New Innovation Challengers

New Innovation Challengers

Mini Teaser: Multinationals in China and India are seeking more sustainable competitive advantages by shifting from imitation to innovation.

by Author(s): Dan Steinbock

True, the rise of China as the leading ICT goods producer has gone hand-in-hand with the increasing role of foreign multinationals in China, which may account for more than half of China's trade in ICT goods (imports plus exports). But even the idea's reformulation is rooted in ignorance. Talent, intelligence and enterprise are not exclusively Western or American characteristics. Indeed, many of these companies are increasingly led and managed by highly driven local residents. Initially, the senior executives and workforces of these companies came from the home base and the headquarters, but, in most cases, localization has been very, very rapid.

Take, for instance, the story of Intel, the world's leading microprocessor maker. When Intel first arrived in China, most of its staff was drawn from operations in other countries. But the company moved quickly to train local employees. A case in point: Within 18 months of starting up, the number of foreign employees in Intel's executive team at its Shanghai plant dropped from 97 to six, and middle management was entirely local Chinese. In the long term, multinational R & D is vital to leading Chinese companies, moving from cost advantage to quality and innovation. Today-after more than 21 years in China-Intel has invested more than $1.3 billion in R & D, test and assembly, while growing its sales and marketing operations to more than 300 cities. Profits followed these investments. Between 2000 and 2005, the proportion of Intel's revenue in the United States fell from $12.4 billion to $5.7 billion, while that from China rose from $2.1 billion in 2003 to over $5.3 billion in 2005. "The economic interdependencies between the U.S. and China are deep and growing", says James Jarrett, Intel vice president and director of Worldwide Government Affairs, who also served as president of Intel China from 1996 to 2000. "You really need to tap into the wealth of engineering talent in China and participate in emerging markets. If you don't participate there, somebody else will."[2]

As Chinese and Indian senior executives and talented employees learn from the multinationals, the process of catch-up speeds up, reflected in advancements in innovation output. Last October, figures from the World Intellectual Property Organization (WIPO) showed patent filings in China (half of them by Chinese) increased sevenfold in the past ten years. China overtook the European nations to become the fourth largest source of patent application filings, underscoring the increasing prominence of northeast Asian countries in intellectual property. Last December, China also overtook Japan for R & D. According to the OECD, IT is expected to invest $136 billion in R & D, which is still well behind the $330 billion the U.S. will invest. Furthermore, patent rights are no longer just a U.S. concern; Chinese companies have defended their rights with increasing aggression in U.S. courts. Like Japan, Korea and Taiwan before IT, the transition toward innovation translates to increased efforts in protecting intellectual property.[3]

From Mimicry to Innovation

Today, innovation is the buzzword in Beijing and New Delhi. In the past, IT was the scientific academies in China and India that advocated increasing R & D. Now yesterday's science and technology policies have morphed into national industrial policy.

In January 2006, President Hu Jintao set the tone with his call for China to make the transition from a manufacturing-based economy to an innovation-based one. Innovation was also a major theme at the National People's Congress, with the government unveiling its latest five-year plan for major increases in spending to nurture innovation. In 2005, China's R & D was 1.5 percent; in 2020, the target is 2.5 percent, or $115 billion per year. China is targeting a broad range of sectors, from areas long dominated by the United States (semiconductors, software, space exploration) to other areas that may provide disruptive potential (stem cells, gene therapy, genetically modified crops). Indeed, China aims to become a leader in emerging technologies like renewable energy. By 2050, the Middle Kingdom intends to surpass the United States and lead the world of science.

In the 2005 World Investment Report, India was ranked third after the United States and China as an R & D hot spot-defined as a place where companies can tap into existing networks of scientific and technical expertise, with good links to academic research facilities and a commercial, pro-innovation environment. "We take satisfaction from the fact that over 100 global companies have come to India to set up R & D centers, affirming the intellectual capital of our scientific and engineering community", said India's Prime Minister Manmohan Singh in November 2006. "Science must grapple with the key challenges facing the country today." Dr. Singh is increasingly emphasizing the need for Indian science and technology to "shift from mimicry to innovation."

