Innovation more than about quick returns

The Fifth Plenary Session of the 19th Communist Party of China Central Committee was held late last month in the backdrop of exceptional circumstances－at a time when China and the rest of the world are fighting to control the spread of COVID-19 and US-China relations have become exceptionally complex. It also coincided with the heightened presidential campaign in the United States.

The plenum highlighted the importance of innovation and the role it should and will play in China's modernization. The emphasis is hardly surprising. Innovation, not just in the form of scientific breakthroughs but also in methods, processes and practices of organizations, businesses and agencies, will greatly impact the ability of countries and societies to modernize.

Industrial Revolution 4.0 is the best example of the importance that countries need to attach to innovation. Industrial developments, for decades and centuries, have been driven by optimal combinations of labor and capital. Historically, modernization has influenced such applications at various stages. The use of cheap labor in production has been gradually replaced by the use of specialized labor as more and more industrial processes have modernized to focus on specific skills for increasing productivity.

Over time, the search for higher productivity has stepped beyond skilled labor. Robots have now become an important part of the industrial workforce in various countries. They mark an important advance in mechanization of the production process. This is a result of continuous innovations seeking to further advance productivity through higher operational efficiency.

Along with labor, major innovations have been achieved in the use of capital. Digital currencies have advanced at a rapid pace in their application. There has also been the growth of a large number of innovative financial products, linked to equity markets, for channelizing household and corporate savings into investments. Which have helped in the funding of major industrial ventures, particularly infrastructure, and reduced the pressure on government funds.

Maintaining the advances in innovation is challenging. But for large economies, particularly one such as China, it is a non-negotiable option. Innovation needs to be persisted with to maintain the advantages in global production and industrial spaces. This is an undisputed challenge facing Industrial Revolution 4.0. National and business resources would need to prioritize funding of research and development and innovative practices for maintaining the advances in productivity.

A strong focus on innovation is greatly welcome given the current demands of industrial development. But for big countries, such as China, the focus, also brings in specific challenges. These challenges arise from implementation issues. They also arise from the relatively low understanding of the importance of innovation among various agencies and users. As a result, the benefits of innovation can quickly reduce and fall short of achieving their long-term fundamental objectives.

Innovations, particularly those at local government levels, are often encouraged to be taken to industry using various financial incentives. The incentives, such as tax exemptions on turnovers and profits, are meant to encourage enterprises, particularly small and medium-sized ones, to take up innovation.

Often, however, such incentives tend to encourage innovations that are typically of limited benefits and short duration. For example, innovations might tend to get focused on manufacturing of relatively lower value-added items in the supply chain. Such innovations do award their creators by getting them financial incentives. But from a government's or a wider economic perspective, such "small" innovations are hardly meaningful. First, they are unlikely to substantially enhance productivity due to their limited value addition capacities. Second, they are also likely to be overtaken by other innovations that follow.

The tendency on the part of many innovation-oriented enterprises could well be to focus on smaller innovations with limited capacity and short-time effectiveness as these fetch quick commercial returns and incentives from the government. But this is where agencies, particularly at the local level, need to be mindful of the greater objective of innovations. Long-term innovations need to focus on bigger goals. These should also be intended for securing the kind of advantages that are crucial for economies to become leaders in industrial production.

An important condition for the focus on innovation to succeed in reaching its objectives is for every involved agency and enterprise to understand and appreciate its long-term value. Focus on quick returns would compromise the long-term objectives of innovation.

The author is a senior research fellow and research lead (trade and economics) at the Institute of South Asian Studies, National University of Singapore.

The views don't necessarily reflect those of China Daily.