Business Enterprise and Innovation in China: Key Industries

Introduction

The 21st century has been called "The Century of Asia," with China clearly leading the pack. One of the driving forces behind China's economic success has been the country's ability to respond to an increasingly globalized and competitive marketplace through innovation and hard work. Although a strong work ethic has been a formative ingredient in China's rise, there have been mixed results when it comes to developing and promoting technological innovation. On the one hand, China has succeeded brilliantly where many other countries have failed in transitioning from its former state-owned enterprise economy to a free market economy. On the other hand, the Chinese "old guard" continues to pursue economic development initiatives in ways that can stifle innovative progress.

To identify the salient features of the business environment most likely to impact China's innovation activities, determine which industries will likely be involved, and examine the major obstacles that remain, this paper provides a review of the relevant literature, followed by a summary of the research and key findings in the conclusion.

Background and Overview

While no one can predict when an innovative concept will emerge, what is known is that innovative practices are essential to achieving a competitive advantage in an increasingly globalized marketplace (Lin & Lin 2010). Given its spectacular economic growth in recent years, many observers might believe China has placed a high value on innovation to fuel its economic development, but this view is only partially correct. For the past four decades, China has succeeded in transitioning itself from a closed, centrally planned economy to a free market system that plays an increasingly important role in the global marketplace, with China becoming the world's largest exporter in 2010 (China 2011). The reforms implemented by the Chinese government to achieve this transition have been credited in large part for enabling Chinese firms to innovate where other countries have failed. For example, Gu (1999) reports that a number of features of China's reform programs have facilitated innovative practices in Chinese industries, in sharp contrast to the experiences of the former Soviet republics in Eastern and Central Europe.

This relentless economic growth, however, has not always been driven by innovation. It has often been the result of ongoing government oversight—and in some cases interference—with the private sector, and even a reversion to some previous state-controlled policies (China 2011). For instance, according to U.S. government analysts, the Chinese leadership has in some cases considered it in the nation's best interests to nationalize certain industries deemed essential to economic security (China 2011).

Despite such political backsliding, China's performance over the past 30 years has been impressive. U.S. analysts note that the series of reforms implemented by the Chinese government have had a remarkable effect on GDP growth, which increased by more than 1,000% since 1978 (China 2001). By 2010, China had become the second-largest economy in the world after the United States when measured on a purchasing power parity basis (China 2011). As a result, Chinese industrial and agricultural output surpasses that of the United States, though per capita income remains below the world average (China 2011).

More recently, growth in Chinese domestic demand has created an increased appetite for imports, which grew by 6.2% during the third quarter of 2009. New jobs have been created primarily in the service, construction, and public sectors, while employment in export sectors has declined somewhat—a sign of the economy's transition away from a strictly export-oriented model, as well as the growing economic clout of China's middle class (China quarterly update 2009). Nevertheless, China's exports continued to experience strong growth, driven in part by the increasing competitiveness of the country's manufacturing industry (China quarterly update 2009).

The Chinese government's most recent Five-Year Plan (March 2011) stresses the need to target domestic markets in order to reduce reliance on exports, but analysts expect only moderate success in achieving these ambitious goals (China 2011). U.S. analysts predict that the Chinese economy is well situated to continue impressive growth in the coming years, and the Chinese government has pledged to increase domestic consumption in order to wean the economy off its current export base.

Innovative Industries in China

Currently, there are signs that the most innovative industries in China are those with a proven track record of success, including the life sciences, nanotechnology, high-speed computing and communications, and fuel cell technology, among others (Simon 2009). The younger generation of Chinese professionals taking the mantle of leadership today will become the innovators of tomorrow, drawing on their recognition and appreciation of industry best practices wherever they are found (Simon 2009). As Simon emphasizes, "Members of this talent community, large numbers of whom will have spent time abroad for work and/or education, will represent the cutting edge of an emerging wave of Chinese technological entrepreneurs who will help to redefine the operating environment for knowledge creation and innovation in China by introducing successful Western practices" (2009, p. 30). Kriz and Keating (2009) similarly report that the current cadre of Chinese students being educated abroad numbers more than 100,000; these professionals will be well positioned to bring innovative practices home, generate new patents, and become productive members of international communities of interest.

