Xue Lan: What corporate innovation fears most is directional changes in policies.
In this year’s National Two Sessions, “technological innovation” and “new productivity” have become hot words. Jiang Ying, a member of the National Committee of the Chinese People's Political Consultative Conference and chairman of Deloitte China, told reporters that continuous improvement of innovation levels by large enterprises or small and medium-sized enterprises, especially specialized and new enterprises, is crucial to improving the operating efficiency of the entire innovation system.
In 2022, the country will invest a total of 3.07829 billion yuan in research and experimental development funding, a year-on-year increase of 10.1%; the ratio of research and experimental development funding to GDP is 2.54%, a year-on-year increase of 0.11 percentage points. Among them, the proportions of funds from enterprises, government-affiliated research institutions, and colleges and universities were 77.6%, 12.4%, and 7.8% respectively.
Although the Chinese government has provided extensive support and preferential policies for the development of technology companies, companies still face a series of challenges in the actual development process. On the global innovation stage, there is still room for improvement in the innovation investment and effectiveness of Chinese enterprises. The gap is especially reflected in basic research.
According to data from the Organization for Economic Cooperation and Development (OECD), companies in developed economies contribute more than 30% of their country’s basic research expenditures. Research shows that basic research expenditures account for less than 1% of Chinese companies’ expenditures on scientific and technological activities.
What are the roles of different types of companies in innovation? What are the structural factors responsible for low corporate innovation investment? How can different companies collaborate to achieve better innovation results? To this end, The Paper Research Institute conducted an exclusive interview with Professor Xue Lan, Dean of Schwarzman College at Tsinghua University and Director of the China Science and Technology Policy Research Center at Tsinghua University, to analyze the level, role, and environment of Chinese enterprise innovation.
The Paper Research Institute’s exclusive interview with Professor Xue Lan, Dean of Schwarzman College at Tsinghua University and Director of the China Science and Technology Policy Research Center at Tsinghua University. The Paper reporter Quan Yitu
The essence of innovation is to transform knowledge into value. Private enterprises have the greatest potential and motivation.
The Paper: What are the current difficulties in the sustainable development of innovation in China?
Xue Lan: The most difficult point is how to deal with the new international situation of technological development.
After the reform and opening up, China's scientific and technological development has always been in a relatively open environment. All aspects of the international scientific and technological community are generally quite open to China. China's scientific and technological development for more than 40 years has always been driven by the two wheels of reform and opening up. Everyone is more accustomed to such an environment.
However, in the past few years, Western countries represented by the United States have begun to block China in the field of scientific and technological innovation. We need to adjust China's scientific and technological innovation and development model in the new international environment. Many problems, including "stuck neck", are part of this overall background.
The Paper: Against this background, what kind of innovation entity do you think the responsibility and potential for technological breakthroughs mainly fall on? What are the differences between different types of entities in terms of innovation advantages and innovation goals?
Xue Lan: There are many roles in the country’s innovation system. Universities, scientific research institutions, and enterprises play their respective indispensable roles. China has state-owned enterprises, private enterprises, foreign-funded enterprises, financial institutions, intermediaries, etc. It is difficult to say that any one institution can completely replace another type of institution.
On this basis, to explore the differences in the innovation roles of different types of enterprises, we must first understand the nature of innovation. There is an essential difference between innovation and scientific research activities. The essence of innovation is to transform knowledge into value. Regardless of whether the scientific research results are technology patents or new products, the final purpose of innovation is to transform the research results into value that can be realized in the market. To achieve this goal, we can only rely on enterprises. From the perspective of value realization, there is no difference between state-owned enterprises, private enterprises, and foreign-funded enterprises, and all must realize value.
However, there are differences upon closer inspection. Enterprises of different natures have different capabilities and preferences for different types of innovative activities. For example, many innovative activities require taking risks; the more disruptive and major innovations are, the more risks they need to take. For state-owned enterprises, our current management system makes it difficult to take major risks and make major innovations. At the same time, ordinary people may also feel that they cannot "gamble" with their shared assets. Therefore, the natural and inherent endowments of state-owned enterprises make it difficult to make a difference in the field of disruptive innovation. Unless the state assigns scientific research tasks to state-owned enterprises in some key areas, they must overcome difficulties. For foreign-funded enterprises, may be affected by the control of technological spillovers by their headquarters countries, so their corporate behaviors may not always conform to market logic.
Therefore, I believe that among various types of enterprises, private enterprises have the most innovation potential and motivation.
To break through the "stuck neck", we need to strengthen basic research.
The Paper: In your opinion, what is the difference between Chinese enterprise innovation and that of enterprises in other developed countries?
