International Business Environments
China Focus
Political, Economic and Technology Focus
Dr. Thomas Lairson
Innovation
Global Competitiveness Report - http://www.gcr.weforum.org/
Summary
· The importance of knowledge and innovation requires the creation of a special business environment that supports the creation, diffusion and application of knowledge to enhance competitiveness
· Innovation cuts across products, processes, services, organization, business models
· China’s national innovation system has important strengths and weaknesses
· Lenovo is example of a big Chinese success; is it an exception?
· Weaknesses in Chinese firms and in Chinese economy are big barriers to innovation by Chinese firms
The expansion of global knowledge networks over the past 15 years has been substantial, especially sustained and enhanced by the Internet. This presents both major opportunities and risks to China’s upgrading situation. China has considerable presence in these networks, formally through ties to firms that are customers, technology sellers, VC firms and to FDI firms operating in China; informally, through the circulation of students, academics and knowledge workers.
Basic argument
Knowledge is the most important input to products, processes, services
Knowledge has greater expansive power from social character, reuse, some leads to more, basis for innovation.
Knowledge economy in rich states = potential rapid growth in poor states by reusing existing knowledge
Knowledge base in developing nations leads to local and then to global innovation
Globalization of knowledge:
Global knowledge networks arise out of expansion of ICT, interaction, trade, finance, FDI, education – global diffusion of knowledge
Global development of knowledge institutions in universities, firms and governments, research institutes, consulting firms
New global knowledge pools = Bangalore, Hong Kong, Seoul, Tokyo, Shanghai, Singapore
Incentives for innovation
Intellectual Property Rights
Risk taking institutions and culture – venture capital systems
Pace of competition and innovation rises
Premium for knowledge increases
Firms must do much more global knowledge scanning: locate and incorporate innovations from anywhere in the world
The ability of a nation to access, apply and develop knowledge depends on its ability to build organization and firms that are knowledge capable
The leap from knowledge acquisition and application to innovation
A firm’s capacity for innovation is closely connected to innovation ecology of its environment.
Number, quality and complexity of the links to global knowledge networks – positive feedback loops
Competition levels – local and global
Number and quality of knowledge workers in the networks
Technology capabilities of the local system
Synergies among firms, universities, research institutes
Comparing the national capacity for innovation
What is innovation?
New product, process, service and/or form of business organization that adds monetizable value to firm or to the economy
fresh thinking that creates value
Innovative versus innovation
New product or process service that is or is not monetizable
Innovation versus invention
Two kinds of innovative firms – combine new ideas with entrepreneurialism
Start ups
Large firms – constantly reinvent themselves
Business model innovation now matters more than R&D for competitiveness of a firm
Can China leverage the large numbers of returning students and western knowledge workers in computers, and semiconductors?
Knowledge workers include those science and engineering personnel, as well as managers and specialized professionals (in areas like marketing, legal services and industrial design) that provide essential support services to research, development and engineering.
Role of the Chinese Government
China has made significant strides in IT production – mostly assembly. Can Chinese firms make the leap to local and global innovation?
China has a strong commitment from the top of the government to innovation
Major goal is to shift from a reliance on foreign technology to domestically generated technology and innovation
China has developed a top-down investment strategy for targeted industries
Goal is to increase R&D from 1.3% of GDP to 2.5% by 2020.
The Chinese government acts as if innovation can be managed like infrastructure investment. Is this right?
The Chinese government appears to undervalue the importance of institution building, creating an innovation friendly environment and can be criticized for emphasizing a nationalist and inward-looking form of innovation. China needs to do much more to encourage knowledge acquisition from the TNCs in China and to link Chinese knowledge capabilities into global knowledge networks. Knowledge is too complex and fast-changing to try a nationalist approach to innovation.
Areas of Emphasis:
core electronic components,
high-end general chips,
basic software, technology for manufacturing extremely large integrated circuits,
new-generation broadband wireless mobile telecommunications,
high-end numerically controlled machine tools and basic manufacturing technology, development of large oil and gas fields,
large nuclear power plants with advanced pressurized water reactors or high-temperature gas-cooled reactors,
control and treatment of water pollution,
development of genetically modified biological species,
development of important new drugs,
control and treatment of AIDS and other major contagious diseases,
production of large aircraft,
high-resolution Earth-observing systems,
launching manned space flights, and lunar exploration projects.
