China on the Way to Becoming a Global Innovator

By: Georges Haour

As part of the transformation of the Chinese economy, attested by many recent news, China is fast transitioning from low cost manufacturing to a higher value innovation-led economy. This article looks at this momentous transition.

When it comes to China, anticipating the next few years is fraught with difficulties. It is a huge and diverse country going through major transitions. After extensive field work and time spent in China, the conclusion of the present study is that China is on its way to become a major, global power for innovation. This is mainly due to private firms, essential engine of the wealth-creation process. These, however, operate in a unique environment, in which the public sector is extremely powerful.

After debunking the metrics typically used to describe China’s innovation scene, we will look at the key characteristics and patterns, expected to inform China’s evolution in this area in the near future.

Metrics on China’s innovation

Innovation is about quality of output and not quantity of input. It is therefore extremely difficult to describe and to anticipate. Several of the elements commonly used are discussed below:

Investments in R&D

These are taken as a percentage of the country’s GDP (Gross National product). In the case of China, the increase of this figure of merit is spectacular, from 0,5 % in 1995 to 2% in 2014. The objective is to reach 2,5% in 2020, thus overtaking the average investments of the countries of the European Union.

Given the rapid growth of China’s economy, numbers in absolute terms are even more impressive. In 2014, R&D investments in China are expected to total $ 270 bio. Following recent trend, this number may overtake that of the USA as early as 2023.

Patents output

The top patent owners in China are the telecommunications companies ZTE and Huawei, as well as the car-maker Chery. In any country, overall patent statistics is only a proxy indicator of innovation. In 2014, China granted 233 000 patents. The quality and the business potential of the inventions, however, are more important than the number of patents.

In the case of China, this indicator is questionable, as the government has given incentives to firms and academics for filing patents. Also, “utility patents”, valid for ten years as opposed to invention patents, which last 20 years, are of questionable value. As a result, it is a rough estimate that roughly two thirds of China’s patents are close to being worthless.

On the other hand, the handling of patent litigation by the courts is steadily improving, so that non-Chinese firms can place increasing confidence in the process. Currently, well over half of the litigation cases take place between two chinese firms.

Non technical innovations

The metrics above concern technical innovations. Many important innovations have nothing to do with technology; one example is the self service, which revolutionized retail stores in the 1950s. Indeed, most advances in the services sectors are not patentable. Thus, one firm may copy the service offered by a competitor.

In China, many innovations concern specific aspects of the business model. For example, the way Haier, the manufacturer of refrigerators and air conditioners, guarantees one day delivery by imposing this condition to the transporting sub-contractor. Mobile phone–maker Xiaomi hardly advertises and mainly sells on internet, Furthermore, as will be seen later, product innovations are often the result of numerous, very small adaptations of existing products; these changes are not patented, but are the reason for the success of the offering in the Chinese market.

In brief, metrics used to assess the innovation level in China are not extremely relevant, because they do not take into consideration highly relevant elements.

Patterns for China becoming a global innovator

These patterns, expected to be followed by China in the coming years include several elements, as discussed below.

Chinese society is highly entrepreneurial, eager to make money and able to extract value very effectively. Chinese consider innovations in a totally market-oriented way. They are ready to experiment and rapidly correct their product. Technical aspects constitute only a tool to be successful in the market place. Furthermore, Chinese are fully engaged with internet, with an estimation of 800 millions users in 2016.

Copying a product, while improving many different elements of it and making it much better suited to the Chinese market, represents a legitimate way to operate. Innovating to reduce cost by copying and improving explain the success of many Chinese companies, such as Baidu (copy of Goggle), or Alibaba, initially inspired by eBay, Xiaomi for mobile phones.

China’s government is obsessed with providing a context favourable to innovation-led growth. Like Japan and Korea, innovation is perceived as a crucial ingredient of wealth-creation and economic development. Chinese top leaders have a technical background. Current President Xi was initially trained as a chemist, then obtained a PhD in Law.

Innovation policies range from favouring the digital revolution, “smart cities”, fiscal incentives for “innovative firms”, as well as an arsenal of programmes to foster R&D and technical developments. These include “3D printing” and informatisation of manufacturing, as well as the “internet of things”.

A set of non tariff barriers and practices favour domestic firms under the cover of a policy of promoting “indigenous innovation”. This is particularly the case of equipment to produce renewable energy.

Chinese firms contribute a rapidly growing share of innovations are private and entrepreneurial. They are very active in the ICT-information and communication technologies and electronic games. The weight of the SOE – State owned enterprises is decreasing, both as a factor of the GDP and in the production of innovative offerings.

We are at the beginning of rapid increase of the outflow of China’s investments, especially towards Europe.

The Shenzen area is densely populated with innumerable firms able to rapidly produce prototypes and components. In this environment is flourishing the “makers” movement, a bottom up dynamics, inventing and rapidly commercialising all types of devices. This movement has received strong encouragement from the government, underlining the message that entrepreneurial spirit is central to tomorrow’s China.

A few large Chinese firms have ventured abroad. Huawei, Lenovo, Haier are notable examples. This number will grow, as, in 2014, Chinese investments going abroad have equalled the flow of investments going into China for the first time. We are at the beginning of rapid increase of the outflow of China’s investments, especially towards Europe.

Conclusion

A strong entrepreneurial spirit, a relentless market-orientation, an agile and rapid implementation in a vibrant economy demanding outstanding quality to price ratios: these are the basic descriptors of the Chinese society.

China is the ultimate internet country, by the sheer number of users, as well as by the intensity of its usage. Already the biggest market for on-line shopping, China is expected to soon lead in on-line financial services.

Combined to that is a strong government relentlessly committed to foster innovation-led growth.

Barring major mishaps, Chinese firms are therefore expected to turn the country into one of the world’s major source of innovations. There is much to learn from the “Chinese way” of innovating. That China is becoming a major source of innovations is good for China and good for the world.

By Georges Haour

Image Editorial Credit: Sergiy Palamarchuk / Shutterstock.com