Innovation to spur China's growth, says McKinsey

Innovation will need to contribute 50% of GDP or $3 trillion to $5 trillion per year to China's GDP

For China to sustain a yearly gross domestic product (GDP) growth of 5.5 per cent to 6.5 per cent over the coming decade, innovation is likely to play a critical role, according to a new study by McKinsey Global Institute. As the impetus to growth from labour force expansion and capital investment is likely to fade away, McKinsey estimates that innovation will need to contribute 50 per cent of GDP or $3 trillion to $5 trillion per year to China's GDP.

The study titled 'The China effect on global innovation' contends that in certain sectors, Chinese companies have already taken advantage of the massive manufacturing ecosystem the country has steadily built up over past decades. In customer-oriented industries such as household appliances and internet software and in efficiency-driven sectors such as solar panels and construction machinery, Chinese companies have made significant progress in innovation.

The challenge before the country is in more challenging forms of innovation such as scientific discovery and engineering. It also lags behind in areas such as creating new drugs and designing new commercial airliners.

The building blocks for the next phase of innovation are already in place. The country has already created the capacity for research with huge investments in universities and research institutions. It spends roughly $200 billion on research, which is the second only to the US. It also churns out close to 30,000 PhDs in science and engineering and leads the world in patent applications.

But when it comes to practical applications, the picture is mixed. The report highlights obstacles to higher innovation such as slow regulatory processes and weak intellectual property protection, which stymie progress.

Based on China's trajectory in consumer industries and manufacturing, McKinsey believes that over the coming decades, "China has the potential to build on its strengths in innovation and become a global leader - creating a China effect on innovation around the world."

The report says as more and more companies use China as a base for low-cost and rapid innovation - "the China effect on innovation will be felt around the world." It adds, "The overall China effect could be disruptive, bringing large-scale yet nimble innovation to serve unmet needs in emerging markets and produce new varieties of goods and services for advanced economies."