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 / Winter 2005 / Issue 41(originally published by Booz & Company)


China’s Five Surprises

Financial support for research and development is also burgeoning. Cities such as Shanghai, Beijing, and Shenzhen are regular stops on Asian pilgrimages made by foreign venture capitalists. Chinese local governments have built business incubators offering cheap rents and technical infrastructure to small and medium-sized enterprises in Zhongguancun, Shanghai’s Zhangjiang High-Tech Park, and similar locations. The national Ministry of Education has promised to quadruple the number of technical universities to which it gives financial support in hopes of raising them to world-class status. And it has introduced incentives to encourage universities, professors, and returning students to commercialize their research. With all this public and private money in play, China recently became the nation with the world’s third-largest R&D investment, after Japan and the U.S. And there are many indications that this money is spent more frugally (and thus more productively) in China than it would be in the U.S. or Europe. (See “Money Isn’t Everything,” by Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, for more on the cost-effectiveness of R&D spending.)

Hence, a surprise is coming for those who regard Chinese companies primarily as imitators, prone to borrowing ideas from other businesses or infringing on patents. These habits infuriate Western companies, but many Chinese are less concerned because they view it as a step in their enterprise development.

The most salient quality of the new Chinese innovators is not their imitativeness, but their willingness to take chances and learn from failure, especially compared to their more risk-averse Western counterparts. They require a relatively low burden of proof when deciding to invest in a new product or technology. “Let’s try it,” they say. Then, if they see it doesn’t work, they abandon it immediately and try something else. Speed characterizes every action. They also learn from one another; word travels quickly about practices and results. The ability to replicate successes and rapidly move up the learning curve has already given Chinese companies an advantage against today’s Western entrants in China.

Many Chinese entrepreneurs seek to create the kind of technological “killer apps” that can establish them as global competitors. Sooner or later, incremental innovation — and the sheer number and speed of their unfettered experiments — will lead to breakthroughs that appear far more original than anything emerging from China today. Some technological developments will seem to come out of nowhere, not aimed at American or European markets at all. Those surprises, like the Chinese inventions of paper and gunpowder, could have transformative effects everywhere.

China’s “Brain Gain”
A glance at the upper management ranks of China’s leading homegrown businesses yields a startling view: not much gray hair. Youthful leadership is the norm because China stopped all formal education from the late 1960s through most of the 1970s (the years of the Cultural Revolution) and thus lost a generation of highly educated managers. To make up for this gap, in a time when managers are needed more than ever before, Chinese enterprises feel an explicit need to recruit and develop responsible business expertise in a hurry.

Often, that expertise is imported. Lured by economic reforms, by the excitement of building a nation, and by the central government’s incentives, foreign-trained and expatriate managers are bringing credibility, leadership, and financial and marketing skills to the executive suites of Chinese companies. Microsoft Chairman Bill Gates, during a panel discussion at the Microsoft Research Tech Fair held on April 27, 2005, in Washington, D.C., talked about this phenomenon in the context of his own company’s new research centers in India and China. “[Those R&D centers] are giving us an exposure to the quality of [Indian and Chinese] students — most of whom, historically, would have come to the United States. But more are either not coming at all, or coming here and then going back.”

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