Chapter 10　Innovation Imperative

After three decades of rapid growth that has transformed the nation and made China the second-largest economy in the world（by GDP），growth is slowing.The population is aging，and the labor force will soon start to shrink.Debt has been rising rapidly to fund investment in infrastructure，but returns on fixed asset investment are declining.Therefore，China can no longer count on additions to the labor force and fixed asset investment to sustain GDP growth，even at the more moderate rates（compared with the past 30 years）predicted for the coming decade.Like the United States，Japan，and the mature economies of Europe，China must now rely increasingly on rising productivity to drive GDP growth.This，then，is China's innovation imperative：to raise productivity sufficiently to make up for the loss of momentum from labor and investment.China has the potential to complete the evolution from an innovation“sponge”that absorbs knowledge and technologies from abroad to a leader in all forms of innovation.

The innovation imperative is not news to Chinese policy makers.The government has long recognized the need to expand the economy's innovative capabilities so that more output will come from higher value-added products and services and more Chinese workers can be employed in high-paying，high valueadded work.Government programs have focused on R＆D spending，training scientists and engineers，and building research institutions.However，these investments have not yet translated into the successfully commercialized innovations that can substantially raise productivity in the economy.Indeed，the growth contribution of multifactor productivity has declined since 2000，despite these investments.