Innovation in China

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The Great Innovation Wall of China

Last week I was struck by two completely contrasting views of China today. They evoke an image of the Great Innovation Wall of China, one that constrains instead of sustains the domestic creation of disruptive ideas.

First, the rise and fall of Bo Xilai—a story of what seems to be power at its worst. When any leader believes he or she is above the law, iron rule is an almost inevitable result. This desire to completely control the world has proved to be the undoing of one of China's most successful and aspiring leaders.

Second, the Prime Minister of China, Wen Jiabao, asserting to the world that China wants to become "a nation that is based on innovation." As any country knows, innovation is the future. It is the basis for job creation and competitive advantage, at the country and company level. But innovation that matters, innovations that disrupt entire industries, cannot be controlled end-to-end—the way Bo tried to bully his province and people.

Innovations that make a profound, positive difference surface when leaders create a space where insight emerges and people are engaged. Innovation, especially the disruptive type, comes from challenging the status quo, over and over. It comes from people making observations and being able to share them without fear of retribution. It comes from people talking to others who don't see the world as they do. Finally, it comes from people willing to take risks, the inherent risks that go along with trying something no one else has ever tried before.

There is a certain craziness to the current Chinese government, in that it thinks it can build a game-changing innovation powerhouse and at the same time exert deep behavioral control over people's everyday actions. It's a water-and-oil concoction that naturally separates no matter how hard you try to shake it.

If a country (or company) injects excessive fear into a system, risk-taking evaporates, experiments shrivel, and disruptive ideas fail to emerge. Recent creativity constricting actions such as these (consider the ongoing saga of blind activist Chen Guangcheng) may very well form the new Great Innovation Wall of China.

China is wading through the sludge of deep contradictions, especially when it comes to innovation, and must reconcile these opposing views (innovation aspirations vs. excessive controls) for authentic innovation to surface and succeed. Until it does, expect to hear the rhetoric of disruptive innovation, but don't count on China to deliver the real thing.

The Great Innovation Wall of China - Businessweek
 

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From brawn to brain

If China is to excel at innovation, the state must give entrepreneurs more freedom

THE end of cheap China is at hand. Blue-collar labour costs in Guangdong and other coastal hubs have been rising at double-digit rates for a decade. Workers in the hinterland, too, are demanding—and receiving—huge pay increases. China is no longer a place where manufacturers can go to find ultra-cheap hands. Other countries, such as Vietnam, are much cheaper. What will this mean for China and the world?

Contrary to conventional wisdom, it will not mean that companies close their Chinese factories and stampede to somewhere poorer. China is still a terrific place to make things. Labour may be cheaper elsewhere, but it is only one cost among several. Unlike its lower-paying rivals, China has reasonable infrastructure, sophisticated supply chains and the advantage of scale. When demand surges for a particular product, the biggest firms in China can add thousands of extra workers to a production line in a matter of hours.

So China is not about to hollow out. But if it is to keep growing fast, it must become more innovative. At present Chinese innovation is a mixed bag. There are some outstanding private firms. Frugal engineers at private companies such as Mindray, which makes medical devices, and Huawei, a telecoms giant, are devising technologies that are cheaper and sometimes better than their rich-world equivalents. Manufacturers operating near China's coast, whether home-grown or foreign, are adept at "process innovation"—incrementally improving the way they make things. And China's internet start-ups, such as Tencent (a social-networking service) and Alibaba (an e-commerce company), have had a genius for copying Western business models and adapting them to the Chinese market.

But innovation is about more than this. One way of defining it would be as fresh thinking that creates value people will pay for. By that measure, China is no world-beater. Though its sweat produces many of the world's goods, it is designers in Scandinavia and marketers in California who create and capture most of the value from those products.

China's leaders know this, and are pouring billions of dollars into research and development. The current five-year plan calls for "indigenous innovation", which the government thinks it can foster by subsidising "strategic" industries and strong-arming foreign firms to transfer intellectual property to budding national champions. That system of state capitalism worked when the aim was to copy and adapt other people's ideas in the cheapest way possible. But can new ideas truly be created by fiat? Elsewhere governments have tended to run into two problems: the state is not a good innovator, and it gets in the way of others who are. Is China really so different?

Although the Chinese government invests a fortune in research and development, too much of this cash is wasted, according to the OECD. Most of it goes into development; not enough into research. It is far too difficult for new Chinese ideas to move from the laboratory to the marketplace. And the pockets of research excellence that exist—for example, in genomics—tend to be disconnected and politicised fiefs. Meanwhile, the state's efforts to pick technology winners have been patchy. Telecoms has been a success, but electric cars have not, and subsidising clean-energy manufacturers has had mixed results. As for trying to set up regional internet clusters, China seems committed, but so far Silicon Valley has proved far too complex and delicate a system for a bureaucrat to copy.

