Innovation "Made by China": Striking a balance between government support and entrepreneurial freedom

In light of China's new low growth reality and its transition to a high-quality consumption-led economy, the country has put the topic of innovation high on its political agenda. But in addition to traditional state support measures, the world's largest nation will have to allow for major changes to the Chinese economic model in order to compete with the world's most advanced innovators.

My encounters with major innovation leaders from around the world at two global conferences in Asia some weeks ago got me thinking about China's capabilities to develop topnotch technologies and disruptive business models able to compete with the rest of the world.

Next to China's Jack Ma, Silicon Valley tech figures like Mark Zuckerberg and Travis Kalanick had come to get a feel for Chinese innovation and evaluate the potential of what could soon be the world's largest market. In light of the showcased technologies and explanations about the sheer endless possibilities arising from digital transformation, artificial intelligence, augmented and virtual reality, nanotechnologies, big data and so on, I was wondering about China's true rank in the world's innovation battle and likely future developments.

From "made in China" to "made by China"
It is true that the Chinese government recently announced important supply-side reforms as part of the country's 13th Five-Year Plan (see my last Influencer post, China at a tipping point). This is a vital step toward the transformation of China into an economy fueled by domestic demand and a growing appetite for high-quality products and additional services. Yet China must also inevitably upgrade its growth model in order to make it sustainable in the long run.

This means that the Chinese economy is steadily moving from "made in China" to "made by China". This "made by China" will be more modern, with more modern manufacturing facilities, which might not be located in China anymore but which will be the tangible result of a combination of Chinese capital and Chinese innovation with a strong emphasis on production equipment and software – as opposed to finished goods only.

For the first time, innovation is high on the government's agenda. And given the fact that China not only has a huge domestic market but is also a country of entrepreneurs, we will certainly see many more Alibabas and Tencents in the near future – if the country's transformation occurs fast enough and is orchestrated right.

Chinese innovations are increasingly able to compete with the world leaders, partly due to their strong home market
Just look at the sectors where Chinese companies are already among the world leaders, such as consumer electronics and construction equipment. China is also setting trends in telecommunications, mobile devices and online services, solar energy and even health, bio and nanotechnologies, with the Beijing Genomics Institute being the largest gene sequencer on the globe. While the Western world seems obsessed with the GAFA, in China the BATX (Baidu, Alibaba, Tencent, Xiaomi) dominate the market and few people care about Amazon (with only Apple having a comparably strong footprint in Asia).

As a matter of fact, innovation in China no longer has to come from abroad. It might be true that Germany developed the car and robots that were first designed in Japan. But China built the first fully automated factory in Dongguan. And the country is at the forefront of tech revolution in various other fields, such as in the use of QR codes that Western users still tend to mock. At any kind of large business gathering in China you can see the participants rushing to get each other's contact details via WeChat, the country's biggest messaging app – the China Development and Boao Forum were definitely no exception.

Today there is no room for doubt that it is China's clear aim to become the world's no. 2 behind the US in information technology goods and services. And there is great potential to develop these new services in the domestic market. Take online to offline technologies, for example: clearly, the possibilities are huge in a country that will likely see 600 million users on 4G in 2016. In the mobility sector, a Roland Berger survey found in 2015 that in Beijing there is a demand for about 15 million cab rides per day but that taxis can only meet 20%  of this demand. Disruptive services, such as Uber and Didi Chuxing, generally find fertile grounds in China, with Didi Chuxing currently holding over 80% market share.

Given the potential of the Chinese markets, the evolving consumer habits and the general eagerness of Chinese people to progress and prosper, we will undoubtedly see a transition toward a more consumption and tech-led economy. And the Chinese government seems ready to support this development by creating fiscal incentives for innovation spending, making targeted investments in sustainable and innovative industries, improving the country's education and training systems, attracting foreign talent and investment, etc.

The Chinese paradox: innovation does not grow in constrained environments
But as much as governments must drive and support the transition to a more innovative economy, it has proven very difficult to grow innovation in too restrictive environments. Out-of-the-box solutions usually do not emerge in systems dominated by state planning, obsessed with strategic foresight. States can finance costly research programs but are incapable of achieving innovative breakthroughs that translate into economically viable projects. On a micro level, large corporations – and there are many in China – may pool enormous amounts of insight about markets and customers but are unlikely to develop truly disruptive products, services and technologies.

What China therefore needs is a shift toward a more market-driven model. This includes reducing entry barriers for start-ups and foreign players, improving intellectual property protection, especially for smaller ventures, and fostering cooperation between existing and new players, i.e., an environment where information, capital and people can move around freely.

China must thus find the right balance between state support and economic liberalism, which means creating an innovation-friendly environment and connecting people without imposing individual strategies. Not only is this something very exciting to watch, but it will also have implications for our own economies and competitive positioning. We have often observed that in China prosperous ideas are scaled and replicated very fast, at home and across the globe. And as we all know that China's economic failure would entail big losses for all of us, we should begin to take a closer look at innovation "made by China", starting with the telecommunications and the internet industry, and learn from them. Because if China succeeds, we in the Western world have the chance to succeed, too.