AN INDEX OF INNOVATION OUTPUT AND INSTITUTIONAL FACTORS

The eight indicators comprising the CICGI can be classified into two broad categories: output indicators and institutional indicators. Two of the indicators, namely share of new-to-world innovations and Chinese articles in leading scientific journals, are output indicators and the rest are institutional indicators. Share of new-to-world innovations is measured by the number of triadic patent families in China, demonstrating the country's capacity to generate new-to-the-world technological innovations. Chinese articles in leading scientific journals is represented by China's h-index which, in comparison with that of the top performing country, the United States, reveals China’s progress in scientific research. Both indicators effectively measure China's performance in innovation output.

What is missing from the CICGI, however, are indicators that measure innovation inputs, which are critical for a country's innovation capacity as they determine output performance. The usual inputs are human capital and investment in R&D (European Commission, 2021; OECD, 2021). The Global Innovation Index (GII) 2020 (Cornell University, INSEAD, & WIPO, 2020) adopts a broader group of input indicators, including the number of full-time-equivalent (FTE) researchers per million in population and Gross Expenditures on R&D (GERD) as a percentage of a country's Gross Domestic Product (GDP). The data indicating the number of FTE researchers per million in population and GERD as a percentage of GDP are readily available for China and other major economies. Therefore, including innovation input indicators in the CICGI is feasible.

The CICGI seems to over emphasize the role of institutions in strengthening China's innovation capacity, as six of the eight indicators measure institutional factors. The fact that innovation input in China has strengthened continuously since 2015 (for example, the GII 2020 shows that China's GERD as a percentage of GDP is relatively high for its upper-middle-income country group) and that China seems unceasingly to generate new-to-the-world technological innovations, narrowing the gap in scientific research with the US, already demonstrates that the country's institutional environment does not limit its performance in innovation capacity growth. I would argue accordingly that two or three institutional indicators would suffice for the CICGI. Furthermore, among the six institutional indicators included presently, intellectual property system effectiveness, ease of starting a business, level of financing for start-ups and small- and medium-sized enterprises, and institutionalized trust are legitimate, but share of resources flowing to non-state-owned enterprises and autonomy of universities face the following issues and should therefore be reconsidered and perhaps dropped.

The share of resources flowing to non-state-owned enterprises is measured by the share of debt held by non-SOEs. In 2015, the share of non-SOE nonfinancial corporate debt was 46%, while in 2020 it was 42% (Hochstrasser & Murmann, Reference Hochstrasser and Murmann2021b). China's performance in this respect is thus deemed to be deteriorating. In my view, this indicator works only under the assumption that non-SOEs are more innovative than SOEs, which is debatable. In China, SOEs and non-SOEs are not distributed homogeneously across industries, value chains, or firm size. After several decades of privatization, Chinese SOEs have retreated to certain core industries such as utilities, infrastructure, energy, commodities, aerospace, shipbuilding, automobiles, and banking, and many of them operate upstream in the value stream. Because many small SOEs have been privatized, the remaining SOEs are largely medium-sized and large enterprises. Woetzel (Reference Woetzel2008) argued that it is no longer easy to identify purely state-owned enterprises in China as the line between them and private companies has blurred considerably. It would be difficult, therefore, to argue straightforwardly that SOEs are less innovative than non-SOEs.

There is anecdotal evidence to support the argument that SOEs are no less innovative than non-SOEs. For example, many of the 96 SOEs that are administered by the central government have launched new-to-the-world innovations. Among them, for example, State Grid and China Southern Power Grid have led the development of China's ultra-high voltage (UHV) electricity transmission technology, which makes it possible to operate power transmission lines at greater than 800,000 volts (800 kV) (Fairley, Reference Fairley2019). Because of the great geographical distance between the northern and western regions of China, where clean electricity power is generated, and the eastern region, where most of the power is consumed, China began developing UHV technology in the 2000s to dramatically reduce the amount of power lost during transmission and also to reduce pollution by avoiding the need for coal-powered energy facilities in the eastern region. In 2018, China became the first country to complete a ± 1100  kV direct current transmission line, which carries the highest voltage, has the largest capacity, and covers the longest distances in the world. By June 2021, China had completed or is in the process of constructing more than 41,000 total kilometers of UHV lines (Qu, Reference Qu2021).

Another example of SOE innovation can be found in telecommunications. China Mobile, a state-owned carrier company, has been leading the effort to construct a 5G network in China. By July 2021, China Mobile had deployed 36% of the world's 5G base stations in China and the country has deployed more than 70% of all 5G stations globally (Liu, Reference Liu2021). The other two main carrier companies in China, namely China Unicom and China Telecom, are also SOEs and they have deployed the remaining 5G base stations. China Mobile disclosed more than 3,300 5G standard essential patents and submitted more than 7,000 technical proposals, making it a top contributor worldwide to the 5G standard (Liu, Reference Liu2021).

