Clean technology R&D and innovation in emerging countries—Experience from China

ARTICLE IN PRESS Energy Policy 38 (2010) 2916–2926

Contents lists available at ScienceDirect

Energy Policy journal homepage: www.elsevier.com/locate/enpol

Clean technology R&D and innovation in emerging countries—Experience from China Xiaomei Tan n World Resources Institute, 10G Street, NE, Washington, DC 20002, USA

a r t i c l e in f o

a b s t r a c t

Article history: Received 6 November 2009 Accepted 14 January 2010 Available online 1 February 2010

This paper touches upon two key issues related to clean technology deployment in emerging countries: what is the life cycle of R&D and innovation? And where does the R&D funding come from? The paper holds that the innovation climate, system and process in emerging countries do not follow the same trajectory as those in developed countries. Crafting an innovation model that is adapted to the needs and conditions of emerging countries thus is critical. Through revealing the four phases of an innovation life cycle in emerging countries, the paper highlights the dominant role of the public sector in clean technology R&D. With regards to R&D funding, the paper concludes that emerging countries could craft their domestic policy to spur clean technology R&D and innovation. China’s experience demonstrates an array of policy measures that could reach this goal. These include designing a national science and technology strategy with a focus on clean energy, establishing funding programs to support clean energy R&D, assembling and managing multidisciplinary teams to bring together different types of expertise, and creating favorable policy environment to incentivize the private sector’s investment in clean technology. & 2010 Elsevier Ltd. All rights reserved.

Keywords: Clean technology R&D Innovation China

1. Introduction Technology progress is at the center of human development. Looking forward, it is expected to play a crucial role in tackling climate change. Our ability to meet the climate-change challenge, on the technology front, depends on two key factors: the direction of technological innovation and the pace of technological innovation. The direction of innovation, to a large extent, is contingent on a balanced, technology-neutral approach to energy policy (Weiss and Bonvillian, 2009; Diazanadon et al., 2009). The pace of technological innovation, on the other hand, depends on a suite of factors. Technological innovation through the history is highly correlated with a country’s income level (Klenow and Rodriguez-Clare, 1997; Caselli and Coleman, 2001; Jerzmanowski, 2002; Comin and Hobijn, 2004). There are huge technological gaps among developed, emerging and developing countries (Fig. 1), between developed areas within a country, and their less developed counterparts. Ever since the Industrial Revolution, developed countries have dominated the technological frontier; they are the ones that innovate and adopt new technologies the earliest. Emerging and developing countries, however, approach technological innovation primarily through the

n

Tel.: +1 202 729 7628; Fax: + 1 202 729 7651 E-mail address: [email protected]

0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2010.01.025

absorption and adaptation of preexisting and new-to-market or new-to-the-firm technologies, instead of the invention of new technologies (World Bank, 2008). The technological disparity between income levels is also reflected within countries, especially within emerging countries. Certain sectors in developed urban areas in China or India, for example, may use world-class technology, but elsewhere in these countries is still using non-frontier technology. Globally, the pace of technology diffusion has accelerated over the past 200 years. The acceleration is especially striking in certain sectors. However, technology deployment in non-developed countries is comparatively slow, particularly in developing countries. Only 36% of emerging and developing countries have reached the 25% penetration threshold and only 9% have reached the 50% threshold for the technologies invented between 1975 and 2000 (Comin and Hobijin, 2004). This deployment speed is detrimental to the cause of tackling climate change. Its impacts on emerging and developing countries are especially harmful, because the bulk of technological progress in these countries comes from the adoption and adaptation of pre-existing but newto-market technologies, and through the spread of technologies across firms, individuals, and the public sector within a country (World Bank, 2008). This paper examines efforts made by China—the world’s largest gross emitter of greenhouse gases—to create an enabling environment for R&D and innovation in the field of clean technology. The goal is to highlight how governments in emerging and developing

ARTICLE IN PRESS X. Tan / Energy Policy 38 (2010) 2916–2926

84%

90% 80% 70% 60% 50% 33%

40% 30% 12%

20% 10%

0% 1%

3% 3%

4%

0% Low-income countries

Lower-middle- Upper-middleincome income countries countries

High-income countries

Royalty and license fee receipts, 2004 (Percentage of GDP) Scientific and technical journal articles, 2003 (Percentage of total) Fig. 1. Scientific and innovative outputs by income. Data source: World Development Indicators and World Intellectual Property Office Data.

countries can craft effective technology policies against the backdrop of a pending international climate agreement expected to trigger significant new financing for clean technology assistance. The paper summarizes China’s policies to prioritize, fund and deploy clean technology R&D and innovation over the short and medium terms. These comprehensive policies reflect China’s ambition of emerging as a global power in science and technology through clean technology R&D and innovation.

2. Life cycle of innovation in emerging countries Scholarly studies on innovation started with Joseph Schumputer (1934), who first distinguished between invention, an idea made manifest, and innovation, an idea applied successfully in practice. Innovation leads to increased productivity, and it is the fundamental source of increasing wealth in an economy. Therefore, in the past decades scholars from various disciplines have focused their research on this important topic. There are four theories of innovation. The first of these concepts is a linear or pipeline model. In this model technological advance is pulled by the expansion of the knowledge frontier, which in turn leads to invention, prototyping, development and finally innovation. The linear model can be applied either at a firm level or an economy-wide level (Mytelka and Smith, 2001). At the firm level it involves a cycle flowing from R&D to production engineering and then marketing. At the economy-wide level, it covers phases from basic research, to applied R&D, manufacturing and then commercialization. The second concept is a non-linear innovation theory. This theory highlights the uncertainties and unpredictable nature of the innovation process (Rosenberg, 1976, 1990). This process is a dynamic interaction among multiple variables, including (1) research; (2) the existing body of scientific and technological knowledge; (3) the potential market; (4) invention; and (5) the various steps in the innovation process (Kline and Rosenberg, 1986; OECD, 1992). Within this process, the firms respond to the economic environment as well as policy environment. The process of innovation therefore is perceived as a complex system, which is both environmentally dependent and specific

