Daily Management Review

China as a Birthplace for Innovations


When people talk about China's influence on the global economy, they have in mind trade, attractive market and greedy consumption of raw materials in this country. For all of this, people often forget abour the country’s another role - an innovator. Yet, exactly here China is becoming a player who changes the game rules, according to the Brookings Institution economist Martin Neil Baily and director of the McKinsey Global Institute, Jonathan Woetzel. In the next 10 years, China has not only become a global hub to where companies go to develop their products, but also will the birthplace of a new approach to innovation, cheaper and more flexible.

Martin Abegglen
Martin Abegglen
This conclusion is based on McKinsey’s fresh research. The company analysts decided to estimate "real impact" of Chinese innovation - that is, to what extent the idea, reflected in the markets around the world, is being commercialized. The sample included 20 thousand companies, which together account for 30% of global GDP. Researchers have identified four "archetypes of innovation" - customer-oriented, industrial-based, engineering development-based, and scientific know-how. By breaking down the business into groups depending on an archetype, analysts have studied revenues within each of them. As China's share of global GDP is 12%, this figure is assigned the threshold for Chinese companies: if they accounted for more than 12% of revenue in the group, they could have been described as strong in innovation.

The analysis showed that China's innovation is strong in two areas - customer focus and efficiency. The first group includes such activities as production of household appliances (here, the Chinese get 36% of the global revenues) or Internet services and software (15% of the global revenues). The industrial-based group is handy with production of efficient solar panels (China has 51% of revenue), textiles (20%) and others. Engineering and scientific development of China shows "some progress", yet not big enough for the threshold, designated by economists.

The researchers said that China has a large-scale manufacturing ecosystem that enables to innovate so as to reduce costs, improve quality and reduce time it takes from idea to final product delivery to the market. In the industries where the country is lagging behind, local companies develop their own approaches to the commercialization of innovations. For example, in the pharmaceutical industry, where the whole way from development to market launch usually takes 15 years, Chinese manufacturers are trying to use approaches that work in other areas.

All this gives reason to believe that after 10 years, China will turn itself into an innovator, Bailey and Woetzel believe. If this happens, by 2025 the contribution of innovation in the country's GDP will have reached $ 3.5 trillion a year. What is more important, China can become a global hub of innovation, say the authors.
- With the combination of a large market, low cost, flexibility and ambition, China gives companies all over the world the chance to turn their ideas into a commercial product faster and cheaper than it has ever been possible. More and more companies will realize this and move operations to China, and a variety of markets can turn upside down – the economists predict. – Eventually, the Chinese model innovation can become a global trend.

Importantly, in contrast to the current leaders in this field, such as the US, China offers lower costs and access to a huge and hungry consumer markets - and its neighbors.

original by Jonathan Woetzel and Martin Neil Baily, Project Syndicate