Technological innovation

Technological innovation
Technological innovation is an important driving force for inclusive growth in China. Innovation depends largely on industrial firms’ technological capabilities through strengthening their internal R&D expenditures. China’s efforts to strengthen its innovation capacity are part of inclusive growth in which an implication is a focus on “indigenous innovation” to increase wages and living standards so that it can utilize science and technology to support inclusive growth. Governments can actively encourage innovation through providing seed grants, start-up money, and direct support payments that enhance the capability of a firm through the increase in knowledge that can be a basis for innovation (Peerasit, 2014). In general, China is the largest contributor to R&D expenditure in non-OECD countries (Martin, 2009).
Before turning to empirical evidence, this section describes the institutional environment in China that is relevant to our analysis—the innovation policies and trends. The institution school focuses on the institution environment that shapes innovation capabilities. The unique Chinese institution and processing trade systems also necessitate the study on what impact the institutional constraints have on innovation input and the resulting indigenous innovation performance of inclusive growth in the Chinese context. As a kind of institutional arrangement covering R&D-related activities, innovation policies play a critical role in remedying market failures and creating a fertile innovation environment. In transition economies such as China, the government plays an important role in developing innovation capabilities through science and technology (S&T) policies. Since 1978, China has implemented a package of institutional changes to adopt an open policy toward facilitating technological progress of domestic firms. The strategic National S&T Conferences (NSTC, 1978, 1985, 1995, 1999, 2006) have marked the different phases of the country’s S&T policy reform during the period of China’s economic transition (OECD, 2008; Jian, 2015). A major objective of China’s FDI-related policy is to “exchange markets for technology.” China also needs indigenous innovation to upgrade its economy while still integrating into vertical specialization and keeping markets open. Initiated in 2006, China’s national medium and long-term science and technology development plan (2006–20) signaled its emphasis on the indigenous innovation system.
Among different institutional factors, trade liberalization and innovation policies are particularly relevant to innovation activities due to the potential significant implications for international managers and Chinese policymakers. Tang and Hussler (2011) found that the Chinese national innovation system is composed of two complementary building blocks: an FDI-based innovation system and an indigenous innovation system. China has established Economic and Technological Development Zones (ETDZs), Export Processing Zones (EPZs), and High Tech Development Zones (HTDZs) to attract FDI. China’s processing trade growth has relied on its international openness and ability to attract inward FDI. Foreign-invested enterprises in these areas were mostly engaged in processing trade. The indigenous innovation system, however, does not seem as influential as the FDI-based one if both systems are shown to have a positive influence on China’s catching-up process. The factors that explain the accelerating trend of utilizing external sources of knowledge include declining transaction costs of acquiring external R&D inputs and shortening product cycle times (Narula, 2003; Fu et al., 2011). For China, with a huge market size very attractive to FDI and a powerful government controlling R&D resources, financial input from the government might signal its attitude of sustainable support to indigenous innovation (Georghiou et al., 2014). The setup of the institutional environment can be an enabler to the enhancement of indigenous innovation capabilities, depending on how the innovation input influences output through policies aimed at greatly improving intramural expenditures on R&D, through strong links with government expenditure for science and technology.