2917

(Lundvall, 1992, 1995; Freeman, 1988; Freeman and Perez, 1988; Nelson, 1993; Pavitt, 1984). The third theory focuses on the management of innovation and the organizations in which innovation takes place. Nelson’s groundbreaking book, National Systems of Innovation (1993), provides an analytic framework linking institutional arrangements to technological advances. The book identifies the major institutional actors in many innovation systems, including government funded research universities, government labs, educational institutions, large corporations and their R&D labs (Bonvillian and Weiss, 2009). Nelson saw the firms as the most active and dominant element in this structure. However, the private sector’s dominance has been gradually taken over by the collaboration between the public and private sectors. Block and Keller (2008) for example, discovered that a majority of the innovation in the US today resulted from collaboration. In the 1970s, approximately 80% of the award-winning US innovations derived from large corporations acting on their own. Today, nearly two-thirds of the award-wining innovations in the US involve certain interorganzational public–private collaboration. This reflects the more collaborative nature of the innovation process and the greater role in private sector innovation contributed by government agencies, federal laboratories, and research universities (Block and Keller, 2008). The last innovation model is introduced by Vernon Ruttan (1971, 1978, 2001), whose work provides comprehensive assessment of how technology is produced and diffused. He believes that technology changes are induced through the responses of farmers, entrepreneurs, scientists, and public administrators to resource endowments and changes in the supply and demand of factors and products. Therefore, his model is called induced innovation model. All these theories have deepened and broadened our understanding of innovation and thus shed lights on how national governments can craft better innovation policy. However, in terms of applicability, these theories do not seem to be directly suitable for emerging and developing countries, because the nature of the challenges that emerging and developing countries face is different from what the developed world is exposed to (Aubert, 2004). These differences are reflected in the following three aspects: (1) innovation climate; (2) innovation systems; and (3) innovation processes. The innovation climates in emerging and developing countries are shadowed by their low levels of educational attainment, the poor business environment and the fragmented information infrastructure (Aubert, 2004). In fact, these weaknesses also explain why the overall development in emerging and developing countries is fettered. The problematic innovation climate consequently leads to poorly structured innovation systems. First, the private sector in emerging and developing countries is weak, where numerous micro-enterprises operate in an informal economy and foreign-based firms tend to be disconnected from the rest of the economy (Aubert, 2004). Second, on the knowledge side, research communities often operate in an ivory tower, cutting off from practical purposes. Third, government agencies’ supports are enormous, covering enterprise development, R&D, manufacture, export, and foreign investment. Given this over crowded support system, it becomes difficult to establish a coordinated and efficient organization for innovation (Aubert, 2004). The conditions described above make innovation process in emerging and developing countries hard to launch. Yet, it is precisely the lack of innovation process that makes emerging and developing countries stay un-developed. Thus, it requires urgent attention to thinking about an innovation model accommodated with the needs and conditions of emerging and developing

ARTICLE IN PRESS 2918

X. Tan / Energy Policy 38 (2010) 2916–2926

countries. Such a model should consider two key circumstances: the public sector instead of private firm plays a decisive role in emerging and developing countries’ innovation processes; and to these countries, innovation means absorbing, deploying and diffusing existing technologies rather than expanding the technological frontier and creating cutting-edged technology. Linsu Kim’s work on Korea’s innovation process provides insights into how innovation is launched in newly industrializing countries (Kim, 1983, 1985, 1988, 1997). According to Kim, technological capability, which refers to ‘‘the ability to make effective use of technological knowledge in efforts to assimilate, use, adapt and change existing technologies’’ (Kim, 1997, (4) is the key to the launch of innovation. The role of the government in this process is overwhelming and multifaceted. The Korean government, for example, has adopted an array of policy instruments designed to facilitate technological learning in industry and in turn strengthen the international competitiveness of the economy. These instruments can be understood from three perspectives: market mechanism, technology flow and time (Kim, 1997). Fig. 2 pictures the life cycle of innovation and R&D regarding clean technologies in emerging and developing countries, where the cycle is dissected into four phases. Introducing appropriate clean technologies is the beginning of the life cycle. Two criteria exist to assess if introduced clean technologies are appropriate: a country’s capacity to adapt a specific clean technology and the technology’s potential impact on carbon reduction. Depending on each country’s circumstance, different clean technologies might have different effects in carbon reduction. Therefore, identifying country-specific clean technologies is pivotal. Once a technology is identified, it is important to judge whether the country possesses the capacity to adapt and diffuse the technology. China’s National Science and Technology Plan—the Medium- to Long-Term Plan for the Development of Science & Technology (S&T National Plan), for example, requires an assessment of whether foreign technologies that are imported can be absorbed and re-innovated. Contingent on the type of the imported technology, a specific Chinese government agency is assigned to undertake the feasibility study. The second phase involves reverse engineering or learning by doing. Reverse engineering refers to the technology learning benefits that arise through utilizing a technology. The more a group repeats a task, the more adept or efficient that group becomes at that task (IPCC, 2007). Through

