Globalization and business innovation in China

Business innovation and enterprise -- Innovation in China

The buzzword of today is represented by the internationalized economic crisis which has commenced from within the American real estate sector and soon expanded to impact all sectors across the entire globe. Before the emergence of the crisis however, the buzzword was that of globalization, understood as the process by which boundaries between states are gradually eliminated and the values, beliefs, cultures and resources of one region can easily transcend to another region.

Globalization has impacted all aspects of life, from the means in which one spends their leisure time to the means in which one completes their professional tasks. Globalization has generated effects on all fields of life, from politics, to economics and culture.

Within the business community, globalization has translated into a myriad of impacts. For once, the phenomenon allowed economic agents to transcend boundaries and benefit from the comparative advantage of other regions. In other words, they gained access to more natural resources and to cost effective labor forces. Then, companies were able to create, increase and consolidate international market shares.

Still, the advent of globalization has also materialized in increased competition in both the national as well as the international markets. Enhanced competition in turn has supported increasing customer demands, which ultimately materialized in urges for sustained development within the industry sectors. In such a setting then, it is believed that globalization has fostered development and innovation.

In the background of globalization, the current project sets out to assess the impacts of the phenomenon on the innovative activities of firms in China. In the pursuit of this objective, three different issues would be approached -- the features of the Chinese business environment, which could impact innovative activities; the industries with a potential for innovation and; the personal and critical view of whether investing in China would support innovation, followed by recommendations of how economic agents could overcome the shortages in the Chinese marketplace.

2. The Chinese business environment

China is one of the largest economies of the globe; its gross domestic product of $10,090 billion is only exceeded by that of the United States and the European Union. The Asian country has generically been an enclosed economy, focused on self sufficiency and rules through dynasties with focus on self and cultural preservation.

Three decades ago however, the country commenced a process of reform which liberalized its markets and prompted China as a notable trade partner. The reform program included elements such as the elimination of collectivized agriculture, the liberalization of prices, the decentralization of the fiscal institutions, privatization and the reduction of state intervention within the economy or the development of stock markets. The implementation of these reforms prompted China to become the largest exporter of the globe and the third largest global economy.

Still, in spite of these developments, China remains an emergent economy, which continually faces numerous problems. Some of the constant challenges for the Asian state include the high levels of national debts, corruption, environmental concerns and the assumed low quality of its exports (Central Intelligence Agency, 2011).

All of these features impact the economic climate at a general level, but also at the specific level of innovation. The lines below discuss some of the positive and negative features in the business environment and the means in which they impact innovation in firms.

2.1. Positive dimensions of innovation in China

There is a wide array of issues which create positive stances for innovation to be implemented by economic agents in China. Some of the more notable ones include the following:

The labor force

The cost efficiencies

Technologies

Governmental support.

a) The labor force

The Chinese labor force is among the most cost effective ones in the world, and these low costs contribute significantly to attracting new investors in the country. But aside from actual investors, the cost effective labor force also stimulates innovation. Specifically, by creating cost efficiencies, the Chinese labor force allows economic agents to retain more in profits, which they can then reinvest in innovation. In other words, by working with the Chinese labor force, the domestic and international companies are better financially equipped to stimulate innovation.

b) The cost efficiencies

Additionally, aside from the actual costs of using Chinese labor force, this element also stimulates innovation at another level. Particularly, the Chinese labor force is highly flexible; it is accustomed to working long hours and adjusting itself to the needs of the employer / investor. This docile and disciplined labor force appeals to investors; supports innovation and economic growth (Park, Cai and Du). This finding is also consistent with that of Wuwei Li (2011), who found that the level of spending is a direct stimulator of innovation. In other words, due to cost efficiencies, economic agents operating in China possess more capitals to be reinvested in innovation.

c) Technologies

China is often perceived as a country focused on its labor force advantages and its export advantages, and playing a less important role within the technological field. Still, innovation is a primary determinant of innovation in China and the country does possess some technological advantages to support innovation within economic agents (Lin, 2007).

According to Adam Ashton (2010), China possesses superior technologies relative to the United States in terms of environmentally responsible advancements, with specific examples in the areas of energy generation and transportation. These specific technologic advancements of China include high voltage transmission, high-speed rail, advanced coal technologies, nuclear power, alternative energy vehicles, renewable energy, supercomputing, electric vehicle batteries or the conversion of sunlight into usable fuel.

d) Governmental support

Aside from labor force, cost efficiencies and technologies, innovation in China is also supported by other elements, including the support of government in innovation; this support is best materialized in the incentives offered by the Chinese governments to foreign investors and the support of the private business sector, as well as the superior protection of the intellectual property rights (The Economist, 2010).

