By Benjamin A Shobert
The United States viewed Japan as a copycat until Japan proved it was more than that. America and Japan viewed South Korea as yet another Asian imitator until South Korea proved it was capable of creating brands and exporting technology rich products.
The US, Japan and South Korea today view China as a source of low-cost labor and as a country that until very recently was culturally incapable of innovating. Now, multinationals from developed economies are coming to recognize that China’s innovative capacity, while admittedly very niche-specific and not without its own limitations, is growing.
This increasing capability is no accident; while some of China’s evolving innovative bandwidth is the organic result of its industries racing to compete as their Western counterparts try to outdistance them through new products and commercialized
In 2011, President Hu Jintao spoke at the Chinese Communist Party's (CCP) 90th Anniversary celebration. Among the main thrusts of his speech was that China's version of Marxism and innovation were not only compatible with one another, but that innovation could be leveraged in unique and valuable ways through China's socialist government.
Western opinion has largely greeted China's early attempts at innovation with skepticism. In part this is because China's largest companies have disproportionately enjoyed success through exports of low technology, high labor content products. Those familiar with China's culture and in particular its educational system are quick to point to the challenges a country with strong collective sensibilities will have when trying to encourage outliers to voice dissent, think creatively, and innovate.
Yet, throughout China, companies such as Tsing Capital and Chrysalix Venture Capital are building successful venture capital funds built around Chinese entrepreneurs who have ideas of their own, whose initial commercial success is likely to be wholly within China, but whose concepts represent a potential next wave of innovative technologies that could impact the world at large.
Many of these ideas challenge the conventional wisdom that China is forever caught in the "copy" paradigm. Policy makers are understandably also interested in this, in large part because as China's ability to innovate grows, its economic rise will begin to take on a new flavor, and one that could potentially challenge the economies of the West in unprecedented ways.
The US believes not only that its ability to innovate has been key to its economic success, but also that the government's role in fostering innovation has been light handed. This orthodoxy is obviously strained when China's economic planning is evaluated, given the heavy handed and central role Beijing plays in fostering early technologies and nascent industries.
While America wants to understand China's innovative capabilities to monitor the evolution of China's industries, America also is being forced to evaluate whether the dominant role the Chinese government plays is actually benefiting innovation, pioneering technological development, and opening new industries. If so, it is yet another point that American politics seems unable to absorb about the unique approach China has developed.
Last week, the congressionally sponsored US-China Economic and Security Review Commission (USCC) held a hearing to discuss the role China's government plays in creating an environment where innovation can occur within the country. Carte Goodwin, the former Democratic Senator from West Virginia and now a USCC Commissioner, opened the hearing by saying, "China and the United States have taken different approaches to developing a capacity for innovation. China relies on central government planning, passed down to the provinces and to China's large state-owned and state-controlled enterprises."
As Goodwin went on to elaborate, in his opinion this is in marked difference to the American model: "The United States has traditionally relied more on the efforts of individual scientists, engineers, inventors, and entrepreneurs, supplemented by government funding, particularly for basic research ... The history of American innovation was written as collaboration between government and private industry."
Goodwin's assertion is not without critics, who would assert that many of the technologies Goodwin points out in his opening statement (radio, radar, GPS) were the direct results of large investments by the American government. What distinguishes those like Goodwin from others who see a more direct involvement by the American government in early industries is the timing and ongoing role Washington played as technologies moved out of the pure science stage and into commercialized opportunities.
In this respect, the Chinese model is different in that it puts forward a more elaborate and ongoing role for the central government long after the science has been validated. For many new technologies, the government's hand will push the idea along until it finds a home in one of the country's many state-owned enterprises (SOE).
Dan Breznitz, author of the book Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China is one of the world's leading experts on how governments approach the formulation of national industrial policies. He is particularly interested in how various countries pick a particular industry to focus on, and once they have done so, how they create a domestic framework that encourages innovation.
His most recent book is a deeper exploration of what China is attempting to do and where its particular brand of innovation is most likely to be successful.
Called to testify at last week's USCC hearing, Breznitz put forward his belief that China's innovative capabilities, while admittedly growing, were still focused on what he called "process, or incremental, innovation."
He added, "Despite the long-term intentions of, and heavy investment by, the Chinese central government developing 'indigenous innovation,' China's true innovational competitive edge is mastering the art of second generation innovation."
Breznitz sees this second generation innovation being focused on taking existing ideas and innovating in relation to the process by which they are delivered. This more incremental approach includes, as he sees it, "the mixing of established technologies and products to come up with new solutions, and the science of organizational, incremental, and process innovation."
These are certainly capabilities that could well serve as the foundation for future competition with the West in more sophisticated markets, but Breznitz sees that as some ways off - "At the same time, 'core' technologies and novel product innovations are still rare and difficult to achieve in China."
Breznitz's idea offers one possible explanation as to why China's earliest efforts to break out of its low-cost manufacturing status have been in industrial versus consumer areas. In the latter, insights into consumer behavior and brand building are the only ways to out compete the likes of Sony or Apple. In contrast to this, industrial markets offer the potential for Chinese brands to more easily move up the value chain and, to Breznitz's point, they are also sectors where China's know-how runs the deepest.
Richard Suttmeier, professor of political science at the University of Oregon, pointed out during last week's USCC meeting that China's ability to innovate is, in part at least, emblematic of its political problems. As he said, "in political terms, the strong belief in state directed, top-down innovation biases the innovation system away from what could be more productive bottom-up approaches, and an information culture which privileges political control of information as a default assumption, also imposes constraints on the innovation system."
Will China's approach work? Suttmeier acknowledged the difficulties inherent in making this occur, while also leaving open the possibility that China's success thus far has been in its ability to walk between two worlds. He added, "Certainly, by Western assumptions about innovation, China seems to be trying to 'square the circle' by simultaneously calling for the creation of an 'innovative society' while also seeking to enforce the tenets of a 'harmonious society' by authoritarian means."
China's many critics have long held to certain beliefs about the country, one of which is its inability to innovate, as signs of deeper more systemic problems. Yet, if China's heavy-handed and centrally planned approach to fostering a more innovative business community actually works, it will be yet another situation where Beijing has proven it can successfully bridge the gap between accepted practices in the West and its own legacy issues.
Conversely, should China be unable to develop a meaningful innovative capacity - perhaps even one greater in scope and deeper in function than the process innovation Breznitz points out - it may well be one of the early signs that China's economic growth has gone as far as it can until deeper cultural and political issues are resolved.
Benjamin A. Shobert is the Managing Director of Rubicon Strategy Group, a consulting firm specialized in strategy analysis for companies looking to enter emerging economies.