Let me in to the dragon's den

If the argument that the Chinese state is uniquely innovative is at best unproven, the obstacles in front of a small private-sector innovator are clear. The most obvious is piracy. China's intellectual-property laws are not bad on paper, but are enforced patchily and partially. Another problem is the way so many industries have been consolidated in the hands of favoured firms. Antitrust and competition laws are not applied vigorously to well-connected champions. State-directed banks take the Chinese people's savings and lend them at microscopic interest rates to national champions. This starves clever but unconnected firms of capital, and cheats savers, too.

Nobody expects the Chinese government to let the reins go completely, but it needs a less top-down approach that gives its citizens more space to experiment. It must let private investors risk money on ideas they think might work, and bear the consequences of failure. An obvious place to start would be to let firms build on what they already do well, such as process innovation. But the next Chinese breakthrough may actually come in an unexpected field. China was once a dazzling innovator: think of printing, paper, gunpowder and the compass. If its rulers loosen their grip a little, it could be so again.

Innovation in China: From brawn to brain | The Economist
 

nrj

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China's lack of success in fostering innovation is no surprise

How does the United States economy look from a Chinese perspective? Pretty good, actually.

Yes, the US has its problems, which were laid bare by the financial crisis. But it is still the most innovative economy in the world and retains fundamental strengths that China, for all its recent success, can only envy.

When China tore off the straitjacket of central planning and introduced market-oriented policies, a new class of private entrepreneurs took advantage of ready-to-use technologies and launched the so-called China Miracle.

The country has enjoyed a "late mover" advantage for more than three decades, relying on cheap labour, land and imported innovations and ideas. That game obviously cannot go on forever.

The rising costs of labour, energy and raw materials are already undercutting the competitiveness of Chinese companies. Some have responded by trying to raise prices but with little success. In a buyer's market, customers have refused to pay more, particularly since suppliers have failed to differentiate and upgrade their products and services.

To put it another way: The Made-in-China advantage is quickly fading. In the future, the goal needs to be "Created in China".

NEEDED: MARKET FOR NEW IDEAS

That won't be easy to accomplish. Innovation requires far more than cheap labour. For starters, you need imaginative financiers, inspired entrepreneurs and first-class researchers. Even with all that, you need a culture that permits innovation to flourish.

Some observers, both inside and outside of China, believe that central planning can effectively perform the function of innovation organiser and coordinator. They couldn't be more wrong.

The process of searching for new technologies and ideas is a creative one, based on trial and error. Information and experience are crucial to innovation and can be gained only by being engaged in the process.

Government officials can't help; they don't have the incentives to acquire information and experience that aren't relevant to their political careers and personal incomes.

What ultimately drives innovation is an invisible yet powerful hand: The market for new ideas. In this market, those who dare to think the unthinkable and bear great risks are rewarded with wealth and fame. In this market, "to get rich is glorious", as China's former leader Deng Xiaoping once put it.

But to transform new ideas into productivity and wealth, the market also needs the support of institutions such as private property, venture capital and the stock market - none of which are strong today in China.



IMITATION AND PIRACY

China's strategy of copying and imitating helped to narrow the gap with the developed world but the approach creates long-term problems. Too little value is placed on original research and intellectual property rights.

Government policies only reinforce the problem. When firms face intellectual property disputes and litigation, growth-hungry local authorities too often offer sympathy and support to their pirating constituents.

This disregard for IP rights produces short-term gains but also effectively kills hope for a flourishing Chinese research and development community and damages the country's long-term growth potential.

It's no surprise, then, that China has had little success fostering innovation. A Chinese version of Nasdaq was created a few years ago to help fund start-ups but it soon became a channel for insiders to cash out quickly and profitably.

Regulators have turned a blind eye to irregularities in pre-IPO investments and trades, which has sapped public confidence.

Share prices have fared poorly, especially because senior executives of the newly listed companies dump their holdings as soon as they can.

Crony capitalism has triumphed at the expense of entrepreneurship and true innovation. In fact, most of China's top technology firms have been funded by overseas institutions and listed on Nasdaq.

China's enormous economic strides have propelled the country forward. Nonetheless, the US, despite its own concerns about the future, remains the world's most competitive economy. It is driven by market forces, not central planning. It rewards innovation. It protects IP. It has trustworthy institutions that minimise corruption and cronyism.

What Americans need most is to restore confidence in their innovation machine and to ignore calls for government intervention, which will only suffocate the creativity of the country's most talented people.

© 2012 Harvard Business School Publishing Corp. (Distributed by The New York Times Syndicate)

Xu Xiaonian is a professor of economics and finance at the China Europe International

Business School in Shanghai.

TODAYonline | Commentary | China's lack of success in fostering innovation is no surprise
 

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Why China won't be innovative for at least 20 more years


Xu Xiaoping, one of China's most prominent angel investors, doesn't think China will be able to produce its own equivalent of Steve Jobs or Bill Gates in this generation.

