A guide to funding and public incentives available to SMEs in China

Access to public incentives and funding instruments on acceptable terms is a key factor for the execution of research and innovation activities. This is especially the case for early-stage and small-sized enterprises, which often have complex technologies and products, untapped markets and intangible assets. Alessio Petino guides us through the public funds and incentives foreign-invested small and medium-sized enterprises (SMEs) operating in China can investigate. He carried out this work through an European Union (EU) funded project.

Government administrations in China, at all levels, have been extremely active in establishing a wide range of incentives and funding instruments to support the growth of innovative companies. These instruments target different company development stages and cover all types of innovation activities. Though dominated by domestic actors, Chinese public incentives and funding instruments are also available to foreign-invested enterprises (FIEs); awareness of these opportunities, however, remains low. Incentives and funding instruments available for SMEs—though larger enterprises are, in most cases, equally eligible to apply—can be divided into five key groups:

• Market entry incentives; made available by local administrations (especially at district or park level) to attract innovative international companies looking to enter the Chinese market. These incentives are very diverse and could cover areas such as tax exemptions/reductions, leasing and rent subsidies, and research and development (R&D). These incentives are generally specified in local regulations (优惠 / 扶持政策), but ad hoc incentives tailored to a company’s specific needs may be negotiated in cases of particularly innovative/strategic investments.

• Status recognition; namely certain statuses that can be granted to companies or recognised (认定) for different purposes, for instance: tech-based SME, high- and new-technology enterprise (HNTE) (as well as ‘HNTE cultivation funds’, which have lower requirements), or technology advanced service enterprise (TASE) (easier to obtain as there are no intellectual property rights (IPR) requirements, and still grants a corporate income tax (CIT) deduction of 15 per cent). Such statuses are considered key requirements (written or unwritten) for obtaining access to most government funding programmes, subsidies and services.

• Subsidies (补助) and rewards (奖励); offered ex post at all levels of administrations for basically any type of innovation activity, for example: local science and technology (S&T) departments offer them for R&D expenses, conversion of scientific achievements, new patents filed, loans taken, and so on; or local departments of industry and information technology for ‘industrial transformation’/‘technological upgrading’ projects.[1] This group of incentives is considered the most accessible, with successful cases involving foreign-invested SMEs regularly identified.

• Research grants (资助); to support activities such as R&D, demonstration and application in key priority areas and topics specified in annual calls (年度申报指南, published on the websites of local S&T departments). The grants only cover a certain percentage of the total project’s budget (generally one-third), to ensure maximum commitment from the applicant. ‘Industry-university-research’ cooperation is always encouraged (or even mandatory). Several local administrations have also established specific research grants for international cooperation projects (as the international partner must be based abroad, these are mainly intended for European headquarters; the China-based affiliate can, nonetheless, be delegated or facilitate daily operations).

• Innovation vouchers (科技创新券); to purchase at discounted rates specific services provided by certain local providers, including testing, measurement, IP counselling, training and coaching, and so on. These are provided at all levels of administration (e.g. high-tech zone/district, municipality).

With the exception of the first group and where the foreign partner must be based abroad, all incentives and funding instruments discussed in this article can only be accessed by entities with legal personality in China – regardless of their specific form (e.g. wholly foreign-owned, equity or cooperation joint venture).

Considerations and recommendations for European SMEs

Public incentives and funding can be attractive for European tech companies in China. However, below are a few considerations that should be kept in mind – all of them drawn from experience and case studies:

1. The obtainment of public incentives and funding must be an effective component of the corporate strategy. Dedicated resources and personnel (either in-house or external consultants) should be allocated for monitoring funding opportunities and preparing applications. This is vital also in view of the pace at which changes and reforms occur in China.
2. Start the journey from ‘status recognition’ programmes, first from the tech-based SME, and then TASE/HNTE status. These are in fact key requirements (written or unwritten) that one company must possess before applying to any funding programmes or subsidies at any administrative level.
3. At the same time, one should first aim at programmes from lower administrative levels, especially high-tech zones or districts. These are perceived as easier to access, and will allow one to become more acquainted with the Chinese funding system and to obtain relevant experience and credit for implementing larger, higher-level programmes in the future.
4. Always encourage one’s personnel (both foreign and Chinese) to apply to individual talent programmes (e.g. Pujiang Talent Programme in Shanghai, Peacock Plan in Shenzhen, etc.). Chinese research grants, particularly large ones, tend to be awarded to renowned talent: hence, the more recognised talent in one team, the higher the chances of obtaining funding.
5. Local authorities are generally open to discuss opportunities and challenges encountered by foreign-invested enterprises for research and innovation activities – including applying to subsidies and funding programmes. Government affairs departments of European companies should actively engage with them – for instance, to be invited to join training regularly organised for domestic actors.

European companies should understand that the granting of incentives and funding in China is directly linked and proportional to the contributions enterprises make to the local innovation ecosystem. The companyneeds to show strong commitment to increase its credit and trust amongst local administrations and decision-makers, for instance through sustained investment in research and innovation, filing of invention patents, conversion of technology results generated by research institutions, expansion of partnerships with local actors, or fostering of talents.

Last, but not least, one should always keep in mind that applying to Chinese funding is a complex process that takes time, energy and resources. Rejected applications are frequent at the beginning. The key is to persist and be resilient.  

Contributor Note

Alessio Petino is an individual consultant currently working under an EU-funded project in the field of research and innovation policy in China. The work presented above was carried out through an European Union Foreign Policy Instruments (FPI) project, ‘Improving EU Access to National and Regional Financial Incentives in China’ – which, under the guidance of the Delegation of the European Union to China , had the objective of monitoring the effective implementation of the EU-China ‘Joint Roadmap on Ensuring Reciprocal Access to Respective Research and Innovation Funding’  This article is a summary of the Guide for European Tech SMEs on China’s Public Incentives and Funding for Innovation, produced under the project; the full Guide, which includes detailed case studies from various regions in China, is available to download from the project’s website: www.chinainnovationfunding.eu.

The views expressed herein are those of the project team and do not represent the official view of either the European Commission or the Delegation of the European Union to China.

[1] 产业（技术）转型升级. These refer to projects involving the introduction of new intelligent equipment, digitalisation of production lines, purchase of advanced and environment-friendly equipment, sale of first sets of new high-tech equipment, to name just a few, in key priority areas.