Innovation
Can China become an innovation hub?
By Professor Seamus Grimes, National University of Ireland, Galway, Ireland
Apr 6, 2011 - 4:47 AM

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From Booz & Company's Global Innovation 1000; See also, INSEAD's Global Innovation Index Report 2009-2010

Professor Seamus Grimes of the Centre for Innovation and Structural Change, National University of Ireland, Galway, is currently based at the Department of Geography, East China Normal University, Shanghai, where he is researching multinational R&D activity.

Can China become an innovation hub? Despite the rhetoric about international cooperation on a wide range of issues, the business world is based more around competition than collaboration, although collaboration is possible also with those you can trust. Large corporation still work with an Intellectual Property (IP)/innovation model that is predominantly proprietary in nature, creating IP within the various far-flung subsidiaries of corporations, but for the corporation and not to be shared with competitors. This reality results in what we can call the ‘political economy of innovation’ in terms of the role of the state in this important area of policy, which often can touch on issues to do with security, defence and military technology.

In the case of China there is considerable distrust and suspicion in the west about China’s long-term political goals internationally, and this creates obstacles for collaboration in the business area. The US and other western countries try to ensure that China does not gain access to technology which could help them militarily. Although very successful Chinese companies such as the telecommunications giant Huawei are already collaborating with a number of western companies in R&D areas, Huawei has been prevented from acquiring US technology companies because of suspicions about its relationship with the Chinese government. Just as in China, where there is considerable government control over sensitive technological areas such as telecommunications and the internet, there is also some degree of paranoia within the US about doing business with China in defence-related technology areas.

These issues also raise questions about the changing nature of the relationship between transnational corporations and the state in this increasingly global era. As western corporations increasingly seek to become global, they often use the convenient rhetoric of becoming a ‘Chinese company’ when seeing to expand in China. The major goal of the modern corporation is to ensure the maximum level of profitability for their shareholders, irrespective of geography. In some cases this will involve seeking to retain as much revenue outside their home country to avoid paying high levels of taxation. In the case of US multinationals operating in the Chinese market, for example, they often only become ‘US companies’ when they feel the need to use the lobbying power of their own government to seek better business conditions within the Chinese market. This has been the case in recent times as China is increasingly determined not to allow foreign companies to continue to dominate technology sectors, as they have done for almost 30 years since the opening of China. China is determined to give local companies every advantage to take on the foreign companies in what is one of the most rapidly growing markets in the world, as other markets are in decline or are badly affected by recession.

While China is making huge strides in recent times in promoting innovation through significant levels of R&D investment, there are on-going misgivings about the rates of return on this investment. Some argue that China is on the cusp of achieving major progress in innovation, while others suggest a more gradual rate of improvement. Like most aspects of life in China, this important area of policy needs to be examined within the Chinese political model based on control and significant state intervention. To  some extent China is seeking to regain its position of superiority after a long period of humiliation, partly ascribed to western imperialistic ambitions. This creates a particular type of business environment in China in which freedom of scope for companies will always have some limitations. The most recent indication of this has been the promotion by the state of ‘indigenous innovation’. One of the consequences of this policy is the use of the huge public procurement market in China to restrict access to products ‘innovated’ in China, which could result in some advantage being given to local companies. China is determined to reduce its dependency on foreign technology from the current estimate of around 50% to 30% in the coming years.

Innovation is not simply about increasing R&D investment, but also about transforming the learning environment to foster creativity, original and critical thinking in education. This is quite a delicate challenge within China’s political climate of creating a ‘harmonious society’ by discouraging any forms of dissent or protest. Within the business environment this can result in a small number of foreign companies, such as Google, deciding relocate some of its activities to Hong Kong in order to have greater flexibility in its operations. It can also result in daily minor irritants associated with China’s famous firewall software monitoring email messages, which may raise questions about client confidentiality for some companies. Doing business in China must involve sensitivity to the state’s ideological priority of political stability, which may result in some forms of constraint in social activity.

Companies who wish to succeed in this increasingly attractive market must be prepared to work within the constraints of an authoritarian state, which does not permit outside agencies to intervene inside China. The state plays a key role in controlling certain restricted sectors such as energy and telecommunication services, in which the main players continue to be State Owned Enterprises (SOEs). While this is not unique to China, many of the Chinese SOEs are seeking to transform themselves from a highly bureaucratic culture to one which is more commercial and innovative. Thus with increased spending in R&D, China is making significant progress in the innovation rankings, but it has still considerable ground to make up before joining more developed regions.

