Innovation in China: winner takes all


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China's efforts to promote higher levels of innovation

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Innovation in China: winner takes all

  1. 1. Innovation in China Winner takes all Prof Seamus GrimesCentre for Innovation and Structural Change, National University of Ireland, Galway
  2. 2. Innovation in the Chinese contextO The political economy of innovationO Different views of the world, of capitalism, the market and the stateO An increasingly powerful one-party state aggressively bargaining its position with western technological hegemony (until now)O National prestige, national security and geopolitical role
  3. 3. Global innovation networks O Not territorially bounded O Knowledge flows within networks of key nodes like Silicon Valley O Multinationals seek to expand market share in China using local talent, but retaining benefits within the organisation O China in a strong position to acquire western core technology in exchange O A clash of two different ideological models
  4. 4. Objectives of the 5 Year PlanO Breaking the monopoly of MNCs and strengthening national security (Liu, 2006)O Security and national power – China‟s self image and conception of its role in the international system (Breznitz & Murphree, 2011)O Politics is the key to understanding how things work in China
  5. 5. 2 main threats to the Chinese innovation system Breznitz & Murphree (2011)The technology concerns andthe political-economic ideologyof the government which viewsmastery of novel-productinnovation and new technologycreation as necessary forwealth and economic security.
  6. 6. McKinsey (2011)The Chinese endgame is clearlythe transfer of intellectual propertyand know-how to allow Chinesecompanies to compete globally notonly in China but on the home turfof MNCs.
  7. 7. Ze Zhang, the vice president of Beijing University of Technology Everyone there was talking constantly of innovation. But I think we are only just beginning to understand what this word really means. It’s like gears grinding against one another. There’s a lot of tension between the push for innovation and the capacity of the political system to deliver it.
  8. 8. Debate in the Party School? In private, they talk very honestly, with lots of debate… They are good people, very open to ideas. Even so, you still have to play by the rules of the game. You have to make points in relation to Party doctrine.
  9. 9. A balanced strategy (The World Bank, 2009)O Job creation for 780m of whom 80% have no higher than junior secondary educationO Clarity of the objective of innovation?O A means to an end: sustaining economic developmentO Need to resist temptation of: being first, being high-tech, and being indigenousO A balance between technology creation and technology adaptation and adoption
  10. 10. A leading technology policy official (2007)„[t]he majority of the market iscontrolled by foreign companies, mostcore technology relies on imports, thesituation is extremely grave as we arefurther pressured by developedcountries who use blockades andtechnology controls – if we are not ableto solve these problems we will foreverbe under the control of others‟
  11. 11. % of retail value paid as royalties to patent holders by Chinese firms (MoST , 2004) O DVD players: 25-33% O PCs: 30% O Mobile phones: 20-40% O CNC machine tools: 20-40% O Much of the Chinese value share (10- 15%) is captured by Asian CMs and MNCs
  12. 12. A dualism (World Bank, 2009)It‟s hard to reconcile the lack of innovation inChinese industry with the stories of rapidlyrising Chinese innovators such as Huawei.Indeed, Chinese industry today is acombination of a small number of innovatorstogether with a large number of producers whoare engaged in „manufacturing withoutinnovation‟.
  13. 13. ‘By and large, firms in China are weak in innovation’ (Gu et al, 2009)O Few have own brandsO organisational learning not encouragedO Passive, imitative and minimalist strategiesO Tried and tested technologiesO Avoiding testing and experimenting as much as possibleO A hierarchical culture with little horizontal communication or networking
  14. 14. ‘weak social capital’ (Gu et al, 2009)O Educational and social capital (values, norms and trust shared by social community) not marginal, but vital O For interactive learning O A prerequisite for absorbing, diffusing and using knowledge in the innovation system O Necessary for creating new ideas and the economic value
  15. 15. Significant weaknesses in practice of corporate governance (Opper and Schwaag Serger, 2008)O Far-reaching judicial reform yes, but in practice this is a laggard of institutional developmentO The need for an honest and functioning judiciary systemO Shapes relationships within and between firmsO Has a significant impact on innovation performance in business
  16. 16. Microsoft R&D 2009„We are not sure that they areready to do the core product work.Four years of experience hasshown that different teams makegrand promises but fail to deliver.This creates major issues fordeveloping trust with HQ. We needto build up expertise‟.
