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Innovation in China: still awaiting transformative leaders

by CKGSB Knowledge

June 23, 2010

Innovation accounts for a sizable portion of economy-wide growth in productivity, especially in high-income countries. According to the 2011 World Intellectual Property Report ‘the Changing Face of Innovation’ recently released by the World Intellectual Property Organization (WIPO), innovation-driven growth is no longer the prerogative of high-income countries alone. Low and middle-income economies including China have increased their R&D expenditures by 13% between 1993 and 2009. China became the world’s second largest R&D spender, adding 10%.

Premier Wen Jiabao reiterated the government’s commitment to building an innovation-driven society on several occasions. “During the 12th Five-Year Plan period, we will give greater priority to R&D, deepen reform of science and technology institutions, and address the root causes of R&D not fully meeting the need of economic development. We will increase input in science and technology and raise the share of budget for R&D in GDP from 1.75% to 2.2%,” said Premier Wen at the 2011 World Economic Forum in Dalian.

The effect of these policies and direction can already be seen. In 2010 there were, in all, 1,637 science parks in mainland China, including 224 national level science parks, 1,344 provincial level science parks, and 69 national university level science parks. “Benefited by state and provincial government policy support, the university science parks have turned into an essential hotbed for cultivating independent intellectual property,” said Chen Hongbo, President of Tsinghua University Science Park (TusPark). According to WIPO’s 2011 report, research by universities and public research organizations makes up almost 100% of the total basic research in China.

Innovation is not only an important measure for a country’s political authorities, but is also a hot topic between entrepreneur and scholars. In the 1990s, Peter Drucker, the father of modern management, predicted that within the next 10 years, China would be producing its own management luminaries. These new leaders will generate innovative strategies and new frameworks for thinking about business, he said.

Ten years have already passed: have we seen the world that Drucker predicted?

“Frankly speaking, the ecosystem of innovation in China is not as good as Silicon Valley. It is just a start-up in China”, said Tao Ning, Chief Operations Officer of Innovative Works, “We are still starters – no matter the product and the services – the business models are all copied from Europe, Japan and US.” In line with Tao’s observation, Professor Teng Bingsheng, Associate Dean and Associate Professor of Strategic Management in the Cheung Kong Graduate School of Business (CKGSB) said, “Regrettably, we have yet to see the emergence of the high-level thinkers Drucker envisioned, and I’m relatively pessimistic about the near-term outlook. In fact, considering the current situation, I’m afraid we won’t see such leaders emerge any time in the next decade.”

China launched its Nasdaq-style growth enterprise market ChiNext in October 2009. One of the main purposes of ChiNext is to provide a financing platform to serve the nation’s independent innovation strategy. In the two years since it launched, scandals about ChiNext-listed companies filled newspapers and irritated investors.

By October 2011, statistics from Shenzhen Securities Information Co., Ltd showed that the 271 enterprises listed on the ChiNext have collected RMB 191.5 billion, almost three times the expected amount. And 172 enterprises have P/E ratios above 60. In sharp contrast to this financing success is a precipitous fall in performance, executives leaving their posts, more than half of the stocks falling on the first day of trading, and preferred shares taking up only 4% of the financing total. Market watchers read this phenomenon as “cashing out”.

Liu Jipeng, Director of the Capital Research Center of China University of Political Science and Law wrote in his blog on the second anniversary of ChiNext, “We thought that ChiNext planted a dragon’s seed, but we see now that it gave birth to a flea.” Furthermore, the capital raised in ChiNext has not been used properly. Xinhua estimates that over 70% of the capital raised has been left idle in bank accounts. Moneyweek’s figures show that some capital was marked for buying real estate, buildings and vehicles.

The irresponsibility of enterprises and executives are both the results of a robust stock market and the interests of common investors. Unfortunately, it is a common occurrence in China’s financial environment. Since the economic reforms of 30 years ago, China has experienced repeated upheavals. Particularly, the development of corporate culture has been disrupted and corporate ethics have notably been eliminated from active business principles.

China has long been called “the factory of the world” but its business leaders aspire to greater achievements. Teng said, “It’s worth pausing to consider how China, as one of the world’s ancient civilizations, could one day contribute to improving the global business environment.”

According to China’s central scientific and technological development plan, China is expected to become an “innovative country” by 2020. By then, scientific progress is set to contribute 60% of the nation’s economic development and R&D investment would increase to 2.5% of GDP. Tao said early this year in an interview, “Ten years might be too short period, but 30 years, I think China could come to the higher level in the global market, and provide some really innovative products and innovative business models.”

To achieve this goal, a new generation of business leaders must establish clearly defined corporate ethics. Teng indicated that the current realities of modern business culture in China are “entrepreneurs and top managers are driven to maximize profits for themselves”. Business leaders must heed the prevailing winds and adopt a new attitude if they are to remain competitive.

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