SML 702: MANAGEMENT OF INNOVATION AND R&D

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WHY CHINA CAN’T INNOVATEAnd What It’s Doing About IT?

By Regina M. Abrami, William C. Kirby, F. Warren McFarlan

About Authors

• Senior fellow - WhartonSchool

• Director - Global Programat Lauder Institute

• Senior Lecturer in PoliticalScience - University ofPennsylvania

Regina M. Abrami

• Spangler Family Professorof Business Administrationat HBS

• T.M Chang Professor ofChinese Studies at HarvardUniversity

• Chairman of the HarvardChina Fund

William C. Kirby

• Albert H. GordonProfessor of BusinessAdministration, Emeritus,HBS

• Guest Professor - TsinghuaUniversity

• Co-Director - Tsinghua’sCase Development Centre

F. Warren McFarlan

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Aim of the Reading3

Understand China

approach to Innovation

• Top down approach

• Bottom up approach• Through Acquisition

• Next generation Approach

Conclusion and Learning from Reading

China: History of Innovation and Criticism

Chinese inventions: gunpowder, the compass, the water, wheel, paper money and long-distance banking

Until early 19th century: China’s economy was more open than the economies of Europe

Today, China is largely a land of rule-bound and rote learners. Criticism (True??) Engineers?? Most Chinese start-ups are not founded by

designers or artists, but by engineers who don’t have the creativity to think of new ideas or designs

Government?? Failure to protect intellectual property rights.

Education System?? How can students so completely focused on test scores possibly be innovators?

Innovation by Top Down (1/3)

Chinese Govt. Vision

By 2020: Transform China into an innovative society

2050: Transform China into world leader in Science and Tech.

2006- Medium to long Term Plan

(MLP)

Use of Wealth and Political to Stimulate Innovation. How???

Creation of Institution, funding commercial university research

Financing development of high-tech zones

Creating Policies/Environment to shape nascent innovative industries

Increase domestic R&D funding

Investments in

ambitious

projects by

China Govt.

Jump Start in Innovation

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Innovation by Top Down (2/3)Medium & Long term Plan (MLP)

MLP was launched in 2006

Increased domestic R&D

Reduced reliance on imported technology by 30% -short term

Strategic emerging sector

Bio-technology, energy-efficient technologies, equipment, manufacturing, information technology, and advanced materials

Export subsidies and preference to purchase from local industry

Innovation by Top Down (3/3)

Wind Energy: Nascent technology in 2002 in China

Government invited global tender, big project launched

Market flooded with import of wind energy components

Govt. directive to source 70% components locally

By 2009 – 6 out of top 10 turbine manufacturer were Chinese.

Domestic firm share of total sale– 51% in 2006 to 93% in 2009

Companies with R&D Opening in China8

Innovation from Bottom Up (1/3)

Company Attitude: Why trouble yourself when Rewards & Growth for Incremental Improvement are Large

Communist Party representative in every company with more than50 employees.

Adapting Technology has become standard and highly Lucrative

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Innovation from Bottom Up (2/3)10

Innovation by Acquisition

Acquiring Technology Firm rather than Licencing

Acquiring Talent

Recruitment of CTO of Competitors

Opening R&D lab in Developed Countries

Innovation from Bottom Up (3/3)11

Innovation thru NextGEN

Existing universities are reviving & New university are opening

Research Budgets of Chinese Universities Increasing

More Enrolment of Chinese Student in Home and Abroad Univ.

Challenges

Parallel governance

Party Committee Intervention in key decision-making, hampers innovation

No role of Faculty Member in Governance

Xi-Jinping Visit: Increased party Supervision of Higher education

Is China a Innovation Economy

Produces more than a million engineering graduates a year—7 times as many as America

Is second in academic publications to America Invested tens of billions of dollars in research and has labs and

infrastructure Govt. focused on building an innovation economy – at any cost.

CRITICISM Questions raised on China’s patent & publication Is it more a ‘window dressing” innovation, as most innovations are

“incremental” and ‘ localisation” Can one manufacture “Innovation” Does it have a conducive environment & freedom to pursue ideas –

which is precondition for innovation

Key Learnings13

For china to become Innovation Society and leader in Science and Technology, improvement in following areas are required:

Stronger/Stringent IPR to allow Chinese company to Innovate rather than sticking to reverse engineering and minor improvement

Government (party representative) intervention from enterprise and universities in key decision making should be reduced to create innovative culture

Reform in education sector from stereotype to liberal education, focusing on humanities should be done to create student more curious, thoughtful and skeptical.

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Innovative Companies of China (http://www.fastcompany.com) (1/2)

1. Huawei Technologies Now the world's second-largest provider of telecom equipment-thanks in part to its success in the Indian market-China's

largest telecom company is at the forefront of the latest 4G mobile-phone technology.

2. BYD The battery giant's cutting-edge technology-notably its lithium-ion ferrous phosphate battery-makes the Shenzhen-

based company a front-runner in the race to make mass-market electric cars.

3. Alibaba Taobao, Alibaba's consumer arm, has more than 145 million registered members—that's 43% of China's Web users. In

2010, Taobao plans to expand its empire by launching a Taiwan-specific online mall.

4. Huayi Brothers Huayi Brothers Media Group joined ChiNext, becoming the first film and TV company in China to list on any stock

exchange. On opening day, the company's stock rose 148%, putting the value of the production house at more than $1.5 billion

5. Tencent China's largest Internet company by market value, Tencent first became a household name for QQ, its instant-messaging

software. It then leveraged its brand name to branch into gaming and online dating, helping it rack up its member count to 450 million—more than either Microsoft's or Skype's messaging service in China

Innovative Companies of China (http://www.fastcompany.com) (2/2)

6. Suntech Power Suntech's revolutionary Pluto technology decreases reflectivity of cells, ensuring that more sunlight is absorbed and

increasing output to record-breaking levels. Its solar photovoltaic cells have a conversion efficiency of up to 19%, versus the industry average of 13%.

7. Sohu In November, Sohu's Sogou search engine released a new input method editor that speeds up searches for Chinese speakers.

Based on cloud technology, it lets users type search terms in Pinyin (the Romanization of Chinese) instead of laboriously entering Chinese characters

8. Eno Since its start in 2006, Eno has become a go-to shopping destination for Chinese teens and a design outlet for Chinese artists

(it's one of the few online stores that sell local designs).

9. Ctrip China's leading online travel-services company caters to the country's rapidly expanding middle class as well as executives of

foreign companies pursuing Chinese business. Coca-Cola, Panasonic, Sony, and Baidu have all tapped Ctrip's savvy corporate-travel program to track employee trips

10. Baidu The search giant lost clients in its transition to a new advertising system, Phoenix Nest, which lets clients track the

effectiveness of their ads more closely than before and differentiates paid ads from authentic search results. (The company had been criticized for mixing the two.) Baidu should continue to dominate search in China, even if Google remains active