Shaping the Rules of Competition

Since both these nations are latecomers in competition and innovation, the two must cope with far more intense rivalries and will probably favor disruptive innovation. By shaping the rules of competition, they can move faster to the higher value-added. In the United States, these policies will be met with lamentation over "government intervention." If, however, the challengers would accept the incumbents' status quo, the two nations would be left with crumbs.

Take, for instance, mobile communications. China is the world's largest mobile market. As telecoms and broadcasters around the globe rush to offer television services over mobile phones, China is taking steps to ensure that its domestic players will not miss out on the potentially massive market by launching its own technology standard for mobile tv.

Or take nanotechnology. In early 2005, China released a national plan for scientific development that calls for raising R & D spending to equal 2 percent of economic output by 2010, from just above 1 percent in recent years. Nanotechnology was named as a major priority, and IT may enable China to "leapfrog" wealthier nations.

In China, the government has orchestrated rapid development in several industries and technologies. In India government plays a supporting role, and private-sector companies drive cutting-edge industries. In the United States, private industries largely determine the direction of research; in the leading European nations, public-sector agencies tend to play a substantial supporting role. But these framework conditions evolve dynamically. In China and India, public-sector organizations continue to play a critical supporting role, typical of industrialization's early stages. Ultimately, the quest for innovation is predicated on effective interplay among ambitious technology development, bold entrepreneurship and aggressive early-seed venture capital. In fact, the increasing number of China-focused venture capital funds suggests a robust population of venture-backed Chinese companies in the IPO pipeline.[4]

The quest for the higher value-added is not easy to achieve; nor can IT be based on a short-term outlook. Sustained productivity advances require innovation-driven strategies and policies. Such steady and sustainable growth of China and India is in America's interest. In the long term, the economic expansion of both emerging economies requires that their respective innovation strategies succeed. Instead of the past confrontational approach defined in terms of containment or protectionism, IT is in America's interest to promote engagement with both China and India and facilitate the continued integration of these two vast emerging nations into the world economy. Engagement is also in the interest of U.S. business. U.S. corporate profits in China passed $2 billion the first six months of 2006, up more than 50 percent from the first half of last year.

Until recently, the "higher value-added" was the privilege of the entrenched multinationals in the United States, Western Europe and Japan. Today, emerging multinationals in China and India seek to convert cost advantages to more sustainable competitive advantages, often through innovation. The growth rates of innovation output-as demonstrated by the patent data-are impressive, even dramatic. Still, the development of these capabilities is not a sprint, but a marathon.

The long march has begun.

Dan Steinbock is the ICT research director of the India, China and America Institute. He serves as a strategic consultant for multinational corporations, international organizations and government agencies.

[1] See Dan Steinbock, "Toward the Innovation Frontier: The Rise of Chinese and Indian Innovators", India and China, edited by K. G. Kulkarni and P. Prime (Delhi: Serial Publications, 2007).

[2] Dan Steinbock, "Can Intel Grow Through Cuts?" Beijing Review, September 27, 2006. On localization as the condition of globalization, see also Steinbock, "The Mobile Revolution and China", China Communications, Vol. 3, No. 2, April 2006; and "India and the Mobile Revolution", Strategic Innovators (IIPM/India), October 2006.

[3] Typically, anti-piracy efforts in both China and India have accelerated as these nations have opted for innovation-driven development paths. Yet these two vast emerging economies remain on the priority watch list of the International Intellectual Property Alliance (IIPA). According to IIPA, the 2005 estimated trade losses due to copyright piracy in business software, records and music, motion pictures, entertainment software and books totaled $443 million in India and $2.4 billion in China, respectively.

[4] Emulating the patent trends, venture capital volumes are primarily in the United States and Western Europe, but the rapid growth is in China and India. In 2005, venture capital investments worldwide reached the level of $31.3 billion. The United States, Canada, Europe and Israel represent 93 percent of capital invested, while China and India account for the remainder. See Ernst & Young, Venture Capital Insight Report, London, May 3, 2006.

Essay Types: Essay