To celebrate the inclusion of Innovation: Management, Policy and Practice in Thomson Reuters Social Sciences Citation Index (SSCI), from 2007, the Editor-in-Chief, Professor Mark Dodgson, and Editorial Board Member, Professor Lan Xue, decided to write an Editorial on innovation in China. By illustrating the extent of China's achievements in innovation, and its future challenges, the authors aim to highlight the continuing need for high-quality research into innovation around the world. Innovation: Management, Policy and Practice is dedicated to publishing research that explains the importance of innovation, and how public policies and business strategies can improve innovation performance for social and economic benefit.

INNOVATION IN CHINA

Since the late 1970s, China has experienced the most rapid and remarkable industrial development in history. China has become a global manufacturing powerhouse and has invested massively in science, technology and education. The emergence of China, along with India and some other developing countries, potentially challenges Western hegemony in innovation. The OECD's 2008 review of China's innovation policy (i) reveals a picture of extraordinary achievement, and the Special Edition of Innovation: Management, Policy and Practice on China (ii) (ISBN 9780-9757422-4-2) examines the processes behind these successes. Yet huge challenges remain as China attempts to respond to President Hu Jintao's call for building an innovation-oriented country pursuing a path of indigenous innovation. These challenges are not only for research institutes and universities, the business sector and government; they are also interesting research questions for students of innovation management and policy.

Public research institutes

A key issue is the role of public research institutes in China's national innovation system, such as those in the Chinese Academy of Sciences (CAS). The challenges in the research sector have to be seen in the context of over 20 years of major organizational reform, and a substantial expansion in research investments in the last decade. Since 1985, when the government began to reform China's research system, research institutes have completely transformed their previous 1950s Soviet-style practice of disengagement from industry. A major policy reform saw substantial cuts to the funding to these research institutions to encourage them to focus their attention on business. This policy was reversed for CAS research institutes in the late 1990s when CAS successfully made a case to the government that its role in the national innovation system was to generate knowledge and therefore support from the government is necessary. CAS has subsequently received major government funding from the 'knowledge innovation program'. The fate of industrial research institutes, however, was very different. Beginning in 1998, another wave of reform in the research system led to the corporatization of over 2000 industrial research institutes when a number of the industrial ministries to which they were affiliated were abolished.

While the increasing nexus between research institutes and business has led to the creation of some of China's most successful high-tech startup companies, research institutes have struggled to address the difficulty of retaining basic science investments while conducting research attractive to industry. In addition, a vacuum was left by some of the corporatized research institutes in areas such as pre-competitive industrial research. In industrialized countries, such functions are usually performed by industrial leaders, which is not possible in China at this stage of its development. The question remains of what institutions should play this role in the innovation system? Through what mechanism should such demand be met?

Universities

University research has faced similar challenges. Universities experienced similar funding difficulties in the 1980s and began to seek industrial funding and establish high-tech firms themselves. From the late 1990s, however, there were increasing criticisms of the university system over concern that their emphasis on the commercialization of their research has distracted them from their core mission of generating and disseminating knowledge. Since 1998 leading research universities such as Tsinghua University and Peking University have received large injections of government funds in efforts to improve their research performance to world-class levels. One policy issue is the range of universities to be included in the Government's substantial investments to develop 'world class universities'. Initially, the view was this would include a group of 9, but it has increased substantially to over two-dozen. Regional governments have ensured that investment in leading universities is matched in institutions in their regions.

Concern remains about the effectiveness of university connections with industry. While there has been a cultural change in universities as their faculty recognize the benefits of being market-savvy, the challenge lies in establishing new forms of research-industry engagement that industry finds attractive but allows universities to continue to focus on their core mission. Leading universities, such as Tsinghua, are exploring new strategies and have, for example, consolidated its extensive spin-off activities under the oversight of a single shareholding company.

Research in the Chinese university system has to be considered in the context of an exceptional period of student growth. In 1999 the admission of new students increased by close to 50 percent over the previous year and double-digit growth in admission continued until a couple of years ago. Increases in the student body have also been accompanied by university mergers, expansions of disciplines, and setting up branch campuses. This has generated new challenges in maintaining academic quality and balancing teaching and research.

The increases in research expenditures since the late 1990s have had consequences for university organization and incentive systems. Xue's (2008) article in Nature, (iii) for example, poses the question of whether Chinese researchers are going to be distracted by the Western model of concentrating effort on publishing in a limited number of English language journals to the detriment of studying Chinese problems and disseminating their research to Chinese audiences.

Business

The challenge for innovation in the business sector lies in how to change the business model from one of imitation to one that is truly innovative. Most successful Chinese companies have grown by diversifying through acquisition into new product areas, rather than by organic growth driven by R&D and new product development. There are shortages of strategic management of innovation skills in areas such as risk assessment, evaluating investment opportunities in R&D, and entrepreneurial start-ups. Venture capital investment tends to be concentrated in risky projects in established firms and innovation-supporting investments by banks are generally made to large State Owned Enterprises rather than start-ups. Much of the focus on innovation has focussed on manufacturing rather than services, and there is a need for more research into the range of services that can benefit from better innovation strategies.

Government

The changes in China's national innovation system have occurred in an innovation-friendly environment. National R&D spending has increased by around 20 per cent annually since 1999. Government has instigated a range of policies designed to improve national innovation performance. Since the reforms of 1985, government has established the National Natural Science Foundation, and created a number of national competitive research programs, such as the 863 Program, which promotes high-tech research. There is growing recognition on the part of government that innovation policy involves more than directing the research sector. In China's medium and long range S&T development plan published in 2006, enterprises were recognized as the major player for technological innovation. However, it is a challenging task to support innovations in small firms that lack resources while at the same time encouraging innovations in large State Owned Enterprises that lack incentives. In government's effort to foster indigenous innovation, it has also important to be mindful of the demand of multinational corporations in a post-WTO era.

The 2008 OECD Report on China's innovation policy observed how the very strong emphasis on high-tech industry needs to be balanced with those in traditional sectors. It also noted the difficulties in coordinating innovation policies across different government ministries. China has a Ministry of Science and Technology, a Ministry of Education, and a powerful National Development and Reform Commission, which have corresponding responsibility for innovation in public research institutions, universities, and industrial enterprises. How to better coordinate different policies and programs that can go beyond single sectors remains a challenge. The policy requirement is one of coordination and capability building. New innovation policies will require new policy approaches and competences in government.

Sustainability

One of the major issues of innovation, which highlights some of the challenges facing business and government, is sustainability. Government has been encouraging alternative energy research, but industry has been slow to respond. Energy costs are heavily subsidized and there are little incentives for businesses to develop more environmentally friendly practices. A better national regulatory system is required. At present, regions compete with one another to allow polluting companies to locate and bring their tax revenue and employment locally.

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