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Technological innovation policy in China: the lessons, and the necessary changes ahead

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China has now moved considerably away from being an imitative latecomer to technology toward to being an innovation-driven economy. The key lessons from China’s experience are that (1) there is synergy between External Knowledge and Indigenous Innovation because the process of learning the tacit knowledge required in using the foreign technology fully is made easier by strong in-house R&D capability; (2) the open innovation approach is very important because it allows multiple driving forces—the state, the private sector and MNEs—with each playing a changing role over time; and (3) the commencement of foreign technology transfer and investment in indigenous innovation should go hand in hand. Without the numerous well-funded programs to build up the innovation infrastructure to increase the absorptive capacity of Chinese firms, foreign technology would have remained static technology embedded in imported machines and would not have strengthened indigenous technological capability. However, China could still end up in the middle-income trap, unless it undertakes a series of critical reforms in its innovation regime in order to keep moving up growth trajectories that are increasingly skill-intensive and technology-intensive.

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Fig. 1
Fig. 2

Source China Statistic Yearbook, National Bureau Statistics of China (2013).

Fig. 3

Figure source “China’s Path to Innovation” by Fu (2015, Chapter 2), Cambridge University Press. Data source China Statistic Yearbook, National Bureau Statistics of China (2013).

Fig. 4

Figure source “China’s Path to Innovation” by Fu (2015, Chapter 2), Cambridge University Press. Data source China Statistic Yearbook, National Bureau Statistics of China (2013).

Fig. 5

Figure source “China’s Path to Innovation” by Fu (2015, Chapter 2), Cambridge University Press. Data source China Statistic Yearbook, National Bureau Statistics of China (2013).

Fig. 6

Source China Statistic Yearbook, National Bureau Statistics of China (2013).

Fig. 7
Fig. 8

Figure source “China’s Path to Innovation” by Fu (2015, Chapter 2), Cambridge University Press. Data source China Statistic Yearbook, National Bureau Statistics of China (2013).

Fig. 9

Figure source “China’s Path to Innovation” by Fu (2015, Chapter 2), Cambridge University Press. Data source China Statistic Yearbook, National Bureau Statistics of China (2013).


  1. Recent useful reviews of China’s S&T programs are Fu (2015), OECD (2008) and Varum and Huang (2007).

  2. Source: Ministry of Science and Technology of the People’s Republic of China:

  3. Figures are calculated by the author from the data collected from the OECD Structural Analysis (STAN) database published by the OECD, and from the World Development Indicators published by the World Bank.

  4. This external route is naturally limited by the country’s ability to fund the investment.

  5. Trott and Hartmann (2009) made the point that Chesbrough might be tilting at a straw man by presenting a rich trove of earlier literature that had advocated the use of both sources of innovation. For Chesbrough (2006), “while Open Innovation draws extensively from an earlier body of academic ownership, it offers a number of distinctive perspectives and interpretations of that prior scholarship. In our judgment, these are sufficient to warrant consideration as a new paradigm for understanding innovation.” Chesbrough (2006) presented eight areas of differentiation.

  6. The literature has also identified other factors that determine the absorptive capacity of a country. One important factor is the nature of the country’s trade regime. Balassa (1971, 1982) documents that the growth performance of “outward-oriented” developing countries is superior to that of the “inward-oriented” developing countries. Other scholars have used different terms for this same dichotomy in trade regime, e.g. the World Bank (1985) calls the “outward-oriented” trade regime a “neutral-incentive” trade regime. Woo (1990, 2004) shows that the incentive effort in outward-oriented industrialization is to promote, in a non-selective manner, the production of tradable goods over the production of non-tradable goods. The empirical work of Rodrik (2008) supports the hypothesis that developing countries that biases production toward tradables have better growth outcomes.

  7. For a broader discussion of other factors (beside failure in innovation) that could cause China to be caught in the middle-income trap, see Woo (2012).

  8. In a study of 12 British enterprises operating in East Asia, Fu et al. (2006) found that these firms chose to use technology that was superior to local level rather than world class technology in their subsidiary or joint ventures in China. One key reason for this was their concern about the poor intellectual property rights protection in China.


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Fu, X., Woo, W.T. & Hou, J. Technological innovation policy in China: the lessons, and the necessary changes ahead. Econ Change Restruct 49, 139–157 (2016).

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