SOE construction laborers work on scaffolding. SOEs are willing to engage in low-expertise innovation activities that non-SOEs are unwilling to take part in.

Reforms of State-owned enterprises (SOEs) have made substantive progress. This was made clear on August 3, when the National Development and Reform Commission revealed on its website that a series of supporting documents for SOE reform have basically been completed. As a core part of enterprises across China, SOEs have a special role to play in technical innovation.

SOE advantages
Technical innovation refers to a process in which new technical knowledge is applied to the market and generates market value. It can be divided into three stages: creation of new technical knowledge, exploration of knowledge industrialization, and improvement and promotion of the shaped technology.
 

Since the three stages entail different amounts of investment and levels of technical expertise, the organizations responsible for innovation have different preferences in regard to them.
 

In China, scientific research institutions and universities, funded by the government and serving the public good, are major participants in the innovative activities at the first and second stages, especially the first. Profit-seeking enterprises, however, have a stronger interest in the third stage. 

In contrast to other types of enterprises, SOEs are uniquely positioned in the second stage due to a number of advantages.
 

In terms of financing, they can obtain both public funds and bank loans, and they are capable of carrying out costly, long-term innovations. They also have concentrated research resources, because they are endowed with a compelling advantage in setting up formal research institutions, such as national key laboratories and engineering centers. They have also accumulated rich production experience in their respective industries. Hence, they are competent in applying new technical knowledge to industrial production. 

It is not just resource considerations that make them ideal for this phase of innovation. SOEs are duty bound and accountable when it comes to the results of second-stage innovations.
 

Their public ownership determines that they, to a large extent, represent public interests, including the benefits of such innovation. Most of their innovation decisions are made out of comprehensive considerations of the potential gains, industrial development and policy goals. 
 

Under a series of reforms titled “invigorating large enterprises and loosening control over small ones,” SOEs are defined by the government as the backbones of their respective sectors. This important role is not only manifested in the scale of production and capacity but also in innovation capability and technical leadership.
 

They are the major forces of the government in promoting technical policies, overcoming common industrial problems and advancing technical development in their industries. 

Moreover, SOEs are a better fit for second-stage innovations than other organizations. 
Compared with universities and scientific research institutions, their corporate attributes make them better equipped to connect innovation technology to the market. 
 

With respect to organizations that are not SOEs, their unique government support and social responsibility make them more able and willing to engage in low-expertise innovation activities than non-SOEs.
 

Delivering benefits
The upstream of second-stage innovations is linked to knowledge of innovative technology, while the downstream is associated with industrial promotion, constituting the fulcrum of the whole innovation process.

Assuming more second-stage innovations, SOEs can bring benefits to other types of enterprises in their own sectors and regional innovation at large.
 

To this end, they should first foster lasting, effective cooperation with scientific research institutions and universities, integrating more market demands into basic innovations and blending rudimentary innovation knowledge effectively into industrial development.
 

They should also collaborate with other forms of enterprises to spread innovative technology to their industries.
 

In order to strengthen ties with universities and scientific research institutions, it is first necessary to step up efforts in developing theories in regard to problems that occur in production practices, thus presenting accurate research requirements to their partners.
 

SOEs should also enhance their own theoretical research and improve their comprehension of innovation knowledge provided by universities and research institutions. They should also try to utilize their knowledge to address common problems in their industries.
 

To better popularize industry-specific techniques, SOEs should intensify innovation cooperation with other types of enterprises to extend the production possibility curve and reduce the crowding-out effect of the latter.
 

Furthermore, SOEs can establish industry-university-research innovation alliances and cooperative, shared and mutually beneficial platforms for research and development (R&D) of technical innovations, thereby ensuring innovation resources are shared among enterprises, scientific research institutions, universities, intermediaries and the government.

Four things to note
First, the pivotal role of SOEs is not applicable to all sectors, but to emerging industries and those with strategic significance to economic development, huge market potential and those that require massive factor input. These industries can reflect SOEs’ advantages in technical leadership and strategic innovation.

Second, overall planning is necessary. Amid the development of high-tech industries, it is important to avoid excessive use of SOEs’ innovation resources and overlapping investment due to competition between different areas.

Third, it cannot be overlooked that innovation efficiency will be low because of insufficient competition, defective governance structures and low management efficiency brought about by administrative monopolies.
 

Meanwhile, it is necessary to face up to problems looming in SOEs, such as the low intensity of R&D, high degree of external dependence in terms of core technology and a lack of resource-sharing mechanisms and pro-innovation corporate culture.
 

Fourth, deep reform of SOEs’ performance assessment models is crucial to achieving their pivotal role. Full attention should be paid to the intensity, continuity and uncertainty of funding in the second stage of innovation, and incorporating the driving effect of common industrial technology and regional innovation development into the key index system of performance assessments for SOE managers.
 

In addition, efforts should be made to nurture an entrepreneurial spirit, build a professional entrepreneur team and further introduce market-driven competition mechanisms during the appointment of executives. It is also imperative to rationalize innovation incentive mechanisms to encourage SOE employees to innovate. In the long run, it is also necessary to develop a corporate culture that is people-oriented, pro-innovation and tolerant of failure.
 

Within a broader context in which the government encourages enterprises to go global and expand their international markets, Chinese enterprises will face fiercer competition with multinationals and entrenched corporations from developed economies, highlighting the need to transition from cost innovation to differentiation innovation.
 

SOEs are expected to pioneer in the tide of marketization and internationalization. To fulfill this role, they first need to actively avail themselves of foreign R&D resources and innovative expertise to straighten out industry-specific technical problems. This can be achieved by cooperating with foreign universities and scientific research institutions, installing R&D arms in foreign countries or employing foreign experts.
 

Also, they need to build their own brand, focus on protecting core technology and develop a reasonable approach to intellectual property overseas to avoid exporting innovative technology without the shield of intellectual property laws while also avoiding infringements on foreign intellectual property.
 

Yin Zhifeng is from the School of Economics at the Central University of Finance and Economics.