1. Wegrzyn 1
Matthew Wegrzyn
Professor Richard Tudway
Global Political Economies
22 February 2015
Chinese Innovation and Entrepreneurship: An Ebb and Flow
What factors have restricted the development of in entrepreneurship and innovation in
China? What reforms have been introduced to bring about improvements in these
areas? What are the preconditions and prospects for lasting change?
To fully understand China’s problematic relationship with innovation and
entrepreneurship, the timeline begins on a podium overlooking Tiananmen Square on October
1st, 1949. There, Mao Zedong, the leader of the Communist Party, proclaimed the creation of the
People’s Republic of China after 13 years of civil war against Chiang Kai-shek’s Nationalist
party. Soon after, the Chinese economy became entirely socialized, embodying Soviet
procedures and ideals. Under this new government, “agriculture was collectivized, industry was
nationalized, and the private sector was eliminated by 1956.”1 However, China soon became
turbulent economically and politically. The unrest prompted Deng Xioaping, a high ranking
government official, to formulate the Four Modernizations in 1978, which set the path for the
modern Chinese State. It allowed regional governments to regulate agriculture, modernized
industrial necessities like coal and steel and modified the Chinese education and national defense
systems.2 These motions helped China develop into an industrial country with a newly vested
role in the international community. After the Four Modernizations, the earliest forms of
1 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of
East Asian Studies 1 (2001): 27-33. Web.
2 Ebrey, Patricia Buckley. "Four Modernizations Era." Four Modernizations Era. Freeman Foundation,n.d. Web. 13
Feb. 2016.
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entrepreneurship, beyond black market operations, emerged from township and village
enterprises (TVEs). These firms were “collectively owned under local governments” but were
intended to create jobs for newly unemployed farmers after the decentralization of agriculture.3
As a result of less regulation, TVEs were able to operate as businesses by creating supply chains,
aiming for profits, and altering production as the market dictates. The creativity and flexibility of
these firms were a stark contrast to the derivative nature of state owned enterprises (SOEs).
SOESs controlled entire industries, especially within science and technology, which were two
main areas of growth and creative destruction. China has developed into an international
superpower, with enough economic, political, and defensive clout to rival the United States.
Even still, China is severely lacking in the areas of entrepreneurship and innovation. This
phenomenon is commonly recognized as a key weakness in the Chinese state, especially as the
country attempts to shift from a manufacturing based economy to one rooted in service and
innovative industries. The Chinese government has recognized this flaw, thus inserting a variety
of incentives and small policy shifts in the late 80’s to the mid-90’s. In 1987, China’s Congress
repealed a law that stated private businesses could have only 7 employees. Through this, more
banks were willing to give loans to entrepreneurs and functioning businesses were able to grow.
The number of private enterprises increased by 93% in 1987 alone.4 Venture capital (VC) was
introduced as a concept soon after, becoming an active enterprise in 1996. However, VC did not
become a viable sector until 2006 after favorable policy shifts and the entry of foreign venture
capital firms boosted the market. One of the most important developments, not only for Chinese
enterprises but for the nation as a whole, was a law passed in 2004 that gave Chinese citizens the
3 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of
East Asian Studies 1 (2001): 27-33. Web.
4 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of
East Asian Studies 1 (2001): 27-33. Web.
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right to private property, which continued to open up the door for entrepreneurs to start their own
businesses.5 While these initiatives were instituted to help China shift from its manufacturing
centric economy, it was not until 2012 when President Hu Jintao indicated “in a report… that
[China] would transition into an ‘innovation-driven economy’” that set the vision for how the
nation would hope to develop.6 In this paper, I will examine why the Chinese economy has
lagged in respect to innovation and entrepreneurship up until now and how China has combatted
these tendencies to move toward an ‘innovation-driven economy.’
China has been void of entrepreneurship and innovation for the majority of its history.
Once the empire that created gun powder, the compass and papermaking, China has deteriorated
its creative capabilities for the benefit of cheap manufacturing and SOEs. There are a myriad of
factors that have contributed to the fall and suppression of entrepreneurship and innovation.
