Chinese government’s spending on R&D increases steadily from 2010 to 2019

By SUN Yutao

Dozens of technological achievements, such as the successful launch of the Chinese space station and core module, demonstrate that China's research and development (R&D) is entering a new era, and the country is striving to become a major world player in science and innovation. Behind the hi-tech development is China's increasing spending on R&D. Research & Development funding is one of the most important factors for national science and technology (S&T) development, and the structure of R&D funds is of great significance to the national S&T governance structure.

Rapid growth of China's R&D expenditure

According to the U.S. Science and Engineering Indicators 2020, based on Purchasing Power Parity (PPP), China was the second largest R&D spender in 2017, accounting for about 23 percent of total world R&D expenditure. In 2020, China's gross expenditure on R&D (GERD) was over RMB 2.4 trillion, twice as much as that of six years ago and 56 times of that of 1995. China's GERD as a percentage of GDP (R&D intensity) reached 2.4 percent. The ratio tripled since 1995 and has surpassed the average of 28 member states of the European Union. Although China did not fulfill the R&D intensity target set for 2020 (2.5 percent), it has retained the momentum to help transform the nation's economic structure and stimulate the next stage of social and economic development by science, technology and innovation.

Optimizing the structure of China's R&D expenditure

Between 1995 and 2019, the growth rate of enterprise R&D funding has significantly exceeded that of government's spending in this area, due to China's transformation to a market-oriented economy and building of an enterprise-centered national innovation system. Consequently, the proportion of enterprise funding in GERD increased from about 30 to 76 percent, while the share of government spending fell to about 20 percent. The stimulus policy, such as additional tax deductions for enterprise R&D expenses, played an important role in encouraging enterprises to increase their R&D expenditures. From 2021, the Chinese Government will raise the rate of additional tax deductions for R&D expenses of manufacturing enterprises from 75 percent to 100 percent, which is expected to increase the total tax reduction from RMB 360 billion in 2020 to RMB 440 billion in 2021.

However, China's structure of R&D expenditure is still unbalanced. The share of scientific research in GERD is relatively low. China spends about 16 percent of its GERD on scientific research, while the rest of the funds are used on experimental development. In 2019, China only invested 6 percent of its GERD on basic research, having maintained a very low proportion of its R&D expenditure (5 percent) on basic research for about two decades. Thus the Chinese Government set a goal of 8 percent in the 14th Five-Year Plan (2021-2025). Moreover, the challenge of lower R&D expenditure on applied research has not received much attention. China's share of applied research expenditure on GERD has decreased from 26 percent to about 10 percent between 1995 and 2019, which is much lower than the ratio of 30 percent spent by the U.S. and Japan.

Expanding channels of R&D funds

The main reason for the lower proportion of scientific research expenditure lies in the single funding source from government, while funding from enterprises on scientific research is seriously insufficient. Most of China's basic research expenditure was from government, especially the central government, while contributions from enterprises were negligible.

China should increase the proportion of government funding in GERD, which is about 20 percent. China's local government's S&T expenditure is larger than the central government's, but the share of local governments' R&D expenditure is low. Local governments also need to increase their expenditure on R&D.

It is also possible for China to increase R&D funding from other sources besides government and enterprises. For example, the Chinese Government could create tax breaks to encourage enterprises and entrepreneurs to make donations to universities for scientific research, or to set up non-profit research foundations.

SUN Yutao, Professor of Faculty of Management and Economics, Dalian University of Technology, Dalian, China.