Fiscal Policy and Institutional Renovation in Support of Innovative Country Building

Jia Kang

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9781138578340
• eBook ISBN: 9781351264624
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

Since the onset of the twelfth Five-Year Plan, China has been at the forefront as an innovative nation based on a carefully designed strategy. Despite this, it can be argued that the Chinese government requires a series of more effective and systematic fiscal and taxation policies.

This book analyses the status quo and possible optimization of China's fiscal and taxation policies. By drawing comparisons with other countries, as well as a practical investigation into the lessons China has drawn from elsewhere, the author shows how a nation should make steadily growing and optimized financial investments in science and technology in order to foster the optimum environment for innovation. It is shown that institutional innovation should be a systematic project which involves top-level design and top-down leadership.

This volume will be a useful reference for students, scholars, and policy makes who are interested in financial policy.

Part I
Theoretical study, practical investigation, and reference from international experiences on innovative country building

1 Literature reviews on independent innovation and innovative country building

The capability of independent innovation is a key factor in determining the competitive advantage of a country or a region. This chapter systematically reviews the research results—such as the definition, connotation, characteristics, impacting factors, development path, systemic index, and policy suggestion—on independent innovation capability and innovation-oriented countries. The chapter also traces the basic development of theories on a National Innovation System. It analyzes the importance and necessity of improving innovation capacity and building an innovative country, and proposes the stage characteristics that need attention as well as what modern-day China must focus on in order to improve the capacity of independent innovation and the building of an innovative country.

1.1 International theoretical study on innovation

As early as 1912, J.A. Schumpter, an American economist, first proposed in his book The Theory of Economic Development the innovative concept characterized by a “new combination of factors of production”. Since then, the study on innovation has become the focus of research on management and economics, and a consensus has gradually been reached that innovation can create a competitive advantage and promote economic development.

1.1.1 Technological innovation theory of J.A. Schumpter and Neo-Schumpterism

1.1.1.1 Innovation theory of Schumpter’s enterprise

In his pioneering work The Theory of Economic Development, Schumpeter defines innovation as “proposing new theories, inventing new technologies, adopting new methods, establishing new systems, developing new policies, building new institutions, providing new products, getting access to new raw materials, opening up new markets, forming a new culture, and creating new art”. He believes that technological innovation is the driving force of economic development and that economic development is an evolutional process, with innovation as its core. According to Schumpeter’s innovation theory, innovation is the establishment of a new production function. This includes five aspects, including the introduction of a new product, the application of a new method of production, the opening up of a new market, the conquest of a new source of supply of raw materials or semi-manufactured goods, and the carrying out of the new organization of any industry. Schumpeter stressed that innovation is not just a technical or economic phenomenon but also a social process. Innovation is driven by the strong motive of profit. The entrepreneurs are the main force behind promoting innovation, and it is these entrepreneurs who continuously realize new combinations of production factors and production conditions in order to achieve the “innovative destruction” process and to promote the economic development process. Western scholars have extracted Schumpeter’s Technological Innovation Model (entrepreneur innovation model) I and Technological Innovation Model II. The British economist Freeman summarizes Schumpeter’s Technological Innovation Model I in Figure 1.1.

Figure 1.1 Schumpeter’s Technological Innovation Model I.

Source: Theory and Policy of National Innovation System, Feng Zhijun ed., Economic Science Press, 1999, p. 42.

According to the development of Schumpeter’s theory of innovation and his argument on the decisive role of entrepreneurs in the process of innovation, economist Phillips proposed Schumpeter’s Technological Innovation Model II: namely, the Entrepreneurial Innovation Model. It was generally accepted by academics, with British economist Freeman’s further refinement. Schumpeter’s Technological Innovation Model II is summarized in Figures 1.1 and 1.2.

Figure 1.2 Schumpeter’s Technological Innovation Model II.

Material Source: Theory and Policy of National Innovation System, Feng Zhijun ed., Economic Science Press, 1999, p. 43.

