Innovation in China Winner takes all

Prof Seamus Grimes

Centre for Innovation and Structural Change,

National University of Ireland, Galway

Innovation in the Chinese context

O The political economy of innovation

O Different views of the world, of capitalism,

the market and the state

O An increasingly powerful one-party state

aggressively bargaining its position with

western technological hegemony (until now)

O National prestige, national security and

geopolitical role

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

Objectives of the 5 Year Plan

O 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

2 main threats to the Chinese innovation system Breznitz & Murphree (2011)

The technology concerns and

the political-economic ideology

of the government which views

mastery of novel-product

innovation and new technology

creation as necessary for

wealth and economic security.

McKinsey (2011)

The Chinese endgame is clearly

the transfer of intellectual property

and know-how to allow Chinese

companies to compete globally not

only in China but on the home turf

of MNCs.

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.

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.

A balanced strategy (The World Bank, 2009)

O Job creation for 780m of whom 80% have no higher than junior secondary education

O Clarity of the objective of innovation?

O A means to an end: sustaining economic development

O Need to resist temptation of: being first, being high-tech, and being indigenous

O A balance between technology creation and technology adaptation and adoption

A leading technology policy official (2007)

„[t]he majority of the market is controlled by foreign companies, most core technology relies on imports, the situation is extremely grave as we are further pressured by developed countries who use blockades and technology controls – if we are not able to solve these problems we will forever be under the control of others‟

% 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

A dualism (World Bank, 2009)

It‟s hard to reconcile the lack of innovation in

Chinese industry with the stories of rapidly

rising Chinese innovators such as Huawei.

Indeed, Chinese industry today is a

combination of a small number of innovators

together with a large number of producers who

are engaged in „manufacturing without

innovation‟.

‘By and large, firms in China are weak in innovation’

(Gu et al, 2009)

O Few have own brands

O organisational learning not encouraged

O Passive, imitative and minimalist strategies

O Tried and tested technologies

O Avoiding testing and experimenting as much

as possible

O A hierarchical culture with little horizontal

communication or networking

‘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

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

development

O The need for an honest and functioning

judiciary system

O Shapes relationships within and between

firms

O Has a significant impact on innovation

performance in business

Microsoft R&D 2009

„We are not sure that they are ready to do the core product work. Four years of experience has shown that different teams make grand promises but fail to deliver. This creates major issues for developing trust with HQ. We need to build up expertise‟.

Microsoft R&D 2011

„All MNCs are in mixed mode right now. We want to make a big impact in China but we are afraid of entering the market. They don‟t know exactly what to do. So we take the middle ground and say we will put some R&D in China, but are not sure what to do with it. Let‟s just test the water. Companies are at different stages, with some more advanced than others in R&D. Microsoft is somewhere in the middle‟.

US networking MNC 2011

„I don‟t think at this point any MNC would trust the IPR here. I don‟t think they would willingly bring R&D into China…that could be 10 years away. MNCs will dominate technology globally, but I don‟t think they will have much traction in China. Because of the nature of China‟s legal system, no MNC CEO would put his reputation on the line for China. They will try to build the China product in China, knowing that the IP is likely to be lost. They are fairly confident that Chinese companies won‟t be able to use this technology to sell into the West..‟

IPR, talent turnover and core R&D

O Increasingly difficult for MNCs to retain top

talent after a few years experience

O Engineers want to be managers

O Want to be involved in cutting edge work

O MNCs fearful of developing core R&D

because of IPR issues

O The challenge of growing junior talent into

management talent

Huawei's research and development centre in Shenzhen

Humble Huawei (2007)

Nonetheless, we at Huawei should be well aware that we still have a lot of catch-up to do in technology. And we have to admit that our international competition is by far advanced technologically. This gap is a product of history. 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 large accumulation of patents. Western suppliers are much more advanced whether it is the system implementation rationale or details of technical implementation.

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. In

design, foreign players earn 96.1% of

revenues. Even in the silicon segment, 93.0%

of revenues go to non-mainland-Chinese

companies. China has a decent share in only

two areas, back-end manufacturing and

assembly and test, where Chinese companies

earn 28.6% of total segment revenues.

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)

President Hu Jintao, 9 Jan 2006

„By the end of 2020… China will achieve more science and technological breakthroughs of great world influence, qualifying it to join the ranks of the world‟s most innovative countries.‟

There is a growing and

refreshing scepticism among

policy-makers in China about

how much policy and

planning can actually deliver

in relation to innovation…

There’s no longer a simple

dichotomy between top-down

and bottom-up.

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

How long will it take to catch up? – some views

O „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.

Harry Shum, Managing Director, Microsoft Research Asia

When people say to me, ‘How far is

China behind the US in terms of

technology?,’ I say ‘three months if you

don’t count creativity’. If someone at

MIT posts some results, then China can

recreate it in three months. But it takes

longer than that to train and instil

creativity.

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.

It has invested vast sums of money in

expensive projects that may not

necessarily have the requisite

supporting “soft” infrastructure in

terms of regulation, human capital

and experience in managing complex,

risky systems.

Economist Intelligence Unit 2011

In green industries, where the

government aspires to be a global

leader, massive subsidies have

kick-started production of

everything from wind turbines to

light-emitting diodes (LEDs). Yet,

many wind farms sit idle,

unconnected to the grid. Plenty of

expensive LED-producing

equipment has been imported but

there is a shortage of skilled

engineers to run the machines.

The government would do well to accept

a more realistic timeframe for China to

become a high-tech power. By adopting

numerical targets for patent grants, for

instance, the government is essentially

forcing the pace of innovation. China

may have seen a tenfold increase in

patent grants over the last decade and is

catching up with the US in patent

numbers, but the comparability of these

patents in terms of content and quality is

still low. A greater focus on other areas,

such as education reform, will allow for

more organic technological progress with

sturdier foundations.

• 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.

China Korea, Rep Singapore Ireland

Score Rank Score Rank Score Rank Score Rank

Global InnovIndex 2011

2009

46.4 29

37

53.7 16

6

59.6 3

5

54.1 13

21

Institutions 51.7 98 77.4 35 90.4 9 91.2 6

Human capital & research 39.9 56 59.9 7 74.7 1 57.8 10

Infrastructure 35.4 33 48.2 6 47.6 9 39.5 23

Market sophistication 54.1 26 61.8 12 78.7 2 65.3 6

Business sophistication 49.3 29 49.8 26 79.1 1 73.8 3

Scientific outputs 52.7 9 53.7 7 48.9 15 51.2 11

Creative outputs 40.9 35 42.2 27 41.4 30 34.2 58

Population (millions)

1,354.1

48.5

4.8

4.6

GDP per capita $ 6,828 27,168.5 50,632.8 41,278

GDP (US$ bns) 4,985.5 832.5 182.2 227.2

The Global innovation Index 2011 (INSEAD)

China India Brazil

Score Rank Score Rank Score Rank

Global Innovation Index 2011

2009

46.4 29

37

34.5 62

41

37.7 47

50

Institutions 51.7 98 52.3 94 54.1 87

Human capital & research 39.9 56 26.9 104 33.9 76

Infrastructure 35.4 33 27.7 63 32.2 45

Market sophistication 54.1 26 44.6 45 35.7 80

Business sophistication 49.3 29 30.8 84 41.5 46

Scientific outputs 52.7 9 24.8 60 25.2 58

Creative outputs 40.9 35 40.3 38 46.9 12

Population (millions)

1,354.1

1,214.5

195.4

GDP per capita $ 6,828 3,270.1 10,412

GDP (US$ bns) 4,985.5 1,310.2 1,573.4