Editor's Note: John Kao, dubbed "Mr. Creativity" by The Economist, is the chairman for the institute of large scale innovation and author of Innovation Nation. You can follow John on Twitter, Facebook and at www.johnkao.com. This post is the second of six pieces by John about his recent trip to China. The first post was China as an innovation nation. Check back each morning this week at 8am for the next installment.
By John Kao – Special to CNN
Why is innovation so important to China? The obvious answer to this question is linked to the importance of economic growth as a driver of social development, a rising standard of living and national eminence.
While China’s growing prosperity is evident, it is worth noting that its GDP is 49% based on manufacturing, a percentage that has held steady for over twenty years. This was described by one senior government official as the result of a “bad deal.” “We make things for the world,” he said, “but we get the pollution, the need to consume natural resources and energy, we get the CO2 emissions and environmental problems.”
Over-reliance on manufacturing in China’s economic base carries significant vulnerability. First, China’s development model will be squeezed from below by new low-cost producers from South East Asia and elsewhere. China’s cost advantage has also come from deferring social investment and entitlements that citizens in other societies take for granted. And if global economic policy makers have their way, China will revalue its currency upward, which will make its cost structure and exports more expensive.
Thus, China will likely become a higher-cost producer, whether because of lower-cost competition, higher currency value or greater social investment. Its current business model is vulnerable as low-cost manufacturing - its traditional value creation engine - inevitably slows down.
It is natural therefore that China would seek a big answer through innovation in desiring to move to the higher value added, upstream part of the economic spectrum. In addition, China has a clear economic interest in diversifying into service industries, a move that so far has not met with significant success by their own admission.
Two other current reasons for China’s current passion for innovation come to mind. First, I believe that there will be an explosion of interest in social innovation there as pressure for a higher standard of living increases. Innovation in a range of public services that don’t necessarily come from government, but could be provided by a host of entrepreneurs, will provide ample fuel for a new wave of innovation.
And innovation will also be important because Chinese businesses currently face a kind of “brand barrier.” While Chinese consumers are increasingly concerned about value, they are said to prefer global brands, especially if they come from the growing middle class. As one entrepreneur put it plaintively, “If I put out a new product, no one will want to buy it from me. Local brands are not recognized.” So there is pressure for new kinds of marketing innovation to enable Chinese brands to rise above the clutter and provide a clear value proposition in the quality and originality of local products that goes beyond low-cost.
This is all well and good, but I believe there are deeper reasons for China’s commitment to an innovation agenda that must be understood in a historical context.
First of all, it must be remembered that China has been a society deeply interested in knowledge and discovery for several thousand years. China has historically been a source of an astonishing amount of new ideas that resulted in the development of gunpowder, hydraulic engineering, seismic sensors, pharmaceuticals - going back millennia. This is perhaps most thoroughly documented in the magisterial work of the sinologist, Joseph Needham, who in a 20 volume work entitled Science and Civilization in China chronicled the vast canvas of China’s commitment to knowledge advancement in a variety of fields ranging from life sciences to civil engineering. As a side note, one of our Chinese colleagues, in responding to a question about Chinese intellectual property (IP) practices, stated rather tartly, “We created a lot of IP like gunpowder and the compass, but we didn’t patent it. Maybe this is why China needs to be more careful about its IP position in the future.” This also illustrates China’s innovation challenge; innovation only comes from the adoption of new ideas, technologies and scientific breakthroughs. China invented gunpowder, but used it to make fireworks. It was left to the West to apply gunpowder to the development of weapons.
To understand today’s focus on innovation in China today, there is also the question of mentality. The literal words for China mean “middle kingdom.” Marco Polo, when he first visited the Emperor of China, Kublai Khan, was told that China had no need for goods from the outside world because it possessed all things in abundance. One finds an echo of this perspective in China’s current drive for indigenous or “homegrown” innovation, about which much more will be said in a later post in this series. But the breadth of the Chinese innovation agenda, the desire eventually to be eminent in all aspects of the innovation horizon, suggests a desire for self-reliance in the innovation domain foreshadowed by the emperor’s comment to Marco Polo.
Finally, innovation is important to China because it fits the times. There is pent-up desire to improve the state of Chinese society, and innovation is seen as key to this. China’s modern history consisted of 150 years of suffering - poverty, famine, war, disruptive social movements such as the so-called Boxer Rebellion, invasion and occupation by the European powers that led to a host of so-called "unequal treaties" such as the opium trade introduced by Great Britain and being treated as second class citizens in their own country, civil war, the Japanese invasion of China in the prequel to what we know as World War II and more.
Few countries have known as much hardship. So it is really only in the last few decades that China has achieved any kind of stability. And in this period, China has experienced a remarkable explosion of socially constructive energy. The skyline of China is mute testimony to this, festooned as it is with new skyscrapers exemplifying some of the very best (and some of the worst) of modern architecture.
In Beijing we have Rem Koolhaas's astonishing CCTV Headquarters building alongside other iconic architectural achievements. And one feels the wealth everywhere in such terms as couture brands, as well as Maserati and Maybach dealerships.
China today is a country filled with ambition that aims if only unconsciously to reclaim its mantle as the middle kingdom. Thus its stance on innovation policy, which will be discussed in greater detail in posts coming up later this week, becomes clearer by referring to a historical context. China does not want to depend on others. And it is crucial to understand that China does not wish to participate in what it perceives to be unequal or disadvantageous relationships with foreigners. Rather, it wishes to create the domestic capability to be able generate innovation itself and has translated this into a set of explicit national goals and initiatives. It is investing like there is no tomorrow in innovation infrastructure in such terms as universities, broadband, talent policies, economic clusters and new investment regimes. As regards innovation in China, the past is truly prologue and the future is being fueled by the highest possible level of innovation ambition.
The views expressed in this article are solely those of John Kao.