adapting introduced clean technologies to local conditions, emerging and developing nations could identify important roadblocks and areas for improvement, which consequently leads to innovation. In fact energy R&D and innovation in emerging and developing countries primarily involve learning to manufacture products or utilize technology that is invented and has been employed for some time somewhere else. Reverse engineering is a broad process, involving multiple actors such as component and system producers, universities and research institutes, upstream and downstream firms, and government agencies. Coordination among these actors is crucial, as demonstrated by the following example, and oftentimes it is governments that take this important role. Once a technology is decoded, it moves on to the stage of manufacture. In this phase, the work of component and material producers, as well as system designers, takes center stage. Small and incremental technology design improvement is the key component of R&D and innovation at this stage. The last phase is exporting clean technologies to other countries. This phase involves marketing, contracting, sales and international cooperation. In this respect, R&D is expanded to all levels of the process. The four phases of the life cycle, however, are intermitted in real life. There is no distinction between borders where a phase ends and starts. The development of supercritical/ultrasupercritical (SC/USC) technology in China provides an ideal example of the innovation cycle in emerging and developing countries. The Chinese government has long considered SC/USC as a key clean technology. A number of policies, measures, instruments and co-operative arrangements have been designed and implemented to facilitate the localization and to accelerate the diffusion of the technology. China’s heavy reliance on coal justifies this strategic focus. Coal contributes to over 75% of electricity in China. In the past decade, China has seen rapid growth of coal-fired power generation. From 2003 to 2008 the country more than doubled its generation capacity, placing it at the second place next to the US. While adding new coal-fired power generations, China has been expeditiously improving its power plants’ energy efficiency. In the past 10 years China’s fuel consumption per unit of electricity generated has steadily decreased (Fig. 3). No doubt the development of SC/USC technology significantly contributed to the rising energy efficiency. China now even boasts the capacity to manufacture and export SC/USC technology. QinBei Power

Fig. 2. Life cycle of innovation and R&D in emerging and developing countries.

ARTICLE IN PRESS X. Tan / Energy Policy 38 (2010) 2916–2926

2919

700

385

Coal-fired power generation, GW

600

375

375 370

370 366

500

365 360 357

400

355 350

300

350 345

289.77

329.48

391.38

483.82

554.42

601.32

2003

2004

2005

2006

2007

2008

200

Coal consumption, gce/kWh

380

380

340 335

Year Fig. 3. Electricity generation versus coal consumption in China. Data source: China Energy Development Report, 2008.

Plant’s two 600 MW SC units and Yuhuan Power Plant’s four 1000 MW USC are all manufactured in China. China operated its first SC plant in 1992, when the former State Economic and Trade Commission (SETC) purchased two 600 MW SC units from the ABB Group and the GE Power Solutions. Through operating these two units, China started the learning process. The first stage of the process involves feasibility study and project planning. The former State Power Corporation (SPC) and former State Administration of Machinery Industry (SAMI) were in charge of these two tasks. The two agencies first organized a group of experts to examine if China had the capacity to absorb the technology and which organizations should be included in the technology localization. After 3 years initial learning, the 10th Five Year Plan officially endorsed the localization of 600 MW SC as a Key National Program. The program covered the importation, adaptation and innovation of three key SC components: boiler, turbine and generator. The second stage of the process mainly includes reverse engineering the technology. This was led by the former State Development and Planning Commission (SDPC). The SDPC directed a collaborative R&D with participants from China Machinery Industry Federation (CMIF), Dongfang Electric Corporation, Harbin Electric Corporation, state funded research centers, and major universities such as Tsinghua University, Shanghai Jiaotong University and China University of Mining and Technology. After 5 years collaborative R&D, China basically decoded the technology. In 2003 China’s first two SC units were completed by Harbin Electric Corporation and Qinbei Power Plant was selected as the localization base. In 2005 Qinbei successfully operated the two 600 MW SC units. While pushing for the localization of SC, China started the feasibility study of USC technology in 2000. Two years later the Ministry of Science and Technology (MOST) officially approved the USC R&D and deployment plan. The plan was constructed under the National High-tech Program (863 Program) during the 10th Five Year Plan. Shanghai Electric Corporation and Harbin Electric Corporation were tasked to manufacture the first 1000 MW USC technology. In 2004 the Huaneng Group’s Yuhuan Power Plant was chosen as the localization base. Two years later, in December 2006 a total of four 1000 MW USC units started to operate at Yuhuan. The success of the localization of SC/USC technology in China entails multiple benefits. The ultimate benefit, of course, is the

Table 1 Total plant capital cost. Data source: Hogan et al., 2007.

Subcritical (300 MW) Supercritical (600 MW) Ultrasupercritical (1000 MW)

China (US$/kW)

OECD (US$/kW)

650–800 550–700 550–700

1095–1150 950–1350 1160–1190

dramatically decreased cost. Table 1 shows that the capital cost of building a SC or USC plant in China is significantly lower than that in OECD countries. This makes SC/USC technology more affordable and consequently results in accelerated diffusion of the technology in China. By the end of 2008, China had a total of 93 SC/USC units across the country. This is only second to the US, which has a sum of 120 units. In terms of capacity and efficiency, China’s technologies are comparable to those in the countries owning the most advanced SC/USC technologies, although China developed the technologies nearly 30 years later than them (Table 2). China now is on board to export the SC/USC technology. In 2008 China’s Dongfang Electric Corporation sold a 600 MW SC unit to Turkey. This was China’s first export of SC technology. In September 2009 Dongfang signed a contract with the Indian East Coast Electric Power Corporation to build a coal-fired power plant equipped with two 66 MW supercritical units. The contract not only includes equipment and facilities but also expertise and services. In addition to Dongfang, Shanghai Electric Power Corporation’s overseas sales have seen a sharp increase, accounting for 45% of total revenue in 2008, up from 13% in 2006 (Autonet 2009). Thanks to its significantly lower price and fair quality, it is expected that the made-in-China SC/ USC technology will occupy the international market quickly in the near future. This in turn facilitates a rapid diffusion of clean technology in emerging and developing countries (Fig. 4).

