Beijing takes the scitech high road II
part 2: rallying the R&D community
A warm welcome to the third post in our Third Plenum series. We now look more closely at how the imperative to boost the scitech sector is playing out on the ground in large enterprises and the R&D community.
We have been watching this model evolve for years. Is it now hitting an inflection point, or will it just always show signs of promise? We are keen to hear your thoughts on where these shifts are heading. Do leave us a comment.
Philippa
Beijing aims far higher than its current rank of 11th on the Global Innovation Index, a rise from 34th in 2012. It envisages becoming the foremost innovation powerhouse by 2049—but grapples with advancing to the cutting edge.
Rekindled top-down institutions under the emerging ‘new nationwide system’ were noted in our previous post. Policymakers know these are not enough. What distinguishes the new approach is a prominent role for large enterprises—and institutions to support them. In this post, we delve deeper to connect top-level design with the challenge of bottom-up reengineering.
old formula loses traction
The PRC has built an economy with an extensive scitech sector. Nevertheless, Beijing has long fretted over its endogenous innovation capability and reliance on imports for critical elements. The current regime is uncoordinated, incapable of rational allocation of resources and structurally inefficient, noted a National Centre for Science and Technology Evaluation report in early 2023. Locally, it is called a ‘two skins phenomenon’ (两张皮), implying a deep disconnect between scientific research and practical needs.
Why the lack of coordination?
Recall central features of the old development formula: a prime element was the project system (项目制), a fiscal ‘pacemaker’ incentivising local governments, documented by sociologists at Peking University, notably Qu Jingdong 渠敬东. An authorised channel for top-down transfer payments needed to bridge revenue gaps, it fostered overdriven inter-regional competition. This ‘tournament system’ was studied in detail by Qu’s colleague Zhou Feizhou 周飞舟. These systems reinforced each other, favouring big projects delivered at speed by local strongmen who had immense discretion over whether to implement rules.
This fuelled the PRC’s initial development and shaped its scitech sector: the focus was not on innovation and breakthroughs in core tech per se, but on growing the broader economy and capacity. The result was a patchwork of more special zones and scitech parks, duplication of effort, unspoken interprovincial barriers, and friction sometimes amounting to armed turf battles. ‘Tournament’ rivalry in the R&D community increasingly diluted the broader mission. Rent-seeking disqualified the sector from the innovation-driven future the PRC now desires.
In a sweeping breakup of agency silos in 2018, Beijing fancied that it could put carriage of scitech reform in the hands of the very cadres who had presided over the former dysfunction and rent-seeking. But by 2021, a meeting chaired by Xi Jinping accepted that ‘deep-seated institutional obstacles have yet to be resolved’.
Rather than the anticipated national medium- and long-term scitech plan (2021-35), which appears to have been delayed, a new three-year reform plan (2021-23) for the governance of the scitech sector was adopted in 2021.
refreshing the formula
Beijing now proclaims that innovation transformation will not be driven by pen-pushers: enterprises rather than bureaucracies should lead the charge. State agencies, at national as well as local levels, will be confined to regulating, steering and supporting.
‘…key to integrating innovation and industry chains is to grant enterprises a leading role in innovation. We must enhance their innovation drive and urge them to innovate with carrots and sticks. So we should leave them to define the issues, promote synergy among key projects and R&D, speed up creating innovation consortia led by top enterprises and supported by universities and research institutes, and get them to collaborate... increasing the efficiency of tech transfer and transformation.
— Xi Jinping 28 May 2021
This implies a radical change in the institutional order that powered the PRC’s rise for decades.
can enterprises lead?
Getting enterprises to take the lead is not straightforward. Compared to their counterparts in advanced economies, PRC enterprises notoriously see more cost than benefit in long-term basic research investment (see charts, but note the precise numbers are controversial). They prefer safer bets with short-term returns on product development. Funding for basic research in the PRC comes from essentially just one source: the state. A diversified funding ecosystem, bringing in enterprises and donations, has been on the wishlist for a long time.
Collaboration between public research institutes and enterprises has traditionally been no easy feat either. Enterprises’ reluctance to reveal and share assets has created profound information asymmetry and a lack of mutual trust. If funds were not an issue, this barrier would remain a hard one.
getting firms onboard
Inspired by international models, such as the US Defense Advanced Research Projects Agency and the German Fraunhofer Society, experiments with market-based R&D funding are underway. 'New type R&D institutions', for instance, diversify funding sources, no longer solely relying on the state.
