China faces chal­lenges in in­no­va­tion

China Daily (Canada) - - FRONT PAGE - By YU RAN in Shang­hai


China will be­come a global leader in in­no­va­tion if Chi­nese com­pa­nies en­hance the strengths in mar­kets that re­quire cre­ative science and en­gi­neer­ing tal­ents, ac­cord­ing to a newly re­leased re­port by the McKin­sey Global In­sti­tute.

MGI iden­ti­fied four archetypes of in­no­va­tion — sci­ence­based, en­gi­neer­ing­based, cus­tomer-fo­cused, and ef­fi­ciency-driven.

Some of China’s great­est suc­cesses have come in in­dus­tries that re­quire cus­tomer­fo­cused in­no­va­tion. As mea­sured by share of global rev­enue, Chi­nese firms are grow­ing rapidly across sec­tors such as house­hold ap­pli­ances —in which they now ac­count for 39 per­cent of global rev­enue — In­ter­net soft­ware (15 per­cent) and smart­phones (10 per­cent).

Mean­while, China’s strength in ef­fi­ciency-driven in­no­va­tion has also al­lowed it to con­sol­i­date its po­si­tion as a pre-em­i­nent global man­u­fac­tur­ing hub and is help­ing Chi­nese man­u­fac­tur­ers rise in the in­dus­try value chain.

“Although Chi­nese com­pa­nies are good at cus­tomer­fo­cused and ef­fi­ciency-driven in­no­va­tion, they still lack re­search and tal­ent to stand out in in­dus­tries that rely on science and en­gi­neer­ing­based in­no­va­tion,” said Chen Yougang, part­ner and head of MGI in China.

Ac­cord­ing to MGI’s anal­y­sis, China is not yet a top global com­peti­tor in three in­dus­tries that de­pend on science-based in­no­va­tion. It has less than 1 per­cent share of global rev­enue in branded phar­ma­ceu­ti­cals, 3 per­cent in biotech, and 3 per­cent in semi­con­duc­tor de­sign. In these mar­kets, Chi­nese firms still tend to fo­cus on lower-value-added prod­ucts and strate­gies, such as mak­ing generic phar­ma­ceu­ti­cals.

This record re­flects both how long it takes to build ca­pac­ity in science-based in­no­va­tion and how much catch­ing up China still has to do de­spite its large in­vest­ments in R&D. In fact, there are no Chi­nese com­pa­nies with strong brand names in science-based in­no­va­tion.

“Chi­nese com­pa­nies need to shift from ‘sourc­ing in­no­va­tion’ to ‘driv­ing in­no­va­tion’ by putting in place ro­bust man­age­ment sys­tems that solve mar­ket needs with dif­fer­en­ti­at­ing tech­nol­ogy and win­ning busi­ness mod­els,” said Erik Roth, se­nior part­ner at McKin­sey.

He added that poli­cies that en­cour­age entrepreneurship, the de­vel­op­ment of more core science and en­gi­neer­ing skills and hav­ing a greater tol­er­ance to take risks and learn from fail­ure will be es­sen­tial in­gre­di­ents to China’s con­tin­ued de­vel­op­ment as a global in­no­va­tion leader.

A rapidly ag­ing pop­u­la­tion, in­creas­ing debt and de­clin­ing re­turns on in­vest­ment are plac­ing new bur­dens on China’s econ­omy. Given these trends, MGI ar­gues that in­no­va­tion is es­sen­tial to China’s long-term sus­tain­able growth. While China has over the past 30 years re­lied on ab­sorb­ing and adapt­ing tech­nol­ogy from other coun­tries, in­no­va­tion should now play a larger role across all sec­tors of the Chi­nese econ­omy.

“By bet­ter un­der­stand­ing the way in­no­va­tion works across in­dus­try sec­tors, Chi­nese busi­ness lead­ers, aca­demics and pol­icy mak­ers can ef­fec­tively fo­cus ef­forts to pro­mote in­no­va­tion,” said Chen.

How­ever, as MGI’s anal­y­sis shows, the con­tri­bu­tion of in­no­va­tion to eco­nomic growth (as mea­sured by mul­ti­fac­tor pro­duc­tiv­ity) has de­clined in re­cent years.

MGI’s anal­y­sis shows that from 1990 to 2010, mul­ti­fac­tor pro­duc­tiv­ity (which is de­fined as GDP growth mi­nus the in­put fac­tors of energy, la­bor and cap­i­tal) con­trib­uted be­tween 40 and 48 per­cent of GDP growth. Over the past five years, mul­ti­fac­tor pro­duc­tiv­ity has con­trib­uted just 30 per­cent of GDP growth, or about 2.4 per­cent­age points of GDP growth per year, the low­est level in 35 years.

The MGI re­port states that in or­der to main­tain GDP growth of 5.5 to 6.5 per­cent per year through 2025, China will need to gen­er­ate 35 to 50 per­cent of GDP growth (2 to 3 per­cent­age points) from mul­ti­fac­tor pro­duc­tiv­ity.

Jonathan Woet­zel, se­nior part­ner and di­rec­tor of the McKin­sey Global In­sti­tute, said that while the gov­ern­ment has pledged good sup­port to in­no­va­tion through eco­nomic de­vel­op­ment poli­cies and in­vest­ments, con­tin­ued re­forms, par­tic­u­larly in State-owned en­ter­prises, are needed to speed up the in­no­va­tion drive.

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