Independent Innovation and the Development of Chinese Enterprises
Author： Source： Date：2017-09-01
In 1978, he was admitted to Tsinghua University with a bachelor’s degree and a master’s degree in mechanical engineering. After graduation,he started his work inthe State Economic Commissionand then the General Office. In 1988, he was appointed as the Deputy Director of the Comprehensive Affairs Department of the State Planning Commission, Deputy Director of the Economic Research Center, and Deputy Director of the Comprehensive Research Department of the Macroeconomic Research Institute. In 1996, he was appointed as the Deputy Director of the State Administration of Economic Cooperation and Secretary of the Ministry of Enterprise Reform, Deputy Secretary-General of the State Economic and Trade Commission. In May 2003, he served as Deputy Director of the State-owned Assets Supervision and Administration Commission of the State Council and Deputy Secretary of the Party committee. In March 2013, he was appointed vice chairman of the Financial and Economic Affairs Committee of the National People’s Congress.
I am very pleased to participate in the first China Innovation Forum. Innovation has a very important significance on future China’s economic and social development. Not only the modernization of national governance needs innovation, the development of Chinese enterprises must also rely on innovation.
At present, the downward pressure of China’s economic growth rate is very large.Many companies feel very difficult because of the hard international economic environment, which leads to the shrinking of the external demand, as well as some changes in the stagein China’s economic development itself. The latter may have a greater impact on the enterprise than the former.
Since the reform and opening up, China has sustained a high economic growth in three decades. Such a large economy achievedan average annual growth about 10% in consecutive 30 years, which is a miracle in the history of world economic development. In addition to the most fundamental reason that china’s reform and opening up liberating its own productive forces, low factor costs and external technology sources are the main factors contributing to high growth. Low production costs are the traditional advantages of Chinese industry and enterprises.Low cost equips China’s industry and enterprises with a congenital competitive advantage, which makes our competitors feel difficult to imitate and difficult to compete. Therefore, a few years ago, Chinese enterprises, relying on low cost and low prices, demonstrated strong market competitiveness. Other countries have to use trade barriers to limit the development of Chinese enterprises so that the trade friction Chinese enterprises faced withreached a record high in recent years. At the same time, low manufacturing costs are also very attractive to foreign investment so it is reasonable to settle the production base in China, which makes China a world factory. Moreover,a large number of foreign investmentsarealso a booster of economic growth.
Foreign technology is another important factor in China’s high economic growth. A few years ago, the technical starting point inChina’s economic development was very low. Most of the technology required for the development of China’s industry was mature technology or even outdated technology abroad, because buying technology from abroad was relatively easy.China’s new industry development from the home appliance industry in 1980s to the current automotive industry is almost entirely based on foreign technology. In other words, we can easily obtain the outside technology, so that upgrading of China’s industry and enterprise product structure is relatively easy and fast.Thus we do not have to go through the process of independent research and development and do not have to bear the cost of independent research and development.
Through the introduction and the purchase of foreign ready-made technology, China’s industrial structure upgraded very fast in last period and the emerging industry developed fast, which directly supported China’s high economic growth. If we carefully analyze the process of China’s rapid growth in last three decades, we will find that we made full use of late-mover advantage and catch-up effect of low income countries, including the introduction of foreign technology to form their own industries, the use of low-cost advantage to develop domestic and international market, the expansion of industry and enterprises, thus the sustained and rapid growth of the national economy.
The development of this period is undoubtedly a successful case, but wemustsoberly see that during this period, the development of China’s economy has a clear stage characteristic. It is acceptable in a specific stage of development, but it is not sustainable. Its unsustainability is mainly due to the excessive reliance on low-cost and foreign technology.And with the increase in income levels and environmental standards, we can never have a low-cost advantage, and as a big country, it is impossible to rely on others’ technology to achieve our own modernization.
After 30 years of rapid development of the national economy, the internal and external factors supporting China’s economic growth are changing:
First, essential factor costs are rising rapidly. At present our country has generally crossed the Lewis inflection point and labor costs are in the process of rapid rise. At the same time, energy, agricultural products, land and environmental costs are also increasing in recent years, so the cost advantage of our country has been greatly weakened. The impact of the decline in cost advantage on China’s economic development is very direct. The competitiveness of all companies and industries relying on the advantages of cost are declining, and some industries have to transfer to the place with lower overall cost.
