In his speech to the 19th National Congress of the Communist Party of China, General Secretary Xi Jinping said China aims to become a global leader in innovation by 2035. He underscored the importance of strengthening China's innovation system, including the protection of intellectual property rights, and fostering a culture of innovation.

With strong home-grown innovation, China can effectively and simultaneously tackle multiple development challenges: shifting reliance on quantitative economic development to quality growth, championing the global fight against climate change, mitigating labor shortages resulting from an aging society, and revitalizing rural and less-developed areas.

How to become an innovation nation

But what are the sources of innovation? What is its relationship to knowledge? How can a country become an innovation nation?

Innovation captures the process through which knowledge and scientific inventions become new products, new business processes, and new institutional arrangements. So defined, innovation is critically dependent on learning ability or capacity: knowledge absorption and creation, and an institutional environment conducive to turning knowledge into new products and services. Building the capacity to innovate is fundamental to leapfrogging development－a process aspired to by all developing countries.

For developing countries, economic openness serves as a main channel for knowledge transfer and innovation. Through trade, foreign direct investment and overseas studies, developing countries learn, imitate and innovate at a rate determined by their knowledge absorption capacity and regulations related to technology transfer. From this perspective, China's remarkable economic transformation over the last 40 years has been a success story. China has managed to pair opening-up with rapid learning, technology absorption and creation, and the piloting of new reforms to further cement its integration with the global economy.

However, innovation that relies on openness has its limits. To encourage "homegrown" innovation, countries must put in place their own innovation systems and nurture a culture of learning, knowledge sharing, and competitive research. This is why many developing countries that embrace opening-up still face the challenge of achieving sustainable growth that can pull them out of the middle-income trap, and propel them into the league of high-income countries. The very complexities of knowledge make its absorption and creation less straightforward, and innovation harder to promote.

Knowledge creates knowledge, and every idea can generate a new one. While knowledge can be either explicit or tacit, the latter is recognized as more important for innovation than the former.

Yet tacit knowledge is much harder to transfer from individual to individual, and from country to country. Unlike explicit knowledge, which can be learned through reading and schooling, tacit knowledge is embodied in individuals and can only be acquired through apprenticeship, learning-by-doing, and managed interactions, such as small networks for knowledge sharing. This underscores the importance of concepts such as "learning institutions" or "knowledge networks" where incentives and opportunities are created for sharing knowledge through day-to-day interaction. A learning institution encourages formal and informal learning networks within itself.

At a country level, an open and competitive learning environment needs to be nurtured for scientific research, policy studies, and invention and innovation in products and services. Governments have a strong role to play in strengthening the education system, promoting skills development that reflect industries' needs, and investing in public research to complement research of proprietary nature conducted by the private sector.
Indeed, as the Organization for Economic Cooperation and Development notes, many key technologies in use today, including the internet, are products of public research. An open and competitive learning environment is even more important for research on policy and development approaches.

Innovation a key part of China's success

Not all policy recommendations and untested approaches represent innovation and new knowledge. Introducing new policy and institutional reforms without first trying them in a local setting may result in a huge waste of public resources－and may even jeopardize social stability, which could set economic development back many years. An open and competitive environment allows policymakers to hear competing policy advice and weigh the pros and cons of each. It also encourages local experimentation with innovative ideas before they are scaled up by policymakers country-wide.

This is a key part of China's success story. During its 40 years of reform and opening-up, China's policymakers have shown pragmatism in encouraging experimentation with new ideas and approaches by local authorities. The famous rural household responsibility system was first quietly initiated by a group of farmers in Xiaogang village of Anhui province. It was subsequently endorsed by the central government and scaled up nationwide.

China's opening up to foreign direct investment has also followed a gradual and experimental approach, first in four special economic zones in 1980, then expanding to 14 coastal cities in 1984 and Hainan province in 1988. More broadly, China's transition from a planned economy to socialist market economy has followed this gradual and experimental approach by letting the economy run on a "two-track system" for a long time before the planning system was phased out.

While this two-track system was criticized for distorting resources and encouraging rent-seeking activities, it served the practical purpose of letting the economy run on the existing production and distribution system, giving the government time to put in place requisite institutions and human capacity essential for its socialist market system. This helped avoid the social instability associated with shock-therapy reforms, wherein an existing system is overhauled within a short period of time. Former leader Deng Xiaoping characterized this trial and experimental development approach as "crossing the river by feeling the stone".

This year marks the 40th anniversary of China's economic reform the opening-up initiated by reform architect Deng Xiaoping. With 40 years of experience, China is now embracing a much more ambitious reform agenda, as announced by President Xi Jinping at the Boao Forum for Asia earlier this year.

China's innovation drive is ushering in a new era through a combined top-down leadership push, and bottom-up approach to encourage local innovation and development experimentation. The digital economy and new technologies will have a major impact on innovation and knowledge sharing at all levels, and it is crucial to ensure the benefits reach everyone in society. To promote region-wide inclusive development through innovation, China is actively promoting South-South learning networks to share knowledge and experiences with other developing countries.

This includes the Regional Knowledge Sharing Initiative with the Asian Development Bank, launched in 2012, and an institute of South-South Cooperation and Development at Peking University. To help transform growth from quantity to quality, China and the ADB are committed to innovation and knowledge sharing as a defining feature of their development partnership.

Jeffrey Liang is principal economist and Amy Leung the director-general of Asian Development Bank's East Asia Department.