  17. 17. Microsoft R&D 2011„All MNCs are in mixed mode right now. Wewant to make a big impact in China but we areafraid of entering the market. They don‟t knowexactly what to do. So we take the middleground and say we will put some R&D inChina, but are not sure what to do with it. Let‟sjust test the water. Companies are at differentstages, with some more advanced than othersin R&D. Microsoft is somewhere in themiddle‟.
  18. 18. US networking MNC 2011„I don‟t think at this point any MNC would trust the IPRhere. I don‟t think they would willingly bring R&D intoChina…that could be 10 years away. MNCs willdominate technology globally, but I don‟t think they willhave much traction in China. Because of the nature ofChina‟s legal system, no MNC CEO would put hisreputation on the line for China. They will try to build theChina product in China, knowing that the IP is likely tobe lost. They are fairly confident that Chinesecompanies won‟t be able to use this technology to sellinto the West..‟
  19. 19. IPR, talent turnover and core R&DO Increasingly difficult for MNCs to retain top talent after a few years experienceO Engineers want to be managersO Want to be involved in cutting edge workO MNCs fearful of developing core R&D because of IPR issuesO The challenge of growing junior talent into management talent
  20. 20. Huaweis research and development centre in Shenzhen
  21. 21. Humble Huawei (2007)Nonetheless, we at Huawei should be well aware thatwe still have a lot of catch-up to do in technology. Andwe have to admit that our international competition is byfar advanced technologically. This gap is a product ofhistory. First, with encouragement of the governments,innovation in developed countries is greatly promoted,making technology more easily accessible. Second,while we are still at the early stage of development,developed countries have already had a largeaccumulation of patents. Western suppliers are muchmore advanced whether it is the system implementationrationale or details of technical implementation.
  22. 22. the country is largely missing from semiconductor league tables (McKinsey, 2011)non-Chinese players (for example, Samsung,Intel, and Hynix) earn 96.3% of all revenues. Indesign, foreign players earn 96.1% ofrevenues. Even in the silicon segment, 93.0%of revenues go to non-mainland-Chinesecompanies. China has a decent share in onlytwo areas, back-end manufacturing andassembly and test, where Chinese companiesearn 28.6% of total segment revenues.
  23. 23. Setting unrealistic targets and not likely to succeed (Ernst, 2011) O China‟s MIIT: „We will significantly increase the self-sufficiency ratio to over 70% for integrated circuits used for information and national security, and to over 30% for integrated circuits used in communications and household appliances‟ O Difficult to see how such an ambitious target should ever be realised (Ernst, 2011)
  24. 24. President Hu Jintao, 9 Jan 2006„By the end of 2020… Chinawill achieve more science andtechnological breakthroughs ofgreat world influence,qualifying it to join the ranks ofthe world‟s most innovativecountries.‟
  25. 25. There is a growing andrefreshing scepticism amongpolicy-makers in China abouthow much policy andplanning can actually deliverin relation to innovation…There’s no longer a simpledichotomy between top-downand bottom-up.
  26. 26. Learning from earlier failures? O Government and industry investment in alternative DVD technologies had largely negative results O Implementation of 3G networks held back because MII insisting on developing TD- DCHMA O State interference in China‟s market
  27. 27. How long will it take to catch up? – some viewsO „10-15 years to see outcomes: it‟s not just about pumping investment into R&D‟O „In less than 15 years; with the help of Taiwanese management (in China) they could leapfrog and you could see good innovation in semiconductors in 5 years.O You need basic research. You cannot copy soft competence. The US has a culture and environment that creates innovation.
