Sustaining urban growth through innovative capacity : Beijing and Shanghai in comparison

Sustaining Urban Growth through Innovative Capacity: Beijing and Shanghai in Comparison * By WANG Jici TONG Xin Department of Geography Peking University World Bank Policy Research Working Paper 3545, March 2005 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. *This paper was prepared for the East Asia Prospect Study being conducted in DECRG at the World Bank. The authors thank Shahid Yusuf, Anjum Altaf, and Kaoru Nabeshima for their suggestions and guidance.  ABSTRACT The paper examines the diverse prospects of innovative sectors in Beijing and Shanghai using available indicators and data collected for this study through surveys. Beijing is the first choice for companies locating in China but foreign employees prefer Shanghai for living convenience and cultural amenities. While Shanghai lags behind Beijing in knowledge creation and the generation of startup companies in the innovative sectors, it takes the lead in the commercialization of technological innovations and the development of creative cultural industries. The municipal authorities of Beijing and Shanghai have improved the innovation environment of the cities, but certain elements still stunt the growth of innovative industries, which cannot be removed easily. Three kinds of knowledge-intensive enterprises included in innovative sectors in the survey are high-tech manufacturers, knowledge intensive business services and creative content providers. The survey found that the clustering of the firms arose from the attraction of preferential policies and the purchase by governments or state-owned enterprises of information technology products. The survey shows that interaction among firms is inadequate in the knowledge-based industrial clusters in both Beijing and Shanghai. Hence, it may be some time before clustering leads to substantial gains in collective efficiency for innovative industry in Beijing and Shanghai. The authors also are grateful for the helpful comments provided by the participants of the workshop organized for this study held in Bangkok, February 22-23, 2004. ii  I. Introduction The aim of this paper is to identify the role of urban policies in augmenting the natural advantages of cities to initiate virtuous spirals resulting in the emergence of innovative industrial clusters. The paper compares the efforts of Beijing and Shanghai to develop knowledge-based industries. It concludes that the innovative sectors in Beijing and Shanghai are still small but very dynamic with bright prospects. However, they are developing in different ways. The problem is the gap between the intention of public policy-makers and the real need of innovators living in the cities, particularly when public policy has to balance several controversial objectives in urban development. The research was based on field studies conducted in Beijing and Shanghai from August 2003 to April 2004, and an extensive review of published material relevant to this topic. The primary sources were quasi-structured interviews with company executives in 100 firms (50 in Beijing and 50 in Shanghai). The firms interviewed varied greatly in size and sector, but all were engaged in producing creative outputs covered by intellectual property (IP) laws or in knowledge-based value adding services for businesses. The interviews inquired about the internal and external factors influencing the innovative capacity of firms, such as knowledge workers, IP laws, cluster dynamics, service businesses, innovative infrastructure, etc., in each city. The next section presents the state-led policy directions that provide the background for the innovation needs of Beijing and Shanghai. The third section gives an overview of their economic development, as well as provides selected indicators on innovative capacity, such as R&D investment, creative industries, high-tech outputs, etc. based on published statistics. It is followed by an assessment of the quality of the business environment in each city from the perspective of the enterprises. This is followed by a critical discussion of the effects of government policies targeting high-tech industries and knowledge-based economy, including preferential policies toward key sectors, special treatment for inducing human talent, planning of parks for specific creative sectors, and so on.  II. State-led Policy Directions: High tech as economic high hope Following China's opening to the outside world, 1983's forum on "the challenge of world new-tech revolution and our countermeasure" held by the State Council quickly embraced the concept of a "new-tech revolution," which had been inspired by the writings of the American futurist Alvin Toffler. It helped shape the public opinion for China's technology-led strategy.1 The deepening of the post-Mao science and technology (S&T) reforms and the implementation of the high-tech supporting Torch Program which began in 1988 have helped sprout more than 150 high- and new-tech industrial development zones (HNIDZ) all over the country. Among them, 53 are at the national level. They nurse over 10,000 high- and new-tech firms. The purpose of the high- and new-tech industrial development zones set by the S&T Commission is: "Relying on the S&T force of China, promoting the commercialization and industrialization of S&T results, enhancing China's competitiveness in the world". As the computer technology centre, Beijing generates by far the most tech-based revenue, while Shanghai demonstrates its strength as an export centre (Wallcott, 2003). In the same period, 49 economic and technological development zones (ETDZ) at the national level were set up. They have also attracted many tech-based firms. The national policies in China target the development of a knowledge-based economy including investments in infrastructure of innovation, such as establishing and improving intellectual property laws, giving preferential treatment for research and development (R&D) investment in both the public and private sectors, attracting and helping talent to start businesses, and providing special assistance in selected technological fields, such as software, integrated circuit (IC), bio-tech industry, and so on. At the same time, the policies also include investments in the infrastructure of efficiency (public services, transportation, telecom, zoning and regulation). By the end of 1997, China's leaders approved a plan, the National Knowledge Innovation Project of the Chinese Academy of Sciences (CAS), to carry out a drastic re-organization of its 123 institutes. The plan will be implemented in three phases over the next 13 years. Substantial amounts of new money have been directed into selected research areas and regions, with hundreds of new staff being recruited from overseas. In line with government priorities, the 1 Administration Office of Torch Program, State Science and Technology Commission of P.R.C (1991):"Introduction to China High and New Technology Industry Development Zones". 