Schumpeter’s Entrepreneurial Innovation Model emphasizes the role of research and development in technological innovation and is later referred to as the “technology-driven model” by scholars. His Technological Innovation Model II emphasizes that

technological innovation is endogenous of enterprises and technological progress is driving the long-term economic growth. The basic policy implication is that the speed, size and direction of technological innovation depend on the speed, scale, and direction of technological progress. More investment in R&D means more rewards on technological innovation.¹

Schumpeter’s main contribution to innovation is the embedding of technology into the process of economic growth. His entrepreneurial innovation theory also provides a solid theoretical foundation for the National Innovation System.

1.1.1.2 Technological innovation theory of Neo-Schumpeterian scholars

Neo-Schumpeterian economists, represented by American economist Jacob Schmookler and Nathan Rosenberg as well as British economist Christopher Freeman, inherited their views from the Schumpeterian tradition of economic analysis: a focus on researching the methods, mechanisms, and impacting factors of integrating scientific and technological progress into economy, and an emphasis on the core role of technological innovation and technological reform in economic growth. The common characteristics of the Neo-Schumpeterian scholars in the research of technological innovation include the focus on the research of the technological innovation process; the technical and economic basis of technological innovation; the technical track and technology paradigm; the cluster of technological innovation; the diffusion of technological innovation; and other major theoretical problems, such as long wave.² In their long-term research, they put forward many innovative models (such as the linear model, chain-linked model, and innovation cycle model) and related theories and policy recommendations. In 1966, Jacob Schmookler published Innovation and Economic Growth, in which he put forward the “demand-pull” hypothesis for innovation; Freeman and others believe that “the link between science and technology and the market is complex, interactive and multi-directional, which changes mainly with time and industrial sector”. Rosenberg argues that science, technology, and market demand play a crucial and interactive role in innovation, combining technology-driven theory with demand-pull theory. In general, “the Schumpeterian School is increasingly emphasizing the commonality of innovation as a complex process of interaction”,³ but they ignore the historical particularities of different countries: namely, the national factors of independent innovation.

1.1.2 Neoclassical theory of economic development and technological innovation

Well-known economists like Edwin Mansfield and Bill Cork, through the in-depth study of technological change, diffusion, and transfer, have promoted Schumpeter’s innovation ideas; formed a unique technology innovation theory; and created Technological Innovation Economics, which argues that “technological progress and innovation is the decisive factor in economic growth”. However, with regards to whether the “technical factor” is the exogenous factor or endogenous factor in the Economic Growth Model, there are disputes which form two theoretical sub-schools: namely the Neoclassical school and the new growth (endogenous growth) school. The Neoclassical Growth theorists, represented by Robert Solow and others, believe that sustainable economic growth cannot be achieved without external push; instead, it can only be realized when the “exogenous” technological progress or population growth is achieved. They are challenged by famous economists such as Kenneth Arrow and Paul Michael Romer, who are considered the representatives of the Endogenous Growth Theory. Endogenous Growth theorists argue that technological progress should be seen as endogenous variables determined by the economic system and that endogenous technological progress is the decisive factor in achieving sustained economic growth.

The theory of scientific and technological innovation proposed by the Neoclassical school is based on the assumption of market failure as a prerequisite and considers technological innovation as a basic factor in the process of economic growth. The neoclassical theory of technological innovation can be divided into the Exogenous Growth Theory proposed by Solow and the Endogenous Growth Theory proposed by Arrow and Romer. The former regards technological innovation as an exogenous factor, focusing on the contribution rate of technological innovation to economic growth, while the latter takes technological innovation as an endogenous factor and integrates it into the mainstream economic model.

1.1.2.1 The prerequisite and assumptions about market failure

British Technology Innovation Economist R. Kum and others pointed out that the field in which most people who engage in science and technology work is actually made up of multiple areas that are highly controlled and planned. In the enterprises, science and technology research depends on cost, profit, and growth goals; basic research funding in research institutes also determines the direction of technological development, and the country will plan and control some areas of development out of national development strategy and security. Therefore, scienti...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Acknowledgements
• Preface
• Part I Theoretical study, practical investigation, and reference from international experiences on innovative country building
• Part II Fiscal and taxation support policies for building an innovative country
• Part III Systemic reform for building an innovative country
• Postscript: establish and improve a fiscal and taxation system conducive to scientific development
• Bibliography
• Index