Is R&D Upgrading China from Imitation to Innovation? An Institutional Analysis of Absorptive Capacity

With its massive investment in R&D, China is generally believed to be getting outfrom the stage of little in-house R&D, building up more R&D capability quickly, andwill gradually become powerful in its own in-house R&D so as to remain globallycompetitive with its own technology. This paper evaluates China’s innovation capabilityat the firm level, with consideration of the overall situation of R&D activities carriedout by firms in China. It is true that many Chinese local firms have jumped from theOEM stage to ODM stage, and many private and State-owned firms begin to haveheavy R&D investment as well. But these product design and R&D activities seemto stagnate at a halfway level. Also some high-end R&D efforts seem to be shrinking.Though most Chinese firms, through a long period of process of technological learningand capability accumulation, finally begin to invest in R&D and carry out relevantprojects, the quality of R&D activities is not so well achieved. The low quality ofR&D investment of Chinese firms is due to the absence of absorptive capacity, i.e.,the high quality external linkages established around Chinese firms, which in turnimpedes the efficiency and effectiveness of in-house R&D projects. Such an absenceof absorptive capacity or efficient innovation linkages has its institutional reason inthe Chinese context. Chinese policy makers shall deepen their perspective on theso-called national innovation system, discover and tackle the real linkage problemswhich are depressing China’s innovation capacity right now.