China reclaiming its status as a leader in innovation

Source:Global Times Published: 2018/1/17 21:48:40

Illustration: Peter C. Espina/GT

Invention is the original act of creation while innovation is the creation of value at scale. Scale is critical, because it enables us to build companies that reduce costs, expand production, create more value and reinvest that into an ecosystem. This means innovation plays its part in allowing a company to grow larger. It's worth thinking about the history and the origins of American and Chinese collaboration on innovation.

For starters, it was actually the Chinese who were the early innovators and inventors, creating concepts that were then used as a basis for innovation and mass production by US entrepreneurs. We think of gun powder coming from the ancient Chinese and it was the US that built the first-ever mass-produced revolver. Other inventions like early Chinese propeller prototypes were used by US companies to build the R4, the first mass-produced helicopter.

We've seen this cycle beginning with Chinese invention and American innovation. But then the script flipped and China began to innovate based on American inventions. This started with hardware like drones, solar power panels, personal computing and handheld mobile devices, but then it moved on to other forms like business model innovation. These business models, emanating from US concepts, grew to a scale unimaginable from the US perspective. For example, Chinese group buying site built a business highly differentiated from its inspiration Groupon and offering a much wider array of services, and now the company has reached 10 times the value of Groupon.

Now the cycle has come full circle. We've reached the point where we see the US innovating based on Chinese-invented business concepts. WeChat Pay's easy integration between chat and payment was quickly replicated by Facebook Messenger and Paypal's collaboration. Untethered geolocated bikes, like those pioneered by Mobike and Ofo, have been replicated by US firms. Even something like WeChat's ability to give tips to user content generators has also now been replicated by firms including Youtube.

How has China managed to take the lead in this cycle? There are several components that I think are critical.

The first is timing. In many ways, China is still a blank sheet of paper. It is untethered by many of the difficulties that face the West in terms of legacy infrastructure, technology habits and practices. China is able to build new user habits and new technology adoption without those old practices.

An oft-cited example is mobile payment. Many in China went from cash directly to mobile payment and even biometric payment. In the US, people got used to credit cards and checks first. Mobile payment still hasn't really taken off despite our high levels of mobile penetration. People in China didn't have to unlearn old habits, enabling them to take the lead in this area.

Another example is retail. In China today, people have embraced mobile retail and even unmanned retail stores. Again, this appears to be quite difficult for American people like myself who grew up going to, first, local stores and then big shopping malls. And you see the adoption rates reflecting that type of hesitancy in US consumption behavior. While e-commerce players are seen dominating China's retail market, Amazon is the ninth-largest retailer in the US by revenue.

Personal transportation is another area in which China is leaping ahead of the US. In the US, we drive our own cars starting at the age of around 16 and the thought of getting in the back of a car driven by someone else, let alone a machine, is really scary for a lot of us. When I ride in an autonomous vehicle, I'm constantly hitting the brake button with my foot. It's a kind of jerky and awkward experience. But I think for a lot of people in China for whom personal automobile use wasn't something they grew up with, they're able to accept these innovations more easily.

China also has a very innovation-friendly regulatory environment. In China, entrepreneurs and innovators can build their ideas first, deploy them and then come back and regulate them. China wouldn't have the explosion of the sharing economy, of insurance products, fintech services and healthcare services that it does today without an environment that enables people to innovate first and then regulate. In the West, particularly Europe and the US, we first regulate and then innovate, so entrepreneurs often have to go through a lengthy process of getting approvals and permits before they can launch something.

Likewise, the Chinese government has been very supportive of innovation, so we've seen better incentives for university professors to start businesses. We've seen better patent protection, along with great amounts of subsidies and funding going to research, while in the US we've seen those being taken away. A recent example is $150 billion being committed to artificial intelligence in China, while the US government has cut the National Science Foundation's funding by over 10 percent. China has also made a lot of efforts to attract global talent and entrepreneurs.

Finally, the Chinese market has been hugely innovative in its ability to create broad ecosystems. In the US, firms like Facebook or Amazon are still largely one- or two-dimensional in the services they provide and the type of sectors they're investing in or incubating. Companies like Alibaba and Tencent invest across all kinds of industries, always trying to look ahead to what's the next big trend. As a result, China has created an environment that is hugely favorable toward experimentation and innovation.

The article was compiled based on a speech earlier in January by Benjamin Harburg, partner and managing director at Magic Stone Alternative Investments, at a forum in Beijing hosted by PBC School of Finance, Tsinghua University.

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