The Source of Innovation in China

Highly Innovative Systems

Y. Zhang, Y. Zhou, Y. Zhang, Y. Zhou

• Publisher: Palgrave Macmillan
• Year: 2015
• Print ISBN: 9781137335050
• eBook ISBN: 9781137335067
• Topic: Betriebswirtschaft
• Subtopic: Unternehmensstrategie

Given the most popular understanding of Chinese comparative advantage is their low labour cost, The Source of Innovation in China argues the fundamental source for Chinese economic growth is its innovation. Based on case studies and surveys collected from 600 firms, this book describes competitive advantages of successful Chinese enterprises.

1

The Rise of China: Innovation or Cost Leader

Introduction

Years ago, when Lee Kuan Yew, the founding father of modern Singapore, was asked in a conference in Barcelona about the innovation of China; he told this story: Lee was then meeting the president of Siemens and he launched the question of which country was more innovative: India or China? Most people, including the Chinese present, were expecting the answer to be India. However, to Lee Kuan Yew’s surprise, the reply was China. Why? The explanation was simple: Siemens had Research and Development (R&D) Centers in both India and China. When a problem was sent to two centers for solution, both came back with results before established deadline. However, the R&D center in China provided several alternatives in addition to the result requested.

Over recent decades, China has become well known as world workshop or manufacture center. At the same time, its innovation capability is often questioned in the Western, with a special counter-emphasis on its low-cost model. On the one hand, academics and practitioners are constantly surprised with its average two-digit GDP annual growth rate. Even though a recently announced annual growth rate is only around 7 or 8 percent, it is still impressive given the globalized economic crisis effects: most Western countries were still in recession or struggling to aspire to a growth rate of 2 or 3 percent. On the other hand, China continues to receive criticism on its economic development model. Basically it refers to low-labor-cost based competitive model, in addition to huge consumption of nature resources and raw materials. Both environmental and human rights issues have been a big concern for the sustainable development of the Chinese economy.

While both environmental and human right issues have a profound impact and deserve their own merits for discussion, in this present book we focus on the innovation as the source of China’s sustainable economic development, and the source of China’s innovation per se. That is, there is a less studied and observed innovation issue in Chinese enterprises beyond its low cost. Few have observed that what lies behind the huge and impressive numbers are strategic innovation based on both hard-working and creative business model combined with modern technology.

The competitive cost of Chinese products and services has for a long time been an important part of the strategic advantages of Chinese enterprises. This is unquestionably a factor in its ongoing advantage in global business, since no house can be built on sand. Similarly, innovative enterprises need to focus on their pricing structure in order to be profitable.

Our principal argument for the innovativeness of Chinese enterprises is that in reality if the advantages of low cost were to have been the sole source of Chinese firms’ development, then the Chinese economy as a whole, reflecting their business dynamics, could have not sustained its development for so many decades – with a high probability of continuing to grow in the coming decades. The data shows that emerging economies such as India, Vietnam, Mexico and Turkey have already replaced China as favored lower-cost production locations. Some Chinese multinationals are even relocating some of their production centers in these emerging economies to reduce production cost.

Thus, the decisions to make continuous foreign direct investment to build up production centers in China are based on more than just low cost. So it could be argued that the principal motivation for foreign investment is the pursuit of the huge Chinese market potential. Without denying that fact, some Western investors also illustrate that even though they are not entering into Chinese market in the short term, their factory in China provides rapid innovation outcomes for their global market, in terms of both quality and volume.

On the other hand, the increasing phenomenon of Chinese enterprises moving abroad raises an additional question about the aforesaid advantage to Chinese companies being based on low cost. If the latter is true, then Chinese enterprises would immediately lose their advantage once they had left their Chinese production centers. Similarly, China is open to foreign investors building manufacturing centers, so in theory all firms, whether Chinese or foreign, have the same chance of accessing cheap labor in China.

