China's efforts to promote higher levels of innovation

1. Innovation in China
Winner takes all
Prof Seamus Grimes
Centre for Innovation and Structural Change,
National University of Ireland, Galway

2. Innovation in the Chinese
context
O The political economy of innovation
O Different views of the world, of capitalism,
the market and the state
O An increasingly powerful one-party state
aggressively bargaining its position with
western technological hegemony (until now)
O National prestige, national security and
geopolitical role

3. Global innovation networks
O Not territorially bounded
O Knowledge flows within networks of key
nodes like Silicon Valley
O Multinationals seek to expand market share
in China using local talent, but retaining
benefits within the organisation
O China in a strong position to acquire western
core technology in exchange
O A clash of two different ideological models

4. Objectives of the 5 Year Plan
O Breaking the monopoly of MNCs and
strengthening national security (Liu, 2006)
O Security and national power – China‟s self
image and conception of its role in the
international system (Breznitz & Murphree,
2011)
O Politics is the key to understanding how
things work in China

5. 2 main threats to the Chinese innovation system
Breznitz & Murphree (2011)
The technology concerns and
the political-economic ideology
of the government which views
mastery of novel-product
innovation and new technology
creation as necessary for
wealth and economic security.

6. McKinsey (2011)
The Chinese endgame is clearly
the transfer of intellectual property
and know-how to allow Chinese
companies to compete globally not
only in China but on the home turf
of MNCs.

7. Ze Zhang, the vice president of Beijing
University of Technology
Everyone there was talking constantly of
innovation. But I think we are only just
beginning to understand what this word
really means. It’s like gears grinding
against one another. There’s a lot of
tension between the push for innovation
and the capacity of the political system to
deliver it.

8. Debate in the Party School?
In private, they talk very honestly,
with lots of debate… They are good
people, very open to ideas. Even
so, you still have to play by the
rules of the game. You have to
make points in relation to Party
doctrine.

9. A balanced strategy
(The World Bank, 2009)
O Job creation for 780m of whom 80% have
no higher than junior secondary education
O Clarity of the objective of innovation?
O A means to an end: sustaining economic
development
O Need to resist temptation of: being first,
being high-tech, and being indigenous
O A balance between technology creation and
technology adaptation and adoption

10. A leading technology policy
official (2007)
„[t]he majority of the market is
controlled by foreign companies, most
core technology relies on imports, the
situation is extremely grave as we are
further pressured by developed
countries who use blockades and
technology controls – if we are not able
to solve these problems we will forever
be under the control of others‟

11. % of retail value paid as royalties to patent
holders by Chinese firms (MoST , 2004)
O DVD players: 25-33%
O PCs: 30%
O Mobile phones: 20-40%
O CNC machine tools: 20-40%
O Much of the Chinese value share (10-
15%) is captured by Asian CMs and
MNCs

12. A dualism
(World Bank, 2009)
It‟s hard to reconcile the lack of innovation in
Chinese industry with the stories of rapidly
rising Chinese innovators such as Huawei.
Indeed, Chinese industry today is a
combination of a small number of innovators
together with a large number of producers who
are engaged in „manufacturing without
innovation‟.

13. ‘By and large, firms in China are weak in
innovation’
(Gu et al, 2009)
O Few have own brands
O organisational learning not encouraged
O Passive, imitative and minimalist strategies
O Tried and tested technologies
O Avoiding testing and experimenting as much
as possible
O A hierarchical culture with little horizontal
communication or networking

14. ‘weak social capital’
(Gu et al, 2009)
O Educational and social capital (values,
norms and trust shared by social
community) not marginal, but vital
O For interactive learning
O A prerequisite for absorbing, diffusing and
using knowledge in the innovation system
O Necessary for creating new ideas and the
economic value

15. Significant weaknesses in practice of corporate
governance
(Opper and Schwaag Serger, 2008)
O Far-reaching judicial reform yes, but in
practice this is a laggard of institutional
development
O The need for an honest and functioning
judiciary system
O Shapes relationships within and between
firms
O Has a significant impact on innovation
performance in business

16. Microsoft R&D 2009
„We are not sure that they are
ready to do the core product work.
Four years of experience has
shown that different teams make
grand promises but fail to deliver.
This creates major issues for
developing trust with HQ. We need
to build up expertise‟.

