By Lu Wei, Department of Techno-Economic Research of DRC

Research Report No 109, 2010

I. China's High-Tech Service Industries: Basic Status and Development Trend

Since the 1980s, the rapid development of knowledge economy has cultivated large numbers of high technologies and the service industry has become growingly knowledge-based and high technology-based. Traditional services have also used more information, network and other high technologies and had more technological contents. In the meantime, the growing demand for service outsourcing has prompted the emergence of new services that are based on high technologies and provide high added values.

1. High-tech service industries are noted for small base number and fast growth, with consumer service growth outpacing producer service growth.

Overall, China's high-tech service industries are emerging industries, which are still in the initial period of growth and claim a small share of the national economy. For example, China's high-tech service industries such as information transmission, computer service and software, scientific research, technical service and geological prospecting account for a combined 9.2% of the added value of the tertiary industry and about 3.7% of the gross domestic product. But as the values of some high-tech service industries are manifested in the value appreciation of service targets and the internal services of some production enterprises are not statistically included, the statistical added values of high-tech service industries are generally underestimated.

Different high-tech service industries are different in market maturity and development speed. The telecom service industry is already a mature industry, with a large scale, a large base number and a growth rate lower than the emerging industries of scientific research and technical service. During the 2004~2007 period, the added value of China's tertiary industry grew 17% annually on average; that of information transmission and computer service and software grew 12.3%, which was lower than the average level of the tertiary industry; that of scientific research, technical service and geological prospecting grew 19.4%, which was higher than the average level of the tertiary industry. During the 2006~2008 period, the annual growth rate of the investment in fixed assets in the industries of scientific research, technical service and geological prospecting was 2 percentage points higher than the average level of the tertiary industry. Although high-tech service industries have a strong producer service function, the growth of China's high-tech service industries has been mainly driven by personal consumption. The input-output tables for 1997 and 2002 indicate that the coefficient of the intermediate consumption by producer service industries was falling while the coefficient of the personal consumption was rising (Li Shantong, Gao Chuansheng et al: Development of China's Producer Service Industries and Upgrading of Its Manufacturing Industry, Shanghai Trinity Bookstore, November 2008). The main reason was that manufacturing enterprises had a fairly high level of producer service internalization. This is somewhat reasonable, because these enterprises were encouraged to become innovators, increase their R&D inputs and internalize their R&D activities.

2. Emerging market enterprises are small in scale and weak in innovation capacity and competitiveness

Except for telecom and large network operators, most high-tech service enterprises are small in scale. For example, China had over 20,000 software enterprises in 2008, with their revenue totaling about 750 billion yuan. On average, each enterprise employed less than 100 people and its annual revenue was about 37 million yuan. If the 40 enterprises whose sales revenue was over 1 billion yuan are excluded, the average annual revenue of each enterprise was even lower. Another example is that China has the largest number of Internet users, but its Internet market is small in scale when compared with developed countries in Europe and America. In 2008, the total revenue of China's Internet information service was even less than that of Google alone. Although China had two Internet enterprises whose market values ranking among the world top 10, the total market value of all Chinese Internet enterprises was lower than Google.

China's high-tech service enterprises are noted for weak innovation capacity, and their technological and operational models are mostly in the stage of imitation. They do not have core technologies and proprietary operational models and have to import core components.

3. They are mainly Chinese-invested and domestic market-oriented

China's high-tech service industries are mainly oriented toward the domestic market. For example, China's software service industry is one of the industries that undertake the largest amount of offshore outsourcing service. In 2009, the export of China's software outsourcing service was 2.4 billion dollars, accounting for only 15% of all software outsourcing service.

In terms of investment sources, most of the investments in high-tech service industries come mainly from Chinese sources, with a fairly small amount coming from abroad. Besides, most of these investments are raised by enterprises themselves, with a fairly small amount coming from government funds and loans. In 2007, foreign-controlled enterprises accounted for 13% of all the 14,373 software enterprises in China, and 30% of the business revenue of all software enterprises. Besides, 90% of the investments in fixed assets in the industries of information transmission, computer service and software were raised by enterprises themselves, which was higher than the average level of all industries in the country. Specifically, the ratio of self-raised fund was 91.15% for the industries of telecoms and other information transmission services and 85.67% for the industry of computer service. The software industry used the highest ratio of loans, accounting for 26% of its total investment. In the industries of scientific research, technical service and geological prospecting, government investments accounted for a fairly high ratio. The state budgetary fund accounted for 17.44% of their investment in fixed assets, which was far higher than the national average level. In particular, the state budgetary fund accounted for 24.21% of the total investments in fixed assets in the R&D service industry (See the table below for detailed information).

Sources of Investments in Fixed Assets in Various Industries in 2007 (%)

Source: China Statistical Yearbook 2008, China Statistical Publishing House.

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