China’s 13th Five-Year Plan: Capitalise on China’s Innovation Momentum

China’s 13th Five-Year Plan designates to adopt new development concepts in order to ensure the establishment of a moderately prosperous society. It calls for innovation to enhance the competitiveness of various industries and to help private enterprises move towards higher value-added businesses amid intensified global competition. Such policies are expected to boost China’s demand for technology and related services.

With advantages like access to foreign technology, free flow of information and capital and strength in commercialisation, Hong Kong is well placed to capitalise on such increasing demand, especially from mainland Chinese enterprises. An increase in innovation activity would also provide Hong Kong companies with more choice when seeking mainland partners for technological cooperation. Coupled with the convenience afforded by the CEPA arrangements[1], Hong Kong is of an upper hand to tap the increasing demand and resources stemming from the mainland’s determination to accelerate the innovation momentum.

China’s 13th Five-Year Plan will boost its demand for technology and related services.

Hong Kong is well placed to tap the increasing demand for technology and resources stemming from an acceleration of innovation in mainland China.

Innovation as the Prime Development Driver

Innovation is the primary driving force for economic and social development under the 13th Five-Year Plan (2016-2020), as the country steers a course towards enhancing the quality of its development amid the challenges of a changing domestic and international environment. The Plan aims to find new drivers for growth through scientific achievement, while encouraging mass entrepreneurship and innovation. Together with plans to reinforce the implementation of the Made in China 2025 strategy to improve the manufacturing sector’s innovation capacity and competitive edge, while promoting the development of strategic emerging industries, these initiatives are set to have a significant impact on China’s economic and industrial development.

(For more information about China’s 13th Five-Year Plan and Made in China 2025, please refer to:
Opportunities Arising from China's 13th Five-Year Plan: An Overview;
China’s 13th Five-year Plan: Challenges and Opportunities of Made in China 2025)

Areas of development stipulated in the 13th Five-Year Plan include:

• Boosting scientific innovation

  Increase R&D-to-GDP ratio to 2.5% by 2020 (2.1% in 2015)

  Efforts will be made to encourage research and development (R&D), to strengthen technology integration capability, and to import technology from abroad, targeting advanced technologies including next-generation information communications, new energy, new materials, aviation and space, biomedicine, and smart manufacturing. Action will also be taken to improve tax-concession policies for corporate R&D expenditure, and to expand preferential treatment for accelerated depreciation of fixed assets to encourage enterprises to upgrade their equipment and apply new technology.

• Promoting mass entrepreneurship and mass innovation

  The Mass Entrepreneurship and Mass Innovation initiative encourages the development of new technologies, products and business formats, and the establishment of technology-transfer platforms to provide support services to start-up firms. The cultivation of entrepreneurship will be improved and greater scope given to the role of government venture capital in guiding funds. At the same time, the regulatory regime will be improved to regulate the development of rewards-based and equity-based crowdfunding and online lending activities.

Burgeoning Innovation Activities in China

There has been a surge in innovation activities in China, especially those related to R&D that have contributed to substantial advancements in technological development. China’s R&D expenditure expanded rapidly to RMB1.4 trillion in 2015 from RMB34.9 billion in 1995. The R&D-to-GDP ratio also jumped to 2.1% from 0.57% during the same period[2]. Notably, private enterprises have already taken the initiative to invest in R&D activities, accounting for 71% of all the R&D expenditure undertaken in the country in 2014, up from 67% in 2008.

* Figure of large and medium sized enterprises.
^ Industrial enterprises above designated size.
Remark: Figures in bracket represent the share of R&D expenditure undertaken by the enterprises in their revenue derived from principal business.
Source: National Bureau of Statistics of China; Ministry of Science and Technology

^ Industrial enterprises above designated size.
Source: National Bureau of Statistics of China; Ministry of Science and Technology

However, R&D expenditure in terms of GDP intensity as well as the ratio of R&D spending to the revenue of private enterprises still remain low compared to advanced countries such as the United States, Japan and Germany. Due also to the gap accumulated in the past few decades, China will continue to fall behind its foreign counterparts in the near term. As a result, the 13th Five-Year Plan is keen to push for further technological innovation activities in order to enhance the competitiveness of enterprises and to upgrade industries.

(Remark: For further information about China’s R&D activities, please refer to the HKTDC research article: China’s 13th Five-Year Plan: The Challenges and Opportunities of Made in China 2025)

On the other hand, Chinese enterprises have become enthusiastic in recent years about investing in R&D and other innovative activities. While enhanced tax incentives, including those stipulated in the 13th Five-Year Plan, would no doubt be contributing factors, Chinese enterprises are driven to engage in R&D activities by the intensified competition in both the domestic and international markets. Their primary objective is to re-invent themselves and add value to their activities, while ensuring the long-term sustainability of their businesses.