On Saturday, I went to a Yale Club of Beijing talk by Xu Xiaoping (pictured above) at Peking University. He's an investor in tech startups as well as in film and philanthropy. At the end of 2011, his angel fund Zhenfund announced its partnership with Sequoia Capital China to create a $30 million joint-venture seed fund. Xu is probably most famous for being the former co-founder and Vice Chairman of New Oriental Group, a NYSE-listed education company that helps prepare Chinese citizens to study overseas, mainly in America.

The Yale Club discussion was focused on the lack of innovation in China. Xu said that while things are changing, it will take more time for creativity to become mainstream. Here are some of his reasons why China could take years to start truly innovating:

1. China has a culture of education first, at the expense of passion
We like to joke about Asian parents being strict and paranoid about their children's education. Of course, not every Asian parent is like this, but there is some truth to the stereotype.

In China, a number of factors feed into parents' paranoia. The main one is fierce competition. With so many people fighting to get into the best schools and presumably best jobs, the only way-in besides guanxi (relationships), is through stellar grades. Xu explained that China's most important high school and university entrance exam, called the Gao Kao, is a killer of passion and creativity — a rather bold statement.

He explained his reasoning with the story of two people. The first was a Chinese boy in Canada who had a great passion for programming and was encouraged by his parents to explore his skills. This boy went on to do amazing things and created a valuable technology company. The second boy was in China. He also had a deep passion for programming and even invented something that Apple could have used. But his parents told him to stop working on it and instead focus on studying for the Gao Kao. Years of draining preparation sucked his passion away for programming and he eventually just became an employee of a large company. Xu believes that this traditional Chinese mindset of fighting to be accepted, rather than encouraging people's natural curiosity and passions, deters China from reaching its true potential.

Xu is convinced that China's education system lags behind more Western countries such as America. That is why his former company, New Oriental, sends people from China overseas to study, broaden their perspectives, and discover themselves. However, as China's economy booms, this trend is starting to slow.

At the end of the talk, I asked Xu Xiaoping, "How long will it take until China can stop sending students overseas to become really creative and innovative?" He replied, "At least 20 years."

2. Chinese products and services need more soul
Xu feels many Chinese tech companies and their products and services lack "soul." For example, Steve Jobs was more artist than engineer. He believed his products needed a personality and evoke emotions in people. Xu said this way of thinking and intuition is largely missing from China and is a fundamental reason why China will not have a Steve Jobs in this generation.

Lei Jun, the founder of Xiaomi Tech, is thought to be China's closest contender for the role of China's Steve Jobs, but even his friend Xu believes he isn't the right guy. He explained that Lei Jun is an engineer at heart, not an artist. Now Xiaomi is looking for a CEO who can execute like an artist, but Xu believes it will be difficult to find that person in China. (Xu himself is passionate about arts and culture. He studied music and was a music teacher at Peking University.)

This partly explains why there is so much cloning in China. Most Chinese startups are not founded by designers or artists, but by engineers who don't have the creativity to think of new ideas or designs. For now, cloning works because it speeds up the time to market, but even people in China are starting to criticize such blatant copying. (The latest example is DianDi, an exact clone of popular mobile-journal app Path.) If people revolt against copying more, the copiers could be forced to change their strategy.

3. Innovators are discouraged by giants that want to crush them
In America, and especially in Silicon Valley, there is a startup culture of build-to-acquire. Meaning many startups create a product that a big company like Facebook, Google, Apple, or Microsoft will want, and then sells it to them. Sometimes, the big company just wants the talented team. Other times, the big company saves money and time by acquiring the startup technology instead of building something from scratch.

However, in China, many big companies like Baidu, Sina, and Tencent can afford to hire a big team to crank out the product rather than buy a startup. Often, if it sees a Chinese start-up working on something with big potential, the large company will just copy the product and pump it up with its huge amounts of existing-users, eventually crushing the original startup's offering. These types of threats from big companies discourages people from innovating and trying their luck.

But Xu said things are starting to change. Companies like Tencent are attempting to be more equitable, and instead of sharing only 10 percent to 20 percent of revenue with game developers, it is taking a more developer-friendly stance with 70 percent revenue sharing. Hopefully things continue in this direction.

Curious about Xu's thoughts on what can speed-up China's journey to innovation, I asked "Does China need a top-down approach from the government or does it have to happen from a bottom-up approach from people leaving China and coming back?" Xu answered that it will be somewhere in between. Of course, trying to change something so engrained as culture and thinking is extremely difficult, and can only happen from a top leadership position. On the other hand, since China does not promote creativity and free thinking in the same way as other countries, the innovations will continue to come from people who are exposed to other countries and cultures.

China was able to accelerate its economic transformation and overcome poverty within 30 years, so transforming China to become more innovative in 20 years seems possible.


Why China won’t be innovative for at least 20 more years | VentureBeat
 

nimo_cn

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Do you know why Apple can only be born in America? Because Americans have the ability to manufacture the best chips.

It is the combination of innovation and manufacturing that makes Apple possible, and I believe manufacturing is the foundation.
 

nrj

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Apple designs processor. They are manufactured by Koreans :dude:
 

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Why China Lags on Innovation and Creativity

China's rise as an economic power has been staggering. Its manufacturing prowess is well-established, having earned it the moniker, "the world's factory." Roughly half of its population now lives in urban areas, up from less than one in five three decades ago. Over 100 of its cities have populations of one million or more.

