiaohong

I. Chinese Enterprises Have Greatly Increased Their Innovation Capacity ButStill Have a Difficult Task for Further Promotion

1. The Chinese enterprises have greatly intensified their innovation and boosted their innovation capacity, but they are still lagging behind the advanced enterprises in the world.

The Chinese enterprises have greatly increased their capacity in terms of products development and provision,but they have only limited amounts of competitive and highly profitable products. The Chinese enterprises can provide full lines of products covering various industrial sectors, and many of their products enjoy certain competitive edge in the world. But problems are still prominent. The light industrial products, textile products and daily necessities are still weak in brand and material capacities. In the IT industry that enjoys scale advantage in the world, the high-end market of terminal products is still dominated by foreign brands and most of their important components still have to be imported. In the equipment sector, the high-end products or their technologies are mainly supplied by foreign companies. In the metallurgical and chemical industries, the high-end products are mainly imported even though their industrial scales are large.

The quantity of patents has risen sharply, but the quality of patents is still low. Patent applications in China rose about 10 folds, from 41,500 pieces in 1990 to 476,000 pieces in 2005. Out of the patent applications by individualsad institutions, the proportion of patent applications by enterprises went up from 16% in 1990 to 33% in 2005. In view of these patent applications, invention patents were only less than one third. The invention patents occupying important market positions were even fewer.

Innovation spending by enterprises has increased dramatically, but is still far lower than their foreign counterparts. China’s R&D spending was only 34.9 billion yuan nationwide in 1995. It rose to 245 billion yuan in 2005, an average annual growth of more than 20%. Its share in GDP also rose from 0.6% to 1.3%, of which enterprises accounted for 60%. Large and medium-sized enterprise R&D spending accounted for only about 0.7% of enterprise sales revenue. The relative level was low, and the absolute size of R&D spending was even lower. In general, the R&D spending by typical Chinese enterprises in some industries is only one-fifth or one-tenth of the amount spent by major foreign counterparts, or even lower.

The organizational capacity for enterprise innovation has become higher, but still cannot meet the demand of enterprise development. Most large and medium-sized enterprises have established special R&D institutions. In 2004, 39 percent of the 23,267 large and medium-sized enterprises across the country had special R&D institutions. The networks for enterprise innovation are also in the making. Enterprise innovation is still highlighted by imitative innovation, improving innovation and integrative innovation. Some enterprises already have a fairly strong innovation capacity. But overall, the enterprises are still weak in their capacities to manage R&D activities and to integrate internal and external innovation networks and in their organizational and management capacities to cover the whole value chain of innovation, ranging from products and technologies to marketing and service.

2. Enterprise capacities for technological innovation vary in different industries.

Different Chinese industries have different gaps with the major foreign counterparts in the areas of industrial foundation and technological innovation capacity. They can be divided into several categories. The industries, such as the steel and petrochemical industries, have a fairly strong capacity for technological innovation and also a fairly strong overall strength; the industries, such as the communications equipment industry, have a fairly strong capacity for technological innovation and an average level of overall strength; the industries, such as the industries producing power-generating equipment and electronic IT terminals (TV, PC), have an average or stronger capacity for technological innovation (it varies according to different products) and certain overall strength; the industries, such as the LCD industry, have certain technological capacity but their overall enterprise strength is weak; in the industries such as the auto industry, the representative enterprises still have to enhance their technological capacity, but their overall enterprise strength is fairly strong.

The representative enterprises in some industries in China already have considerable strength. The industries with weak strength are the late-coming ones, such as the LCD industry and those industries with foreign investment. The enterprises that have fairly strong capacity for technological innovation usually have a fairly strong or above-average overall strength. But their technological capacity is asynchronous with their overall strength. For example, the LCD enterprises already possess certain technological capacity through acquisition and continuous development. But as they are latecomers and small in scale, they do not have a great overall strength and may find it difficult to continue upgrading their technological capacity. The gap between enterprise strength and technological capacity is related to the technological features of the industries. In the industries that have relatively mature technologies or can obtain technologies easily, the Chinese enterprises can grow fairly fast. In the communications equipment industry that has relatively low threshold for starting capital in the early stage of development, the enterprises have more opportunities for successful development due to the great changes in technologies. But the LCD enterprises that began late and required large amounts of starting capital still face great growing risks even though they already possess certain technologies. In the industries where market factors have direct and important impacts and where markets are large and grow faster, the enterprises can grow faster. But there are exceptions. For example, the auto industry is dominated by joint-venture enterprises; although the industry has been growing fast, the local enterprises have relatively small space for growing. Market thresholds are also important. As the communications equipment industry emphasizes systems, mainly serves large customers and has a high technological threshold, the latecomers are difficult to enter once early birds are already in. After years of market competition, the early-coming enterprises can have a fairly high profitability and continue to grow. The power-generating equipment industry is similar to the case of the communications equipment industry. It has a high market threshold, which helps the early-coming enterprises to enjoy high market shares and reap fairly high profits for a long time.

In general, the Chinese enterprises can boost their innovation capacity rapidly. But due to the complex factors that influence industrial and enterprise innovation capacities, the status and upgrading of enterprise innovation capacity can vary somewhat from industry to industry.

II. Preliminary Analysis of the Mechanism and Environment for EnterpriseInnovation in China

1. Meaning of enterprise innovation mechanism

According to the definition by Peter Xiong, enterprise innovation is not invention. It refers to the provision by enterprises of the technology- and knowledge-based new commodities or new combinations. It is a new commercial success. Either based on Peter Xiong’s definition or based on the studies of innovation process, both theory and practice indicate that enterprises are key players in innovation. The theoretical model of innovation indicates that the process of commercial innovation is complex and influenced by many factors and has diverse sources of innovation. It requires the capacity and various kinds of knowledge (science, technology, production and market) that cover the value chain and also the ability to identify and control key capacities and knowledge. In the meantime, it is also subject to the influence of both the internal factors and external environments of the enterprises. Innovation is influenced by many factors, its process is complex and its result is uncertain. Therefore, the key players in innovation must be able to effectively identify directions, organize resources, continue to invest, and dare to face risks. As the enterprises expect to enjoy monopoly and high profit arising from technological innovation and have diverse resources, namely the motivation and capacity for sustained innovation, they are the key players in innovation in a market economy.

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