Xue Lan: From the perspective of basic research and applied research, in the overall innovation system, a basic division of labor is that research institutes and universities should play a greater role in basic research, and enterprises should play more roles in technology implementation and products. end plays a role. But when it reaches a certain scale and stage, many companies invest heavily in basic research.
Research shows that American companies do basic research for two reasons. On the one hand, to reach the top of an industry, you need to achieve breakthroughs to create more high-end products and commercial success. On the other hand, large companies cannot just look at the present but also need to look at the next three to five years. Basic research can open a window for enterprises to observe the future and clarify the direction of future development. It is very difficult for large companies to make a U-turn and transform, so they must look further and prepare for a rainy day.
There are two categories of basic research. One type is basic research driven by curiosity, such as the research of Einstein and Newton. The other type is "Pasteur's Quadrant" research, or basic research inspired by applications. This type of research occurs during the application process. Because we do not understand the principles behind it, we encounter practical problems that are difficult to solve, and we have to "go back" and do basic research. For example, electricity has been used for a long time before the principle of electromagnetism was proposed.
Investment in basic research in the "Pasteur Quadrant" is a major difference between Chinese companies and foreign companies. In 2022, China's basic research funding will account for 6.57% of research and experimental development funding, but the contribution of enterprises is very low, probably around 1%. In comparison, basic research in South Korea accounted for 14.67% of research and experimental development funding in 2019, of which Korean companies contributed 58.25%.
This gap explains an important reason why we are "stuck" - Chinese technology companies are too close-minded and too pragmatic, and are unwilling and unwilling to do basic research. They hope to wait until someone abroad has done it before they can find a way to use it. Use it directly. This kind of innovation pursues short, flat, and fast results. In addition, Chinese companies’ grasp of basic principles and basic research capabilities are indeed relatively weak. Therefore, once foreign countries get stuck, China's entire innovation system will be greatly affected.
Many people feel that on the one hand, there are many "stuck" places in the application of science and technology, but on the other hand, they constantly say that basic research must be strengthened. Is this a contradiction? I said it was not contradictory at all. What's the "stuck" place now? It is precisely that there is a lot of principled and basic research behind it to make breakthroughs, but our companies have done too little in this regard.
The Paper: Private enterprises’ investment in basic research is relatively low. Can it be understood in conjunction with the concept of “enterprises’ independent innovation capabilities”?
Xue Lan: Yes. Where does the company's independent innovation capability lie? It means understanding the principles and the ability to solve problems. When an enterprise develops to a certain stage, it must have its R&D team and capabilities. After 1998, China’s second scientific and technological system reform encouraged companies to build R&D centers. Our company's R&D capabilities are still relatively weak, and investment is insufficient. Ultimately, investment in basic research is limited, so the ability to innovate independently is also limited.
A loose and stable institutional environment is a favorable condition for innovation
The Paper: Why do Korean companies invest more resources in basic research? What are the structural factors behind this?
Xue Lan: First of all, there is a difference in industrial structure. South Korea is a chaebol monopoly economy, and large companies have a very high market share. This economic structure allows large companies to have the financial resources to do research, and after it produces results, it is easier to apply them on a wide range of platforms. In addition, South Korea's general business environment policies are generally supportive of large chaebols. This is a stable trend.
Several factors in China may affect companies' focus on R&D, especially basic scientific research. First, China is developing extremely fast, and new opportunities arise and can be realized quickly. For example, if you invest one million in real estate, you may see a 30% growth next year and the year after that. However, if a company invests in scientific research, it will take ten or twenty years before the results can be seen. Therefore, this rapidly changing market is not very attractive for companies to invest in R&D.
Second, it is related to China’s policy changes. China's policies may still encourage private enterprises today, but there may be some restrictions tomorrow. However R&D is a long-term thing, and no valuable results can be produced within three, five, or ten years. From a business perspective, if you don’t know what the situation will be like three years from now, you will not invest. Therefore, I believe that the general policy environment must remain relatively stable so that companies can have the confidence to invest in the future.
The Paper: When it comes to the institutional environment, your paper mentioned that “China’s relatively relaxed institutional system has created favorable conditions for the formation of artificial intelligence innovation system elements such as market, data, and legitimacy.” How do you understand what you mean by the loose institutional structure?
Xue Lan: Since the reform and opening up, China has generally encouraged the innovation of new technologies. From the introduction, development, and innovation of technology, we do not step forward to "manage" innovation when we see it. Rather, we encourage innovation with the attitude that innovation is a good thing. When any problems are encountered during the application and diffusion of this technology, solve them. From this perspective, in the past few years, our policy environment and social environment have been relatively supportive of innovation.