Purpose of the book

The purpose of this book is to clarify these doubts as to whether Chinese enterprises are innovative, and having done so, to define these sources of Chinese innovation. For instance, institutional factors have always been regarded as playing a relevant role in Chinese transitional economic development and its innovation capability. Fuller (2009: 61) acknowledges the effort of institutional factors when evaluating and understanding the institutions and practices of National Innovation System (NIS) in China. As China is transitioning from a socialist planned economy and a developing economy, the role of its institutions is more relevant than any other economic context.

Nevertheless, the focus of our argument on the sources of innovation in China is not so much on governmental support as on the entrepreneurial activities of indigenous Chinese firms. With the recent surge of interest in the innovation phenomenon in China, with literature dedicated to that issue (e.g. Xie and Wu, 2003; Liu and White, 2001; Gu, 1999), studies have been done on the different underlying factors, referring both to developments in technology and to the other underlying elements that promote innovation. For instance, previous works have pointed out the importance of institutions to encourage learning (e.g. Bell and Pavitt, 1992), as well as the importance of learning in learning to enhance positions of capability in the global production network (e.g. Liu and Zhang, 2014). In order to understand the innovation phenomenon in China, a wide range of factors, from the national/regional innovation system to networking and social capital, have been explored. We also attempt to expose the hidden factors such as human culture: for instance, how do learning and knowledge transfer occur? How do human resources play their role in innovation and creativity? What does multinationalization mean for Chinese innovation?

Innovation is often regarded as technological development (e.g. Sun, 2002) rather than anything else, so the term is often confused with “invention.” However, in business and management, innovation is much more broadly defined, with a range of classifications. For instance, the product, process and strategy type of innovation is defined by Grant (2013). But because the focus is usually on technology, innovation is often narrowly defined in literature, research and the policymaking process. While technology is unquestionably relevant in the innovation process, other factors such as culture and knowledge also determine its success, but have attracted much less study as a source of innovation.

With this purpose in mind, we go beyond the technological type of source of innovation in Chinese firms. Fuller (2009: 59) defines “contributions to technological development” in China as “using local Chinese human resources to create products that are closer to the international technological frontier than those products commonly created in China in the recent past.” The study specifically includes a condition that local human resources must be included, to avoid counting only foreign technological personnel as contributing to technological development in China.

The assumption on which Fuller (2009) implicitly builds the foundation of his hypothesis is that human resources, especially local ones, are essential to the development of technological innovation in China. His logic is based on the point that “without any knowledge-transfer to the local workforce, such operations should not be deemed as contributing technical knowledge to the host economy because the knowledge leaves the host economy as soon as the foreign technical personnel depart” (p. 59). Though the principal determinant for innovation is still technology, the study recognizes other variables such as human resources, as knowledge workers influence the performance of innovation. In previous decades, overseas Chinese returnees were deemed as playing an important role in many new technology operations (Saxenian, 2002). Nonetheless, in the industries studied by Fuller (2009), especially in the integrated circuit design industry in China, returnees or foreign technical personnel were a minority among the technical staff of the new technology firms.

Though the definition of Fuller (2009) regarding innovation and technological development is arguable, his finding may be limited by the specific industry context (the IC industry is principally dominated by Taiwanese firms; Liu and Zhang, 2014). The fact that local human resources sustain the industrial innovational system illustrates to certain extent the reality of innovation in China. Rather than innovation arising from imported technology, as is usually believed, it is in fact the domestically generated broadly defined innovation which has been the principal source of the success of Chinese enterprises.

Furthermore, technological innovation is usually measured by patent registration. But even though China has gained a reputation for the impressive number of patents it has registered in recent years, in this book we refer more the concept of innovation in a broad sense. That is, we define innovation as not only technological innovation, but also to include process innovation and strategy innovation. It is the last in particular that we would like to emphasize, since it is the springboard for Chinese enterprises to become highly competitive in the global market. A combination of different types of innovation is what leading Chinese firms plan to use in order to position themselves to advantage in the current hyper-aggressive, borderless market, and to be prepared for future strategic moves.