More than half of Americans already believe China is the world's most powerful economy, according to Gallup polls, and a growing chorus of commentators believes that it will overtake the U.S. as the world's largest economy by 2030. Some are projecting this to happen as early as 2016.

How rapidly can China's economy move up the development ladder and become genuinely innovative and technology-driven?

Xu Xiaoping, one of China's leading investors, "doesn't think China will be able to produce its own equivalent of Steve Jobs or Bill Gates in this generation," according to a recent article in The Washington Post. He expects that it will take "at least 20 years" before China's economy becomes truly innovative and creative.

Surely its policies are directed toward that end: China has rapidly expanded its spending on universities and research and development; it has attracted R&D centers from abroad; and its level of innovation (as tracked by patents) has increased substantially.

A recently published study I conducted with my colleagues Charlotta Mellander and Haifeng Qian from Cleveland State University suggests China still has a long way to go before it becomes an advanced center for innovation and creativity. Our study, published in the journal Environment and Planning, assessed the knowledge economy across China's major regions, tracking levels of college grads, the creative class, high-tech industries, and major universities and examining their effects on regional economic performance. Using the statistical technique of structural equation modeling, we gauged the effect of those factors over time, teasing out their strengths both individually and in combination with other factors.



China's knowledge economy is incredibly spiky. Its college grads and members of the creative class are even more geographically concentrated than they are in the United States and other advanced nations. (The maps above and below by Zara Matheson chart the shares of human capital or college grads and the creative class across China's major regions).

Both college grads and the creative class are heavily clustered in three major city-regions - Beijing, Shanghai, and Tianjin. These star regions boast great universities and have much higher levels of urbanization (70 percent or more) than the rest of the country. Beijing is the leader by far, where slightly more than one in five adults hold college degrees and roughly one in ten are members of the creative class. Shanghai and Tianjin have significantly lower levels of both, with roughly 15 percent of adults holding college degrees and just 5 percent of the workforce in the creative class. This is far, far below the levels of global cities in the advanced nations, many of which boast creative class shares of 30 or 40 percent or more.



China has faced considerable difficulty converting its knowledge-based assets (college grads and the creative class) into economic value-added. What high-value, high-tech industry it has developed remains extremely concentrated in Beijing, Shanghai, and Tianjin. When we looked across all China's regions, our analysis turned up little, if any, connection between their stock of human capital and their ability to generate high-tech industries and improve their regional economic output. This stands in contrast to the pattern of the United States and other advanced nations, where human capital and technology are the key drivers of innovation and economic growth.



When all is said and done, China remains an industrial nation. Its creative class and human capital levels are minuscule by the standards of advanced economies and heavily concentrated in just three super-star city regions. Those regions appear to operate as self-contained entities; their levels of human capital and innovation have not spilled over to other regions or to the national economy as a whole. Worse, China's overall technological and economic performance appears to be disconnected from its human capital and knowledge-based assets. Moving forward, China is likely to face substantial obstacles in transitioning from its current industrial stage of development to a more knowledge-based economy.

Xiaoping is right: it will be at least a couple of decades if not more before China can compete as a truly innovative and creative economy.

Why China Lags on Innovation and Creativity - Jobs & Economy - The Atlantic Cities
 

nrj

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This is what mckinsey has to say -

A CEO's guide to innovation in China

Dynamic domestic players and focused multinationals are helping China churn out a growing number of innovative products and services. Intensifying competition lies ahead; here's a road map for navigating it.

China is innovating. Some of its achievements are visible: a doubling of the global percentage of patents granted to Chinese inventors since 2005, for example, and the growing role of Chinese companies in the wind- and solar-power industries. Other developments—such as advances by local companies in domestically oriented consumer electronics, instant messaging, and online gaming—may well be escaping the notice of executives who aren't on the ground in China.

As innovation gains steam there, the stakes are rising for domestic and multinational companies alike. Prowess in innovation will not only become an increasingly important differentiator inside China but should also yield ideas and products that become serious competitors on the international stage.
Chinese companies and multinationals bring different strengths and weaknesses to this competition. The Chinese have traditionally had a bias toward innovation through commercialization—they are more comfortable than many Western companies are with putting a new product or service into the market quickly and improving its performance through subsequent generations. It is common for products to launch in a fraction of the time that it would take in more developed markets. While the quality of these early versions may be variable, subsequent ones improve rapidly.
1
Chinese companies also benefit from their government's emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy's long-term health and to the global competiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence.

But progress isn't uniform across industries, and innovation capabilities vary significantly: several basic skills are at best nascent within a typical Chinese enterprise. Pain points include an absence of advanced techniques for understanding—analytically, not just intuitively—what customers really want, corporate cultures that don't support risk taking, and a scarcity of the sort of internal collaboration that's essential for developing new ideas.

