Strategy for a tech-driven Greater Bay Area

Robust growth of the GBA

The Guangdong Bureau used a quantitative approach to evaluate the innovation and technology development in the region. Based on the methodology of China’s National Bureau of Statistics, the Bureau created the GBA innovation development index looking at research and development (R&D) in six areas: the number of enterprises engaging in R&D, patent and new product output, R&D manpower, enterprise capital expenditure on R&D, investment on technology upgrade, and the innovative environment. Not surprisingly, the index showed that the market environment for innovation development in the nine GBA cities on the Mainland nearly tripled between 2013 and 2018, suggesting remarkable breakthroughs.

Enterprises demonstrated strong commitments with government support

The index shows that the GBA’s technology development has been boosted especially by the rapid increase in the number of enterprises engaging in R&D and the output of R&D in terms of patents and new products, both of which have more than tripled. In fact, Guangdong (mainly the GBA cities) led the whole country in terms of international Patent Cooperation Treaty (PCT) applications, with 24,700 patent applications or more than 40% of national total in 2019². Meanwhile, the nine GBA cities on the Mainland are collectively home to around 20.5% of China businesses that have R&D facilities, compared with an overall share of 13.2% in 2018.

It suggests strong enterprise sponsorships that are in line with favorable policies since the launch of the National Intellectual Property Strategy in 2008³, as well as the ambitious national and regional targets on patent applications and ownership⁴. For example, internet companies in the region are actively investing through their corporate venture capital, amid government incentives on patent application. Also, the Government introduced venture capital (VC) funding promotion policies, such as co-financing for private VC funds from local government funds⁵. With a strong presence in Shenzhen, China’s VC market expanded to become the world’s second largest⁶.

Soft environment such as talent supply lags behind

Meanwhile, the study also shows that the soft environment of the GBA’s innovation and technology development continued to lag. Compared to the more tangible achievements above, R&D manpower, enterprise capital expenditure on R&D and the innovative environment have all increased albeit at less pronounced pace. It may suggest room for further improvement in terms of the availability of R&D talent, the share of R&D funding as a share of value-added of industry (VAI) and the share of R&D funding in local government finances.

It is important to note that the lag comes from exceedingly strong growth in enterprise commitment rather than a lack of progress in these areas. In terms of the share of local government spending on technology development, the GBA is a strong national leader with 4 of the top 10 cities coming from this region. It comes amid a four-fold increase in spending in the past five years, to close to RMB90b in 2018 from around RMB20b in 2014. Corporate R&D spending by industrial enterprises, meanwhile, also increased to 7.2% of total VAI in 2018 from 5.7% in 2014.

Nevertheless, the divergent trends reveal the challenge to institutionalize innovation after the low hanging fruits have been picked. Building upon the progress of tech enterprises, the process functions a lot like a coral reef⁷. It calls for the gradual creation of an ecosystem by the accumulated networks of both new and veteran talent in the right field. Individuals in the network should be encouraged to mix together in productive ways. Over time, ideas emerging in the network of talent find endogenous support for development, which could in turn attract more technical, labor and capital resources.

Three innovation leaders in the GBA

By location, Shenzhen and Zhuhai are leaders among the nine GBA cities on the Mainland with the highest readings in the innovation development index, followed by Dongguan, which showed the most improvement from being one of the three cities ranking last in 2013 to one of the leaders. Shenzhen stands out in having one of the highest scores in enterprise capital expenditure on R&D, reflecting its massive private sector in the technology sector. The city also has strong R&D manpower and an innovative environment, consistent with its profile as China’s technology hub and the obvious leader in the GBA in terms of innovation.

Zhuhai also has one of the more “tech-ready” economies with strong R&D manpower and an innovative environment, but while Shenzhen’s focus is on electronics and communication equipment, Zhuhai is more specialized on the biomedical industry. With an official target for the size of the industry to reach RMB80-100b in 2020, Zhuhai’s VAI growth has been one of the leaders in the region in recent years.

Dongguan, meanwhile, has a relatively late start in innovation and technology development but its 2018 score in patent and new product output was almost as strong as Shenzhen. The process began in 2012 with government-led initiatives to upgrade the industrial sector from its traditional role as a hub for processing trade. The initiatives included tax concessions, R&D subsidies, seminars and exhibitions to support the city’s community of mainly private and smaller enterprises in technology⁸.

Among the nine mainland cities in the GBA, however, the study found that the divergence in industrial development actually widened between 2013 and 2018, with Shenzhen being the obvious leader. As a whole, the VAI of high-tech industry amounted to 35.8% of total VAI in 2018, with only Shenzhen reaching the official target at 50%. The traditional manufacturing hub of Guangzhou and Foshan, in particular, have been flagged for needing more improvement in innovation and technology development.

