Last month a report published by Thomson Reuters claimed that China is poised to slip seamlessly into the vanguard of global innovation in 2011, outpacing both the United States and Japan in the number of patents filed.

If only the transition from a labor-intensive, energy-hungry economy, reliant on manufacturing exports, to a modern, high-tech society with an abundant capacity to innovate was that simple.

There is increasing urgency for China to make significant progress up the technological ladder. Labor costs are rising and in many regions an acute labor shortage is beginning to bite. The low-level processing industry has become less and less profitable and margins are being squeezed further as China faces continued pressure to allow the renminbi to appreciate.

Whether or not China can succeed in upgrading its economy in the coming years will be the central theme of the third annual conference of the Globalization and Economy Policy Center, which begins on Tuesday at the University of Nottingham's campus in Ningbo.

At present there are several barriers to China's ability to transform itself into an innovative nation that is internationally competitive. The nature of China's economic structure is a major obstacle to innovation. The profits enjoyed by large State-owned enterprises (SOEs) are primarily due to their monopoly status. The country's two most profitable SOEs, PetroChina and China Mobile, recorded a combined profit for 2009 that was equal to the total profits of the country's top 500 private companies.

Yes, these SOEs do make technological progress, but with guaranteed profits of that magnitude it is hardly surprising that the incentive to innovate is low, which decreases their prospect of being internationally competitive.

Motivation is greater in small and medium enterprises (SMEs) but, even then, many SMEs rely on cheap labor costs for the bulk of their profits. They lack the capital and simply do not possess the scale of economy to sustain innovation over the long term.

Worryingly, there is strong evidence that academic research is out of touch with industry in China. Debates have raged in the UK recently over the amount of government funding that should be allocated to universities' research activities.

Chinese academia has no such concerns. Chinese government investment has increased 20 percent every year for the last decade. The government has poured money into the first two phases of its Project 985, which focuses funding on the country's top 39 universities with the aim of making them world-class institutions.