Multinationals are far stronger in these areas but face other challenges, such as high attrition among talented Chinese nationals that can slow efforts to create local innovation centers. Indeed, the contrasting capabilities of domestic and multinational players, along with the still-unsettled state of intellectual-property protection (see sidebar, "Improving the patent process"), create the potential for topsy-turvy competition, creative partnerships, and rapid change. This article seeks to lay out the current landscape for would-be innovators and to describe some of the priorities for domestic and multinational companies that hope to thrive in it.

China's innovation landscape

Considerable innovation is occurring in China in both the business- to-consumer and business-to-business sectors. Although breakthroughs in either space generally go unrecognized by the broader global public, many multinational B2B competitors are acutely aware of the innovative strides the Chinese are making in sectors such as communications equipment and alternative energy. Interestingly, even as multinationals struggle to cope with Chinese innovation in some areas, they seem to be holding their own in others.
The business-to-consumer visibility gap

When European and US consumers think about what China makes, they reflexively turn to basic items such as textiles and toys, not necessarily the most innovative products and rarely associated with brand names.

In fact, though, much product innovation in China stays there. A visit to a shop of the Suning Appliance chain, the large Chinese consumer electronics retailer, is telling. There, you might find an Android-enabled television complete with an integrated Internet-browsing capability and preloaded apps that take users straight to some of the most popular Chinese Web sites and digital movie-streaming services. Even the picture quality and industrial design are comparable to those of high-end televisions from South Korean competitors.

We observe the same home-grown innovation in business models. Look, for example, at the online sector, especially Tencent's QQ instant-messaging service and the Sina Corporation's microblog, Weibo. These models, unique to China, are generating revenue and growing in ways that have not been duplicated anywhere in the world. QQ's low, flat-rate pricing and active marketplace for online games generate tremendous value from hundreds of millions of Chinese users.

What's keeping innovative products and business models confined to China? In general, its market is so large that domestic companies have little incentive to adapt successful products for sale abroad. In many cases, the skills and capabilities of these companies are oriented toward the domestic market, so even if they want to expand globally, they face high hurdles. Many senior executives, for example, are uncomfortable doing business outside their own geography and language. Furthermore, the success of many Chinese models depends on local resources—for example, lower-cost labor, inexpensive land, and access to capital or intellectual property—that are difficult to replicate elsewhere. Take the case of mobile handsets: most Chinese manufacturers would be subject to significant intellectual property–driven licensing fees if they sold their products outside China.
Successes in business to business

Several Chinese B2B sectors are establishing a track record of innovation domestically and globally. The Chinese communications equipment industry, for instance, is a peer of developed-world companies in quality. Market acceptance has expanded well beyond the historical presence in emerging markets to include Europe's most demanding customers, such as France Télécom and Vodafone.
Pharmaceuticals are another area where China has made big strides. In the 1980s and 1990s, the country was a bit player in the discovery of new chemical entities. By the next decade, however, China's sophistication had grown dramatically. More than 20 chemical compounds discovered and developed in China are currently undergoing clinical trials.

China's solar- and wind-power industries are also taking center stage. The country will become the world's largest market for renewable-energy technology, and it already has some of the sector's biggest companies, providing critical components for the industry globally. Chinese companies not only enjoy scale advantages but also, in the case of solar, use new manufacturing techniques to improve the efficiency of solar panels.

Success in B2B innovation has benefited greatly from friendly government policies, such as establishing market access barriers; influencing the nature of cross-border collaborations by setting intellectual-property requirements in electric vehicles, high-speed trains, and other segments; and creating domestic-purchasing policies that favor Chinese-made goods and services. Many view these policies as loading the dice in favor of Chinese companies, but multinationals should be prepared for their continued enforcement.

Despite recent setbacks, an interesting example of how the Chinese government has moved to build an industry comes from high-speed rail. Before 2004, China's efforts to develop it had limited success. Since then, a mix of two policies—encouraging technology transfer from multinationals (in return for market access) and a coordinated R&D-investment effort—has helped China Railways' high-speed trains to dominate the local industry. The multinationals' revenue in this sector has remained largely unchanged since the early 2000s.

But it is too simplistic to claim that government support is the only reason China has had some B2B success. The strength of the country's scientific and technical talent is growing, and local companies increasingly bring real capabilities to the table. What's more, a number of government-supported innovation efforts have not been successful. Some notable examples include attempts to develop an indigenous 3G telecommunications protocol called TDS-CDMA and to replace the global Wi-Fi standard with a China-only Internet security protocol, WAPI.

Advantage, multinationals?

Simultaneously, multinationals have been shaping China's innovation landscape by leveraging global assets. Consider, for example, the joint venture between General Motors and the Shanghai Automotive Industry Corporation, which adapted a US minivan (Buick's GL8) for use in the Chinese market and more recently introduced a version developed in China, for China. The model has proved hugely popular among executives.

