China's Quest for Independent Innovation


chinese circuit3
Original image of chip courtesy http://morguefile.com/forum/profile.php?username=msxo


H Rowen headshot
Principal Investigator
Senior Fellow, Emeritus
  • Professor, Management, Emeritus
  • Senior Fellow, Hoover Institution, Emeritus

No longer satisfied with China's role as the "world's factory", Chinese government leaders have launched a campaign for 2010 focused on "independent innovation". The goal is to reduce dependence on foreign technology by creating higher value-added home-grown products, services, and technologies.

Chinese leaders are sounding a clarion call: in Seattle last April, President Hu Jintao lamented that he has to use Microsoft computer programs to log on in the morning and a Boeing plane to fly out of Beijing. A Chinese DVD player exporter makes merely 1 dollar profit from each unit priced at 32 dollars, while 20 dollars typically flow to the foreign patent owners. According to Minister of Commerce Bo Xilai, China must export 100 million shoes or 800 million shirts in exchange for the value of one Boeing aircraft. Innovation is seen as a path not only to sustainable economic prosperity but also global leadership; as President Hu summed up: "independent innovation" is the "core of national competitiveness".

China's quest is the subject of SPRIE's research on identifying patterns, sources, and practices of innovation in China's information and communication technology (ICT) industries. SPRIE's activities have included seminars at Stanford, international workshops (such as "Greater China's Innovative Capacities: Progress and Challenges", co-sponsored with Tsinghua University in Beijing in May 2006,) and field research including 100 face-to-face interviews with senior executives of multinational and local firms in China.

A few numbers show China's progress. Total R&D spending nearly tripled over the past decade, reaching 1.3% of GDP in 2005, even while GDP doubled. China is now ranked third worldwide in overall R&D spending (after the US and Japan), with targets to increase spending to 2% of GDP by 2010. It more than doubled output of science and engineering PhDs between 1996 and 2005. During the past decade, China's rate of growth of US patents granted has risen faster than did those of Japan, Taiwan, or Korea earlier (now ranked numbers 2, 4, and 5 respectively), with an even more impressive rise in Chinese-authored S&T publications in international journals.

Yet, the highest value-added work in China still is done largely in foreign-invested companies and increasingly in firms led by returnees who have been educated and worked abroad. And most "R&D" is focused on incrementally improving existing products and services. However, the top Chinese teams are making significant contributions to worldwide design and research as well as becoming integrated into the global innovation system. For example, among the more than 600 MNC R&D labs established in China, Nokia's lab is designing global new products from the ground up, and Microsoft Research Asia in Beijing has contributed advances in speech recognition, wireless multimedia and graphics to Microsoft's suite of current products.

At the same time, China's domestic firms are striving toward full participation in global networks. Huawei, its leading telecommunications and networking firm with sales of more than $5.6 billion last year, reports spending more than 10 percent of sales on R&D. With more than 10,000 researchers in China plus R&D centers in India, Sweden, Russia, and the U.S., the company epitomizes the growing pursuit of low-cost innovation--not just low-cost manufacturing and services.

However, the obstacles to innovation are not trivial. Many Chinese institutions, though improving, still fail to provide a productive environment for innovation, including a competitive and open system for R&D funding or effective intellectual property protection. The current gold rush mentality for quick profits runs counter to genuine innovation which is often the result of time and resources invested in research with long-term and uncertain pay-offs. On the people front, senior level researchers able to lead major projects are in short supply and the burgeoning stock of talent entering the work force has not been well prepared to innovate. "The bird that flies out of its flock is the first one targeted by hunters," goes the Chinese proverb. Conformity and mastery of existing knowledge have long been valued more than creative problem solving.

Moreover, the call by government leaders raises fundamental questions about the role of the state. Even as President Hu was urging party members last Spring to "actively promote cultural innovation", censors were pulling 20 paintings with political content from a Beijing art exhibition An open, creative environment can exacerbate tensions with political control. And while government policies have pushed phenomenal economic growth, top-down fiats may be counter-productive to genuine innovation. In fact, its perils were demonstrated in a high-level fraud case this year. Chen Jin, a dean at Jiaotong University in Shanghai, received more than $14 million in government research funding and became a national award-winner when he claimed to innovate a series of DSP IC chips under the proud brand name of "Hanxin" ("China heart" or "China core"). Yet this much celebrated "innovator" was revealed a fraud who had clumsily re-styled Freescale/Motorola chips.

However, at their best, researchers in China are proving their mettle, such as at the Institute of Physics in Beijing that has published on nanotechnology and materials sciences, such as the superconducting properties of thin films, the characteristics of nanotubes, and the fabrication of quantum dots. Following the US, China is now the second-largest producer of scientific articles in international journals on nanotechnology, the wave of new technologies.

The best research labs and firms already are on their way toward contributing to China's quest for innovation. SPRIE's field research has identified areas of emerging ICT competence. In technology-driven sectors, these include multimedia chip design (e.g. ViMicro), baseband chip design (e.g. Spreadtrum and T3GT), analog foundry (e.g. ASMC), cell phone design (e.g. TechFaith), portable digital devices (e.g. Huaqi in MP3) and communication equipment (e.g. Huawei and ZTE).

Innovations in services and business models are plentiful, especially in consumer services. For example, Ctrip, the leading travel service provider, has a representative click-and-brick business model that combines IT (online and mobile) with labor-intensive booking and distribution solutions (cash-on-delivery) to provide high quality services. Another example is the wide adoption of value-added services for mobile communication, such as short messaging service and ring tones, supplied by Nasdaq-listed Chinese companies such as Kongzhong, Tom Online, Sina, Sohu, Hurray, and Linktone.

SPRIE's field research and analysis will continue, focusing during the coming year on the mobile industry--from chips to devices to content and services--where China's market of 450 million (and growing) cell phone users and manufacturing expertise provide an environment favorable for innovations. The question of whether (and when) China can pull off this transformation -- from workshop of the world to a wellspring of innovation -- is key to the country's future with significant implications around the globe.