The impact of indigenous innovation strategies

- Circular on Promulgating the National Strategies for Patent Development (2011-2020) (关于印《全国专利事业发展战略（2011—2020年）》的通知)

- Plan for Promoting the Rise of the Central Regions (促进中部地区崛起规划)

- Guidelines on Improving Sponsorship for the Growth Enterprise Market (关于进一步做好创业板推荐工作的指引)

- Several Opinions on Encouraging and Guiding the Healthy Development of Investments from the Private sector (国务院关于鼓励和引导民间投资健康发展的若干意见)

- People's Bank of China and China Banking Regulatory Commission, Opinion on Improving the Financial Services in support of Energy-Conservation, Reduction of Waste Discharge and Disuse of Obsolete and Backward Production Capacities (中国人民银行、中国银行业监督管理委员会关于进一步做好支持节能减排和淘汰落后产能金融服务工作的意见)

- Outline of State Plans for Medium- and Long-term Development of Quality Human Resources (2010-2020) (国家中长期人才发展规划纲要)（2010－2020年）

- General Office of the State Council, Circular on Division of Major Work in Encouraging and Guiding Healthy Development of Investments from the Private Sector (国务院办公厅关于鼓励和引导民间投资健康发展重点工作分工的通知)

- Several Guiding Opinions Concerning the Promotion of the Development of Industrial Design (关于促进工业设计发展的若干指导意见)

- Circular Concerning Tax Policies on Imports for Special Significant Science and Technology Projects (关于科技重大专项进口税收政策的通知)

- General Administration of Press and Publication, Opinion on the Development of the Electronic books Industry (新闻出版总署关于发展电子书产业的意见)

- Decision on Accelerating the Fostering and Development of New Strategic Industries (国务院关于加快培育和发展战略性新兴产业的决定)

In order to encourage indigenous innovation, it can been seen from the release of these aforementioned regulations and policies that the Chinese government has tried its best to accelerate patent application procedures, provide financing through the banking or securities market, provide preferential tax policies and take other measures to promote advanced industries that are capable of indigenous innovation.

How indigenous innovation will be featured in the 12th Five-Year Plan

During the term of the 12th Five-Year plan, 2011 to 2015, transformation of the economic model is one of the important tasks for Chinese government. A decision of the State Council on Accelerating the Cultivation and Development of Strategic Emerging Industries puts forward that a basic pattern of healthy development and coordinated progress of strategic emerging industries shall take shape by 2015, which will promote the upgrading of the industrial structure. The added value of strategic emerging sectors shall account for 8 percent of China's GDP. To fulfill this goal, increasing independent innovation capacity is key to the cultivation and development of strategic emerging industries.

The 12th Five-Year Plan will continue to stress the innovation of science, technology and the enhancement of the industrial competitiveness. According the empirical data of China's economic development, it is unlikely for the transformation to be completed through the market itself. Instead, the government's macroeconomic measures must play an important role in the transformation of the economy. Financing and tax preferences, as well as more legal and economic stimulation measures will be taken to encourage innovation.

How will capital promote indigenous innovation?

The fundamental fact is that cultivating industries' indigenous innovation requires capital input. Based on the encouragement of indigenous innovation by the government, the capital invested in these encouraged industries must have more of an opportunity to get adequate returns. From the legal perspective, companies that may be listed on the Growth Enterprise Market could be investment targets. The China Securities Regulatory Commission (CSRC) requires sponsoring institutions to preferentially recommend enterprises that are engaged in strategic new industries under the national development plan, especially those enterprises in the fields of new energy, new materials, information, biology, new pharmaceuticals, energy efficient environmental protection, aviation, oceanography, advanced manufacturing and high-tech services, as well as enterprises with indigenous innovative capacities and strong growth in other fields. It's likely inbound and outbound venture capital will pay more attention to strategic new industries, and these new industries will induce more capital inflows as well. On the other hand, if capital is going to be invested in traditional industries such as real estate, textiles and apparel, public affairs, communications and transport, etc., the innovative capacity of the company shall still be of concern. The China Securities Regulatory Commission requires that only those companies in traditional industries that have outstanding self-innovative capacities in technology and business models can be qualified to go public, and these companies must also be successful at promoting industrial structure adjustment and technology upgrading.

