Thought the Chinese government will only focus its indigenous-innovation-stimulating efforts on strategic emerging industries? Think again.

China continues to pursue, perhaps more concertedly then ever, initiatives to foster “indigenous innovation.” This concept – defined as advancing domestic Chinese innovation via “original innovation” (yuanshi chuangxin/原始创新), integrated innovation (combining existing technologies in a new way), and assimilated innovation (making improvements to imported technologies) – was prominently laid out in the National Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020) (hereafter “S&T MLP”), which sets the goal to make China into a world leader in technology by 2050. A variety of initiatives followed the S&T MLP in seeking to further advance its goals, including, most recently, the 12th Five Year Plan for Establishing National Indigenous Innovation Capacity (hereafter the “Plan”) promulgated on May 29th 2013 by China’s State Council.

Implications of the Plan’s initiative to target several key industries, not just strategic emerging industries (SEIs), for indigenous innovation are described in this article.

Observations on how the Plan fits into China’s innovation policy framework

Recently, it has become relatively common to hear of foreign businesses and analysts making decisions based on the assumption that the Chinese government intends to concentrate its indigenous-innovation-stimulating efforts solely in SEIs. SEIs are seven industries – energy conservation and environmental protection, new-generation IT industry, biological, high-end equipment manufacturing, new energy, new materials, and new energy automobiles – and a variety of sub-industries therein, development of which, via a series of initiatives starting with a policy proclamation in 2010, is intended to allow China to “leap forward” to the forefront of the world innovation economy and global competitiveness.

However, perhaps surprisingly, the Plan reveals that the Chinese government is currently not only focused on building indigenous innovation in SEIs. Part 4 of the Plan clearly states that SEIs as a whole (all seven industries) are only one of five categories of “key” industries, in addition to the agriculture, manufacturing, services, and energy and transportation industries and various sub-industries therein, in which indigenous innovation should be continuously encouraged. Additionally, the Plan lists the importance of building indigenous innovation capacity relevant to sectors, and sub-sectors/industries therein, in what it calls the “social sphere,” including education, health, culture, and public safety. Various government-led initiatives are set-forth in the Plan to stimulate indigenous innovation in these areas.

Various implementing policies for SEIs already emphasise the need to boost innovation and the overall strength of industries that are more indirectly related yet importantly support the development of SEIs (for example, development of highways is said to support demand for energy-efficient cars, a product line emphasised in SEI policies). But the Plan takes a step further, emphasising a range of industries and sub-industries in some cases even further removed from SEIs.

This approach might make economic sense. At the same time, the Plan’s focus on indigenously innovating in multiple industries may lead some to question how much the SEI initiative will actually hone government resources on transforming China into a global innovator in those seven particular industries.

Either way, the Plan provides new coherence to the policy framework in China. For example, it helps contextualise Chapters 40 and 43 of the 12th Five Year Plan (2011-2015) for the National Economic and Social Development of PR China, approved by the National People’s Congress on March 17th 2011, which emphasise the importance of building innovation in China’s “cultural” industry and otherwise developing it into a pillar industry in China. The Plan can be interpreted to mean that even though the cultural industry does not clearly fall within an SEI, encouraging indigenous innovation therein is nonetheless indeed a government priority.

By way of another example, the Plan appears to confirm the relevance of certain 12th five year plans for economy-wide industrial development issued from the central and provincial levels as well as industry-specific 12th five year development plans and other recent plans from both levels encouraging innovation in industries that are not listed as SEIs. For example, the Plan can be interpreted to mean that even though financial services are not listed as an SEI, recent development plans to encourage indigenous innovation in that industry, like the 12th Five Year Plan on Financial Sector Development and Reform promulgated by a number of ministries in 2012, are to receive top-level government buy-in.

Threats and opportunities for foreign innovators

The most obvious threat to foreign innovators from the aforementioned initiatives in the Plan is that the government is concertedly trying to boost domestic ownership of intellectual property rights (IPR), sometimes in rather extreme ways, in more industries than perhaps assumed. One unique approach the Chinese government is using (which is also encouraged in the Plan) to build domestic innovation is setting targets for, rewarding, and otherwise assisting in the development of Chinese “indigenous IPR” (a term which, while not defined clearly in the Plan itself, in other measures is typically defined as IPR owned by a Chinese, i.e. not foreign majority owned, company). Under the Plan and its implementing initiatives, this approach may result in more widespread, in terms of number of industries outside SEIs, support for domestic inventors than previously thought. This may increasingly challenge the competitive advantages foreign firms.

Still, if a foreign business is operating or seeking to operate outside, or not only within, an SEI – namely in the agriculture, manufacturing, services, and energy and transportation industries; education, health, culture, and public safety sectors; or an area supporting SEIs and/or the aforementioned areas — they may be able to benefit from some perhaps previously unexpected spillovers from government initiatives to encourage innovation in such areas. While it seems unlikely foreign enterprises meeting the aforementioned profile, except for those in joint ventures (JVs) with a well-connected Chinese partner, will find it easy to directly receive government financing, subsidies, or other forms of financial support meant to build indigenous innovation, they may enjoy an increase in certain business and consumer demand. Demand for new products and services related to the sectors and industries mentioned in the Plan will likely rise, potentially translating into opportunities for foreign innovators to cooperate with Chinese enterprises, universities, and research institutes by, among other means, licensing cutting-edge technology, otherwise transferring technology, collaborating on research and/or development initiatives; expanding their own R&D centres to keep up with rising consumer demand; among other opportunities.

Of course, taking advantage of these opportunities can also pose certain risks. As such, foreign innovators need to consider how the opportunities will enable them to reach their short, mid, and long-term aspirations in the Chinese market (and foreign markets) while considering risks associated with sharing certain types of know-how with Chinese partners, the propensity of Chinese partners to create opportunities for vs. threats to a foreign party in the mid- to- long-term, among other issues.

Conclusion

There are several implications of the Plan’s initiative to target several key industries, not just SEIs, for indigenous innovation. The Plan brings more policy coherence and thus predictability to China’s overall indigenous innovation strategy, which somewhat allows businesses to better strategise and plan operations. And it may provide opportunities in more market segments than previously thought when considering the Plan’s and related initiatives’ contribution to rising demand from Chinese entities for innovations. The Plan also creates the threat of encouraging more widespread, in terms of number of industries, support for IPR development by domestic inventors than perhaps previously assumed. The scale of these opportunities and threats in part depends on how effectively the Plan’s initiatives are coordinated with the host of currently effective and upcoming measures related to indigenous IP and innovation in China.

 

Dan Prud’homme is a China-based intellectual property and innovation policy analyst.

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