What always fascinates me about China as a country is that it appears to be able to achieve whatever it sets out to do. While this ability is understandable in a deterministic activity like infrastructure development, China is well on its way to replicate this feat in a much more open-ended activity like innovation.

China’s Next Strategic Advantage: From Imitation to Innovation, a new book by George Yip and Bruce McKern (MIT Press, 2016), provides a comprehensive account of the contemporary state of innovation in China.

The most striking feature of innovation in China is the sheer quantum of resources that the country invests in research and development (R&D). At $162 billion, this is around 2% of its gross domestic product (GDP). At this level of spending, China is knocking at the door of the advanced economies of the West. Just as a reference point, R&D spending in India has never crossed 1% of GDP.

Only 30% of the R&D spend is attributable to the Chinese government and most of the rest is by business. In India, the ratio is the opposite!

Why do Chinese companies sign into R&D in such a big way? Yip and McKern suggest a three-stage model followed by Chinese companies. In the first stage, they innovated to create “fit-for-purpose" products for the local market. In the second, they used innovation to bring themselves up to world standards. And, in the third, they now strive for global leadership. As in other countries like Japan and Korea whose model China emulated, Chinese companies borrowed, adapted and then improved upon imported technologies across these three stages.

What is striking is how some large Chinese companies have become innovation powerhouses. Two important examples cited in this book are Huawei Technologies Co. Ltd and Haier Inc. Over the last decade, Huawei has become the leader of the telecommunication equipment industry. Over the last 30 years, Haier has evolved from a producer of poor quality products into one of the leading appliance companies of the world.

According to Yip and McKern, innovation in Chinese companies is largely customer- or market-driven. Since there is lots of regional variation, opportunities exist to address multiple niches. Customer needs also change over time, brand loyalty is low and consumers are willing to try out new things. The market is reasonably forgiving, so companies can afford to experiment. It is this customer orientation that has helped Chinese firms compete effectively against multinational companies (MNCs) who have much larger resource endowments. Increasingly, customers want all that MNCs are known for—quality, brand, etc.—but also a Chinese flavour, and a nationalist feel.

Joyoung is a good example of a company that has successfully met local needs. Its flagship product is a soya bean milk maker that combines a blender and rice cooker. This product has enabled it to compete successfully with MNC appliance brands like Philips in the Chinese market. Chinese companies are well known for a high degree of product variety to meet regional and niche needs. This approach extends to international markets.

Yip and McKern see speed and adaptability as major strengths of Chinese companies. They cite the examples of several MNCs (e.g. Best Buy and Walmart Stores Inc.) who lost out in China because they did not adapt to the Chinese market and instead tried to replicate the strategies they used successfully elsewhere. MNCs like Coca-Cola Co. and Procter & Gamble Co. that have appointed a local leadership and adopted the more exploratory approach of Chinese companies have done well.

Within companies, internal innovation processes may not be very strong and big-ticket ideas seem to come from the top management. However, organizations have good execution skills and can translate ideas into successful products and processes.

The Chinese government has played its part in building the innovation ecosystem. Major contributions include large investments in foundation local technologies like high-speed trains and civil aircraft; establishment of high- technology industrial parks; efforts to attract Chinese technical talent back to China; and a major transformation of the Chinese higher education system. Universities play a major role in working with Chinese companies in myriad ways.

The protection accorded to intellectual property (IP) is improving in China, which is in sync with the national policy to move towards being a more innovative nation. Though special IP courts have been established, administrative rather than legal measures are the preferred method of dispute resolution. Yet, the authors conclude that the Communist Party will always have the final say.

While I read a book such as this one on China, I can’t help making comparisons to India.

Why don’t we have a company like Huawei? India is such a large market for telecom services, but almost all the equipment used is imported. Huawei’s first product was a PBX system, similar to what the Centre for Development of Telematics developed in the 1980s, yet today it is a $46-billion company.

And, if not a Huawei, why not a company like a Haier? India had consumer appliances companies like Voltas, Godrej and BPL—why couldn’t any of them make it to the size and impact of a Haier?

The authors suggest that Chinese companies find it difficult to get the money they need for R&D. But they seem to overcome this challenge and invest money nonetheless. Why do they do it? And why don’t Indian companies?

Is innovation a competitive necessity for Chinese companies? Or is it driven by their aspiration? Do globalized companies spend more on R&D, and can this explain why Chinese firms spend more than Indian companies? How do Chinese companies afford the cost of having such product variety? How do they manage such a complex inventory?

So far at least, Chinese companies have pursued incremental rather than radical innovation. This is true of Indian companies as well. The authors assume that Chinese companies will make a natural transition to radical innovation. Is that inevitable? Or, is there anything specific that Chinese and Indian companies need to do to pursue radical innovation?

Yip and McKern have made a useful addition to the growing literature on innovation in China. They have captured the innovation happening across sectors. Their book also covers what’s happening in the Chinese R&D centres of MNCs. The only dimension that could have been covered better is government’s support for corporate R&D and innovation.

And, most importantly for me as a student of innovation, their book triggers many questions that can be the subject of study. I hope to share the answers to these questions as I find them.

Read an unabridged version on www.foundingfuel.com

Rishikesha T. Krishnan is director and professor of strategic management at the Indian Institute of Management Indore.

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