Indigenous Innovation Pathways with Chinese Characteristics (Qizhen Humanities and Social Sciences Library) 9819951984, 9789819951987

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Qizhen Humanities and Social Sciences Library

Qingrui Xu Jin Chen

Indigenous Innovation Pathways with Chinese Characteristics

Qizhen Humanities and Social Sciences Library

Taking advantage of the interdisciplinary strength of Zhejiang University, “Qizhen Humanities and Social Sciences Library” seeks to build bridges between social science academics in China and abroad. Whether the subject matter is on the arts or sciences, the past or the present, the east or the west, pure or applied; it seeks to promote publications that represents the academic excellence, cultural quintessence and the research cutting edge of China’s higher education.

Qingrui Xu · Jin Chen

Indigenous Innovation Pathways with Chinese Characteristics

Qingrui Xu School of Management Zhejiang University Hangzhou, China

Jin Chen School of Economics and Management Tsinghua University Beijing, China

ISSN 2731-5304 ISSN 2731-5312 (electronic) Qizhen Humanities and Social Sciences Library ISBN 978-981-99-5198-7 ISBN 978-981-99-5199-4 (eBook) https://doi.org/10.1007/978-981-99-5199-4 Jointly published with Zhejiang University Press The print edition is not for sale in China Mainland. Customers from China Mainland, please order the print book from Zhejiang University Press. Translation from the Chinese Simplified language edition: “中国特色自主创新道路研究” by Qingrui Xu and Jin Chen, © Zhejiang University Press 2019. Published by Zhejiang University Press. All Rights Reserved. © Zhejiang University Press 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Paper in this product is recyclable.

Preface

Contents in this book are achievements of the innovation team of Zhejiang University, which undertook major social science projects in China a few years ago, in addition to their other research findings in the past 30 years. President Xi Jinping’s speech on May 30, 2016, at the National Conference on Science and Technology Innovation, the 18th Conference of Academicians of the Chinese Academy of Sciences and the 13th Conference of Academicians of the Chinese Academy of Engineering, and the 9th National Congress of the China Association for Science and Technology, sounded the call for the sixth march of China towards science and technology and called for an effort to promote the innovation development strategy to achieve the goal of making China a new innovative country by 2020, the forefront of innovative countries by 2030, and world power in science and technology by the 100th year of the founding of People’s Republic of China. This call has aroused the infinite enthusiasm for innovation among science and technology workers, academics, enterprises, and practitioners in all fields of work, and inspired their passion and motivation for innovation to accomplish such a great, glorious, and arduous task, which is unprecedented. Also, the innovation team of Zhejiang University, which has been engaged in innovation for more than 30 years, has enthusiastically joined the innovation research to contribute to the indigenous innovation of China. President Xi’s words of insistence on the path of indigenous innovation with Chinese characteristics inspired our enthusiasm for further research and efforts in this field. Therefore, efforts are made by the team to prepare this book, which is hoped to be a stepping-stone towards an indigenous innovation path with Chinese characteristics. China is a great country with the emergence of innovation in all aspects and at multi-levels. Therefore, a company-oriented research approach is proposed by our team for research, exploring, and summarizing the laws and policies of innovation development at multiple levels, such as enterprise, region, and country. Initially, a summary is presented of the path and experience of Chinese enterprises from technological innovation to portfolio innovation to total innovation. This thread

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also runs through multiple levels from industry, to region, to country, and to internationalization, for which new insights that go beyond the total innovation theory proposed more than a decade ago are offered by research. The wave of total innovation has spread from enterprises to regions. For example, Comrade Xi Jinping, then Secretary of the Zhejiang Provincial Party Committee, proposed the “Eight-Eight Strategies” for regional development in July 2003, emphasizing that the focus of regional innovation should be on total innovation such as institutional innovation, industrial innovation, ecological innovation, and cultural innovation. Also, total innovation is gradually up to the national level. The CPC Central Committee and the State Council have put forward the strategic ideas of theoretical innovation, institutional innovation, technological innovation, and cultural innovation, as well as pushing the wave of innovation to all walks of life, all communities, and even everywhere in society. As theoretical researchers of innovation, we are encouraged and will go further to deepen and implement the idea of total innovation. The technological innovation system in China is a multi-structured and multi-level system, with a bottom-up order consisting of a company system as the grassroots, a regional system as the middle, and a national system as the top. The research in this book goes on in these aspects above but not yet in depth in other aspects. Therefore, the findings are not yet perfect, which is hoped to be a modest spur for further valuable contributions. We will be grateful for your comments. Authors of this book are Prof. Xu Qingrui (academician), Prof. Wu Xiaobo (Changjiang Scholar), Prof. Chen Jin (Changjiang Scholar), Prof. Wei Jiang (Young Changjiang Scholar), Prof. Guo Bin, Prof. Cai Ning, Prof. Chen Feiqiong, Associate Prof. Zhao Xiaoqing, and Associate Prof. Zheng Gang. Xu Qingrui and Chen Jin are responsible for the overall compilation of the book, with supplementary assistance by Zheng Gang. Details about work division are as follows: Xu Qinrui, Zhao Xiaoqing, Zheng Gang, Zhang Jun, Chen Litian, Ren Zongqiang, Zhang Suping, etc. for Part I; Zheng Gang for Part II; Guo Bin, Wu Zhiyan, Shou Chungyi, Zhang Jun, Ren Zongqiang, Chen Litian, etc. for Part III; Wei Jiang, Cai Ning, Wu Jiebing, Xiang Xinyan, etc. for Part IV; Wu Xiaobo, Wu Dong, Du Jian, Chen Feiqiong, etc. for Part V; Chen Jin, Zhu Ling, etc. for Part VI. Comments will be appreciated as this book is imperfect due to limitations of the authors. Hangzhou, China Beijing, China October 2018

Qingrui Xu Jin Chen

Contents

Part I 1

2

Research on Theoretical Issues of Indigenous Innovation

Steps, Connotation and Targets of Indigenous Innovation . . . . . . . . . 1 Steps of Indigenous Innovation in China . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Five Waves of China’s Indigenous Innovation . . . . . . . . . . . . . . 1.2 Evolution of China’s Innovation System Around the Reform and Opening-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Summary of Experience and Implications for Indigenous Innovation at the Current Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Connotation and Trend of Indigenous Innovation . . . . . . . . . . . . . . . . 2.1 Misconceptions of Indigenous Innovation . . . . . . . . . . . . . . . . . . 2.2 Connotation of Indigenous Innovation . . . . . . . . . . . . . . . . . . . . . 2.3 Trend of Indigenous Innovation: Total Innovation . . . . . . . . . . . 3 Particularity of Indigenous Innovation Path with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Particularity of Chinese Conditions . . . . . . . . . . . . . . . . . . . . . . . 3.2 Peculiarity of Natural Resources . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Particularity of Market in China . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Particularity of Political System and Economic System in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Strategic Objectives of China’s Indigenous Innovation . . . . . . . . . . . . 4.1 Three Obstacles to China’s Indigenous Innovation . . . . . . . . . . 4.2 China’s Strategic Objective System of Indigenous Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Path and Subject Evolution of Indigenous Innovation Model and Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Model of Indigenous Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 An International Comparison of Indigenous Innovation Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Model of Indigenous Innovation in China . . . . . . . . . . . . . . . . . .

3 3 3 13 13 18 18 21 23 25 25 26 27 27 28 28 30 33 33 33 39

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2 Model for Improvement of Indigenous Innovation Capability . . . . . . 2.1 Static Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Dynamic Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Evolution of Indigenous Innovation Subjects in Chinese Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Theoretical Model of Indigenous Innovation and Innovation Subjects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Comparative Analysis on Innovation Process of Chinese Communication Equipment Industry and Automobile Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Suggestions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Technical Standards and Indigenous Innovation . . . . . . . . . . . . . . . . . 1 Role of Technical Standards in Industrial Innovation . . . . . . . . . . . . . 1.1 Enhance the Core Competence and Competitive Advantage of Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Status and Problems of Technical Standards Development, Industrialization and Marketization in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Technical Standard Strategy and Its Capability Basis . . . . . . . . . . . . . 2.1 Technical Standard Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Technical Standard Setting and Its Capability Basis for Industrialization and Marketization . . . . . . . . . . . . . . . . . . . . 3 Enhancement Mechanism of Technological Innovation to Technical Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Promotion Mechanism of Technological Innovation to Industry Standardization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Technical Standard Development Model of Haier Group . . . . . 3.3 Development Model of Technical Standardization in China’s Communication Equipment Manufacturing Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part II 4

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Study on Indigenous Innovation Path with Enterprises as Innovation Subjects

Enterprises as Subjects of Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Connotation and Necessity of Enterprises as Subjects of Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Connotation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Inevitability of Enterprises Becoming Subjects of Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 China’s Efforts in Promoting Enterprises as Innovation Subjects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Evolution of Enterprise Technological Innovation Model . . . . . . . . . . 1 Technological Innovation Models of Enterprises . . . . . . . . . . . . . . . . . 1.1 R&D-Dominated Innovation Model (U/A Model) . . . . . . . . . . . 1.2 Secondary Innovation (Further Innovation Based on Absorbing Advances in Overseas Science and Technology) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Integrated Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Secondary Innovation and Post-secondary Innovation . . . . . . . . . . . . 2.1 Three Sub-models of Secondary Innovation . . . . . . . . . . . . . . . . 2.2 Post-secondary Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Portfolio Innovation Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Innovation Evolution Path of Typical Foreign Innovative Enterprises and Its Inspiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 1 Innovation Evolution Path of Typical Foreign Innovative Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 1.1 Hewlett-Packard (HP): From R&D-Dominated to Portfolio Innovation and Total Innovation to Enhance Competence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 1.2 General Electric (GE): From the R&D-Dominated to Total Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 1.3 IBM: From Technological Innovation to Total Innovation in Strategy, Organization and Business Model . . . . . . . . . . . . . . 99 1.4 Samsung: From Import-Imitation to Total Innovation Based on Technology Leadership . . . . . . . . . . . . . . . . . . . . . . . . . 101 1.5 Sony: From Imitation to Total Innovation Characterized by Technology Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 2 Inspiration from Innovation Evolution Path of Typical Foreign Innovative Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

7

An Empirical Study on Indigenous Innovation Path of Chinese Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 From Secondary Innovation to Total Innovation . . . . . . . . . . . . . . . . . 1.1 Haier Group: From Absorbing Advances in Overseas Science and Technology to Portfolio Innovation and Total Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Baosteel: From a “Follower”, Who Absorbed Advances from Foreign Science and Technology, to a Leader . . . . . . . . . . 1.3 HangYang (Hangzhou Oxygen Plant Group Co., Ltd.): A Large Equipment Manufacturer Won Late-Mover Advantage by Relying on Secondary Innovation . . . . . . . . . . . . 1.4 Huawei: Transformation of Private High-Tech Enterprises from Imitation to Technology Leadership . . . . . . . .

