(Yicai) July 30 -- Many observers believe that the University of Science and Technology of China and Zhejiang University have propelled the economic takeoff in Hefei and Hangzhou, and therefore assume that the rise of Xi’an and Wuhan, which are also home to top universities and colleges, is inevitable. But closer examination reveals that the reality is far more complicated.

The rise of Hefei and Hangzhou has relied on technological innovation, but it is not a simple equation of “university equals industry.” A complete innovation chain comprises three tiers, and the absence of any one hinders progress: universities and research institutions deal with zero-to-one basic research; market-oriented innovation ecosystems undertake one-to-10 technological evolution; and comprehensive industrial clusters manage 10-to-100 mass production. The three layers are interrelated and each is indispensable.

Xi’an has over 60 universities and colleges and more than 460 research institutions. Wuhan is home to two of China’s top universities, Wuhan University and Huazhong University of Science and Technology. The three Northeastern provinces, with a combined population of only 90 million, have four top-tier and seven excellent universities and colleges, surpassing the education resources of Jiangsu, Zhejiang, and Guangdong provinces. But 60 percent of science and engineering graduates leave Xi’an every year, and the commercialization rate of research outcomes in Wuhan is only 20 percent. The reason for this is that things get stuck in the next stage.

Hefei, on the other hand, has a market system that incentivizes innovation. The capital city of Anhui province does not merely rely on the University of Science and Technology of China; it also provides space for technological trial and error. The founders of its three pillar enterprises -- electronic components producer BOE Technology, chipmaker CXMT‌, and electric car firm Nio -- were not alumni of the university. But Hefei offers state-backed “patient capital” that is willing to go through a decade of losses if necessary, as well as a complete incubation chain for scientific and technological innovation.

Hefei famously staked one-third of its municipal fiscal budget on BOE, which was making a loss at the time. It subsequently continued to hike its investment in CXMT‌, despite the company suffering cumulative losses of CNY36.6 billion (USD5.41 billion) over 10 years. Providing such ample room for technology to evolve allows it to develop practical mature solutions.

Universities Alone Don’t Create Tech Hubs

Public data reveals a striking disparity: Northeast China, Wuhan, Xi’an, and Tianjin have some of the best higher education resources in China, with one-third of the country’s high-quality universities and colleges, but only 53 companies from these areas have listed on the Shanghai Stock Exchange’s Star Market. Suzhou, however, which does not have any top universities and colleges, has 57 companies listed on the Star Market, showing an impressive ability to commercialize science and technology.

Taking Hefei as an example again, the city’s efforts went far beyond the first two tiers in the scientific and technological innovation chain. It has also made great efforts in the third tier, the development of comprehensive industrial clusters.

After betting on BOE, Hefei proactively attracted over 180 upstream and downstream suppliers, such as Corning and Sunnypol, enabling interconnected facilities and localized supply chains to build an industrial cluster worth over CNY100 billion. After investing in CXMT‌, the city brought in Nexchip, a semiconductor foundry, as well as packaging, testing, and specialty material enterprises. In just 10 years, the output value of the city’s integrated circuit sector skyrocketed from CNY18 billion to CNY151.4 billion, and more than 400 chip companies formed a closed-loop industrial chain, completing the entire 10-to-100 process from technology to mass production and sales.

Though Xi’an and Wuhan have mature technological prototypes, they lack supporting supply chains, so local enterprises have no choice but go to Jiangsu, Zhejiang, and Shanghai to purchase components, resulting in high production costs, and long delivery cycles. This makes it hard to increase production capacity, so their industrial scale always lags behind their scientific research strength.

In short, a city cannot become a technological powerhouse if any link in the three-tier innovation chain is missing. The University of Science and Technology of China provides a fundamental source of scientific research for Hefei, but the true drivers of the city's rise were a market system capable of absorbing technological iterations and a comprehensive industrial cluster that could translate technology into mass production.

(The author is the former chief economist of HSBC China and vice chairman of the China Chief Economist Forum.)

Editor: Tom Litting