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(originally published by Booz & Company)


China’s Long Road to Innovation

Beijing is mandating an increase in home-grown R&D, but Chinese companies face long odds in meeting international standards of innovation.

Despite the global economic crisis, China’s economy is likely to surpass Japan’s to become the world’s second largest; it could even push past a diminished U.S. economy to become the global leader. Yet a huge question mark hangs over China: Can its companies innovate? The answer to this question will determine whether China will remain, essentially, a low- and midlevel manufacturer of goods that other people design and engineer or it will rise to the top of the technological food chain and compete against the world’s leading multinationals.

In one sense, the innovative capacity of enterprises and private companies affiliated with the Chinese government is clear: They are extraordinarily successful at driving down the costs of making products. They have also shown great creativity in taking ideas — even if those ideas are borrowed — that work in one part of China and applying them in the less-developed regions of the country. For instance, Chery Automobile Company imitated or pirated designs from the General Motors Corporation (the issue was settled out of court and neither side will comment). It sold low-cost versions of those vehicles outside China’s provincial capitals, in rural areas where GM’s joint venture with Shanghai Automotive Industry Corporation (SAIC) had not yet established distribution.

The acid test, however, is whether China can innovate technologically. In the United States, western European countries, Japan, and South Korea, innovation means taking ideas that flow from research, developing them into commercially viable propositions, and introducing them into the market. But unlike those countries, China, in its rush to modernize, has allowed its key technology sectors to be dominated by foreign companies. No Chinese company has emerged to challenge global industry leaders in fields such as software or semiconductors. Some 80 percent of China’s high-tech exports come from foreign companies that have located plants on the mainland, estimates Gordon Redding, director of the Euro-Asia and Comparative Research Centre at INSEAD and coauthor of The Future of Chinese Capitalism: Choices and Chances (Oxford University Press, 2008).

Even though China invented paper and gunpowder many centuries ago and recently sent astronauts into space, Chinese companies today conduct virtually no research. Therefore, they are not likely to engage in what the West regards as innovation for another 20 years, says Du Debin, a professor at East China Normal University in Shanghai who specializes in the China-based R&D activities of foreign multinationals. He recently spent a year in Silicon Valley studying the fundamentals of American-style innovation. He concluded that the flow of cutting-edge ideas and the infrastructure that allows those ideas to be translated into commercial products does not yet exist in China on the scale necessary to foster innovation.

A shortcut tried by some cash-flush Chinese companies is purchasing innovation capacity by buying parts or all of various Western companies. Lenovo, the large personal computer manufacturer, acquired the PC division of IBM; the SAIC, which has large joint ventures with General Motors and Volkswagen, bought certain assets of Britain’s Rover from Ford Motor. But in most cases, when Chinese companies buy foreign entities, they obtain only control of existing technology rather than the talent and internal systems necessary to continue producing cutting-edge ideas. “SAIC got two Rover models as part of the deal, but they are older and dated,” says Michael J. Dunne, managing director of China for J.D. Power Commercial Consulting.

The automotive sector is an area of particular focus for the Chinese government, which is anxious to create auto companies that can compete globally. “The holy grail of the auto industry is designing and engineering your own products,” says Dunne. “Unless you can do that, it’s hard to see how you can be competitive.”

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  1. Benjamin Bai, Anthony Chen, and Marcus Woo, “Traps for the Unwary,” Managing Intellectual Property, China IP Focus, April 2008: The difficulties of licensing intellectual property in China. 
  2. Christoph Alexander Bliss, Ronald Haddock, and Kaj Grichnik, “China’s Shifting Competitive Equation,” s+b Leading Ideas Online, 3/18/08: Western multinationals are adapting their approach to the Chinese market in view of rising labor costs and a shifting currency.
  3. William J. Holstein, “Protecting the Company Jewels in an Unprotected Country,” s+b Leading Ideas Online, 7/03/07: Western companies are using a variety of techniques to protect their technology in China.
  4. Gordon Redding and Michael A. Witt, “The Future of Chinese Capitalism,” INSEAD Podcast, August 2008, The authors of The Future of Chinese Capitalism: Choices and Chances comment further on China’s technological ambitions.
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