Why China Is the World’s Innovation Role Model

With all the talk about trade tensions between the United States and China, currency manipulation by the Chinese, and U.S.-North Korea-China military brinkmanship , it’s worth noting that there’s another way to think about China: as an innovation role model.

“Anybody involved in international business needs to treat China not just as a place to sell, but also as a place to learn,” wrote Edward S. Steinfeld and Troels Beltoft in the Summer 2014 issue of MIT Sloan Management Review. “In our view, companies need to lean in rather than pull back.”

Just to be clear, the authors don’t sugarcoat the many criticisms of Chinese companies. In the article’s first two paragraphs, the authors acknowledge Chinese companies’ “unfair competitive practices, discriminatory regulation, and intellectual property theft.” In the three years since the article was published, these practices continue to be pain points in the global market.

But Steinfeld — currently a professor of political science, director of the China Initiative, and the Howard R. Swearer Director of the Thomas J. Watson Institute for International and Public Affairs at Brown University in Providence, Rhode Island — and Beltoft — CEO and managing partner of Beltoft & Co. in Aarhus, Denmark — make the case in “Innovation Lessons From China” that the country’s companies have also been extraordinarily creative in how they (legitimately) use technology to succeed internationally. China, they argue, is “becoming the best place to go if you want to learn how to make ideas commercially viable.” Three years later, this is truer than ever.

Chinese companies excel at disruptive innovation, identifying ways that established businesses are misjudging what it is that customers really want. Prescient disruptors swoop in and provide “good enough” products at lower price points for what turn out to be vast numbers of customers. Steinfeld and Beltoft provide examples of Chinese manufacturers of smartphones and wind turbines that have been deft at identifying unmet market opportunities and then successfully producing and marketing those products. Chinese companies continue to be good at this, with recent examples in electric car technologies, including cars going directly head-to-head against U.S.-based Tesla Inc.); solar panel production; and industrial robot manufacturing (prompting New York Times columnist Farhad Manjoo to quip, “Today, we buy a lot of stuff made in China by Chinese people. Tomorrow, we’ll buy stuff made in America — by Chinese robots”).

The Chinese innovation process, as Steinfeld and Beltoft detail in their article, involves a number of factors, including product design for low-cost manufacturing, an understanding that customers are simultaneously “impatient, frugal, and sophisticated,” and the localization of supply chains for component sourcing. In addition, Chinese innovation is also known for a ferocious focus on what’s called cost out — “identifying and removing all forms of waste that hurt the bottom line,” often through the redesign of products to make them easier to manufacture. And everything is done at incredible speed, generally manifesting as an imperative “to get the product to market as quickly as possible, capture increased margins during a narrow time frame, and then, as soon as the inevitable imitators jump in, scramble forward into a new round of incremental product innovation.”

All these steps, Steinfeld and Beltoft argue, are critical for companies outside of China to study, understand, and borrow, because they lie at the heart of commercial innovation. “We see innovation as linking invention — the origination of new ideas — with commercialization, the translation of new ideas into actual products or services that can command value,” the authors write. They punctuate this point to bring it home: A “new idea itself can be a relatively small part of the equation. Indeed, you need to have the knowledge and ability to transform the new into the profitable. This is where the Chinese business ecosystem excels.”

For more innovation process ideas that outsiders can acquire from operating inside China, we invite you to revisit this article from our archives.