Innovation in China is Happening, But Not How You Think.

China product innovation

David Barboza, the New York Times’ Shanghai business correspondent, recently did a story on his interview with Dan Breznitz and Michael Murphree, authors of the book, Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China. Per Barboza, the book is about “China’s innovation drive” and it posits that “China should worry less about coming up with breakthrough technologies and focus more on what it already does best: making incremental innovations in everything from manufacturing to logistics.”

I agree.

According to Breznitz/Murphree, China should continue focusing on incremental process and manufacturing innovation, and hold off on trying to compete with the United States and Europe (what about Japan?) on “novel ideas and breakthrough products”:

China has shown strength in process innovation and creating new manufacturing systems. Rather than trapping China in low-end manufacturing, they say, these capabilities will power the Chinese economy for years to come and eventually allow China to move up the value chain.

Indeed, they argue that the Chinese government’s push to compete with the United States and Europe on novel ideas and breakthrough products may be wasteful and inefficient, partly because of government interference but also and because China has not yet reached an advanced stage of development.
Breznitz/Murphee talk of how places today “specialize not in specific industries but specific stages or activities within those industries”:

In different places — Taiwan, the U.S., South Korea — there are different stages of production in each industry. The next logical step in thinking about innovation, since industries are fragmented, is that different places need different systems and different kinds of innovation. China excels in different kinds of process or manufacturing innovation. This includes design for manufacturing, organization of production, sourcing and logistics.

They go on to say that China is doing a bang-up job at innovating within its manufacturing specialities:

China’s companies are extremely efficient at creating new versions, often simpler, cheaper and more efficient, of technologies and products shortly after they are invented and marketed elsewhere in the world. For instance, I can’t think of any company in the world that can have over 200,000 people in one location producing a wide array of electronic gadgets for multiple companies other than Foxconn in China.

The American military, the best fighting machine in the world, can hardly move 200,000 people into the exact locations it wants them in months, but this company moves engineers and production workers from line to line and product to product with amazing efficiency. This is production innovation. China does innovate.

But when it comes to “novel-product innovation, China is very weak” and this, according to Breznitz/Murphee is due to China’s governmental system:

There’s no way around it. The central government is the main antagonist in the process. The political economic institutions and system in China make it so entrepreneurs can’t make profit by developing novel innovation. But this same system makes process and second-generation innovation very profitable and successful.

They then talk of how there is a tendency to “equate innovation with invention” and to believe that without invention, you will “fade.” This belief, in turn, “leads to a tired dichotomy: either China is already innovating, or it’s on borrowed time and will stagnate like other middle income countries.”

Per the authors, innovation is more than just invention: It also includes “the whole array of moving and improving inventions so consumers get better, newer, and cheaper products and services.” Much of “what we think of as innovation is what we notice in the final gizmo, but the innovation is actually in the guts that make the device work.”

Breznitz then cites to the Apple power cord as a great example of China process innovation:

Do you own an Apple computer? There’s a white power supply box on the power cord. That box has been improved with continuous R.&D. so it doesn’t go up in smoke and so it will do what it does ever more efficiently. This is entirely done in China.

The company that makes the power supplies is constantly doing research to make them smaller, more efficient, cooler, cheaper, and less energy intensive. This can only be done in China because firms can find high-quality engineers and tell them, ‘You will make power supplies better’ and the engineers will oblige. What are the chances you can hire someone from an elite U.S. university such as Carnegie Mellon to do that? This gives China power in the global production networks.

The authors see China’s model as “not just sustainable,” but as a driver for China increasing its power over the next fifteen years.

It is an excellent article on innovation and since I have discussed just a fraction of it, I urge you to read the whole thing here.

3 responses to “Innovation in China is Happening, But Not How You Think.”

  1. We agree with the thrust of what you say about the importance of China’s process innovation and wrote on it earlier this year — From Fast Imitation To Frugal Innovation — highlighting the challenge it poses to foreign firms not so much at the top end of markets but in the middle market where a combination of ‘good-enough’ technology and low price could prove unbeatable.

  2. Isn’t Foxconn a Taiwanese company? Apples and oranges.
    If China was smart, then instead of chasing innovation, perhaps it had better work on quality. Back in the 80’s all of the Korean companies got hot on this, before Samsung, LG, Hyundai, and Kia were brands in the US.
    They did realize the importance of innovation, as they were paying something on the order of $80 billion a year in royalties to the Japanese and American innovators, which really cut into their bottom line. But anybody who ever drove a Hyundai Pony (I think these were only shipped to Canada?) back then knows that the Koreans needed to focus on quality if they had their sights set on the US auto market.

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