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1.5 CIMC (China International Marine Containers (Group) Ltd.): An Equipment Manufacturer, Rising from Cost-Ahead to Overall Leadership . . . . . . . . . . . . . . . . . . . 1.6 GEELY: A Chinese Auto Company Rapidly Improves Indigenous Innovation Capability Through Imitation and Secondary Innovation to Total Innovation . . . . . . . . . . . . . . 2 From Integrated Innovation to Total Innovation . . . . . . . . . . . . . . . . . . 2.1 Lenovo Group: Integrate Global Resources, From “Trade-Production-Technology” to “Technology-Production-Trade” . . . . . . . . . . . . . . . . . . . . . . . 2.2 INSIGMA (Zhejiang University Network New Group Co., Ltd.): An Innovation Path of Integrated Innovation-Portfolio Innovation Featuring “Computer+X” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 From Original Innovation to Total Innovation . . . . . . . . . . . . . . . . . . . 3.1 Netac: Original Innovation and Indigenous Intellectual Property Rights Raise Core Competence . . . . . . . . . . . . . . . . . . . 3.2 FOUNDER: A Typical Representative of Original Innovation to Gain a Competitive Advantage . . . . . . . . . . . . . . . 8

Dominant Path of Indigenous Innovation in China’s Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Dominant Path Choices of Indigenous Innovation by Chinese Enterprises: From Secondary Innovation to Total Innovation . . . . . . 1.1 Indigenous Innovation in China is Still in a Transition Stage from Absorbing Advances in Foreign Science and Technology to Indigenous Innovation When Enterprises are Weak in Original Innovation . . . . . . . . . . . . . . . . 1.2 Integration Innovation Requires R&D and Technological Innovation Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Secondary Innovation Dominates Enterprises’ Grandness in China Since the Reform and Opening-up . . . . . . 1.4 An Upgrade from Secondary Innovation to TIM is Inevitable for Indigenous Innovation of Chinese Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Inevitability of TIM for Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Required by Enterprises for Further Technological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Required by Further Refinement of Innovation Management Theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3 Connotation, Characteristics of TIM and Its Differences from Management of Traditional Innovation and Portfolio Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Connotation of TIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Characteristics of TIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Differences of TIM from Management of Traditional Innovation and Portfolio Innovation . . . . . . . . . . . . . . . . . . . . . . .

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Part III Building Indigenous Innovation Capacity and Technology Catching-Up in China’s Industry 9

Factors Influencing Industrial Indigenous Innovation and Technology Catch-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Technology Gap and Time Window . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Role of National Innovation System in Industrial Technology Catch-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Key Role of Technological Regime in Industry Technology Catch-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 Measure and Trend of Industry Indigenous Innovation Capability in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Measure of Indigenous Innovation Capability in China’s Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Changes of Indigenous Innovation Capability in Various Types of Manufacturing Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Labor-Intensive Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Knowledge-Intensive Industries . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Capital-Intensive Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 R&D-Intensive Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Case Study of Industrial Indigenous Innovation Capability Enhancement in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Indigenous Innovation in China’s Steel Industry, Such as Baosteel, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 History of Steel Industry in China . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Status of Innovation Capability Development of Major Steel Enterprises in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Innovation Capability Structure of Major Steel Enterprises in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Evolution of Industrial Innovation Capability of China’s Steel Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

151 151 152 152 155 155 158 159 160 161 161 163 163 163 164 165 167

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2 Industrial Indigenous Innovation of Home Appliance in China: Washing Machine as an Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Industry Start-Up (1979–1989): Technology Import and Imitation Beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Industry Expansion (1990–1998): Portfolio Innovation and Market Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Industry Development (1999 to Present): Indigenous Innovation and Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 A Summary of Innovation Capability Development Process of the Washing Machine Industry . . . . . . . . . . . . . . . . . . 3 Indigenous Innovation in China’s Communication Manufacturing Industry: Datang, ZTE, and Huawei as Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Late 1G to Pre-2G Era (1982–1995) . . . . . . . . . . . . . . . . . . . . . . 3.2 Late 1G to Pre-2G Era (1982–1995) . . . . . . . . . . . . . . . . . . . . . . 3.3 Mid-Late 3G to 4G Era (2002 to Present) . . . . . . . . . . . . . . . . . . 3.4 Summary of Innovation Capability Development in China’s Communication Equipment Manufacturing Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Impact of FDI on Innovation Capability and Performance of China’s Manufacturing Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Divergence Among Existing Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Study Methodology, Sample and Data . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Results of Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 FDI and Intra-Industry Spillover Effects . . . . . . . . . . . . . . . . . . . 3.2 Interaction Effect Between FDI and Industrial Technology Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 FDI and Inter-Industry Spillover Effects . . . . . . . . . . . . . . . . . . . 4 Policy Significance of the Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Model Choice-Making and Enhancement Mechanisms for the Industrial Indigenous Innovation Capability Building . . . . . . 1 Framework for Choice-Making of Manufacturing Indigenous Innovation Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Mechanism for Industrial Indigenous Innovation Capability Enhancement with Enterprises in Dominance . . . . . . . . . . . . . . . . . . . 3 Experiences of Indigenous Innovation and Technology Catch-Up in China’s Manufacturing Industry . . . . . . . . . . . . . . . . . . . . 3.1 Hinge on the Importance of Indigenous Innovation Capability Cultivation in Technology Catch-Up of China’s Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Rational Use of FDI: Complementary and Substitution Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3.3 Unique Opportunities for Catching-Up Formed By a National Market Environment . . . . . . . . . . . . . . . . . . . . . . . . . . 208 3.4 Technology Deconstruction Based on a Sectoral Innovation System is a Significant Mechanism for the Construction and Enhancement of China’s Sectoral Indigenous Innovation Capability . . . . . . . . . . . . . . . . . 209 3.5 Inspiration From and Full Use of Secondary Innovation, Taking a Sustainable Sectoral Indigenous Innovation Path . . . . 209 Part IV Cluster Indigenous Innovation Based on Regional Networks 14 Construction of RIS Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Three Issues of Industrial Innovation Development in Regional Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Innovation Basis System: Stuck in Low-End Resource Paths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Innovation Synergy System: A Chained Innovation Based on Division-Cooperation, Which Is in Mire . . . . . . . . . . 2.3 Innovation Motivation System: Weakened Leadership By Major Enterprises in Innovation . . . . . . . . . . . . . . . . . . . . . . . 3 Evolution of RIS and System Construction . . . . . . . . . . . . . . . . . . . . . 3.1 Evolution of RIS Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Connotation and Characteristics of RIS . . . . . . . . . . . . . . . . . . . . 3.3 Elements and Construction of Open RIS . . . . . . . . . . . . . . . . . . . 4 Contributions of Open RIS to Innovation Capabilities . . . . . . . . . . . . 4.1 Contribution of Open RIS to Breakthrough Innovation Basis System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Contribution of Open RIS to Innovation Synergy System . . . . . 4.3 Contribution of Open RIS for Improving Innovation Motivation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Integrations of Multi-leveled Open RIS . . . . . . . . . . . . . . . . . . . . . . . . 5.1 NIS with RIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 NIS with SIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 RIS with CIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Relationships Between Innovation Systems at All Levels with the Global Innovation System (GIS) . . . . . . . . . . . . . . . . . . 15 Enhancement Mechanisms for Cluster Indigenous Innovation Capability (CIIC) with Synergy of Multi-level and Multi-player Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Construction of Open Clustered Enterprise Network Based on Multi-level Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 System Architecture of Cluster Enterprise Network . . . . . . . . . 1.2 System Elements of Clustered Enterprise Networks . . . . . . . . .

215 215 217 217 219 219 220 220 222 223 225 225 226 227 228 229 230 230 231

233 233 234 234

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2 Paths of Synergetic Evolution for Cluster Indigenous Innovation and Multiple Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Theory Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Multiple Network Mechanisms of Cluster Indigenous Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Case Study on Paths of Cluster Indigenous Innovation and Multiple Networks Synergistic Evolution . . . . . . . . . . . . . . 3 Composition and Enhancement Mechanism of CIIC . . . . . . . . . . . . . 3.1 Connotation and Components of CIIC . . . . . . . . . . . . . . . . . . . . . 3.2 Indigenous Innovation Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Multi-level, Multi-element Knowledge Network to Cluster Indigenous Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Integration of Productive Service Resources to the CIIC: A Case of Venture Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Venture Capital Institutions Are Conducive to the Innovation Capability of Cluster Start-Ups . . . . . . . . . . . 1.2 Improvement of Venture Capital System for Cluster Financing Platform Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Mechanisms for Linking Open CIS and Knowledge Networks . . . . . 2.1 Local Knowledge Network Structure and Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Embedment of Hyperlocal Knowledge Network and Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Embedment of Hyperlocal Knowledge Network and Evolution of Cluster Innovation Network . . . . . . . . . . . . . . 17 Measures to Improve CIIC Based on Total Innovation . . . . . . . . . . . . 1 Measures to Guarantee Driving Force of Independent Innovation by Involving Multi-level Subjects . . . . . . . . . . . . . . . . . . . . 1.1 Upgrade Major Enterprises to Concentrate Innovation Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Support SMEs to Stimulate Innovation Potential . . . . . . . . . . . . 1.3 Develop Industry Associations to Promote Collective Self-management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Measures to Enhance CIIC via Multi-entity Cooperation . . . . . . . . . . 2.1 Drive Cooperation of Cluster Enterprises with External Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Create a Favorable Environment for Hyper-Localization Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Accelerate Steps of Local Knowledge Service . . . . . . . . . . . . . .

235 235 236 236 239 239 241 245 245 246 246 248 249 250 252 257 257 258 258 259 259 260 260 260

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3 Measures of Multi-factor Integration Platform to Promote Cluster Indigenous Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Improve a Series of Basic Service Platforms . . . . . . . . . . . . . . . 3.2 Cultivate a Bunch of Production Service Platforms . . . . . . . . . . 3.3 Cultivate R&D Service Platforms . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Cultivate a Group of Business Service Platforms . . . . . . . . . . . . Part V

261 261 261 262 262

Secondary Innovation and Surpassing Catch-Up in the Global Value Network

18 Catch-Up Scenarios and Indigenous Innovation Dimensions in the Global Value Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Challenges and Opportunities by Division of Labor in the Global Value Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Classification of Catch-Up Situations in the Global Value Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Dimensions of Indigenous Innovation in the Global Value Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Learning Mechanism and Evolutionary Path for Enterprise Indigenous Innovation in the Global Value Network . . . . . . . . . . . . . . 1 Learning Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Evolutionary Path of Indigenous Innovation from “Catch-Up” to “Surpassing Catch-Up” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Case Studies of Indigenous Innovation Implementation Systems and Paths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Evolution of Innovation Model: Haier Washing Machine . . . . . 3.2 Industrialization of Indigenous Technical Standards: TD-SCDMA Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Business Model Innovation Based on DMS Integration in the Global Value Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Value Network Based on DMS Framework . . . . . . . . . . . . . . . . . . . . . 2 Business Model Innovation in the Global Value Network . . . . . . . . . 3 Synergy and Integration Between Large Enterprises and SMEs in the Value Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

265 265 265 267 268 269 273 273 277 279 279 283 289 289 290 292

21 Mechanisms and Evolution of ODI’s Impact on Indigenous Innovation Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 1 Model Choice for ODI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 2 Mechanisms of ODI’s Impact on Indigenous Innovation Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

