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3 Innovation the name of the
game By Dan Steinbock
Ask leading senior executives in the
United States, Western Europe or Japan how they
intend to cope with the challenges of China and
India, and you'll get a familiar response: "We
shall move higher in the value-added chain." China
might be the "world's factory" and India the
"world's back office", but the conventional wisdom
reassuringly says: "Cheap manufacturing may
migrate to China and cheap services to India - but
innovation
will
remain in America."
The conventional
wisdom is a myth. Emerging multinationals in China
and India are no longer satisfied with imitating.
Instead, they seek to convert cost advantages to
more sustainable competitive advantages - often
through innovation.
Competition for
innovation Prosperity is based on
productivity, which is rooted in innovation.
Often, innovation is measured by input indicators
such as research and development (R&D) (which
reflect the willingness to invest but do not
guarantee the ability to excel). Output
indicators, such as patents, also measure
innovation.
Throughout the 1950s and
1960s, the United States set the standards for
prosperity, productivity and innovation. The US
enjoyed superior leadership in science and
technology, research and development, and the
emerging sector of information and communication
technology (ICT) goods and services. After World
War II, the economies of Europe's leading nations
and Japan were too devastated to pose a
competitive threat to US multinationals, which
were barely exposed to international competition.
Since the late 1970s and 1980s, the innovative
capacities of Organization for Economic
Cooperation and Development (OECD) countries have
converged substantially.
Like the United
Kingdom, Germany and France in the postwar era,
China and India are now accelerating catch-up
efforts and seeking to move higher in the
value-added chain. Take, for instance, recent
developments in ICT.
In the early 1990s,
China's economy was still known primarily for
simple, low-tech manufactured goods, such as
textiles, shoes and plastics. Now it is moving to
produce more complex, high-tech ICT goods. After
almost a decade of explosive growth in the
electronics sector, China overtook the United
States as the world's biggest supplier of ICT
goods in December 2005. According to the OECD,
China's ICT exports - including laptop computers,
mobile phones and digital cameras - increased by
more than 46% to $180 billion in 2004, for the
first time surpassing US exports of $149 billion.
Between 1996 and 2004, the value of America's
combined exports and imports of ICT goods grew
more than 50%, from $230 billion to $375 billion.
Over the same time period, the value of China's
ICT trade soared from $35 billion to $329 billion
- almost 1,000%.
For decades, India sought
its place in the sun as a tourist destination yet
received fewer tourists than Singapore. Meanwhile,
the government ignored the
entrepreneurial-firms-driven
information-technology sector. That has changed.
By year-end 2005, India had 44% of the global
market for IT and business process outsourcing
(BPO) offshoring. By early 2006, India's IT sector
amounted to $36.3 billion, and the number is
expected to rise to more than $56 billion in 2007.
IT services accounted for almost half the total,
BPO for a fifth. Almost 80% of all IT services and
software revenues are exported. The revenues of
each Indian IT leader - Infosys, Wipro, Tata and
Cognizant - exceed $1 billion, and they dominate
almost half of IT and 4% to 5% of BPO services.
Increasingly, these Indian leaders are seen as
cost-efficient alternatives to the IBMs and
Accentures of the world in areas such as
application outsourcing and development.
Innovation catch-up When faced
with these realities, conventional wisdom points
to the fact that, despite the gains made by China
and India, the list of the top 10 innovator
countries has changed relatively slowly, as
measured by the US Patent and Trade Office. A
small number of geographic locations tend to
dominate the process of global innovation in
specific sectors and technological areas. In the
1980s these locations included the United States
and Canada, the leading European nations and, of
the Asian nations, only Japan. Toward the late
1990s, Taiwan and South Korea made the list.
Meanwhile, the relative share of large European
Union countries, such as France, Germany and the
UK, has decreased. Since the introduction of
reforms, first in China and later in India, the
nations steadily improved their rankings until
2004 - in 2005, China was 26th (18th in 2004) and
India 27th (19th in the previous year).
Moreover, the advanced nations dominate
the worldwide patent competition. In 2005, the top
four innovator countries - the US (51.9%), Japan
(21.1%), Germany (6.3%) and the UK (2.2%) -
accounted for more than 81% of patents. China and
India remain far behind the top 10 innovator
countries in absolute terms. In 2005, almost
75,000 patents were filed in the United States,
more than 30,000 in Japan and some 9,000 in
Germany. In China and India, the corresponding
figures were 402 and 384 - that is, each about
0.5% of the US volume.
Despite their
absolute superiority, the leading innovator
nations have fallen behind in the relative growth
rates (measured as compound annual growth rate,
CAGR). From 1977 to 2004, the patent growth rates
of the US, Germany and France were about 2-3%,
whereas Japan's was twice that - 6.4%. Meanwhile,
the growth rates of the tiger economies (South
Korea, Taiwan, Singapore and Hong Kong) have been
two to four times Japan's. Despite the vast size
of the nation, China's performance (25.6%) was
almost as strong as that of South Korea (26.1%)
and nine to 10 times those of the US and the
leading EU nations. India's growth rate has been
quite impressive as well (12.5%). [1]
Furthermore, recent growth rates conceal a
rapid decrease among the leaders and a rapid
increase among the challengers. Between 2000 and
2005, the growth rates of all the top four
innovator countries were negative (minus-0.5% to
minus-2.5%). The tiger economies showed healthy
rates of 2-8% - but China and India were in a
class of their own - with 22.5% and 19.6%
respectively.
Let's take a closer look at
the emerging innovation strengths in these two
respective nations.
Innovation in China
and India Of almost 30 organizations among
first-named assignees in China, some two-thirds
represent an array of electronics industries,
including semiconductors, contract manufacturing,
computer hardware, software and IT services. Other
major
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