However, it is important to define those two buzzwords. Entrepreneurship is a more precise idea
than innovation. It is one’s ability to start, develop, and grow one’s own business. Innovation,
however, is a harder idea to pin down. When referencing innovation in this context, it is “the
introduction or adoption of new products, new production processes, new ways of organization
and management, new methods of marketing and, new business models.”7 This definition
permits a wide perspective on the Chinese economy across multiple facets of enterprise. There
are many ways, however, to measure entrepreneurship and innovation with precise figures and
markers. The central factors that are responsible for China’s lack of innovation and
5 Sun, Y,. Du, D., Determinants of industrial innovation in Chine; Evidence from its recent economic census.
Technovation (2010), doi:10.1016/j.technovation.2010.05.003
6 Fan, Peilei. "Innovation in China." Journal of Economic Surveys 28.4 (2014): 725-39. Web. 13 Feb. 2016.
7 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China &
World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.
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entrepreneurship lie in China’s business resources and the government’s relationships with small
and medium enterprises (SMEs).
The first core factor that has restricted Chinese innovation and entrepreneurs lies in the
poor enterprise resources for SMEs. Start-ups and small businesses have long been a sliver of
China’s vast economy. Dominated by state owned enterprises (SOEs), 45% of China’s GDP in
2011 was through SOE operations.8 “SMEs have contributed substantially to commercial
exploitation of new product and rapid diffusion of new technology,” throughout the world. They
drive industrial evolution, creative destruction, and promote firm flexibility. All of these
characteristics drive innovation and are the opposite attributes of SOEs.9 However, the business
environment in China has long been detrimental to entrepreneurs and small businesses. Three
main areas that have restricted China’s growth in innovative fields are skilled labor markets,
availability to financing, and Chinese culture itself. China has always been afflicted by a ‘brain
drain,’ especially with university students. In 2012, 24 million native students enrolled in
Chinese universities, a figure that has only recently overtaken the United States, which stands at
20 million. In 1998, China had a student enrollment of 3.4 million compared to America’s 14.5
million. Despite exceptional growth in Chinese student enrollment since 1998, over 200,000
students enroll in United States universities in any given year, many staying in America with
their newly acquired skills.10 From 1978 to 2013, over 1 million Chinese students went abroad
for study and research.11 Many skilled students and workers have left China to remain in more
8 USA. Congress.US China Economic and Security Review Commission.USCC.gov. By Andrew Szamosszegi and
Cole Kyle. N.p., 26 Oct. 2011. Web. 15 Feb. 2016.
9 Zhu, Yanmei, Xinhua Wittmann, and Mike W. Peng. "Institution-based Barriers to Innovation in SMEs in
China." Springer.Sceience+Business Media, 13 Aug. 2011. Web. 15 Feb. 2016
10 Abrami, Regina M., William C. Kirby, and F. Warren McFarlan. "Why China Can't Innovate." Harvard Business
Review. N.p., 01 Mar. 2014. Web. 15 Feb. 2016.
11 Fan, Peilei. "Innovation in China." Journal of Economic Surveys 28.4 (2014): 725-39. Web. 13 Feb. 2016
5. Wegrzyn 5
innovation friendly environments such as the United States and Germany. Those with the skills
who do stay in China have minimal experience and are not loyal to their employers because their
skills are scarce, constantly switching companies for the highest salary, commonly offered by
SOEs.12 Another deterrent to the entrepreneurism in China has been the poor financing options
open to SMEs. Researchers interviewed 82 managers and CEOs of small business throughout
China, across multiple industries. Lack of access to financing was labeled as the second largest
detriment to innovation, only behind unfair competition with SOEs and large monopolistic firms.
Venture capital is only a decade old in practice and banks do not wish to put excessive risks into
SMEs. The study also showed that “less than 10% of private enterprises can obtain bank loans
and less than 1% are able to obtain other external financing from capital market.13” As a result,
many SMEs are self-financed, which makes entrepreneurs reluctant to invest in R&D and other
long term projects, when profits and strong cash flow need to be realized in the short term.
