China’s economic development and financial opening are now at a crucial turning point.
External downside risks now dominate due to the COVID-19 pandemic and trade tensions, and domestic markets urgently need upgrading to lift technological innovation. The recently drafted 14th Five Year Plan emphasises an innovation-oriented development strategy. Although many measures have been adopted, how to effectively finance innovation remains one of China’s primary challenges.
Research and development (R&D) expenditure is a common measure of investment in innovation. Innovation investment is usually long term and tends to run down firms’ internal funds. The availability of external finance is critical for firms trying to innovate.