In the two decades of reform since 1980, China has seen three major changes. First, the open-door policy has enhanced access to a global pool of technologies and re-oriented development efforts. Second, the extensive reforms introduced in science and technology policies have successfully mobilised economic incentives for technological development and diffusion.

Third, there has been a shift in focus from state-sponsored research projects towards a broader framework of support for technological innovation.

China has achieved some impressive successes in the indigenous development of technology. However, problems continue to confound policies designed to bolster technology-based development. Despite massive import of foreign advanced technology, the level of production in many Chinese industries remains far from the global technological frontiers. While a group of hi-tech enterprises has gained fame for entrepreneurship and innovation, the large majority are still struggling to attain significant economies of scale and international competitiveness. Domestic investment and diffusion of new knowledge continues to be inadequate.

Although there is a growing supply of skilled graduates, it is doubtful this will meet the need for well-trained personnel. The open-door policy has created new opportunities to import advanced technology, either as capital goods with designs and specifications, or in the form of training and management procedures. Transfer of foreign technology and organisational know-how remains crucial. But without more extensive and integrated domestic research and development, foreign technology will not help China catch up.

In the 1990s, Chinese policy-makers increasingly turned to the role of innovation and high technology as they realised the capacity of China's enterprises to absorb or innovate technology was a key factor in competitiveness. However, local decision-makers continue to focus on the 'hard' (and tangible) equipment rather than 'soft' (and intangible) elements of technology. In 1998, equipment still constituted US$11.2 billion (HK$87.2 billion), or 69 per cent, of the US$16.3 billion total value of technology import contracts. For years, decision-makers have been instructed by policy guidelines as well as foreign experts of the importance of intangible knowledge such as management skills and technical training or consultancy, but apparently without success.

On the other hand, Chinese national aggregate investment in research and development has been growing during the 1990s. Gross expenditure on research and development grew from approximately 40 billion yuan (HK$37.7 billion) to almost 70 billion yuan between 1996 and 1999. In 2000, gross expenditure on research and development has been estimated at 89.6 billion yuan, equivalent to one per cent of the gross national product (GNP), according to official statistics. China is thus gradually getting closer to the goal, formulated in 1995, of spending 1.5 per cent of its GNP on research and development.

One of the encouraging aspects has been that enterprises have become increasingly important as performers of research and development. In 2000, industrial enterprises carried out more than 60 per cent of research and development in China.

The information technology industry is probably the fastest-growing element of the hi-tech sector. China is now ranked as the third largest producer of IT equipment in the world, after the US and Japan.

However, the attempt to create a competitive semiconductor industry has faced serious difficulties. Crucial factors, such as skilled manpower, are in short supply, as are supporting 'clusters', such as competitive design and advanced domestic producers of manufacturing equipment.

The most interesting development is the proliferation of 'new and high-technology' industrial development zones. The output of the 53 zones approved in 2000 was a total of 1,323 billion yuan, a jump of more than 30 per cent from 1999. The zones are becoming important for exports of hi-tech products, accounting for export revenues of US$8.8 billion, or approximately 20 per cent of the total value of the country's hi-tech exports. Nevertheless, the majority of firms in the zones are established to exploit the growing market for hi-tech goods and services in China, and exports are not a high priority.

The entry of China into the World Trade Organisation presents a range of new challenges for Chinese enterprises. Competition in the Chinese market will increasingly require substantial investments in new technology, or improvements in existing technology. The firms that have effectively utilised their own resources to upgrade or develop new technology will be better prepared to face overseas competition and expand their role in the Chinese market.

Erik Baark is an associate professor in the Division of Social Sciences of the Hong Kong University of Science and Technology