In fact, the market for vehicles powered by internal-combustion engines remains dominated by multinationals, despite significant incentives and encouragement from the Chinese government, which had hoped that some domestic automakers would emerge as leaders by now. The continued strength of multinationals indicates how hard it is to break through in industries with 40 or 50 years of intellectual capital. Transferring the skills needed to design and manufacture complex engineering systems has proved a significant challenge requiring mentorship, the right culture, and time.

We are seeing the emergence of similar challenges in electric vehicles, where early indications suggest that the balance is swinging toward the multinationals because of superior product quality. By relying less on purely indigenous innovation, China is trying to make sure the electric-vehicle story has an ending different from that of its telecommunications protocol efforts. The government's stated aspiration of having more than five million plug-in hybrid and battery electric vehicles on the road by 2020 is heavily supported by a mix of extensive subsidies and tax incentives for local companies, combined with strict market access rules for foreign companies and the creation of new revenue pools through government and public fleet-purchase programs. But the subsidies and incentives may not be enough to overcome the technical challenges of learning to build these vehicles, particularly if multinationals decline to invest with local companies.

Four priorities for innovators in China

There's no magic formula for innovation—and that goes doubly for China, where the challenges and opportunities facing domestic and multinational players are so different. Some of the priorities we describe here, such as instilling a culture of risk taking and learning, are more pressing for Chinese companies. Others, such as retaining local talent, may be harder for multinationals. Collectively, these priorities include some of the critical variables that will influence which companies lead China's innovation revolution and how far it goes.

Deeply understanding Chinese customers

Alibaba's Web-based trading platform, Taobao, is a great example of a product that emerged from deep insights into how customers were underserved and their inability to connect with suppliers, as well as a sophisticated understanding of the Chinese banking system. This dominant marketplace enables thousands of Chinese manufacturers to find and transact with potential customers directly. What looks like a straightforward eBay-like trading platform actually embeds numerous significant innovations to support these transactions, such as an ability to facilitate electronic fund transfers and to account for idiosyncrasies in the national banking system. Taobao wouldn't have happened without Alibaba's deep, analytically driven understanding of customers.
Few Chinese companies have the systematic ability to develop a deep understanding of customers' problems. Domestic players have traditionally had a manufacturing-led focus on reapplying existing business models to deliver products for fast-growing markets. These "push" models will find it increasingly hard to unlock pockets of profitable growth. Shifting from delivery to creation requires more local research and development, as well as the nurturing of more market-driven organizations that can combine insights into detailed Chinese customer preferences with a clear sense of how the local business environment is evolving. Requirements include both research techniques relevant to China and people with the experience to draw out actionable customer insights.

Many multinationals have these capabilities, but unless they have been operating in China for some years, they may well lack the domestic-market knowledge or relationships needed to apply them effectively. The solution—building a true domestic Chinese presence rather than an outpost—sounds obvious, but it's difficult to carry out without commitment from the top. Too many companies fail by using "fly over" management. But some multinationals appear to be investing the necessary resources; for example, we recently met (separately) with top executives of two big industrial companies who were being transferred from the West to run global R&D organizations from Shanghai. The idea is to be closer to Chinese customers and the network of institutions and universities from which multinationals source talent.

Retaining local talent

China's universities graduate more than 10,000 science PhDs each year, and increasing numbers of Chinese scientists working overseas are returning home. Multinationals in particular are struggling to tap this inflow of researchers and managers. A recent survey by the executive-recruiting firm Heidrick & Struggles found that 77 percent of the senior executives from multinational companies responding say they have difficulty attracting managers in China, while 91 percent regard employee turnover as their top talent challenge.

Retention is more of an issue for multinationals than for domestic companies, but as big foreign players raise their game, so must local ones. Chinese companies, for example, excel at creating a community-like environment to build loyalty to the institution. That helps keep some employees in place when competing offers arise, but it may not always be enough.

Talented Chinese employees increasingly recognize the benefits of being associated with a well-known foreign brand and like the mentorship and training that foreign companies can provide. So multinationals that commit themselves to developing meaningful career paths for Chinese employees should have a chance in the growing fight with their Chinese competitors for R&D talent. Initiatives might include in-house training courses or apprenticeship programs, perhaps with local universities. General Motors sponsors projects in which professors and engineering departments at leading universities research issues of interest to the automaker. That helps it to develop closer relations with the institutions from which it recruits and to train students before they graduate.
Some multinationals energize Chinese engineers by shifting their roles from serving as capacity in a support of existing global programs to contributing significantly to new innovation thrusts, often aimed at the local market. This approach, increasingly common in the pharma industry, may hold lessons for other kinds of multinationals that have established R&D or innovation centers in China in recent years (read about AstraZeneca's experience in "Three snapshots of Chinese innovation"). The keys to success include a clear objective— for instance, will activity support global programs or develop China-for-China innovations?—and a clear plan for attracting and retaining the talent needed to staff such centers. Too often, we visit impressive R&D facilities, stocked with the latest equipment, that are almost empty because staffing them has proved difficult.
Instilling a culture of risk taking

Failure is a required element of innovation, but it isn't the norm in China, where a culture of obedience and adherence to rules prevails in most companies. Breaking or even bending them is not expected and rarely tolerated. To combat these attitudes, companies must find ways to make initiative taking more acceptable and better rewarded.
One approach we found, in a leading solar company, was to transfer risk from individual innovators to teams. Shared accountability and community support made increased risk taking and experimentation safer. The company has used these "innovation work groups" to develop everything from more efficient battery technology to new manufacturing processes. Team-based approaches also have proved effective for some multinationals trying to stimulate initiative taking (read about General Motors' approach in "Three snapshots of Chinese innovation").

