China recently announced guidelines for the formulation of its 14th Five-Year Plan (2021-25). This is a crucial period for China to achieve its long-term vision of socioeconomic development and modernization. With its per capita income exceeding $10,000, China now has strong potential to join the ranks of high-income economies and double its per capita income by 2035.
China's transformation into a high-income economy will serve as a major growth driver for the global economy in years to come. However, this process will inevitably face profound challenges, tensions and risks under the increasingly volatile global environment.
History shows that developing countries typically encounter a growth plateau when they reach middle-income status. The ladder to climb to the levels of high-income economies are often kicked away or blocked. To escape this middle-income trap, a country has to carefully transition its growth model from being primarily driven by low-cost input advantages to becoming increasingly powered by innovation and productivity improvement.
China has made tremendous progress in strengthening its innovation capability over the past two decades. Its research and development expenditure as a share of GDP has risen steadily from 1.1 percent in 2001 to 2.23 percent in 2019. According to the Organization for Economic Cooperation and Development's Main Science and Technology Indicators, China is now the world's second-largest R&D performer in terms of purchasing power parity, and it is narrowing the gap with the United States. China's R&D expenditure increased from 26 percent that of the US in 2005 to 80 percent in 2018.
In 1999, the World Intellectual Property Organization received only 276 patent applications from China. By 2019, the number had increased 200-fold. Last year, China for the first time surpassed the US to be the source of the largest number of applications for international patents, filing 58,990 applications via WIPO's Patent Cooperation Treaty system, compared with the 57,840 applications of the US.
As indicated in the Global Innovation Index co-published by Cornell University, INSEAD and WIPO, China has substantially improved its international ranking in innovation performance from the 37th place in 2008-09 to the 14th in 2020. It's the first middle-income country to break into the top 15 innovative economies. Going forward, as stressed in the guidelines for the formulation of China's 14th Five-Year Plan, China will further deepen reforms to upgrade its national innovation system, and improve the institutions and relationships that shape China's innovation performance.
As a developing country, China's economic growth and productivity improvement can benefit from two different kinds of innovation. The first is catch-up innovation based on "latecomer advantages".There are substantial gaps between the business segments where developing countries operate and the global technological frontier. Instead of re-inventing advanced economies' technical progress, developing countries can learn, adopt and refine advanced economies' existing technologies at relatively low cost, even leapfrogging older technology and directly absorbing and locally adapting the latest cutting-edge technologies. Catch-up innovation is a key potential driver that can successfully enable developing countries to grow faster than high-income countries.
While China has a more advanced industrial structure than its income level would suggest, the gap between China's industrial productivity and that of high-income countries remains huge. The productivity gap of China's services sector is even larger. There are still huge spaces for catch-up innovation in almost all segments of China's business system.
The second is breakthrough "path creating" innovation at the global frontier, which is critical to the competitiveness and growth of advanced economies. While intrinsically risky and involving high chances of failure, "path creating "innovation can nurture strong capabilities and generate first-mover advantages in establishing technological leadership, supported by patents and other forms of intellectual property rights protection. Lacking "path creating" innovation capabilities, latecomer economies typically face profound difficulties in catching up with high-income countries as incumbent leaders often erect high entry barriers and restrict the space of technological transfers with protectionist policies.
Despite the overall productivity gaps between the Chinese economy and the global frontier, China has been establishing leadership positions in some emerging sectors such as new-generation information and telecommunications, artificial intelligence and renewable energy. A growing number of Chinese companies are ranked among the world's leading companies in terms of R&D expenditure and innovation performance. Confronting the rising tide of protectionism and the acceleration of disruptive technological changes, strengthening the capabilities in "path creating" innovation will become increasingly important for China's development.
Both catch-up innovation and "path creating" innovation are essential for China's economic transformation and require continuous efforts in capability building. When it comes to resource allocation, China's policymakers and business leaders need to strike an appropriate balance among the two types of innovation according to China's specific conditions as its economy evolves. China should also strive to foster an open and collaborative international environment that encourages technological advancement at the frontier as well as broader technological diffusion in the developing world. Boosting innovation and shared prosperity is the most effective response to our global challenges.