3. How to fund clean technology R&D and innovation? The public investment in clean technology R&D is universally inadequate, both at absolute and comparative levels. At the absolute level, current government funding of R&D is impossible

ARTICLE IN PRESS 2920

X. Tan / Energy Policy 38 (2010) 2916–2926

Table 2 Comparison of SC/USC units among six countries by the end of 2008. Data source: Nalbandian (2008). Country

First SC/USC built

Number of SC/USC units

Average unit capacity (MW)

Average pressure

Average reheat (1C)

First reheat (1C)

China US Japan Germany UK India

1991 1959 1968 1960 1967 2008

93 120 53 21 2 1

646 724 661 585 375 660

25.3 25.0 25 26.0 25.1 24.7

563 543 562 551 599 540

568 543 575 563 568 565

Fig. 4. Localization process of SC technology in China.

to meet the real needs, while at the comparative level, the R&D funding in clean technology is small compared to other sectors of the economy. The world’s biggest R&D spender, the US, for example, invests roughly 3% of GDP in R&D, while only 10% of that is in the energy sector. By contrast, R&D investments in the medical and biotechnology field are approximately 15% of sales, almost a staggering 40 times more than in the energy field (Kammen, 2008). Hence, the urgency for energy R&D funding is irresistibly high. Many countries across the world have begun making serious investments in clean technology R&D. According to a report by Breakthrough Institute and the Information Technology and Innovation Foundation, China, Japan and South Korea have already passed the US in the production of most clean energy technologies, and over the next 5 years, the governments of these nations will out-invest the US three-to-one in these sectors (2009). In the US, American Recovery and Reinvestment Act of 2009 pledged a $5 billion increase in energy R&D fund. Recently a group of 34 US Nobel laureates wrote a letter to urge congress to include the fund in Climate Legislation. ‘‘The stable support this fund would provide is essential to pay for the research and development needed in the US, and to achieve their goals in reducing greenhouse gases at an affordable cost’’ (FAS, 2009). Earlier OPEC nations created a $750 million clean tech fund to develop cleaner and more efficient petroleum technologies for the protection of the local, regional and global environment (GreenTech, 2007). Funding for clean technologies R&D in emerging and developing countries is a rather controversial issue in a way that these countries request an international fund for supporting their development and deployment of clean technologies. Some

countries regard such a funding support as a pre-requirement for their mitigation actions. The developed world, however, is not ready to promise any substantial support. The financial crisis has made such a promise even vaguer. A difficulty related to such an international fund is to work out the level of funding needed for these countries’ decarbonization actions. There are a range of estimates. According to IEA, to develop, deploy and diffuse 17 key technologies globally will require about $1 trillion per annum between now and 2050 (IEA, 2008). Another estimate suggests that the funding needed will range from $97 billion to $149 billion (Climate Catalyst 2009). Considering these estimates, the European Commission proposed global public support for energy R&D should at least double by 2012 and quadruple by 2020 (European Commission, 2009). In 2008 the US Congress proposed $400 million per year over 5 years to support the deployment of clean energy technologies in developing countries. This will be amounted to $2 billion over the course of 5 years. More recently the US Secretary of State Hillary Clinton pledged to work with other countries to jointly mobilize $100 billion a year by 2020 to help developing countries cope with climate change (Clinton, 2009). Are these proposed funds likely to meet the real needs? Are the entrusted international institutes able to integrate climate change into economic development plans? No doubt these are the variables that are beyond developing countries’ control. This reflects the weakness of the existing solutions to the financing issues. In fact most solutions alike come down to an international funding inflow from the rich world to the poor world, but little thinking has been devoted to what the developing world can do to direct and finance their R&D toward the goal of mitigation. This section examines efforts made by China—the world’s largest gross emitter of greenhouse gases—to

ARTICLE IN PRESS X. Tan / Energy Policy 38 (2010) 2916–2926

create an enabling environment for R&D and innovation in the field of clean technology. The goal is to highlight how governments in emerging and developing countries can craft effective technology policies against the backdrop of a pending international climate agreement expected to trigger significant new financing for clean technology assistance. The section summarizes China’s policies to prioritize, fund and deploy clean technology R&D and innovation over the short and medium term and those comprehensive policies reflect

Table 3 China’s S&T National Plan: key elements. Data source: Ministry of Science and Technology (MOST).

Four targets

By 2020 Five strategic focuses

Invest 2.5% of GDP in R&D

Develop technologies in energy, water resources and environmental protection Reduce China’s dependence on foreign Provide innovation in IT and new technologies to 30% materials to improve China’s technologies in manufacturing Increase the contribution of Develop biotechnology to further its technologies to economic growth to application in agriculture, industry, 60% human and health services Rank in the world’s top five countries Accelerate the development of in patents granted and citations aerospace and marine technology used in international science paper Strengthen R&D in basic science and cutting-edge technology

Table 4 China’s 11th Five-Year S&T Plan: key elements. Data source: MOST. By 2010 Invest 2% of GDP in R&D Reduce China’s dependence on foreign technologies to 40% Increase the contribution of technologies to economic growth to 45% Rank in the world’s top 10 countries in citations used in international science paper Rank in the world’s top 15 countries in patents granted Increase the ratio of added value of high-tech products versus added value of manufacturing reach to 18% Have 50 million people work in the field of S&T, including 7 million scientist, technicians and engineers

Fig. 5. China R&D expenditure and intensity, 1998–2008. Data source: China S & T Statistics Data Book, MOST.

