SUPPORTING REPORT 3 2 35 CHONGQING An Innovation Strategy to Climb Up the Value Chain and Create the Conditions for a Skilled Labor Force Photo: xieyuliang. © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, inter- pretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judg- ment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Citation Please cite the report as follows: World Bank. 2019. Chongqing 2035: An Innovation Strategy to Climb Up the Value Chain and Create the Conditions for a Skilled Labor Force. Supporting Report 3. Washington, DC: World Bank. Acknowledgments The Lead Authors of the Overview and four supporting reports are Serge Salat, Xueman Wang, and Zhou Linjun. Cover photo: Kinny. Design: Ultra Designs, Inc. Table of Contents 1. Introduction 2 FIGURES Figure 1. R&D Expenditure in Chinese Cities 3 2. Current Trends and Key Issues 3 Figure 2. R&D Expenditure of Industrial Enterprises above a Designated Size in 2015 3 3. Lessons from Global Cities 5 Figure 3. R&D Expenditure as a Share of GDP 5 4. Recommendations 7 TABLE Innovation transformation I Boost the city’s capacity for innovation 7 Table 1. Number of Higher Education Institutions and Research Institutes in Major Chinese Cities 4 Innovation transformation II Build a large skilled workforce by strengthening vocational education to expand the technical BOXES knowledge of the labor force 7 Box 1. Innovation Strategy Key Messages 2 Innovation transformation III Take advantage of Chongqing’s large Box 2. Synergies between Universities and consumer market and make the city a Start-Ups Ecosystems in Global Cities 6 test-bed for innovative products and Box 3. Germany’s Dual Education System 6 technologies 9 Box 4. Shenzhen’s Strategy to Attract Innovative Innovation transformation IV Companies and Talent 8 Cultivate a creative industry and provide Box 5. Why Apple Prefers to Make Its iPhones entrepreneurial spaces for the development in China 8 of small and medium enterprises 9 Box 6. London’s Creative Industries 9 References 10 Endnotes 11 Photo: onlyyouqj. 2 / An Innovation Strategy to Climb Up the Value Chain and Create the Conditions for a Skilled Labor Force 1. Introduction The innovation economy has become a driving Traditionally, Chongqing has been a city of force intransforming entire industries, often at production, focusing on the application of an accelerated pace. Cities are making massive technology rather than its development and investments in innovation and research and innovation. However, while this has served the city development (R&D) to support and attract well in the past, Chongqing’s low innovative capacity technology-driven industries that are leading the puts it at risk of missing out on future economic digital revolution and disrupting established markets. opportunities. This problem is exacerbated by a To succeed in this transformation, a strong and skilled shortage of highly skilled labor and by a mismatch labor force is the most crucial factor. Human capital, between available jobs and the existing workforce. meaning the skills, knowledge, and experience of the labor force, is critical for future economic development and innovation (Quintini 2014). BOX 1 Innovation Strategy Key Messages Current trends and key issues: talent by enhancing its talent-seeking programs; in the long term, the city should aim to develop ■■ Investments in R&D, both by the Chongqing its own talent by developing world-class Municipal Government and by local firms, lag universities to create the right skill mix. behind China’s other three provincial-level cities. ■■ Build a large skilled workforce by strengthening ■■ Chongqing lacks leading universities and vocational education to expand the technical research laboratories. knowledge of the labor force. Following the ■■ The city’s unbalanced labor market and a example of Germany’s dual education system, shortage of highly skilled labor could hinder it Chongqing should aim to become China’s center from climbing the value chain. of excellence for vocational education. Benchmarking with global cities: ■■ Take advantage of Chongqing’s large consumer ■■ Unlike global cities, Chongqing lacks an eco- market and make the city a test bed for system for creative businesses and innovation, innovative products and technologies. which requires top-tier universities, innovation- ■■ Cultivate a creative industry and provide intense enterprises, and a start-up scene. entrepreneurial spaces for the development of small and medium enterprises. Recommendations: ■■ Boost the city’s capacity for innovation. In the short term, Chongqing should aim to attract SUPPORTING REPORT ➌ CHONGQING 2035 / 3 2. Current Trends and Key Issues Chongqing’s R&D expenditure constitutes only certain size in Chongqing ranks last among China’s a small share of its GDP. Chongqing lags behind four municipalities, and it is less than half that China’s three other provincial-level municipalities of Shanghai (figure 2). This is a key factor, given in terms of R&D spending in total and as a share that most innovation is driven by private