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The rise of innovation in China

Professor Li and his family
PhD Management’98
Haiyang Li

Dr Haiyang Li is Professor of Strategic Management and Innovation at the Jesse H. Jones Graduate School of Business, Rice University. He received a bachelor's and a master's degree in economics from Renmin University of China, and a PhD from City University of Hong Kong. Professor Li was a recipient of the College of Business Distinguished Alumni Award 2017. Here he talks about how companies innovate in the US and China, the growth of China's technology clusters, and the role of education in facilitating a culture of innovation.

©Visual China Group
©Visual China Group

Back in 1995, the China tech landscape would be unrecognisable to a young person of today. Nokia reigned supreme in the mobile phone sector, Alibaba was just a glimmer in Jack Ma’s eye, and the internet was the elephant in the room, its potential only dimly realized.

One China company stood out. Lenovo was an early mover in building PCs in mainland China. Founded in Beijing by academic Liu Chuanzhi in November 1984, and incorporated in Hong Kong four years later, Lenovo bucked the trend. Here was a Chinese company that was doing battle with the best of international competition. The company caught the eye of the young Haiyang Li.

“One of my classmates had gone to work at Lenovo after graduation. He earned 400 RMB per month, a fabulous sum! At that time, China companies did not have a developed technology sector, products, or a market. So I was fascinated. How did this company become successful so quickly? And how significant was product innovation in its rise?” says Professor Li. Lenovo was to go from strength to strength and in 2005, famously acquired IBM's personal computer business. So this early Chinese big step acquisition of a western company begs the question: How do companies best innovate? In-house, by developing open-source platforms, by acquisition – or by other means? It is a question that Professor Li has put some thought into over the past twenty years.

Technological vs business innovation

Firstly, how should we understand innovation? What models should we follow? Professor Li sees that the traditional paradigm of big step innovation is being supplanted by a hybrid model.

“Companies are starting to shift to business model innovation as a new process for creating, delivering and extracting value. Companies may not now offer significant tech or breakthrough products, but they are still successful in creating a big step up in value.”

Professor Li cites the emergence of Walmart many years ago, and the current success of Alibaba and Tencent. All have significant elements of business model innovation.

“I spent my early academic research years focusing on product innovation, but the landscape is changing. Now the business model is as significant as product or technological innovation.”

The processes are parallel. Indeed, it may no longer be enough to innovate products. The business model must also work. He continues: “When eBay came to China, although it was a first mover in the market, it didn’t do very well. Its business model didn’t fit the Chinese market. Again, many Apple products are not new but based on existing technologies, adding business model innovation. By combining the two, they create something new and popular.”

How innovative are China companies?

China is now a major driving force for innovation. For example, among the world’s top 20 most innovative companies ranked by Fast Company in 2017, five are from China, and all of them are private firms – Alibaba, Tencent, Xiaomi, Huawei, and Dalian Wanda.

The World's 20 Most Innovative Companies 2017
1. Amazon 11. Alibaba
2. Google 12. Tencent
3. Uber 13. Xiaomi
4. Apple 14. BBK Electronics
5. Snap 15. Huawei
6. Facebook 16. Dalian Wanda
7. Netflix 17. Airbnb
8. Twilio 18. BuzzFeed
9. Chobani 19. Open Whisper Systems
10. Spotify 20. Illumination Entertainment

Source: Fast Company & Inc


China has made rapid strides to become the world’s second-largest economy and today accounts for 20% of global R&D expenditure, according to the US National Science Board. Meanwhile, the US still leads the market with a 27% share, but this figure is down from almost 33% a few years ago.

Strategic government planning can offer a major competitive advantage. Whereas the US under President Trump seeks to shrink the role of government – recently failing to appoint a Presidential Science Advisor, China prioritises innovation in science and technology. The Third Plenum of the Chinese Communist Party’s 18th Congress in November 2013 made it clear that the nation’s growth model needed to be changed to be more innovation-driven.