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3 Evolution of ODI and Indigenous Innovation Capabilities: Exampled by Haier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Integrate ODI with Innovation to Enhance Global Innovation Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Technology-Seeking ODI: Drive All Time and Space Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Market-Seeking ODI: Drive Overseas Production and Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Total Factor Integration and Innovation Capability Boosting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Strategic Measures for Indigenous Innovation and Surpassing Catch-Up in the Global Value Network . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Policy and Service System for ODI . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 A Policy System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 A Service System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Bottlenecks and Strategic Solutions to Indigenous Innovation . . . . . Part VI

300 300 301 302 302 305 306 306 307 307

Study on Path and Policy of Indigenous Innovation with Chinese Characteristics

23 Indigenous Innovation Path with Chinese Characteristics Based on Total Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Indigenous Innovation: The Core of Quality Improvement for Economic Growth in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Essence of an Indigenous Innovation Path Based on Total Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Secondary Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Portfolio Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Total Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

313 313 318 323 323 324

24 Enterprise Innovation Ecosystem and NIS for Total Innovation . . . . 1 Enterprise Innovation Ecosystem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 National Innovation System (NIS) for Total Innovation . . . . . . . . . . . 2.1 Connotation of NIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Functions of NIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Elements of NIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 NIS in China and Improvement Measures for NIS with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

331 331 339 339 341 342

25 Policy System for Total Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Strengthen Government Guidance on Indigenous Innovation . . . . . . 1.1 Guidance by Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Strengthen the Government’s Guidance by Strategy in Indigenous Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

349 349 349

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4 5

6 7

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1.3 Strengthen the Government’s Overall Deployment of Indigenous Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Build Strategic Goal Management and Performance Systems-Oriented by Indigenous Innovation . . . . . . . . . . . . . . . Optimize the Innovation and Entrepreneurship Environment to Enhance Indigenous Innovation Capability of Enterprises . . . . . . . Increase Contribution of Universities to Indigenous Innovation . . . . 3.1 Increase via Talent Cultivation . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Increase via Scientific Research . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Increase via Social Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Further Strengthen National Research Capacity . . . . . . . . . . . . . . . . . . Great Efforts for Synergistic Innovation . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Establish a National Innovation Committee to Further Reform the Science and Technology System and Foster Synergistic Development of “Industry-University-Research” . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Build a Market-Oriented Mechanism to Enable Synergistic Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Improve Institutional Mechanisms for Synergistic Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Further the Reform of a Synergistic Innovation System and Refine the Scientific and Technological Innovation Policy System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accelerate Transfer and Transformation of SCI-TECH Achievements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policies and Mechanisms for Improvement of Venture Capital . . . . . 7.1 Create a Favorable Environment for Venture Capital . . . . . . . . . 7.2 Cultivate Professionals in Venture Capital to Create a Culture Conducive to Venture Capital . . . . . . . . . . . . . . . . . . . . 7.3 Establish a Multi-level Capital Market . . . . . . . . . . . . . . . . . . . . 7.4 Cultivate Diversified Venture Capital Investors . . . . . . . . . . . . . 7.5 Build a Sound Venture Capital Exit Mechanism . . . . . . . . . . . . 7.6 Establish a Policy and Regulatory System to Guide Rapid Development of Venture Capital . . . . . . . . . . . . . . . . . . . . Speed up Cultivation of High-Level Talent for Technological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Adhere to the Concept of Talent as the Primary Resource and Seek to Realize the Strategy for Making China Strong Through Training Competent Personnel . . . . . . . . . . . . . 8.2 Implement the National High-Level Talent Training Program to Accelerate the Training of Top Scientists . . . . . . . . 8.3 Make Great Efforts to Cultivate Innovative Engineering and Scientific Talents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

355 356 357 358 359 360 361 363 369

369 370 371

373 374 375 376 377 378 379 380 381 381

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26 Holistic Innovation: An Emerging Innovation Paradigm . . . . . . . . . . 1 Research Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Literature Review: Innovation Paradigm Shift . . . . . . . . . . . . . . . . . . . 2.1 Innovation Paradigm Shift by Country/Region Scholars . . . . . . 2.2 The Deficiencies of Existing Innovation Paradigms . . . . . . . . . . 3 Holistic Innovation: An Emerging Innovation Paradigm Based on Eastern Wisdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Defining Holistic Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Core Elements of HI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 HI: A Theoretical Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 HI: Three Connotations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

389 389 391 391 394 395 395 396 401 403 406

Summary and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415

Part I

Research on Theoretical Issues of Indigenous Innovation

Overview This part focuses on connotations, strategic targets, and paths and mechanisms of indigenous innovation capacity enhancement as well as the relationship between technical standards and innovation capacity by analyzing steps of indigenous innovation development in China. First, steps and connotations of indigenous innovation in China. A five-stage discussion in this part is devoted to the history of China’s indigenous innovation, and an analysis of the background, policies, and characteristics of innovation in various periods, thereby summarizing the elements contributing to the enhancement of indigenous innovation capacity: ideological emancipation is a prerequisite for effective indigenous innovation; talent cultivation is the key to indigenous innovation; market demand is an essential driving force for indigenous innovation activities; indigenous innovation is a systematic project that requires the synergy of various elements and the optimization of the “industry-university-research” cooperation system, etc. Targeting defects in the concept or recognition of indigenous innovation in previous research, the connotation of indigenous innovation is proposed in this part: Indigenous innovation is an organic combination of the original innovation, integrated innovation, “further innovation based on absorbing advances in overseas science and technology”, and management innovation and institutional innovation to effectively integrate resources and improve the overall innovation ability, which takes self as a priority, companies as subjects, and the core technology and intellectual property rights of key technology as well as the activities and market of the high value-added chain as the goal. Second, the model and capacity growth of indigenous innovation. Based on a comparison between innovation at home and abroad, three models of indigenous innovation are outlined in this part: Technological Leapfrogging, Value Chain Enhancement, and Disruptive Innovation. The complexity and diversity of China’s multi-level market, diverse geography, and comprehensive industrial layout

2

Part I: Research on Theoretical Issues of Indigenous Innovation

require various modes of indigenous innovation in different industries, stages, and regions. Indigenous innovation models are dynamic during the advancement of innovation ability in China. Value chain upgrading is dominant at the stage of creative imitation; technological leapfrogging and disruptive innovation are dominant at the first stage of indigenous innovation while the former takes place at the second stage. Third, the relationship between technical standards and technological innovation: Development of technical standards drives technological innovation, which in turn provides a basis for standards based on core technological capacities. From three aspects: the impact of technical standards on companies’ competitive advantage, the capacity basis required for the formation, industrialization, and marketization of technical standards, and the mechanism of technological innovation to promote the construction of industrial standards, Part I explores the relationship between technical standards and technological innovation, followed by an analysis on the capacity basis required at different stages of the implementation of technical standards strategy, and the emphasis on mastering core technology and getting insights into industrial direction, to promote the synchronization of standards development with scientific research, industrialization, and technological updating, and how to integrate technologies with China’s intellectual property rights into technical standards to enhance competitive advantage.

Chapter 1

Steps, Connotation and Targets of Indigenous Innovation

1 Steps of Indigenous Innovation in China 1.1 Five Waves of China’s Indigenous Innovation Indigenous innovation in China can be divided into five stages, two of which were experienced before the Reform and Opening-up, followed by the other three after it. 1. Steps and Characteristics of Reform and Opening-Up and Indigenous Innovation (1) Stage 1 (1949–1956): From imitation to self-design China was forced into the Korean Wars after it broke out in 1950, which put us in a face-to-face confrontation with the United States and threats from other Western countries. The construction of national defense came to be a priority due to a turbulent international environment. As a result, heavy industries were required. However, overall industrial status lagged far behind in the early years of the People’s Republic of China, with a major output of industrial products as 15–80% of the peak in the 1930s (Yi Degang et al., 2007). There was a big gap between China and developed countries. Then, China learned from the Soviet Union from 1949 to 1956, actively, intending to build up a technological base. A “scissors difference” strategy between industry and agriculture was adopted, with priority given to heavy industry for strengthening national defense forces and maintaining national security. 156 Soviet-aided projects were designed to set up a relatively complete basic industrial system and the skeleton of the national defense industry in China, which initially served to lay a foundation for industrialization in China. However, products produced by merely imitating the Soviet Union are inconsistent with China’s conditions. For example, Shenyang Mining Machinery Factory desired to design a belt conveyor for transporting grain according to users’ needs in the early © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_1

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1 Steps, Connotation and Targets of Indigenous Innovation

1950s, but belt conveyors designed solely based on the Soviet Union model were only suitable for ores but not for grain transport. Such cases are commonplace, so the design must be based on conditions in China and its needs. Therefore, “self-design” was proposed by China in 1956. The resolution of the Eighth National Congress of the CPC called for a transition of products from imitation to self-designed, saying that “it is necessary to widely absorb the latest achievements in science and technology of the Soviet Union, various people’s democratic countries and other countries of the world; meanwhile, the design and production of new products should be tailored to meet China’s specific demands, by keeping closely in touch with conditions of nature and economy” (Documentary Research Office of the Central Committee of the CPC, 1994). “Self-design” embodied a combination of China’s innovation with its situation, taking the Ministry of Machinery Industry as an example. The importance that design should be adapted to Chinese conditions was recognized by the Ministry of Machinery Industry during the First Five-Year Plan, by which more than 4,000 new products were created based on both imports of Soviet technology and mapping and imitation (Zhang Baichun et al., 2004). Guided by “self-design”, a 2,500-ton free forging hydraulic press was designed in 1956, with a cultivation of more than 20 hydraulic designers (Zhang Baichun et al., 2004). To sum up, this stage was dominated by learning from the Soviet Union model, which was found to be a deadend, and a technical line characterized by inefficiency and expensiveness was not in line with China. Therefore, “self-design” was put forward. It was required by “self-design” that technology introduced into China should be transformed based on learning other countries’ experiences, with a combination of China’s national conditions and subjective initiative, which was the prototype of China’s indigenous innovation. However, “self-design” at this stage was just limited to several fields (e.g., machinery industry), instead of nationwide ideological emancipation. (2) Stage 2 (1957–1977): Independence and self-reliance Breakthroughs were made overseas in the mid-1950s in four areas: atomic bombs, computers, communications equipment, and aerospace. It was a time when China was stuck in a complex international situation. For war preparations, the establishment of a war preparation system for army, navy, and air forces was proposed, which involved a family of new sciences such as computers, electronics, etc. Abilities in new sciences are rather weak, which needed to be built upon although a basis for industrialization had been laid and technological capabilities had been initially cultivated during the previous stage. Later in this stage, the model of learning from the Soviet Union was no longer feasible due to the tension in Sino-Soviet relations. As a result, China put forward an idea and model of “independence and self-reliance.” The Long-term Program for Developing Sciences and Technology from 1956 to 1967 (draft) proposed that “attention should be paid to a combination of resources and technical requirements during the study, mastery, and utilization of foreign achievements, to avoid mindless imitation”. In 1958, China stepped into its development model, stating that “selfreliance is the key although it is important to seek assistance from the Soviet Union”,

