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Chinese digital economy powered by technological and institutional innovation

OUYANG RIHUI | 2019-06-20
(Chinese Social Sciences Today)

A lady tries a wearable device using virtual reality technology. Fully digitalized consumption scenarios now constitute a new technology engine for the sustained growth of the digital economy. Photo: CHINA DAILY


 

The digital economy in China has spawned new businesses and models while improving the quality and efficiency of economic growth. It has become a core driver of economic and social development in the nation.


According to data from the China Academy of Information and Communications Technology under the Ministry of Industry and Information Technology, the size of the Chinese digital economy swelled from less than 150 billion yuan to 31.3 trillion yuan between 2002 and 2018, with the nominal annual compound growth rate averaging at 38 percent. In 2018, the digital economy accounted for 34.8 percent of China’s GDP, contributing 67.9 percent of GDP growth. So, what mechanism is powering the development of China’s digital economy?

 

Technological innovation
China was formally connected to the internet in 1994, launching the exploration and development of the digital economy.


By examining the impact of the five technological revolutions in the past 200 years on economic development models and institutions, British-Venezuelan evolutionary economist Carlota Perez proposed a techno-economic paradigm that consists of four phases: irruption, frenzy, synergy and maturity.


Applying the paradigm, the Chinese digital economy went through the irruption phase from 1994 to 2002 and experienced the frenzy phase between 2003 and 2013. It began to enter the synergy phase in 2014, as digital technologies and traditional industries started to integrate, heralding digital transformations. In the future, China’s digital economy will enter the maturity phase, furnished with a more mature and complete modern market system.


In the irruption and frenzy phases, China’s digital economic growth was due primarily to inherent advantages from demographic dividends. As of late June 2005, the number of internet users hit 100 million. In late June 2008, 253 million people had access to the internet. With a penetration rate of 20 percent, China overtook the US as the country with the largest population on the internet that year. By the end of 2010, there were 457 million internet users and the penetration rate jumped to 34.3 percent, exceeding the number of American and Japanese netizens combined. By the end of 2013, China had 618 million internet users, and the penetration rate was 45.8 percent. The huge internet population fueled the development of new models and businesses like email, e-commerce, social media, e-government, online games and internet finance.


After 2013, the growth in the number of Chinese netizens slowed down. The progress of digital technologies and the innovative application of technology have since become the “double helix” propelling digital economic development. According to the New Growth Theory, technological innovation, an outcome of the double helix structure of technology development and application innovation, is the decisive factor in advancing continuous economic growth.


The digital economy is in essence an innovation economy, and digital technologies constitute the core driving force. Digital technologies have created new industries and services for the innovation of technological application, while the latter has brought about new products, businesses and models. The two wheels have been driving digital industrialization and industrial digitalization simultaneously.


Predominant in China’s digital economy, industrial digitalization is promoted by technological progress and application innovation. In 2018, the profits of digitalized industries amounted to 24.9 trillion yuan. Their share in the digital economy rose from 49 percent in 2005 to 79.5 percent in 2018, and their share of GDP increased from 7 percent to 27.6 percent during that period. The contribution rate of industrial digitalization to digital economic growth was as high as 86.4 percent.
E-commerce has been another significant component in the Chinese digital economy. In 2018, the online retail sales volume totaled more than 9 trillion yuan, ranking first in the world for the sixth consecutive year.


The thriving of e-commerce in China was initially owing to the popularization of online payment and logistics information technologies. At present, fully digitalized consumption scenarios realized by artificial intelligence, big data, the internet of things and virtual reality have improved user experience and now constitute a new technology engine for the sustained growth of e-commerce. Smart phones, apps and QR codes along with social media platforms like Weibo, WeChat and Tik Tok have given rise to social commerce that continues to power the rapid development of e-commerce.

 

Institutional innovation
In his 2001 book Good to Great, American scholar Jim Collins put forward the concept of the “flywheel effect,” saying that good-to-great transformations resemble relentlessly pushing a giant, heavy flywheel, turn upon turn, building momentum until a point of breakthrough, and beyond.