2921

China’s ambition of emerging as a global power in science and technology through clean technology R&D and innovation. 3.1. Financing clean technology R&D through government programs China is keenly aware that the next phase of the science and technology revolution will center on clean energy, and is determined to emerge as a global power in science and technology development. By staying at the forefront of the clean energy revolution, China hopes to transform the label ‘‘made in China’’ to the moniker ‘‘created in China.’’ In pursuit of this goal, in January 2006 China published the S&T National Plan. The plan established the government’s front-andcenter role in determining the direction, quality and quantity of China’s R&D and innovation efforts to 2020. The plan sets four quantitative targets and five strategic focuses, under which there are 11 key fields and 68 priority subjects. Of the five strategic focuses, top priority is given to developing technologies related to energy, water resources and environmental protection (Table 3). Based on the S&T National Plan, the MOST formulated the National 11th Five-Year Development Plan of Science and Technology (Table 4). This provides short-term targets and goals for China’s R&D and innovation activities from 2006 to 2010. Consistent with the S&T National Plan, the 11th Five Year S&T Plan lists energy and environmental protection as key areas to target. Specifically, the plan highlights three key clean technologies: fostering key energy-saving technologies, 2–3 MW wind turbine commercialization, and high quality transmission technology and equipment ( 7800 kV DC/AC 1000 kV UHV). In the past decade China’s government R&D appropriations have increased dramatically, from 43.9 billion yuan ($6.8 billion) in 1998 to 254 billion yuan ($39 billion) in 2008. Accordingly, gross R&D expenditure and R&D intensity have also enjoyed rapid growth (Fig. 5). Among various publicly funded S&T programs (Table 5), the 863 and 973 Programs provide the most direct funding sources for clean technologies. 3.1.1. 863 Program Also known as the State High-Tech Development Plan, the 863 Program was created to stimulate the development of advanced technologies in a wide range of fields in order to render China independent of financial obligations for foreign technologies. The

ARTICLE IN PRESS 2922

X. Tan / Energy Policy 38 (2010) 2916–2926

Table 5 Government funded R&D programs, subjects and funding levels. Data source: MOST. Program

Fundsa

Subject

863: National High-Tech R&D Program National Natural Science Fund Key Technologies R&D Program

IT, energy, resources and environment, advanced materials, biotechnology and agricultural technology, advanced 20 manufacturing and automation, marine, space and laser technologies. Basic and applied research in the natural sciences with most funding directed to life sciences and engineering. 10.5 R&D in agricultural processing and biotechnology, key manufacturing technologies, IT and high-tech industries, 6.3 environment, traditional Chinese medicine, and social development. 973: National Basic Research R&D Basic and applied research in energy, agriculture, information, environment, population, and health, materials and 4 Program synthesis. Innovation Fund for Small, Development support in areas of electronics and IT, biotechnology, materials, automation, environment and energy for 2.6 Technology-based Firms technology-based SMEs. Agricultural Science and Technology Development support for agricultural technology generation, transfer and application. 1.4 Transfer Fund National New Products Program Publication of annual list of new products that contain self-owned IPRs, have high export potential, replace import 0.7 products, are made primarily with domestic parts or that adopt international standards for support through grants and other policies. Torch Development support in areas of new materials, biological and medical technology, electronic information, integrated 0.3 light and electronics and their machinery, new and efficient energy. Spark Support of R&D and S&T education for rural economies, advanced technologies for township enterprises, the 0.5 improvement of labor conditions and skills, and the creation of sustainable agricultural technologies. a

Funds were allocated during 2001–2005. Currency was RMB and unit was billion.

Table 6 863 Program’s energy focus—11th Five Year Plan. Data source: MOST-2006 Application Guideline for 863 Program Energy Technology Field. Priority

Funding level

Hydrogen and fuel cell technologies Energy efficiency technologies Clean coal technologies Renewable energy technologies

75 75 45 29

Multidiciplinary sciences, 19%

million/year million/year million/year million/year

IT, 12%

Agriculture, 13% Material, 13% Energy, 11% Human health, 15%

Fig. 7. Total R&D spending by type of activity, MOST, 2007. Data source: MOST-China Science & Technology Statistics Data Book.

Natural resources and environmental protection, 17%

Fig. 6. 973 Program funding by strategic focus. Data source: MOST-973 Program News (2008).

title ‘‘863’’ refers to the date when the program was proposed, the third month of 1986. In that month, four Chinese scientists composed a joint letter to former Chinese leader Deng Xiaoping, proposing that the government establish a program to fund hightech R&D. Deng Xiaoping swiftly approved the proposal which has since played a vital role in driving China’s science and technology development. The program has changing focuses and priorities, depending on the needs of national economic development. During the 11th Five Year Plan, the 863 Program set up 10 focused areas, including energy technologies. Within the energy category there are four technology priorities: hydrogen and fuel cell, energy efficiency, clean coals and renewable energy. A total of RMB 1.12 billion is

Fig. 8. Central and local government S&T appropriation, 1997–2008. Data source: MOST-China Science & Technology Statistics Data Book.

ARTICLE IN PRESS X. Tan / Energy Policy 38 (2010) 2916–2926

2923

allocated to invest in these 4 priorities, with hydrogen and efficiency technologies receiving the majority of funding (Table 6). For each technology, the program supports two types of topics: exploratory and targeted. The exploratory topics are often tentative and involve significant amount of invention and innovation. The targeted topics are set based on specific targets that have been achieved by other countries. Usually the targeted topics get significantly more funding than the exploratory topics. The distinction of exploratory and targeted topics and uneven funding allocation between them implies that China puts more weights on absorbing and localizing existing technologies than innovating cutting-edge technologies.

of the program’s initiation, at the third meeting of the National Science and Technology Committee in 1997. Since its inception, a core focus of the 973 Program has been on energy, natural resources conservation and environmental protection. From 1998 to 2008 the program funded 382 projects with a total funding of 8.2 billion yuan ($1.3 billion), of which 28% went to energy, natural resources conservation and environmental protection (Fig. 6). During the 11th Five Year Plan period, the 973 Program’s energy focus and financing targets are at the following topics:

3.1.2. 973 Program Complementing the 863 Program, which focuses on specific technologies, is the National Basic Research Program, also called the ‘‘973 Program.’’ The title ‘‘973’’ again derived from the timing

 Basic research on efficient and environmentally sound usage of

 Basic research on the distribution and safe mining of deep coal resources and coal-bed methane. coal.