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and for the first time, it was proposed to “dispel superstition and emancipate the mind” (Zhang Baichun et al., 2004). Under the policy of “independence and self-reliance,” China, on the one hand, stepped up investment in scientific research and talent cultivation; in 1960, China’s expenditure on scientific research jumped nearly 60 times from 1952; and scientific and technological personnel in all state-owned units nationwide reached 1,969,000, 3.6 times more than in 1952 (Bo Yibo, 1993). On the other hand, innovations were made for company management through the experiences and lessons drawn from the Soviet Union. In March 1960, An’gang put forward the idea of democratic management, i.e., the participation of cadres in labor, workers in management, reform of unreasonable rules and regulations, and the triple combination of workers, cadres, and technicians, known as “two involvements, one innovation, and three coalescences,” the essence of which lies in the improvement of the business operation through the participation of all members in innovation. The “An’gang Constitution” is an example of innovation in enterprise management systems in China and the “economic democracy” it promotes is the key to the efficiency improvement of enterprises. Emphasis was placed on the peaceful use of atomic energy, science and technology in radio electronics, jet technology, automation of production processes, and precision instrumentation at this stage (Kou Zonglai, 2008). Achievements in these new areas of science and technology are shown in Table 1. The government, as the subject of innovation at this stage, carried out innovation activities by concentrating human, material, and financial resources on major Table 1 Innovation achievements in China 1957–1977 Year

Innovations

1958

Built the first 10,000-ton ocean-going cargo ship “Dongfeng” with a displacement of 17,182 tons

1959

Successfully trial-produced the first large-scale fast electron tube mathematical computer (104)

1961

The first ten-thousand-ton hydraulic press in China was successfully developed in Shanghai Jiangnan Shipyard

1964

China’s self-developed atomic bomb successfully exploded

1965

The first artificial protein crystalline bovine insulin was synthesized at the Institute of Biochemistry, Chinese Academy of Sciences

1967

Successful hydrogen bomb test explosion

1970

Successful launch of the first man-made satellite

1973

The first high-yielding hybrid rice to be used on a large scale in production by Yuan Longping

1973

Successful extraction of artemisinin

Source Liu Guoguang. Research Report on China’s Ten Five-Year Plans [M]. Beijing: People’s Publishing House, 2006

6

1 Steps, Connotation and Targets of Indigenous Innovation Circulation Companies Mission: Circulation

Research Institutes Mission: R&D

Government

Production Companies Mission: Production

Consumption Subjects Mission: Consumption

Fig. 1 Chinese innovation system in planned economy system

events, by which cutting-edge industries such as defense science and technology grew efficiently at the exclusion of other industries. (3) Characteristics of innovation before Reform and Opening-Up Before the Reform and Opening-up, innovation activities were government-led, with no interaction between research institutes and production enterprises that merely undertook R&D and production for national programs. See Fig. 1 for details. The motivation for innovation in a planned economy stems from the government’s perceived needs for national economic and social development and national defense and security, which was then planned by all levels of government. During the innovation, the government was subject to resource input, so resources were allocated strictly according to the plan. As innovation implementers, research institutes and production companies carried out innovations to fulfill governmental tasks, but their interests were not directly tied to the outcomes of the innovations they achieve, nor did they bear the risks and losses associated with innovation failure. The advantage of government-led innovation activities in a planned economy lies in the ability to concentrate human, material, and financial resources systematically in a short period to carry out major innovation activities as exemplified by achievements such as “Two Bombs and One Satellite” and the synthesis of bovine insulin. However, this model suffers from the following limitations: First, the organic linkage among all aspects of innovation was deliberately cut off, making a disconnect between technology development and enterprise production. Second, enterprises and research institutes lacked the motivation and capability for innovation. Enterprises just produced according to the government’s instructions, which were an extension of the government’s actions. It was the same for research institutes, whose task is to complete the research projects assigned by their superiors, regardless of the cost and effectiveness of their applications. Third, it lengthens the time required for the innovation. Procedures such as planning and approving were required for any innovation activities, so complex approval procedures lengthened the time required for innovation when it involved a wide range of areas and spans different industries and geographies.

1 Steps of Indigenous Innovation in China

7

2. Development and Characteristics of Indigenous Innovation after the Reform and Opening-Up (1) Stage 3 (1978–1995): Reform and Opening-Up, the emancipation of the mind Computers came into widespread use worldwide from the 1970s onwards. Advanced production methods such as numerical control, computer control, computer-aided design, and computer-integrated manufacturing systems emerged one after another, which increased production efficiency greatly and shaped the development of the world economy profoundly. Meanwhile, it was the time when science and technology in China, which had just undergone the impact of the Cultural Revolution, was in a depression. In 1977, there were 1.2 million scientific and technological talents in the United States and 900,000 in the Soviet Union, while just 200,000 in China (Liu Guoguang, 2006). In such a context, the key to modernization lied in nurturing science and technology and raising innovation abilities. First, for a national focus on science and technology and acceleration of progress in science and technology, China proposed “Emancipation of the Mind” again after 1958. The National Science Conference held it in 1978 put forward science and technology as the productive force, emphasized its importance, and proposed “respecting knowledge and talents”. Second, it emphasized “economic construction as the center” as a solution to the disconnection between science and technology and the economy, rapidly transformed science and technology into productivity, and promoted the integration of science and technology and the economy through specific initiatives such as the reform of the appropriation system and the establishment of technology markets (Deng Xiaoping, 1993). Finally, emphasis on talent cultivation. A decision was made by the Central Committee of the CPC in 1977 to resume the National College Entrance Examination which had been suspended for 10 years, which was of great importance to the economic and scientific development of China. In 1991, graduates from colleges and universities reached 614,000, an increase of 2.2 times compared with 1977 (Liu Guoguang, 2006). During this stage, China modified the previous closed “self-reliance” approach and clarified that digestion and absorption re-innovation based on technology import performed as a major innovation mode in this stage (Hu Chui, 2010). The “12 Key Projects Program”, which was a national priority, was formulated in 1986, with the cooperation of research institutes, enterprises, and universities, and focused on the digestion and absorption of 12 major projects, which contributed to shortening the technological gap with developed countries (Shen Neng et al., 2008). Innovation at this stage covered 8 fields: agriculture, energy, materials, computers, lasers, space, high-energy physics and genetic engineering, etc., as shown in Table 2. Innovations at this stage were based on further emancipation of the mind. Unlike the previous two stages, innovation in this stage was closely focused on economic construction, with emphasis on the commercial application of R&D results rather than defense construction. It indicated that China began an understanding of the scientific meaning of innovation and was aware of the necessity of “technology push” and “market pull” for successful innovations. A secondary innovation model

8

1 Steps, Connotation and Targets of Indigenous Innovation

Table 2 Key innovations in China 1978–1995 Year

Innovations

1979

Main project of Chinese character laser phototypesetting system

1983

Self-designed Galaxy I supercomputer started operation

1984

The world’s first “test-tube goat”

1989

The first 5 MW low-temperature nuclear heating reactor reached criticality and started up successfully

1991

Qinshan Nuclear Power Plant, the first nuclear power plant with pressure reactor technology, was completed and connected to the grid for the first time

Source Liu Guoguang. Research Report on China’s Ten Five-Year Plans [M]. Beijing: People’s Publishing House, 2006

dominated in China in an effort to catch up with developed countries because of the large gap between technology at home and advanced ones abroad. (2) Stage 4 (1996–2005): Clarification of enterprises as subjects of innovation, emphasis on basic research and development of high-tech The international competition after the end of the Cold War has transformed into a competition of comprehensive national power that was dominated by the competition of economic strength of each country. The ability to master and apply science and technology, especially high-tech, has turned to be an important symbol of the comprehensive national power. For effective improvement of international competitiveness, China carried out system reform actively for a favorable atmosphere of innovation as well as getting insights into trends of the world’s leading technologies through opening up and selected key areas for high-tech development in accordance with China’s condition. Guided by the strategy of revitalizing the country through science and education, firstly, China established a socialist market economy starting from the economic system, which makes enterprises market-oriented (enterprises were no longer production workshops under the state planning system) and provided conditions for mobilizing enterprises to innovate. Second, substantial adjustments have been made to the science and technology system: ➀ Promotion of research institution reform, and encouragement of enterprises to establish their research institutes enable enterprises to be real subjects of innovation. In 1998, the State Council decided to reform the management system of the 10 scientific research institutes under the State Economic and Trade Commission, i.e. realizing enterprization via conversion into sci-tech enterprises or sci-tech intermediary institutions and entering enterprises (Peng Jisheng, 2000). ➁ Made efforts for the transformation of scientific and technological achievements. Such as the adoption of the Law of the PRC on Promoting the Transformation of Scientific and Technological Achievements in 1996 and the issuance of Provisions on Promoting the Transformation of Scientific and Technological Achievements in 1999. ➂ Developed high-tech for industrialization. The Decision on Strengthening Technological Innovation, Developing High Technology

1 Steps of Indigenous Innovation in China

9

Full-time equivalent of R&D personnel (10,000capita/year)

Share of R&D investment in GDP (%)

Full-time equivalent of R&D personnel

Year

Fig. 2 R&D intensity and personnel in China 1996–2005. Data source China Statistical Yearbook on Science and Technology 1997–2006

and Realizing Industrialization promulgated in August 1999, as well as the “863 Program” and “Torch Program” acted as an important catalyst for the development of China’s high-tech industries and the industrialization of scientific and technological achievements (Peng Jisheng, 2000). Finally, it clarified the main tasks and priority areas for innovation for this stage. It was to transform traditional industries by using electronic information and automation technologies for economic construction; to focus on high-tech development in fields such as electronic information technology, biotechnology and new medicine, new materials, new energy, aerospace and ocean, to realize industrialization; and to make significant progress in basic research (Liu Guoguang, 2006). Inputs to innovation were substantially increased at this stage, as shown in Fig. 2. Figure 2 shows that by 2005, the share of R&D investment in GDP reached 1.32% and the full-time equivalent of R&D personnel increased from 800,400 in 1996 to 1,364,800, with an increase of 70%. Satisfactory innovations were made in this stage with the improvement of the environment and increased investment for innovation, as shown in Fig. 3. As shown in Fig. 3, a rapid increase occurred in patents granted for inventions, exports of high-tech products, and articles characterizing basic research of SCI, from 1996 to 2005. In addition, there was an increase in the international ranking of SCI articles number from the 14th in 1996 to the 5th in 2005. It is distinctive that enterprises increasingly became the main force of innovation in this stage. In terms of R&D investment, enterprises have accounted for 60.40% of total R&D expenditure since 2001, reaching 68.30% in 2005, and enterprises have gradually dominated R&D expenditure. Furthermore, the distribution of domestic service invention patents granted by sector reveals a rapid increase in the share of enterprises. In 2005, a number of 7,712 innovation patents were granted to industrial