Without skilled labor and financing, entrepreneurs are unable to accumulate the necessary
resources to fully develop and grow his or her business. This in turn, has led to stagnation in
entrepreneurship and innovation.
China’s culture certainly has had an influence on innovation and entrepreneurship. While
it may not necessarily be as direct and measured as lack of enterprise resources, the impact can
certainly be observed. Confucian principles have permeated Chinese society for generations,
spreading values such as persistence, diligence, thrift, and harmony. Chinese entrepreneurs are in
constant flux because traits like openness to change and flexibility contradict Confucian edicts,
12 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of
East Asian Studies 1 (2001): 27-33. Web.
13 Zhu, Yanmei, Xinhua Wittmann, and Mike W. Peng. "Institution-based Barriers to Innovation in SMEs in
China." Springer.Sceience+Business Media, 13 Aug. 2011. Web. 15 Feb. 2016
6. Wegrzyn 6
noted in a study comparing the characteristics of Chinese entrepreneurs to SOE mangers.14 In
this same study, it found that Chinese small business owners had two traits that surpassed all
other entrepreneurs throughout the world: political nimbleness and interpersonal harmony. These
are directly connected to the Confucian ideals and the political climate they have grown in,
where entrepreneurs need to navigate legislation, red tape bureaucracy, and high ranking officials
in government. Another cultural hindrance is the Chinese education system, which has been
characterized as a platform for respect and knowledge absorption rather than critical thinking or
challenging philosophies. This has been observed by some researchers to decrease creativity in
younger generations.15 One interesting detriment that can be connected to China’s culture is the
performance of domestic venture capital firms (DVCF) compared to foreign venture capital firms
(FVCF). DVCFs and the firms they invest in tend not to increase R&D expenditure while
FVCF’s clients have been known to greatly increase the internal investment.16 This is a
manifestation of Confucian ideals in Chinese business. DVCFs do not want to disrupt harmony
and maintain levels of investment, minimizing risk. FVCFs from different cultures, like the US
and the EU, tend to increase R&D expenditure, a sort of gamble with the intention of disrupting
the status quo through innovation. While culture is not a central factor, it is a certainly key part
of the quandary that restricts Chinese entrepreneurship and innovation.
The second core factor that has been restricting small businesses has been the Chinese
government. The People’s Republic of China has had a complicated relationship with small
business owners since the creation of the communist state. The government imposed a number of
14 Lao, Debbie, and Philip Sohmen. "The Development of Modern Entrepreneurship in China." Stanford Journal of
East Asian Studies 1 (2001): 27-33. Web.
15 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China &
World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.
16 Guo, D., and K. Jiang. "Venture Capital Investment and The Performance of Entrepreneurial Firms: Evidence
from China." Journal for Corporate Finance 22 (2103): 375-95. Science Direct. Web.
7. Wegrzyn 7
regulations and policies that contracted SME creation and growth. Consequently, up until the late
1990’s, there were few effective intellectual property and fair competition laws. Even after
legislation was enacted, many firms were at the mercy of multilevel bureaucracy where the local,
provincial, and national government systems all had different interpretations and agendas in
regards to the law. More than 55% of SMEs indicated that the government created barriers to
innovate and grow through unfair competition, lack of regulations, and lack of SME support.17
The Chinese state commonly gives preferential treatment in terms of subsidized loans and legal
configurations to SOEs and multinational enterprises (MNEs) that are Fortune 500 companies.
Another important aspect of how the government has hindered innovation and entrepreneurial
thought is through the lack of general regulations, especially in terms of intellectual property
rights (IPR). In order to join the WTO, China had to agree to a minimum level of IPR. These
regulations were loosely enforced, which harmed certain industries tremendously, most notably
in science areas. This area is where innovation across the globe has been most evident.
