After more than 40 years of reform and opening up , China is striving to transform into an innovation-driven economy in the next decade. Some might have doubts, but China has made rapid progress in the past few years. The Communist Party Central Committee emphasised high-quality growth in a resolution adopted at a plenary session last month, and Vice-Premier Liu He later reiterated that China’s growth should be innovation-driven . The country’s top policymakers are firm in their belief that innovation will play a vital role in China’s economic development. China is focusing on innovation as it grows into being a powerful country. The 14th five-year plan states that innovation remains at the heart of China’s modernisation efforts. So, what progress China is making? And can it ultimately transform itself into an innovative-driven economy? First, China’s innovation development is gaining international recognition. Its ranking in the Global Innovation Index, released by the World Intellectual Property Organization, rose from 14th in 2020 to 12th this year. As the world’s largest developing country and second-largest economy, China has made steady progress towards building an innovative economy. According to the 2020 China innovation index, compiled by the National Bureau of Statistics and other government departments, overall development of innovation reached a score of 242.6 last year (in 2005, it was 100), up 6.4 per cent from 2019. Innovation has provided important support for maintaining China’s economic growth and promoting high-quality development. China’s innovation index is divided into three levels – the overall index, four sub-indexes and 21 subfield indexes. Among the 21 evaluation indicators in the four subfields, 19 improved in 2020 compared to 2019. Six of those achieved double-digit growth. Second, enhancing economic strength is fundamental to building an innovative economy. China has the world’s largest manufacturing base and is the biggest producer of more than 220 types of industrial products. China is among the global leaders in goods and services trading and commodity consumption. Its economy is full of vitality and has great potential to develop into an innovative economy. Chinese manufacturing enters ‘critical period’ with an eye on hi-tech Furthermore, its industrial sector continues to move towards the middle and high end of the global value chain , where innovation is key to sustainable growth. China has built a modern industrial system which is comprehensive and fairly independent. Strategic emerging industries have become important engines powering high-quality development. Meanwhile, the digital economy has injected new vitality into the country’s economic development. Industrial achievements have paved the way for China to develop an innovative economy. With solid fundamental and industrial support, China has the potential to cultivate world-class innovations beyond developing markets. Third, as a result of heavy investment in research and development , China’s strength in science and technology has developed rapidly and provided the backbone for an innovative economy. Science and technology are widely used in production, and innovation-driven development has achieved remarkable results. According to a government communique released in September, China’s R&D investment reached 2.4 per cent of the country’s GDP in 2020. The government’s investment in research and development has seen double-digit growth for five consecutive years. Spending reached 2.4 trillion yuan (US$383.1 billion) in 2019, an increase of 10.2 per cent over the previous year. China’s ratio of spending on R&D to national GDP has reached its highest level since 2010. That ratio, also known as input intensity, was close to the 2.5 per cent average level of Organisation for Economic Cooperation and Development member countries. Most of that investment in R&D – 82.7 per cent specifically – was dedicated to experimental development, with basic research receiving 6 per cent of the funding while applied research received 11.3 per cent. In terms of organisations, enterprises provided more than 1.8 trillion yuan for R&D, making up 76.6 per cent of total investment. Government-affiliated research institutions provided 14.4 per cent, with colleges and universities providing 7.7 per cent. Geographically speaking, the top provinces or municipalities in terms of R&D investment compared to their local GDP were Beijing, Shanghai, Tianjin, Guangdong and Jiangsu. Technological self-reliance key to China’s plans, says top Xi aide Fourth, enterprises continue to play a leading role in the development of science and innovation. This means China’s innovative economy is mostly market-oriented rather than state-driven. This can be seen in the fact that almost 77 per cent of China’s R&D investment came from enterprises, which also generated most of the innovation. Government development plans, guideline documents and speeches of top leaders have all made it clear that innovation is vital for economic and social development. Finally, while its innovation capability is constantly improving, China is still a developing economy. For instance, it still lacks major achievements in basic science and has relied on developed countries for core technologies. This might be a severe challenge while its relationship with the United States is still tense and competition could intensify. China’s ability to transform scientific and technological achievements into products and services needs to be further improved, even with the rapid growth of many enterprises. Talent development and incentive mechanisms need to be further marketised, especially within government-funded research institutions. There is no doubt China will eventually transform itself into an innovation-driven economy. The question is how long it will take – can it be achieved by 2035, as leaders envision? The journey to success is never easy, so there is a rough, rugged road ahead. G. Bin Zhao is a senior economist at PricewaterhouseCoopers China, and he also leads the firm’s China Strategic Research. The opinions expressed here are the author’s own