Although policymakers in many states have become increasingly preoccupied with promoting innovation, it is not always clear what the specific nature of that innovation might be in different regions, or the extent to which investment in areas such as R&D bring about major changes in levels of innovation. It has already been mentioned that one of China’s current preoccupations in relation to innovation is to promote ‘indigenous innovation’ in order to reduce dependence on foreign technology. The rise of a number of highly successful Chinese corporations in international markets such as Huawei, Haier and Lenovo, also point to an emphasis in the Chinese approach to innovation based on cost.

Many Chinese companies are regarded as being highly responsive to rapidly changing market conditions, and capable of using existing technology to produce low cost goods suitable for the rapidly growing middle or ‘good enough’ market in China. This phenomenon of cost innovation is creating a certain level of apprehension among foreign multinationals in China who have had a relatively easy market to date, particularly in the high technology sectors. In the past 30 years, foreign multinationals have accumulated considerable wealth from licensing their technology to their subsidiaries in China. But increasingly, Chinese companies such as Huawei in telecommunications have succeeded in taking on the multinationals not only in China but internationally. Some suggest that China may form a key battleground for establishing the new round of global competition, with success in global markets being somewhat related to the ability to compete effectively in China. An important dimension of this rapidly expanding Chinese ‘middle market’, which can be found in middle tier cities, is affordability. Thus companies producing medical CT scan equipment need to produce affordable models for middle tier hospitals. These affordable products can also serve significant markets in less developed regions.

Innovation in the western multinational context has been strongly associated with the dominance of markets by major brand corporations, which invest heavily in R&D to ensure high quality products. In order to remain competitive, many of these corporations have become increasingly globalised through outsourcing and offshoring much of their manufacturing and also significant R&D activity to both China and India. Within the context of the current recession, with China showing continuing high levels of economic growth, some might question whether such offshoring has reached a critical tipping point. The basic rules of capitalism do not change, but the extensive relocation of economic activity towards the East has brought about a very significant shift in the centre of gravity of industrial organization. China’s impressive performance during the current recession also suggests that perhaps this great country has entered a new stage in its development. There are some reasons, therefore, for wondering whether China’s particular brand of capitalism within a framework of strong state intervention may have the capacity to bring about some major changes in the on-going dominant role of major western corporations in the global economy.

During this period of transition when China is seeking to reduce considerably its dependence on foreign technology, foreign companies in China are likely to experience increasing obstacles in their efforts to capture the local market. Perhaps for the first time in history, a ‘developing country’ finds itself in a particularly strong bargaining position in relation to foreign companies. For such corporations to maintain their dominant position in global markets, they must grow with emerging markets and compete effectively in these markets, with China being the most significant market in terms of its size and rapid growth. China’s experience to date with these companies in terms of technology transfer has been disappointing, and there is an evident determination to change the rules of the game in the coming years in order to ensure that China benefits by insisting that products for its market are innovated in China. While corporations use rhetoric about their intentions to develop products for the local market, the underlying multinational model is to use the global resources of the corporation to develop global products. The differences between these two models are likely to create on-going tensions, which are reflected in the reports and reflections of lobby groups representing the interests of these companies. But the companies themselves have little choice but to develop various forms of compromise to ensure their continued growth in China.

The unprecedented power which China undoubtedly possesses in its bargaining with foreign invested firms is based on its size, growth rate and dynamic market. To what extent it is capable of upending in some respect western hegemony of technology and market dominance is a truly fascinating question. China’s push to become a major global innovation hub is strongly grounded in its rapid rate of growth in R&D investment. But innovation must finally result in market dominance, if it is to have a really lasting impact. A relatively small number of Chinese ‘national champion’ companies have already shown a capacity to dominate certain subsectors, while some western technology corporations which dominated the Chinese market during the earlier phase of opening now appear to be languishing to some extent. It should be noted also that corporations from neighbouring Asian countries such as Japan, Korea and Taiwan have also been very successful in the Chinese market. Thus while China faces huge obstacles itself as a technology latecomer to significantly alter the dominant knowledge nodes of western technology, it is making a determined effort to slow down the aggressive advance of western corporations into its lucrative market, and will seek a high price from such corporations in exchange for their future growth prospects in China. 

SEE also Finfacts articles:

Foreign multinationals in China: Faustian bargain to trade technology for access?

China’s drive for ‘Indigenous Innovation' and foreign multinationals


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