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This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting edge ideas and advice for global leaders about emerging markets.

By Mark Greeven (IMD Business School) and George S. Yip (Imperial College London and Northeastern University)

China Is Innovating via its Companies

There is a continuing misperception in the West that China imitates rather than innovates. But this perception underestimates the rapidly growing potential of China for commercially oriented innovations that make money rather than win prizes. Chinese companies have long had a reputation for imitation, but some of them are now beginning to innovate, not only in processes but also in products and technology. Many Chinese companies, such as Huawei in telecoms equipment and Haier in major appliances, are also taking their innovations globally.

How Chinese Companies Innovate

Our research finds that innovating Chinese companies take six major paths to innovation. While all these paths have also been taken by many Western companies, Chinese companies uniquely adapt and intensify each approach, using creative combinations of these innovation practices.

Path 1: Ascending steadily from incremental to radical product innovation. Because of China's catch-up situation, most of its companies began life as imitators, innovating only incrementally. But, in a typically Chinese way, they pursued incremental innovation, relentlessly implementing innovation after innovation.

Path 2: Localizing business models: Building embedded business ecosystems. Business model innovation is particularly attractive to Chinese companies for two reasons. First, there is no need for world-class technical capability, which many Chinese companies may lack. Second, China is so different from the West that some business model innovation is essential for local adaptation, which can be more easily and better executed by Chinese than foreign companies.

Path 3: Relying on experimentation: Fast trial and learning. Even more than Western companies, Chinese companies use fast trial and error to test the market, adjust, and learn. Often, market testing, product development, and business model design takes place all at the same time. Experimentation and risk taking fit well with Chinese pragmatism and the transitional nature of a market with much uncertainty.

Path 4: Focusing on customer rather than technology, in terms of local needs and product variety. Chinese companies are skilled in customer-driven innovation, even for foreign markets in the USA and elsewhere. Chinese companies not only respond more quickly to local customer needs, but also cater to a larger variety of needs. They meet such needs not by building more sophisticated products but by bringing more versions of the product to market.

Path 5: Upgrading technology quickly: “Red queen race” and staying ahead of copycats. Most Chinese companies did not have a strong starting point in terms of technology, knowledge, and experience, so they need to catch up faster. Also, there are so many local competitors in any sector in China—typically 10 to 100 times more than in a Western economy—with relentless competitive practices, that would-be leading Chinese companies are desperate to gain a technological edge.  

Path 6: Being organizational agile to enable innovation: Fast decision making. Most Western companies, especially American ones, aim with varying success to engage in fast decision making, with flexibility and a decisive boss. Despite a top-down, CEO-oriented hierarchy, Chinese companies also have a high degree of horizontal flexibility, which allows for smooth and rapid flows of resources and knowledge among peers in different departments and functions. They use a “huddle and act” mode of problem-solving that is heavily based on personal relationships rather than formal processes.

The Future will be Innovated in China

Chinese companies do not tend to use just one innovation path but a combination of paths and perhaps even all six. the future of innovation by Chinese companies is bright, solidifying the increasing recognition that China will become a major global force in innovation in the near future.

Original Article

M. Greeven & G. S. Yip. 2021. Six paths to Chinese company innovation. Asia Pacific Journal of Management, 38, 17-33. http://dx.doi.org/10.1007/s10490-018-9635-3

Contact

If you are interested in learning more about this work, contact Professor Yip.