How fast a culture of innovation takes off varies by industry. We see a much more rapid evolution toward the approach of Western companies in the way Chinese high-tech enterprises learn from their customers and how they apply that learning to create new products made for China (read a perspective on the evolution of its semiconductor sector in "Thee snapshots of Chinese innovation"). That approach is much less common at state-owned enterprises, since they are held back by hierarchical, benchmark-driven cultures.
Promoting collaboration

One area where multinationals currently have an edge is promoting collaboration and the internal collision of ideas, which can yield surprising new insights and business opportunities. In many Chinese companies, traditional organizational and cultural barriers inhibit such exchanges.

Although a lot of these companies have become more professional and adept at delivering products in large volumes, their ability to scale up an organization that can work collaboratively has not kept pace. Their rigorous, linear processes for bringing new products to market ensure rapid commercialization but create too many hand-offs where insights are lost and trade-offs for efficiency are promoted.

One Chinese consumer electronics company has repeatedly tried to improve the way it innovates. Senior management has called for new ideas and sponsored efforts to create new best-in-class processes, while junior engineers have designed high-quality prototypes. Yet the end result continues to be largely undifferentiated, incremental improvements. The biggest reason appears to be a lack of cross-company collaboration and a reliance on processes designed to build and reinforce scale in manufacturing. In effect, the technical and commercial sides of the business don't cooperate in a way that would allow some potentially winning ideas to reach the market. As Chinese organizations mature, stories like this one may become rarer.

China hasn't yet experienced a true innovation revolution. It will need time to evolve from a country of incremental innovation based on technology transfers to one where breakthrough innovation is common. The government will play a powerful role in that process, but ultimately it will be the actions of domestic companies and multinationals that dictate the pace of change—and determine who leads it.
A CEO's guide to innovation in China - McKinsey Quarterly - Strategy - Innovation
 

Ray

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You cannot have innovations if you have 'Mind Control' and 'Behaviour Control'.

To be able to innovate your mind should be 'free like a leaf in the breeze' - floating and free.
 

s002wjh

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all you need to do is have a proper education, skills, experience. invention/innovation has nothing to do with political/religion freedom, soviet, nazi, japan pre WWII all have good products. however china education today are mostly memorization, lack creativity of western part, but some school are changing and incorporate western teaching style into existing chinese style of teaching.
 

tony4562

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While China is hardly a mekka for innovation, she just happens to be significantly superior to india in this regard:

according to Global Innovation Index 2011 China ranks 29th whereas India is 62nd

To the guys above. maybe before you find time to ridicure China for her perceived lack of innovation, you should first question yourself how come India, a country with 1.2+ billion people, fares so miserably here?
 

nrj

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While China is hardly a mekka for innovation, she just happens to be significantly superior to india in this regard:

according to Global Innovation Index 2011 China ranks 29th whereas India is 62nd

To the guys above. maybe before you find time to ridicure China for her perceived lack of innovation, you should first question yourself how come India, a country with 1.2+ billion people, fares so miserably here?
Apperantly this topic is about China & not some stick measurement contest.
 

Ray

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While China is hardly a mekka for innovation, she just happens to be significantly superior to india in this regard:

according to Global Innovation Index 2011 China ranks 29th whereas India is 62nd

To the guys above. maybe before you find time to ridicure China for her perceived lack of innovation, you should first question yourself how come India, a country with 1.2+ billion people, fares so miserably here?
The answer is simple.

You innovate when you have poor products that don't work.

If you have world class stuff, you don't require to innovate. It is there for your asking!

If one has gourmet food every day, does he have to learn how to cook?
 

tony4562

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Apperantly this topic is about China & not some stick measurement contest.
you better not fire a gun when you don't have the right ammunition cause it it could back fire on you any time. My suggestion to you is that since India sucks so bad on the innovation front even compared to China, you should (as the moderator) delete this thread and start a similar thread named "india innovation or the lack of it" in the indian economy subforum instead. Highly recommended!
 

nrj

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you better not fire a gun when you don't have the right ammunition cause it it could back fire on you any time. My suggestion to you is that since India sucks so bad on the innovation front even compared to China, you should (as the moderator) delete this thread and start a similar thread named "india innovation or the lack of it" in the indian economy subforum instead. Highly recommended!
Suggestion disregarded. Move on.
 

