The Changing Face of Innovation in China

Foreign companies must retool their R&D strategies to keep pace with newly innovative Chinese enterprises.

Global Business China Technology Innovation

The art of bian lian — or “face changing” — is integral to Sichuan opera: A main character changes masks to avoid capture by foes. The transformation is quick and surprising, the new face clearly different. In the theater of business, Chinese performers are undergoing a rapid transformation of their own as they seek to evolve from backroom producers to the world’s leading face of innovation.

Over the past five years, domestic Chinese companies have been innovating unlike ever before. In 2016, the National Supercomputing Center in Wuxi, China, unveiled the Sunway TaihuLight, the world’s fastest supercomputer, with 10.65 million CPU cores. Meanwhile, Chinese company Ehang Inc., based in Guangzhou, launched the world’s first aerial passenger drone, the Ehang 184, capable of autonomously transporting a person in the air for 23 minutes. These feats of Chinese ingenuity join many other recent innovations in a range of industries. Western companies beware: This is not the China you are accustomed to, and the ramifications for your research and development strategies may be profound.

For much of the last two decades, foreign innovation in China has been driven by competition among foreign companies and by imitative threats from local Chinese companies.1 R&D has generally been managed according to the following paradigm: Foreign R&D competes against other foreign R&D in higher-end market segments, while Chinese companies operate in lower-end market segments, often competing only indirectly with foreign R&D.2

Moreover, many have long been skeptical about the ability of China’s ecosystem, especially its political, cultural, educational, and financial institutions, to foster genuine indigenous innovation. Many foreign companies we have spoken to over the years have admitted to contributing to this narrative, in part hoping that it would become a self-fulfilling prophecy.

However, the face of the Chinese competitor has visibly changed in the past five years due to a variety of factors. Years of foreign investments have allowed China to develop into a manufacturing powerhouse rich in technological learning opportunities for local companies. Leaders among these companies have moved up the capabilities ladder from producers to creators. Chinese innovation is visible in internet business models, telecommunications, software, artificial intelligence, fintech (financial technology), new materials, consumer products, high-end equipment, and green technologies.3 Innovative Chinese companies such as Huawei, ZTE, Alibaba, and Baidu are becoming household names outside China.

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References

1. A. Hu, “Propensity to Patent, Competition, and China’s Foreign Patenting Surge,” Research Policy 39, no. 7 (September 2010): 985-993.

2. M. von Zedtwitz, “Managing Foreign R&D Laboratories in China,” R&D Management 34, no. 4 (September 2004): 439-452; and M. Magni and Y. Atsmon, “Getting the Most From Your R&D in China,” Sept. 30, 2011, https://hbr.org.

3. For example, see McKinsey Global Institute, “The China Effect on Global Innovation,” July 2015, www.mckinseychina.com; G. Haour and M. von Zedtwitz, “Created in China: How China Is Becoming a Global Innovator” (London, U.K.: Bloomsbury, 2016); G. Yip and B. McKern, “China’s Next Strategic Advantage: From Imitation to Innovation” (Cambridge, Massachusetts: MIT Press, 2016); E. Jung, “China’s Internet Boom,” MIT Technology Review, June 21, 2016; S. Mittal and J. Lloyd, “The Rise of FinTech in China: Redefining Financial Services” (EY and DBS Bank, November 2016); and OECD, “OECD Science, Technology and Industry Scoreboard 2017,” Nov. 22, 2017, www.oecd.org.

4. McKinsey Global Institute, “The China Effect on Global Innovation,” July 2015, www.mckinseychina.com.

5. S. Veldhoen, B. Peng, A. Mansson, G. Yip, and J. Han, “China’s Innovation Is Going Global: 2014 China Innovation Survey,” (Beijing, China: Strategy&, 2014), www.strategyand.pwc.com.

6. “European Business in China: Business Confidence Survey 2017” (Beijing, China: European Union Chamber of Commerce in China, 2017), www.europeanchamber.com.cn.

7. Although starting from several years ago foreign companies have found it increasingly difficult to retain good talent, the dynamics we are seeing today make the war for talent even more complex. See S. Pham, “Chinese Students Are Losing Interest in Working at International Firms,” CNN Money (June 15, 2017).

8. C. Murphy and L. Lin, “For China’s Jobseekers, Multinational Companies Lose Their Magic,” The Wall Street Journal, April 3, 2014. Note: The same survey instrument was used in 2013 and 2017. For 2008 data, see “2008 Talent Survey in China” (Universum Global, 2008).

9. Also see “Kelly Services 2017 China Salary Guide” (2017), www.kellyservices.cn.

10. For example, see N. Chang, “Employment in China’s Tech Industry,” Tech Crunch, Oct. 15, 2016.

11. For example, see C. Huang, “Recent Development of the Intellectual Property Rights System in China and Challenges Ahead,” Management and Organization Review 13, no. 1 (March 2017): 39-48; and “Governance of Intellectual Property Rights in China and Europe,” ed. N. Lee, N. Bruun, and M. Li (Cheltenham, U.K.: Edward Elgar, 2016).

12. For an empirical analysis, see A.G. Hu and G.H. Jefferson (2009), “A Great Wall of Patents: What Is Behind China’s Recent Patent Explosion?” Journal of Development Economics 90 (September 2009): 57-68.

