Beyond catch-up—can a new innovation policy help China overcome the middle income trap?

Abstract

Since it embarked on its economic opening and reform path in the late 1970s, the Chinese government has assigned a central role to science, technology and innovation for the country's economic development. In the phase of 'economic catch-up', China has pursued a top-down innovation policy, characterized by targeted investments in science and technology. Recently, a significant shift in China's innovation policy can be discerned, with government increasingly acknowledging the importance of markets, private enterprises and favorable institutional conditions as determinants of a well-functioning innovation system. This shift is concurrent with the realization that the transition from middle- to high-income country, and hence the avoidance of the 'middle income' trap, might require different innovation policies than in the past. In this article, we analyze and assess China's initial innovation policy as well as its emerging reorientation. Finally, we identify some remaining challenges in China's efforts to escape the middle income trap.