Comparing China’s share of global revenue in biotechnology, semiconductor design, specialty
chemicals, or pharmaceuticals sectors to their share of global GDP in 2013 (12%), China has less
than 3% of the world’s revenue in these areas.18 Similarly, the aviation, consumer electronics,
and automotive, industries are all below China’s world GDP market share. These distinct
laggards are directly connected to loose IPR laws. Weak government regulations hurt all sizes of
enterprise from SOEs down to small tech startups. However, due to preferential treatment from
the government, SOEs are more likely to have legal action upheld in terms of IPR when
compared to SMEs. Intellectual property protection and innovation are strongly correlated in
17 Zhu, Yanmei, Xinhua Wittmann, and Mike W. Peng. "Institution-based Barriers to Innovation in SMEs in
China." Springer.Sceience+Business Media, 13 Aug. 2011. Web. 15 Feb. 2016
18 Woetzl, Jonathan."Gauging the Strength of Chinese Innovation." McKinsey & Company.N.p., Oct. 2015. Web.
18 Feb. 2016.
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private firms because innovation through R&D expenditures and patents are much more sensitive
to weak IPR than SOEs. For example, private firms in provinces within China that have
relatively high IPR have 40% to 100% more R&D stocks/assets, meaning they were able to
develop more innovations, more efficiently.19 Not only are SMEs developing more than SOEs
through R&D, but the quality of the patents, nationally and internationally, are better. Private
firms’ patents have received 3.19 citations per patents from 1990 to 2014 while SOEs have only
1.36 citations in the same period. 20 These developments are despite weak IPR laws and
enforcements that have hindered all levels of enterprise, but specifically SMEs. However,
Chinese patents as a whole are only recently gaining strength on an international scale. Triadic
patents, intellectual property that are filed in the EU, US, and Japan, are indicators of innovative
strength throughout the world. While China was granted 172,113 patents, the highest amongst
developing nations, China’s total number of triadic patents is less than one tenth of the US or
Japan.21 This is a prime example of how poor IPR laws can hurt all levels of enterprise, on a
national and global scale.
Another piece of how the Chinese government has hurt SMEs is through the strict
oversight of small business operations. The Communist party, despite modernizations and policy
alterations, still has a heavy hand in the way business operate. A prime example of this is the
government’s everyday interactions with SMEs where “the Communist Party requires a
representative to be present in every company with more than 50 employees. Every firm with
more than 100 employees must have a party cell, whose leader reports directly to the party in the
19 Feng, Lily, Josh Lerner, and Chaopeng Lu. "Intellectual Property Rights Protection, Ownership, and Innovation."
Iowa State University, 9 June 2015. Web. 18 Feb. 2016.
20 Feng, Lily, Josh Lerner, and Chaopeng Lu. "Intellectual Property Rights Protection, Ownership, and Innovation."
Iowa State University, 9 June 2015. Web. 18 Feb. 2016.
21 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China &
World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016
9. Wegrzyn 9
municipality or province.”22 This organizational structure is detrimental to the proprietary nature
of a firm’s strategic direction, operations, and competitive advantage, thus constraining normal
competitive behavior. All of these enterprise drivers are hindered, creating an unsatisfactory
environment not only for SMEs, but for any firm that is not directly linked with the government,
like an SOE. Incentives are also an important aspect of innovation development, a system China
has yet to completely adopt. “The biggest gap between China and the most innovative countries
is… the lack of effective incentives to stimulate efforts and creativity for novel innovation and to
guide efficient allocation of resources.”23 Some incentives that create a sound enterprise include
competition, security on a macro and micro level, advancement of IPR, and complete financial
accessibility. Not coincidentally, these are the exact concessions that SMEs managers and CEOs
cited as barriers for innovation and entrepreneurship. The Chinese government has played a
significant role in neutralizing and compromising innovation and entrepreneurship.
Ironically, although Chinese innovation and entrepreneurship has been restricted, there
have been several government initiatives to develop the country in both areas since the 1990’s.
Leadership in China has been examining the economy closely, focusing on vulnerabilities to
correct. Two traditional sources of growth for the economy has been its labor force and return on
capital. However, both areas are trending downward. The working age population will decrease
by 16% by 2050 and it takes approximately 60% more capital to correspond to a 1% growth in
GDP in 2010 compared to 1990. Stemming from this, to maintain a growth rate of 6%-7%, it has
been estimated that innovation, measured as multifactor productivity (% of GDP left after
22 Abrami, Regina M., William C. Kirby, and F. Warren McFarlan. "Why China Can't Innovate." Harvard Business
Review. N.p., 01 Mar. 2014. Web. 15 Feb. 2016.
