China Needs Innovation. But We All Knew That

The Organization for Economic Cooperation and Development (OECD) just came out with a report in collaboration with China's Ministry of Science and Technology on the state of China's economy. According to an AP wire story, The report says that "despite its sizzling economic growth, the country [China] relies mainly on low-tech industries staffed mostly by unskilled labor:

"China has relied heavily on technology imported from abroad, and the development of its technological capability has until recently lagged behind its economic growth," said the OECD, which groups 30 industrialized countries.

"Developing the country's innovation capacity is a prerequisite for escaping from a pattern of specialization characterized by intensive use of low-skilled labor and natural resources and a low level of technological capabilities," it said.

The report noted that China has made real progress in "mobilizing resources for science and technology on an unprecedented scale and with exceptional speed, and is now a major R&D player." China's research and development (R&D) spending has increased 19 percent annually since 1995.

But China's "lack of adequate protection for patents and other innovations is a serious handicap, making foreign companies reluctant to share technology because of the huge risk of piracy. Chinese inventors tend to shy away from commercializing their own innovations for the same reason." The report called for China to increase its enforcement of its own laws on intellectual property (IP).

The report also noted China's lack of funding for research, particularly in the more dynamic private sector:

Although businesses account for two-thirds of all research and development, there is a severe lack of funding for financing new ventures, which tend to be among the most innovative in any economy.

"China's financial system does not meet the funding needs of private firms," notably small and medium-size enterprises, or SMEs, the report said. "The capital market is underdeveloped, and SMEs find it difficult to secure loans since banks favor large companies, particularly state-owned enterprises," it said.

The report recommends "China improve corporate management and financing, enact antitrust legislation and promote competition through better, more open regulations."

But we all knew that. Right?