State-funded R&D projects have also introduced new methods. Officially labelled ’unveiling the list and assuming control’ (揭榜挂帅), the new models draw on images from traditional Chinese knight-errantry
jiebang 揭榜, drawing up a public list of challenges
guashuai 挂帅, open competition between champions
Ministries or large enterprises identify task lists that are then pursued via open, decentralised competition. A variant, the ‘horse race’ (赛马), starts with several competing groups, who are knocked out in a round-robin schedule based on progress toward the task. Under the motto ‘let whoever can, do’ (谁能干就让谁干), there are, in theory, fewer formal constraints than with conventional funding methods. Consortia and alliances, mixing organisations of different types, are encouraged. Teams taking part sign 'military’ oaths, define milestones and commit to the competition.
Evaluation and reward are not set by simple metrics but by users, e.g. a state owned enterprise (SOE) that needs a technical solution to a challenge. SOEs now post their own lists using this approach, inviting SMEs and other players into the arena.
This new approach to public funding is becoming widespread. A recent case in point is the Ministry of Industry and Information Technology's pledge to nurture ‘future industries’ this way. A directive in September listed over 50 specific tasks across the metaverse, humanoid robotics, brain-computer interfaces and advanced AI. An initial trial phase will precede planning, deployment and execution. The ministry described its role as
assessing progress
regularly releasing batches of tasks
guiding local governments to provide incentives
Enterprises are not only promised influence over public funding and state support but also access to top-notch R&D facilities and skills. Favoured firms will be offered seats at the table to formulate national scitech plans, policies and technical standards.
Meanwhile, public scitech institutions are to become more goal-oriented and manage their R&D output as market assets, rather than state or administrative holdings. State Key Laboratories (SKLs), long the bedrock of innovation, for instance, are undergoing restructuring. Some 150 SKLs were renamed ‘national‘ (全国) rather than ’state’ (国家) key labs between May 2022 and June 2023. Official details remain few, but several SKL directors reveal that the new titles are conferred to labs that formulate measurable targets aligned with national priorities. SKLs with joint supervision from government and enterprises are now especially encouraged. Those failing to gain approval from the centre are expected to lose access to state funding beyond 2024.
Aware that more benefits might still not convince large enterprises to get on board, more policies are emerging to disadvantage those not embracing innovation. A new performance criterion measuring SOE ability to market original tech is one example. Another illustrative case is found in Ordos City, where efforts to close down major enterprises lacking in three critical areas (R&D investment, R&D institutions, and patents) have been underway since 2020.
making the system flow
A tech factor market plan unveiled in October 2022 is central to the new market-oriented set-up. The idea is simple: like capital, ‘tech factors‘ (IP, patents, R&D services, etc.) are ideas rather than physical entities—they are valuable only if they can be traded and circulated.
The hundreds of scattered ‘tech exchanges’ developed previously are set to be streamlined by 2025. Three national ones in Beijing, Shanghai, and Shenzhen are taking shape, adjacent to their respective stock exchanges. Regional and sector-specific exchanges should be nested within these. By enabling transactions and contract listings, the plan is to provide solutions to the longstanding challenges of pricing, supply and demand matching, a fairer market, and hopefully protecting IPR. The exchanges are intended to provide the transparency and standardisation required to set up effective R&D output trading. Beijing aims to grow the total value of PRC tech contracts from C¥2.8 tn in 2020 to C¥5 tn by 2025. If successful, this shift should profoundly impact how technology is traded and protected.
In addition to these exchanges, the anticipated ecosystem includes streamlined, professional tech commercialisation services. Stronger links to venture capital and incubators are goals. The big National Fund for Technology Transfer and Commercialisation is playing an active role in this space; it is now tasked with piloting more risk-tolerant investments.
The revamp package is designed to boost PRC capability in cross-border tech flows. Beijing seeks to attract overseas skills and venture capital, with the latter serving essential risk-taking and management functions. Middle Eastern capital, among others, is emerging as a promising potential partner in this endeavour.
a makeover?
The next few years promise a severe shift in the game. In Xi's own words, a clearer division of labour can be seen taking shape:
Where appropriate, relevant state agencies and local authorities should take the lead. Where it is appropriate for firms to lead, the state should fully support them.
What exactly constitutes ‘appropriate’ remains unclear. Aligning all actors in the system with national priorities, meanwhile allowing them a sense of agency, will remain a delicate balancing act—much hinges on where the state places its bets. Changes to public funding streams and clearer enterprise guidance are awaited and will provide hints.
Beyond mechanical changes, the PRC grasps that emerging and future technologies could be truly transformative, redefining the vectors of power and social cohesion. This reinforces Beijing’s drive to be in control.
What are international partners to make of this? In navigating this fork in the road, Beijing knows that a role as junior partner in a global division of labour cannot deliver its goals. More than ever, the PRC wants to be a peer or a leader. Cooperation projects may be less relevant. Broader partnerships will be preferred. High barriers set by other aspiring top scitech actors would be no surprise.
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