The Emergence of Innovation in China

Jim Euchner,  From the Editor, RTM 61.3

“Let me speak frankly: the advantage of innovation for multinational companies has shrunk substantially since the early 2000s.”

—Professor Hengyuan Zhu, Tsinghua University

 

I was invited to visit China for the first time in 1989, to speak about expert systems, then at the forefront of practical AI. At that time, technology transfer from the West to China was a one-way street, and it was expected to be so for some time. My visit was canceled by the tragic events at Tiananmen Square in June of that year. The emergence of a vibrant culture of innovation and entrepreneurship in China seemed very far away.

Today, less than 30 years later, it is hard to overstate the pace of change in China’s innovation capability, especially over the last decade. Ten years ago, multinational companies saw China primarily as a place to source manufacturing at lower costs. They were chary of IP protections, reluctant to move R&D centers to China, and skeptical of the sophistication of local innovation management. Many questioned how the growing economic freedoms would coexist with strong governmental control of the overall economy. There was uncertainty surrounding joint ventures with local enterprises, but awareness that they were necessary. It was a cautious dance.

Today, the Chinese economic system is booming. Behind the Great Firewall of China is an innovative and thriving ecosystem of Internet giants—Alibaba, Tencent, and Baidu, to name the most prominent—that rival in size and innovation the giants in the West. The growth in the economy has created a growth in the middle class that others have compared to the post–World War II economy in the United States. This growth has created demand; the result is a virtuous spiral, so that production for internal consumption may now be sufficient to sustain economic growth in China.

This special issue of RTM explores the many ways in which innovation has evolved in China over the past decade. We do so by revisiting some of our best articles on innovation in China, together with updates and commentaries by their authors. Those commentaries provide perspective; they highlight what has changed, note what hasn’t, and suggest how things might continue to change in China in the coming years.

Xudong Gao looks at the world through the lens of local Chinese firms challenged to catch up with multinationals. His commentary on “Effective Strategies to Catch Up in the Era of Globalization,” originally published in 2011, finds that many of its observations hold. In particular, the strategy that he observed in the telecom equipment industry focused on innovation-based differentiation has proved successful for Chinese firms. He notes that industries as diverse as “new-energy city buses, heavy-duty trucks, power-generating equipment, metal-forming and metal-cutting equipment, railway equipment, and seamless steel tubes are using the same strategy to make rapid progress in catching up and even leapfrogging multinational competitors.” He concludes that, although multinationals still have advantages in fundamental research and brand identity, those advantages are shrinking.

“Foreign R&D in China at a Crossroads?,” Max von Zedtwitz, Li Gong, and Martin Daffner’s commentary on “Managing Foreign R&D in China” (first published in 2007), provides a general context. The authors begin their remarks with the observation that 10 years—the interval since the publication of the original article, is “the equivalent to three generations of change in R&D management in China.” In their update, they provide a succinct summary of the most important shifts, many of which were anticipated in the 2007 article. They note shifts in the R&D mission of multinationals in China, from localization of products developed elsewhere to new product development “in China for China.” The authors also discuss the government’s implementation of forced technology transfer policies, which could threaten the technological edge of multinationals. And they make note of some things that have not changed as much as might have been expected, including the continued importance of access to government officials for success.

Addressing the issue of innovation from the perspective of multinational firms, Paul Beamish and Megan Zhang provide a commentary on “Joint Ventures in China Face New Rules of the Game,” authored by Erik de Bruijn and Xianfeng Jia in 1997. Given that this article is now 20 years old, the dramatic changes in the economic climate and technical capabilities of Chinese firms Beamish and Zhang describe shouldn’t be surprising, nor should the shifts they observe in the nature and extent of joint ventures between Chinese firms and multinationals. Still, they find that many of the recommendations offered by de Bruijn and Jia in the original article continue to hold, and they add three that reflect the increasing technical capabilities of Chinese firms and China’s outreach to other parts of the world.

Gene Slowinski and Albert Johnson update their 2008 article, “University Relationships in China,” with a general discussion of the continued importance of building cultural understanding and finding ways to partner with in-country resources. They note, however, that the terms of collaboration have shifted as the government’s Indigenous Innovation effort has borne fruit and as the rise of technical cities has created centers of technological expertise in China. They conclude that “China is finally bringing the sheer scale of its population and the depth of its component manufacturing prowess to bear to accelerate innovation and deploy economically effective innovations into the world economy.”

This issue’s interview is with Professor Hengyuan Zhu of Tsinghua University. Professor Zhu has been studying innovation in China for nearly 20 years, and he has observed a peculiarly Chinese approach that he calls “contextualized innovation.” He defines this approach as “innovative activities centered around the context in the environment: the manufacturing context, the supply chain context, the market context.” Contextual innovation leverages the strengths China brings to innovation, particularly its large and growing market and its manufacturing prowess, which can readily turn innovative ideas into products. In this wide-ranging interview, Zhu also discusses the future role of multinationals, the changing IP landscape, and the growing maturity of innovation management practices in China. He notes, however, that “ten years from now, we will have new tools and new methodologies to do product innovation,” so reinvention may be more important than adoption of existing methods.

I finally did get to China this past year, while working in innovation for Goodyear. Every day I spent there was enlightening, even though many of the things that I saw were things that I had read about. At the Beijing University of Chemical Technology, which has a strong program in the science of rubber and elastomers, I was impressed by both the number and quality of the students. At a firm that was a partner to Goodyear in the development of high-quality silica for tires from rice husk ash, I was impressed by the speed of decision making and the creative, experimental path the company had taken to develop its product. I was also intrigued by the firm’s commitment to sustainability, evinced in its productive use of every part of the rice plant. My visits with commercial fleets, which are growing rapidly to support the dramatic increase in commerce in China, and new electric vehicle (EV) manufacturers seeking to take a worldwide lead in the EV industry, supported by a large and growing home market and increasing government mandates, were eye-opening.

China has become a truly exciting environment in which to innovate. I expect a continued growth in innovation capability that is likely to borrow from the West but to emerge as distinctly Chinese. We hope that this issue of RTM provides readers a glimpse of this rapidly moving train and some insight into evolving strategies multinationals can adopt for success with innovation in China.

Read more from this issue.

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