Is institutional innovation formalistic or practical? Does it make any sense? How to test it?

There is only one answer to these questions — how enterprises feel.

At the Promotion Meet for Replacing Old Growth Drivers with New Ones, Liu Jiayi, Secretary of Shandong Provincial Committee, acknowledged Shandong’s strong performance while pointing out that Shandong lacks enough large-scale projects, promising projects, strategic investors, “unicorns” and “gazelle” enterprises, foreign-funded projects, leading talents and innovation teams.

How can a region develop if it fails to attract enterprises?  In a market-oriented economy, enterprises often “vote with their feet” to choose the most suitable environment they think for growth. Therefore, to promote institutional innovation and create a superior business environment, the government should aim at the needs of enterprises, follow the principle of ensuring “enterprises can seek and acquire more profit opportunities in Shandong”, make every endeavor to serve enterprises, and overcome all difficulties to attract enterprises to “settle in”.

On the surface, the backward development of Shandong in recent years is caused by the continuous weakening of traditional growth drivers, the slow cultivation of new drivers and the inadequate replacement of old growth drivers with new ones. However, the deep-seated reason lies in Shandong’s shortage of an institutional environment that can attract high-quality production factors, which is also the root cause of Shandong’s undesirable performance in economic innovation, growth momentum, and development quality.

Why are provinces like Guangdong, Jiangsu, and Zhejiang developing rapidly? The underlying cause is that high-quality production factors can find and obtain market profit opportunities there, which may be manifested as higher earnings or lower costs, thus maximizing the enterprise interests. For example, unlike in other provinces where all procedures for the establishment of a business or approval of a project can be completed at one go, Shandong needs two or three, and there may even be various problems such as asking for bribes and acts of nonfeasance and misfeasance, which inevitably hinder the aggregation of high-quality production factors. Therefore, it should be an important direction of Shandong’s current efforts to eliminate various explicit and implicit institutional barriers for high-quality production factors gathering through active institutional innovation.

Institutional innovation should pay attention to:

First: anything which is not prohibited by the law is feasible.

As enterprises are profit-seeking, they seek and tap potential profit opportunities in the market based on the information they have. These profit opportunities are scattered and hidden among different regions, industries and market players, which are difficult to be estimated and found in advance, as once being found they would be used in advance to achieve market equilibrium.

Institutional innovation is to provide rules and boundaries that spark motivations and behaviors for players of resource elements that discover and realize these market profit opportunities. Therefore, to promote institutional innovation, all kinds of market players should be given the freedom to seek and find market opportunities to maximize the enterprise profits. And efforts should be focused on reducing the restrictive constraints on enterprises, and ensure that enterprises can do anything which are not prohibited by the law to expand the fields and channels of innovation, entrepreneurship and creation.

The best way to foster and attract high-quality enterprises and projects is to minimize the restrictions and thresholds for enterprises to help them maximize interests.

Second: institutions have to make no exception.

With the responsibility and obligation to maintain market order and improve market efficiency in economic activities, the government has to handle the relationship with the market in the modern market economy.

In order to ensure market efficiency and fairness, all rules, regulations, standards, procedures and other systems formulated by the government have to serve as the general constraints of all players.

It is necessary to strengthen the rigid constraints of institutions to avoid “opportunistic behaviors” such as rent-seeking and conspiracy by right of information and other advantages. This requires the government institutions to promote information disclosure and enhance social supervision of government-related staff to create a sound playing field.

Third: any kind of “formalistic reform” and “fake innovation” should be eradicated.

The management system reform of the government is indispensable for the market to play a decisive role in the allocation of resources and the government to play a better role.

However, government functions are completed by functional departments at all levels and relevant staff. These functional departments will be involved in department interests adjustment in reforms, which may trigger such behaviors of specific government staff like profit-making or rent-seeking.

Once “institutional innovation” deviates from its original intention, it will become “formalistic reform” and “fake innovation”. For example, some departments hold on to the power that can generate benefits, while shifting some authorities that need to assume responsibilities to other departments or delegating to lower departments; some reforms show little inclination to strengthen the role of the market but are a disguised attempt to increase unnecessary administrative controls.

Some government staff may also interfere in normal economic activities for the sake of personal gains or rent-seeking when performing their duties.

For those departments and personnel who are lazy, neglectful and derelict of their duties, it is necessary to strengthen the administrative accountability and force them to pay the prices, thus completely putting an end to the behaviors of seeking self-interests for departments or individuals in the name of institutional innovation.

 Forth: institutional innovation should encourage innovation and forgive mistakes.

Innovation is always risky.

When the risks of innovation are relatively high and the benefits are uncertain, or when the benefits of innovation are shared by the society and the risks of innovation failures are borne by individual leaders, these leaders, as important subjects of institutional innovation, will have much less enthusiasm for institutional innovation.

Therefore, a necessary mechanism shall be established to tolerate mistakes and stop mistakes in the reform process and create a favorable environment that encourages, supports, and actively makes innovation.  There is a need to implement the “three distinctions” put forward by General Secretary Xi Jinping, clarify the responsibility subjects for and the procedures of allowing for and addressing mistakes in reforms, establish the evaluation mechanism of institutional innovation effectiveness, enhance the discourse power of the public, experts and scholars in institutional innovation and in the evaluation of leaders, and explore exemption systems for institutional innovation mistakes without major damage, thereby forming a positive and tolerant atmosphere to encourage innovation.

 Text by Wang Jinsheng [associate professor at the Department of Economics, Party School of Shandong Provincial Party Committee of CPC (Shandong Academy of Governance)]

Editor: Ma Qingwei, Li Meng, and Shao Fangchao / Planner: Ren Yubo

(Originally published on the 9th part (Luncong Weekly · Sixiang Zongheng) of Dazhong Daily on May 22)