Chinese Innovation: On the Rise

By Shlomo Maital

China patents

An insightful new report by McKinsey Global “China’s Innovation Imperative” sheds important light on China’s massive effort to become more innovative.

   Here are some of the report’s key insights:

   * “to realize consensus growth forecasts—5.5 to 6.5 percent a year—during the coming decade, China must generate two to three percentage points of annual GDP growth through innovation”.   In other words up to half of China’s GDP growth must come from innovation. This is no easy task.

* “…about 40 percent of the increase in total factor productivity could come from innovations in higher-level manufacturing and services enabled by the Internet. Other innovations could come from catch-up activities that bring Chinese enterprises up to global best practices as well as breakthroughs yet to emerge. China will have evolved from an “innovation sponge,” absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader.”

* “China has become a strong innovator in areas such as consumer electronics and construction equipment. Yet in others—creating new drugs or designing automobile engines, for example—the country still isn’t globally competitive. That’s true even though every year it spends more than $200 billion on research (second only to the United States), turns out close to 30,000 PhDs in science and engineering, and leads the world in patent applications (more than 820,000 in 2013).”

* “…we identified four innovation archetypes: customer focused, efficiency driven, engineering based, and science based. We then compared the actual global revenues of individual industries with what we would expect them to generate given China’s share of global GDP (12 percent in 2013). As the exhibit shows, Chinese companies that rely on customer-focused and efficiency-driven innovation—in industries such as household appliances, Internet software and services, solar panels, and construction machinery—perform relatively well.”

     In general, China has strengths in process innovation, as it proves each time it takes production blueprints from a foreign firm and quickly produces the product. China also appears strong in incremental innovation.   Perhaps a new focus should be placed on radical innovation – game changing new ways to create value and to do business.

   The mantra of China’s 13th 5-year-plan is “China dreams”.   Dream big, China.