China's next strategic advantage? Innovation.

From imitation to innovation

Two leading business thinkers have charted China’s development and its rapid rise in innovation in a new book.

By Danny Samson

As China moves quickly towards becoming the biggest economy in the world, its private and public investment in innovation is heading the same way. China’s Next Strategic Advantage not only documents the history of Chinese economic development, but also points to the rise of Chinese innovation capability and its implications outside China’s borders.

Many people talk of China’s economic and industrial development as following roughly the same path as Japan and South Korea on a much larger scale. In this book, authors George S. Yip and Bruce McKern acknowledge the commonality in development cycles, but they also point to the important differences between China and other economic success stories of the past 70 years.

China has a different national governance system, with its own system of innovation. The processes of innovation have changed since first Japan Inc. (Toyota, Mitsubishi, Sony etc) and more recently Korea Inc. (Samsung, Hyundai) landed on the global stage.

China's Next Strategic AdvantageA great example of a key difference is open innovation, where businesses take a highly collaborative approach. China has worked hard over several decades to achieve collaborative joint ventures between its local companies and multinationals. The learning it has done in this process has left it well placed to go global in its innovation, and it is now doing just that. According to the two authors, 100 science and technology parks have now opened in China. R&D as a percentage of GDP exceeds that of Europe and is fast approaching that of the US. Patent applications per year – some 600,000 – have already exceeded US numbers.

In interpreting the rise of Chinese innovation, the authors present a four-factor approach: customers and culture explain early-phase developments, but it’s capabilities and cash that underpin China’s current position and future trajectory.

China now abounds with companies that have innovation as a key plank of their competitive strategy: Huawei, TCL, Tencent/WeChat, Xiaomi, Alibaba and many others. The authors point out how strongly the Chinese Government has encouraged such innovators and facilitated the resources required. For instance, they have lured back to China tens of thousands of Western-trained scientists and other experts, and they are creating a mature patent system as well as tax policies and incentives.

Professional development: Leadership essentials: leading innovation

It is clearly important for multinationals’ strategies to address the giant innovation engine that is developing in China. The authors provide five generic strategies that multinational companies should consider in order to operate in China:

  1. Engaging in bold experimentation and rapid iteration as Chinese businesses move into radical innovation.
  2. Creative adaption, meaning focusing on the needs of local markets. 
  3. Developing new categories and rapidly exploiting these. 
  4. Focusing on “lean value”. 
  5. Developing mixed teams and global leaders.

This book gives a valuable account of the almost scary pace of innovation we can expect from China and its businesses. The strategic advice for existing companies is less useful than the general picture it paints, which provides insights for managers and investors alike.

As the capability of Chinese companies to implement innovation increases, we will soon see large and well-funded new global players in a range of industries in our markets.
In Australia, existing firms with market presence and brand value can perhaps best prepare by looking to be a part of the open innovation opportunities – and learning to join up with those coming Chinese innovators.

Danny Samson is professor of management at the University of Melbourne and co-author of 2016’s Innovation and Entrepreneurship: Creating New Value (Oxford University Press).

About the authors

George S. Yip is professor of strategy at Shanghai’s China Europe International Business School (CEIBS), and co-director of its Centre on China Innovation.

Bruce McKern has been dean of two Australian business schools and was the first director of Macquarie University’s Graduate School of Management. He is now a visiting professor at CEIBS and at Stanford’s Hoover Institution.

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September 2016
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