10

1 Steps, Connotation and Targets of Indigenous Innovation Invention patents granted (10,000)

SCI articles (10,000)

Exports of high-tech products ($100million)

Year Fig. 3 Innovation output of China 1996–2005. Data source China Statistical Yearbook on Science and Technology 1997–2006

and mining enterprises, accounting for 52.24% of all domestic service invention patents granted. (3) Stage 5 (2006–Present): Building an indigenous innovation system and an innovative country Innovation capacity in China has been improved to a certain extent after the development of the previous stages, which in turn contributes to international competitiveness. The World Competitiveness Yearbook 2006 shows a jump in China’s international competitiveness from the 31st of 2005 to the 19th. However, it should not be overlooked that core technologies were not cultivated in many of China’s strategic industries under the guidance of the “market-for-technology” policy, but were instead stuck in the trap of foreign technological dependence (Jinglian Wu, 2005). For example, the Chinese government has tried to improve the technology level and innovation capacity of the automobile industry by “market-for-technology”, but it has not worked out as expected: the automobile enterprises in China lost the platform and motivation for independent development in the joint venture process, thus failed to substantially improve their indigenous innovation ability. In this context, China raised indigenous innovation to the strategy level. In 2006, the State Council issued the National Outline for Medium and Long Term Sci-Tech Development (2006–2020), which set a development strategy of “indigenous innovation, key leapfrogging, supporting development, and leading the future”, with special emphasis on the importance of intellectual property strategy and standard strategy. In 2010, President Hu Jintao pointed out in a report of the Conference of Academicians of the Chinese Academy of Sciences and Chinese Academy of Engineering that enhancement of indigenous innovation capacity should be taken as a strategic base, with emphasis on enhancing the capacity of original innovation followed by that of integrated innovation and further innovation based on absorbing advances in overseas science and technology. On May 30, 2016, General Secretary Xi Jinping

1 Steps of Indigenous Innovation in China Applied Research

Experimental Development

Funds Invested

Basic Research

11

Fig. 4 Investment of R&D funds in China 2006–2009. Data source China Statistical Yearbook on Science and Technology 1997–2006

pointed out that “innovation with efficiency is a necessity. We will fall into the passive in strategy, and miss the opportunity for development, which may even be a whole era if we fail to be aware of, adapt to, and seek changes. The implementation of an innovation-driven development strategy is an inevitable choice to cope with changes in the development environment, grasp the autonomy of development and improve core competitiveness; to accelerate the transformation of the model of economic development and solve the deep-seated contradictions and problems for economic development; and to effectively lead a new normal of China’s economic development and maintain economic sustainability and health in China” in his words at the National Conference on Science and Technology Innovation, the 18th Conference of Academicians of the Chinese Academy of Sciences and the 13th Conference of Academicians of the Chinese Academy of Engineering, and the 9th National Congress of the China Association for Science and Technology. From 2006 to 2009, China continued to increase its investment in innovation. The following is an illustration on innovation capacity growth in China at this stage, exampled by 2006–2009. Investment of R&D funds in China from 2006 to 2009 is shown in Fig. 4. As shown in Fig. 4, funds for basic research increased year on year in absolute terms from 2006 to 2009, but it only accounted for about 5.0% of total R&D funds in relative terms, leaving a significant gap with advanced countries in terms of research level. According to the National Bureau of Statistics from 2010, the proportion of investment in basic research to total R&D expenditure in China was 4.7% in 2009, compared to 17.5% in the United States and 12.3% in Japan. Moreover, statistics from the National Bureau of Statistics show that the national R&D expenditure in 2016 was RMB 1567.6 billion, with an investment intensity close to that of developed countries, of which the R&D expenditure of enterprises in high-tech zones accounted for more than 30% in China. Total R&D expenses reached RMB 1.76 trillion in 2017. China achieved satisfactory innovations at this stage, as shown in Table 3. Table 3 shows a significant increase in the number of SCI articles and international rankings compared to the previous stage. In 2009, China ranked the second in the

12

1 Steps, Connotation and Targets of Indigenous Innovation

Table 3 Innovations in China 2006–2009 Year

Invention patents Proportion of SCI articles International Exports of granted (unit: ten invention to total (unit: ten ranking of SCI high-tech thousand) patents granted (%) thousand) article numbers products (unit: $ million)

2006

5.78

21.56

7.15

5

2814.50

2007

6.79

19.32

8.91

5

3478.19

2008

9.37

22.75

9.55

4

4156.11

2009 12.80

21.99

11.95

2

3769.31

Data source China Statistical Yearbook on Science and Technology 1997–2006

world in terms of number of SCI articles published. The export volume of hightech products and the number of invention patents granted in China continue to rise steadily, while the proportion of inventions to total patents granted remains unchanged from the previous stage. Additionally, the 2010 China Statistical Yearbook on Science and Technology shows that China ranks 9th in the number of citations in the essential science indicators (ESI) (January 1999 to August 31, 2009), with a total of 649,689 articles and 340,466 citations. The citation rate (citations/total articles) is 5.24, much lower than the top 8 countries. Among them, the U.S. ranked 1st, with a total of 2,774,344 articles, 44,669,056 citations, and a citation rate of 15.02 (National Bureau of Statistics et al., 2010). It is necessary for China to continuously strengthen its ability building at this stage, with emphasis on the quality of development rather than just the quantity of innovations. (4) Characteristics of innovation after the Reform and Opening-Up Enterprises in the market economy increasingly take the subject of indigenous innovation after the Reform and Opening-Up, without weakening the role of the government. The government influences the whole economic activities through macro-control and supervision, acting as an innovation promoter and innovation environment creator in indigenous innovation. Instead of being an appendage and implementer, enterprises have to bear the risks of innovation while enjoying the benefits it brings. Also, research institutions gain more autonomy after the reform of the science and technology management system, which alleviates the disconnect between sci-tech and economics. Advantages of the indigenous innovation system with enterprises as subjects are that the motivation of enterprises for innovation is stimulated; the innovation in market mechanism emphasizes the pulling force of market demand, thus innovations will meet the market demand effectively; as an innovation guider, the government improves the soft environment for innovation; and the market allocates resources such as talents and capital effectively.

1 Steps of Indigenous Innovation in China

13

1.2 Evolution of China’s Innovation System Around the Reform and Opening-Up Before the Reform and Opening-Up, the government played a leading role in the innovation system, while research institutes and enterprises were merely R&D and production units implementing national programs, with no interaction between them. However, enterprises gradually emerged as the subject of indigenous innovation after the Reform and Opening-Up. The Evolution of China’s Innovation System around the Reform and Opening-Up is shown in Fig. 5. Figure 5 shows that China’s innovation system is in an open environment, where all elements centered on enterprises, play their strengths to jointly promote indigenous innovation (which is also the embodiment of synergistic innovation).

1.3 Summary of Experience and Implications for Indigenous Innovation at the Current Stage Basic elements for carrying out indigenous innovation activities are summarized in this section by review, collation, and analysis of the history of technological progress since the founding of the People’s Republic of China, which is of reference for conducting indigenous innovation activities more effectively at the current stage.

t

en

nm

Relatively Closed Environment

iro

en

Government

v En

Op

Research Institutes

Direction

Government

Directive

Supportive Policy

Achievements Product Directive

Product Consumer Group

Productionoriented Enterprises

Before the Reform and Opening Up

Imitation

Guiding Policy

Circulation Enterprise

Secondary Innovation Capability

Technology + Universities Talent Export and Research Market Institutes Demand

Technical Business Ideas- Demand Commercial Applications Product/ Service

Consumer Group

Funding, Services Professional service providers, such as consulting, accounting, etc.

After the Reform and Opening Up

Integrated Innovation Capability

Original Innovation Capability Evolution of Capability

Fig. 5 Evolution of China’s innovation system around the reform and opening-up

14

1 Steps, Connotation and Targets of Indigenous Innovation

1. Emancipation of the mind is a prerequisite for effective indigenous innovation. Emancipation of the mind is still an issue of high priority as it was raised in 1958 when the state initiated the idea of “breaking away from superstition and emancipating the mind”, and again in 1978. Some scholars argue that centuries of politicized Confucianism have eroded the spirit of subjective and indigenous innovation (Yang Fan et al., 2007). But it doesn’t mean a lack of indigenous innovation in China. An example of the possibility and necessity of emancipation can be found in the successful development of China’s first 10,000-ton hydraulic press in Shanghai Jiangnan Shipyard in 1961. A common idea then was imitation, i.e. to imitate foreign products after purchase. Therefore, a lot of questions were raised when Shen Hong, an engineer, suggested to Chairman Mao to build a 10,000-ton hydraulic press. Skeptics held that “a 10,000-ton hydraulic press is required to build a 10,000-ton hydraulic press”, i.e., a 10,000-ton hydraulic press must be imported before a 10,000-ton hydraulic press can be built, with the construction of a 10,000-ton heavy machinery plant to produce the large forgings required by the 10,000-ton hydraulic press. However, it was impossible to import a 10,000-ton hydraulic press due to the small number of presses in the world at that time. Nevertheless, Shen Hong, with his design team, succeeded in building a 10,000-ton hydraulic press through several years of hard research. It was the courage to go beyond the traditional way of thinking, emancipate the mind and strive boldly that enabled Shen Hong to obtain this major innovation. As the subject of innovation, enterprises are required on cultivating a cultural atmosphere conducive to innovation, emancipating their minds, and encouraging all employees to participate in innovation. A favorable innovation culture is the soil and breeding ground for innovation subjects to give full play to their capability to innovate and earn internationally competitive innovations. Instead of being built overnight, a culture of innovation requires a long and continuous cultivation process. So attention should be paid to the cultivation of innovative culture at this stage. 2. Talent Cultivation is the key to indigenous innovation. Indigenous innovation activities require a rich knowledge base and innovative talents, which the establishment of the knowledge base depends on the previous practices of the employees, so innovative talents serve as the key to the indigenous innovation activities of enterprises. In an open and tolerant atmosphere, innovative talents will perform the creation, dissemination, and application of knowledge on their own, thus promoting the development of the overall innovation capability of enterprises. For enterprises, innovative talents come from cultivation or import (from universities and research institutes). In addition to cultivating innovative talents within enterprises, it is more important to cultivate them in universities and research institutes from the perspective of a national innovation system. Measures were taken by the government to cultivate talents in each of the five waves of indigenous innovation. In the early years of the People’s Republic of China, the government advocated learning from the Soviet Union and cultivating talents through practice; after the Reform and Opening-Up, respect for knowledge and talent

