Torchbearer: Igniting Innovation in China’s Tech Clusters – MacroPolo

Innovation—or at least the idea of it—has gone viral. Governments around the world seem to want to crack the code to Silicon Valley and create their own versions of it. Policymakers hail innovation as the remedy for all manners of economic ills, promising incentives and support for entrepreneurs and startups.

China, too, has caught the innovation bug. It is apparently so successful at innovating that, in just a few years, the longstanding perception of China as a technology laggard got completely turned on its head. For decades, “Made in China” labels in Wal-Mart inspired derision not fear, yet the “Made in China 2025” (MIC2025) industrial policy has generated panic and concern in American and European capitals. Now, so goes the narrative, China is such a tech powerhouse that it is on the cusp of creating dystopian futures that sci-fi writers once imagined.

The truth is of course somewhere in between. But rather than a debate about regime type and innovation, it is instructive to look at just how China reached a point of convergence with advanced economies on numerous technological fronts. None of this happened over night, and many factors propelled China forward in developing its own technologies, chief among them the powerful role of the state.

One of these state-driven factors that has received scant attention is the three-decades old “Torch” program run out of the Ministry of Science and Technology (MOST). Judging by how Chinese officialdom talks about this program—and the fact that the model has recently been exported to Australia—it appears to be one of the more successful programs that has delivered results.

Given the expansive scope of Torch, the following offers only a snapshot of this program to highlight an important but overlooked aspect of China’s technological progress. A more comprehensive analysis will be needed to determine just how successful the program has been and the extent of its contribution to China’s technological output.

Figure 1. Number of STIPs Grew Three-fold from 1995-2017Note: STIP = Science and Technology Industrial Park
Source: China Torch Statistical Yearbook; MOST.

Launched in 1988, the heart of the Torch program is to create the infrastructure and ecosystems necessary to support innovation and startups, including legions of business technology incubators and mass maker spaces. But Torch’s crowning achievement has been the creation of Science and Technology Industrial Parks (STIPs) that induce economic agglomeration effects (see Figure 1). For while tech clustering is ideal in theory, because it generates significant positive spillovers, it doesn’t always happen organically or quickly.

The Chinese government, with its tendency to intervene, decided that it needed to provide an enormous “nudge” to rapidly effect clustering around high-tech zones. That nudge took a while to get going—the number of STIPs stagnated for about a decade from 1995—but it took off after 2006 under the auspices of the 11th Five-Year Plan.

Since 2006, STIPs have sprouted up across the country, attracting companies and funding into these zones, creating a virtuous cycle of investment and growth. As of 2017, about 1.85 million companies were registered in the STIPs, of which about 49,000 were officially designated high-tech enterprises (a status that comes with tax breaks and other perks). Not only have these STIPs generated some 1.7 trillion yuan in taxes, they are also a fairly significant source of exports. The export value of the STIPs in 2017 was roughly $478 billion, or about 20% of China’s total exports (see Figure 2).

Figure 2. STIPs are Powerful Engines for Local EconomiesSource: China Torch Statistical Yearbook; MOST.

What exactly makes a firm “high-tech” is not entirely clear, but the data does show that these firms are predominantly private or quasi-private: state-owned enterprises comprise only 3% of the firms in the STIPs (see Figure 3). Once the clustering has taken place, it appears the government has more or less gotten out of the way to let the companies compete and operate, which may partly explain how well some STIPs have performed. When Premier Li Keqiang further elevated his “double innovation” policy in September 2018 to encourage mass entrepreneurship and job creation, there were clear nods to adopting the best practices from Torch.

Figure 3. Private Firms Dominate in High-Tech Clusters*Foreign-invested also includes those from Hong Kong and Taiwan; **LLCs can also sometimes be majority state-owned.
Source: China Torch Statistical Yearbook; MOST.

These tech clusters aren’t created equal, however, with coastal China garnering the largest number of STIPs and where the overwhelming number of high-tech enterprises are concentrated (see Figure 4).

Although many observers have focused on Shenzhen as the tech darling, Beijing Zhongguancun, the very first STIP, still stands head and shoulders above the rest across virtually all metrics, including revenue and R&D spending. Shenzhen-based Tencent may be a more valuable company than Baidu today, but Beijing is still home to some 40% of Chinese tech unicorns.

Figure 4. Not Surprisingly, Tech Clusters Are Most Concentrated Along Coast  Note: Eastern Region= Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, Hainan;
Central Region= Shanxi Anhui, Jiangxi, Henan, Hubei, Hunan;
Western Region= Inner Mongolia, Guangxi, Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang;
Northeastern Region= Liaoning, Jilin, Heilongjiang.
Source: China Torch Statistical Yearbook; MOST.

Central and western China, often dismissed as industrial backwaters, are also seeing significant tech clustering around Chengdu, Wuhan, and Xi’an, where important parts of China’s aviation industry are located. There are surprises even in Guangdong province, where the city of Foshan, often overshadowed by Guangzhou and Shenzhen, punches above its weight in terms of the number of high-tech firms and R&D spending.

Much deeper assessments of the Torch program and how it integrates into China’s sprawling innovation ecosystem are needed. But this snapshot of a program that has flown under the radar suggests that obsession over policies like MIC2025 misses the complexity and interlinked nature of Chinese innovation. Many of the Torch program’s sectoral focuses, such as new materials, information technology, software, and renewable energy, overlap with MIC2025 and other similar policies.

Perhaps it shouldn’t be so surprising, then, that China “suddenly” became innovative. The Torch program is just one example of how China has played to its strength—deploying government resources to accelerate clustering effects and hoping that they will pan out. Three decades later, those efforts appear to be bearing fruit, albeit unevenly.

Damien Ma is the director of MacroPolo. You can find his work on energy, politics, and other topics here.