Innovation has a highly significant role to play in helping to avert the possibility of a ‘middle-income trap’ in emerging economies like China. As such economies exhaust the possibilities of maintaining their competitiveness through the reallocation of labor from low-productivity rural employment and through technology catch-up, so their continued growth in per capita income comes to depend on enhancing their competitiveness and productivity through innovation (World Bank, 2013).
On the face of things, China has made substantial progress along the road to becoming an innovation-based economy. While the share of global R&D expenditure accounted for by developed economies has dropped since 2002, China's has risen steadily. Expressed in terms of total R&D expenditure as a percentage of gross domestic product (GDP), China's rate of catching up is even more impressive (SPI, UNU-Merit and AIT, 2014). China has become the most prominent R&D hub in emerging economies, followed some way behind by India. Both countries have also become net exporters of R&D services as their growing R&D competence and status attract more R&D projects (Berger, 2012). Similarly, the number of patent applications coming from China rose from a very low level in 2000 to reach in 2010 around two-thirds of Japan's and half those of the United States’ (SPI, UNU-Merit and AIT, 2014).
China ranks relatively high compared to other major emerging economies for its ‘innovation’ according to the Global Competitiveness Report (World Economic Forum, 2015). In the 2015 results, China ranked 31st out of a total of 140 countries for which data were collected. This rank was higher than that achieved by Brazil, India, Russia, and South Africa. In the 2015 Global Innovation Index, China ranked 29th out of 141 countries, the highest rank among emerging economies (Global Innovation Index, 2015). China also attained the 1st rank for high-technology exports. However, despite the country's heavy expenditure on R&D and high patent production, these rankings imply that its real innovation achievement continues to remain a modest one compared to developed countries (Cao, Li, Li, and Liu, 2013).
Part of the problem China faces is that R&D investments in cutting-edge industries, such as aerospace, biotechnology, and energy-efficient automobiles, may take 15–20 years before they can be commercialized and produce returns. On the other hand, some other knowledge-intensive fields such as information and communications technology (ICT) should yield much faster returns.