Second, the source of technology has problems.In last three decades, China’s industrial structure upgraded mainly because of the introduction of technology. There is a period of time when we had a wide gap with our foreign peers. But after three decades of high growth, the gap between Chinese and foreign industries has been greatly reduced.Technologythat Chinese enterprises need to buy now is often beingused by foreign companies now. Butif foreign companies sell their own technology to us, it will difficult for them to survive. So these years,many Chinese enterprises say the purchase of foreign technology is becoming more and more difficult. And the foreign peers are often very frank, “If we sell technology to you, how do we survive?” Foreign technology sources have problems, exerting great impact onChina’s future economic development.Moreover, the development of new industries will encounter difficulties if our country’s industrial structure wants to further upgrade. Now we are not lacking in good projects instead of domestic capital.And the deeper reason lies in no new technology.
Changes in these two aspects are substantial and irreversible, marking that China’s economic pattern has transferred from low-income countries’ catch-up patternto middle-income countries’ mature economic form. This stage change of economic development not only means that the rational range of China’s economic growth will gradually move down and the contradictions restricting the development of China’s economy and enterprises will also change.
In the next period, China’s overall economy and Chinese manufacturing enterprises will face major challenges in following two directions:
First, the core issue of the development is the further upgrading of industrial structure. Under the background of a gradual reduction in the source of external technology, can we achieve further industrial upgrading in the next few years through the independent technological innovation, so as to ensure the sustained and stable development of the national economy and enterprises, although in a relatively lower speed?
Second, the current challenge is mainly the manufacturing industry’s excessive capacity in the current industry level. Manufacturing industry is the main part of China’s economy.A few years ago, due to the cost advantage, the scale of China’s manufacturing industry has greatly expanded. However, with the increase in costs and the corresponding reduction in market share, overcapacity will become more serious. The excessive competition will cause a large area of business difficulties.
So the new stage of China’s economic development brings about prominent innovation problem in front of us. Regarding the national economy as a whole, innovation can promote the further upgrading of industrial structure, thus the national economy can get a new space for development, in order to achieve sustainable development. In other words, lackinginnovation, and unfavorable structural upgrading will likely lead to stagnation in the national economy, thus entering the so-called “middle income trap”. The industrial connotation of “middle income trap” means that the stagnation of industrial upgrading leads to the stagnation in economic growth. Of course, when the government faces a low economic growth rate, it would stimulate the economic growth once again, but the expansion of domestic demand is not a substitute for the upgrading of industrial structure. From the perspective of enterprises, innovation can help them enter the new market, so as to avoid vicious competition in the existing industrial leveland obtain new growth. Enterpriseswho do badly in innovation can only stay in the existing industrial level and will suffer a long time over-competition suffering.
Faced with these major challenges, the government and enterprises should make systematic responses. In the government level, there are mainly three aspects.
First, make full use of finance, leverage and infrastructure investment to stabilize economic development, prevent excessive deceleration and to achieve steady progress.
Second, utilize all resources and means to advance industrial upgrading, boost independent innovation, in particular, to optimize the system and the environment of independent innovation. For example, if intellectual property rights are not effectively protected, no one will invest in innovation.
Third, properly handle the overcapacity in manufacturing industryand encourage the extra production capacity to exit as soon as possible.
Many specific work is involved to solve these three major issues. In addition, even some macro-system and institutional construction should be researched and planned systematically.
In the enterprise level, there are mainly two aspects.
Firstly, in the short term, guard against risks and improve the ability of enterprises to resist market impact. The specific aspect includes:
1.Adjust business strategy, strengthen investment and M&A management timely. In the context of the overcapacity of the whole society, the production capacity and the scale of enterprises don’t matter much. Mergers and acquisitionsaimed to expand the size of investment and should be stopped. Besides, all investment, mergers and acquisitions should turn to technology upgrading, industrial upgrading and business model upgrading. At the same time, enterprises should control the asset-liability ratio, leaving a little room in finance.