“Rather than simply focusing on technological innovation, the reform plan viewed innovation as supported by ecosystems. Chinese leaders have realized that there is a need to explore innovation as a system. This includes the financial market, the talent market, the social security system, as well as the technology management system,” says Li.

This approach has been supported by the phenomenal growth of science parks in China. The first was founded in Beijing back in 1988. Now they feature across the country. Ten years ago there were 53. Now there are more than 150. They are a useful way of attracting young startups.

How effective is China’s approach? Professor Li gives a qualified “thumbs up”.

“Innovation happens despite central planning, not because of it. You cannot plan for innovation. A lot of it happens by accident. All the current investment in China R&D will have an effect, but it may take years for big step innovation to come.”

Zhongguancun Science Park in Beijing Photo courtesy of Zhongguancun Management Committee
Zhongguancun Science Park in Beijing Photo courtesy of Zhongguancun Management Committee

Science Parks in China

The Beijing Zhongguancun science and technology industrial park was approved by the Chinese State Council in 1988. As of February 2018, China has 19 national-level innovation demonstration zones, alongside 147 regional parks which play a significant role in boosting the economy. China has launched more than 1,600 high-tech start-up incubators, the highest number among all nations worldwide. New innovation hubs offer cutting-edge research centres, which have attracted international attention such as Apple's recent decision to build a new R&D centre in Suzhou.


Innovation US style

The American approach offers a contrasting way forward.

“The US companies are private, not state owned, and their strategies follow a bottom-up model. In China companies follow top-down procedures with lots of resources from the government, an incentive culture, and tax breaks,” says Li.

In the US firms are more motivated to grow innovation organically.

“The US firms have a very strong innovation infrastructure within the company, the leadership, organization structure, and the culture. Facebook gives a lot of freedom and empowerment for innovation, for employees to be the champion of innovative ideas.”

“Proctor & Gamble and General Electric are also developing an open innovation process, and getting sources, ideas and support from outside.”

Education and exploration

The role of schools remains crucial in cultivating an exploratory attitude to life.

“I am a father with two kids, one just going to college and one in middle school, and we can observe the differences in terms of how we are trying to educate our kids compared to our friends back in China.”

“In the US, society tries to provide opportunities for kids to grow based on their own interests. Even if you don’t go to an Ivy League school or college, there is a lot of support for individuals to pursue their interests, and to be innovative.”

This contrasts with his experience growing up in China in the 1980s where going to college was the main way to move up and there weren’t a lot of other opportunities, particularly for young people in rural areas.


Underpinning the approach of the two education systems are varying attitudes to risk and differences in values. As Professor Li puts it:

“US culture supports people who do something different. That’s critical. In China people are trying to conform. Parents have their kids go to classes to follow what other people are doing, rather than ask what their kids really want to do. The motivation is quite different, from kindergarten right through to College.”

“It’s still US individualism compared to China collectivism. China is more hierarchical, and people are trying to obey senior people. In the US, people seem to be more equal in many ways and you do not have to follow a hierarchical structure. You can follow what you think is good for you.”

Corporate campuses

The diversity in the US approach is also seen in the new corporate campuses springing up across the country.

“Apple is not the first US company to build its own university. Look at GE, which opened its corporate training centre back in the mid-1950s.”

But Professor Li points out the advantage of the traditional university.

“The comprehensive university can offer more subjects than a particular company. The liberal arts are especially important in placing specialisms in context.”

“In many universities in the US for the first two years students haven’t decided on their major. They can do what they want. Indeed, at Rice 90% of our students eventually will have double majors. So there is a lot of flexibility and freedom to explore options.”


One of the more inconvenient aspects of living and working in China is its great firewall. Old work-arounds are no longer effective, so is the firewall disempowering China technology companies?

“The short answer is yes. If you want to be innovative, a seamless flow of information is key, otherwise it is very difficult to share ideas and learn from others. Therefore many Chinese technology firms are investing overseas for the technological freedom.”

“Even VPNs are not working in China now, which will bring a lot of frustration for all kinds of areas. Free access to Google Scholar is becoming more and more difficult.”