 New theories and methods on more efficient exploitation and utilization of oil and natural gas.

 Major scientific issues related to China’s large grid system.  Key scientific programs related to large-scale and pollutionfree production, storage and transmission of hydrogen fuel.

 Exploration of utility-scale renewable energy and new energy development.

 Exploration of large-scale nuclear fission and fusion development.

 Key scientific issues related to energy efficiency improvement.

Fig. 9. Local government S&T appropriation by strategic focus, 2008. Data source: Zhejiang Science & Technology Bureau (2009).

On average each project gets a funding of RMB 22 million over a span of 5 years. The funding is allocated on the basis of ‘‘2+ 3 model’’. Namely each project has to go through a mid-term evaluation 2 years after its launch and the funding for the next 3 years will be based on the evaluation. The evaluation is conducted by an expert group which is composed of top-notched scientists in the concerned field. This funding model has proved to be effective in assuring the quality of the projects. In terms of the amount of the funding, the 863 Program has consistently outpaced the 973 Program. In 2007 China only devoted 4.7% of its total R&D funding to basic research and 13.3% to applied research. The remaining 82% was allocated to

Fig. 10. Government programs involved in China’s SC/USC localization.

ARTICLE IN PRESS 2924

X. Tan / Energy Policy 38 (2010) 2916–2926

experimental development (Fig. 7). This suggests that the Chinese government views applied science instead of basic science as its strategic focus, which greatly contributed to China’s rapid development in high tech. However, the unbalanced funding mechanism has led to an unbalanced innovation labor force. Technical elites are very motivated to conduct R&D in high-tech, as this field attracts more funding and can quickly bring fames. On the contrary, basic science appeals to very few scientist and technicians. This unbalanced labor structure consequently leads to a lack of basic science support for high tech researches. This explains why China relies on purchasing license for key clean technologies, although China is able to manufacture many hightech products. Both the 863 and 973 Programs are funded and managed by the MOST. At the local level, provincial and municipal governments are also actively involved in funding R&D. In the past 10 years Chinese local governments’ S&T appropriation has seen a steady increase and it even surpassed central government’s S&T appropriation in 2008 (Fig. 8). Guangdong Province topped the nation in S&T appropriation, with a total investment of 13.2 billion yuan ($2 billion), accounting for 3.5% of Guangdong’s GDP in 2008. In terms of the percentage of S&T appropriation, Shanghai has consistently topped the nation with a nearly 5% of GDP devoted to S&T. Local government S&T appropriation is targeted at supporting the development, commercialization, export and diffusion of local technologies. In 2008, about 45.2% of local government S&T appropriation was devoted to this purpose. If including the spending on basic and applied research as well as social science, the total R&D expenditure accounted for 55.9% of the entire local government S&T appropriation (Fig. 9). Providing matching fund to the MOST’s key projects is an important role that local S&T appropriation plays. The development of China’s first ultrasupercritical (USC) unit at Yuhuan Power Plant, for example, benefited substantially from the Shanghai government’s Science and Technology Research Fund. Fig. 10 details the specific programs/projects involved in the development of SC/USC technologies in China.

Table 7 Policy measures to stimulate the private sector’s R&D and innovation. Data source: China S&T National Plan, 2006. Preferential tax treatments:

 Accelerated implementation of consumption value-added tax to allow for    

capital expenditure deduction. Accelerated depreciation of R&D apparatus and facilities. Increased deduction of R&D expenses from taxable income. Preferential tax policies for R&D-focused small and medium enterprises. Further support the establishment of overseas R&D centers. Favorable financing policies:

 Provide loans to R&D-focused enterprises, and finance their imports and exports.

 Encourage commercial banks to provide loads based on government guarantees and discounted interest rates.

 Encourage venture capital investment with government funding and commercial loans.

 Create favorable environment for R&D enterprises to go public in overseas stock exchange.

 Establish technology-oriented financing platforms.  Special funding for the absorption, digestion, and re-innovation of imported technologies. Government procurement policies:

 Government purchase domestically innovated products and technologies.  Financial support to enterprises that purchase domestically innovated products and technologies.

 Establish technical standards through government purchases of domestically innovated products and technologies. Protection of intellectual property right (IPR) and implementation of technology standards:

   

Further improve the national IPR system. Create a legal system that respects IPR. Prioritize the development of technology standards. Actively participate in the international standard-setting. Designation of high-tech development zones:

 Build infrastructures for high-tech development zones.  Create a favorable policy environment for enterprises based in high-tech development zones.

 Provide policy support to technology transfer center and other technologyfocused intermediary service institutions.

3.2. Incentivize enterprises to be the driving force of innovation In addition to direct funding support from governments, China has encouraged its private sector to undertake a greater role in R&D and innovation. The S&T National Plan alleges to support the reform of national R&D system so that the private sector can be the driving force of R&D and innovation in China. Experiences from developed countries indicate that to sustain a country’s international competitiveness, its private sector must take a leading role in R&D and innovation (Nelson, 1993). No doubt China is fully aware of this. Its R&D system reform is designed to prepare for a transition from a labor-intensive to a technologyfocused economy in the coming years. The commitment to reform is reflected through a series of incentive policy interventions, such as taxes, financing, government procurement and designation of high-tech development zones. Table 7 lists the major policy measures used by the Chinese government to stimulate the private sector’s R&D and innovation efforts. Under these favorable policy environments, the private sector has intensified their R&D and innovation efforts. An important indicator is the rapid increase of R&D expenditure by the private sector. From 1996 to 2006 the private sector’s share of China’s total R&D expenditures has risen from one-third to two-thirds (Linton, 2008). In 2007 over 70% of China’s R&D funding came from the private sector. Accordingly the private sector undertook over 72% of China’s R&D activities (Fig. 11).

