Innovation in China: Out of the Master’s Shadow

15 September, 2016 / Articles

“THE Master said, ‘I transmit rather than innovate. I trust in and love the ancient ways’.” Those words from Confucius seem to offer a cultural explanation for why China is an innovation laggard. Many Chinese companies seem to be copycats, unable or unwilling to come up with world-beating ideas, products and services of their own. The Chinese legal system also looks rigged against foreign inventors. A cultural deference to authority and an educational system that emphasises rote-learning complete the stereotype.

It is true that markets in Chinese cities offer knock-off Gucci handbags, Peppa Pig toys and Apple gizmos. Jack Ma, boss of Alibaba, an e-commerce giant accused of tolerating counterfeits on its websites, sparked an outcry in June by claiming: “Fake products today are of better quality and better price than the real names.” Beijing’s patent office recently ordered Apple to stop selling some versions of its iPhone in Beijing, which allegedly copy designs belonging to an obscure Chinese firm.

Yet there are also signs of an imaginative China emerging. In fields from gene editing to big-data analytics to 5G mobile telephony, Chinese experts are now among the world’s best. Sunway TaihuLight (pictured), a supercomputer made using only local computer chips, is five times as fast as the best American rival. Fleet-footed and frugal Chinese firms are coming up with business-model innovations too. WeChat, a social-media and payments platform with 700m monthly active users, is more useful and fun than Facebook, Twitter and WhatsApp put together.

Most Chinese companies are still plodders, just as many firms in America’s rustbelt or deep South are hardly innovation icons. But it is increasingly clear that a vanguard of world-class firms is emerging in the Middle Kingdom, and two new books explain why and how the best of China Inc is learning to innovate.

Douglas Fuller is an academic at Zhejiang University, in a part of China’s eastern coast that has for centuries produced the country’s greatest entrepreneurs (including Mr Ma). In a new book, Mr Fuller is scathing in his indictment of state capitalism. By showering state-owned enterprises and “state-favoured” private firms with soft money and protecting them from market discipline and bankruptcy, the state removes any incentive for them to upgrade their technological capacity.

So how does he explain the rise of outstanding Chinese firms? Mr Fuller believes that “ethnic Chinese, foreign-invested firms…are the hidden dragons driving China’s technological development.” He argues that the best ones are only partly Chinese, with hybrid structures that allow access to capital and talent from outside the mainland. Local startups often lack the privileged access to financing enjoyed by established Chinese firms, and so are forced to raise money from foreign venture capitalists. Because international investors and regulators demand financial discipline and good governance, these firms have no choice but to compete at the level of top global companies. Such firms also boast talent from Hong Kong or Taiwan, who blend knowledge of Chinese culture with global sophistication.

Producing a handful of stars is one thing, but could the Chinese market really become the world’s innovation hotbed? That bold thesis is put forward by George Yip and Bruce McKern, academics affiliated with the China Europe International Business School in Shanghai, in their new book. They show how technological disruptions, business-model innovations and the world’s most eager customers are coming together in this market to produce agile and inventive firms.

Though their arguments are stretched thin at times, the authors are persuasive when arguing that the Chinese market accelerates innovation. Consumers are quick to adopt new trends and are digital sophisticates. Unlike those in established markets, they are quite forgiving of mistakes, which lets firms experiment, fail and learn quickly. The domestic market, with both a super-rich elite and a big bottom of the pyramid, is a useful bellwether of global trends. And the huge diversity of the continental-scale country forces firms to adapt nimbly. Messrs Yip and McKern call it “the world’s biggest Petri dish for breeding world-class competitors”.

Fine, but what about the thorny problem of intellectual property (IP)? The authors insist the government is getting serious about protecting it, pointing to special IP courts in big cities with technically trained judges and staff. Apple is appealing against the iPhone decision by Beijing’s patent office, and continues to sell its phones in China. Surprisingly, Shanghai’s government has just ordered Han City, a multi-storey mall overflowing with counterfeits on the city’s main shopping promenade, to be shut down. China’s leadership also vows to “strive to build an IP power, an innovative country, and a well-off society”. If it does so, surely even the Master would approve.

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