The collaborative roles of Hong Kong and Macau

As highly specialized economies with little tech-related industries, the two Special Administrative Regions (SARs) Hong Kong and Macau are not included in the study, but the study also reveals ways that the relative strong suits of Hong Kong’s economy could collaborate with the tech-related industrial development in the rest of the area, especially in terms of its soft technology environment.

According to the Global Scientific and Technological Innovation Centers Evaluation Report by the Shanghai Information Center, Hong Kong is in the 15th place compared to Shenzhen’s 27th and Guangzhou’s 46th in 2020 in terms of overall innovativeness. Although Hong Kong lacks an industrial sector, its position comes predominantly from the city’s comparative advantage in fundamental research, including the number of academic publication citations, the international ranking of its universities, the recognition of its scientific research, and the quality of its scientific research facilities. The talent generated from the universities in Hong Kong could feed the demand for technology talent in the GBA.

Technology enterprises may also tap into the financial market in Hong Kong to further expand its investment on R&D. Specifically, in the Opinion on Financial Support for the Construction of the Guangdong-Hong Kong-Macao Greater Bay Area⁹, which was released in May 2020, private equity funds in the two SARs are encouraged to participate in cross-border financing arrangements for innovative enterprises within the GBA, while qualified innovative enterprises are encouraged to list in Hong Kong. Institutional investors in both locations are also allowed to participate in private equity investment funds and venture capital funds in the GBA through Qualified Foreign Limited Partners (QFLPs).

A four-pronged approach for a conducive innovation ecosystem

It would rely on making balanced progress between the Government, the private sector, the capital market and the workforce.

1.    Government

To achieve this, keen participations of the Government, entrepreneurs, the financial sector and technical talent are all required. For the Government’s part, efforts should not only be on subsidizing patent applications and rewarding businesses with R&D facilities, but also on sponsoring more R&D through funding from the fiscal budget, lifting unnecessary hurdles on the normal flow of ideas and supporting businesses through tax cuts and regulation change. In addition, investment on new infrastructure, which enables technology development in areas such as 5G, IoTs, industrial internet, cloud computing, blockchain, data centers, smart computing centers and smart transportation, is a high priority.

2.    Private sector

The private sector should benefit from upgrades in technology infrastructure, from more comprehensive coverage of data networks to the support of incubator and accelerator programs. Shenzhen has already been tasked with driving innovation and technology development in the GBA in August 2019¹⁰, which could lead to a positive spillover of Shenzhen’s proven infrastructure and institutional settings to the region. Meanwhile, land use policies within the region may be better coordinated to allow tech businesses access to more affordable land¹¹. In addition, domestic industries will become more open to both foreign investors and competitors. Coming into effect on 1 January 2020, the foreign investment law has stipulations that protect foreign investors from intellectual property infringements and obligatory technology transfers¹². In fact, foreign direct investment on the high-tech industry has already jumped by as much as 27.6%YoY between January and November 2019, and it will continue to play an important part in China’s technology sector¹³.

3.    Capital market

The study recommends establishing a “technology credit system” based on financial transactions and R&D output to evaluate the creditworthiness of new tech enterprises. The result of the technology rating system can add transparency to the government support program to use intellectual property asset as collateral for financing¹⁴.

In fact, the rating system has been included as one of the objectives in the financialization of intellectual property by China’s Ministry of Finance in May¹⁵. As such, the government-led initiative will accelerate to create evaluation tools for technology-related intellectual property, while insurance products will also be developed. This will ultimately help to lower the cost of capital for tech enterprises, allow more targeted government policies to support technology industry development, and deepen the participation of private equity and venture capital in the technology sector.

4.    The workforce

Arguably the biggest bottleneck in innovation and technology development in the GBA is the shortage of talent both in terms of the share of R&D personnel in the labor force and the concentration of university graduates. This is part of a legacy issue that Shenzhen lacks the endowment of top research universities that are strong in the technology field¹⁶. However, as discussed above, this is an area where Hong Kong may collaborate as a generator for talent.

There has been remarkable progress. The 16 measures to facilitate Hong Kong people working and living in the GBA¹⁷, announced in November 2019, relaxed the restrictions for not only Hong Kong’s permanent residents but also its expatriate population to work in mainland China. Various city-level governments have also released plans to provide subsidies for overseas talent, in areas such as income tax, housing and transportation. Through these measures, the GBA aims to attract professionals from around the world.