23 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China &
World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.
10. Wegrzyn 10
subtracting three main factors of production), must make up 35% to 50% of GDP growth.24
These figures have been in the government’s perspective for decades. With the structure of
China’s changing economy, “China’s cost competitive advantage has gradually lost, and the cost
strategic development of enterprise is facing severe challenges.”25 China’s days of being the
cheap manufacturer of goods has grown to a halt because of the declining labor, effective capital,
and increased competition from other developing countries. While there have been many
restrictions and detriments to innovation and entrepreneurship, China seeks to become a world
leader in developing new products and processes throughout businesses. China is performing this
shift through government policy and institutions such as universities and R&D centers.
As analyzed earlier, the Chinese government has a multitude of restrictions to innovation
and entrepreneurship at all levels of governance. Yet, since the start of the new millennium, it
has sought to alter its role in the world economy. China focused on manufacturing for the
majority of its modern history yet since “the middle 1990’s, China has tried to build an industry-
centered national innovation system and has dramatically increased its investment in science and
technology.”26 Through internal investment, China has begun focusing on what new technologies
and scientific contributions it can develop through its own enterprises, government entities, and
capital, thus creating its own national innovation system (NIS). It has done so through
investment and policy alterations. One of the most important initiatives China has put in place is
its R&D expenditure, as it is one of the best ways to improve the innovation capacity of a nation.
From 1996 to 2009, the Chinese government has increased its R&D investment as a percent of
24 Woetzl, Jonathan."Gauging the Strength of Chinese Innovation." McKinsey & Company.N.p., Oct. 2015. Web.
18 Feb. 2016.
25 Hao, Xian Feng, Yun Sun, Wen Yan Tian, and Zhe Yu Pan. "Analysis on Innovative Incentive Policy in China."
Atlantis Press,2015. Web. 21 Feb. 2016.
26 Sun, Y,. Du, D., Determinants of industrial innovation in Chine; Evidence from its recent economic census.
Technovation (2010), doi:10.1016/j.technovation.2010.05.003
11. Wegrzyn 11
GDP from .6% to 1.7%.27 Growing at an annualized rate of 13.3%, China has put itself on pace
to raise R&D percentage to 2.5% to be on par with other OECD nations such as the US and
Japan by 2020.28 29 In 2014, China’s R&D expenditure was 2.01 %.30 Furthermore, the Chinese
government has recognized the importance of strong intellectual property laws. As a result of
better enforcement, China’s patent grants has been growing exponentially. In 2012, China’s
patent office granted 1.26 million patents, a 31% increase and the most of any country in the
world. China also grants close to 80% of applicants his or her patent, significantly higher than
the US rate, which lies below 50%.31 China has helped itself in a multitude of ways by terms of
shifting its policies. One example is with venture capital. Although it was introduced as a
concept and open to universities, corporations and individuals in 1996, foreign firms were unable
to invest in Chinese companies. In addition, the domestic firms were made up of former
government officials and SOE managers who had no experience in venture capital. However, in
2005, the Chinese government shifted policies greatly to allow new foreign firms to come in,
which now make up 65% of the total investment pool, along with domestic changes such as the
right to private property, legalization of convertible securities and preferred stock and the ability
for SMEs to be listed on the Shenzhen stock exchange.32 In the same study, the researchers found
that firms backed by venture capitalists have higher labor productivity, greater net profit per
employee and, invest more in R&D, all of which are significant drivers of innovation and
27 Fan, Peilei. "Innovation in China." Journal of Economic Surveys 28.4 (2014): 725-39. Web. 13 Feb. 2016.
28 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China &
World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.
29 Sun, Y,. Du, D., Determinants of industrial innovation in Chine; Evidence from its recent economic census.
Technovation (2010), doi:10.1016/j.technovation.2010.05.003
30 "World Development Indicators | The World Bank." World Development Indicators | The World Bank. World
Bank, 2015 Web. 21 Feb. 2016.
