Why Innovators in China Stay Close to the Market

Look at the electric shavers on offer from Philips at stores in New York, London, or Tokyo, and one will seem much like another. But go to Shanghai, or a smaller Chinese city like Yantai, and you’ll see something different. There, Philips has products that arose from local innovations and are customized for Chinese consumers.

It’s not surprising that a multinational company would be willing to adapt its offerings to serve a large market — as a Philips executive commented, a second-tier city in China might have a larger addressable market than most European countries. What is surprising is that Philips doesn’t feel the need to do this market-specific innovation in many large countries but does so in China. What is so different about competing in the Chinese market that it demands an entirely different approach than is dominant elsewhere in the world?

Over the past three years, we conducted two large representative surveys of corporate innovation. The first looked at innovation practices across eight countries, most of them highly developed. The second focused specifically on innovation practices in China, by both domestic and foreign companies operating there. We found that in China, innovation is different. Everywhere else we’ve looked, we’ve found that companies take a similar approach to corporate innovation.1 But the companies in China — be they domestic or foreign — have chosen a different path in a market where fast growth is producing a disproportionately large share of new customers for many industries, and advanced digital infrastructures, including widespread digital platforms, provide the means to access them.

Diverging Paths to Corporate Innovation

Our research shows that outside China, large companies are converging on a pattern for sourcing innovation. Internally, they are centralizing innovation. If they don’t have central R&D units, they are building them. And, increasingly, they are building centrally controlled innovation labs located in rich innovation ecosystems, such as Silicon Valley. Meanwhile, the appetite for seeking innovation from inside individual business units is decreasing, with ever fewer important innovations coming from these sources.

Externally, companies are rapidly expanding their innovation portfolios to get access to expertise, particularly for digital technologies. More businesses are turning to crowdsourcing and working with universities, startups, and third-party experts.