By all accounts, China has made a significant investment in “independent innovation” and entrepreneurship as part of an announced effort to break out of its traditional profile as a country that thrives by undercutting competitors and copying their technologies in order to execute a strategy of mass production and routine assembly. Capital has been allocated for research and development, science parks have been established around the country and major Chinese universities have followed the lead of their counterparts in the West by launching “innovation and entrepreneurship” programs. However, The Economist, among others, have been critical about the actual returns on these investments, arguing that the most successful Chinese companies thrive on producing low-cost versions of Western products or adaptation of Western innovations to the Chinese market and that Chinese “venture capitalists” are hardly risk-takers when they choose to focus on established industries (e.g., agriculture and hotels) and support firms relying on copycat technologies. Other apparent problems include excessive intervention by the government in the marketplace through its constantly changing pronouncements on standards and weak intellectual property rights even after cosmetic changes were made in the legal infrastructure in the form of new statutes and regulations.
It should be noted though that not everyone is writing off Chinese innovation. Breznitz and Murphree have argued that while Chine may not yet be as successful as it wants to be with respect to innovation that takes the form of developing and commercializing “breakthrough products”, it nonetheless has become a formidable competitor with respect to several other types of innovation such as “process innovation”, which includes improvements in the manufacturing and distribution systems necessary for efficient production and delivery of products, and “product innovation”, which includes the steps needed to adapt existing products to the requirements of China’s own huge domestic markets. Numerous examples exist for the proposition that, at least for now, Chinese firms are the global leaders in key processing tasks from mass production to logistics and have become invaluable partners for foreign companies looking to introduce their products and technology into a market that now boasts 1.3 billion consumers. The preferences of Chinese university graduates also fit this strategy nicely as schools regularly pump out engineers who arrive at their employers with the tools necessary to further refine and improve production methods and quickly understand the technologies embedded in products first conceived overseas. The long-term viability of this strategy depends on various factors including the possibility that other countries, such as India, will overtake China from a technical perspective and that foreign firms will grow weary of using Chinese companies as “intermediaries” to access the Chinese market. Another risk for Chinese firms dependent on foreigners to create new products is that something may happen at the point of conceptions that slows or stops the process and thus leaves Chinese factories without orders to process and complete.
All of the above is informative for emerging company managers everywhere as they ponder their own innovation strategies. The lesson from Breznitz and Murphree is that there may be more than one way to lead the innovation race and firms need to decide what is best for them and remain relentlessly focused on their strategies. There book, “Run of the Red Queen: Government, Innovation, Globalization and Economic Growth in China”, is available now through Yale University Press.