China’s development of wind energy technology, for example, illustrates how its private sector acquires technological capacity through government supports. In 1996 China initiated the ‘‘Riding the Wind Program,’’ which was aimed to develop domestic wind energy technology through building jointventures with the understanding that foreign partners would transfer wind turbine technology to the Chinese partners in return for preferential treatment in the Chinese market. The first two joint-venture manufacturers were Xi’an-Nordex and Yitou-MADE. The technology transfer was initially carried out with a requirement of 20% local content requirement and gradually rising to 80%. However, this joint-venture approach did not work out as expected. Most international turbine producers choose to invest in China as wholly foreign-owned enterprises. There are a number of reasons. An important one is that foreign partners are concerned about giving out proprietary information to Chinese partners. Vestas’ experience with Gamesa1 has made many leading turbine

1 Vestas, a Danish wind turbine producer started a joint venture with Gamesa, a Spanish turbine producer in 1994. The technological collaboration had ultimately helped Gamesa grow to be a major competitor who was seeking independence later. In 2001 Vestas terminated technology transfer to Gamesa 2 years earlier than the agreement.

ARTICLE IN PRESS X. Tan / Energy Policy 38 (2010) 2916–2926

2925

Fig. 11. Total R&D funding by source and implementer, 2007. Data source: MOST-China Science & Technology Statistics Data Book.

producers cautious in partnering with foreign companies. In 2008 joint ventures only occupied 3.3% of the Chinese turbine market (Shi, 2008). In addition, these joint ventures often function as a provider of maintenance and post-sale services, let alone R&D. The joint-ventures’ failure to acquire wind energy technology has motivated the Chinese government to back domestic turbine producers’ R&D and innovation. Through the 863 and 973 Programs (2005, 2008), the central government has provided a significant amount of research funding to domestic turbine manufacturers. China’s top five wind turbine manufacturers all have a large R&D center. They play a key role in the acquisition, localization, diffusion and re-innovation of wind energy technology in China. For instance, Xinjiang Goldwind Science & Technology Company (Goldwind), the largest turbine manufacturer in China, started its R&D operation by undertaking the National Key Science and Technology Project in the 9th Five-Year Plan to develop 600 kW wind power generating sets in 1998. One year later, Goldwind successfully developed China’s first 600 kW wind power generating set, with a localization rate of 90%. During the 10th Five-Year Plan period, Goldwind was granted three National Science and Technology Projects, one of which was to develop 1.2 MW direct-driven permanent magnet wind turbine. Four years later the first two 1.2 MW magnet turbines were erected. Their localization rate, again, reached 90%. So far Goldwind has acquired independent R&D capacity and proprietary IPR for 1.5 MW and is currently testing its 3 MW model. And the design and development of 5 MW wind turbine is in the conceptual design stage. In addition to direct R&D funding assistance from the central government, Goldwind has also received much support from the government of Xinjiang Autonomous Region. The local government designated a high-tech development zone for Goldwind and also provided matching R&D funds to some of the 863 and 973 grants. In terms of favorable policy, Goldwind enjoys an up to 15% income tax deduction for the year 2001–2010. This benefit is supported by two regulations promulgated by the National Development and Reform Commission (NDRC): the Catalog for the Guidance of Industrial Structure Adjustment (2005) and the Circular on Preferential Tax Policy Issues for Developing the Western Region (2001).

4. Discussions This paper has examined an array of complementary policy measures that China utilizes to spur domestic R&D and innovation in clean technology. These measures include designing a national level-S&T strategy prioritizing clean energy; establishing direct funding programs to support clean energy R&D; incentivizing the private sector to undertake a leading role in R&D and innovation; and capitalizing on public–private synergies to bring together multi-sector expertise. The paper did not seek to provide a critique of these measures. Rather, it described the totality of China’s clean technology development efforts as an example of the approaches that can be taken in crafting effective, country-specific clean technology policy and development. For developing countries, the bulk of technological progress comes from the adoption and adaptation of pre-existing but newto-market technologies, and through the spread of technologies across firms, individuals, and the public sector within a country (World Bank, 2008). In the decades ahead, most of the growth in global energy demand—90% by 2030—will come from emerging countries. If greenhouse gas emissions are to be constrained, and a low carbon economy achieved, large-scale clean technology deployment is therefore especially vital for the developing world. Also critical is crafting an innovation model that caters to particular conditions and needs of developing countries. China’s comprehensive efforts laying the groundwork both to achieve a domestic clean energy economy, and to assist other developing countries to do so, indicate its commitment to becoming a global leader in the clean technology revolution. The China experience also provides policy approaches and funding and partnership models from which other emerging and developing countries can learn.

References 973 Program News, 2005. Introduction of IGCC Project, February 2, 2005. /http:// www.973.gov.cn/ReadItem.aspx?itemid=639S. 973 Program News, 2008. 10th Anniversary of 973 Program Took Place in Beijing, October 7, 2008. /http://www.973.gov.cn/ReadCont.aspx?aid=422S. Aubert, J.-E., 2004. Promoting innovation in developing countries: a conceptual framework. World Bank Institute.

