During the inaugural session of the "High-Quality Development of Private Economy Series Salon" hosted by Economic Observer, Professor Huang Shaoqing from Antai College of Economics and Management at Shanghai Jiao Tong University expressed that the enhancement of a country's innovation capabilities stems from the trial and error of millions of entrepreneurs. Huang highlighted that this aspect is crucial, especially now as China's innovation shifts from “absorption and introduction” to “original innovation”. Private enterprises, abundant in number and more dynamic and cost-effective in trial and error, are poised to play a significant role in innovation.

Huang believes that addressing the needs of “original innovation” requires systematic adjustments in policy. For instance, the government must take responsibility for promoting scientific prosperity, and financial policies need to increase credit support for small and micro enterprises. More importantly, there is a need for an adjustment in industrial policies, transitioning from selective to functional industrial policies. Compared to the former, the latter is more inclusive, fostering fair competition and encouraging every individual's right to entrepreneurship and innovation.

Huang remarked, “Taking Japan and South Korea as examples, these countries began emphasizing original innovation after reaching a certain stage of development. A core aspect of original innovation is the adjustment of related systems and policies, transitioning from one institutional equilibrium point to another.”

The following content is organized based on Huang Shaoqing's speech during the salon:

After completing my Ph.D., I joined the Private Enterprise Research Center at China Europe International Business School, assisting Professor Wu Jinglian. During those years, I visited numerous private enterprises in places like Taizhou, Wenzhou, Suzhou, and Wuxi, engaging in extensive discussions with them. At that time, my overall impression was that despite the extensive discussions about state-owned enterprise reform, the development of the private economy was more inspiring and deserved greater room for growth.

Today, based on long-term research, my understanding and perception of private enterprises is that they possess stronger innovation capabilities compared to state-owned enterprises. Private entrepreneurs exhibit a higher desire and capacity for innovation.

Joseph Schumpeter believed that entrepreneurs are a special group of people who execute innovative functions, a capability only possessed by a subset of the population. Here, innovation refers to the recombination of production factors, or from an economic perspective, technological change. Some argue that only a select group holds innovative capabilities and that state-owned enterprises are less innovative due to the lack of entrepreneurs.

Looking at it now, I believe this statement is not accurate. Besides Schumpeter’s perception of entrepreneurs, other economists, including Professor Coase from the Austrian School and Professor Baumol, believe that entrepreneurial talent is a common attribute shared by many. However, what matters is how this widely available talent is applied.

People may not necessarily apply their talents to innovation or productive activities. State-owned enterprises are not devoid of entrepreneurs; their entrepreneurial talent is no less than that of private enterprises. However, the issue lies in the fact that this talent is not applied to innovation or expanding the "economic pie". The directional differences in how entrepreneurial talent is utilized between private and state-owned enterprises are caused by the environment, as Baumol pointed out. Where entrepreneurial talent is applied depends on the prevailing rules of the game in society and the reward structures determined by these rules.

State-owned and private enterprises operate in different environments in China. Taking policy environment as an example, state-owned enterprises enjoy resource advantages, receiving substantial support from government departments and easier access to market opportunities in many fields. Other entities struggle to receive such treatment. State-owned enterprises do not need to strive earnestly in applying their talents towards productive improvements to achieve good returns. Consequently, the entrepreneurial talents of state-owned enterprise employees are rarely reflected in innovation.

If the environment changes, the talents of some state-owned enterprise personnel may also shift towards innovation. For instance, when some state-owned enterprises are restructured into private enterprises, their leaders, now company owners, immediately display a strong desire for innovation, resulting in improved innovation levels and performance.

In summary, the reason we observe better performance in private enterprises is not because they have monopolized entrepreneurial talent, but because their personnel survive and thrive through innovation. The economic status of private enterprises, reflected in the “5678” phenomenon, is not a gift from others but a result of their own efforts. Such a status is reluctantly achieved; it is a matter of survival.

To maintain their innovative vitality, private enterprises must continue to operate in an environment with no other options. This is not about intentional discrimination, but about sustaining a high level of market competition across all sectors through market-oriented reforms. This intensity forces private enterprises to innovate as the only option. Market competition reduces profit margins, making it untenable to continue with existing products. Only through innovation can enterprises escape the survival pressure brought about by competition, prompting them to seek better technology and products. Of course, this “no other option” scenario resulting from market competition is equally crucial in strengthening the innovation capabilities of state-owned enterprises.