31 Guo, D., and K. Jiang. "Venture Capital Investment and The Performance of Entrepreneurial Firms: Evidence
from China." Journal for Corporate Finance 22 (2103): 375-95. Science Direct. Web.
32 Guo, D., and K. Jiang. "Venture Capital Investment and The Performance of Entrepreneurial Firms: Evidence
from China." Journal for Corporate Finance 22 (2103): 375-95. Science Direct. Web.
12. Wegrzyn 12
entrepreneurship. Furthermore, China has tried to alleviate its own brain drain by implementing
the ‘National One-Thousand Plan.’ To increase the talent pool for the government and China’s
firms, the Chinese government is offering positions to entrepreneurial, “pioneering talents” who
have a Master’s or PhD in a creative area and is below the age of 55. He or she would be paid 1
million yuan a year in addition to incentives such as health care, housing, insurance, and
alleviation of taxes.33 These forms of incentives are in all levels of government, illustrated in
how the Beijing mayor put out a similar program, focusing on science and technology. These
policies are important in order to ensure that China’s best innovators, inventors, and
entrepreneurs do not immigrate to America or another nation in order to advance their ideas and
ventures. The final policy shift to discuss is China’s alteration in foreign direct investment (FDI).
From 2010-2014, China has shifted its FDI from risky ventures in Brazil and Africa to more
secure, innovative investments. For example, in 2010, the largest area of outward FDI was in oil
and gas, intended support a majority manufacturing economy. However, in 2014, the number one
and two areas of outward FDI were computers/electronics and mining. Through acquisitions of
companies like Lenovo, the Chinese have tried to not only grow innovation and entrepreneurism
from within, but they are looking to acquire it from outside the nation. The mining investment
allows China to further expand its portfolio of rare earth metals, essential for the production of
electronics. In terms of inward FDI, an interesting wrinkle was that in 2014, FDI for the service
industry sector increased by 7.8% while the manufacturing industry suffered a double digit
loss.34 This reflects China’s shifting economy. Through all of these changes, the Chinese
33 Hao, Xian Feng, Yun Sun, Wen Yan Tian, and Zhe Yu Pan. "Analysis on Innovative Incentive Policy in China."
Atlantis Press,2015. Web. 21 Feb. 2016.
34 Fung, Peter. KPMG. Rep. KPMG International, 2015. Web. 21 Feb. 2016.
13. Wegrzyn 13
government is keeping a keen eye on how firms, large and small, start up and seek to create new
ideas and processes.
The second main way China has begun the shift to an innovation driver is through
institutions such as universities and R&D centers, both in-house and independent. The Soviet
Union was the original model for Chinese entrepreneurship and innovation. The research,
education, and manufacturing arms of research institutes, universities, and SOEs were siloed
from one another, separate by thick government regulation and oversight. China has since
progressed from those draconian laws, largely because the Chinese government recognized in the
late 1990’s that allowing collaboration amongst those three arms would grow the economy, both
in the present and future. One of the first steps taken was on the university level. China
graduated the most science and engineering undergraduate and graduate students in 2012, with
6.7 million receiving degrees.35 China has consciously invested into creating more higher
education systems and also increased admissions into areas such as science and technology. The
central idea driving the Chinese higher education is increased exposure to areas of innovation
and high potential growth. By integrating universities with firms that can either add to new ideas
and/or realize those concepts, China has increased its creative base that is most likely to innovate
and start their own businesses. R&D institutes, both within businesses and independent, are also
central to China’s innovation and entrepreneurial growth. While there are public R&D centers,
they tend to be less efficient and effective than their individual counterparts. An important new
trend are multi-national enterprises (MNEs) that have begun to shift entire R&D wings to China,
in search of the burgeoning talent pool emerging from universities with masters and PhD
35 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China &
World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.