Our hypothesis on the rapid economic development in China is based on its innovation system, which is a consequence of an exemplary combination of the paradoxical factors of high technology and low cost. In the 1970s and 1980s, as Japanese firms emerged into the global market, the management of the best enterprises (such as Toyota) were able to handle these contradictory issues. They managed to keep their overall operational costs low in order to provide tempting offers to clients; yet they also supplied high quality goods and services, satisfying their customers’ needs. Do Chinese enterprises simply copy the Japanese strategy, managing to transfer knowledge from the outside and then internally creating its own? Are there any features of Chinese enterprises that are distinct from Japanese ones, despite the fact that both are from Eastern Asia, which from a Western viewpoint pertains to the same cultural bloc? (Kase et al., 2011)

Theoretical foundations

One of the principal theses of this book is that the underpinning element sustaining Chinese economic development is business entrepreneurship and the highly innovative systems surrounding it. Based on our extensive research work over recent years, we propose that the innovation of Chinese enterprises has been based not only on technology but also, essentially, on strategy and the business model. In addition, we challenge the common understanding of the way in which Chinese culture impedes innovation, we argue the contrasting cultural effects on innovation, and we propose that there is innovativeness in the embedded cultural roots of Chinese society. Examining the network characteristics along with Chinese economic evolution, we also distinguish three types of network-based innovation: a government-initiated innovation network, a twin-driven institution–market innovation network, and digital-era network-centric innovation. Thus, we come to the point that the innovative capability of Chinese enterprises centralizes on its people by proposing a people-centric innovation model through strategic human resource management. Finally, we discuss the challenges that Chinese enterprises face when they multinationalize overseas, and how they can continue innovating while overcoming these challenges.

Since human resources such as knowledge workers are part of the underlying sources of Chinese innovation, we must discuss various aspects of social science such as cultural influences. At Professor Richard Freeman’s Science and Engineering Workforce Project (SEWP) at the National Bureau of Economics Research (NBER), talented workers are intermingled with science and technology. China has made huge efforts and investment to transform its transitional economy from that of low-cost and large-scale manufacturing to an innovative one. However, can China turn itself into a true innovator? What are the drivers for Chinese innovation, and what is the operational mechanism? These are the basic questions that the book attempts to answer.

We recognize the innovation steps that China has taken along this exploratory and practical path. At the different levels – national, industrial, firm, and individual – everything has been integrated into a new transitional economy of innovation. Throughout the book, we draw attention to highly innovative systems which describe different mechanisms of Chinese innovation practices (see Figure 1.1).

First, as an economy in a profound transition process and undergoing rapid development, the Chinese economic and social system possesses strong tolerance with multiple characteristics. What underlies the so-called “socialism with Chinese characteristics,” “socialistic market economy,” or “state capitalism” as known in the West, is its core mechanism of a strong government and a big market. These two principal drivers interact with and complement each other, together playing an important role in several aspects of the social economy, including innovation in industrial economy. Thus, the two drivers of system and market are equally important factors that jointly enhance the innovation capability of the enterprises.

Figure 1.1 Integrative framework of highly innovative systems in China

As far as the system drivers are concerned, it is the explicit policy combined with the implicit cultural root that together influence innovation in China. In terms of policy, in 2006 the Chinese government issued its National Long Term Science and Technology Development Plan (2006–2020). Since then, the government has prioritized a national strategy for China to become an innovative country within 20 years.

Innovation has been the driving force at the national, regional, industrial and firm levels. The regional innovation system means that industrial clusters have been developed rapidly, represented by economic and technological development zones and science parks. This not only provides healthy promotion for firms’ innovation in the policy environment, but also...

Table of contents

• Cover
• Title
• 1  The Rise of China: Innovation or Cost Leader
• 2  Chinese Innovation in Product, Process and Strategy: The End of Low Cost Era?
• 3  Chinese Culture and Value: Enhancing or Impeding Innovation?
• 4  Network-based Innovation in China: Typology along with Economic Evolution
• 5  People-centric Innovation: Strategic HR Management and Innovation
• 6  Innovation Challenges When Multinationalizing: The Source of Innovation
• Index