China's start-ups hold global
change potential By Benjamin A
Shobert
The United States viewed Japan as
a copycat until Japan proved it was more than
that. America and Japan viewed South Korea as yet
another Asian imitator until South Korea proved it
was capable of creating brands and exporting
technology rich products.
The US, Japan
and South Korea today view China as a source of
low-cost labor and as a country that until very
recently was culturally incapable of innovating.
Now, multinationals from developed economies are
coming to recognize that China’s innovative
capacity, while admittedly very niche-specific and
not without its own limitations, is growing.
This increasing capability is no accident;
while some of China’s evolving innovative
bandwidth is the organic result of its industries
racing to compete as their Western counterparts
try to outdistance them through new products and
commercialized
technology, China’s
additional innovative competencies are also the
result of concerted efforts by the central
government in Beijing.
In 2011, President
Hu Jintao spoke at the Chinese Communist Party's
(CCP) 90th Anniversary celebration. Among the main
thrusts of his speech was that China's version of
Marxism and innovation were not only compatible
with one another, but that innovation could be
leveraged in unique and valuable ways through
China's socialist government.
Western
opinion has largely greeted China's early attempts
at innovation with skepticism. In part this is
because China's largest companies have
disproportionately enjoyed success through exports
of low technology, high labor content products.
Those familiar with China's culture and in
particular its educational system are quick to
point to the challenges a country with strong
collective sensibilities will have when trying to
encourage outliers to voice dissent, think
creatively, and innovate.
Yet, throughout
China, companies such as Tsing Capital and
Chrysalix Venture Capital are building successful
venture capital funds built around Chinese
entrepreneurs who have ideas of their own, whose
initial commercial success is likely to be wholly
within China, but whose concepts represent a
potential next wave of innovative technologies
that could impact the world at large.
Many
of these ideas challenge the conventional wisdom
that China is forever caught in the "copy"
paradigm. Policy makers are understandably also
interested in this, in large part because as
China's ability to innovate grows, its economic
rise will begin to take on a new flavor, and one
that could potentially challenge the economies of
the West in unprecedented ways.
The US
believes not only that its ability to innovate has
been key to its economic success, but also that
the government's role in fostering innovation has
been light handed. This orthodoxy is obviously
strained when China's economic planning is
evaluated, given the heavy handed and central role
Beijing plays in fostering early technologies and
nascent industries.
While America wants to
understand China's innovative capabilities to
monitor the evolution of China's industries,
America also is being forced to evaluate whether
the dominant role the Chinese government plays is
actually benefiting innovation, pioneering
technological development, and opening new
industries. If so, it is yet another point that
American politics seems unable to absorb about the
unique approach China has developed.
Last
week, the congressionally sponsored US-China
Economic and Security Review Commission (USCC)
held a hearing to discuss the role China's
government plays in creating an environment where
innovation can occur within the country. Carte
Goodwin, the former Democratic Senator from West
Virginia and now a USCC Commissioner, opened the
hearing by saying, "China and the United States
have taken different approaches to developing a
capacity for innovation. China relies on central
government planning, passed down to the provinces
and to China's large state-owned and
state-controlled enterprises."
As Goodwin
went on to elaborate, in his opinion this is in
marked difference to the American model: "The
United States has traditionally relied more on the
efforts of individual scientists, engineers,
inventors, and entrepreneurs, supplemented by
government funding, particularly for basic
research ... The history of American innovation
was written as collaboration between government
and private industry."
Goodwin's assertion
is not without critics, who would assert that many
of the technologies Goodwin points out in his
opening statement (radio, radar, GPS) were the
direct results of large investments by the
American government. What distinguishes those like
Goodwin from others who see a more direct
involvement by the American government in early
industries is the timing and ongoing role
Washington played as technologies moved out of the
pure science stage and into commercialized
opportunities.
In this respect, the
Chinese model is different in that it puts forward
a more elaborate and ongoing role for the central
government long after the science has been
validated. For many new technologies, the
government's hand will push the idea along until
it finds a home in one of the country's many
state-owned enterprises (SOE).
Dan
Breznitz, author of the book Run of the Red
Queen: Government, Innovation, Globalization, and
Economic Growth in China is one of the world's
leading experts on how governments approach the
formulation of national industrial policies. He is
particularly interested in how various countries
pick a particular industry to focus on, and once
they have done so, how they create a domestic
framework that encourages innovation.
His
most recent book is a deeper exploration of what
China is attempting to do and where its particular
brand of innovation is most likely to be
successful.
Called to testify at last
week's USCC hearing, Breznitz put forward his
belief that China's innovative capabilities, while
admittedly growing, were still focused on what he
called "process, or incremental, innovation."
He added, "Despite the long-term
intentions of, and heavy investment by, the
Chinese central government developing 'indigenous
innovation,' China's true innovational competitive
edge is mastering the art of second generation
innovation."
Breznitz sees this second
generation innovation being focused on taking
existing ideas and innovating in relation to the
process by which they are delivered. This more
incremental approach includes, as he sees it, "the
mixing of established technologies and products to
come up with new solutions, and the science of
organizational, incremental, and process
innovation."
These are certainly
capabilities that could well serve as the
foundation for future competition with the West in
more sophisticated markets, but Breznitz sees that
as some ways off - "At the same time, 'core'
technologies and novel product innovations are
still rare and difficult to achieve in China."
Breznitz's idea offers one possible
explanation as to why China's earliest efforts to
break out of its low-cost manufacturing status
have been in industrial versus consumer areas. In
the latter, insights into consumer behavior and
brand building are the only ways to out compete
the likes of Sony or Apple. In contrast to this,
industrial markets offer the potential for Chinese
brands to more easily move up the value chain and,
to Breznitz's point, they are also sectors where
China's know-how runs the deepest.
Richard
Suttmeier, professor of political science at the
University of Oregon, pointed out during last
week's USCC meeting that China's ability to
innovate is, in part at least, emblematic of its
political problems. As he said, "in political
terms, the strong belief in state directed,
top-down innovation biases the innovation system
away from what could be more productive bottom-up
approaches, and an information culture which
privileges political control of information as a
default assumption, also imposes constraints on
the innovation system."
Will China's
approach work? Suttmeier acknowledged the
difficulties inherent in making this occur, while
also leaving open the possibility that China's
success thus far has been in its ability to walk
between two worlds. He added, "Certainly, by
Western assumptions about innovation, China seems
to be trying to 'square the circle' by
simultaneously calling for the creation of an
'innovative society' while also seeking to enforce
the tenets of a 'harmonious society' by
authoritarian means."
China's many critics
have long held to certain beliefs about the
country, one of which is its inability to
innovate, as signs of deeper more systemic
problems. Yet, if China's heavy-handed and
centrally planned approach to fostering a more
innovative business community actually works, it
will be yet another situation where Beijing has
proven it can successfully bridge the gap between
accepted practices in the West and its own legacy
issues.
Conversely, should China be unable
to develop a meaningful innovative capacity -
perhaps even one greater in scope and deeper in
function than the process innovation Breznitz
points out - it may well be one of the early signs
that China's economic growth has gone as far as it
can until deeper cultural and political issues are
resolved.
Benjamin A. Shobert is the
Managing Director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis
for companies looking to enter emerging economies.
He is the author of the upcoming book Blame
China and can be followed at
CrossTheRubiconBlog.com.
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