Diffusing technology is important too

Mainland China needs to broaden the application of existing technologies besides seeking new innovations

16 September 2021 Qu Hongbin, Chief China Economist

Innovation is not just about discovering and developing new technologies: existing technologies need to be diffused across economies. Mainland China tops the global rankings for patent filings and invests substantially in research, but it still lags in terms of labour productivity compared with developed economies.

Despite gains in recent decades, mainland China’s labour productivity remains less than a third the level of developed economies for the industrial sector, and less than a fifth for the services sector. This points to a large technology gap.

However, we estimate that if the country could narrow its labour-productivity gap to half the average of high-income economies, its GDP would more than double.

Diffusing existing technologies is low-hanging fruit in lifting productivity. And it is not limited to cutting-edge technology: lower-level manufacturing and services like management processes can benefit.

And the problem is not just at the overall level; there are productivity gaps within industries and between companies in mainland China. Large firms tend to be more productive than the industry average in ICT, financial services, chemicals and industrial operations, though below average in fields such as power and utilities, construction, mining, logistics and real estate – which tend to have a large proportion of state-owned enterprises. Listed firms are also more productive.

Beijing has made innovation a policy priority and we expect it to step up efforts to foster the diffusion of technology. Internationally, these could include:

  • Further opening up to other economies by lowering of trade barriers to help greater cross-border technology adoption.

  • Reducing the ‘negative list’ that limits foreign access to investment and operating in China. The list was introduced in 2017 with more than 60 areas, but 33 remain, with some restrictions in science, technology, education and health.

  • Supporting imports of high-tech machinery and equipment by lowering import tariffs. This would help domestic firms to upgrade their technology.

  • Closing international trade and investment deals should help technology to diffuse through these channels and counter some of the recent trends of de-globalisation and increased geopolitical tensions. Indeed, reducing those tensions would be beneficial for overall trade and business sentiment.

Meanwhile, domestically, Beijing can:

  • Invest in ICT infrastructure including 5G rollout and broadband expansion that will aid digitalisation.

  • Support lifelong-learning to improve workers’ skillsets to make better use of more technologies.

  • Support industry associations and platforms to spread ideas and best practices. Universities should also be encouraged to share their research with companies through increased accessibility to public research.

  • Tax incentives can also boost technology adoption, particularly for smaller firms. Tax write-offs for R&D investment could incentivise technology investment while value-added tax refunds could stimulate imports of machinery and equipment for technology upgrading.

  • Direct grants and subsidies could also help the smaller and lagging players while increased government guarantees for smaller firms, plus lower guarantee rates, could make credit easier and cheaper. This will support smaller firms’ development.

  • Levelling the playing field would also give better access to credit and resources to smaller firms, which struggle for access to credit, resources and procurement deals. Targeted preferential loans for innovation can also be implemented.

First published 18th August 2021.

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