People unfamiliar with recent developments within China generally believe that the nation lacks innovation capabilities as well as the infrastructure to support entrepreneurship. The stereotypical view, often fueled by Western media, portrays China as an “innovation desert” full of copycat companies that make shanzhai (fake) products.
They describe a China that lacks innovativeness due to an inadequate system of intellectual property protection, a rote-learning educational system that stifles creativity and a business landscape dominated by State-owned enterprises.
This perception is based on China’s history, but it does not reflect current realities. Worse, it fails to recognize the emerging wave of innovation from China.
Understanding innovation in the context of contemporary China requires a broader definition of innovation, beyond the classic product or technology-centric view espoused by Western management theory. We suggest a broader interpretation of innovation that includes solutions that offer added value to customers or businesses, which may be manifested in a variety of forms, but are not limited to low-cost disruptions or technological breakthroughs.
To better understand this broader view of innovation, we should look deeper into examples coming from China.
Three layers of innovation
In our view, there are three essential layers of innovation: people, organization and market.
At the core are people. Large corporations often find it difficult to maintain the same level of creativity and freedom, both of which are conducive to the innovation process, as exists within startups. In China, a growing culture of mass entrepreneurship and relevant favorable policies are emerging. As a result, we are witnessing rapid growth in startups, which serve as the breeding ground for creative entrepreneurial minds.
Inspired by successful examples of private entrepreneurs, a “why-not-me” mentality motivates aspiring young entrepreneurs to create solutions that deliver value. This new breed of young entrepreneurs are adept at identifying new and creative ways to add value to consumers’ lives within a volatile and sometimes sub-optimal environment.
Among the entrepreneurs who were born in the 1980s and 90s, there is a strong sense of entrepreneurial zeal and optimism ignited by recent successful examples of Alibaba Group Holding Ltd’s Jack Ma, Xiaomi Inc’s Lei Jun, Tencent Holdings Ltd’s Pony Ma and many others.
There are other factors in play that are creating a more favorable environment for innovation. These include China’s grassroots’ openness to the world, experienced returnee entrepreneurs with expertise and access to a global pool of resources gained from their experience abroad, and simply China’s scale that allows good business ideas to scale up rapidly.
China’s large population base also helps increase the probability of success from “trial and error” experimentation with new solutions. Many grassroots entrepreneurs are able to spot market imperfections and leverage that contextual understanding to create relevant solutions.
Lei Jun is a case in point. Xiaomi’s approach to innovation relies on a deep understanding of customer needs and continual feedback to tailor products for specific usage requirements.
Second, organization. Organizations typically resist change when they become successful. As markets mature, market leaders often lose their competitive edge as they fail to anticipate change, typical across numerous global industries.
As we know, China’s market changes fast. Many Chinese companies are very young and have a higher risk appetite for opportunities and radical innovations. A well-known case is how Haier Electronics Group Co Ltd achieved significant growth when it introduced a washing machine capable of cleaning not only clothes but also potatoes.
This demonstrates Haier’s awareness of indigenous demand from China’s lower-tier cities and the company’s customer-centric management philosophy.
Entrepreneurial Chinese organizations can be described as hungry, agile and nimble. They continually push for growth because there is no legacy of success to protect. This innovative character results in higher levels of patent activity and investment into research and development.
Third and last is the market. Critics often point to the flaws in China’s lack of market-centricity when expressing concerns about the future. These criticisms often dwell on the dominance of SOEs in certain sectors, a lack of transparency, the abundance of government incentives pushing for technological change without oversight mechanisms and the heavy presence of government investment to drive the economy.
SOEs will continue to play a major role in China, but private companies have emerged across multiple sectors (including foreign entities in China) and will become the dominant forces of innovation and economic expansion. In open sectors, competition has become intense as foreign corporations, SOEs and local private companies vie for a piece of the pie. Deregulation has been a major driver for China’s growth over the past couple of decades and that will remain the case.
Over the past couple of decades, China’s market has experienced unprecedented economic expansion, aided largely by government policies that provided top-down support at national and provincial levels. Tangible benefits include science and R&D parks as well as industry clusters throughout China. The supporting foundation for continued growth and innovation is also falling into place, including fast consumer adoption of the Internet, creation of startup incubators, and increased sources of funding for new businesses from venture capital, private equity and angel investment.
Innovation breeding ground
China is a complex, diverse and dynamic market, characterized by intense competition. Chinese companies are emerging with unique capabilities to win the bases of competition through lower cost, better quality and faster execution.
Innovative Chinese companies such as Baidu Inc, Alibaba, Tencent, Xiaomi, Haier and others have demonstrated unique capabilities and an innovation mindset well-suited to China’s unique context. Such businesses have proven capable of building cross-industry ecosystems for collaborative innovation and a willingness to “boundary jump” across traditional industry lines. These ecosystems exhibit “biodiversity”, which makes the entire value chain more robust and sustainable; of course, up to certain limits.
The China context can be described as a highly complex, diverse, dynamic and discontinuous environment accentuated by time-space compression. Within this breeding ground, innovative Chinese companies are leveraging this market context to deliver exponential growth.
Edward Tse is founder and chief executive officer and Bill Russo is managing director of Gao Feng Advisory Co, a global strategy and management consulting firm based in China.