2.Strengthen the cash management, consolidate the capital chain. We must Refine the operation of capital management, meet ends meet, leavespare money, strengthen theaccounts receivable management, reduce the debt and arrears. When the economy is not good, the risk of all types of enterprises will rise. At that time we need not onlyto pay attention to our own risks, but also concern about the risk of customers and suppliers.
3.Strictly perform the management of various activities to reduce costs. Some enterprises weredetermined to change the mechanism to grasp the cost of management in the difficult time, and achieved significant results. General speaking, when the enterprise experience difficult time, their workers’ tolerance is strongest.At that time, if enterprises are determined to promote the transformation of mechanisms and manage properly,they both can effectively enhance the ability against the impact of market, but also lay a solid foundation in institution and management for the long-term development of enterprises.
Secondly, at the primary stage, re-construct the competitiveness base of Chinese enterprises through the innovationin the technology, product and business model and enter into the new market through the upgrade.
1.Facilitate the independent innovation of enterprises with full efforts. At present, wemaystill have the opportunity to follow the foreign technology, but we must be aware that this road is not long. From now on, we must make great determination to strengthen the independent research and development system and make up for the innovation weakness, so that they will be strong in technology, especially for large enterprises. Specific efforts include determination to increase R&D investment, perfection of the R&D management system and improvement improve the efficiency of R&D funding; reform of institutional mechanisms, especially the distribution system, increase of the enthusiasm and creativity of R&D personnel. At present, the price of China’s manufacturing workers is not the lowest, but China has the world’s most cost-effective R&D personnel.It is crucial to organize and take full advantage of them.
2.Strive to enhance the business model. Due to the rapid development of Internet technology, the combination of traditional business and Internet technology has spawned a series of new business models, which is a great opportunity for the transformation of business model. For manufacturing companies, especially host manufacturers, if they can transit from product manufacturers to project contractors and provide both products and service,then business model can be changed and profit margins will be greatly enhanced, In this regard, many companies have a successful case.
3. Strengthen the brand building.
In short, China’s economic development is entering a period of great turning point.After entering thedevelopment stage of middle-income countries, the national economic development and enterprise development environment, conditions and contradictions and problems we are faced with, will be greatly different with that of low-income stage. Service industry will serve as a new growth point of China’s economic growth, and innovation will bethe core issues ofChina’s economic development in next period and Chinese enterprise development. Our business must seriously study and predominate over these changes, adapt to these changes with appropriate response and their own efforts to seek long-term sustainable development.
Thank you all!
Ning Shao is the Vice Chairman of the Financial and Economic Affairs Committee of the National People’s Congress.
Speech delivered at the 1st Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
I am very pleased to participate in the first China Innovation Forum. Innovation has a very important significance on future China’s economic and social development. Not only the modernization of national governance needs innovation, the development of Chinese enterprises must also rely on innovation.
At present, the downward pressure of China’s economic growth rate is very large.Many companies feel very difficult because of the hard international economic environment, which leads to the shrinking of the external demand, as well as some changes in the stagein China’s economic development itself. The latter may have a greater impact on the enterprise than the former.
Since the reform and opening up, China has sustained a high economic growth in three decades. Such a large economy achievedan average annual growth about 10% in consecutive 30 years, which is a miracle in the history of world economic development. In addition to the most fundamental reason that china’s reform and opening up liberating its own productive forces, low factor costs and external technology sources are the main factors contributing to high growth. Low production costs are the traditional advantages of Chinese industry and enterprises.Low cost equips China’s industry and enterprises with a congenital competitive advantage, which makes our competitors feel difficult to imitate and difficult to compete. Therefore, a few years ago, Chinese enterprises, relying on low cost and low prices, demonstrated strong market competitiveness. Other countries have to use trade barriers to limit the development of Chinese enterprises so that the trade friction Chinese enterprises faced withreached a record high in recent years. At the same time, low manufacturing costs are also very attractive to foreign investment so it is reasonable to settle the production base in China, which makes China a world factory. Moreover,a large number of foreign investmentsarealso a booster of economic growth.
