Sun. May 26th, 2024
  • China’s slowing economy and local government fiscal pressures are causing a slowdown in the country’s science and technology (S&T) funding, potentially impacting its ambitions to become a self-reliant global technological powerhouse.
  • The Chinese government, which plays a dominant role in S&T funding, representing around 60% of all financing for the country’s S&T ecosystem, will likely have to strategically channel funding towards a narrower core of national security-relevant technologies and companies.
  • Universities and R&D institutes, which account for 85% of China’s basic research spending, are at significant risk from slowing economic growth and diminished local government budgets.
  • In order to maintain high levels of S&T financing, the government could take measures such as increasing central-to-local fiscal transfers, stimulating commercial sources of S&T funding, using non-financial tools to support innovative firms, and focusing on strategic sectors that create national security vulnerabilities.

The report from Rhodium Group highlights how China’s slowing economy could have a significant influence on the country’s ambitions to become an innovation powerhouse. Amid an economic slowdown and intensifying fiscal pressure, the Chinese government, which contributes about 60% of the S&T system finance, may need to direct resources strategically. This focus will likely skew towards a narrower core of national security-related technologies and companies.

China’s economic slowdown seems poised to strongly affect funding for universities and research institutes, institutions that play a vital role in China’s innovation ecosystem, as these bodies account for 85% of China’s basic research spending and largely rely on government funding. As local government revenues have been consistently dropping, and many are experiencing a fiscal crunch, these academic and research institutions may become increasingly constrained financially, which could potentially slow the development of transformative innovation in less critical fields.

The report suggests potential pathways out of the financial crunch for S&T funding in China. These include the Chinese government taking bold steps to increase fiscal revenues; increasing central-to-local fiscal transfers and making more of them conditional upon S&T funding; backfilling government S&T funding sources with commercial ones; increasing the use of non-financial tools in support of innovative firms and key S&T actors; and concentrating resources on a select few sectors and players deemed most critical for national security.

China’s overall S&T spending may continue its upward trajectory in the coming years – albeit at a slower pace – if the Chinese government effectively leverages the solutions mentioned above. If the government can efficiently concentrate scarce resources on a select set of technologies and firms, it stands a chance of enhancing its technological capabilities in these sectors. However, limiting focus to a select few technologies could inadvertently hinder China’s broader innovation ecosystem, which thrives on the spillover between different technological areas and cross-pollination among a wide variety of actors.

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