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Justin Lin: Innovation Cannot Ignore Comparative Advantage


By Li Yuyang

On the conference of Analysis of Economic Situation held recently by China Center for Economic Research, Peking University, Dr. Justin Yifu Lin believed it's important that Chinese leaders put forward the policy that the capability improvement on independent innovation should be considered as the strategic and basic point of the scientific and technological development as well as the key in regulating industrial structure and transforming the mode of economic growth and this independent innovation would be a shining point in China's 11th Five-year Plan.

Lin expressed that the reason for the comparatively rapid development after Industrial Revolution in the current developed countries is the accelerated speed of technology upgrades. China, as a developing country, has a huge gap with those developed countries in terms of per capita income as well as industrial and technology levels; thus accelerating the speed of technology innovation is the most important for China's economic development.

The central government has put forward clearly in the 11th Five-year Plan the three forms of independent innovation, namely original innovation, integrated innovation and secondary innovation based on introduction, digestion and absorption. Lin believes that "innovation" itself is a kind of production activity, whose product is "new technology"; "innovation" itself is also a kind of investment activity since the newly innovated technology, like capital, can be used in future production circles, improving productive efficiency.

Therefore, innovation should also conform to the principle of cost and benefit. New technology inventions must be carried out constantly for the sustained economic development. As for developing countries, there are two possible forms of technology innovation for most industries: introduction or independent research and development. In the past, we had laid more emphasis on technology introduction since it would be generally far less expensive for developing countries to utilize introduced technologies to make technology innovation than to re-invent such technologies by themselves.

However, introducing is by no means copying rigidly but digesting and absorbing, and more importantly innovating during the process; meanwhile, original innovation is also required in some fields. Lin considered that independent innovation is probably embodied in the following four aspects as far as China's current development stage goes:

Firstly, as many foreign technologies are suited to their own features of factor structure, when introducing foreign technologies, we can replace capital with labor in many processes of production under the premise of guaranteeing the quality of products; by doing so we can further reduce cost since the labor cost in China is far less than that in foreign countries. Such innovation of production process requires independent fulfillment by our enterprises.

Lin told a story about an enterprise named San Xiao in Yangzhou. This enterprise, engaging in toothbrush production, had once occupied 70 percent of the domestic market share in 1990s. At that time, San Xiao, just like other toothbrush manufacturers, produced toothbrushes with traditional technique and the prices of its products were very low due to extensive market competition.

How to break the dilemma of low-level competition? The idea of improving the quality flashed into their mind since there were two problems for toothbrushes in those days: one was that the toothbrushes were liable to shed; the other was that the toothbrushes always made gum bleeding. In a mechanic exhibition in Beijing, they fixed their eyes on a German production line, which was relatively advanced in that the toothbrushes produced out of it didn't shed any more and every hair of the toothbrushes were end rounded before leaving factory so that such toothbrushes wouldn't hurt gum. However, the production line needed an investment of RMB 3 million Yuan, which was a big one for a private-owned enterprise in 1993.

Later, they discovered that it was only the last two processes that influenced the quality of products: the processes of fixing brush hair and grinding; the equipments needed in these processes only cost 800,000 Yuan. As the price of German labor was high, the equipments needed in the prior processes were designed for automatic production in order to save workers. Therefore, San Xiao modified the production processes and bought ten equipments used in the last two processes; as a result, they occupied the market rapidly with improved quality and largely reduced costs. Such kind of innovation of production processes characterized by replacing expensive capital with cheap labor can only be relied on our own research and development since Germany enterprises cannot do that.

Secondly, for such industry no longer enjoying industrial advantage in developed countries, we have to fulfill the innovation of new products and new technologies by ourselves. Take the motorcycle industry as an instance. The annual output of motorcycles in China has exceeded 10 million, making China a country with most output volume of motorcycle. Moreover, such countries as Germany and Italy that used to produce motorcycles have now basically withdrawn from the market. As a result, the technology and product innovation of motorcycle is dependent on our own research and development. Chongqing, the city with most output volume of motorcycle in China, is a good example in that it currently obtains 5 patents everyday in average and nearly 2000 within a year.

Thirdly, for domestic industries enjoying comparative edge, and the technology distance in these industries between these Chinese enterprises and enterprises in developed countries is small, Chinese enterprises must carry out their own innovations since it's difficult for them to introduce technology from developed countries when upgrading technologies. Chinese enterprises in the industries that the designs of terminal products require standard components are now on such a stage, particularly those enterprises whose products enjoying huge domestic market. China Broad Group Co. Ltd in the air conditioning industry and Huaqi Information Technology Developments Co. Ltd producing Aigo USB disk in the electronic industry are of this kind.

Fourthly, products and technologies that are necessary in terms of national security but cannot be introduced from foreign countries must be innovated independently by ourselves. Analyzing the previous three forms of independent innovation, Lin said that the subject of the innovation is the market-oriented enterprises, whose research and development of technology is generally the extension on their current technology basis with relatively high probability of success and comparatively less capital input; and these newly developed technologies and products are able to be geared to the market requirement, the investment benefit of such innovation will be relatively high and enterprises are possible to achieve success in the open and competitive market on their own power if  they are granted certain privileges on taxation and purchase. However, the fourth form of innovation entails state financial support.