sector of GDP. While Beijing and Shanghai spend 5.9 participation in research. percent and 3.8 percent of GDP on R&D respectively, Chongqing lacks strong universities and research/ Chongqing spends only 1.7 percent (figure 1) innovation labs. There are only 72 colleges and (National Bureau of Statistics of China 2016). universities in Chongqing, of which less than half R&D expenditure among Chongqing’s industrial have R&D activities. Furthermore, the city has far enterprises is relatively low. The amount of R&D fewer research institutes than other major Chinese expenditure by industrial enterprises above a cities (table 1). FIGURE 1 R&D Expenditure in Chinese Cities FIGURE 2 R&D Expenditure of Industrial Enterprises above a Designated Size in 2015 Internal expenditure (10,000 RMB) Internal expenditure (10,000 RMB) 1,600 8 5,000,000 1,479.8 1,400 7 4,742,400 4,000,000 1,200 5.9% 6 1,030 1,000 5 3,000,000 800 3.8% 4 2,440,875 2,459,000 3.1% 2,000,000 1,996,609 600 3 537.3 400 2 1.7% 1,000,000 300 200 1 0 0 0 g jin ai ng ng g ai jin jin jin gh gh an an qi qi ei ei an an ng ng Ti Ti B B Sh Sh ho ho C C ● R&D expenditure Source: National Bureau of Statistics of China 2016. ● R&D expenditure as a proportion of GDP Source: National Bureau of Statistics of China 2016. 4 / An Innovation Strategy to Climb Up the Value Chain and Create the Conditions for a Skilled Labor Force TABLE 1 Number of Higher Education Institutions and Research Institutes in Major Chinese Cities Beijing Shanghai Guangzhou Chongqing 92, including Tsinghua 64, including Fudan 83, including Sun Yat- 64 Higher University, Peking University, Shanghai Jiao sen University, South China education University, and Renmin Tong University, and Tongji University of Technology, institutions University University and Jinan University 100, including Chinese Over 80, including 40, including 27 Academy of Sciences, Shanghai Institute of Guangzhou Institute of China Center of Biological Sciences, Geochemistry, South Research Advanced Science and Shanghai Materials China Sea Institute of institutes Technology, and Chinese Research Institute, and Oceanology, and Institute of Academy of Geological National Center of Protein High Energy Physics—all Sciences Science affiliated with Chinese Academy of Sciences Source: Shenzhen Municipal Government 2018. There is a notable shortage of highly skilled is only one opening for every three graduates of employees, and the city also suffers from a vocational schools, and the situation gets worse for mismatch of talent and jobs. In 2016, Chongqing university graduates, with roughly 1 opening for every had a working-age population (aged 15-64) of 21.62 7 applicants (Chongqing Technological Development million, or 63.7 percent of the city’s hukou population. Strategy Institute and Chongqing Productivity In 2016, the average duration of schooling for the Development Center 2017). population aged 15 and above was only 9.76 years, This mismatch represents a waste of human capital which is low compared to other municipalities in and may come at a cost to Chongqing’s economy. China (Chongqing Bureau of Statistics n.d.). By underutilizing its college and vocational school Moreover, the city suffers from a mismatch of talent graduates in its high-tech industries, Chongqing and jobs. For example, the IT industry offers the indicates that it is not preparing for the pervasive highest ratios of job openings to job seekers with employment transformations that robotics will bring minimum qualifications, with ratios close to parity to its industries. between applicants and openings. However, there Photo: TommL. SUPPORTING REPORT ➌ CHONGQING 2035 / 5 3. Lessons from Global Cities International experience shows that when a region’s While technology is disrupting the labor landscape, or country’s R&D expenditure accounts for less than there is a general shortage of highly skilled labor 1 percent of its GDP, its ability to innovate is very in many cities. According to the Organisation for weak. A GDP share of 1-2 percent indicates a certain Economic Co-operation and Development (OECD), ability to innovate, and a GDP share of 2-5 percent 40 percent of European employers reported in 2013 indicates a strong ability to innovate. This suggests that they had difficulties finding people with suitable that Chongqing has a low baseline to start and that skills (OECD 2016). This shortage was most common it must strengthen its R&D activities going forward in the manufacturing sector. (figure 3). For a production center like Chongqing, closely Technological innovation and high human capital associating the practice of business applications give rise to innovative cities and their accession to in enterprises with learning can improve student the status of global cities. These cities combine a training and help the city’s workforce to develop the vibrant knowledge economy with top-tier universities skills needed for the next stage of industrialization. and have a dominant innovative sector developed To develop high-level technical skills among its around a