17. Microsoft R&D 2011
„All MNCs are in mixed mode right now. We
want to make a big impact in China but we are
afraid of entering the market. They don‟t know
exactly what to do. So we take the middle
ground and say we will put some R&D in
China, but are not sure what to do with it. Let‟s
just test the water. Companies are at different
stages, with some more advanced than others
in R&D. Microsoft is somewhere in the
middle‟.

18. US networking MNC 2011
„I don‟t think at this point any MNC would trust the IPR
here. I don‟t think they would willingly bring R&D into
China…that could be 10 years away. MNCs will
dominate technology globally, but I don‟t think they will
have much traction in China. Because of the nature of
China‟s legal system, no MNC CEO would put his
reputation on the line for China. They will try to build the
China product in China, knowing that the IP is likely to
be lost. They are fairly confident that Chinese
companies won‟t be able to use this technology to sell
into the West..‟

19. IPR, talent turnover and core
R&D
O Increasingly difficult for MNCs to retain top
talent after a few years experience
O Engineers want to be managers
O Want to be involved in cutting edge work
O MNCs fearful of developing core R&D
because of IPR issues
O The challenge of growing junior talent into
management talent

20. Huawei's research and development centre
in Shenzhen

21. Humble Huawei (2007)
Nonetheless, we at Huawei should be well aware that
we still have a lot of catch-up to do in technology. And
we have to admit that our international competition is by
far advanced technologically. This gap is a product of
history. First, with encouragement of the governments,
innovation in developed countries is greatly promoted,
making technology more easily accessible. Second,
while we are still at the early stage of development,
developed countries have already had a large
accumulation of patents. Western suppliers are much
more advanced whether it is the system implementation
rationale or details of technical implementation.

22. the country is largely missing from
semiconductor league tables
(McKinsey, 2011)
non-Chinese players (for example, Samsung,
Intel, and Hynix) earn 96.3% of all revenues. In
design, foreign players earn 96.1% of
revenues. Even in the silicon segment, 93.0%
of revenues go to non-mainland-Chinese
companies. China has a decent share in only
two areas, back-end manufacturing and
assembly and test, where Chinese companies
earn 28.6% of total segment revenues.

23. Setting unrealistic targets and not
likely to succeed (Ernst, 2011)
O China‟s MIIT: „We will significantly increase
the self-sufficiency ratio to over 70% for
integrated circuits used for information and
national security, and to over 30% for
integrated circuits used in communications
and household appliances‟
O Difficult to see how such an ambitious target
should ever be realised (Ernst, 2011)

24. President Hu Jintao, 9 Jan 2006
„By the end of 2020… China
will achieve more science and
technological breakthroughs of
great world influence,
qualifying it to join the ranks of
the world‟s most innovative
countries.‟

25. There is a growing and
refreshing scepticism among
policy-makers in China about
how much policy and
planning can actually deliver
in relation to innovation…
There’s no longer a simple
dichotomy between top-down
and bottom-up.

26. Learning from earlier failures?
O Government and industry investment in
alternative DVD technologies had largely
negative results
O Implementation of 3G networks held back
because MII insisting on developing TD-
DCHMA
O State interference in China‟s market

27. How long will it take to catch
up? – some views
O „10-15 years to see outcomes: it‟s not just
about pumping investment into R&D‟
O „In less than 15 years; with the help of
Taiwanese management (in China) they
could leapfrog and you could see good
innovation in semiconductors in 5 years.
O You need basic research. You cannot copy
soft competence. The US has a culture and
environment that creates innovation.

