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Commentary: Gearing up for knowledge economy (2)

By Robert Wihtol and Yolanda Fernandez Lommen  (China Daily)

15:08, September 21, 2012

Education is only part of the challenge. Without a creative private sector, innovative economic activities will not be possible. Companies need incentives, financing, and the right policy and legal environment to act on innovative ideas.

Spending on R&D and ICT are crucial. China adopted a comprehensive R&D policy in 2006 and now spends 1.8 percent of GDP on R&D, which is set to rise to 2.2 percent by 2015. This is comparable to European economies' 1.9 percent but less than the Republic of Korea's 3.4 percent.

However, less than 10 percent of China's R&D is in ICT industries, while in knowledge-driven economies it is typically 25-50 percent. Moreover, most R&D in China is conducted by the government and State-owned enterprises, while private companies spend much less. And the link between R&D and manufacturing is weak.

Also, spending on R&D and ICT alone is not sufficient. Cutting-edge companies need to transform this spending into competitive production of knowledge and information-based goods and services. China has some highly innovative companies, particularly in telecommunications and consumer electronics, but the majority still focus on output rather than innovation.

Most high-income economies have an effective market place for innovative ideas, supported by public and private institutions and a range of financing options. In addition to university-based doctoral, post-graduate and research programs, many European countries have publicly supported funds to finance research, technology and innovation. In the US, wealthy private foundations complement government-supported basic research.

The link between research and private enterprises is vital. Innovative companies network with research institutions and have large R&D budgets. They provide incentives and working environments designed to attract talent and encourage creativity. Private equity and venture capital investors seek out innovative companies with potential to thrive in the market place.

China has built a strong foundation for progressing toward a knowledge-led economy. The 12th Five-Year Plan (2011-15) outlines an industrial policy that is expected to lead innovation-driven growth, spearheaded by seven strategic industries and supported by increased R&D spending.

However, much remains to be done. Liberalizing the financial sector and capital markets would broaden companies' access to finance while lowering the cost. More sophisticated capital markets would allow for an expansion of private equity and venture capital, which would in turn increase financing for innovative companies.

Small and medium-sized enterprises (SMEs) play a key role in China, generating 65 percent of patented inventions and 80 percent of innovative products. But SMEs have insufficient access to credit, which limits their access to skills and technology. Encouraging banks to lend to SMEs, and providing policies and training to support entrepreneurship would unleash a dynamic force in the economy.

The global economic slowdown has highlighted the importance of accelerating China's transformation to a knowledge-led economy. Many of the necessary reforms are set out in the 12th Five-Year Plan. But they need to be implemented decisively.

【1】 【2】

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