High-tech Innovation "Made in China"

Professor Yan Li, Associate Professor of Information Systems and Decision Sciences, and Associate Dean of Faculty (Asia-Pacific) at ESSEC Business School, shares her views on innovation, and addresses the persistent myth that 'China Can't Innovate'.

The "West" has a very specific perception of what it means to be innovative. "Innovation" is usually reduced to the transformative technologies and radical changes in business models that are created at start-up level. Westerners point to Steve Jobs or Mark Zuckerberg and argue that the really big ideas come from California garages or Harvard dorm rooms.

To be fair, many of the current Fortune 500 companies do hail from America's healthy start-up economy. Silicon Valley appears to be the perfect breeding ground for disruptive innovation: Stanford supplies the engineering talent and the area is teeming with venture capitalists and lawyers who understand the complexities of starting a high-tech business.

Although the Chinese government has tried very hard to replicate this kind of environment, by pushing for the development of IT infrastructure, offering special tax status to innovative companies, and offering assistance to Chinese expatriates who want to come home to start a company, it will take some time before we'll really see a Silicon Valley in China.

Up until now, Westerners have perceived China's brand of innovation as merely tailoring existing ideas to the very specific Chinese market. However, China is now home to four of the world's Top 10 largest internet and technology companies - Alibaba, Baidu, Tencent, and Xiaomi - so one should think twice before labeling Chinese innovators as "copy-cats". While the Chinese do sometimes "copy" existing western business models, they adapt them with huge amounts of localization for the Chinese market - this in itself is a kind of incremental innovation.

Indeed, by catering specifically to the needs of Chinese youth and focusing on social games, Tencent QQ out-performed Microsoft's Windows Live Messenger service. Zhenai.com, although similar to services like Match.com, offers counseling services to its customers, which fits well with the indirect manner that one displays affection in the Asian culture.

Chinese netizens are just a lot different from their Western counterparts. With the fastest growth of Internet usage lying in online shopping, thanks to the boom of e-commerce in China, the Chinese are used to shopping, sharing shopping experiences, and even reviewing products online.

In fact, the Chinese have become so receptive to e-commerce that they have started to embrace mobile commerce, an extension of the e-commerce platform. The reason behind mobile technology's success in Asia has a lot to do with the attitude of the people there, which is very different from that of the European consumers.

Some may argue that Alibaba was able to take the upper hand in China over Amazon, their western competitor, only because they understood how to manoeuvre China's government regulations. This argument ignores the many incremental innovations that Alibaba has made in order to fit seamlessly within, and to dominate, the Chinese e-commerce market.

Baidu, China's answer to Google, shares a similar success story. Of course, Google was at a disadvantage in this arena because of government regulations, but there are other reasons for Baidu's success. They have an understanding of the local market that Google just didn't have, and they were able to innovate accordingly to become uniquely Chinese. They also understand the social behaviours and habits of the Chinese people, which enabled them to develop services that catered to these needs.

By being local, Chinese entrepreneurs enjoy some 'home ground advantage'. With their fingers on the pulse of the Chinese society, they are able to innovate from existing models by tweaking it to cater to the unique Chinese consumers. "The biggest mistake that Google made in China," said Baidu CEO Robin Li, "stemmed from their CEO not spending 6 months in China to understand the country."

That said, Chinese innovation is more than just adapting a good idea to the Chinese market. It's about engaging in a kind of innovation "ping pong" game. In other words, Alibaba might have taken a few cues from Amazon, but Amazon is also learning a thing or two from Alibaba when entering the Chinese market. Sure, the ball might have started in Amazon's court, but China is now developing the service in a new way, and Amazon is learning from that.

In fact, Amazon won't really have a choice. Where they once held a near-monopoly on US soil, Amazon is going to face some stiff new competition from a company that can offer similar products and services, but at more competitive prices. Indeed, the Alibaba IPO has changed the international landscape and created two e-commerce poles - one based in China and the other in the United States. Alibaba has already started to flex their international muscles by tapping into the South East Asian market, and their IPO will speed up their internationalization process.

One area where Amazon really stands to learn a thing or two from Alibaba is on the mobile commerce front. China's growing economy is increasingly focused on mobile, so the m-commerce market offers huge potential in China. Alibaba is well positioned to leverage on their e-commerce properties to excel in this market. In fact, Alipay, Alibaba's third-party payment service, amassed USD 89 billion in assets under management in just 10 months and made it to top three global money market fund, making its mark to be more than "the PayPal of the East".

In fact, e-commerce and m-commerce are areas where Chinese innovation goes from incremental to disruptive. The Chinese retail industry has effectively been revolutionized, to the point where in-store purchases are declining and the increase in the number of physical stores is stagnating. The e-commerce and m-commerce boom is imposing a tremendous impact on the Chinese retailing landscape, a change that has never before been seen.

About the author

Prof. Yan Li is Associate Professor of Information Systems and Decision Sciences, and Associate Dean of Faculty (Asia-Pacific) at ESSEC Business School. Her research papers have appeared in top-tier information systems, management conferences and journals such as IEEE Transactions on Engineering Management, Information & Management, and the Journal of Business Research. Her current research interests include consumer behaviour in mobile social networks, strategies in IT offshoring and policy making in Green IT.

Prof. Yan Li currently teaches the course on "Targeting Masses in Asia: Big Data and the Bottom of the Pyramid" in the ESSEC & Mannheim Executive MBA Asia-Pacific programme.

Learn more about the ESSEC & Mannheim Executive MBA Asia-Pacific at this page. For more information, call +65 6413 9706 or e-mail emba-asia@essec.edu

About ESSEC Business School, Asia-Pacific

ESSEC Business School established a campus in Singapore in 2005. Its operations in the Asia-Pacific region represent the perfect foothold for the school to be part of the vibrant growth of Asia and to bring its expertise to the burgeoning region.

ESSEC Business School, Asia-Pacific offers academic and executive programs with Asian insights and global perspectives. Backed by a multicultural faculty based in Singapore, the school offers academic programs such as the ESSEC & Mannheim EMBA Asia-Pacific, the Master of Science in Management, the Global Bachelor in Business Administration, as well as a series of specialised masters in Finance, International Business, Management of Health Industries, etc. In addition, the school delivers executive courses and in-company programs designed to suit the specific needs of organisations and individuals. For more information, please visit www.essec.edu/asia

CPE Registration number: 200511927D Period of registration: 30 June 2011 until 29 June 2017