China also has launched a series of more specific initiatives to enhance innovation:
accelerating creation of independent “well-known” Chinese brands
supporting the technology innovation of small- and medium-sized enterprises
issuing corporate bonds for qualified high-technology enterprises
regulating the management of start-up investment funds and the debt-financing ability of start-ups
suggesting ways to establish and improve regional intellectual property
standardizing foreign acquisition of key Chinese enterprises in the equipment manufacturing industry
building research-orientated universities
promoting state-supported high technology and new technology industry development zones
establishing guidelines and funding for venture capital investment,
creating tax policies supporting the development of start-ups, and
establishing “green channels” to help bring talented individuals who have studied abroad back to China.
Reorganize and dramatically enhance the China Academy of Sciences
Advance the quality of research institutes – 30 internationally recognized and 5 world class by 2010
Expand discretionary research funding for research institutes
Major effort to attract Brain Drain resources back from abroad
Focus areas:
Information technology
Optical electronics, space science, and technology
Advanced energy technologies
Materials science, nanotechnology, advanced manufacturing
Population, health, medical innovation
Advanced industrial biotechnology
Sustainable agriculture
Ecology, environmental protection
Natural resources, ocean technologies
Comprehensive research relying on mega-science facilities
CAS face recruitment problems based on its political legacy
CAS must do better in relations with industry and with Chinese universities
Major efforts are also far along to enhance incubation technology parks
Build an enterprise-centered R&D capability
Establish 30 more parks by 2010. Particular emphasis is given to attracting foreign R&D facilities. Fifteen Korean companies have R&D centers in China, 14 of which have been established since 2000. Samsung and LG Electronics have three each, which concentrate on developing technology and product models for the Chinese market.
Shanghai Zhangjiang Hi-Tech Park
· Attracted $10.6 billion in foreign capital from 42 companies, including Roche, GlaxoSmithKline, and Medtronic,
· Established 31 R&D institutes and a hospital for clinical trials.
· Attracted 70 “fabless” computer chip companies (which design, develop, and market their products but do not manufacture them), three foundries, two photomask producers, 12 packaging and test companies, 34 equipment vendors, and numerous systems application companies.
Zhongguancun
· China’s largest high tech concentration; approaching cluster status
· Grows out of Chinese Academy of Sciences and spinoffs (including Legend)
· Until 1995, all firms were SOE or collectives; today virtually all are private
· In 2002, 12,000 enterprises: 1500 are foreign; most are very small
· In 2005 17000 firms
· Total production in 2002 is $34B; about 10% of production is for export
· Foreign firms account for 48% of revenue and 78% of exports
· ICT production is $19B in 2002
In the first quarter of 2008, the top four economies after America in attracting venture capital for start-ups were: Europe $1.53 billion, China $719 million, Israel $572 million and India $99 million, according to Dow Jones VentureSource. Israel, with 7 million people, attracted almost as much as China, with 1.3 billion.
The reason? Israel is a country that is hard-wired to compete in a flat world. It has a population drawn from 100 different countries, speaking 100 different languages, with a business culture that strongly encourages individual imagination and adaptation and where being a nonconformist is the norm. Because Israel’s economic and military power today is entirely dependent on extracting intelligence from its people, Israel’s economic power is endlessly renewable.
Thomas Friedman
Chinese Firms and innovation
Chinese Computer Industry
Much of the Chinese computer industry comes from relocating capabilities from Taiwan
China is largest global producer – assembly and export
China has low value added in computers
Taiwan – OEM to ODM in computers, components and semiconductors (ASICs)
Relocation of production from Taiwan to Dongguan and Shanghai/Hangzhou
By 2000, Taiwan had a turnkey system of semiconductor systems plus a wide array of the capabilities for most of the main components of a PC (three big component missing were the hard drive, microprocessor, and OS). Thus systems integrators were combined with most of the specialized providers of components and services. This system was coupled with a vast array of assembly faculties in China.