  28. 28. Harry Shum, Managing Director, Microsoft Research AsiaWhen people say to me, ‘How far isChina behind the US in terms oftechnology?,’ I say ‘three months if youdon’t count creativity’. If someone atMIT posts some results, then China canrecreate it in three months. But it takeslonger than that to train and instilcreativity.
  29. 29. Reduction in dependence on foreign technology a means, not an end (The World Bank, 2009, 20/21) The government is well advised to encourage Chinese enterprises to raise their capabilities for technology creation. But achieving the right balance between technological independence and openness means that the optimal level of independence from foreign technology is not the highest one but the one that contributes most to the development of technological capacity and ultimately to the sustainability of economic development. It takes the private market to find out and approach such an optimal level of technological independence.
  30. 30. Economist Intelligence Unit 2011It has invested vast sums of money inexpensive projects that may notnecessarily have the requisitesupporting “soft” infrastructure interms of regulation, human capitaland experience in managing complex,risky systems.
  31. 31. In green industries, where thegovernment aspires to be a globalleader, massive subsidies havekick-started production ofeverything from wind turbines tolight-emitting diodes (LEDs). Yet,many wind farms sit idle,unconnected to the grid. Plenty ofexpensive LED-producingequipment has been imported butthere is a shortage of skilledengineers to run the machines.
  32. 32. The government would do well to accepta more realistic timeframe for China tobecome a high-tech power. By adoptingnumerical targets for patent grants, forinstance, the government is essentiallyforcing the pace of innovation. Chinamay have seen a tenfold increase inpatent grants over the last decade and iscatching up with the US in patentnumbers, but the comparability of thesepatents in terms of content and quality isstill low. A greater focus on other areas,such as education reform, will allow formore organic technological progress withsturdier foundations.
  33. 33. • China‟s export growth will be driven primarily by demand from non-OECD countries. Penetration of OECD markets in high-end manufactures is likely to be limited, although China will see rapid increases in market share in non-OECD markets. Western companies have in recent years lost significant export market share in non-OECD markets.• In a related trend, foreign-invested firms in China will relinquish their dominant role in driving China‟s export growth. Over the coming year, the share of China‟s exports produced by domestic companies, currently at 48%, will cross the halfway mark.
  34. 34. China Korea, Rep Singapore Ireland Score Rank Score Rank Score Rank Score RankGlobal InnovIndex 2011 46.4 29 53.7 16 59.6 3 54.1 132009 37 6 5 21Institutions 51.7 98 77.4 35 90.4 9 91.2 6Human capital & research 39.9 56 59.9 7 74.7 1 57.8 10Infrastructure 35.4 33 48.2 6 47.6 9 39.5 23Market sophistication 54.1 26 61.8 12 78.7 2 65.3 6Business sophistication 49.3 29 49.8 26 79.1 1 73.8 3Scientific outputs 52.7 9 53.7 7 48.9 15 51.2 11Creative outputs 40.9 35 42.2 27 41.4 30 34.2 58Population (millions) 1,354.1 48.5 4.8 4.6GDP per capita $ 6,828 27,168.5 50,632.8 41,278GDP (US$ bns) 4,985.5 832.5 182.2 227.2
  35. 35. The Global innovation Index 2011 (INSEAD) China India Brazil Score Rank Score Rank Score RankGlobal Innovation Index 2011 46.4 29 34.5 62 37.7 472009 37 41 50Institutions 51.7 98 52.3 94 54.1 87Human capital & research 39.9 56 26.9 104 33.9 76Infrastructure 35.4 33 27.7 63 32.2 45Market sophistication 54.1 26 44.6 45 35.7 80Business sophistication 49.3 29 30.8 84 41.5 46Scientific outputs 52.7 9 24.8 60 25.2 58Creative outputs 40.9 35 40.3 38 46.9 12Population (millions) 1,354.1 1,214.5 195.4GDP per capita $ 6,828 3,270.1 10,412GDP (US$ bns) 4,985.5 1,310.2 1,573.4