Earlier policies the Chinese government adopted to encourage the digital economy aimed to promote e-commerce and the application of information technology. In particular, the 12th Five-Year Plan defined the new generation of information technology as a strategic emerging industry of the nation.


From 2015 onwards, the flywheel of the digital economy has been pushed again and again, resulting in clear development strategies for the sector. In 2015, China raised the “Internet Plus” action plan. In 2016, General Secretary of the CPC Central Committee Xi Jinping gave the instruction to “make the digital economy bigger and stronger” during the 36th collective study session of the politburo. In 2017, the term “digital economy” was written into the government work report for the first time, as the report to the 19th CPC National Congress set out policies for boosting the construction of a “digital China.”


Furthermore, in 2018, Xi elaborated systematically on the digital economy at a national symposium on cyber security and the application of information technology. The 2019 government work report encouraged the expansion of “Smart Plus” to empower the manufacturing industry’s transformation and upgrading. Recently, Xi stressed in a congratulatory letter to the 2019 International Big Data Industry Expo that China is paying close attention to the development of the big data industry and is willing to share digital economy development opportunities with the world and jointly seek new growth drivers and development paths by exploring new technologies, businesses and models.


Local governments at all levels have actively responded to the call from the central authority and successively unveiled policies related to the digital economy. Many places vowed to regard the digital economy as the “No. 1 Project” and galvanize the development of intelligent manufacturing, the industrial internet and smart cities.


In 2018, the digital economy accounted for more than 50 percent of the GDP in Beijing and Shanghai. The rate for Guangdong, Tianjin, Zhejiang and Jiangsu exceeded 40 percent, and that for Fujian, Shandong, Hubei, Chongqing, Liaoning and Sichuan was higher than 30 percent. The share of the digital economy in the GDP of other provinces and cities all exceeded 20 percent.


Meanwhile, governments at all levels have been actively abolishing, rectifying and setting formal rules on the digital economy to drive emerging industries, help transform traditional sectors and realize inclusive growth. In August 2018, the Fifth Session of the Standing Committee of the 13th National People’s Congress passed the E-commerce Law, while urging the amendment of such laws and regulations as the Anti-Unfair Competition Law, Patent Law, and Regulations on the Implementation of the Law on the Protection of the Rights and Interests of Consumers.

 

Synergistic innovation forces needed
Currently the power mechanism for the development of the digital economy in China has initially taken shape. The large internet population is the initial driving force, the innovation of digital technologies is the immediate driver, while institutional innovation is fundamental. Nonetheless, imbalances loom large.


The first is the imbalance between central and local governments. Some regions have failed to understand the digital economy thoroughly and pay sufficient attention, lacking effective measures and sound supporting policies concerning finance, talent and employment.


Second comes imbalanced regional development. There is a big gap between the eastern and western regions and between urban and rural areas in terms of digital infrastructure.


Moreover, institutional construction has relatively lagged behind. The development of the digital economy has far outpaced the formulation of related laws and regulations. Such problems as online information security and personal privacy protection need to be addressed.


In addition, the development of the digital economy in the primary, secondary and tertiary industries is imbalanced as well. Industrial digitalization is concentrated on the tertiary sector, while its proportion in the value added of industry and agriculture is lower.


Fifth, talent supply and demand is imbalanced. The pool of digital talent is larger in the southern part of China and smaller in the north. In addition, more than 85 percent of digital talent has been devoted to product research and development, while that for in depth analysis, advanced manufacturing and digital marketing combined accounts for less than 5 percent. The shortage of talent in emerging technologies is severe.


Douglas North, a new institutional economist, argued that although technological progress matters in economic development, effective institutions that can provide appropriate personal benefits play a pivotal role. China’s digital economic development has confirmed his argument.


Therefore, the digital economy in the future will entail the helix of digital technology, but it will need the flywheel of institutional innovation even more. Synergistic forces of technological and institutional innovation must be formed.

 

Ouyang Rihui is a research fellow and deputy director of the China Center for Internet Economy Research under the Central University of Finance and Economics.

edited by CHEN MIRONG