Foreign technology is another important factor in China’s high economic growth. A few years ago, the technical starting point inChina’s economic development was very low. Most of the technology required for the development of China’s industry was mature technology or even outdated technology abroad, because buying technology from abroad was relatively easy.China’s new industry development from the home appliance industry in 1980s to the current automotive industry is almost entirely based on foreign technology. In other words, we can easily obtain the outside technology, so that upgrading of China’s industry and enterprise product structure is relatively easy and fast.Thus we do not have to go through the process of independent research and development and do not have to bear the cost of independent research and development.
Through the introduction and the purchase of foreign ready-made technology, China’s industrial structure upgraded very fast in last period and the emerging industry developed fast, which directly supported China’s high economic growth. If we carefully analyze the process of China’s rapid growth in last three decades, we will find that we made full use of late-mover advantage and catch-up effect of low income countries, including the introduction of foreign technology to form their own industries, the use of low-cost advantage to develop domestic and international market, the expansion of industry and enterprises, thus the sustained and rapid growth of the national economy.
The development of this period is undoubtedly a successful case, but wemustsoberly see that during this period, the development of China’s economy has a clear stage characteristic. It is acceptable in a specific stage of development, but it is not sustainable. Its unsustainability is mainly due to the excessive reliance on low-cost and foreign technology.And with the increase in income levels and environmental standards, we can never have a low-cost advantage, and as a big country, it is impossible to rely on others’ technology to achieve our own modernization.
After 30 years of rapid development of the national economy, the internal and external factors supporting China’s economic growth are changing:
First, essential factor costs are rising rapidly. At present our country has generally crossed the Lewis inflection point and labor costs are in the process of rapid rise. At the same time, energy, agricultural products, land and environmental costs are also increasing in recent years, so the cost advantage of our country has been greatly weakened. The impact of the decline in cost advantage on China’s economic development is very direct. The competitiveness of all companies and industries relying on the advantages of cost are declining, and some industries have to transfer to the place with lower overall cost.
Second, the source of technology has problems.In last three decades, China’s industrial structure upgraded mainly because of the introduction of technology. There is a period of time when we had a wide gap with our foreign peers. But after three decades of high growth, the gap between Chinese and foreign industries has been greatly reduced.Technologythat Chinese enterprises need to buy now is often beingused by foreign companies now. Butif foreign companies sell their own technology to us, it will difficult for them to survive. So these years,many Chinese enterprises say the purchase of foreign technology is becoming more and more difficult. And the foreign peers are often very frank, “If we sell technology to you, how do we survive?” Foreign technology sources have problems, exerting great impact onChina’s future economic development.Moreover, the development of new industries will encounter difficulties if our country’s industrial structure wants to further upgrade. Now we are not lacking in good projects instead of domestic capital.And the deeper reason lies in no new technology.
Changes in these two aspects are substantial and irreversible, marking that China’s economic pattern has transferred from low-income countries’ catch-up patternto middle-income countries’ mature economic form. This stage change of economic development not only means that the rational range of China’s economic growth will gradually move down and the contradictions restricting the development of China’s economy and enterprises will also change.
In the next period, China’s overall economy and Chinese manufacturing enterprises will face major challenges in following two directions:
First, the core issue of the development is the further upgrading of industrial structure. Under the background of a gradual reduction in the source of external technology, can we achieve further industrial upgrading in the next few years through the independent technological innovation, so as to ensure the sustained and stable development of the national economy and enterprises, although in a relatively lower speed?
Second, the current challenge is mainly the manufacturing industry’s excessive capacity in the current industry level. Manufacturing industry is the main part of China’s economy.A few years ago, due to the cost advantage, the scale of China’s manufacturing industry has greatly expanded. However, with the increase in costs and the corresponding reduction in market share, overcapacity will become more serious. The excessive competition will cause a large area of business difficulties.
So the new stage of China’s economic development brings about prominent innovation problem in front of us. Regarding the national economy as a whole, innovation can promote the further upgrading of industrial structure, thus the national economy can get a new space for development, in order to achieve sustainable development. In other words, lackinginnovation, and unfavorable structural upgrading will likely lead to stagnation in the national economy, thus entering the so-called “middle income trap”. The industrial connotation of “middle income trap” means that the stagnation of industrial upgrading leads to the stagnation in economic growth. Of course, when the government faces a low economic growth rate, it would stimulate the economic growth once again, but the expansion of domestic demand is not a substitute for the upgrading of industrial structure. From the perspective of enterprises, innovation can help them enter the new market, so as to avoid vicious competition in the existing industrial leveland obtain new growth. Enterpriseswho do badly in innovation can only stay in the existing industrial level and will suffer a long time over-competition suffering.