Moreover, what role should private enterprises play in such an environment in the future, and what should be the path for autonomous technological innovation?

In the past, development was based on improvement-oriented innovation, which involved limited innovation, technology introduction, slight modifications, and then market introduction. However, original innovation requires starting from basic research, a process longer than technology absorption, spanning from scientific research to technology development, pre-competitive development, and finally to product and process development before entering the market.

Previously, the introduction of technology and products provided clear references. But today, as we aim for original innovation, enterprises enter a “no man's land” in technology when it comes to product and technology development, making it difficult to predict which technology or product direction is correct.

This implies that Chinese enterprises have an important task at hand—they must engage in trial and error to identify the correct technological path and discover new, reliable growth points, avoiding the trap of stagnating in traditional products and technologies.

In contrast to state-owned enterprises, private enterprises invest their own money, or funds raised from those who trust in them, to experiment and innovate. This imbues them with a strong desire for success, as the stakes are high – ranging from financial loss to the risk of bankruptcy. From a societal standpoint, this relentless pursuit of trial and error is crucial as it is most likely to unveil optimal technological paths and development directions for the future.

While many private enterprises might perish in the process of trial and error, their failures are a necessary sacrifice for societal progress. It is imperative for society to embrace these failures, providing these entrepreneurs with new opportunities and a chance to rise again and continue their experiments.

Taking solar photovoltaic cell technology as an example, there are currently two distinct technological paths and competitions in progress, making it challenging to determine the superior option. This ambiguity is beneficial as innovation doesn't naturally produce winners. A nation's innovative capacity is forged by the collective trial and error of millions of entrepreneurs. A conducive environment encourages and compels entrepreneurs to dare to experiment, while also helping those who fail to stand back up.

This situation poses new requirements for governmental policies. Besides a competitive market environment, a series of institutional and policy support is essential. For instance, if the government wishes to foster original innovation, it must take up the responsibility of promoting scientific prosperity, providing private enterprises with a broader space for technological choices. Scientific knowledge, being a public good, cannot rely on the market for its provision and necessitates government funding without interference in the autonomy of scientific research.

In the realm of technology policy, the adequacy of the intellectual property protection system needs further consideration. Protection should be neither too strong to stifle new technological innovation nor too weak. Antitrust issues and intellectual property matters require meticulous attention to ensure protection without monopolization. In today's era of rapid digital technological innovation, striking a balance between antitrust and intellectual property protection is challenging yet crucial.

The financial system and policies play a significant role as well. The industrial-era financial system in China was conducive to large-scale production, providing substantial loans for expansion. However, encouraging original innovation and multifaceted experimentation necessitates a financial landscape that supports small and micro-enterprises, which have smaller investment and financing scales. The financial system apt for original innovation is yet to be fully established.

Lastly, on the topic of industrial policy, many scholars advocate for a shift from selective to functional industrial policies. The past innovation model of imitation and improvement did not require stringent institutional standards, and enterprises could thrive even with selective industrial policies. However, functional industrial policies, being more inclusive and fostering fair competition, are better suited to unleash the potential of individual entrepreneurship and innovation, aligning more closely with the needs of original innovation.

Original innovation diminishes the importance of economies of scale, emphasizing the significance of small-scale experimentation by small and medium enterprises. If existing institutions and policies remain unchanged, the risk of failure will increasingly escalate. Japan and South Korea serve as examples; after reaching a certain development stage, they emphasized original innovation, necessitating adjustments in their systems and policies. For China to pivot towards original innovation, governmental administrative intervention must be reduced in many areas, returning the opportunities for trial and error to private enterprises.

In conclusion, a series of adjustments in policy and institutional environments is vital for laying the foundation for the future development of private enterprises and their shift towards original innovation. While private enterprises must strive for excellence, governmental bodies must also engage in profound reflection and push for substantial reforms.

Investment environments are significantly influenced by both encouraging and restrictive policies, with the latter often having a more pronounced impact. When legal and institutional uncertainties rise, businesses face higher investment risk premiums to compensate for potential losses. Without a corresponding increase in returns, companies will be reluctant to invest. The current increase in investment uncertainty is due to the variability of government policies and the unpredictability of government actions, leading to a noticeable decline in investments.

Addressing the future challenge of constraining governmental actions through the rule of law and accountability mechanisms, and thereby reducing uncertainties, remains a daunting task.