A PASSERBY could easily mistake the headquarters of one of the most innovative enterprises in China for yet one more of its many factories.

Tucked against the hills of the Yantian District, in the grungy port area of the southern city of Shenzhen, Guangdong Province, sits the building, which only a few years ago was indeed a factory. It now swarms with young scientists looking for the next breakthrough in human, plant and animal genetics.

Despite its low-key appearance, the headquarters of BGI stand out in Shenzhen's corporate landscape. Originally set up several hundred miles away in Beijing in 1999 as, according to BGI's website, "the first citizen-managed, nonprofit research institution in China," it was already making a name for itself in global biotech circles before migrating to Shenzhen in 2007.

Now a state-level institution, BGI has been tapping into the creative juices of one of China's most youthful and vibrant cities to be at the vanguard of international genomics exploration.

Though having broken free of what the firm saw as the stifling environment of Beijing, BGI has a big human capital challenge on its hands - staying on top of its field by becoming the employer of choice among scientists from around the world.

"We are a new industry, and we have a high demand for skilled people," said Wang Jun, vice dean of BGI. "We're really finding it difficult to attract and train really professional people."

BGI isn't alone. Local executives in a range of other sectors have the same lament. Shenzhen's population of some 10 million makes it one of China's biggest cities, and it's been an attractive site for a number of big-name companies to set up base in recent years, giving Shanghai a run for its money as a major shipping town.

But the fact that the average age in the city is only 29 years old is becoming an Achilles' heel for companies like BGI, which has more than three-quarters of its 3,680 staff based in Shenzhen.

Attracting and drawing on the expertise of foreign workers is an imperative now not just for the likes of Wang and BGI, but also for Shenzhen officials.

Like many cities in the Pearl River Delta area of Guangdong Province whose economies have been growing on the back of a national export boom, times are changing in Shenzhen.

The previous economic staples - an array of cheap apparel, electronics, auto components, toys and other exports - are still important. But as Shenzhen and the rest of the province have become wealthier, and more costly places to do business for their traditional low-end manufacturers, competition is intensifying to attract more advanced modern service and technological industries, while helping the country move toward a higher-value, innovation-driven economy.

Addressing the skills gap in these areas is key.

To do that, Shenzhen has made a bold move. As in the ancient Chinese poem, "The Peacocks Fly to the Southeast," Shenzhen's officials are hoping their plan unveiled in April - dubbed the Peacock Plan - will soon have high-skilled human capital flocking southwards to their city. Among other things, the plan will provide professionals from outside the country with subsidies worth up to US$230,000, according to their skill levels, if they come to the city to work.

Other cities nearby - Foshan, Guangzhou and Dongguan, to name a few - have unveiled similar initiatives, as have other cities, including Beijing, Shanghai and Tianjin. But none is said to be as ambitious as Shenzhen's five-year, US$12 million strategy to attract high-caliber foreign professionals who will spur innovation.

Shenzhen itself is a product of innovation. Just over 30 years ago, it was a small fishing village with a population of around 200,000, a backwater in the shadow of its vibrant rival to the south, Hong Kong.

But since the late 1970s, when Deng Xiaoping opened up the country internationally, Shenzhen has gone from rags to riches, and is now home to a host of renowned companies, including telecom equipment makers Huawei and ZTE, Internet services firm Tencent, and electric battery and auto maker BYD.

"Shenzhen is a very open city," Yang Bicheng, head of external communications at BGI, noted during a recent tour of its headquarters. "It encourages innovation and there are not as many rules."

Hard and soft

Experts, however, say the success of the Peacock Plan lies in companies' ability to disentangle from China's general struggle to foster another Silicon Valley. According to Adam Segal, a fellow at the Council on Foreign Relations in the US, the first step is distinguishing between innovation's "hard" aspects - like tapping into funding to build infrastructure - and its "soft" aspects, such as building a culture of incentives for rewarding risk-taking.

In terms of the "hard" investments, he says that China is doing relatively well; but as far as "the social, political and cultural understanding that moves ideas from the lab to the marketplace" is concerned, the lag between China and other countries is "significant."

Reaching 12.3 percent last year, China's share of global research and development (R&D) spending has been rising steadily since 2006, when the government began pushing the creation of "indigenous innovation." The country is also catching up in other ways - the total number of patent applications is rising, although most of the patents are for use in China only, and more science and technology doctorates are being awarded at local universities.

For the time being, however, innovation in China primarily involves "taking a design to produce a product more cheaply and quickly," Segal notes. "Right now, most of the incentives are for copying the market and for getting things out there quickly and localizing for the Chinese market." Breakthrough innovation is not forthcoming in China because of "a research environment where you aren't rewarded for taking initiative, for taking on your superiors," he adds.

The gap between research institutions at universities and industry is also wider than in other countries, according to Liu Xielin, professor of innovation studies and associate dean of the School of Management at the Chinese Academy of Sciences' Graduate University in Beijing. "There's a lot of government money for R&D that goes into universities and institutes, but the research that is done is far away from real industrial needs."

There is a "gap between these massive investments in beautiful research institutes and the contents of those institutes," says Dieter Ernst, a fellow at the East-West Center, a think tank in Hawaii. Senior staff at China's major universities "really deeply understand" what is needed to overcome the hurdles to develop the "soft" aspects of innovation," he notes. "Many of the people who work both at the top and in the relevant research institutes understand, but getting the message up to the higher levels of government is difficult."

As for Shenzhen, "there is definitely a shortage of talented people," says Liu Yang, an HR manager at Peking University Shenzhen Graduate School (PKUSZ). Shenzhen's plan is "good in the short term," she notes, because the slumping economy in the US and Europe might make China attractive to researchers looking for work. That said, she concedes, "there's still more good infrastructure for innovation in places like the US."

Too early to cheer

As she sees it, it is too early to tell how educational institutions might benefit from the Peacock Plan, whether it means using the funding to help reduce their overhead costs or to retain academics already on staff. Initially, she says, PKUSZ will mainly target "returning Chinese," such as expats who have studied overseas.

Meng Yi, head of scientific research at PKUSZ, says only two professors at the university applied for Peacock Plan subsidies during the first round in May, and both are Chinese nationals who had studied abroad, rather than the foreigners the plan targets.

Observers wonder whether one factor holding back foreign interest is that applicants have to submit project proposals in Chinese and defend them before a board set up by the Shenzhen government. Others cite concerns over the country's difficulty in enforcing policies, such as those for intellectual property rights protection.

Adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original version, please visit: http://bit.ly/pEzN9B