“China will not only innovate, but will change the nature of innovation itself”.
This proclamation by Jonathan Woetzel of the McKinsey Global Institute illustrates the power of Chinese innovation: the theme chosen for this year’s Innovation Summit, organised by The Economist Events.
The 2016 summit aimed to give business people and policymakers a better understanding of the opportunities available to companies doing business in China, and to show them how to overcome the specific challenges presented by the country’s economic and political system. Tom Standage, The Economist’s deputy editor, and co-chair Vijay Vaitheeswaran, the newspaper’s China business editor, brought 11 panels of experts from a range of disciplines together on the stage at the JW Marriott Hotel Hong Kong for a full day of discussion and debate. The summit explored how China’s ability to innovate is critical not just for its own economy but also to the growth prospects of the entire world.
China’s industrial sector barely grew in 2015, while services saw stellar growth of 11.9%. The Chinese government wants to recalibrate the economy away from export-oriented manufacturing and towards consumption and services. Lumbering state-owned enterprises may still dominate traditional industries, but the private sector is advancing.
The government’s new five-year plan has set the right incentives for innovation. President Xi Jinping outlined his ambitions for Chinese innovation at the G20 summit in Hangzhou, telling world leaders that China will become an innovation-driven economy by 2020. Innovation will be important to help address global challenges such as climate change and sustainable development. Everywhere, it thrives within ecosystems of collaboration, copying and competition.
China’s historically closed economy had led analysts to think of it as a kind of Galapagos Islands, developing independently of the West, in isolation. Yet it is no longer true that “what happens in China stays in China”. Thanks in part to overseas-Chinese returnees—known as “sea turtles”—bringing ideas back to China, and foreign multinationals such as BP, AstraZeneca and Johnson & Johnson setting up research and development (R&D) functions on the mainland, Chinese industry is blossoming with new ideas. But it faces challenges. Can innovation save China’s economy?
Vijay Vaitheeswaran, an innovation evangelist and member of the World Economic Forum’s global agenda council on the economics of innovation, considers innovation “the most abused word in the English language”. “Show me a company with a chief innovation officer, and I will show you a company that has a problem with innovation,” he later quipped.
For Mr Vaitheeswaran, innovation is “fresh thinking that creates value”. Throughout the day, other experts contributed their own definitions. For some, the word should apply not just to invention, but also to problem-solving; it doesn’t have to be about technology. Paul Nunes, global managing director of the Accenture Institute for High Performance, stressed the importance of innovation in conventional manufacturing, which still plays a critical role in China’s economy. Innovation can happen in management, marketing and the creation of new services. For Markus Steilemann, board member for innovation at Covestro, an innovation is an invention that makes money. “If you can’t convert [an innovation] into commercial success, then it is useless.”
Until recently, China was considered an innovation absorber, mostly copying ideas from elsewhere to roll out in local and foreign markets. The audience understood the concept of shanzhai: the ability of Chinese firms to replicate products and ideas from other markets quickly and cheaply in response to demand. This practice has become outdated, but the skill of agile, flexible production is as important in prototyping and experimenting with new ideas now as it was in copying handbags and smartphones.
Raman Singh, a regional president at Mundipharma, explained how the Chinese pharmaceutical industry has moved beyond cheap “copycat” drugs into high-value treatments and products. Shenzhen, just across the border from Hong Kong, was the home of shanzhai. Now, it is the “workshop of the world”, and a leader in innovative production.
Less is more
Governments have a terrible record at picking winners and losers in industry. Successful innovation hubs from Tel Aviv to Singapore follow formulas. Jason Pontin, editor-in-chief and publisher of the MIT Technology Review, described a world full of abandoned innovation hubs: sad places that failed because they didn’t follow those formulas. State investment is best put to providing a basic platform of innovation infrastructure, including education, and by implementing clear industrial and energy
policies. Governments can help to foster innovation by supporting the rule of law, encouraging flexible labour markets and enforcing contracts and intellectual property protection.
Author Fraser Howie cautions against treating “innovation” as a magical incantation, thinking, “If I say ‘innovation’, things will happen.” It doesn’t work that way. Nevertheless, real innovation will be vital to China’s future.
The enthusiasm of China’s government and private firms for innovation is clear. Despite some occasionally misdirected government intervention, competition is hot. For every problem, there can be 100 solutions. Investment is lubricating the flow of ideas in and out of China in a variety of industries. A new generation of Chinese customers and entrepreneurs are giving Western ones a run for their money. As its innovation industry evolves, China’s innovative industries will do best not by isolating themselves from other markets, but by collaborating with them as part of a global ecosystem.
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