1 Steps of Indigenous Innovation in China

15

was advocated, together with the restoration of the college entrance examination system. The Outline of National Medium- and Long-term Program for Talent Development (2010–2020) was promulgated in June 2010, which clarified that the overall goal of China’s talent development lies in cultivating a talent team with a large scale, optimized structure, reasonable layout and excellent quality, so as to establish the country’s advantage in the talent competition and enter the rank of a world talent power for laying the foundation of talent for the basic realization of socialist modernization in the mid-twenty-first century. General Secretary Xi Jinping pointed out in his speeches at the National Conference on Science and Technology Innovation, the Conference of Academicians of the Chinese Academy of Sciences and Chinese Academy of Engineering, and the Ninth National Congress of the Chinese Association for Science and Technology in 2016 that reform should be made to the mechanism of talent cultivation, introduction and employment to cultivate a pool of strategic sci-tech talents who can grasp the world’s scientific and technological trends and judge the direction of scientific and technological development; a pool of sci-tech leaders who are excellent at cohesion and coordination, and a large number of entrepreneurs and highly skilled talents who are brave and good at innovation. Cultivation model of innovation talents should be improved, with emphasis on the cultivation of scientific spirit and creative thinking, strengthening models such as integration of science and education and joint university-enterprise cooperation, etc., cultivating a large number of innovative and entrepreneurial talents who are familiar with market operation with sci-tech background, and a large number of young scitech talents. It is necessary to create a favorable academic environment, where academic ethics and research ethics are promoted; and an atmosphere, where innovation is encouraged and failure is tolerated, for the whole society. The protection of intellectual property rights should be strengthened, followed by a distribution policy oriented to increasing the value of knowledge, including a share-increase of income from the transformation of scientific research results for R&D personnel and exploration of incentives such as equity, options and dividends for innovative talents, so that they can get what they are worth. 3. Market demand is a driver for indigenous innovation activities. Innovation activities in the two stages before the Reform and Opening-Up were driven by the government’s perceived needs for national economic and social development and national defense, rather than by market demands. Even in the early stage of the Reform and Opening-Up (before 1992), non-state enterprises, which had just sprouted, were considered to be competing with state-owned enterprises for raw materials, causing inflation and out-of-control markets, and were the target of consolidation under the planned economy (Wu Xiaobo et al., 2007). It can be seen that market demand is ineffective in promoting indigenous innovation under the planned economy. Since 1992, the pull of market demand for innovation emerged with the establishment of the socialist market economy, the flourishing of private enterprises, and the restructuring of state-owned enterprises. An example is the indigenous innovation of VCD (Video Compact Disc) since the 1990s. Experience in developed

16

1 Steps, Connotation and Targets of Indigenous Innovation

countries suggests that the spread of television will stimulate a huge demand for home video and playback equipment. By 1993, the penetration rate of television in China reached nearly 80%, but the VCR was too expensive to meet the demand for video and playback equipment. This unmet need provided a market opportunity for the commercialization of VCD technology. However, foreign companies at the forefront of technology failed to capture this demand although the principles of VCD playback systems were well understood at that time. Chinese entrepreneurs who were familiar with the Chinese market figured out the commercial value of VCD technology (the first company to start producing VCDs was Wanyan, 1993), and as a result of which the expensive VCRs were replaced by VCDs (Lu Feng et al., 2003). It proves that in a market economy, market demand is a driver of innovation. Now, the increasing diversity of market demand and the higher demand for responsiveness have posed greater challenges for enterprises. For example, Haier Group, in order to adapt to changes in the market environment, proposes the “RenDanHeYi (win–win Mode of Individual-Goal Combination)”, which changes the traditional organizational structure from a “positive triangle” to an “inverted triangle”, in which front-line employees form autonomous business units to grasp and meet the needs of users in the first place. In addition to meeting the existing market demand, enterprises should pay attention to exploring potential user demands, approaches such as participation of innovation before users, user experience center and user innovation community are effective for exploration of potential user demands. 4. Indigenous innovation is a system, in which the roles and functions of each element need to be clarified and the system of “industry-university-research” cooperation needs to be improved. In a planned economy, the government acts as a decision-maker of innovation activities, while enterprises lack the incentive for innovation. Limited resources can be allocated effectively to priority areas through planning in a relatively closed, resource-starved environment. However, a complex environment and massive data and information make it difficult for the decision-making of a country to schedule production independently. Currently, indigenous innovation is a systematic project that requires the cooperation and synergy of multi-aspect such as enterprises, government, universities and research institutes, etc. First, the role of each element should be clarified. Enterprises act as subjects of indigenous innovation; government as a maker of innovation policy and creator of innovation environment; universities and research institutes as innovation sources and knowledge base of indigenous innovation system; intermediaries as providers of funds and common technologies required for innovation. All elements interact and interpenetrate with each other, and the government guides “industry-university-research” cooperation effectively to achieve optimal allocation of resources for effective indigenous innovation. Then, perfection is made to the “industry-university-research” cooperation system on this basis. Efforts should be made by the government to create a policy environment conducive to “industry-university-research” cooperation

1 Steps of Indigenous Innovation in China

17

Basis for Indigenous Innovation

Emancipation of the Mind

Knowledge Acquisition

Talent Cultivation Knowledge Dissemination

he o sp At m

re:

Op

en n

e

nd ss a

Inn

ova

tion

Government

Supportive Policy

Guiding Policy

Technology + Universities Talent Export Enterprise Ideas Commercial and Research Application Institutes Technical Demand

Market Demand Product/ Service

Consumer Group

Market Demand Knowledge Application "Industry-UniversityResearch" Cooperation

Demand

Funding, Services

Professional service providers, such as consulting, accounting,etc.

Fig. 6 Mechanism of basic factors of indigenous innovation

with adherence of enterprises as subjects and orientation to the market. Policies on finance, taxation, government procurement, finance, intellectual property and talents should be applied to promote the effective implementation of the “University-Industry-Research” cooperation system. The sharing of outcomes, risks and benefits are key elements of the integration of “industry-universityresearch”, while intellectual property rights are the concentrated manifestation of the outcomes and benefits of cooperation. Therefore, the “industry-universityresearch” cooperation should take intellectual property rights as the central link in the solution of the benefit distribution mechanism. A mechanism of four basic elements mentioned above of indigenous innovation activities in China’s innovation system is shown in Fig. 6. The increase of comprehensive national power and international competitiveness of China must rely on indigenous innovation. The indigenous innovation proposed by China is in response to the excessive reliance on imported technology in the past. Lu Feng pointed out, “Indigenous innovation is not a Chinese invention, but already appeared in Japan and South Korea… innovation can only be independent, which is natural and self-evident for the technologically advanced, but the emphasis on independence for technical laggards is necessary because it takes courage to catch up.”1 The core of indigenous innovation is the innovation capability of enterprises. Whether enterprises in China addition to their mechanisms. But where does the innovation capability come from? An analysis on the history of innovation development in China shows that the innovation capability of enterprises is a result of continuous accumulation and gradual development of human resources, 1 Lu Feng. Courage to Develop Indigenous Innovation-Prof. Lu Feng’s Speech at the Report on Indigenous Innovation (excerpt). (02-26-2006) [08-14-2018]. http://theory.people.com.cn/GB/ 49154/49155/4142965.html.

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1 Steps, Connotation and Targets of Indigenous Innovation

knowledge and capital over a long period according to the market demand in China (Law of Progression).

2 Connotation and Trend of Indigenous Innovation Nowadays, sci-tech is experiencing rapid development, accompanied by increasingly fierce international competition, and the transformation of high-tech achievements into real productivity is increasing quickly. Science and technology, with indigenous innovation as its core, are now the decisive force for national and corporate development and the essence of competence. For more than half a century, technological innovation has been a fundamental strategy of many countries and enterprises, which has significantly increased their capacity for indigenous innovation and formed an increasingly competitive advantage. Such as the U.S. makes maintaining a leadership position in science and technology a national strategic goal, with a National Innovation Promotion Plan proposed by the U.S. Council on Competitiveness in 2004 to further strengthen U.S. international competitiveness, clearly stating that innovation is the only key element for U.S. success in the twenty-first century; the U.K. proposes to ensure the excellence and strength of basic science; Japan defines a strategy to establish a nation based on science and technology innovation and intellectual property; Korea also proposes a technology-based nation strategy; etc. In terms of international experience, Japan, South Korea and some Southeast Asian countries and regions have formed many products and technologies with indigenous intellectual property right through indigenous innovation, which not only dominate the domestic market but also support many brand products with international influence and drive the GDP into a high-speed growth. Practice shows that it is the foundation of sustainable development and competence to cultivate the key, core and generic technologies of the country through indigenous innovation. Indigenous innovation and the building of an innovative country are undoubtedly the key drivers of China’s economic and social development and the key to transforming the economic development of China.

2.1 Misconceptions of Indigenous Innovation Recently, “Indigenous Innovation” in China has been a focus of all levels of governments, academia and enterprises. What exactly is “indigenous innovation” has been the subject of divergent opinions over the years. There are some questionable views and concepts about what “indigenous innovation” is and how it should be carried out, which are tentatively called “misconceptions” here. These misconceptions negatively affect, to varying degrees, the capability of enterprises to innovate and promote the construction of an innovative country, and even mislead the government and enterprises in their innovation decisions.

2 Connotation and Trend of Indigenous Innovation

19

(1) Misconception 1: Indigenous innovation is equal to the pursuit of technology leadership as well as high-level technology Indigenous innovation is not limited to technical innovation, instead, great values will also be created by indigenous innovation in management, system, culture, and business model, etc. For example, an introduction of an innovative management system called “plant separated from the grid, bidding energy price for sale to grid” into the electric power industry in 2002 in China triggered continuous innovation in the strategy, organization, control management model and operation mechanism of electric power enterprises in China. Institutional innovations tend to be more important than technological innovations like steam locomotives or telegraphs. For example, it is the institutional innovation, and establishment of the Shenzhen Special Economic Zone in the 1980s, that enabled the rapid economic development of Shenzhen since the Reform and Opening-Up. Based on years of management practice, Haier Group has successively summarized and refined indigenous innovations in management, which are characterized by Haier and are effective, such as “OEC management” (which aims at overall control of everything that every employee finishes on his or her job, with a 1% increase over what was done the previous day), business process re-engineering with market chain, and “SST (based on Chinese Pin-Yin, i.e. remuneration, compensation, and tripping) mechanism”, “everyone is a strategic business unit (SBU)”, and “RenDanHeYi (Win–Win Mode of IndividualGoal Combination)”, etc., which bring efficiency-up and cost-down to Haier, generating huge benefits no less than technological breakthroughs, contributing to Haier’s international competitiveness as a key role. Many enterprises hold that indigenous innovation means controlling cutting-edge core technologies and pursuing technology leadership. It is a biased view. In fact, any technology that meets market demands currently or in the future, including advanced and applicable technology and technology that can be successfully marketed, is what indigenous innovation should pursue. (2) Misconception 2: Indigenous innovation should rely entirely on oneself for original innovation Indigenous innovation is neither equal to closed innovation nor contradictory to open innovation. Of course, successes exist in specific areas where indigenous innovation can be achieved solely through in-house efforts. But the fact that we are lagging behind in many areas of technology compared to developed countries must be faced squarely. As a result of globalization, it is clear that you cannot keep up with the pace of global technological progress by relying only on indigenous innovation behind closed doors. Clear traces of imitation can easily be found in the early products of Chery Automobile Company. What is valuable is that Chery has worked out an independent development model of “integrating global resources with self as the key to creating a platform”. Chery crossed the stage of imitative innovation in just a few years by integrating and utilizing world resources and entered the stage of positive R&D in 2002. By full utilization of technology and talent at home and abroad, Chery has not only broken the technology blockade of a few multinational corporations