Lenovo:
Spin-out from CAS Institute of Computing Technology (research institute under Chinese Academy of Sciences in 1984
China and spin-outs look more like US and Taiwan than Japan
Begins operations as a distributor and installer of foreign PCs
Launched own PC brand in 191
From 1997 on the leading PC maker in Chinese market
1984-1990
Lenovo not selected by Chinese government to receive special support to establish computer industry in China
Lenovo was able to leverage its connection to ICT to win contracts
Builds national sales network, including distributors, resellers and a direct sales system
Accumulates considerable marketing experience
Accumulates close connection to customers
Late 1980s begins manufacturing add-ons with ICT help
1991-2000
Early 1990s Chinese government shifts from protectionist import substitution strategy to opening PC market to TNCs – swamps SOEs but not Lenovo
Lenovo builds and markets most advanced PCs unlike most TNCs suppliers – image as technology innovator
Leverages its knowledge of customers to offer innovative special features for Chinese market (special OS, one touch keys, etc.)
Price competitive based on lower cost structure (use Taiwan and other TNC suppliers operations in China)
Distribution network big competitive advantage – customers guide product design (hot key for internet connection)
Acquired leading-edge production technology from abroad and obtained training from suppliers
Establishes substantial R&D capability located in business units and not as a stand alone center
2001-present
Chinese government lowers tariffs on PCs leading to WTO and more afterwards
This leads TNCs to set up JVs and wholly-owned enterprises in China
TNCs bring technological advantages to China and gain cost savings in production
Lenovo responds with a major push for new technology and innovation
Innovations remain targeted at customer segments with products specially designed for these segments
Add a telephone-based direct sales unit
Focus on product and process technology to reduce costs
Build to order capabilities
Strategic alliances
R&D at 2 tiers:
Process and business R&D
Advanced R&D – incorporate and leverage new and emerging technologies
Lenovo’s development shows a consistent pattern:
Establish strong competitive advantage – sales capabilities
Obtain knowledge from this advantage and leverage to sustain and extend the advantage
Strong internal learning systems used to expand into new business opportunities
Knowledge application to products and processes
Develop close links to global knowledge networks:
TNC partners
Suppliers
R&D links to global knowledge centers
Strategic alliances
Leverage capabilities to global breakout: IBM
Can Chinese firms in GPNs upgrade and innovate?
Layers of GPNs Value China
1) Commodity production of modular components
2) Design and specialized services
3) Complex product integration
4) ODM/OBM
5) Setting product standards/define value chains/global systems integration
Where are most Chinese firms in the GPN VC?
Upgrade and Innovate?
· Position of Chinese firms in VC is usually distant from users/actual customers
· Chinese firms tend to be linked to trading companies
· This limits the connections of Chinese firms to Global Knowledge Networks
· Chinese firms are not in a position to do design or provide specialized services
· Chinese firms in GPNs limit innovation to process – just to stay in place
· Few Chinese firms have been able to leverage their production capabilities for international markets to gain traction in domestic markets
· The ability to develop proprietary innovations are undermined by weak IP protection
· Firms are pushed into diversification into unrelated products – into low entry barrier products. This is not innovation.
Weaknesses of Chinese firms and innovation system
China’s weaknesses as an innovator
These weaknesses derive mostly from the legacies of a command economy and from the traditions of localism. This legacy creates bad incentives to firms, whose behavior undermines the innovative potential in firms and in the society.
"Industrial strategic culture" encourages firms to seek short-term profits, local autonomy, and excessive diversification.
Chinese firms focus on developing privileged relations with officials in the Chinese Communist Party hierarchy, spurn horizontal association and broad networking with each other, and forgo investment in long-term technology development and diffusion.
Chinese firms continue to rely heavily on imported foreign technology and components -- severely limiting the country's ability to wield technological or trading power for unilateral gains.
China’s production facilities are mainly focused on low-end and low-tech commodities with very thin profit margins (shoes, clothes, toys and household goods
China is at the assembly end of global and regional production networks with limited value capture opportunities
China’s export of high tech goods is dominated by foreign firms – roughly 80% - 90% . Many of these are wholly owned foreign enterprises.
Chinese firms are taking few effective steps to absorb the technology they import and diffuse it throughout the local economy, making it unlikely that they will rapidly emerge as global industrial competitors.
China’s fragmented political system undermines the development of effective horizontal knowledge networks by Chinese firms. To create commercially viable products and services, firms must monitor and access new forms of knowledge, understand evolving market trends, and respond rapidly to changing customer demand. Firms that can develop strong links to research institutions, financiers, partners, suppliers, and customers have an advantage in acquiring, modifying, and then commercializing new technology. Such horizontal networks are essential conduits for knowledge, capital, products, and talent.