Growth through Innovation An Industrial Strategy for Shanghai By Shahid Yusuf Kaoru Nabeshima April 22nd, 2009
Download 0.88 Mb.
|
- Navigate this page:
- Venture Capital
VI. Innovation OutcomesThe expenditure on R&D is a highly imperfect indicator of innovation capability because a lot of what is classified as R&D by firms is little more than minor product development and testing. Calling it R&D brings tax credits or other financial benefits but is not conducive to innovation. The indirect measures of innovation capacity are invention patents, papers published in refereed scientific journal, and new products. The newness of the latter is also often suspect and newness cannot be equated with innovation, nevertheless, it is a pointer. Patents and papers infrequently lead to commercial innovation however, these two contribute to the pool of scientific knowledge and useable ideas out of which come innovative products, processes or services which can be profitable over the longer term. Strong encouragement by central and municipal governments, starting in 1999, produced a sharp increase in these three indicators of innovation capacity, after 2001. Table 5 .50 indicates how Shanghai has performed relative to China as a whole and to Beijing its closest competitor in patenting.125 Although the shares of applications from Shanghai are close to those from Beijing, patent applications emanating from Beijing seem to be approved more frequently, suggesting that the quality of patents from Beijing is higher. Table 5.50: Share of Domestic Invention Patents from Beijing, Shanghai, and Hong Kong, 1990-2006 (%)
Note: only invention patents are included in the figure. Source: Shanghai Science and Technology Yearbook 2007, China Statistical Yearbook on Science and Technology various years. While the share of patent applications (including invention, utility, and design) from universities and colleges are increasing in recent years, more than two-thirds of patent applications come from firms (see Table 5 .51).126 Universities submit 25 percent of the invention patents, but the majority of patents are still granted to firms.127 Table 5.51: Share of Patent Applications by Different Types of Organizations in Shanghai (%)
Source: Shanghai Science and Technology Yearbook 2007 Table 5.52: Share of Invention Patents by Different Types of Organizations in Shanghai, 2006 (%)
Source: Shanghai Science and Technology Yearbook 2007 Firms in communication equipment, computers and other electronic equipment are in the forefront of applicants for invention patents and in being granted patents.128 In 2006, firms in this subsector applied for 1,289 patents (more than half of all applications for invention patents) and were granted 430 patents (about one-third of all invention patent grants) (see Table 5 .53). Firms in smelting and pressing of ferrous metals, general machinery, chemicals, medicine, and transport equipment follow the electronic industry in terms of patents. Firms in other manufacturing subsectors rarely apply for patents. Table 5.53: Distribution of Patent Applications and Grants in Shanghai among Manufacturing Subsectors, 2006
Source: Shanghai Science and Technology Yearbook 2007 The number of papers published also increased dramatically (see Figure 5 .17). Clearly, innovation capacity as measured by these imperfect criteria, is on an upswing. Figure 5.17: Number of Scientific Papers Published 
Source: Shanghai Science and Technology Yearbook 2007 Introduction of new products to the market is also viewed as an indicator of innovativeness. In 2007, revenues from such new products accounted for 21 percent of gross value of industrial output in Shanghai as against 13 percent in 2001 (see Table 5 .54). There are a number of subsectors where the share of revenues from new products exceeded the average for Shanghai. It is noteworthy that equipment producers of various kinds lead the field. Three subsectors stand out. These are: general equipment; transportation equipment; and communications equipment, computers and other electronic equipment. These three subsectors account for more than 70 percent of the new product output, suggesting that their outputs are much larger than those coming from other subsectors, even innovative ones. Judging from Table 5 .54, it appears that these three subsectors also have the highest share of new products in exports, although export intensity and the revenues from new products are not correlated. There are some subsectors that have high export intensity (e.g. metal products, chemical fibers, and rubber products), although they do not introduce many new products. Since 1994, manufacturers of general equipment, transportation equipment, and communications equipment, computer and other electronic equipment, have introduced the largest number of new products (see Figure 5 .18). Table 5.54: New Products Development of Industrial Enterprises in Shanghai, 2007
Note: Export intensity is calculated as the share of new products exports over the revenue from the new products. Data is based on firms with revenues greater than 5 million yuan. Source: Shanghai Statistical Yearbook 2008 Figure 5.18: Changes in Share of New Product Output in Shanghai 
Source: Shanghai Statistical Yearbook 2008 Another indicator of technological, if not innovation capacity is the changing share of high tech components and capital goods in Shanghai’s exports. Close to 40 percent of exports from Shanghai are high-tech products up from 20 percent in 2001 (see Table 5 .55). The bulk of the high-tech exports are computer and telecommunication related goods. This also is a promising trend although thus far, most of these exports are produced by foreign invested firms using imported inputs. Table 5.55: Value of Exports of High-tech Products in Shanghai (2001-2006), billion US$
Source: Shanghai Science and Technology Yearbook 2007 The level and distribution of FDI offers an additional indirect perspective on how Shanghai’s comparative advantage is perceived by foreign investors.129 It is useful because such investors are able to compare Shanghai’s medium term potential with that of other cities in China and abroad and to make decisions which weigh a variety of options. By selecting specific industries, MNCs are factoring in incentives as well as technological capacity, the quality and productivity of the workforce, the adequacy of the physical infrastructure, and the livability of the city. From the information contained in Figure 5 .19 one can see how rapidly FDI in Shanghai has risen since 1990. In 1990, the total FDI inflow was US$0.2 billion and there were hardly any wholly-owned foreign firms. By 2007, the actual FDI flow had increased to US$7.9 billion, three-quarters into wholly-owned foreign subsidiaries. Figure 5.19: Amount of foreign direct investment inflow to Shanghai (billion US$) 