The Chinese government has also used international joint ventures as a method to promote innovation across its industries (Cheung 2007). Experience to date confirms that this approach carries proven benefits for all stakeholders involved. According to Cheung, "In the context of development, multinational enterprises (MNEs) often bring specific advantages such as sophisticated technology, financial resources, manufacturing skills, managerial talents and entrepreneurship when the level of competition in the host country is intense" (p. 228).

In some cases, international joint ventures provide the general framework within which innovation can occur; in others, MNEs make specific contributions to promote innovation, including the transfer of technologies—and MNEs are more likely to make such transfers when they have a vested interest in the enterprise (Cheung 2007). This approach has been in use since 1978, when China's "open door policy" was promulgated to attract foreign investment and advanced technologies (Cheung 2007). Notwithstanding China's enormous pool of talent and resources, the need for advanced foreign technologies to achieve innovation remained firmly in place throughout the closing years of the 20th century. Zhang and Pearce (2010) emphasize that, despite the enormous amounts of underutilized resources available to China, the country's current progress in innovation would not have been possible without advanced technologies sourced from abroad.

One industry in particular appears to have benefited from these open-door policies in a way that reflects the type of innovation most suitable for the emerging Chinese business model. According to Gao and Damsgaard (2007), "China is the largest mobile telecommunications market in the world, which grows at one of the highest rates on the global scale" (p. 184). These authors are also quick to point out that innovation in China's mobile telecommunications market has proceeded quite differently from elsewhere in the world: "Constrained by its unique social environment, China's mobile telecommunications market has innovated in a particular way" (Gao & Damsgaard 2007, p. 185).

In support of this observation, Gao and Damsgaard (2007) report that while markets in other countries have transitioned from second generation (2G) technologies through 2.5G to third and fourth generation (3G and 4G) systems, the Chinese government postponed issuing even 3G licenses while waiting for domestic 3G technologies to catch up. This constraint on one avenue of innovation led to another innovative approach being adopted in its place. As Gao and Damsgaard note, "Interestingly, we instead have seen the success of personal handyphone system (PHS), a cordless telephony technology generally treated as an extension of the fixed network. It is of practical interest to know the characteristics of mobile telecommunications market innovation in China and to disclose the driving forces to it" (2007, p. 185). According to Harris and Dennis (2002), the PHS functions as a standard mobile telephone but also features facsimile and video transmission capabilities, the ability to send and receive email, and full Internet compatibility.

The driving forces fueling growth in the PHS industry are not unique, but they have been focused on an "innovation process [that] often leads to changes in market structure composed by varied players, and the appearance of novel services in the market" (Gao & Damsgaard 2007, p. 185). Not all industries have shared the positive experiences of the mobile telephone sector in China, however, and a number of obstacles and challenges continue to hamper innovative practices.

Conclusion

The research showed that China is well situated to build on its recent successes, and many economists predict the country will become the leading global economy in the foreseeable future. Driving this economic growth has been a thoughtful—some would say overly cautious—approach to promoting economic development through innovative practices. Although China has much going for it in terms of a growing domestic market and a talented pool of younger professionals who will assume the country's leadership in the years to come, it remains constrained in its efforts to promote innovation by several factors. These include an export-dependent economy that is vulnerable to fluctuations in the global marketplace and massive local government debt resulting from the rush to modernize infrastructure.

Despite these obstacles, the research also showed that enterprises in China have taken the initiative to overcome such challenges. Even though innovative practices have proceeded differently in China than elsewhere in the world, innovation continues to drive the Chinese economy in several industries, including mobile telecommunications and other high-tech sectors such as nanotechnology, life sciences, high-speed computing, and fuel cell technologies. In the final analysis, scholars of the 22nd century will likely cite the first decade of the 21st century as the beginning of China's genuine economic development, founded on a free market philosophy where it is indeed "glorious to get rich."