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1 Steps, Connotation and Targets of Indigenous Innovation

(MNCs) against China’s independent brands but also greatly accelerated the pace of independent R&D. (3) Misconception 3: Indigenous innovation is the job of technical departments and R&D personnel Indigenous innovation is a complex system that includes not only the generation of ideas and the R&D process but also a chain of processes such as pilot testing, manufacturing, marketing, after-sales service and user feedback, market research, etc., which require the collaboration of various functional departments such as R&D, manufacturing, marketing, management and service, as well as the cooperation of all employees, suppliers, users and other stakeholders. Innovation is no longer just the patent of R&D personnel, but a joint behavior of all employees. Everyone from sales, manufacturing and R&D personnel to after-sales service, management and finance personnel can be excellent source of innovation. Academician Li Guojie, former director of Institute of Computing Technology, Chinese Academy of Sciences, pointed out that the breakthrough of core technology cannot rely only on a few researchers behind closed doors, instead, real competitive products can come out only through continuous use and improvement according to the feedback from users. Core technology comes out of practice, while competitive domestic products are nurtured by users. It is the overall capacity of the innovation chain that determines whether indigenous innovation succeeds or fails, rather than the capacity of a single technology breakthrough. (4) Misconception 4: Intellectual property rights acquired through purchase means indigenous innovation It is reflected in the failure to recognize the technological blockade and containment against China by the Western developed countries, the naivety of thinking that technology and intellectual property rights can be acquired through free trade, and the hope of the development of China’s science and technology on the import of technology. Some domestic economists believe that R&D in China is more expensive than abroad. Key technologies can be imported as technology is as liquid as capital, so for a long time, China has relied on foreign sources of technology. For now, focus should be on labor-intensive processing industries and on improving industrial element endowments rather than tackling key technologies. It is only after the accumulation of capital and talents that conditions will be available to emphasize indigenous innovation. Another opinion is that it is ahead of its time to talk about indigenous innovation. Now China is not yet sufficient in terms of indigenous innovation, so it is necessary for a while of accumulation, after which indigenous innovation will be made with sufficient strength. Indigenous innovation is essentially a question of the path, namely, what path to take. For example, the SPC exchange, which was imported from France and Belgium more than 20 years ago, was US$ 480 per line, but the price dropped rapidly when we succeeded in developing it independently, to $1 per line in the end. Huawei is a small enterprise founded in 1987 as an agent for communication

2 Connotation and Trend of Indigenous Innovation

21

equipment. There were more than 200 enterprises similar to Huawei in China at that time, but the only difference between Huawei and other agents is that Huawei started to show its dedication to technology and obsession with technology in the early 1990s. In 1991, the Huawei Constitution stipulated a minimum of 10% of Huawei’s annual sales to be invested in R&D. Huawei has advanced to the forefront of the world after just 20 years. (5) Misconception 5: Indigenous innovation is equal to technological imitation An analysis of domestic research and reports on indigenous innovation in recent years shows that confusion is often found between indigenous innovation and imitative innovation, e.g., imitation of product development is widely promoted as indigenous innovation by some enterprises. In fact, as long as a little careful analysis of such reports is made, insiders will be aware that most of these so-called indigenous innovation results are simple imitations of foreign products, i.e., products produced on the basis of imported technologies. Indigenous innovation is understood here as the effort carried out independently by Chinese scientists and technicians, which is only a superficial view of innovation activities. The essence of indigenous innovation should be in the core content that the innovation outcomes are based on a unique (different from foreign enterprises) product technology platform.

2.2 Connotation of Indigenous Innovation In recent years, experts and scholars provide various descriptions of the connotation of indigenous innovation from different perspectives, and so far a consensus has been gradually formed in China. Indigenous innovation is an organic combination of the original innovation, integrated innovation, further innovation based on absorbing advances in overseas science and technology, and management innovation and institutional innovation to effectively integrate resources and improve the overall innovation ability, which takes self as a priority, companies as subjects, and the core technology and intellectual property rights of key technology as well as the activities and market of a high value-added chain as the goal. Indigenous innovation, as the name implies, is an innovation activity carried out primarily by oneself, as opposed to technological dependence on developed countries. However, such an understanding is problematic, because no enterprise, not even a country, is capable of completely indigenous innovation given a rapid pace of globalization and technological change. Any enterprise or country is to some extent dependent on the technology of other enterprises or countries for its development, which is increasingly strong. The United States, a powerful country in terms of technology, is increasingly applying technologies imported from Japan, Germany and other countries to enhance its competitiveness, let alone developing countries like China, where a greater degree of technological dependence is inevitable.

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1 Steps, Connotation and Targets of Indigenous Innovation

Therefore, indigenous innovation is not about getting rid of learning technology of other countries or enterprises, but about being able to stand out in the industrial value chain and provide unique value to customers, and thus get a better return by getting rid of the control and exploitation of developed countries. Thus, it seems that indigenous innovation refers to utilizing the world’s technological resources as much as possible and integrating them into our technological system, rather than just getting rid of foreign technologies. So what kind of innovation will enable us to get independence in the industry value chain and provide unique value to our customers? The position and significance of indigenous innovation in the whole innovation process can only be grasped by examining the staging process of innovation and the dynamic process of industrial innovation and understanding the value chain positioning of enterprises in the innovation process. The Enterprise innovation process is shown in Fig. 7. Figure 7 shows that the success of innovation must be a synergy of technological development and market demand, a synergy that is achieved through idea generation, system platform design, product and process design, manufacturing and marketing. The entire innovation process, from technological development and market demand perception to manufacturing and sales, cannot be done by one enterprise or even one country alone in such a global environment today. Therefore, each enterprise or country can only establish its niche at a certain stage of innovation and thus take its place in the entire value chain. As a result, moving up from the lower end of the innovation process (the lowest value end) will be more common for enterprises in developing countries towards higher-end innovation activities such as product and process design. So which stage of innovation activity should enterprises rise to in order to take their places in the industrial value chain, provide unique value to their customers, and thereby escape from the control and value exploitation of developed countries and gain a more lucrative return? Obviously, activities carried out only in the product and process design stage have to rely on the technology system platform already established by enterprises in developed countries, without basic independence. However, it conflicts with the requirements of both the current sci-tech strength and resource endowment to invest huge resources in many areas of core sci-tech to compete with

Sci. & Tech. Development

Idea Generation

System Platform Design

Output & Process Design

Market Demand

Fig. 7 Enterprise innovation process

Manufacturing and Sales

2 Connotation and Trend of Indigenous Innovation

23

developed countries. Therefore, the connotation of indigenous innovation requires a focus on the cultivation and construction of the platform for idea generation and product system, so that enterprises in China will be able to control or participate in controlling the operation of the whole value chain and the formation and distribution of value.

2.3 Trend of Indigenous Innovation: Total Innovation Indigenous innovation in the new situation is total innovation based on an integration of resources at home and abroad. Theories of enterprise innovation management have also evolved over the decades, from single, mere technological innovation, to portfolio innovation, and then to an organic combination of various innovations based on core capacity. In the 1990s, a focus of innovation was primarily on technology, quality, and cost control, while attention is being paid to the creativity and growth drivers of enterprises today. Although great progress has been made in recent years in technological innovation in China, some issues still exist and need to be taken into account. For a long time, a lack of attention to technological innovation in enterprises and low investment in technological innovation in most enterprises have led to issues such as weak capacity, and a lower level of technological innovation. A great deal of practice shows that a chronic problem of technological innovation in enterprises is that quite many technological innovation projects fail in realizing the expected benefits, for reasons that lie not in technical elements (such as R&D, product and process innovation, technical platform construction and technical infrastructure, etc.), but in inefficient synergy between technical elements and nontechnical elements such as strategy, culture, organizational structure, system (including property rights, incentive system, etc.), market and HRM of enterprises. The deep-seated reason for the above problems in China’s enterprise technology innovation is the lack of advanced, scientific and systematic guidance on the new concept of technology innovation management, the lack of sufficient insight into the higher requirements of technology innovation in the new competitive environment and changes in market demand, and the lack of a systematic view and comprehensive innovation thinking. In short, the turbulent environment, increasingly fierce competition and changing customer demands require enterprises to compete on all fronts and to respond to the full range of customer demands faster than their competitors. It requires efforts for technological innovation, centered on which comprehensive, systematic and continuous innovation must be carried out. The shift from traditional innovation management to total innovation management (TIM) is an inevitable choice for enterprises in the knowledge economy to face the challenges of fierce market competition and increasingly diverse and personalized user demands. Currently, TIM has been practiced by some advanced international companies, such as 3M, Hewlett-Packard,

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1 Steps, Connotation and Targets of Indigenous Innovation

Nokia, and Southwest Airlines. Encouragingly, TIM has also been explored in practice by some of the advanced enterprises in China. Based on the idea of total innovation and the guarantee of its innovation culture, Haier Group advocated and ensured that “everyone is an innovation SBU” from the organization and management system, which greatly improved the enthusiasm for highly involvement innovation and the technological innovation capability, thus ultimately improving core competitiveness of Haier. Baosteel Group takes concept innovation as a guide and vigorously promotes the Enterprise System Innovation (ESI) based on the idea of total innovation in recent years, gaining favorable outcomes. For domestic enterprises with weaker innovation capability, it is a significant way to narrow the gap with international advanced enterprises, enhance indigenous innovation capability and maintain a sustainable competitive advantage by mastering the connotation of TIM and implementing it as soon as possible. A theory system of Total Innovation Management (TIM) was proposed by the innovation research team led by academician Xu Qingrui of Zhejiang University (Xu Qingrui et al., 2003). The connotation of TIM consists of value addition as the goal, cultivation and enhancement of core competency and core competitiveness as the center, strategy as the orientation, synergistic innovation of all innovation elements as the means; seeking to achieve innovation by everyone, for everything, and at all times and everywhere through effective innovation management mechanisms, methods and tools. TIM should run through all-employee, all-elements, and all-time-space innovation. All-employee refers to all employees, all departments and processes, all suppliers and stakeholders. All-factor refers to ideology, culture, technology, strategy, market, organization, system and management. All-time-space refers to all-region, global resources, and 7X24 hours innovation. Not one enterprise can keep up with the pace of technological change in all the technological areas in which it is involved, and it is unlikely that any enterprise with a strong technological presence possesses all the resources and technologies needed for innovation. Indigenous innovation will be more difficult when innovation is increasingly dependent on external resources. Successful innovation depends on effective collaboration with various external organizations to achieve breakthroughs in core technologies. In this regard, Prof. Chesbrough (2003) of the United States proposed an open innovation model: valuable innovations can be obtained from both inside and outside a company, and their commercialization path can take place either from inside or outside the company. Companies use both internal and external innovation resources to complement each other in their innovation process, and the commercialization path for in-house technologies can be both internal and external. Total innovation is a requirement of the times for innovation. Since the 18th Party Congress, Comrade Xi Jinping highlighted repeatedly a central position of innovation in the overall national development, great importance to sci-tech innovation, the implementation of the innovation-driven development strategy, and the acceleration of total innovation centered by sci-tech innovation. Innovation has always been an important force for the progress of human society. China has always attached great importance to sci-tech progress and innovation.