university of excellence (box 2). Their major population, Chongqing can learn from Germany’s universities have close links to large enterprises dual education system, which enables students to and develop innovative solutions using start-up acquire a wide range of knowledge and applicable incubators to promote their growth. skills (box 3). FIGURE 3 R&D Expenditure as a Share of GDP 4.5 R&D expenditure as percentage of GDP 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2.40 3.30 2.94 3.49 2.96 3.32 4.15 2.81 2.81 e 2.02 2.02 1.57 0 . n d en nd y es e ep or an ag pa an at ed la ,R ap na ng m er Ja nl St er Sw a Fi er av ng hi qi itz re d G C ng te Si D Ko Sw EC ni ho U O C Source: Produced by the Urban Morphology and Complex Systems Institute for this report, based on Chongqing Municipal Bureau of Statistics and NBS Survey Office in Chongqing 2016 and the World Bank 2018. 6 / An Innovation Strategy to Climb Up the Value Chain and Create the Conditions for a Skilled Labor Force BOX 2 Synergies between Universities and Start-Ups Ecosystems in Global Cities Boston, home to some of the best universities in The development of Seoul, one of the most the world, including Harvard and MIT, is a global innovative and high-tech cities in the world, leader in biotechnology. Montréal has developed was the result of the synergy among its world- an ecosystem of start-ups in artificial intelligence renowned higher education institutions and high thanks to Université de Montréal’s robotics technology. The city ranks fourth in the world program. San Francisco, Los Angeles, Toronto, in terms of patent applications, after Tokyo- and Chicago are other examples of cities with Yokohama, Shenzhen-Hong Kong SAR, China, well-established start-up ecosystems. All three and San Jose-San Francisco. Seoul is attracting have strong universities, high-profile companies growing interest from international investors and with links to schools, and offer opportunities to multinationals seeking to exploit its highly skilled entrepreneurs. workforce and innovative culture. Source: Hales, et al. 2017; Dutta, Lanvin, and Wunsch-Vincent 2017; Jones Lang LaSalle 2016. BOX 3 Germany’s Dual Education System How did a country of 80 million people become between study and work. It ensures the constant a global leader in the automotive, mechanical, modernization of programs, as learning is and chemical industries? Germany achieved this constantly updated and follows the development thanks to the quality and reliability of its industrial of advanced technology and the needs of the products and the high level of competence of its economy. In addition, the dual education system industrial workforce. This is one of the successes has allowed Germany to maintain a low youth of the country’s dual education system, which unemployment rate, produce a skilled workforce, combines enterprise training with theory taught in and increase its economic competitiveness. public schools one or two days a week. Companies offering training programs employ 70 percent of the German workforce, and 100 percent The joint educational responsibility between of apprentices get a job after completing training. schools and businesses creates a synergy Source: OECD 2016. Photo: metamorworks. SUPPORTING REPORT ➌ CHONGQING 2035 / 7 4. Recommendations Innovation, or “innovative development,” is one The short-term strategy should include developing of China’s major national goals. The Chinese policies to attracting innovative entities and talent government intends to make the country a to Chongqing; the long-term strategy should include global leader in innovation by 2035. Cities like building world-class universities and technical Chongqing have a key role to play in this vision, research centers. In this regard, Chongqing can draw and are expected to become hubs for advanced lessons from the success of Shenzhen, a “young” city manufacturing and knowledge-intensive services. that has adopted a similar dual strategy to make up Chongqing’s 13th Five-Year Plan has specific targets for the shortfall of established universities in the city and indicators to assess achievements in innovation (box 4). by 2020.1 In particular, the plan aims for Chongqing to catch up with the OECD average by raising R&D spending from 1.57 percent of GDP in 2015 to 2.5 Innovation transformation II percent in 2020. It also calls for increasing the number Build a large skilled workforce by of R&D staff per 10,000 employees by 66 percent strengthening vocational education to (from 36/10,000 to 60/10,000) and growing the expand the technical knowledge of the number of high-tech and new-tech enterprises from labor force 1,035 to 3,000. The share of knowledge-intensive services in the regional domestic product is targeted Chongqing is rich in human capital. By strengthening to rise to 20 percent in 2020 from 16.3 percent in 2015 vocational education, the city can transform its (Chongqing Municipal People’s Government 2016). workforce into highly qualified human capital, which is in demand among high-end industries. To move