Magazine Summer 2014 Research Feature

Innovation Lessons From China

Foreign businesspeople complain that China doesn’t play fair. But anybody involved in international business should treat China not only as a place to sell but also as a place to learn.

Edward S. Steinfeld and Troels Beltoft Reading Time: 19 min 

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In China, “no brand” handset manufacturers target price-sensitive customers at the low end of the market, which is booming. The idea is to supply cheap, attractive devices with basic functionality.

Despite China’s long and established demand for high-technology products, many leading global companies have become increasingly wary about operating in the Chinese market. They see unfair competitive practices, discriminatory regulation and intellectual property theft — all ostensibly condoned by the government — as part and parcel of the Chinese experience.1 Foreign businesspeople today routinely complain that in exchange for market access, they are required to transfer technology to favored Chinese competitors. And once such entities have the technology, they — in collusion with the government — will endeavor to seize market share not just in China but also in other markets.

We don’t deny that some of these claims are valid. After all, the Chinese government openly acknowledges its desire to establish companies that are market leaders and to do so, at least in part, through technology transfer. However, we see a different side of China, one that requires foreign companies to remain actively engaged.

Our research describes unique forms of China-based technology innovation, mastery of which is becoming increasingly indispensible for any company aiming to succeed in the global market. (See “About the Research.”) Anybody involved in international business needs to treat China not just as a place to sell, but also as a place to learn. In our view, companies need to lean in rather than pull back.

Innovation “China Style”

China today may not yet be the place to go for path-breaking R&D or radical new invention. But it’s becoming the best place to go if you want to learn how to make ideas commercially viable. Such knowledge — whether it involves product design for low-cost manufacturing, novel approaches to component sourcing or ways to accelerate speed to market — frequently lies at the heart of commercial innovation. We see innovation as linking invention — the origination of new ideas — with commercialization, the translation of new ideas into actual products or services that can command value.2 Each element requires creativity and distinct types of knowledge.

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About the Authors

Edward S. Steinfeld is a professor of political science and the Dean’s Professor of China Studies at Brown University in Providence, Rhode Island. Troels Beltoft is CEO and managing partner of Beltoft & Company in Aarhus, Denmark.

References

1. GE CEO Jeffrey Immelt’s comments in 2010 typified this view. See G. Dinmore and G. Dyer, “GE Chief Accuses China of ‘Hostility,’ ” Financial Times, July 2, 2010, sec. 1, p. 1.

2. For comparable views of innovation, see R. Henderson and K. Clark, “Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms,” Administrative Science Quarterly 35, no. 1 (March 1990): 9-30; and W. Aulet, “Disciplined Entrepreneurship” (New York: Wiley, 2013).

3. Comparable phenomena have been observed in earlier cases of East Asian development. For example, in the case of South Korea, see A. Amsden, “Asia’s Next Giant: South Korea and Late Industrialization” (Oxford, U.K.: Oxford University Press, 1989); and L. Kim, “Imitation to Innovation: The Dynamics of Korea’s Technological Learning” (Boston, Massachusetts: Harvard University Press, 1997).

4. Interview, Beijing, June 2013.

5. Scholars have observed comparable patterns in the Chinese automobile and construction equipment sectors. See L. Brandt and E. Thun, “The Fight for the Middle: Upgrading, Competition, and Industrial Development in China,” World Development 38, no. 11 (November 2010): 1555-1574.

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Comments (2)
Ken Zimmerman
Bud Taylor asserts that "...innovating management is the key to commercializing ideas."  A problem, among many with this view and the views on Chinese industrialization and innovation presented by the MIT SMR is that both omit, skip over, deny some of the fundamental factors upon which Chinese "innovation" and "industrialization" are based.  These are slave labor, slave wages, totalitarian government, and brutal (very brutal) repression of basic democracy and open and universal decision making and economic life.  Such tendencies also existed and to some extent still exist in US Industrialization and capitalist economics.  Remember until WWII it was common for the US Army and local national guard to be used to break union strikes with guns and bayonets. In fact many historians would argue only the pressing needs of the War ended this practice.  So China is simply a bit more extreme case of what's happened already in the history of the US.  Some would say it's a usual part of industrialization and capitalist economics.  I won't comment on this contention.  But it would be naive and simplistic for anyone, including MIT SMR to argue that its not part of the shifts in Chinese economic life and so called "industrial innovation."  Thus it would dangerous and foolish to hold up China's actions as a model for the US or other western economies.  We in the west have a lot to learn.  But not from the current regime in China.
Bud Taylor
This is a terrific article.  It puts a positive light on what used to be known as "second-in" innovation (I spent over two years in South Korea observing this).  It explains that innovating management is the key to commercializing ideas.