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Quality innovation and economic development in China

November 16, 2017

The point of view is quoted from Prof. Cheng Hong at“China quality development forum” held by the National Bureau of Quality Inspection. The full text is reproduced as follows:

Last week, I just finished a year-long visit to Stanford University in the United States, and the reason I was determined to stay for a whole year at Stanford was actually closely related to the topic I'm going to talk about today. I think the fundamental problem of quality development is innovation, and Stanford is one of the most innovative universities in the world, and Silicon Valley is the most innovative region in the world. To study the issue of quality innovation, it is necessary to stay in such an innovative place.

A few years ago, people did not understand quality innovation concept when it was first put forward. Now the situation improves a lot, people start to know more about quality and innovation. Quality is essentially about meeting needs, and quality innovation, by taking advantage of technology, management and culture, can better meet the needs of consumers. President Xi Jinping pointed out that it is necessary to promote the quality change, efficiency change and motive force change. Change, in other words, is innovation.

China's quality development has entered a crucial historical stage. It is necessary for me to make a report here to express some of the feelings as scholar in the United States.

1. The great achievements of China's quality development

To know the future, and we should first make clear the history. There are many different opinions about the quality of China, but my basic judgment is that the quality of China has made great achievements. The conclusion can be verified from survey data from Institute of Quality Development of Wuhan University.

IQDS has been doing large-scale enterprise survey for several years, the main purpose is to understand the real situation of the quality innovation of Chinese enterprises. Of course, the evaluation of quality is very complicated, because the demand of quality is different. However, several accepted quality indicators can verify that China's quality development has achieved great achievements.

(1) China's product quality has a strong market competitiveness, based on the product quality evaluation according to international trade.

In 2016, China's exports accounted for 13% of the world total, keeping the position of the world's first for eight years. Moreover, the added value of exports also increase. This shows that quality competitiveness is growing.

(2) China's product has obvious quality advantages, taking products quality and product variety as evaluation standard.

The more various the products are, the more able it is to meet the diversified needs of customers. Thus, the products diversity is also an important factor to measure quality. Among the 22 product categories, China ranked first of seven categories. Of the world's 500 major industrial products, China has the world's largest output in 220 products. This indicates that the variety of our products is already very rich, and it does well to meet the different types of demand in the global market.

(3) China's product quality progress rapidly, referring to substitutability of imported intermediate

It is important to look at substitutability of imported intermediate, when judging how the product quality is. We used to be unconfident when it came to imported intermediates, for example, all the good products were either produced in foreign countries, or with main raw materials imported. However, in the recent years, we find that the import of intermediate goods only accounted for 6.2% of the total amount of intermediate goods. With the improvement of China's independent innovation capability, we have become more and more capable of producing high-quality intermediate inputs. These data fully demonstrate that China's product quality has made great achievements.

2. Stick to the quality development path with Chinese characteristics

With my experience at Stanford University, I can say with certainty that our quality standard is definitely not the same as the American standard, nor is the Europe standard. The main learnings of quality development is to create appropriate environment to make product better meet the customer demands.

(1) Give full play to comparative advantages and meet the diversified and multi-level quality requirements

In the past days, China was very poor, and had a lot of cheap labor. To this end, we combined foreign capital with cheap labor, took the development path of processing trade, met the market needs with lowest price. But as the labor cost increases and capital accumulates, capital-intensive products begin to grow, China's technology-intensive products rise rapidly, and companies like

Huawei continue to dominate the world market. As a result, China's huge market capacity, especially the labor force, the large number of enterprises, allowing us to produce different types of product quality, and ability to meet the market demand is becoming more and more strong.

(2) Improve the intrinsic driving force of quality development through institutional reform

What is the most difficult to improve the driving force of quality development? The answer is that companies do not have the intrinsic incentive to improve quality. Government standards can only apply to basic things. While the rich, diverse and multi-layered and changing consumer demands can only be met by group standards. Paper called International Trade Issues we published in the domestic authoritative journals, showed that the promotion effect of enterprise group standards on total factor productivity reached 13.7%. On August 3, Guangming daily post our academic paper, Quality Innovation Drive China's Economic Transformation and Upgrading, which quality has great potential to promote economic transformation and upgrading.

(3) Increase investment of quality factors, optimize the allocation of quality factor and improve the quality of macroeconomic growth.

Quality Profit Model is to realize the profit increase by improving the quality ability. In contrast, company can also realize growth by investing large scale production factors, especially external ones, called Speed Profit Models. The productivity rate of enterprises applying Quality Profit Model, is 17% more that of enterprise with Speed Profit Model. The bigger difference is that the total factor productivity of quality-oriented enterprises is growing at an annual rate of 11 percent, while the rate of speed-oriented enterprises is declining at a rate of 2 percent per year. Based on the survey data, I have published a book, Quality innovation and China's economic development, saying that Chinese people should pursue a quality path with Chinese characteristics, which is to tell good Chinese stories.

3. Establish the mechanism of “double quality improvement” of both micro product and service quality and macro-economic development

President Xi said that China's economy has shifted from a high speed growth to a high quality growth, we must insist on quality first. Therefore, I have only one suggestion for quality development, which is to establish the mechanism of "double quality improvement" of the micro product and service and the macro economic development. I have a few suggestions on this topic.

(1) Establish the incentive and constraining mechanism that is entrepreneur driven.

We find that the entrepreneurs have played an important role in improving quality. It is fundamental to build incentive and constraining mechanism that is entrepreneur driven. To this end, entrepreneur is supposed to realize the importance of quality innovation and master the basic methods of quality innovation. IQDS has constantly dedicate itself to help entrepreneur improve quality. For instance, we carry out quality project and training courses. Until now, there are more than 15000 entrepreneurs attended trainings. Through training, I have turned the frontier research achievements into the practical capability for entrepreneur to improve quality.

On the other side, it is necessary to strengthen the construction of public service mechanism for quality innovation. We have explored the effect of quality test in many places, such as Guangzhou, Chongqing, Liaoning, which turns out to be beneficial for improving the quality of enterprises. In addition, constraining mechanism is also supposed to be built for enterprise, such as the Whistleblower Protection Act of United States, which provides a good incentive and restraint mechanism. When company has witnessed quite a large number of fraud cases, it is the corporate employees, instead of administrative regulator, know the details. So, the establishment of the Whistleblower Protection Act put restraining effect on entrepreneurs.

(2) Establish the quality evaluation mechanism that take "comparative experiment" as the main approach.

Good quality is to meet the customer needs eventually. Thus, it is important to mobilize customer engage into quality evaluation. In western countries, there is a very mature quality management mechanism from customer sides, that is "commodity comparison test".