ARTICLE IN PRESS 2926

X. Tan / Energy Policy 38 (2010) 2916–2926

Block, F., Keller M., 2008. Where do innovations come from? Transformations in the US national innovation system, 1970–2006. The Information Technology & Innovation Foundation. Bonvillian, W.B., Weiss, C., 2009. Taking covered wagon east. Innovations Journal 4 (4) Fall 2009. Caselli, F., Coleman, W., 2001. Cross-country technology diffusion: the case of computers. American Economic Review—AEA Papers and Proceedings 91, 328–335. Clinton, H. 2009. COP15 Copenhagen Press Brief by Hillary Clinton. Thursday 17 December 2009. Comin, D., Hobijn, B., 2004. Cross-country technology adoption. Making the theories face the facts. Journal of Monetary Economics 51 (1), 39–83. Diazanadon, L., Gallagher, K., Bunn, M., Jones, C., 2009. Tackling US energy challenges and opportunities: preliminary policy recommendations for enhancing energy innovation in the US. /http://belfercenter.ksg.harvard.edu/ publication/18826/tackling_us_energy_challenges_and_opportunities.htmlS. European Commission, 2009. Towards a comprehensive climate change agreement in Copenhagen. COM, 2009, 39/3. FAS (Federation of American Scientists), 2009. 34 US Nobel Laureates urge inclusion of President Obama’s $150 billion clean energy technology fund in climate legislation. July 16, 2009. /http://www.fas.org/press/news/2009/ july_nobelist_letter_to_obama.htmlS. Freeman, C., Pe´rez, C., 1988. Structural crises of adjustment: business cycles and investment behavior. In: Dosi, G. (Ed.), Technical Change and Economic Theory. Francis Pinter, London, pp. 38–66. Green Tech, 2007. OPEC nations create $750 million clean tech fund. November 20, 2007. /http://news.cnet.com/8301-11128_3-9821727-54.htmlS. Hogan, L., Curtotti R., Austin A., 2007. APEC energy security and sustainable development through efficiency and diversity: economic issues in technology R&D, adoption and transfer. Abare Research Project 07.12; prepared for the eighth meeting of APEC. IEA, 2008. Energy Technology Perspectives: Scenarios and Strategies to 2050. OECD/ IEA, Paris. IPCC, 2007. Climate Change 2007—Mitigation of Climate Change. Cambridge University Press, Cambridge. Jerzmanowski, M., 2002. TFP difference: appropriate technology vs. efficiency. Brown University, Mimeo. Kammen, D., 2008. Investing in the future: R&D needs to meet America’s energy and climate challenges. United States House of Representatives Select Committee on Energy Independence and Global Warming Testimony for the September 10, 2008 Hearing. Kim, L., Utterback, J., 1983. The evolution of organizational structure and technology in a developing country. Management Science 29 (10), 1185–1197. Kim, L., 1997. Imitation to Innovation: The Dynamics of Korea’s Technological Learning. Harvard Business School Press, Boston, MA. Kim, L., Kim, Y., 1985. Innovation in a newly industrialization country: a multiple discriminant analysis. Management Science 31 (3), 312–322. Kim, L., Lim, Y., 1988. Environment, generic strategies, and performance in a rapidly developing country: a taxonomic approach. The Academy of Management Journal 31 (4), 802–827.

Klenow, P., Rodriquez-Clare, A., 1997. The neoclassical revival in growth economics: has it gone too far?. In: Bernanke, B., Rotemberg, J. (Eds.), NBER Macroeconomics Annual. MIT Press, Cambridge, MA, pp. 73–102. Kline, K., Rosenberg, N., 1986. An overview of innovation. In: Landau, R., Rosenburg, N. (Eds.), The Positive Sum Strategy. NAE, National Research Council, Washington, DC, pp. 275–305. Linton, K., 2008. China’s R&D policy for the 21st century: government direction of innovation. /http://ssrn.com/abstract=1126651S. Lundvall, B. (Ed.), 1992. National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning. Pinter Publishers, London. Lundvall, B.A., 1995. The social dimension of the learning economy. Danish Research Unit for Industrial Dynamics Working Paper No. 96-1. Aalborg University, Denmark. Ministry of Science and Technology (MOST), 863 Application Guideline, 2006. National High-Tech Science and Technology Research and Development Program—2006 Application Guideline./http://www.most.gov. cn/tztg/200808/P020080818616178432976.docS. Ministry of Science and Technology (MOST), China Science and Technology Statistics Data Book. /http://www.most.gov.cn/eng/statistics/2007/index.htmS. Mytelka, L., Smith, K., 2001. Innovation theory and innovation policy: bridging the gap. Paper presented to DRUID Conference, Aalborg, June 12–15, 2001. Nalbandian, H., 2008. Performance and risks of advanced pulverized coal plant. IEA Clean Coal Center. Nelson, R., 1993. National Innovation Systems: A Comparative Analysis. Oxford University Press, New York. OECD, 1992. Technology and the Economy: the Key Relationships. OECD, Paris. Pavitt, K., 1984. Patterns of technical change: towards a taxonomy and a theory. Research Policy 13 (6), 343–373. Rosenberg, N., 1976. The direction of technological change: inducement mechanisms and focusing devices. In: Rosenberg, N. (Ed.), Perspectives on Technology. Cambridge University Press, Cambridge, pp. 108–125. Rosenberg, N., 1990. Why do firms do basic research (with their own money)? Research Policy 19 (2), 165–174. Ruttan, V., 1971. Agricultural Development: An International Perspective. The Johns Hopkins Press, Baltimore. Ruttan, V., 1978. Induced Innovation: Technology, Institutions, and Development. The Johns Hopkins Press, Baltimore. Ruttan, V., 2001. Technology, Growth and Development: An Induced Innovation Perspective. Oxford University Press, New York, Oxford xvi, 656. Shi, P., (2008, 2007). Statistics on installed wind capacity in China, February 28. /http://www.cwea.org.cn/upload/20080324.pdfS, accessed 8 March 2009. Weiss, C., Bonvillian, W.B., 2009. Structuring an Energy Technology Revolution. MIT Press, Cambridge. World Bank, 2008. Global economic prospects—technology diffusion in the developing world. /http://siteresources.worldbank.org/INTECAREGTOPKNOE CO/Resources/SessionBURNS.pptS. Zhejiang Science & Technology Bureau. 2009. S&T Progress News, no. 920, November 17, 2009. /http://www.zjkjt.gov.cn/html/zxtg/see.jsp?id=4624S.