Partner Insight: Giving context to Chinese innovation — by Iris Quan

A full understanding of the Chinese context is a prerequisite to succeed in innovation in China.

TSVC Partner Iris (Xiaohong) Quan writes on ChinaDaily to discuss the conflict and merging future of Sino-American relations in technology and innovation.

TSVC Partner, Iris Quan, Ph.D. & Professor

Iris Quan is a professor in the Lucas College and Graduate School of Business at San Jose State University. Her research interests are in the fields of entrepreneurship and innovation. She holds a PhD from the University of California, Berkeley.

China’s share of global investment in research and development (R&D) grew to 13 percent in 2011 (compared with the United States at 34 percent, Europe 23 percent and Japan 12 percent) and reached 20 percent in 2015, second to the US.

In 2011, China surpassed the US in terms of patent application numbers filed with the World Intellectual Property Organization of the United Nations, and has since maintained its lead position in patent applications for six years in a row.

R&D personnel in China reached 63 million in 2011, which accounted for 25 percent of the world total, surpassing the US (17 percent). Scientific paper publications — SCI indexed (Science Citation Index) — reached 14.9 percent of the total in 2014, ranked No 2 after the US (27.5 percent).

Despite this rosy picture, questions remain on the innovativeness of Chinese firms. Let’s take a further look. For instance, out of 1.2 million patents that were granted domestically in China in 2014, invention patents, which have the highest level of innovativeness in patent evaluations, only accounted for about 13 percent. In comparison, utility patents in the US, which are equivalent to invention patents in China, accounted for about 90 percent of total patents granted in 2014, according to the United States Patent and Trademark Office.

Venture capital can provide another insightful perspective on China’s innovation. Venture capital is well recognized as playing a vital role in innovation, job creation, wealth creation and economic growth. According to Dow Jones VentureSource data, Chinese firms received 332 venture capital equity financing deals in 2011, surpassing the UK’s 274. In total value, Chinese companies attracted US$6 billion in venture capital equity financing, compared with US$6.1 billion in Europe as a whole. Even as recently as 2009, Europe’s venture capital financing of US$5.2 billion was almost double China’s US$2.8 billion at the time.

The numbers are intriguing. Considering the significant role of innovation promoter that venture capital has traditionally played, does the data mean that the Chinese economy is getting truly innovative, to a degree that surpasses some traditional innovation hubs in developed countries?

Further analysis of the data shows that the median size of a venture capital deal for a Chinese company was US$12.4 million in 2011, while the figure was US$2.7 million in Europe and US$5 million in the US. This seems to suggest that venture capital investment in Chinese startups tends to be at later stages of business development. Is investing in Chinese companies too risky so that venture capital firms would not delve into the early stages?

The Chinese government is very ambitious in promoting innovation and has declared its intention to transform China into “an innovative society” by 2020 and a world leader in science and technology by 2050, according to its 2006 Medium- and Long-Term Plan for the Development of Science and Technology. And its power has been demonstrated in shaping nascent innovative industries such as the wind turbine industry and high-speed rail. There are also efforts to put humans on the moon.

However, as recently as 2014, Harvard Business Review published an article entitled Why China Can’t Innovate. The authors stated: “Today, though, many believe that the West is home to creative business thinkers and innovators, and that China is largely a land of rule-bound rote learners — a place where R&D is diligently pursued but breakthroughs are rare.” The reasons? Some cite lack of creativity in its engineers. Some argue that most Chinese firms do not invest enough money in research. Others blame the government for its failure to protect intellectual property rights. Still others blame the Chinese education system.

Innovation, however, is not all about technological innovation. According to the prophet of innovation, Joseph Schumpeter, innovation is to carry out new combinations. There are five types of new combinations — production of new types of goods; introduction of a new method of production; opening of a new market; use of new sources of raw materials and intermediate goods; and new organization of production. With that understanding, we see impressive innovations going on in China indeed.

Booming entrepreneurship activities have well illustrated that innovation is happening widely within China. Young entrepreneurs are flocking to what seem to be unlimited money-making opportunities with investments in artificial intelligence (AI), blockchain, food delivery, education, and healthcare.

Technology giants like Tencent, Baidu and Alibaba have strategically reached a broad array of industries and try to foster innovation within the firms. Some traditional State-owned enterprises have used various means to upgrade their technological capability, such as Beijing BOE Optoelectronics Technology. Indeed, with commercialization as a focus, Chinese innovation is evolving in diverse ways across different industries.

Chinese firms certainly have some advantages in innovation. For instance, Chinese startups will benefit from proximity to the supply chain and rapid prototyping in the area of consumer robots. The huge amount of data that AI businesses require can also be relatively easily obtained in the Chinese market.

Supportive government policies combined with generous salaries are helping China’s companies lure top talent away from Western rivals. Abundant investments can also propel innovation through mergers and acquisitions. A full understanding of the Chinese context is a prerequisite to succeed in innovation in China.