Take the development of artificial intelligence as an example. When the country formulated the "New Generation Artificial Intelligence Development Plan" in 2017, we were already aware that this technology may have potential risks to society and require great attention. But we don’t stop developing because of potential risks. Rather, we try to solve these problems that arise during the development process.
Putting artificial intelligence into the development process of the entire digital economy and platform economy, our overall orientation is "tolerance and prudence." Encourage innovation when it comes and supervise when problems arise. Both economic regulation and social regulation in China are still in the process of formation and cannot reach a complete state all at once, so there is room for change in specific policies.
However, the orientation of key policies should be stable. In terms of policy orientation, the general direction is definitely to develop science and technology while ensuring public safety. There have been some debates in the past few years, and perhaps the policy orientation has changed to a greater extent. This has caused some people to worry about the country's attitude towards the private economy, etc. Such changes will affect the stability of the innovation environment.
The Paper: In other words, policy stability not only means that a certain policy has a long implementation cycle but also means that the introduction of different policies should adhere to a relatively clear and stable direction.
Xue Lan: Yes. We dismantle policy stability, and the most critical thing is the overall direction. If the overall direction changes drastically, the impact will be huge. Policies will fluctuate, such as the tax rate, which may be 5% this year and reduced to 2% next year. This kind of fluctuation is normal, and so is adjustment. What I fear most is a change in direction.
As long as the general direction remains unchanged, the governance relationship between the state and enterprises can be dynamic. We have done relevant research and found that in the process of the rise of the digital economy, national regulatory authorities are also learning quickly and actively communicating with enterprises. This is the "agile governance" we advocate, which transforms the relationship between government and enterprises from a cat-and-mouse relationship to a partnership relationship. It provides "reassurance" to companies making meaningful long-term investments.
The complementary ecology of enterprises is China’s innovation potential
The Paper: What do you think of the phrase “platform companies lead innovation”?
Xue Lan: There is a concept in classical economics called "natural monopoly", which means that certain products and services are more efficiently produced and operated by a single enterprise on a large scale than by multiple enterprises at the same time. Large-scale platform companies in the platform economy may have a natural monopoly tendency to some extent, which will have a great impact on the future development of the industry.
Under fierce competition, enterprises update quickly, which is an obvious feature of the digital economy. Every few years, platform companies face competition from many new companies. Even large companies must persist in innovation if they want to develop in the long term. If platform companies develop well, they will have more resources and innovative capabilities to promote and lead the industry's technological development.
But on the other hand, if it uses resources to inhibit competitors' innovative behavior, the industry's technology may become stagnant. From this perspective, government supervision is necessary. For example, in the United States and Europe, antitrust supervision is very strict for large companies like Microsoft and Apple, and the fines are also very large because the attitude of large companies towards innovation is a double-edged sword. They may have the most ability and motivation to innovate, but They may also monopolize innovation and stifle it.
The Paper: We have observed that some large platform companies are cooperating with some small and medium-sized enterprises to promote innovative products, forming an innovation ecosystem of large, medium, and small enterprises.
Xue Lan: Yes, this is the difference in corporate culture. Some large companies buy many small businesses and put their innovations aside to stifle competition. Another option is to form partnerships with small businesses to pursue a win-win situation.
In general, as long as reasonable competition is adopted, there is nothing wrong with it. Even if a win-win relationship is formed, it is difficult for large companies to judge in advance whether small and medium-sized enterprises will eat it up as they develop during the cooperation process.
Essentially, we have to judge whether the competitive behavior of some large enterprises is vicious competition. If it is vicious competition, it will have a great impact on innovation and must be regulated to prevent it.
The Paper: What contribution do you think small and medium-sized enterprises make to innovation?
Xue Lan: Historically, the most disruptive innovations are generally not made by large companies at the time. Large companies may suppress disruptive innovation based on their business strategies, so large companies are not necessarily the most innovative. Small and medium-sized enterprises also have a place and role in the innovation chain. China's corporate ecosystem, with the participation of large and medium-sized enterprises, should be much richer than that of South Korea. This is a kind of innovation potential.
Speaking of symbiotic innovation ecology, a new model in Silicon Valley is to gather many small businesses to innovate. When new products and new business models emerge, small and medium-sized enterprises and start-ups are the first to try them. They know that it may take more than 20 years to become a big company, or that it is difficult to promote products to the world, so they hope to be acquired by big companies when they are almost done. When large companies see that the products of these small companies are complementary to theirs and that they have the ready production capacity to expand the market, they will be willing to pay for the innovative activities of small companies. In this ecosystem, small and medium-sized enterprises are the source of innovation, while large enterprises have done commercial promotion to a greater extent.
This article was first published in "The Paper" on March 5, 2024
