On January 5, 2017, the article “2017: Ten Challenges Faced by Innovation in China”, written by Professor Cheng Hong, was published in the commentary headline of China Business News and promptly received the full-copy reproduction by multiple Chinese media such as Sina Finance, Phoenix Finance and Netease Finance, Sohu Finance. The full text is reproduced as follows:
The year of 2017 attaches great importance to Chinese economy, for the value of innovation as a new impetus to economic development has become a social consensus. However, innovation practice and methods is under the potential risks of being deviated from the normal track, and even in some regions and areas, a certain degree of bubbles began to appear. Innovation is the decisive choice for the future development of Chinese economy, and it is a battle that cannot afford to lose. In the following page, I will analyze ten challenges we are facing in innovation in 2017.
First, the real economy is missed as the most important fundamental in innovation.
Why is innovation so important to Chinese economy? Where is the starting point of innovation issues? The answer is the real economy which has developed in China for over 30 years. It is now facing the pressing demand from transformation and upgrading, and innovation is the best solution.
Meanwhile, developed countries and regions, in particular the United States, all have made the common choice of re-industrialization as their strategy, and it was also forecasted that the U.S. would surpass China in the next five years and become the most competitive manufacturing power in the world. Innovation in the real economy is the foundation of innovation in other sectors including service industry, and with tremendous diffusion and driving effect, it is also the most important target of applying science and technology and other innovation.
However, it is tough and struggling for China’s real economy to develop. Engaging in service and other sectors is regarded as innovation, while developing manufacturing business becomes a synonym of traditional sectors. A certain volume of bubbles occur in innovation is fundamentally due to the wrong starting point of innovation in China.
Second, quality innovation is missed as the fundamental foothold of the real economy.
There are a lot of innovation demand in the real economy, but what is the most fundamental question? The answer is that the quality of our products fails to satisfy the demand of the market, which is the main task of China’s supply-side structural reform.
Due to the large but weak real economy in China, the labor productivity and total factor productivity is not high, and the overall quality of economy has become the main weakness of long-term development. How should this problem be solved? The solution is to improve the quality by innovation, including changing development strategies in enterprises as well as turning to quality innovation and a quality-oriented profit model.
The fundamental goal of innovation in other areas of enterprises, including science and technology innovation, human resource innovation and business model innovation should be focusing on product quality innovation. For the demanders and consumers, all the innovations of enterprises are indirect, except the innovation of product quality which is direct and perceivable. Nonetheless, now enterprises’ innovation is rushing to engage in new industries, and in what is so-called smart high-tech, but they refuse to honestly improve their ability to innovate in product quality, neither do they produce more competitive high-quality products.
Innovation in the real economy should turn to fundamentals and actually improve the competitiveness of Chinese product quality through innovation. Other innovations in the real economy are bound to put the cart before the horse unless this problem can be solved.
Third, entrepreneurs lack of a strong ability to innovate.
China’s economic innovation is around the corner, but entrepreneurs, as the most important mainstay of innovation, don’t have a particularly strong sense of crisis.
This year, we continued the “China Employer-Employee Survey”. It can be found that entrepreneurs believe lack of innovation ranks far behind market demand, rising labor costs and other issues. That is to say, most of the entrepreneurs still blame their current difficulties on market and other external factors, but ignore the fact that some companies are able to have a completely different outstanding performance in the same market conditions. According to Joseph Schumpeter, the creator of the innovation theory, innovation is the creative destruction of entrepreneurs. Without entrepreneurial creativity, no firm innovation will be achieved, including science and technology innovation which mainly from entrepreneurs’ discovery of markets and allocation of resources.
Fourth, innovation is simply equated with application of the Internet.
Internet is of course a very important form of innovation, and “Internet +” can really bring some good innovative applications. But now the question is, does innovation equal to application of the Internet, or can innovation be achieved as long as the Internet is applied?
At present, almost all of the entrepreneurial innovation focused on the Internet, mainly represented by the application of APPs. It seems that to tell a story, or to pursue some venture capitals is the Internet innovation. In fact, you may find with slight observation that a lot of innovation in the Internet is just imitation and even copying, completely without any significance of innovation. If it goes blindly in this way, I am afraid that its bubbles will be more than that of the real economy.
In view of the further analysis, can the Internet really subvert the traditional economy? Aren’t All the human consumption needs into high-quality products? Even with application of the Internet, in addition to reducing transaction costs and information asymmetry, Can this essence be changed?
We certainly should firmly grasp the opportunities arising from Internet innovation, but deification and over-exaggeration of the Internet is actually an act of deception (Hu You), and vulgarization and simplification of innovation.
Fifth, beware of “pseudo-innovation” by monopoly.
Innovation is an exploration of uncertainty, in need of the free competitive environment the most, and we should especially alert the monopoly. However, in many areas, by decorating an innovative idea, or facilitating the existing market forces, they are implementing substantial monopoly in collusion with the executive powers.