13. L.C. Yee, “China Tops US, Japan to Become Top Patent Filer,” Reuters, Dec. 21, 2011.

14. “Contemporary Quantity Comparison of Three Kinds of Patents Received From Home and Domestic Between 2015 and 2016” (State Intellectual Property Office of the People’s Republic of China, 2016).

15. China’s 2014-2020 National IP Strategy sets an even higher target: 14 invention patents to be owned per every 10,000 people in China by 2020.

16. “Economic Impacts of Intellectual Property-Conditioned Government Incentives,” ed. D. Prud’homme and H. Song (Singapore: Springer, 2016).

17. C. Yin, “China’s Courts Saw Record Number of IP Cases in 2016,” China Daily, April 24, 2017.

18. “Annual Report 2016” (State Intellectual Property Office of the People’s Republic of China, 2016).

19. For example, see K. Asakawa and A. Som, “Internationalization of R&D in China and India: Conventional Wisdom Versus Reality,” Asia Pacific Journal of Management 25, no. 3 (September 2008): 375-394.

20. S. Howell, H. Lee, and A. Heal, “Leapfrogging or Stalling Out? Electric Vehicles in China,” working paper no. RPP-2015-07, Harvard University Kennedy School of Government, Cambridge, Massachusetts, 2015, www.hks.harvard.edu.

21. For more details on China’s strategic emerging industries (SEIs) initiative, see D. Prud’homme, “Forecasting Threats and Opportunities for Foreign Innovators in China’s Strategic Emerging Industries: A Policy-Based Analysis,” Thunderbird International Business Review 58, no. 2 (March-April 2016): 103-115; and D. Prud’homme, “Dynamics of China’s Provincial-Level Specialization in Strategic Emerging Industries,” Research Policy 45, no. 8 (October 2016): 1586-1603. There is substantial overlap in the industries targeted in the SEIs initiative and Made in China 2025. For an analysis of the impact of Made in China 2025 on foreign industry, see U.S. Chamber of Commerce, “Made in China 2025: Global Ambitions Built on Local Protections,” March 16, 2017, www.uschamber.com.

22. Bombardier also participated in the high-speed rail contracts in China.

23. See the latest business confidence surveys from the American Chamber of Commerce in China, U.S.-China Business Council, and European Union Chamber of Commerce in China.

24. “Action Not Words Needed on Foreign Access to China Markets, Says Chamber,” South China Morning Post, Sept. 19, 2017 (quoting European Union Chamber of Commerce in China president Mats Harborn).

25. For one useful additional source on this trend, see Yip and McKern, “China’s Next Strategic Advantage.”

26. P.J. Williamson and E. Yin, “Accelerated Innovation: The New Challenge From China,” MIT Sloan Management Review 55, no. 4 (June 2014): 27-34.

27. For an additional source on this challenge, see Bain Insights, “Competing in China With ‘Good Enough’ Products,” Forbes, April 30, 2014.

28. See also R. Tsang and K. Chong, “How to Win on China’s ‘Good Enough’ Battlefield,” Bain & Co., Feb. 12, 2014.

29. For a recent analysis of different strategies for managing IP in China, see A. Schotter and M. Teagarden, “Protecting Intellectual Property in China,” MIT Sloan Management Review 55, no. 4 (summer 2014): 41-50.

30. For a discussion on the reluctance of foreign companies to use China’s utility model system and the famous Chint v. Schneider case, which somewhat helped change the perception of foreign companies about the usefulness of utility models in China, see D. Prud’homme, “Utility Model Patent Regime ‘Strength’ and Technological Development: Experiences of China and Other East Asian Latecomers,” China Economic Review 42 (February 2017): 50-73.

31. E.S. Steinfield and T. Beltoft, “Innovation Lessons From China,” MIT Sloan Management Review 55, no. 4 (summer 2014); and L. Brokaw, “Why China Is the World’s Innovation Role Model,” MIT Sloan Management Review, May 10, 2017, https://sloanreview.mit.edu.

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3 Comments On: The Changing Face of Innovation in China

  • Seamus Grimes | June 13, 2018

    After an early burst of activity in establishing R&D centres in China, some foreign companies now seem to have reached a point in their development where they are not sure how they might develop further. In addition to the obvious competition from local companies described in this article, the policy environment for foreign companies appears to have become more uncertain and less inviting. building trust with local companies for research collaboration appears to present significant challenges. The ability of foreign companies to adjust towards the Chinese approach to doing business is being stretched.

  • Peter Zhao | June 20, 2018

    This is an excellent article. Its discussion about more innovative Chinese companies and the challenging policy environment in China are well-informed and timely.

  • Lynn Etheredge | July 15, 2018

    The “big data” digital revolution, for China and globally, can dramatically accelerate Time To Scale (TTS) for innovations, from the classic (slow) S curve of diffusion to a (rapid) J curve.For new lung cancer treatments, this means nationwide use in 50% of patients in 18 months vs 14-17 years for diffusion with traditional learning systems. This is potentially very important for China, with its rates of lung cancer, but also for ROI to innovators for a global markets. See the recent NIH Grand Rounds talk: http://rethinkingclinicaltrials.org/news/june-15-2018-research-at-scale-exploring-what-is-possible-with-high-quality-real-world-data-examples-from-flatiron-health-amy-p-abernethy-md-mph/ China’s innovators are well-positioned to develop and use big data “rapid learning” systems in bio-medicine and agriculture e.g. BGI (human genomics, w/ https://www.ga4gh.org) and Syngenta (global crop science, with http://www.godan.info).

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