Persistent Problems in China's Innovation System: Institutions and Politics

China has been persistently trying to create a competitive innovation system through state intervention and intensive capital investments. This chapter takes as its point of departure that technological advances spawning productivity increases will be critical for China to overcome the downward pressures on economic growth, and that the country must continue its march toward the world's technological frontier if Beijing wishes to close the gap in comprehensive national power with the United States. Throughout the 2010s and beyond, President Xi Jinping introduced significant new policies designed to achieve these goals, including the well-known Made in China 2025 initiative. Four institutional constraints continue to hinder the country's efforts: (1) the structure of the state apparatus, as well as incentives for local and provincial officers; (2) the financial system's bias of credit allocation toward state-owned enterprises/state-favored firms and the resulting managerial deficiencies of these firms; (3) redundant programs and the information asymmetries due to sheer geographic size and population of China; and (4) the balance of exports vis-à-vis government procurement in industrial policy design. Although there have been significant advances in the number of patents and scientific publications, as well as the rise of industrial clusters in certain regions, China's political system, with growing centralization under Xi, and the incentives embedded in the institutional apparatus, continue to prevent the formation of an efficient and competitive innovation system in the country.