Dovah

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you better not fire a gun when you don't have the right ammunition cause it it could back fire on you any time. My suggestion to you is that since India sucks so bad on the innovation front even compared to China, you should (as the moderator) delete this thread and start a similar thread named "india innovation or the lack of it" in the indian economy subforum instead. Highly recommended!
You should shut the ---- up! Highly recommended.
 

nrj

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Beijing Is Stifling Chinese Innovation

'Indigenous innovation' policies scare away the foreign-owned research labs that would spur creativity.

China's indigenous innovation program, launched in 2006, has alarmed the world's technology giants more than any other policy measure since the start of economic reforms in 1978. A recent report from the U.S. Chamber of Commerce even went so far as to call this program "a blueprint for technology theft on a scale the world has not seen before."

The goal of the indigenous innovation program is to accelerate China's move up the technology ladder. Using a variety of mechanisms (such as making access to China's market dependent on transfers of leading-edge technologies and R&D labs to China), the program supposedly helps Chinese companies assimilate, absorb and re-innovate upon the proprietary technology developed by foreign companies.

Virtually every assessment of the indigenous innovation program has framed it as a win-lose proposition—a win for China and a loss for foreign multinationals. Our analysis, however, suggests that indigenous innovation measures have been counter-productive for China itself. Instead of inducing technology giants to shift leading-edge R&D work to China at a faster pace, its effect has been exactly the opposite.

China today hosts about 1,000 foreign-owned R&D labs. Yet, with rare exceptions, these labs focus primarily on local adaptations of innovations developed elsewhere, rather than the development of leading-edge technologies and products for global markets.

Tech company executives are eager to leverage the quality and scale of China's talent pool. However, given the indigenous-innovation measures, they do not trust China as a secure location for leading-edge R&D.

A comparison with India is illustrative. India has no equivalent to indigenous innovation rules. The government also is content to allow companies to set up R&D facilities without any rules about sharing technology with local partners or the like.

These policy differences appear to have a significant influence on corporate behavior. Consider the top 10 U.S.-based technology giants that received the most patents from the U.S. Patent and Trademark Office (USPTO) between 2006 and 2010: IBM, Microsoft, Intel, Hewlett-Packard, Micron, GE, Cisco, Texas Instruments, Broadcom and Honeywell.

Half of these companies appear not to be doing any significant R&D work in China. Between 2006 and 2010, the U.S. PTO did not award a single patent to any China-based units of five out of the 10 companies. In contrast, only one of the 10 did not receive a patent for an innovation developed in India.

India also has proven more fertile territory for these companies. For the 10 tech giants taken together, India-based labs received more patents (1,119) than did China-based labs (886) during this period.

At a company level, the difference can be even more striking. For the seven out of 10 companies where Indian units received more patents than Chinese labs, the aggregate numbers were 978 vs. 164. Only a strong showing for China from two outliers, Microsoft and Intel, pulled up its aggregate filings—Chinese labs at those two companies secured 722 patents compared to 141 from Indian labs.

Those exceptions to the rule are revealing. Unlike the others, both Microsoft and Intel have near-monopolies in technology platforms for the global PC industry. Since software applications are designed to run on these platforms, Microsoft and Intel have far less reason to be concerned about technology appropriation by competitors. While software piracy by potential customers is a concern, it is mostly a short-term challenge. In short, Microsoft and Intel leverage China as a global research hub precisely because these companies don't have to worry much about the downsides of indigenous innovation.

The R&D disparity is all the more striking given China's three seemingly major advantages over India. With a GDP more than three times larger, China offers a much bigger market than India. China also spends four times as much as India on R&D. And China produces a much larger number of Ph.D.s.

Yet Beijing is standing in the way, because it's looking at the problem from the wrong angle. Instead of trying to extract technology from foreign firms today, it should be creating a hospitable environment for these firms to create and train world-class innovators.

When a tech giant sets up an R&D lab in a new location such as Beijing or Bangalore, more than 95% of the researchers are hired locally. Over time, many of them leave and use the expertise they've acquired to start new ventures or join other, often local, companies. This kind of personnel "spillover," far more than sharing individual technologies, has been key to thriving innovation ecosystems like Silicon Valley.

If it wants to become a global technology leader, China needs open doors, strong intellectual property protection and no stacking of the deck in favor of Chinese companies—a policy mix exactly opposite to some of its current indigenous-innovation measures.

Sep 2011

Business Asia: Beijing Is Stifling Chinese Innovation - WSJ.com
 

Ray

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Curryguy,

If you have a point please do not use one liners or posts that conveys nothing appropriate to the thread.
 

huaxia rox

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its abolutly correct to say china needs more innovations or china now lacks innovations....but the problem is compared to whom???if compared to the US or japan i think yes the gap is obvious and we r trying to remedy the situation.....but prc is already doing better than many other countries......

i just dont know if the next make believe senario sounds funny..........in a basketball match the chinese team cant match the amercan NBA all star team and lost the match then an indian guy jumped out saying....look....chinese dont know how to play basketball.......
 

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