Approaches to Innovation: China
The main approaches used by China to drive innovation are government policies, Frugal Innovators and cost-effective worker's pool, next-generation manufacturing and funding ecosystems, and a large domestic market.
- China has gone through 13 five-year plans up to this point, and the country's entire economy is KPI driven. Right now, the government is running a five-year plan (ending 2020) focused on scientific advance and green development.
- In 2006, the central government issued a ‘Medium- to Long-term Plan for the Development of Science and Technology.’ The stated goal of this was to cultivate an innovative society by 2020.
- Currently, China's budget allocation is prioritized on aviation and aerospace, agriculture, electrical power, new-energy automotive, high-end robotics, next-generation information technology, new materials and composites, rail transportation, maritime engineering, biomedical and advanced medical equipment sectors.
- The Chinese administration, through its various regional branches, is focusing on the promotion of strategic emerging industries in these areas, according them preferential treatment with subsidies, tax breaks, bank lending, and direct financing. The goal of the Chinese government is that "the share of the global GDP for all those industries should increase to 15% in 2020".
- The percentage of GDP invested in R&D is expected to reach 2.5% by 2020, up from 2.1% in 2016.
- The Chinese administration is playing an active role in building world-class infrastructure to support digitization as an investor, developer and consumer. It gave the internet giants of China, Baidu, Alibaba and Tencent a free hand to experiment before setting up regulation, especially in the privacy, data management, and property rights fields.
- The Chinese government is also heavily focused on innovation education, the ninth five-year plan of China explicitly made reform aimed at improving the quality of education a core priority. Since then, China has allocated an ever-increasing percentage of its budget to education. In 2015, that expenditure reached 4.26% of the country’s GDP.
- China is the second-largest spender on research and development (R&D) after the US, accounting for 21% of the world’s total of nearly $2 trillion in 2015. China’s spending on R&D grew by an average of 18% per year between 2010 and 2015 (more than four times faster than the US spending).
Frugal Innovators and Cost-effective Worker's Pool
- The concept of Frugal Innovators refers to the first wave of Chinese innovators who developed cheap and reliable solutions for the majority of the Chinese people, a huge, but low-income population. A great example of that is BYD.
- BYD was founded in 1995 by a chemical engineer, Mr. Wang Chuanfu. The company started as a manufacturer of cheap batteries for mobile phones, with a “Western-style” and decent quality, but adapted to Chinese purchasing power. BYD became the second-largest battery company in 2002. In 2003, BYD created an automotive subsidiary, specializing in building electric cars.
- The innovation philosophy of these early Frugal Chinese entrepreneurs is, rather than expending years on design, take tried and tested worldwide products as a benchmark and adapts them to Chinese tastes through a process of reverse engineering.
- Though labor costs in China have been rising, China still enjoys cost advantages in two major talent categories, R&D and marketing and sales.
- China has grown its local pool of engineers and MBAs by investing in universities. It also provides several incentives for overseas Chinese to return.
- Another example of Chinese companies benefiting from cost-effective worker pool is that in 2016, DJI had 1,500 people in R&D, or 40% of a workforce of 4,000 — a luxury only available to a company that can tap into low-cost engineering talent.
Next-Generation Manufacturing and Funding Ecosystems
- China’s Pearl River Delta region, for instance, has a world-class manufacturing ecosystem for electronic components, with the requisite physical infrastructure, logistics, and manufacturing capabilities.
- This manufacturing ecosystem confers several benefits, such as, the ability of rapid prototyping and shortening the time for new product introductions, many component suppliers being co-located. A prototype that takes two weeks to develop in Silicon Valley can be created overnight in Shenzhen.
- New products often require many prototypes, such as the Dyson vacuum cleaner, that required over 5,000 prototypes. Therefore, having a manufacturing ecosystem like this gives Chinese companies a huge margin over others. Economies of scale in component manufacturing provide Chinese companies with a 50-60% cost advantage, while still ensuring quality.
- China's venture capital sector has been growing rapidly. From just $12 billion in 2011–13, or 6 percent of the global total to $77 billion in 2014–16, or 19 percent of the worldwide total.
- The majority of venture capital investment is in digital technologies such as big data, artificial intelligence (AI), and financial technology companies.
- China is in the top three in the world for venture capital investment in key areas of digital technology, including virtual reality, autonomous vehicles, 3D printing, robotics, drones, and AI.
- One in five start-ups in China is funded by BAT (Baidu, Alibaba, and Tencent) or BAT alumni, with 30% of them receiving funding from these three big players.
- China’s global share of venture capital funds has now risen to 27%. Investment in China rose from a low base between 2006 and 2013, and then leaped from $3 billion to $34 billion in 2016.
Large Domestic Market
- China has a population of over 1.3 billion people and a single dominant language in Mandarin (nearly a billion speakers), which, coupled with a fast-growing economy and a rising middle class, results in a vast home market.
- By perfecting their business models locally, Chinese companies can go abroad with greater confidence.
- An example of leveraging this advantage is that Haier became a low-cost, high-quality manufacturer of major appliances in China, an advantage it has parlayed to become one of the global market leaders today.
- McKinsey reported that “in 2016, China had 731 million internet users," which is more than the European Union and the United States combined.
- China also has 695 million mobile users, compared with 343 million in the EU and 262 million in the United States. Digital native internet users are about 280 million, nearly the same as the total number of US internet users. China’s large user-base of mobile and young people enables faster adoption of digital innovation.
- In mobile payments, penetration among China’s internet users has proliferated from just 25 percent in 2013 to 68 percent in 2016. The value of China’s mobile payments was $790 billion in 2016, 11 times that of the United States.
We searched through multiple case studies and overviews about factors driving growth in the innovation sector in China. We utilized credible sources like Harvard Business Review, BMI Lab, and Springer. Multiple factors we found were common among various sources, which we selected and further researched on them. We also searched for supporting statistics related to these growth factors on sources like Factor Daily and the World Economic Forum. We also provided examples of Chinese companies leveraging on these growth factors.