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(originally published by Booz & Company)


China’s Long Road to Innovation

Currently, GM and other Western car manufacturers transfer enough engineering and design know-how into their joint ventures with Chinese state-owned manufacturers to advance the quality of the products they sell in China, but not so much that the technology leaks into the hands of Chinese automakers. Microsoft, Intel, and Motorola have adopted much the same strategy. Under pressure from the Chinese government to conduct more R&D in China, they carefully segment their research operations so that no Chinese company can obtain enough technology or know-how to compete directly against them. Foreign multinationals also concentrate on R&D activity for the Chinese market rather than for global markets, another way to guard against creating new competitors.

Reverse Flow
Some Chinese researchers, engineers, and designers who work for multinationals in China have left to work for domestic enterprises, and many more will over time, says Du. “If scientists leave foreign companies, they bring out knowledge and that’s good for China,” he notes. He says this flow of talent will eventually create “indigenous” innovation, the goal that the Chinese government is pushing.

Another potentially important flow of know-how is the hai gui, or Chinese who are returning from the United States after having worked in technology firms there. Hai gui literally means “sea turtles,” which is what Chinese jokingly call the returnees, evoking the turtles that return to the beach where they were born to lay eggs. One such returnee is Anthony C. Chen. Chen was among the first wave of Chinese students to go to the United States in the 1980s to study. He received a law degree from Harvard University and is now an intellectual property attorney for Jones Day in Shanghai.

Chen says the returnees, whose exact numbers are not known, are bringing their entrepreneurial know-how back to China and launching start-up firms. They are taking advantage of China’s much cheaper technical talent and its readily available venture capital and private equity money. “There is a pretty dynamic flow of talent,” says Chen.

Overcoming Obstacles
A few Chinese companies are taking preliminary steps toward R&D-based innovation. Huawei Technologies, for example, has developed a large patent department and has filed several thousand patent applications. Lenovo, which is controlled by the Chinese Academy of Sciences, a government-sanctioned group for leaders in the scientific community, is funding early-stage research in computer science. But for the most part, Chen says, Chinese firms are not yet willing to invest large sums in R&D. “They are more worried about survival and getting the product out on the market,” he says. “They don’t feel they have the luxury of supporting pure research.” Instead, they buy or license technology and adapt it to the local market. This activity may be profitable in the short term, but it does not contribute to the creation of a strong R&D base.

Ultimately, Du and other Chinese experts question whether Chinese enterprises and companies can ever innovate technologically. One issue is culture. In Western and Japanese companies, researchers are allowed to develop ideas rather than being told which ideas to pick, and they are allowed to fail. These conditions require a delicate balance between a company’s top management and its technical talent. But in Chinese companies, which tend to be very centralized, individual initiative and risk-taking are rarely rewarded. Chen also argues that Communist Party control of the economy is a disincentive for innovation. “The party wants all the good ideas to be its ideas,” he says.

The government is attempting to overcome these barriers to innovation with a 15-year plan for science and technology, launched in early 2006 as the first step toward China’s goal of being a world leader in the field by 2050. It aims to increase the percentage of its gross domestic product devoted to R&D from 1.3 percent today to 2.5 percent by 2020. By comparison, the United States currently spends about 2.5 percent of its GDP on R&D, and Japan spends slightly more than 3 percent. The government is also stepping up its demand on foreign multinationals to conduct more R&D in China and is discouraging low-level forms of investment, such as the manufacturing of technologically unsophisticated products like apparel. Finally, it is revising its tax and export duty system to encourage focus on technologically advanced products.

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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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