28. Harry Shum, Managing Director,
Microsoft Research Asia
When people say to me, ‘How far is
China behind the US in terms of
technology?,’ I say ‘three months if you
don’t count creativity’. If someone at
MIT posts some results, then China can
recreate it in three months. But it takes
longer than that to train and instil
creativity.

29. Reduction in dependence on foreign technology a
means, not an end
(The World Bank, 2009, 20/21)
The government is well advised to encourage
Chinese enterprises to raise their capabilities for
technology creation. But achieving the right
balance between technological independence and
openness means that the optimal level of
independence from foreign technology is not the
highest one but the one that contributes most to
the development of technological capacity and
ultimately to the sustainability of economic
development. It takes the private market to find
out and approach such an optimal level of
technological independence.

30. Economist Intelligence Unit
2011
It has invested vast sums of money in
expensive projects that may not
necessarily have the requisite
supporting “soft” infrastructure in
terms of regulation, human capital
and experience in managing complex,
risky systems.

31. In green industries, where the
government aspires to be a global
leader, massive subsidies have
kick-started production of
everything from wind turbines to
light-emitting diodes (LEDs). Yet,
many wind farms sit idle,
unconnected to the grid. Plenty of
expensive LED-producing
equipment has been imported but
there is a shortage of skilled
engineers to run the machines.

32. The government would do well to accept
a more realistic timeframe for China to
become a high-tech power. By adopting
numerical targets for patent grants, for
instance, the government is essentially
forcing the pace of innovation. China
may have seen a tenfold increase in
patent grants over the last decade and is
catching up with the US in patent
numbers, but the comparability of these
patents in terms of content and quality is
still low. A greater focus on other areas,
such as education reform, will allow for
more organic technological progress with
sturdier foundations.

33. • China‟s export growth will be driven
primarily by demand from non-OECD
countries. Penetration of OECD markets
in high-end manufactures is likely to be
limited, although China will see rapid
increases in market share in non-OECD
markets. Western companies have in
recent years lost significant export
market share in non-OECD markets.
• In a related trend, foreign-invested firms
in China will relinquish their dominant
role in driving China‟s export growth.
Over the coming year, the share of
China‟s exports produced by domestic
companies, currently at 48%, will cross
the halfway mark.

34. China Korea, Rep Singapore Ireland
Score Rank Score Rank Score Rank Score Rank
Global InnovIndex 2011 46.4 29 53.7 16 59.6 3 54.1 13
2009 37 6 5 21
Institutions 51.7 98 77.4 35 90.4 9 91.2 6
Human capital & research 39.9 56 59.9 7 74.7 1 57.8 10
Infrastructure 35.4 33 48.2 6 47.6 9 39.5 23
Market sophistication 54.1 26 61.8 12 78.7 2 65.3 6
Business sophistication 49.3 29 49.8 26 79.1 1 73.8 3
Scientific outputs 52.7 9 53.7 7 48.9 15 51.2 11
Creative outputs 40.9 35 42.2 27 41.4 30 34.2 58
Population (millions) 1,354.1 48.5 4.8 4.6
GDP per capita $ 6,828 27,168.5 50,632.8 41,278
GDP (US$ bns) 4,985.5 832.5 182.2 227.2

35. The Global innovation Index 2011 (INSEAD)
China India Brazil
Score Rank Score Rank Score Rank
Global Innovation Index 2011 46.4 29 34.5 62 37.7 47
2009 37 41 50
Institutions 51.7 98 52.3 94 54.1 87
Human capital & research 39.9 56 26.9 104 33.9 76
Infrastructure 35.4 33 27.7 63 32.2 45
Market sophistication 54.1 26 44.6 45 35.7 80
Business sophistication 49.3 29 30.8 84 41.5 46
Scientific outputs 52.7 9 24.8 60 25.2 58
Creative outputs 40.9 35 40.3 38 46.9 12
Population (millions) 1,354.1 1,214.5 195.4
GDP per capita $ 6,828 3,270.1 10,412
GDP (US$ bns) 4,985.5 1,310.2 1,573.4