The shift of the primary driving force of China's modernization process from factor-driven to innovation-driven has become the country's established development strategy. Within such a framework, technological innovation takes precedence. However, to make this aspect a driving force for economic development, it is necessary to effectively translate technological innovation into tangible productivity. This is essential to avoid technology being divorced from the economy, and it will be necessary to integrate both into an organically related innovation-driven system.
While the above principles may seem like common knowledge, this issue has not been well addressed in China for decades. From the perspective of think tank research, achieving the conversion of technological innovation into practical productivity is not merely an issue within the small system of the technology field. It involves a larger systemic construction and operation that encompasses technology, policies, industries, enterprises, finance, and investment. The content of this system is broader than the concept of the "innovation system" that focuses solely on technology.
When addressing the issue of the practical transformation of technological innovation, ANBOUND's founder Kung Chan proposed a "Technology Innovation Transformation Productivity Model". It is important to note that this model is a public policy model concerning the conversion of technological innovation into "real productivity". The key to the model lies in identifying three important pathways for technological transformation, namely industrial returns, policy returns, and capital returns. Different pathways represent different policy approaches and transformation models, which are issues worthy of attention and consideration for investment institutions, enterprises, and local governments.
The first type is "industrial returns". This is a traditional mode of technological transformation that primarily leverages the industrial system, organizing companies to apply technological innovation in the production process. It harnesses the power of technological innovation to create new products, enhance production efficiency, improve product quality, and expand production scale, ultimately gaining returns in the industry. In the context of real economic and industrial development, seeking industrial returns through technological transformation is the most fundamental and widespread model. Looking at the development experiences of various countries and the history of technological industry development, the majority of manufacturing industries have followed the path of industrial returns, including the so-called industrial upgrades.
The second type is "policy returns". This relies on the government concentrating resources, issuing relevant policies for guidance and promotion, and harnessing the power of technological innovation to achieve returns on technological innovation and investment. These returns may be reflected in financial data, such as the economic returns of technological innovation investments, or in other non-economic goals, such as industrial security, breakthroughs in critical technologies, and national security. In China, there have been many examples of policy returns in the past, including the development of the solar energy and semiconductor industries driven by policies, as well as the ongoing development of electric vehicles and energy storage industries. It should be noted that, in certain major industrial sectors at the national level, policies may support their development through a comprehensive national system.
The third type is "capital returns". This involves obtaining returns on technology through capital market transactions (such as IPOs, corporate sales, or mergers and acquisitions), and relying on premium valuations in the capital market. The capital return pathway is the mainstream model for the development of technology companies internationally, with the U.S. market being the most representative, forming the typical model of "venture capital - innovation enterprise growth - IPO or acquisition - capital market premium exit". Over the past two decades of globalization, the Chinese market has not only attracted substantial amounts of American venture capital but has also extensively borrowed from the U.S. experience, essentially replicating the American model of capital returns. In addition to the main board market, the Chinese stock market has also established markets such as the Growth Enterprise Market (GEM) and the Science and Technology Innovation Board (STAR) Market, which are tilted toward technology companies. These market structures and basic paths represent the specific application of the American model in China.
Among the three mentioned models, industrial returns and capital returns are internationally prevalent, while the policy returns model has developed a more distinctive character in China, shaped by its unique characteristics. In practical implementation, these three models are not mutually exclusive choices; rather, they often run concurrently. For instance, the Chinese government holds greater influence in resource allocation, and all three models of technological innovation returns have been developed in China, each demonstrating different progress. In a highly market-oriented country like the U.S., capital returns and industrial returns are the absolute mainstream models. However, policies such as the CHIPS and Science Act may also be adopted to guide and stimulate the development of the semiconductor industry in the U.S., enhancing control over the semiconductor industry chain and improving industrial security.
Currently, China has identified innovation-driven development as the core strategy for national development. It can be affirmed that, even in the face of an economic and fiscal downturn in the future, China will continue to allocate more resources to transform technological innovation into productivity and maintain this resource allocation option. Choosing the right path in the mode of technological innovation transforming into productivity has practical significance for enterprises, investment institutions, and local governments, regardless of the economic and fiscal situation.
Seeking industrial returns is the foundational model for the transformation of technological innovation, and the other two models must be built upon the main theme of industrial development. As a major manufacturing country, China has relatively good basic resources and industrial supporting foundations for industrial development. Areas for improvement in the future may lie in the policy environment supporting industrial development, institutional arrangements, and the construction of the industrial ecosystem.
The actual returns of the Chinese capital market are quite poor. Due to various deep interventions of power, the capital market in the country has been in a long-term state of market failure that is difficult to reverse. China and India started their capital markets at roughly the same time. The BSE Sensex index in India has now exceeded 70,000 points, while China's Shanghai Composite Index is still below 3,000 points, essentially stagnant. In such a capital market, even though profits can be made through IPOs, the overall returns are not likely to be high, let alone sustainable. The reasons for the low returns in the Chinese capital market are numerous, including institutional imperfections, significant differences in legal and marketization aspects domestically, the gap in integrity among Chinese companies, and a deviation in the positioning of the capital market domestically (such as positioning it as a financing market rather than an investment market), all of which profoundly impact capital returns in the Chinese market.
It should be noted that in the path of policy returns, the Chinese market actually has significant potential, driven by its distinctive characteristics. As a country with a strong central and local government, China often has strong mobilization and appeal capabilities for resources. This enables the concentration of policy and financial-fiscal resources, which are beneficial for the transformation of technological innovation. Looking at the actual situation in China, investment in the technology industry is rather astonishing, often measured in the trillions. As it stands, China's innovation returns driven by policies have had both successes and failures in practice. For example, in the solar energy industry, the country experienced a surge due to policy stimuli, followed by a collapse across the entire industry. After several years of development, the country has now become the largest producer and exporter of photovoltaic products. In the semiconductor industry, the country has invested enormous amounts over the past 30 years, experiencing both failed chip projects worth hundreds of billions and achieving some success in building the chip industry chain. Chan emphasizes that, despite repeated failures in policy returns within the country, it remains an important path for China's future technological transformation.
Researchers at ANBOUND point out that, in the policy return model of transforming technological innovation, if the government and the market coordinate well, forming a collaborative model of "enterprise + government + investment and financing institutions + think tanks", it can help build an ecosystem of "technological innovation transformation supported by government and policies". If this ecosystem operates smoothly, it will enable all participants to potentially gain significant returns. Under this scenario, enterprises can seize development opportunities and may also receive capital returns. Meanwhile, the government, through policy support and resource mobilization, can promote the development of the technology industry and enterprises, strengthen related industries or industrial chains, and obtain tax returns. On the other hand, investment and financing institutions, with government policy support, have a higher probability of successful investments in enterprises and can also leverage policy concepts to gain premiums. In the construction of the collaborative ecosystem mentioned above, various economic establishments like research institutions, including think tanks, are indispensable. They can play a constructive role in forming policies, obtaining government support, researching enterprise or industry models, assisting in local investment attraction, and facilitating matchmaking services.
Final analysis conclusion:
China has established a national strategy driven by technological innovation for development. It will invest more resources in transforming technological innovation into productivity. ANBOUND proposes that there are three important paths to drive technological innovation transformation into productivity, namely industry returns, policy returns, and capital returns. All three paths have practical value in China, with the policy return model having Chinese characteristics. This is a crucial model that enterprises, investment institutions, governments, and think tanks should pay attention to and actively participate in.