A strategy that prepares Chongqing for this up the value chain and develop advanced industrial transition to a knowledge-based economy will applications, Chongqing needs both senior white- require four innovation transformations. collar workers with the latest knowledge of global markets, as well as blue-collar workers with high levels of technical skill. Future advances in the Innovation transformation I manufacturing industry will require the production Boost the city’s capacity for innovation of highly refined goods; hence a large number of Improving a city’s capacity for innovation is a long- skilled craftsmen will be needed. To encourage more term endeavor. Compared to other more established children from urban families to enter vocational cities, Chongqing is unlikely to create world-class schools, the bias against vocational education needs universities within a short period of time. While the to be addressed. Several measures can be introduced municipal government should increase R&D funding, to achieve this objective, such as the creation of high- encourage R&D expenditure among its companies, level technological universities, increases in funding, and lay out a long-term plan that builds high-quality the expansion of teaching staff, and the updating of clusters of universities, Chongqing should also teaching materials. To emulate Germany’s success in identify solutions that address the current gaps. the manufacturing industry (box 3), and ensure the Overall, Chongqing should develop a strategy that development Chongqing’s manufacturing industry, combines short and long-term solutions. the improvement of vocational education is crucial. 8 / An Innovation Strategy to Climb Up the Value Chain and Create the Conditions for a Skilled Labor Force BOX 4 Shenzhen’s Strategy to Attract Innovative Companies and Talent Shenzhen, a city of 12.5 million people, is one of First, the Shenzhen Municipal Government the most innovative cities in China. However, as formulated a long-term plan for the development a “young” city, it has only two major universities of higher education in science and technology. and three key research centers, unlike adjacent However, it acknowledged that the problem could Guangdong Province, which has 83 universities not be solved in the short term. By cultivating and 40 research centers.2 By finding a balance an open environment, the city attracted and between its urgent priorities and its long-term encouraged institutions and talent from other plans, Shenzhen has successfully developed an regions and made rapid progress in scientific and ecosystem of creative industries and technological technological innovation. innovators. Source: Shenzhen Municipal Government 2018 BOX 5 Why Apple Prefers to Make Its iPhones In China At the Fortune Global Forum in Guangzhou in For Cook, China has a unique technological early December 2017, Apple CEO Tim Cook ecosystem: “China has moved into very outlined the three key reasons why Apple advanced manufacturing, so you find in China manufactures its iPhones in China: the availability the intersection of craftsman kind of skill, and of millions of highly skilled workers, tooling sophisticated robotics and the computer science engineers, and software developers; its unique world. That intersection, which is very rare to find ecosystem combining craftsmanship, robotics, anywhere, . . . is very important to our business and computers; and the presence of firms because of the precision and quality level that we with capabilities in technological process co- like.” development. Companies like Apple are looking for co- “The number one reason why we like to be in China development in engineering and development. is the people. China has extraordinary skills. And As Cook states, there is significant interaction the part that’s the most unknown is there’s almost between Apple and the Chinese manufacturers: 2 million application developers in China that write “The process engineering and process apps for the iOS App Store. These are some of the development associated with our products require most innovative mobile apps in the world, and the innovation in and of itself. Not only the product entrepreneurs that run them are some of the most but the way that it’s made, because we want to inspiring and entrepreneurial in the world,” Cook make things in the scale of hundreds of millions, said. and we want the quality level of zero defects.” Source: Leibowitz 2017. SUPPORTING REPORT ➌ CHONGQING 2035 / 9 The Apple CEO Tim Cook sees in China’s vast supply along the Yangtze River that established an alliance of highly skilled vocational talent as the key reason and platform for technological innovation sharing. If for the country’s success: “The vocational expertise scientific and technological achievements cannot find is very deep here, and I give the education system an industrial chain locally, the cities can collectively a lot of credit for continuing to push on that even implement projects. Similarly, Chongqing can rely when others were de-emphasizing vocational. Now