2.2. Negative dimensions of innovation in China

The factors which foster innovation in China can generically be linked to new features and improvements generated throughout the extended reform process, such as new access to technologies or market liberalization. Still, the centralized and previously enclosed economy of China, coupled with some other new features in the country, also create negative stances for the generation of innovation by economic agents. These features include primarily the following:

The planning system

The competition

Other negative aspects.

a) The planning system

The planning system was traditionally a central one in China and this lacked the drive for innovation and change. In some of the larger size Chinese corporations, the planning system is still centralized. The organizational hierarchies are vertical and decisions are taken exclusively at the top. The focus on research and development is limited, as are the funds allocated to this department.

The resources for research and development are also widely controlled by the large size entities as well as by the state, with the small size entities revealing a restricted access to these resources. In other words, innovation is stifled in China as the state owned enterprises which have resources are not motivated to innovate, whereas the smaller, private companies which are motivated to innovate do not possess the necessary resources (Organization for Economic Co-operation and Development, 2002).

c) Other negative factors of innovation in China

Aside from the planning system and market competition, the Organization for Economic Co-operation and Development also identifies the following as elements discouraging innovation in China:

Incomplete enterprise reform, which should continue to transform "Chinese enterprises into market entities, which are profit-driven, innovative and very responsive to market demands" (Organization for Economic Co-operation and Development, 2002)

Limited managerial competence, especially in the fields of technology and innovation management

Limited enterprise investment in research and development

Restricted protection of intellectual rights, which demotivates innovation by demoralizing the innovators whose work is being copied, but also by decreasing the need for innovation as the industry operators will just copy the innovations of others, rather than create their own advancements

Shortage of skilled and qualified labor force in the field of innovation

Low levels of development for the financial instruments required to fund research, development and innovation

Low levels of technological diffusion (Organization for Economic Co-operation and Development, 2002).

3. Industries with innovative potential

As it has been mentioned throughout the previous section, the Chinese economy and business sector are characterized by a wide array of elements which both promote as well as stifle innovation and research and development. Some of the shortages, such as the protection of property rights, are being addressed and would be gradually transformed into items promoting innovation rather than discouraging it. Nonetheless, it has to be recognized that the country is faced with numerous challenges to innovation and that most of these challenges are pegged to the emergent nature of the country, its economy and its industry sectors.

In spite of the shortages identified, there are some specific industries in the Asian country which do stand increased chances of supporting innovation. These refer to the following:

Technology

Entertainment and cultural innovation

Environmental field

The technological sector is, by far, the field most likely to stimulate innovation. And China has already commenced to create new technologies. Specifically, while it is often accepted that the Chinese technology workers are centered on replicating the innovations within the global community, the recent years have witnessed impressive innovations in the Chinese technology sector, such as those pointed out by Ashton (2010).

The entertainment sector is often linked to the technological one, through the development of items such as tablets of smart phones which increase the quality of the leisure time. And aside from the technological gadgets, the entrainment industry in China would also further develop in terms of cultural innovation, through elements such as amusement parks, design parks or art villages, which are becoming more and more popular across the country (Chang-Rong and Fu-Yu, 2011). This sector is as such also revealing high potential for future developments and innovation.

Finally, the last sector perceived as having a high potential for innovation is represented by the environmental field. China is faced with a multitude of environmental issues, such as urban pollution or deforestation. But the Chinese technical workers and the managerial workers have committed to developing new solutions which promote environmental responsibility. This would become obvious in terms of both technologic innovation, as well as other measures to promote responsibility, such as education or changing business practices. The innovative potential of the environmentally responsible sector is stimulated from both within the domestic sector as well as the global community (Organization for Economic Co-operation and Development, 2008).

4. Conclusions and recommendations

China is currently the world's third largest economy, preceded only by the European Union and the United States of America. Still, China remains an emergent economy and has an increased potential to improve its economic conditions in the future.

But like any other emergent economy, the country reveals a series of shortages which discourage foreign investments. One specific aspect in this sense is represented by the approach to innovation.

The reforms implemented three decades ago are still ongoing and they focus on liberalizing China and strengthening its international position. Nonetheless, they have so far been insufficient in dealing with all the problems and China continues to face issues which discourage innovation. These for instance include the lack of specialized workers in research and development, poor intellectual property rights protection, or still increased intervention of the state. In order for investors to be better attracted, it is necessary for the state to remedy these problems. Or for the time being, it is necessary for the investors to devise specific strategies which protect them against the peculiarities of the national innovation system.