In the 12th Five-Year Plan, the capital invested in industries that are more capable of indigenous innovation could be the most profitable in China. Capital and indigenous innovation are becoming mutual promotion factors.

Key issues about indigenous innovation strategies that concern foreign investors

Some foreign investors hold the view that the investment environment in China is more complex than ever before. Their biggest concerns are whether indigenous innovation policies grant domestic companies with competitive advantages and whether they are compelled to transfer their intellectual property rights (IPRs) into China.

Firstly, the Chinese government has tried to preclude any discrimination of foreign investors in its policies. Legally speaking, foreign-owned companies in China have equal marketing and legal positions with domestic companies. They also can enjoy any indigenous innovation preferential treatments that are provided to domestic companies. Moreover, Premier Wen and several ministers successively declared that China would go on treating foreign-owned companies equally and the policies for attracting foreign capital would not be changed in the future.

Secondly, foreign capital has more advantages than its domestic counterpart to promote innovation because of its advanced management and human resources. In addition, foreign capital could bring more advanced technologies into China. Of course, as a national competitive strategy, controlling a number of indigenous IPRs is a requisite for China to enhance its international competitiveness. However, any policy should not promote indigenous innovation at the price of dampening foreign investment sentiment. If so, new foreign technologies attached to foreign capital would be unwilling to enter into China and this will harm China's indigenous innovation as it cannot be completed without foreign capital.

It is a great challenge for the Chinese government to find the equilibrium between promoting indigenous innovation and further attracting foreign capital. Policy adjustment will continue to test this equilibrium and the foreign investment environment will become more complex.

Concern about discrimination for government procurement contracts

In 2002, China promulgated the PRC Government Procurement Law (中华人民共和国政府采购法), which provides that Chinese governmental agencies and entities must purchase domestic goods, works or services except where those goods, works or services can't be obtained within China under reasonable commercial terms. The biggest concern from this is how “domestic” is defined. A controversial policy, the Indigenous Innovation Products Accreditation Programme (IIPAP) was introduced on November 15 2009. To qualify for the catalogue listed in the IIPAP, companies and their products must satisfy a set of conditions. One of the conditions is that the intellectual property attached to a product must be free from foreign restrictions on its use, disposal or improvement. On January 11 2010, the State Council's Legislative Affairs Office released comments on drafting Implementing Regulations on the Government Procurement Law. Specifically, Article 10 of the Draft Implementing Rules defines a “domestic product” as one “made within China's borders and for which domestic manufacturing costs exceed a certain percentage of the final price”. Such a definition is widely interpreted as permitting foreign-invested companies' products to pass a local content threshold and to qualify as 'domestic' for the purpose of government procurement. But there is still no stipulation on the percentage of domestic content required to qualify a product as domestic.

Upon promulgation, the IIPAP was widely challenged by foreign investors and foreign governments. Fortunately, Premier Wen declared a policy of equal treatment for foreign-invested companies in terms of having access to Chinese government procurement contracts. Subsequently, from the legal side, foreign-invested companies seem likely to qualify as domestic companies for governmental procurement purposes. However, there still remains the question of what proportion of foreign-invested companies' products have been purchased by the Chinese government for governmental procurement contracts.

Indigenous innovation is repeated throughout the aforesaid regulations and policies, which indicates that it has been an increasingly important concept in the minds of China's policymakers. Furthermore, any tax preference, financing, and economic stimulation policies may be associated with the promotion of indigenous innovation. For foreign investors to enjoy the benefits from Chinese economic growth, they should pay close attention to the encouraged industries in the 12th Five-Year Plan.

Frank Qian, Watson & Band, Shanghai