on the sharing of innovations from other regions I think many countries in the world have woken up through transplantation and transform them to and said this is a key thing and we’ve got to correct create local value. that. China called that right from the beginning” (Leibowitz 2017). For high-tech companies like Apple, China is Innovation transformation IV no longer seen as an assembly line with cheap Cultivate a creative industry and manpower but as a place where skilled labor is provide entrepreneurial spaces for the abundant and technological solutions can be co- development of small and medium developed with local firms (box 5). enterprises In recent years, entrepreneurial spaces have flourished in Chongqing. These now number about Innovation transformation III 600, including those under construction. Allowing Take advantage of Chongqing’s large access to markets, professional services, and finance consumer market and make the city a channels, these spaces offer affordable, practical, test bed for innovative products and and comprehensive services for entrepreneurs. It technologies is important to note that innovation players in the creative industries are mostly small and medium- Chongqing may not become a major cradle of sized enterprises that could complement the innovation in the near future, but it could be structure of Chongqing’s scientific and technological an attractive location for the development and industries (box 6). manufacture of innovative products. In December 2017, this strategy was implemented by eight cities BOX 6 London’s Creative Industries London’s creative industries are significant With a GVA of US$62 billion in 2015, creative contributors to the economy.3 In particular, industries account for 11 percent of the London IT, software, and computer services, which economy and 11.9 percent of its jobs. This sector represent the largest share of the creative sector, benefits from productivity gains related to the contributed to 38 percent of its gross value clustering of creative businesses and workers. added (GVA) in 2015 and more than half of its According to the Greater London Authority, the growth since 2009. This sector of the economy GVA per job in London’s creative industries was is concentrated in a few neighborhoods, which US$105,400 in 2015—22.2 percent above the produce about half of the country’s GVA in average for all sectors. Furthermore, the most creative industries, and as such benefit from productive sectors tend to be in knowledge- agglomeration forces and transfer of knowledge. intensive and tradable activities. Finally, this productivity translates into wages that are almost one-third higher than the average wage outside creative industries in 2016. Source: Rozario 2017; Bakhshi and Mateos-Garcia 2016. 10 / An Innovation Strategy to Climb Up the Value Chain and Create the Conditions for a Skilled Labor Force References Bakhshi, Hasan, and Juan Mateos-Garcia. 2016. “The Jones Lang LaSalle. 2016. “Seoul stakes its claim among Geography of Creativity in the UK.” Nesta. July 22. the top global cities.” JLL Real Views. June 9. https://www.nesta.org.uk/publications/geography- https://www.jllrealviews.com/places/seoul-stakes- creativity-uk. its-claim-among-the-top-global-cities/. Chongqing Bureau of Statistics. n.d. 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May 28. http://www.sz.gov.cn/ 2017. “Global Cities 2017: Leaders in a World of zfgb/2018/gb1052/201805/t20180528_12002951. Disruptive Innovation.” A.T. Kearney. https://www. htm. atkearney.com/documents/10192/12610750/ Global+Cities+2017+-+Leaders+in+a+World+of+Dis World Bank. 2018. “Research and Development ruptive+Innovation.pdf/c00b71dd-18ab-4d6b-8ae6- Expenditure (% of GDP).” https://data.worldbank. 526e380d6cc4. org/indicator/GB.XPD.RSDV.GD.ZS. SUPPORTING REPORT ➌ CHONGQING 2035 / 11 Endnotes 1. To enhance Chongqing’s technological innovation 2. Shenzhen was a market town of 30,000 people in capacity, the 13th Five-year Plan of Chongqing 1980 when it became China’s first Special Economic for Technological Innovation sets out the overall Zone (SEZ). In 2017, after 37 years of sustained objective of Chongqing becoming an innovation- growth, it reached 12.5 million inhabitants and its GDP oriented city, with three qualitative targets: (1) an surpassed that of Guangzhou and Hong Kong SAR innovation-oriented economic structure; (2) regional at US$338 billion, placing it third in China behind innovation capacity enhancement; and (3) innovation Shanghai and Beijing. ecosystem optimization. These targets are based 3. The GVA of London’s creative industries has on 10 quantitative indicators, actioned through nine increased by 38.2 percent in nominal terms since priority tasks for technological innovation in a number 2009, compared to 30.6 percent across all sectors. of sectors, including advanced manufacturing, new information, health, new materials, new energy, modern agriculture, eco-environmental protection, new urbanization, and public security (Chongqing Municipal People’s Government 2016). 2 35 CHONGQING