Since the local government likes the concept of new energy vehicles, I am here to invest in a new energy vehicles in your factory. In addition to a lot of subsidies and other preferential policies and conditions, the most important requirement is that all the new-energy buses in your city can only be purchased from my company. Due to the fact that you are developing culture functions, I will design for you several internationally popular cultural entertainment projects. The condition is that you should transfer the land around the cultural function area at a very low price for my development of the real estates.
These practices are never real energy technologies and cultural innovation. It actually takes advantage of the name of innovation to implement monopoly, fundamentally undermining the free competition environment which innovation needs the most. This is not innovating at all, but inhibiting innovation.
Sixth, guard against short-term innovation behaviors.
Innovation is not an overnight thing. It is a gradual process of natural evolution and needs a good system of ecological environment. However, we are still accustomed to the Great Leap Forward-style approach, hoping that today’s input makes tomorrow’s output of innovation. Engaging in a project, they find a few experts for planning and accreditation, focus on resource investment, and then “innovation” succeed. They equal innovation with introduction of investment. As long as the preferential policies are offered, the introduction of those high-tech companies is innovation as well.
In fact, innovation itself is a trial and error process and its success is definitely not determined by pre-planning. In the process of free market competition, people innovate by continuous “learning by doing” based on the induction of interests. As for those who introduced the so-called “innovation” projects, most are the processing or the background hardware facilities, which is only due to preferential policies, but has nothing to do with innovation.
Seventh, mismatch of resources in science and technology innovation.
Over the years, all levels of government have been increasing their investment in science and technology. Investment intensity, which is the proportion of science and technology investment in GDP, has almost become the most important indicator measuring the innovation in an area. As the Government’s investment in science and technology, in fact, is part of public finance, so its basic requirement is certainty, that is, input must have a clear output. This requirement of certainty in public financial input naturally contradict with the uncertainty of science and technology innovation.
How should we act? It is necessary to take actions from the management of science, including topics for experts to argue, rigorous bidding to the cumbersome, and results that must succeed to achieve international and domestic levels etc. So after this, can be achieved innovation? Not entirely. If the uncertainty in science and technology innovation can eliminated by relying on these actions of management, it probably cannot be counted as innovation because this kind of innovation is too simple.
What’s worse, since science and technology input is required to be successful, then a rational participant’s choice is to design low-level duplication projects as far as possible and meet the requirements of the government, which is the only way to ensure success. In fact, the government’s large-scale investment in science and technology innovation cannot bring any real innovation. It is because the certainty required by the government investment is in conflict with the uncertainty of science and technology innovation output. The solution is simple, that is, except in a small amount of basic research input, we should let the market to configure the capital investment in science and technology innovation.
Eight, accumulation of market risk in financial innovation.
Financial innovation is very important, especially to solving the matching problems between the banks and the SMEs, so the institutional reform is required. However, many banks are not really doing financial innovation for the real economy, but “estrange from the real economy to the fictitious” and even “become the fictitious from the real.” In order to enlarge the scale, they venture to take risks to carry out a variety of inter-bank business, especially expanding the off-balance sheet business.
This lack of effective regulatory expansion, is not any meaningful innovation, but constantly amplifying the market risk, which has far exceeded the credit risk. The recent volatility of the bond market reminded us of the potential systemic financial risk that may arise. In fact, the accumulation of financial market risk is due to blindly pursuing the so-called innovation, especially the financial innovation of the Internet, but not always adhere to the principle of prudent supervision of the finance. If coupled with the securities, the insurance market potential will risk of interaction, and then the entire financial market risk will be greatly increased.
Ninth, distortion effect of human capital in innovation.
China’s labor dividend has disappeared, so it is key to create human capital dividend through innovation as soon as possible, especially to focus on accelerating the transformation and upgrading of unskilled labor to skilled labor. This is the main solution to China’s human capital dividend. However, now innovation of human capital in many places and areas is simplified as attaching importance to the elite talents, to those advantaged, well-educated high-tech talents, by setting all kinds of privileged talent programs, but the fact is ignored that we are desperately short of frontline workers who have real impacts on economic innovation.
On the other hand, a large number of university graduates are engaged in jobs which can be done by those with high school or vocational school education. In fact, they are invisibly not fully employed.
Now, blind development of university education still continues in various regions. This is definitely not innovation, but a serious distortion of human capital investment.
Tenth, the market fails to play a decisive role in innovation.
Innovation is essential to China’s economic development, no matter to what extent the estimation is made. But the economic innovation and development is completely different from the factors development model of the economy in previous decades. In the development stage of factors, it is possible to allocate resources through government forces, such as unifying the development zones, maximizing preferential policies, or concentrating capital investment because these factors including labor, land and capital resources are explicit.
However, in the innovation and development stage, the resource factors are creativity, creative ideas and knowledge. These factors are hidden and unable to be allocated by government forces, and only the market can stimulate the innovation of knowledge resources. Now many managers still have path dependence in the traditional factors development stage, and are accustomed to using administrative means to solve innovation problems, which not only cannot promote innovation, but on the contrary, also seriously inhibits the innovation ability of the market.
Innovation is a new impetus of Chinese economy in the new normal. To truly implement the innovation-driven development strategy requires promoting innovation by innovative thinking, complying with the law of innovation and solving the challenges of innovation.