February 23, 2017, by Tony Hong
China’s Innovation: From Where It Came and to Where It Will Go?
By Professors Yutao Sun and Cong Cao
China’s innovative capacity has been on the rise and China’s innovation system is still state-led. However, when we talk about “China’s innovation” in a knowledge-based and globalized economy, we have to first figure out what “China” and “innovation” mean. Specifically, we need to call into question things such as whether China owns the innovation achieved in its geographical territory and in what sense China is innovative. With these in mind, we may see a different picture of China’s innovation.
First, indeed, China has an ambitious high-tech development strategy, but high-tech development does not automatically bring about innovation. In recent decades, the Chinese government has launched high-tech development plan every five years, and issued from time to time some national strategies, such as Made in China 2025 and Mass Entrepreneurship and Mass Innovation.
Started from scratch, China has become the world’s largest exporter of high-tech products. However, such a fact does not necessarily reflect China’s indigenous innovation capability in high technology. In fact, foreign-invested enterprises (FIEs), including wholly-owned foreign enterprises and joint ventures, have dominated the exports of China’s high-tech products, although their share decreased to 72.1 percent in 2013 from 79.3 percent in 2002. The share of high-tech exports from state-owned enterprises (SOEs) also sharply dropped to 5.6 percent in 2013, while the share of other enterprises, particularly private enterprises, increased to 22.2 percent from 5.7 percent in 2002, indicating the gradual but rapid coming of age of the private sector in China’s high-tech industries.
Second, China’s ICT sector is probably the most innovative, having the smallest gap with global leaders. The issue is that Chinese firms do not necessarily own core competencies. In addition to state monopolies of China Mobile, China Unicom, and China Telecom in telecomm services, there are also leading firms such as Baidu, Tencent, Alibaba (BAT), Huawei, and Xiaomi. The draft of the Foreign Investment Law, proposed by the Ministry of Commerce (MOFCOM) in January 2015, categorized entities established in China but ‘‘controlled’’ by foreign investors as FIEs. Accordingly, neither BAT nor Xiaomi are Chinese firms, on top of that Baidu copies Google, Alibaba is China’s version of Amazon while Tencent combines features of Facebook and WhatsApp.
When we talk about China’s innovation, Huawei is an indispensable case. However, Huawei is not typical. Yes, it is not an SOE, not a joint venture; yes, it is highly R&D-intensified; and yes, it has been developing indigenous technologies and an international market. But the company has mainly pursued customer-oriented innovation.
For example, China’s smartphone market leaders such as OPPO, Vivo, Xiaomi, Lenovo, and ZTE, among others, depend on non-Chinese suppliers for key technologies. Enter Huawei, an outlier with its semiconductor subsidiary, HiSilicon, providing chips used in its smartphones. However, the global market is still dominated by the U.S. through Apple and the Qualcomm/Android model with Apple taking away some 90 percent of the global smartphone profit.
Lastly, there are different types of innovation. Some argue that we are in an exciting innovative era, as new technologies, new business models, and startups are emerging constantly; others consider that we are in a poor innovation era with no revolutionary breakthroughs. This can be applied to the discussion of innovation in China.
In its 2015 report, “The China Effect on Global Innovation,” McKinsey, the consultancy, proposes four archetypes of innovation: customer-focused innovation, efficiency-driven innovation, engineering-based innovation, and science-based innovation.
China has a small share of the global market in the industries where innovation requires original inventions or engineering breakthroughs, such as branded pharmaceuticals and automobiles. This reflects China’s innovative gaps with the West. China is flourishing in industries where innovation is about meeting unmet consumer needs or driving efficiencies in manufacturing such as appliances and solar panels. China’s massive consumer market and unmatched manufacturing ecosystem give the country unique advantages in these sectors.
However, customer-focused and efficiency-driven innovation as exploitative activities are easier to achieve than the explorative innovation based on engineering and science. Transformation from exploitative to explorative innovation represents a process of technological catching-up. But, this will not be a smooth and short process. It is in this sense that a discussion of China as a leader of innovation is probably a bit premature.
Yutao Sun is a professor with the Faculty of Management and Economics, Dalian University of Technology and Cong Cao is a professor with the Faculty of Humanities and Social Sciences, University of Nottingham Ningbo China.