Aside from the shortages in the approach to innovation, China also reveals some notable benefits, such as cost efficiencies and increased capitals, flexible and disciplined workforce or continued technologic developments and commitments. While these are still insufficient to ensure investors' success in China, they do represent evidence that the country is developing, it reaching its potential and is able to further develop. In this setting then, it is recommended for investments to be made in China as these would generate gains, as well as support innovation in the country. This recommendation is based on the future development of China, but is accompanied by the need for investors to devise strategies which best answer to these challenges. In this order of ideas, some suggestions as to how investors could maximize their investments and support innovation include the following:

Use mechanisms of market protection to the highest possible extent as the stock prices in China are highly volatile. Prudence should be the main concern in any investments.

Collect information from reliable sources only and recheck the data retrieved. It is even recommended for the potential investors to contract the services of local consultants in order to best identify all legal, commercial, cultural and other traits important for the business venture; it is also necessary to conduct extensive research on the selected business partners. This step is necessary as the business operations in China still lack transparency.

Diversify the investment portfolio in order to not depend on a single firm or industry in China, but to minimize the risks of losses.

Remain highly alert to all changes impacting the Chinese economy and marketplace, including the new laws issued by the government. China is still developing its political system to fit the new global context and the current state of the economy and investors are sensitive to changing legislations. This recommendation is applicable when investing in both the public, as well as the private sector in China. "Even when investing in private Chinese companies you need to take politics into account. A sudden morality campaign by the government might mean shutting down things like micro-blogging sites without warning, or imposing limits on online gaming (gaming addiction among youngsters is increasingly being viewed as a serious social problem). That would hurt the stock prices of online game companies like Netease, Shanda and Sohu" (Rein, 2010).

For learning and accommodation purposes, investors should consider indirect investments in China. These would be materialized in the purchase of stocks in companies which trade with China or which interact with the country at deeper levels. Throughout this period, the investors would be able to observe the sensitivity of the Chinese market, its reactions and its potential, and the investor would be able to identify risks which interest them and consider potential solutions.

In case of direct investments, it is recommended that the foreign investors emphasize on prospective partners which follow these specific trends: the preference of Chinese people to travel, the increasing purchase power of women and the fact that the future economic growth is not linked to the megacities of Shanghai and Beijing, but to less economically known cities such as Hefei, Dalian and Chenhdu (Rein, 2010).

The Asian country is still developing and emerging and its full potential is still unknown, but believed to be impressive. Economic agents investing in the country would be able to capitalize on their investments for the decades to come and they would also be able to further stimulate innovation. Still, they must first ensure that they respond to the challenges presented by the domestic market. In other words, similar to any other investment situation, the recommendation is that of prudence and adaptation to the features of the local community and marketplace.

References:

Ashton, A., 2010, 7 technologies where China has the U.S. beat, GreenBiz, http://www.greenbiz.com/blog/2010/12/07/7-technologies-where-china-has-us-beat last accessed on November 8, 2011

Chang-Rong, K., Fu-Yu, L., 2011, Cultural innovation industry exports talent to China, Want China Times, http://www.wantchinatimes.com/news-subclass-cnt.aspx?cid=1504&MainCatID=15&id=20110207000010 last accessed on November 8, 2011

Li, W., 2011, Applying Grey relational analysis to evaluate the factors affecting innovation capability: evidence from Chinese high-tech industries, Canadian Social Science, Vol. 7, No. 3

Lin, C.Y., 2007, Factors affecting innovation in logistics technologies for logistics service providers in China, Journal of Technology Management in China, Vol. 2, No. 1

Park, A., Cai, F., Du, Y., Can China meet its employment challenges, University of Oxford, http://www.economics.ox.ac.uk/members/albert.park/papers/employ.pdf last accessed on November 8, 2011

Rein, S., 2010, How to invest in China, Forbes, http://www.forbes.com/2010/07/20/china-investing-personal-finance-leadership-managing-rein.html last accessed on November 8, 2011

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2010, Innovation in China. Patents, yes; ideas, maybe, The Economist, http://www.economist.com/node/17257940 last accessed on November 8, 2011

2011, The world factbook, Central Intelligence Agency, https://www.cia.gov/library/publications/the-world-factbook / last accessed on November 8, 2011