Autonomy of Chinese universities is measured by eight indicators that include whether such institutions are free to own their buildings and equipment, borrow funds, spend budgets independently and achieve their objectives, establish the academic structure and course content for their curricula, employ and dismiss academic staff, set salaries, determine student enrolments, and set tuition fees. As Hochstrasser and Murmann (Reference Hochstrasser and Murmann2021a) rightly point out, the Chinese Ministry of Education as well as provincial governments directly supervise most Chinese universities and all excellent Chinese universities are public, so there is little room for Chinese universities to maneuver in the current educational system. More importantly, university autonomy seems not to be a key factor in determining how Chinese universities perform in international rankings.

GII 2020 demonstrates Chinese strength in comparison with other countries with respect to the ratings of each country's top three universities in the QS World University Rankings (Cornell University, INSEAD, & WIPO, 2020). Chinese universities’ positions in other major international university rankings, including the Times Higher Education World University Rankings, Academy Ranking of World Universities, and US News & World Report Best Global Universities Rankings, have all improved rapidly over the last few years (Shanghai Ruanke, 2021; Times Higher Education, 2021; US News & World Report, 2021). Chinese universities have made such progress not because they have gained autonomy but because governmental investment in universities has grown rapidly and competition among them for the best faculty, programs, and students has intensified. Further efforts to update the CICGI should track the quality (rankings) of Chinese universities rather than their autonomy.

AN IMPORTANT UNMEASURABLE FACTOR THAT CONTRIBUTES TO INNOVATION CAPACITY IN CHINA

One important factor that contributes to China's innovation capacity but is difficult to measure using the CICGI is industrial policy. Although the Chinese economy has largely been transformed from a planned economy over the course of four decades, the Chinese government still holds centralized power, which allows it to enact and implement industrial policy to shape economic activities (Huang & Sharif, Reference Huang and Sharif2016). A key characteristic of Chinese industrial policy is its long-term orientation. Consider the five-year plans that have been in place almost since the advent of the People's Republic. In 1953, China began formulating ‘five-year’ plans to set the direction, priorities, and objectives for economic and social development. As these national five-year plans are action blueprints that Chinese governments at all levels follow, provincial and lower-level governments, companies, universities, and public research organizations have also formulated their own five-year plans and have aligned their development priorities and objectives with the central government's. To accompany the development plans, Chinese governments at all levels have enacted concrete industrial policies, which typically apply to finance, human capital, infrastructure, fiscal policy, and so on. These policies and plans represent coordinated innovation efforts by a range of actors based on well-defined objectives. Such innovation policy has been termed ‘mission-oriented innovation policy’ (Hekkert, Janssen, Wesseling, & Negro, Reference Hekkert, Janssen, Wesseling and Negro2020; Mazzucato, Reference Mazzucato2016, Reference Mazzucato2018).

Mission-oriented innovations are not new. The NASA Apollo project in the US and the French Concorde project are examples. China is, however, quite effective in launching and implementing such projects. A recent example of a mission-oriented innovation-related industrial policy is China's newly launched carbon peak and neutrality policy. In September 2020, Chinese President Xi Jinping announced in a speech before the United Nations General Assembly that China aims to allow CO₂ emissions to peak before 2030 and achieve carbon neutrality before 2060 (Xi, Reference Xi2020), signaling China's determination to take the green, low-carbon, high-quality development path and fulfil its commitment under the Paris climate agreement.

Setting carbon peak and neutrality targets is also an important part of China's overarching plan for resource conservation, environmental protection, and transformation of economic and social development patterns. The initiative will incentivize the creation and adoption of demand-pull innovations and promote large-scale investments in the power, transportation, manufacturing, and construction sectors to reduce carbon emissions while at the same time strengthening China's innovation capacity in related areas. In July 2021, China inaugurated its national carbon market, which includes more than 2,000 companies in the power sector, replacing the European Union's similar program as the world's largest carbon market (Hou, He, He, & Liu, Reference Hou, He, He and Liu2021). Although the impact of industrial policy is difficult to measure using CICGI methodology, it is without a doubt a key factor in the growth of China's innovation capacity.

A NEW CONTEXTUAL FACTOR THAT CONTRIBUTES TO INNOVATION CAPACITY IN CHINA

The international political and economic environment in which innovation in China is carried out changed dramatically between 2015 and 2020, i.e., the observation period for Hochstrasser and Murmann's (Reference Hochstrasser and Murmann2021a) analysis. Since the US-China rivalry in high technology competition intensified after the trade war broke out in 2018, more than 300 Chinese high-technology companies and 13 universities have been included on the Entity List of the US Department of Commerce (United States Department of Commerce, 2021). These companies and organizations have been severely restricted in purchasing goods and services from US companies or licensing US technologies, as the listed entities are subject to US license requirements for the export or transfer of specified items.

The trade restrictions have prompted Chinese companies to reconsider their positions in the global value chain and to strengthen their R&D in core technologies. Chinese innovation policy has also begun emphasizing basic scientific research, supporting projects designed to develop core technologies, coordinate innovation activities at the central government level, and revamp key national laboratories, among other developments. Future efforts to update the CICGI should focus on tracking growth in China's innovation capacity in the abovementioned initiatives. For example, an indicator of basic research expenditures as a percentage of GDP could be adopted to measure China's investment in basic scientific research, and the share of standard essential patents owned by Chinese companies, universities, and public research organizations could be employed to measure progress in developing core technologies.