Forbes | What Drives China’s Innovation?

Author: Edward Tse
Mar 8, 2016 @ 08:25 PM

Is China capable of innovating? This is a controversial question. Plenty of people, especially those in the West are doubtful of China’s innovative capabilities. But it’s not just outside of China where you find non-believers, many Chinese also mock the concept of “Chinese innovation”. To be fair, China is famous (or should I say infamous) as the “Empire of Shanzhai” (counterfeits).

In May, 2015, the U.S. Vice President Joe Biden gave aspeech to a group of cadets at the US Air Force Academy where he said, “… I challenge you, name me one innovative project, one innovative change, oneinnovative product that has come out of China.” Two months earlier, the Harvard Business Review published an article entitled “Why China Can’t Innovate”. The authors, Regina M. Abrami, a Wharton Business School professor, F. Warren McFarlan and William C. Kirby, two professors from Harvard Business School stated, “Today, though, many believe that the West is home to creative business thinkers and innovators, and that China is largely a land of rule-bound rotelearners—a place where R&D is diligently pursued but breakthroughs are rare.” Former Hewlett Packard’s CEO, Carly Fiorina, echoed this view in a bookshe published last year, “Although the Chinese are a gifted people, innovation and entrepreneurship are not their strong suits. Their society, as well astheir educational system, is too homogenized and controlled to encourage imagination and risk taking.”

In the spring of 2014, I published in Europe’s World an article entitled “Don’t Belittle the Potential of China’s Innovation”. In this article, I described my perspective on China’s innovation potential. In October, 2015, in the Schumpeter column of The Economist, China was acknowledged as capable of innovation in certain areas. These “certain areas”were referring to China’s capability to create highly adaptive and responsive business model innovations in a fast changing environment. The column’s writer quoted the thesis of my book China’s Disruptors. That was ground breaking because it was the first time ever that mainstream, western media openly recognized China’s innovation capabilities. Recently, more western media are talking about China’s innovation capabilities. Last year, the December edition of Wired published an article entitled “How a Nation of Tech Copycats Transformed into a Hub for Innovation”. The article discussed the large surge in number of young tech entrepreneurs, especially internet entrepreneurs, in China. The cover of Wired’s March issue showed a complete reversal on how the west is now viewing China’s innovation capabilities. Placed beneath the face of Xiaomi founder LeiJun are the headlines, “It’s Time to Copy China. What You Can Learn From Its Most Inventive Startups.” In January, Uber CEO Travis Kalanick gave a talk inB eijing where he forecasted that in the next five years, China’s innovationwill surpass that of Silicon Valley. He also warned his colleagues in Silicon Valley that they need to be aware of this paradigm shift and cannot become complacent. Wired, Travis Kalanick, and The Economist are not marginal players. They all have their fingers on the pulse of global business and technology.Their views on China’s innovation are worth taking note of. So why is China’s innovation apparently taking a giant leap forward forcing industry and opinion leaders to finally taking note. I think it’s because of the following reasons:

“Why not me?”: At the end of the 1970s during the onset of China’s era of reform and opening to the world, the Chinese discovered that not only was their economy backwards and undeveloped compared to the economies of the developed nations,but the gap between the Chinese economy and those economies was vast. For a nation that had believed they were living in an utopian state stemming from acivilization with a rich history going back thousands of years, this dose of reality created a sense of inferiority and complete shock. Against this background spurred a new sense of purpose among Chinese entrepreneurs. The desire to strive for success and show the world that they too can succeed. They thought to themselves, if Li Ka-shing and Bill Gates can become men of great wealth, why not me? Although it’s been 40 years since the opening of China, this question of “Why not me?” is still the key engine that drives the Chinese entrepreneurial spirit.

Market opportunity provided by the state economy: For a very long time, China’seconomy was dominated by the state-owned enterprises (SOEs). SOEs have theirrole to play in the Chinese economy, but they also have shortcomings. In a market defined by fast changes, intense competition, and need for innovation,SOEs are slow to react. Many innovative companies have taken advantage of this market gap and have seen extra ordinary growth.

Transformative and intense competition: China’s process of shifting from a planned economy toa market economy is gradual. It’s taken several decades already and wouldlikely take another couple of decades more, if ever to completely transition.During this shift over time, a range of sectors were opened up. The allure ofthe China market’s massive scale continues to attract numerous players and ignites intense competition. The hyper competition spurs companies to enhance their competitiveness and innovation is the best way for companies to stay ahead.

Chinese society’s pain points: In Chinese society’s process of transformation, painpoints that had been hidden from sight are increasingly being exposed out in the open. While these pain points are part of the imperfect environment, they provide entrepreneurs opportunities for innovation. Many innovations came about for the sake of solving societal ills or easing the pressure created by societal pain points.

The rise of mobile internet: This of course is a key driving factor. With the internet, smart devices, and social media becoming a core part of the everyday life of Chinese consumers, this provides tremendous disruption opportunities forinnovators and entrepreneurs alike.

The massive scale of the Chinese market: The size and fast changing nature of China’s market allow companies to rapidly scale up. At the same time, it provides plenty of room for innovators and entrepreneurs to learn via trial anderror. Leading Chinese companies are also benefitting from high valuations that are based on favorable forward looking expectations of China’s market potential. This gives them the needed capital ammunition to support their growth.

Capital resources: Over the past 20 years of China’s development, many venture capital firms and angel investors have benefitted from exceptional returns from theirinvestments in China. Regardless of whether these investors came from abroad or were homegrown, Chinese companies have also greatly benefited from the vastsums of capital these investors have provided over time.

China has entered new era. A new generation of entrepreneurs defined by their youth and exponential growth nature has generated new energy and vigor into the country. Of course, in the process of innovation and entrepreneurial pursuits, only a few would succeed or succeed at the first try. Perhaps incertain situations the government would interfere. But as long as these entrepreneurs do not break laws or defraud consumers, China’s society now allows and welcomes trials and errors. This era — the era of China’s entrepreneurs — is bringing forth real ground breaking times in China’s long history.

About the Author:

Edward Tse is founder & CEO, Gao Feng Advisory Company, a global strategy and management consulting firm with roots in China. A pioneer in China’s management consulting profession, he led the Greater China operations for two major international management consulting firms for 20 years and is widely known as China’s leading global business strategist. He is author of The China Strategy (2010) and China’s Disruptors (2015).