Institutional barriers still inhibit China despite tremendous growth in science and technology.

China has witnessed tremendous growth in science and technology (S&T) inputs in terms of university students, research and development (R&D) investments and S&T workforce: University students. On the input side, investment by the state in higher education led to an approximate tenfold increase from 2 million in 1991 to 19 million by 2007. Gross enrollment rates of 18-22 year olds rose within around 15 years from 3.5% early in the 1990s to 22%. The 15-year (2006-2020) Medium-to-Long-term Plan for the Development of S&T (MLP) aims to increase gross enrollment rates to 25% by 2020. Half of China's university students major in science and engineering subjects. R&D expenditures and personnel. As a percentage of China's fast growing GDP, research and development (R&D) expenditures have gone from under 0.7% of GDP in 1991 to 1.5% by 2007. At purchasing power parity, China's gross R&D expenditures have reached 100 billion dollars and rank third behind the United States and Japan.The number of scientists and engineers involved in S&T activities has doubled and the number of R&D personnel has tripled over the last two decades. Quality concerns. Each of the inputs comes with serious quality concerns: --In university education, only slightly over 10% of faculty members have Ph.D.s, and only 40% have any post-graduate degree. --R&D expenditures are inefficiently used as shown by the meager output of internationally valuable patents. --In respect of R&D personnel, McKinsey Global Institute has found that only 10% of China's young white-collar workers are fit for employment at multinational corporations (MNCs). Of total R&D personnel, less than 4% have Ph.D.s, and only 10% have master's degrees. Patents. China uses its large R&D expenditures inefficiently. With the third- highest R&D expenditures in the world, it generates relatively few internationally valuable patents, such as United States Patent Office (USPTO) utility patents. China's USPTO patents have increased twentyfold over the last 15 years from a very low base, but China still only ranked 12th in USPTO patents received in 2008. Domestic firms do not seem to be leading this innovation activity. Instead, foreign firms are in the driver's seat. From 2003 to 2007, MNCs generated 1,125 USPTO utility patents where the lead inventor on the patent was located in China. In contrast, Chinese firms and institutes only created 244 such lead inventor patents. Barriers to innovation. Although China's rapid growth in technology inputs over the past decade is remarkable, there are serious institutional problems impairing efficient and effective use of these inputs:

--Ineffective public funding. Ministry of Science and Technology (MoST) and other public sources of R&D funds have traditionally done a poor job of distributing these resources to those who might best realize innovation returns. Peer review panels can incline to favoritism, collusion or even incompetence. MoST's brief move towards blind review panels to address issues of collusion and favoritism has been reversed. --Public procurement. The procurement process favors firms with strong government connections and thereby hinders efficient allocation of public resources to support domestic innovation. --Financial system. The financial system is still heavily biased towards state-owned firms. State-run venture capital firms have done little to rectify this as they generally do not invest in entrepreneurial startups. Outlook: All three institutional problems will only be solved over the medium-term, at best. More likely they will continue to act as a drag on China's development of innovative capabilities for the next decade.