Software expert Alex Tao returned to Toronto from a recent business trip to Beijing with a gift for his wife: a Huawei Mate 7 smartphone - a model launched just a few weeks ago. It cost about 15 per cent less than it would have in Canada but what most impressed Tao was its "cool appearance, big 6-inch screen, 13 mega-pixel camera and a long-lasting battery". Such technological and design improvements have helped Huawei quickly win market share from dominant smartphone makers Apple and Samsung. It is one of a growing band of mainland companies emerging as innovative industry leaders and changing global perceptions of China as the world's factory for cheap, lower-end products. Analysts say the strategy rolled out by Beijing to promote "Innovated in China" - as opposed to merely "Made in China" - is crucial to boosting productivity, although mainland-wide transformation has a long way to go. The world's second-largest economy has suffered from a property slump, excess capacity and rising labour costs, with the gross domestic product expanding at a five-year low of 7.3 per cent in the third quarter of the year, rapidly losing steam from the double-digit expansion rates seen in the past decade. "We … see increasing numbers of entrepreneurs, angel investors and venture capitalists establishing a presence in China and seeking out new innovative ideas and projects," said Egidio Zarrella, a clients and innovation partner at KPMG China. "They are helping to create an ecosystem similar to Silicon Valley, with Chinese characteristics." Shenzhen-based Huawei, China's largest telecommunications equipment manufacturer, spent 12.8 per cent of its annual sales revenue on research and development last year. By comparison, Apple spent 2.7 per cent of net sales on R&D in the first six month of the past fiscal year. However, a KPMG survey found that average spending on R&D by mainland companies remains low. About 83 per cent of mainland manufacturers said they spent less than 1 per cent of revenue on R&D in the past two years, although an equal share of respondents indicated they planned to double or triple that level of spending over the next two years. Analysts say it remains hard to gauge the level of innovation on the mainland. "In the past 10 years, using measures of innovation such as patents applied for and articles published in scientific journals, China has improved tremendously and is now top three in the world," said Asian Development Bank economist Niny Khor. "However, it is a distance between innovation indicators to real output in the economy." For example, the domestic content of mainland exports was only about 15 per cent, which meant "there's very large room for improvement". JP Morgan estimates that labour productivity on the mainland has at least halved from the level before the 2008 global financial crisis, thanks to a historic wave of credit expansion that fuelled excessive investment. Meanwhile, surging labour costs have eaten into the profitability of manufacturers. National Bureau of Statistics spokesman Sheng Laiyun said yesterday the mainland's labour resources had shrunk further this year, not only in population share but also in absolute volume. Meanwhile, migrant workers' monthly incomes had risen 10 per cent year on year. "The change in labour structure will directly push forward an economic restructuring and transformation of development model," Sheng said. Tianjin-based Seagull is one of millions of medium-sized companies that have strived to move up the value chain by restructuring product lines and upgrading technologies. By grasping three leading technologies - tourbillon, perpetual calendar and minute repeater - in making mechanical watches, Seagull had joined the world's biggest names to showcase its premium products at the Swiss Watch Expo, deputy general manager Zhang Jianguo said. It helped Seagull reverse heavy losses suffered in the 1990s. Even so, Zhang acknowledged there was a long way to go to enhance its global name. "Unlike the century-old shops such as Omega and Rolex, our history has been short, only turning 60 next year," he said. "It takes time for us to establish our global image and branding." Premier Li Keqiang has said bolstering innovation is the "golden key" to generating fresh momentum for growth, but how to bolster it has yet to be detailed. World Bank chief economist and senior vice-president Kaushik Basu welcomes Li's advocacy of innovation, saying structural reforms including nurturing innovation and creativity will be key to sustaining long-term economic growth on the mainland. "To boost innovation, a nation has to do the usual things like allocating more resources to R&D, create an efficient system of patents and copyrights, as both Japan and Korea have done," Basu said. "But over and above this, it is important to create space in universities and institutes for individuals to pursue creativity in all fields, from engineering and mathematics to art and poetry."