Faced with these major challenges, the government and enterprises should make systematic responses. In the government level, there are mainly three aspects.
First, make full use of finance, leverage and infrastructure investment to stabilize economic development, prevent excessive deceleration and to achieve steady progress.
Second, utilize all resources and means to advance industrial upgrading, boost independent innovation, in particular, to optimize the system and the environment of independent innovation. For example, if intellectual property rights are not effectively protected, no one will invest in innovation.
Third, properly handle the overcapacity in manufacturing industryand encourage the extra production capacity to exit as soon as possible.
Many specific work is involved to solve these three major issues. In addition, even some macro-system and institutional construction should be researched and planned systematically.
In the enterprise level, there are mainly two aspects.
Firstly, in the short term, guard against risks and improve the ability of enterprises to resist market impact. The specific aspect includes:
1.Adjust business strategy, strengthen investment and M&A management timely. In the context of the overcapacity of the whole society, the production capacity and the scale of enterprises don’t matter much. Mergers and acquisitionsaimed to expand the size of investment and should be stopped. Besides, all investment, mergers and acquisitions should turn to technology upgrading, industrial upgrading and business model upgrading. At the same time, enterprises should control the asset-liability ratio, leaving a little room in finance.
2.Strengthen the cash management, consolidate the capital chain. We must Refine the operation of capital management, meet ends meet, leavespare money, strengthen theaccounts receivable management, reduce the debt and arrears. When the economy is not good, the risk of all types of enterprises will rise. At that time we need not onlyto pay attention to our own risks, but also concern about the risk of customers and suppliers.
3.Strictly perform the management of various activities to reduce costs. Some enterprises weredetermined to change the mechanism to grasp the cost of management in the difficult time, and achieved significant results. General speaking, when the enterprise experience difficult time, their workers’ tolerance is strongest.At that time, if enterprises are determined to promote the transformation of mechanisms and manage properly,they both can effectively enhance the ability against the impact of market, but also lay a solid foundation in institution and management for the long-term development of enterprises.
Secondly, at the primary stage, re-construct the competitiveness base of Chinese enterprises through the innovationin the technology, product and business model and enter into the new market through the upgrade.
1.Facilitate the independent innovation of enterprises with full efforts. At present, wemaystill have the opportunity to follow the foreign technology, but we must be aware that this road is not long. From now on, we must make great determination to strengthen the independent research and development system and make up for the innovation weakness, so that they will be strong in technology, especially for large enterprises. Specific efforts include determination to increase R&D investment, perfection of the R&D management system and improvement improve the efficiency of R&D funding; reform of institutional mechanisms, especially the distribution system, increase of the enthusiasm and creativity of R&D personnel. At present, the price of China’s manufacturing workers is not the lowest, but China has the world’s most cost-effective R&D personnel.It is crucial to organize and take full advantage of them.
2.Strive to enhance the business model. Due to the rapid development of Internet technology, the combination of traditional business and Internet technology has spawned a series of new business models, which is a great opportunity for the transformation of business model. For manufacturing companies, especially host manufacturers, if they can transit from product manufacturers to project contractors and provide both products and service,then business model can be changed and profit margins will be greatly enhanced, In this regard, many companies have a successful case.
3. Strengthen the brand building.
In short, China’s economic development is entering a period of great turning point.After entering thedevelopment stage of middle-income countries, the national economic development and enterprise development environment, conditions and contradictions and problems we are faced with, will be greatly different with that of low-income stage. Service industry will serve as a new growth point of China’s economic growth, and innovation will bethe core issues ofChina’s economic development in next period and Chinese enterprise development. Our business must seriously study and predominate over these changes, adapt to these changes with appropriate response and their own efforts to seek long-term sustainable development.
Thank you all!
Ning Shao is the Vice Chairman of the Financial and Economic Affairs Committee of the National People’s Congress.
Speech delivered at the 1st Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