Mergers & Acquisitions 

Professor Li points out that M&A is a time-honoured approach to introducing innovation into US companies. Apple, Microsoft and Google have all bought a lot of tech startups, as opposed to going solely for organic growth. This is becoming important for China tech companies too:

“M&A is a particularly important strategy for Chinese firms who do not have a strong tech infrastructure. They need to get access to talents, IT, and customers.”

"The most important point is not buying, but how they are going to manage the acquisition. How are you going to successfully integrate that company into your own company? Many Chinese companies learn to manage integration after the merger. If not thought through, M&A can create problems.”

Chinese multinational electronics company TCL’s acquisition of French consumer electronics giant Thomson, was a case in point. When the deal was announced back in 2004, it was considered to be a dramatic example of China’s determination to put its stamp on the global marketplace.

But it turned out to be a disaster. During 2005- 2006, TCL suffered a total loss of US$680 million. The reasons? TCL did not do good due diligence on Thompson. TCL executives did not have enough international experience and expertise in global management. And cultural clash was another factor.

Innovation and the state owned enterprise

The sector most resistant to change is often seen as the state owned enterprises.

“The interesting question is how do you define innovation? I have been looking at state owned companies in Eastern Europe, and they are very productive in terms of patents. There is pressure from the government to be innovative. It is very different from private firms which have more performance related objectives.”

“The question is: can you successfully commercialize the innovation into the market? State owned companies perform better upstream in R&D activities, and private companies perform better downstream, that is closer to the market.”

Global talent

In this emerging innovative corporate culture, does China need to attract more young global talent? Here Professor Li is unequivocal.

“Yes, China should be more open to attracting talent of all ethnicities. I have been in the US for 17 years, and I think diversity is a huge advantage here.”

“Places like Hong Kong are already very diverse, but the mainland needs to be more open. A lot has been done, like the 1000 Talents programme, to attract the so-called ‘returnees’. But this has been a mixed success.”

The returnees have technology advantages relative to their local peers, but many of them have not performed well in terms of innovation and entrepreneurship.

“Coming from well-established institutional environments like the US can be a disadvantage. They are vulnerable and find it difficult to adapt in China where such local ecosystems are not in place.”

“Many returnees are not good at doing business through non-market mechanisms such as personal networks, and they have difficulty extracting value from their technological and managerial skills accumulated overseas.”

High speed take-up

The US regulatory approach can slow progress in infrastructure planning. Professor Li takes an example from close to home:

“If we look at the high speed train, here in Texas there has been talk about putting one in between Houston and Dallas for years. It’s still just discussion. Contrast China, and the rapid development of the High Speed Train network over the past fifteen years.”

But regulatory frameworks can also speed the introduction of new technologies.

“The China state is so powerful that they can force the introduction of progressive regulatory frameworks, for example, to speed the introduction of autonomous vehicles. So we may see fast take-up in China and other Asian countries.”

Fat green shoots

Succession planning has long been seen as a stumbling block for family owned businesses. But for Professor Li, tech company CEOs don’t have to be stage centre.

“Apple was an exception. Look at 3M, a very innovative company but the CEO of 3M (Inge Thulin) is relatively low profile.”

“CEOs set up the innovative context, but not necessarily the process. They set up a context where ordinary employees can be empowered and do something extraordinary.”

Incentive innovation cultures remain important around the world.

“Stock options can be used as an incentive to improve employee performance. And Chinese companies can make better offers to attract overseas talent to work in China.”

But incentives aren’t the whole picture.

“Right now a lot of people pursue something for intrinsic interest. Especially the new generation in China want to produce something that will change the world, something from their heart.” 

Professor Li ends on a word of advice:

“After I got a job offer from Texas A&M University, I was very curious as to why they wanted to hire me. They told me: In the 21st century US business schools need to have someone on board who knows China business.”

“So you need to choose your field carefully. If you look at the management field over the last twenty years, many fat green shoots have been around innovation.”