Analysis of Sci-tech Innovation Phases and Its Value Chain
Tags: 2017-06-28
Analysis of Sci-tech Innovation Phases and Its Value Chain

Any well-established economics encompasses the value theory as the value analysis (VA) of the research object can help lay the foundation of its economic theory. Therefore, innovation economics should contain the analysis of innovation value. The core of innovation-driven economic development is sci-tech innovation. As innovation of this kind includes multiple closely connected phases, an innovation chain is thus formed. It is of great theoretical and practical significance to study the added value in different phases of the chain so as to explore a good way to create more innovation value.

On Defining the Start and End of the Sci-tech Innovation Chain
Existing innovation theories define that innovation starts from the incubation of new technologies: Joseph Schumpeter explicates that innovation is carried out in enterprises. That is why he regards it as a new combination of elements, and a function of entrepreneurs. Christopher Freeman asserts that innovation in the economic sense is accompanied with the first commercial transaction involving the new product, process, system or device, although the word is used to describe the whole process, and extends its denotation to the diffusion of invention and innovation. Obviously, both of them distinguish knowledge innovation from technological innovation. That is to say, if we only focus on technological innovation, then innovation chain starts from new technology incubation or invention, and accordingly, enterprises are the birthplace of innovation. Since technological innovation is a new combination of elements in enterprises and a function performed by entrepreneurs, enterprises act as the main player in innovation. However, if we are to discuss technological innovation in its modern sense, it is insufficient to start the chain from the incubation phase, and innovation is more than a function in enterprises. A new demarcation of the start and the end of innovation is needed.

The technological development pattern has seen a revolutionary change: more advances have been made from new scientific findings. The source of innovation has turned from the enterprises to the scientific research institutions. New scientific findings are transformed into new technologies, directly pushing forward technological innovation. At present, a new discovery is made and applied to industries simultaneously. Big technological leap can be made by transforming the latest scientific discoveries into new technologies. For example, discoveries on new energies and materials, breakthroughs in information technology and biotechnology are rapidly transformed into new technologies. All industrial revolutions are based on scientific and technological revolution. The high-profile fourth industrial revolution is with informatization and intelligentization as its core and large data, cloud computing, artificial intelligence and other cutting-edge technologies as its dominant industries. This innovation-based sci-tech progress model, with scientific discovery as its source, embodies the integration of knowledge innovation (scientific discovery) and technological innovation.

It is of great theoretical and practical significance to extend the initial stage of innovation to the basic research phase, i.e. the phase of knowledge innovation. By so doing, we not only elevate the basic research to a higher status, but more importantly, break down the boundaries of knowledge innovation and technological innovation, efficiently linking up the two. Two points have been made clear: original technology and disruptive technology required for innovation drive come from the basic research; only when the basic research is integrated with the phase of new technology incubation in the innovation system can it produce original and disruptive technology in the real sense. Ideas about such technologies may be generated in the basic research stage, but they won’t be realized until integrated with the phase of new technology incubation.

A clear-cut definition of the end of sci-tech innovation is also need. It is usually believed that an innovation is finished with a new invention or a patent. From the viewpoint of China's innovation-driven strategy, an invention, or a new technology, is far from enough. Innovation is only completed when the invention and technology are applied and introduced to the market, especially when high technologies are commercialized.

However, China is now suffering from inconsistent performances of technological innovation and industrial innovation: the former is leading the world while the latter is lagging far behind in the mid- and low-end. The main factors are as follows: inadequate industrial innovation capacity, little connection between the technological innovation and the industrial innovation, and insufficient transformation from technological innovation achievements into new industrial technologies.

From the foregoing analysis, we find that sci-tech innovation shouldn’t start merely from the R&D and invention, but from basic research, or knowledge innovation, be it original technology or disruptive technology. Accordingly, academia and scientists conducting basic research, together with enterprises, should be parts of the sci-tech innovation chain.