Also, both the enterprises and individuals have been inspired by the success of technology giants such as Alibaba and Tencent. Along with a more liberalised business environment, the number of technology-related start-ups in China – including technopreneurial ventures engaged in technological innovation – has increased exponentially in the past couple of years. In addition to makers, certain enterprises as well as investors are now rushing into different technological ventures – despite risks and keen market competition. Some private enterprises and investors have even joined forces to nurture start-ups, offering them technological and financial resources. The 13th Five-Year Plan is expected to boost such enthusiasm as it promotes the advancement of mass entrepreneurship and innovation as a long-term strategy to facilitate growth.

(Remark: For further information about the innovation momentum sparked by government’s promotion of mass entrepreneurship and mass innovation, please refer to HKTDC research articles: Technopreneurship in China (1): Recent Innovations and Opportunities)

Hong Kong to Capitalise the Cross-Border Opportunities

Undoubtedly, implementation of the 13th Five-Year Plan will boost the Chinese mainland’s R&D and innovation activities. This will enhance the competitiveness of mainland enterprises, potentially intensifying the competition that would pose a threat to other players in the market as a result. Despite such challenges, Hong Kong could ride on the mainland’s innovation momentum to tap the relevant opportunities.

Meeting Mainland’s Demand for Technology Services

The 13th Five-Year Plan calls for innovation as a means to strengthen the competitiveness and innovation capabilities of various industries. It will therefore stimulate demand for numerous types of new and high technology in China. In certain high-tech industries, such as the Internet of Things (IoT) applications and development of the next-generation internet, China currently lacks expertise, which means related R&D and technology applications are somewhat constrained. However, Hong Kong’s technical personnel are well versed in advanced foreign technology and excel in using technologies developed to international standards/frameworks. They can therefore assist in the commercialisation of related projects on the mainland, helping them to meet the technological demands listed in the 13th Five-Year Plan.

Servicing the Mainland’s Flourishing Technopreneurship

Given the 13th Five-Year Plan’s strategy to promote mass entrepreneurship and mass innovation, makers and investors will be increasingly encouraged to engage in different technological ventures. This will elicit huge demand from “technopreneurs”, not only for financial resources but also for support in areas such as technology, market connections and entrepreneurial development. Technology players and investors based in Hong Kong could take advantage of the city’s long-standing advantages, such as free flow of information and capital, to become important partners for mainland technopreneurs and help satisfy their demand for all kinds of services.[3]

Tapping Mainland’s Innovation Resources

Hong Kong companies are active when it comes to undertaking R&D and innovation activities. According to the latest figures[4], 3,878 Hong Kong companies were involved with R&D activities in 2014, with expenditure amounting to US$954 million, an increase of 6% from the previous year. Innovation activities were even better supported, with 6,821 companies engaging in such activities and spending totalling US$2.18 billion, a rise of 5.6% from 2013. Notably, a substantial portion of these Hong Kong companies had cooperation arrangements with external partners to undertake R&D and technological innovation activities, especially those based in Hong Kong and mainland China. As the 13th Five-Year Plan is set to boost the mainland’s innovation activities, Hong Kong companies are therefore likely to have more options when choosing mainland partners for joint technological cooperation projects.

Hong Kong Companies Involved in Technological Cooperation with External Partners

Remark:
(i) Total numbers of Hong Kong companies collaborating in R&D and technological innovation) with external parties were 849 and 1,223, respectively.
(ii) Each company may be collaborating with more than one external party, and therefore the total of the percentage shares exceeds 100%.
(iii) 2014 figures
Source: Census and Statistics Department, Hong Kong SAR Government

Riding on the benefits of CEPA

Under the CEPA arrangement, Hong Kong service suppliers are allowed to establish wholly owned enterprises to provide inter-disciplinary research and experimental-development services on the mainland. As from 1 June 2016, they can also enjoy national treatment to provide such services in pursuance of the Agreement on Trade in Services under CEPA. With such convenience, Hong Kong companies may consider utilising the technological resources on the mainland, especially the human capital, to undertake and provide R&D or related services there. In addition, for those already with a set-up on the mainland, Hong Kong companies may also enjoy the corresponding tax benefits when undertaking innovative activities at their mainland premises and improve their innovative capabilities.

[1] CEPA refers to the “Mainland and Hong Kong Closer Economic Partnership Arrangement”.

[2] Source: National Bureau of Statistics of China

[3] For further information, please refer to HKTDC research article: Technopreneurship in China (1): Recent Innovations and Opportunities)

[4] Figures from survey undertaken by the Census and Statistics Department of the Hong Kong SAR Government.

[5] For further information about CEPA, please refer to the web site of the Trade and Industry Department of the Hong Kong SAR Government: http://www.tid.gov.hk/english/cepa/index.html