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Foster an Enabling Institutional Environment for Innovative Entrepreneurs

( drc ) 2018-12-14

By Tian Jietang

Research Report Vol.20 No.6, 2018

After years of efforts, China has overtaken the United States to have the most R&D personnel in the world. In terms of innovative entrepreneurs, however, we still lag behind the United States by a large margin. The R&D intensity of industrial enterprises above the designated size is less than 1%, much lower than the average of 2% in developed countries[① Annual Report on China’s Independent Innovation Capacity 2015, Economic Daily, April 21, 2016.]①. Lack of innovative entrepreneurs poses a main obstacle to the innovation-driven development of China. In response, we should further optimize the market environment and policy mechanism, and create an enabling environment for the growth of innovative entrepreneurs.

I. The New Era Calls for Innovative Entrepreneurs

1. Entrepreneurs are the primary force driving innovation

As China’s economy is transitioning from a phase of rapid growth to a stage of high-quality development, innovation, an integral part of the new development concept, has been carrying greater weight. As stated in the report of the 19th National Congress of the Communist Party of China in 2017, innovation is the primary force driving development; it is the strategic underpinning for building a modernized economy. Innovation, unlike science and technology, is essentially an economic concept. Scientific and technological achievements that have no commercial value are not innovations. The realization of commercial value is rooted in the market mechanism and depends on the wisdom and contribution of innovative entrepreneurs. As Joseph Schumpeter, founder of innovation economics, once pointed out, entrepreneurship is the most critical force promoting innovation, and a fundamental driving force of social and economic development.

Innovative entrepreneurs are not only good at transforming new inventions or creative ideas into economic benefits but more importantly, can produce new technologies through continuous investment in R&D activity, and even participate in some basic research with the nature of public goods and contribute to scientific achievements, thus turning the “exogenous” scientific and technological achievements into an “endogenous” product of market economy. As a result, the virtuous circle of “science and technology - commercialization - science and technology” can be achieved, taking economic and social development to a higher level. It is justifiable to say that if innovation is the primary force driving development, entrepreneurs are the primary force driving innovation.

2. Entrepreneurs in the new era need to be innovative

At the new stage of development, it is necessary, from the perspective of both demand and supply, for entrepreneurs to become more innovative. This is the inevitable requirement of the new era, and also a crucial choice for the sustainable development of entrepreneurs themselves.

China is undergoing a shift in consumer demand: from large-scale homogeneous demand to personalized needs for high-quality products and services. In the early and middle stages of the reform and opening-up, entrepreneurs concentrated on meeting the basic needs of people, such as food, clothing, housing and travel; in the new era, entrepreneurs should be more innovative and focus on providing diversified, high-quality products and services to meet people’s needs for a better life. Internationally, the next round of technological and industrial revolution is in the making; new technologies in information technology, artificial intelligence, biomedicine, new energy and other fields are cropping up continuously, providing ample opportunities for innovation. Meanwhile, some countries have initiated trade frictions or waged trade wars against China, and intensified technology

lock-in. Against this backdrop, Chinese enterprises have no choice but to strive for breakthroughs in key technologies. Entrepreneurs must seize the opportunities and rise to challenges by casting out the traditional mindset and becoming more innovative.

II. Definition and Main Attributes of Innovative Entrepreneurs

1. The economic meaning of innovative entrepreneurs

Mark Skousen (2005) classifies entrepreneurs into two types: (1) arbitraging entrepreneurs, who make profits by transferring production resources or products across different industries and regions, and push the market from disequilibrium toward equilibrium; (2) innovative entrepreneurs, who devote themselves to innovation activities, and developing new technologies or new products to open up new markets and shake up the old market and production process. William Bygrave, an American scholar, offered a comprehensive understanding of entrepreneurs and entrepreneurship. He combined the two roles of entrepreneurs in economic activity, and defined entrepreneurial process as a cycle in which entrepreneurs break market equilibrium through innovation, and then promote market equilibrium through arbitrage.

Historically, arbitraging entrepreneurs and innovative entrepreneurs performed their respective functions in economic development, but it was innovative entrepreneurs who played a decisive role. This is because economic growth, from a long-term perspective, is the result of continuously promoting technological progress and improving the use of natural resources.

2. Definition and main attributes of innovative entrepreneurs

Based on the above analysis, innovative entrepreneurs can be defined as corporate controllers and decision makers who lead or organize activities such as R&D and application of new technologies, development of new products, production or business model innovation, and development of new markets to create market value. According to this definition, innovative entrepreneurs must at least: (1) directly organize or lead innovation activities of enterprises; (2) create market value; (3) be the actual controllers and decision makers of their enterprises.

Innovative entrepreneurs generally have some unique qualities that set them apart from common entrepreneurs, scientists and engineers. As some management experts (Dyer, et al, 2010) point out, innovative entrepreneurs have five characteristics. (1) Associating: Able to successfully connect seemingly unrelated questions, problems, or ideas from different fields to generate new ideas. (2) Questioning: Innovators constantly ask questions that challenge common wisdom. (3) Observing: Finding market opportunities by scrutinizing common phenomena in a different light. (4) Experimenting: Seeing the world as their laboratory, and constantly optimize new ideas and new products. (5) Networking: Devoting time and energy to finding and testing ideas through a network of diverse individuals gives innovators a radically different perspective.

3. Market mechanism and culture hold key to cultivating innovative entrepreneurs

Innovative entrepreneurs are not born out of top-down instructions, but are nurtured in the “soil” of a relatively free and flexible market mechanism and innovation culture. It goes without saying that the government can, by improving the legal system and social environment, play a positive role in the cultivation of innovative entrepreneurs.

Innovative entrepreneurs are a group that has accompanied several technological and industrial revolutions in history, all of which originated from market economies. Economists Joseph Schumpeter and William Jack Baumol pointed out that the most fundamental characteristic of the market mechanism is not to achieve static maximization of welfare through equilibrium, but to stimulate innovation to boost rapid economic growth. In this process, innovative entrepreneurs, as the leader and promoter of innovation activities, play an indispensable role. At the same time, an innovation economy will form an innovation culture that encourages people to challenge and tolerates well-intended failure. Such a culture will influence one generation of entrepreneurs after another, and even lead to some kind of innovation ideology and outlook. As a result, innovative entrepreneurs will emerge in an endless stream, providing a driving force for economic and social progress.

III. Status Quo of China’s Innovative Entrepreneurs

1. China now has a large group of innovative entrepreneurs.

At present, opinions and standards are divided over the definition and number of innovative entrepreneurs. A relatively convenient way is to estimate the number of innovative entrepreneurs from the number of innovative enterprises. According to the national enterprise innovation survey in 2014, about 266,000, or 41.3%, of the 646,000 enterprises above the designated size in China carried out innovation activities. A narrower measure is high-tech enterprises. According to the data of the Torch High Technology Industry Development Center of the Ministry of Science and Technology, by the end of 2016, the number of high-tech enterprises in China had crossed the threshold of 100,000 to reach 104,000. Judging from these data, a large group of innovative entrepreneurs has taken shape in China. The fact that there is still a big gap in overall innovation capacity between Chinese enterprises and those of developed countries reflects the gap between Chinese and foreign innovative entrepreneurs, which lies not in quantity, but in quality.


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