Sci-tech Innovation Phases and Innovation Chain
The sci-tech innovation process includes three phases: the upstream phase (the knowledge innovation phase, or the basic research phase), which is the source of technological innovation; the midstream phase, i.e. the phase for incubating innovative knowledge into new technologies; the downstream phase, a phase to apply new technologies and to create innovation value. If we are to take the industrialization of innovation technology into consideration, one more phase can be added: the industrialization of high technology.

Content varies from phase to phase. Both the upstream and midstream are concerned with sci-tech innovation with the former being basic and theoretical and the latter focusing on application (invention phase). The downstream is more of innovation of business models and the market.

After the basic research has become the upstream phase of innovation, the role of the newly defined R&D which has turned into the midstream phase remains the same. This upstream stage is the initial stage of technological innovation, during which new ideas and conceptions grow into new or improved products and technologies. Hence, it is a stage for producing new technologies, products, and techniques, and a period marking the beginning of mass entrepreneurship and innovation. It cannot be ignored that the basic research as the upstream phase has instilled new content and vitality to the R&D stage.

Traditionally, the R&D of new technologies were made by professional applied research institutes, or by R&D centers of enterprises. Since sci-tech research by academia was included in the innovation system, collaborative innovation of industry-university-research institute has become a new trend. All parties co-build a new platform with scholars and scientists working in the incubation and R&D phases and entrepreneurs also in the R&D stage.

There are three options to apply the newly developed technologies in the downstream phase. First, it can be applied by enterprises through technology transfer or technology transactions. Second, it can be used directly by those enterprises which are on the platform as participants in the collaboration. Third, it can be used by the scientific and technological personnel to start new enterprises, and whereupon become their flagship product. Although the first two are adopted by existing enterprises, the new technologies they create will also be used to start new businesses just like those in the third approach. Therefore, the downstream phase is also called the stage of technology entrepreneurship. Its success marks the success of the R&D of new technologies, but there are uncertainties and risks.

The very first link of the technological innovation chain, that is, the stage of knowledge innovation, is the source of sci-tech innovation. Featured by its public nature, this fundamental stage serves for the public good, its beneficiary being the whole society, not any private investor. Naturally, the government and public funds, representing social interests, are undoubtedly the main investors in this phase. Surely, other private investors are not excluded if they desire to benefit from the innovation results. Nevertheless, as anyone investing in the lucrative downstream stage will take a share of the spoils, the main investors must be enterprises. And in the midstream stage, special attention should be given to key beneficiaries of innovation results and major components of the innovation system.

The Value Formation of Innovation Achievements and Its Value-added in Innovation Chain
The total value of the innovation achievements should be the result of the entire innovation chain. However, each phase in the chain will see the creation of new value, and innovative returns are always gained in a certain phase when it begins to transit to the next.

The key to transit from the upstream to the midstream is to ensure that universities, research institutes and their scientists participate in the R&D phase. The midstream stage of innovation, i.e. the R&D stage, is the basic stage where the value of innovation achievements is formed. During this period, we can adopt the value analysis method in Marxist economics – the total value = c + v + m – to evaluate the innovation results. At the junction of the R&D stage and the application stage, the value of innovation results can be realized in two ways: One is through the transformation of innovation results and the other is through innovators, both bringing different magnitude of value.

If the technology entrepreneurship turns out successful, we will enter the phase where enterprises apply the newly developed technologies. The goal of this stage is not limited to the use of new technologies; it also encompasses the industrialization of them. At this stage, innovators, be they enterprises in the collaborative innovation project or people engaged in technology entrepreneurship, will take a series of behavior to create added value. In this process, enterprises may rationally guide their innovative behavior, and adapt themselves to the market. First of all, they should upgrade their innovation achievements. They need to increase the workflow, and improve the performance and appearance of products so as to satisfy the demand of the market and entrepreneurship. Derivatives can be created if needed. Second, business model innovation and marketing innovation should be made. Successful innovation not only depends on state-of-the-art technologies, but also need innovation of business models as a complement.

