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The implications of the rise of the Innovation in China

By Jesus David Cano Romano
July 27, 2015

Innovation is now part of the new narrative in China, with the series of reforms and guidelines set to guide the nation towards a new path of growth based on quality growth, internal consumption and innovation as part of the major pillars.

The Chinese government plans to transform the nation into a global leader in science and technology, and has boosted R&D investment throughout the country.  Chinese universities and institutes are undertaking cutting-edge research on technologies ranging from big data to biochemistry, nanotechnology to robotics, while partnering with science parks to commercialize these innovations. Chinese entrepreneurs are increasingly pioneers of innovation, whether in products or business processes, and are constantly adapting to the ever-changing and growing demands of the Chinese consumer market.

The numbers are clear during 2014 according to McKinsey, for example, the country spent nearly $200 billion on R&D, the second-largest investment by any country in absolute terms (and about 2% of GDP). China’s universities graduate more than 1.2 million engineers each year—more than any other country. And it leads the world in patent applications, with more than 825,000 in 2013, compared with about 570,000 for the United States.

In spite all of this investment and joint ventures there are still some issues that China needs to solve if wants to morph from a low-cost manufacturer to a value added innovator, mainly related to the work conditions that have been improving significantly  but still some gaps to fill and the intellectual property protection issues mainly related to copycat items.

Innovation will also be critical to generating jobs and income, especially in services. Continued urbanization is expected to bring 100 million more residents to large Chinese cities by 2020. That will create a need for ten million new urban jobs every year, even as manufacturing employment drops.

Both domestic companies and global companies operating in China can benefit from the Chinese innovation model. The results can be used by both types of companies to compete in China and around the world. Both groups of companies also can make bigger bets on China’s innovation potential and take advantage of the speed of innovation in China. In addition, global players operating in China can deal with local competition through multiple approaches: beat, buy, or join (collaborate with) them.

For Companies doing business with and inside China some topics needed to be reviewed in order to understand the rise of the innovations vows in the country are:

• Given China’s adjustment to a ‘’new normal’’ in economic development, how will this impact the country’s near-term reform efforts and how will it affect the global economy?

• With the ’Made in China 2025’’ manufacturing plan, how will the nation’s role in international industry partnerships link global value chains, upgrade traditional industries and boost growth and employment?

• China’s establishment of the AIIB, New Development Bank and the Silk Road Fund has significant regional and global implications. How will these institutions shape multilateral development lending and infrastructure development?

• The Renminbi has ambitions to become a significant global currency in the near future. How will this impact capital account liberalization, spur the progress of domestic financial reforms and transform global markets?

• Chinese technology start-ups could disrupt markets and industries. How will digitization trends and China’s ‘’internet plus’’ policy transform sectors from finance to media industries, retail and consumption models, as well as manufacturing and supply chains?

• As Chinese entrepreneurs continue to venture into global markets, what will it take for Chinese companies to become truly global brands? We will look at the strategies deployed by Chinese entrepreneurs in overseas markets to overcome challenges and build their reputation globally.

With the right policies in place to support entrepreneurism, encourage market-based competition in more industries, and make China more attractive to top science talent, China can succeed in all forms of innovation. Timing will be critical: with slowing GDP growth, an aging population, and declining returns on massive fixed investments, China must find ways to raise productivity. Innovation is key to this sustainable growth path.