China is often thought of as a place for cheap manufacturing rather than high-end innovation, but in recent times that’s been changing. Last year China poured $300 billion into R&D, second only to the United States. That expenditure amounts to 2 percent of China’s GDP, 12th in the world on a per capita basis. Canada, by contrast, invested less than $30B.
Ivey Professor Christopher Williams studies innovation and entrepreneurial dynamics in international companies. After years of research focused on firms in the advanced economies of the Western world, he’s turned his attention to China. “Many people see China as a place to go to manufacture stuff cheaply, but behind the scenes something big has been going on in terms of innovation,” he says.
Innovation in China is a challenge because companies are operating in an economy that’s still catching up to the developed world. China’s volatile business environment, from corruption to territorial disputes to lax enforcement of intellectual property rights, is another barrier. “For these reasons China is a very interesting place to study innovation,” says Williams. “The question guiding my recent research is how do firms in China innovate successfully given this environment?”
To answer this question, Williams has teamed up with a number of Asian researchers. One stream of his research focuses on indigenous Chinese firms. In a study co-authored with Choi and Lee and published in Research Policy, he looked at the effect of different types of ownership structures on patent performance. The study found that foreign ownership and participation in business groups were very strong and consistent predictors of patent performance. “Indigenous companies have been seeking their innovation inputs from the ‘outside,’” he says. Conversely, the findings showed that insider ownership actually had a negative impact on innovation and patent performance. Although this finding surprised him, it underlines the same message: “It has been important for these companies to get outside help when trying to drive innovation.”
In a follow-on study to be presented at this year’s European International Business Academy, Williams and Zhu surveyed managers of small and medium sized enterprises in China on the role that foreign knowledge plays in guiding their innovation process. Williams notes that some theories of innovation developed in the Western context suggest that diversity - going to a broad range of countries and companies - encourages creativity and innovation. However, other theories suggest too much diverse knowledge in a short space of time can have a negative impact, particularly when it comes from countries where managers have no experience. When testing these different perspectives in China, Williams found that diversity was a good thing for Chinese companies, having a “very potent positive effect” on the relationship between foreign knowledge and innovation.
This finding highlights the importance of Chinese firms being open to internationalization, and being able to manage the internationalization process. This is a trend that Williams clearly observes from his research. He’s also impressed by the growing competence of Chinese managers in this respect. “There is an important role here for Chinese expat managers who have gained experience and been educated in North America or Europe,” he says.
A third study published in Asia Pacific Journal of Management looked at how investment in innovation drives growth in sales in Chinese firms. For this study Williams and Choi examined both depth of innovation and diversity of innovation. These two variables are prominent in Western academic literature on innovation, but had not been studied in the Chinese context. Depth of innovation is the degree to which a company focuses on one specific field or technology. Diversity is the number of different fields or technologies a company focuses on.
The authors identified non-linear, U-shaped and inverted U-shaped, relationships. Sales growth was optimized at low or higher depth. Between those two extremities, though, sales growth was suppressed. “On the other hand,” says Williams, “some diversity was good for sales, but too little or too much diversity was not good.”
In another recent study with Juana Du, Williams focused on how international companies build innovative capabilities in China. Here he examined the role of trust and local learning in developing new ideas and bringing new products to market. He focused on three locations: Shanghai, Beijing and Guangzhou. Williams found, as he expected, that trust matters everywhere in China. “Having the confidence to share knowledge and information comfortably without worrying about exploitation is very important in every location we looked at,” he says.
However, the results showed that the importance of learning from local partners varied from place to place, depending on the nature of the local system of innovation. He found that the impact of learning from local partners on the subsidiary’s innovation was very strong in Beijing, less strong in Shanghai, and not significant in Guangzhou.
Williams’s research points up exceptional opportunities for innovation in China, for both local companies and multinationals. “Locations such as Beijing are now extremely advanced innovation hubs,” he says. “There is also a growing capability in managers to transform foreign knowledge into innovative outcomes. This doesn’t mean it will be plain sailing, but all indications are China will be a very potent driver of global innovation in the decades ahead.”