2  academy aims to "embrace the era of knowledge economy" and "build up a national innovative system". During the 16th Congress of Chinese Communist Party held in 2003, China's authorities decided on "promoting industrial restructuring and upgrading through a New Path toward Industrialization (xinxing gongyehua daolu), which is characterized by upgrading technologies, improving economic efficiencies, lowering resource consumption, reducing environmental pollution, and fully developing human resources." And in the Tenth Five-year National Social and Economic Development Plan (2000-2005), one of the most important strategies is improving the national industrial competitiveness through informatization (xinxihua). The Scientific Development Blueprint for the Tenth 5-Year Plan period (2001-2005), which has been officially announced by the State Development Planning Commission, stresses the development of high-tech industries, such as computer software, integrated circuits, and pharmaceuticals. By 2005, high-tech industries are expected to make up 6 percent of the country's gross domestic production, compared with 4 percent in 2001, according to the blueprint. However, the requirements of an innovation system are stringent. China needs a good, broad-based educational system and a system of innovation to erase the legacy of central planning. For example, most key technological upgrading programs are undertaken by the state research sector and few enterprises are involved. Many enterprises have poor product development abilities and small R&D spending. Since enterprises undertaking technological upgrading will be granted loans to buy advanced technology, scientific research institutes are usually ill informed about the latest developments. In terms of technology import, duplicate introduction is also common. The government still interferes too much in the management of enterprises. The intermediary agencies, which provide major services for small firms in turning high-tech research findings into products, are still incapable of meeting the growing demand of technological innovation. The first and most important part of the infrastructure of innovation for China is intellectual property law. China has not yet introduced effective protection through IP laws. As a result, the traditional cultural goods and services are stagnating in spite of "modernization" throughout the country, especially in cities. And the outcomes of the national high tech industries, such as IC and software, medicines, biotech products, which represent the modern 3  sectors, seldom come from new creative ideas. Without effective protection from the IP laws, people can seldom benefit economically from their creative activities. Information technology (IT) industry In terms of scale, China's IT sector is among the top three in the world. China has become the world's biggest producer of mobile phones, DVD players, color TV sets, program controlled switches and other electronic equipment. The rapid development of the IT industry has created a large number of job opportunities. About 6.2 million Chinese worked in the industry in 2002.2 The spatial change of the sector can be attributed to the transition from planned economy to market economy. At the beginning of the economic reform, the location decision of IT industry in China was made by the central government. In July 1986, the Ministry of Electronics Industry (MEI) decided to select Beijing, Shanghai, Jiangsu, and Guangdong as the national production bases. The authority of Beijing has put emphasis on the reconstruction of planned traditional electronics bases, such as the Jiuxianqiao electronics district, where China's first computer was born in the 1960s. However, beyond the expectation of the government, new IT centers, such as Beijing's Zhongguancun and the city of Shenzhen emerged as a consequence of market forces. A number of electronics firms were established by intellectuals in the Zhongguancun Street of Beijing's Haidian district in the mid 1980s. These and the firms that have followed are spin- offs from state-run research institutes and universities, such as the Chinese Academy of Sciences (CAS), Peking University and Tsinghua University (See Conroy, 1992; Wang and Wang, 1998). More recently, the booming Internet economy in China has made high-tech firms shift from hardware manufacturing to Internet-based application software development and information services. The fast developing telecommunication sector has accelerated the process. Since 1995 the Ministry of Science and Technology has begun to set up software development bases. There are 19 National Torch Software Development Bases established including the Beijing Software Park and the Shanghai Software Park. In addition, the State Information Technology Coordination Group was set up in 1996. At each stage specific goals have been established to use information resources, to build a network, and to develop information industry. 2China's IT industry Maintains High Growth. http://english.people.com.cn/200210/20/eng20021020_105361.shtml 4  The year 1998 saw the setting up of the Ministry of Information Industry of China, to reform the regulations, create the technical standards and promote the development of the market for the development of IT industry. One outcome is that the Chinese telecoms industry experienced unprecedented reform, from monopoly to opening, from integration of government administration with telecom operators to being run independently by telecom operators plus effective regulation of the government. In order to upgrade the IT industry, the State Council of China issued Policies on Encouraging the Development of Software Industry and IC industry in 2000 to increase the creativeness and international competitiveness of Chinese IT industry. The document outlines policy support for the software industry through investment, financing, taxation, industrial technology, exports, accreditation of software enterprises, and protection of intellectual property rights. For investments by IC manufacturers whose amount of investment exceeds 8 billion Yuan or whose IC wire width is less than 0.25