Top-down Policy Innovation is Leading to Bottom-up Business Transformation

The "economy is the collective system by which humans make information grow” - César Hidalgo

Top-down policy innovation and implementation by some local governments in China are leading to the accumulation of digital know-how, adoption of emerging technologies and the creation of new partnerships and business models within and between companies.

With labour costs rising, the workforce aging and trade war protracting, policy innovation that translates into industrial transformation is vital to overcoming such problems and, in China’s case, to surviving and thriving as a production and economic powerhouse.

While it is difficult to copy and paste one model of innovation to another, successful cases can act as 'food for thought' for governments and entrepreneurs trying to build an innovative environment.

The Science Byte

Chilean Physicist Cesar César Hidalgo notes that in economies, as with physics, knowledge is attained and created as resources and information flow naturally to where energy is better utilised - it just needs an environment with the right conditions in which to flourish.

Governments have not always had the best track record in creating environments of efficient resource and information distribution. Many conclude that innovation, therefore, only truly occurs from the bottom-up. It seems contradictory to try to force down innovation from the top. Indeed, you need only look at China’s electric vehicle market for an example of how resources can be inefficiently distributed from the top-down. In this scenario, startups with little prior domain expertise received tremendous amounts of subsidies and piled into the industry. We are yet to see if this will translate into creating global champions on par with BYD, Geely and Tesla or if they’ll join the likes of ofo, LeEco and Faraday Future.

It’s the Incentives, Stupid

Seemingly having learnt from the lessons of the past, local and provincial governments are improving policies, from tenders to subsidies, that encourage more sustainable business exchange and activity. Such policies are being aggressively implemented in strategic areas such as manufacturing upgrading, Artificial Intelligence (AI) and the Internet of Things (IoT) - industries of great importance to the next industrial revolution and therefore General-Secretary Xi Jinping.

Shanghai, Kunshan (in Jiangsu) and Jiashan (in Zhejiang) have shown that policy innovation yields results. Caohejing (CHJ) Hi-Tech Park, an industrial incubator in Shanghai, has exploited government subsidies linked to “global influence” targets to upgrade its offerings. The impact? CHJ has managed to attract local hardware startups and global behemoths, such as Bosch and Johnson & Johnson, alike. CHJ Manager, Howard Wang, notes that without such policies “it would be very hard to carry out” activities that attract a diversity of companies that in turn leads to accelerated exchange and collaboration between partners that might not otherwise have had to opportunity to do so.

German company Startup Factory has teamed up with the Kunshan Government to create Smart Factory Kunshan, a joint venture that has innovated how companies produce and share resources, creating what is being coined as the ‘WeWork of Manufacturing’.

Dream Town, in Jiashan, is structured in a different way but has nevertheless shown how new business models are being adopted between government and business, leading to a surge in biotech, Augmented Reality (AR) and Virtual Reality (VR) startups basing themselves in Zhejiang.

By implementing policies that encourage the movement of knowledge to high-tech parks and incubation hubs, information exchange and collaboration is being better facilitated. This smarter allocation of money is tangibly leading to innovation and business transformation.

Think Outside the Bubble

It’s not just about improving high-tech park and incubation hub policy. Guangdong Province has taken a bold approach by, for example, subsidising the implementation of big data solutions for up to 1-year to help production companies transform on the demand side and increase the chances of success for local technology startups on the supply side. Old school production companies that may need a nudge – in the form of financial incentives – are now more likely to overcome their more traditional mindset and resolve squeezed profit margins as a result. Not only that, but companies are increasingly able to roll out their solutions, receive market feedback and iterate more rapidly as a result.

Venture capital (VC)-funded Black Lake Co-Founder & CEO, Yuxiang Zhou, recognizes that “the government is trying to design policy to really facilitate the trend of cloud migration and digital transformation of factories. It’s not surprising as manufacturing makes up to over a third of China’s GDP. With the worsening trade war, people became more aware of the difference in efficiency between Chinese factories and Western ones.”

As the United States closes some of its markets to China, companies in China are working to overcome their inefficiencies and increase their learnings from abroad and, in some cases, showcase how global their ecosystem is to win government grants. As companies are increasingly global in makeup, they learn more, adapt and innovate. Take ByteDance that is increasingly successful abroad and not just in China.

For the healthy skeptics, it is difficult to determine precisely whether the policies are to create an environment of innovation or if it is simply a means-to-an-end of achieving the government’s grand ‘Made in China 2025’ and ‘Internet+’ strategies. It is also difficult to measure success rates as we are still in the early stages of transformation.

What is for sure, however, is that in tight times money and resources are allocated more smartly which in turn is more likely to transform the economy - “the collective system by which humans make information grow” - in the long term.