14. Wegrzyn 14
degrees. In 2004, there were around 600 R&D centers in China and in six years, that number
more than doubled to surpass 1,200.36 As industrial firms are making up more than 70% of
China’s R&D spending, results are being seen. An empirical study said that for every percentage
spent on R&D, there was a .59% increase in patents granted to employees and a .53% increase in
share of new product sales. 37 These figures demonstrate the power of reinvesting in developing
new ideas and technologies. R&D translates to increased sales, products, and possibilities for the
future. China has wisely supported the integration and expansion of universities and R&D
centers, which have developed a new generation of engineers, creators, and entrepreneurs that
will fuel China’s future.
China is a lexicon of cultural barriers, political ambiguity, and economic paradoxes with
a complicated history with the capitalistic practices of innovation and entrepreneurship. In the
Maoist era, with procedures and an economy modelled after the Soviet Union, there was no room
for SMEs outside of black markets amongst nationalized agriculture, steel production, and
manufacturing. Only after the Four Modernizations did China finally begin the process of
becoming a modern nation. Yet there were a number of policy and ideal shifts that did not
crystallize until the late 1990’s, early 2000’s. At that point, China’s economy was accelerating
without signals of slowing down. Yet the Chinese government realized this growth would be
unsustainable as a manufacturing centric economy. Therefore, China set its sights on the service
industry and the weakest aspect of its economy: innovation and entrepreneurship. Chinese SMEs
have long suffered under lack of funding, minimal public support, and inadequate labor. In
addition, the government had a number of elements that hurt small business development such as
36 Abrami, Regina M., William C. Kirby, and F. Warren McFarlan. "Why China Can't Innovate." Harvard Business
Review. N.p., 01 Mar. 2014. Web. 15 Feb. 2016.
37 Sun, Y,. Du, D., Determinants of industrial innovation in Chine; Evidence from its recent economic census.
Technovation (2010), doi:10.1016/j.technovation.2010.05.003
15. Wegrzyn 15
the dominating SOEs, minimal IPR, and oppressive Communist oversight. That being said,
China has begun to shift, internally as a government and externally in higher education and
business institutes. The Chinese government began to institute pioneering talent initiatives,
making it more attractive to be a researcher and entrepreneur. Enforcement of intellectual
property laws and the availability of financing helped innovation and new businesses expand.
However, China still has much further to go. It is still a developing nation under a tight
government controls. Less oversight from the Communist party is needed to succeed in the
model of capitalism that the country is pursuing. It is still unknown whether all of the new
initiatives, procedures, legislation, and capital will help China reach its goal of becoming an
innovation driven economy. China ranks seventh in the world in terms of innovation
performance, behind the likes of Korea, USA, Japan, the EU, Canada, and Australia.38 China has
put in the mechanisms in order to change from a country that relegates innovation and
entrepreneurship to one that helps it blossom but the dichotomy of growth versus control still
rings true. The influence of China’s social and governance culture restricts a China that could be
boundless with innovation potential and entrepreneurial spirit. By continuing to invest in new
technologies and ideas through R&D, pouring capital into higher education, and shifting the
culture away from nationalized industries, China will succeed in becoming an innovation driven
economy. How long that will take boils down to whether the political and economic landscapes
continues its inertia towards bustling innovation and entrepreneurship.
38 Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy Changes." China &
World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.
16. Wegrzyn 16
Works Cited
Abrami, Regina M., William C. Kirby, and F. Warren McFarlan. "Why China Can't Innovate."
Harvard Business Review. N.p., 01 Mar. 2014. Web. 15 Feb. 2016.
Ebrey, Patricia Buckley. "Four Modernizations Era." Four Modernizations Era. Freeman
Foundation, n.d. Web. 13 Feb. 2016.
Fan, Peilei. "Innovation in China." Journal of Economic Surveys 28.4 (2014): 725-39. Web. 13
Feb. 2016.
Feng, Lily, Josh Lerner, and Chaopeng Lu. "Intellectual Property Rights Protection, Ownership,
and Innovation." Iowa State University, 9 June 2015. Web. 18 Feb. 2016.
Fu, Xiaolan, and Rongping Mu. "Enhancing China's Innovation Performance: The Policy
Changes." China & World Economy 22.2 (2014): 42-61. Web. 15 Feb. 2016.
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