Source: Shanghai Statistical Yearbook 2008 These are encouraging trends because they suggest that foreign businesses are beginning to view Shanghai as a center for advanced manufacturing activities which is making progress in perfecting a local innovation system. Venture CapitalMuch of the patient capital raised by firms in Shanghai comes from the banking sector which reflects an East Asia wide pattern. Banks being the dominant financial institutions do engage in venture financing, partly as a way of building their lending business.130 However, bank lending is only a partial substitute for the kind of risk capital innovative firms need, hence attention in China and elsewhere has focused on the venture capital industry. In 2007, there were 236 venture capital firms (including foreign venture capital) in Shanghai with investment of 30 billion yuan (see Table 5 .56). VC industry in Shanghai accounts for 40 percent of all VC activities in China (Shanghai Venture Capital Association 2008). Table 5.56: Number of Venture Capital Firms and Capital Committed in Shanghai, 2004-2007
Source: Shanghai Venture Capital Association (2008) As one would expect, the type of subsector that VCs invest in is heavily geared towards high-tech areas such as software and networks; biotechnology; microelectronics; new materials; and also financial services (see Table 5 .57), although in recent years, the spread among different subsectors is lessening. The VC industry’s areas of focus overall are stable, but those by foreign VCs shift from one year to the next. In 2004, investments in software and biotech accounted for almost half of foreign VC investment. However, by 2006, the focus had shifted to telecommunication and traditional manufacturing. Broadly, the area of concentration is similar between the domestic and foreign firms in 2007, although foreign firms are more active in telecommunication and less so in biotech (Table 5 .58). Table 5.57: Areas of Investment by VC in Shanghai, 2004-2007 (%)
Source: Shanghai Venture Capital Association (2008) Table 5.58: Area of Investment by Foreign VC in Shanghai, 2004-2007 (%)
Note: Foreign VC includes those from Hong Kong, Taiwan (China), and Macao (China). This table is based on 16 foreign firms among the 85 VC firms sampled and returned the survey. Source: Shanghai Venture Capital Association (2008) VC investment in Shanghai is concentrated in the growth and expansion stage of the firm and not in the very early stages. Compared to the distribution in 2006 and that in 2007, the latest year for which information is available, has not changed radically, although there is more emphasis on the seed stage (see Table 5 .59). Foreign VCs also tend to prefer growth and expansion stages. This is also the pattern of venture capital investment in the United States and elsewhere. Typically, seed capital comes from angel investors rather than from venture capital (Auerswald and Branscomb 2003). Table 5.59: Distributions of VC Investment in Shanghai, 2006 and 2007 (%)
Source: Shanghai Venture Capital Association (2008) Among the sampled VC firms, market prospects were singled out as the most important consideration before making an investment, followed by the quality of the management team, the financial condition of the firm, and the technological capability of the firm (see Table 5 .60).131 Foreign firms assign similar weights on these factors, except for technological capabilities. Instead, foreign VCs put more emphasis on the integrity of corporate governance. Table 5.60: Factors Considered Important by VC Prior to Investment (%)
Note: based on the responses by 83 firms sampled in 2007 Source: Shanghai Venture Capital Association (2008) The most often used vehicle for exit is acquisition by domestic non-listed firms (or natural persons) (see Table 5 .61). Listing on the stock exchange abroad, ranks as the second most favored method. Combining this with domestic listings accounts for close to 40 percent of the exits. The balance is through acquisition by various types of firms. What is notable is that the acquisition by listed foreign firms is quite small, representing only 1.6 percent of the total. Table 5.61: Modes of Exit by Start-Up Firms (%)
Source: Shanghai Venture Capital Association (2008) The number of people working for VCs more than doubled from 2003 to 2007. The number of professional managers also increased during these period. However, it seemed that the increase in the supply of professional managers was not able to keep up with the expansion of VC industry and the share of professional managers was decreasing until 2005.132 Since then, the supply of managers has begun outpacing the expansion of the industry. Foreign VCs are more often staffed with professional managers relative to the overall sample. The trend should enhance the effectiveness of the VC industry and facilitate the growth of more technology intensive firms. Nevertheless, more capable VCs can only make a contribution if innovative ideas are forthcoming. Venture capital cannot push innovation. It is pulled by innovation generally of the kind where the payback period is in the region of five years.133 Table 5.62: Number of Employees at VC in Shanghai, 2003-2007
Note: based on sampled firms Source: Shanghai Venture Capital Association (2008) Directory: curated curated -> Concept stage curated -> Concept stage curated -> Republic of Côte d'Ivoire Urbanization Review curated -> Report No: aus11011 Central America curated -> Report No. 94474-pk fiscal Disaster Risk Assessment Options for Consideration curated -> Environmental and Social Management Framework for the Costa Rica Telecommunications Sector Modernization Project curated -> Environment Impact Assessment For Jiangxi Shangrao Sanqingshan Airport Beijing Guohuantiandi Environmental Technology Development Center. Ltd. Oct. 2012 Content curated -> Report No: 70178. People's Republic of China curated -> Making Nutrition Policy Central to Development Understanding the Political and Institutional Conditions for Policy Change Case Study of the Political Economy of Nutrition Policies in Ethiopia Prepared By Download 0.88 Mb. Share with your friends:
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||