Main Investors in Sci-tech Innovation Phases and Their Value Pursuit
The above analysis of the technological innovation chain shows that innovation starts from the upstream phase to the midstream and then to the downstream, and finally to the phase of high-tech industrialization. The key of the chain lies in phase transitions and the major driving forces are corresponding capitals. Specifically, the key to transiting from the knowledge innovation phase into the incubation phase is the transformation of scientific research achievements, and the driving force is the intellectual capital. For the next one, i.e. transition from technology incubation to application, the key is technology entrepreneurship driven by the risk capital. The last transition, which is from new technology application to high-tech industrialization, depends on innovation of business model and market, fueled by the entrepreneurial human capital. It is evident that the whole process of scientific and technological innovation is the integration of the financial capital of scientists, the intellectual capital of entrepreneurs, and the human capital of entrepreneurs and venture capitalists. These three capital pursues their own value in all phases of innovation. To further explain them in the light of labor theory, activities involving all of them belong to the complex type of labor, which creates more value than the simple type. It is of great significance to know that all parties in different phases have their own value pursuit. This will help to establish an institutional mechanism for the mutual benefits of all parties and to form an innovative community of interests.

New technology cannot be incubated without knowledge capital. The knowledge capital here doesn’t mean the creation of knowledge, but the transformation of knowledge to technology. Guidance is needed when investing knowledge capital in areas where new technologies are incubated. Such investment is in essence to attract capital through knowledge. Although the technology entrepreneurship relies on knowledge capital and human capital, it cannot be made without physical capital, which usually takes the form of venture capital. In the modern economy, although there are uncertainties in venture capital, "a considerable and growing number of individuals and companies are focusing on starting new businesses." [1]

Companies built upon physical capital usually have a clear target – to maximize the capital profit. However, for enterprises that rely on innovation achievements, on the one hand, they are the collection of knowledge capital, entrepreneurial human capital and venture capital; on the other, they are operated by a whole team in enterprises. In this case, sci-tech innovation and entrepreneurship are integrated, their participants requiring for sharing innovative value and for achieving their own value. Although those enterprises start their businesses from a certain innovative achievement, its operation should focus on the value realization of that achievement. One thing to be made clear is that once the enterprise is established, it no longer deals in this particular innovative achievement, instead, more technologies should be created and sometimes a new technology incubator should be set.

The above analysis tells us that in the process of technological innovation and entrepreneurship, each subject has its own value pursuit and corresponding function play. Knowledge capital pursues value realization, which is the initial step to turn its creativity and new knowledge and technology into technology entrepreneurship. Venture capital pursues risk returns and expects to profit from the sales of the established firm. Science and technology entrepreneurs pursue the long-term development of their enterprises, creating new drives while realizing innovative value. Distinguishing the functions of different capital in science and technology entrepreneurship will be of great significance to the design of innovation and entrepreneurial incentive system and policy.



The above analysis also clarifies the intensity of the government's involvement in different innovation phases. The investment in basic research must be done by the government with sufficient amount. Investment should continue in the new technology incubation stage. But it is impossible and unnecessary for the government to invest too much since enterprises are the main body in this stage. Therefore, the governmental investment is mainly for guidance. The function of such investment in the high-tech incubation phase is to attract universities and enterprises to cooperate in areas concerned with high-tech incubation, which reflects the government's contribution to resources integration and innovation. In China, companies specialized in venture capital are still underdeveloped with little long-term investment being made. Under such circumstances, it is a good way to accelerate technology innovation that the government plays a guiding role in venture investment. Nonetheless, it is unfavorable to thoroughly resort to administrative means, and market-oriented operation in the form of funds will be more efficient.

By Hong Yinxing, 
Director of the ZMT Academic Committee,
Former Secretary of the CPC of Nanjing University,
Senior Professor of Liberal Arts, Doctoral Advisor.

From Economists 2017 Issue Volume 4

[1]奈特. 风险、不确定性和利润[M].北京: 中国人民大学出版社, 2005:187.