3 Particularity of Indigenous Innovation Path with Chinese Characteristics

25

From the “March towards Science”, “Scientific Spring”, and the implementation of the strategy of revitalizing the country through science and education, to the improvement of indigenous innovation capability and the construction of an innovative country, China has continuously improved its science and technology level, entered the stage of following, parallel and leading, and become a major science and technology country with significant influences. For an upgrade of sci-tech from large to strong, efforts should be made to set up the concept of innovation development and implement the innovation-driven development strategy more effectively, adhere to the “two-wheel drive” of scientific research, technological innovation and institutional innovation, break down all ideological and institutional barriers that restrict innovation, especially greater efforts to “total”. For the comprehensive promotion of innovation, innovation must be implemented in all areas of national development, in which both sci-tech should fulfill its leading role in supporting the economy, and more technological innovations should be brought into daily life, so as to give full play to the important role of scientific research and technological innovation in ensuring national security. For comprehensive promotion of innovation, the “short plank” must be made up, i.e., efforts should be made to solve the outstanding problems such as weak original innovation capacity and insufficient transfer and transformation of sci-tech achievements, so as to systematically improve China’s indigenous innovation capacity in open environment.2

3 Particularity of Indigenous Innovation Path with Chinese Characteristics 3.1 Particularity of Chinese Conditions China is a large developing country during economic transition, with a large population, vast territory, rich resources, a time-honored history, low per capita income, and low per capita resource availability. Since the Reform and Opening-Up, China experiences high economic growth, yet it is still developing as a whole, especially with an extended unbalanced development between eastern and central and western regions, urban and rural areas, etc. Ouyang Yao (2009) proposed the concept of “Comprehensive Advantages of Great Power” based on China’s special national conditions, which is mainly expressed as the advantages of “great power” and “transformation”. First, China is a “great power” with uneven economic and technological development, with some regions or sectors enjoying advantages in labor resources and applicable technology, and others offering advantages in capital and high technology; second, China is great 2

Anonymous. An Innovation Era Comes to Full Force in China [EB/OL… (06-17-2016) [12-012018]. http://digitalpaper.stdaily.com/http://www.kjrb.com/kjrb/html/2016-06/17/content_341695. htm?div=-1.

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1 Steps, Connotation and Targets of Indigenous Innovation

power in the process of economic transformation, with imbalances in the progress of transformation among regions and sectors. A “collection”, i.e., “Comprehensive Advantages of Great Power”, will be formed by a scientific and rational optimization of various advantages to enhance the competence of the national economy. It includes high-tech, labor with high quality and low cost, and a broad domestic market, which is an advantage that cannot be found in small countries. Also, it provides exceptional environmental conditions for China’s indigenous innovation.

3.2 Peculiarity of Natural Resources Although China possesses a lot of natural resources as a whole, it ranks lower than the average internationally in terms of per capita possession. In addition, we are going to build an all-around, well-off society that will benefit more than one billion people, supporting 22% of the world’s population with only 7% of the world’s arable land. Statistics show that it is only about 1/10 of the world average in terms of per capita oil resources and only about 1/4 of the world average in terms of per capita water resources in China. Since the Reform and Opening-Up, China experienced continuous growth in total energy consumption. 2017 statistics from the State Statistics Bureau show that China’s total energy consumption was 4.36 billion tons of standard coal in 2016, an increase of 1.4% over 2015. The World Energy Statistics Yearbook 2017 shows that China consumes 31% of the world’s raw coal, 27% of steel, and 60% of cement. For a long time, economic growth in China follows an extensive development path of high input, high consumption and high pollution. This rapid growth based on the extensive economic growth model has made resources increasingly unsustainable and the environment unbearable. In addition, China suffers from low efficiency in resource development and utilization. In 2013, energy consumption per $10,000 of GDP generated in China was 3.4 times that of the world average, 2.3 times that of the United States, 4.5 times that of the European Union, 2.8 times that of South Korea, and 8 times that of Japan, according to data published by the National Development and Reform Commission in 2014. Now, China is experiencing a low efficiency of raw material utilization and serious waste, with resource consumption intensity per unit of output value much higher than that of the world average. As a large developing country, the traditional path of extensive development will be a dead-end for China as we face severe pressure on resources and the environment. Restructuring and transforming the mode of economic development is urgent. Indigenous innovation is the inevitable solution to these problems.

3 Particularity of Indigenous Innovation Path with Chinese Characteristics

27

3.3 Particularity of Market in China China is a developing country with a vast territory, multi-ethnic and multi-faith, unbalanced regional development, which is enjoying rapid growth. Such a characteristic results in a potential internal market demand that is differentiated, multi-layered, and continuous on a huge scale. For example, the Spring Festival transport. The Spring Festival transport, with its unique Chinese characteristics, is known as “the largest periodic human migration in human history”. Statistics from the Ministry of Transportation of the PRC shows that nearly 3 billion people, or about 1/2 of the world’s population, moved around during 40 days in 2018. Data released by the Ministry of Industry and Information Technology on February 24, 2018, shows that 12.37 billion mobile text messages were sent nationwide during the seven-day Spring Festival holiday. It shows how large and special the Chinese market is. In addition to the international market, there is much room for the development of indigenous innovation in the domestic market. To a large extent, the domestic market will play a supportive and fundamental role for a long time. It should be different from the export-oriented and foreign trade-oriented innovation paths of Singapore and Japan, where the local markets are limited.

3.4 Particularity of Political System and Economic System in China The glorious achievements made since the founding of People’s Republic of China are ultimately the fruits of the socialist system with Chinese characteristics. The emergency response and mobilization capacity and the collective will of the people in the face of the Wenchuan earthquake disaster demonstrate the powerful advantages and great power of the socialist system with Chinese characteristics, causing many overseas media to exclaim, “China’s capacity to mobilize huge forces in a short period is incomparable to any other system.” Moreover, China’s success in hosting the Beijing Olympic Games and Shanghai World Expo, the successful completion of the Shenzhou VII manned space mission, and China’s high-speed railroad technology in just five or six years from the import, digestion to re-innovation, show that China has completed 40 years of high-speed railroad development in developed countries, from an insignificant catch-up to the leader attracted the attention from the world, … These all highlight the power of solidarity and joint research under the socialist system and the particularity and superiority of the indigenous innovation path with Chinese characteristics. In other words, it is the particularity of the political and economic systems that make indigenous innovation a strategic arrangement for solving the problem of key technologies being restricted by others. Practice over the years has shown that core

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technologies cannot be purchased. The history of industries such as aerospace, electronics and information technology, and numerous facts tell that national will is indispensable in the development of technology, especially strategic high technology and related industries. Mastering key technologies and upgrading key industries through indigenous innovation should be a basic foothold for China’s technological progress in the new era. In addition, attention should also be paid to some special issues, including the background of Chinese culture and history, during the indigenous innovation process. The specific national conditions and demands require that China must firmly follow the path of indigenous innovation with Chinese characteristics, build an innovative country, promote a fundamental transformation of the economic development model from element-driven to innovation-driven, and realize sustainable and coordinated economic and social development by relying on total innovation, including institutional innovation, management innovation, technological innovation and business model innovation.

4 Strategic Objectives of China’s Indigenous Innovation 4.1 Three Obstacles to China’s Indigenous Innovation First, innovation consciousness. Bound by thousands of years of feudal thinking, China is deficient in innovation consciousness compared with Western countries. Second, economic security. China experiences a low contribution rate of scientific and technological progress to economic development, which is less than 40%, and excessive dependence on foreign technology, with the dependence of China’s core technology exceeding 50% in 2015.3 The low contribution of scientific and technological progress to economic development makes it urgent for China to change its model of economic development (Han Xiaoming et al., 2009) and to break away from technological dependence on overseas countries and develop indigenous intellectual property rights. Third, resources and environmental constraints on sustainable development. China is one of the countries with the highest per capita scarcity of natural resources (minerals, water, land, germplasm, etc.) while its extensive economic development model, which lacks core technology, has put China under increasing pressure from resources and the environment. Energy consumption per unit of GDP in China was 3.7 tons of standard coal/$10,000 in 2016, which is much higher than that in developed countries, according to data published by the National Bureau of Statistics. The core technology in China is subject to the above three obstacles, which can be summarized specifically as the following five aspects. 3

He Yafei. External Dependence of Core Technologies Exceeds 50%: EB/OL1 (09-30-2015) [1201-2018]. http://finance.sina.com.cn/review/hgds/20150930/120823387140.shtml.

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First, there is a gap in our perception of innovation compared to innovative countries. There are still ambiguities in our society about innovation and the construction of an innovative country, weak institutional and socio-cultural foundations for innovation, and failure to effectively reflect the concept of market-oriented innovation. Second, obstacles exist in the mechanism and system. Compared with innovative countries, gaps of China’s innovation system lie mainly in the operation mechanism and management system. First, the scientific and technological forces in various areas are self-contained, scattered and duplicated, with an overall inefficient operation. Second, the macroscopic management of sci-tech resources is fragmented, with resource allocation methods and evaluation systems failing to adapt to the new situation of innovation development. Moreover, the mechanism of cultivating and motivating innovative talents and encouraging innovation and entrepreneurship is imperfect, resulting in a lack of an innovative cultural environment. Next, some research institutes and universities are not functioning in a coordinated manner and are not performing as well as they should. Finally, it is not perfect in the market competition mechanism, and not sound in the supporting system. Third, China lags behind innovative countries in terms of economic and industrial structure, as well as overly extensive economic development (see Table 4). As published by the National Bureau of Statistics, the value-added industrial output in China increased by 6.0% in 2016, in which the value-added of the high-tech manufacturing industry increased by 10.8%, accounting for 12.4% of the value-added industrial output. Fourth, insufficient quantity and quality of investment in innovation. To begin with, China suffers a big gap in the sci-tech investment scale compared with innovative countries. In 2016, China invested 2.08% of its GDP in sci-tech, which is lower than that of innovative countries. Presently, 71% of large and medium enterprises (LMEs) in China lack an institution for technological R&D. A statistic from the Development Research Center of the State Council shows that, in 2016, China’s manufacturing economy accounted for 2% of the world’s total. In 2014, it was 0.45:1 for the ratio of digestion and absorption expenses to technology import expenses for Table 4 Comparison of economic and industrial structures between China and innovative countries Index Economic structure Industrial structure

China

Innovative countries

Proportion of agricultural population in the national labor force

Over 50%

Less than 5%

Proportion of service industry output to GDP

30%

60%

Proportion of the value-added of high-tech industries to 10% that of the industrial output

40%

Proportion of investment in high-tech industries to total 10% investment

50%

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1 Steps, Connotation and Targets of Indigenous Innovation

LMEs in China, which is far behind developed countries, such as Japan and Korea, where the ratio is about 1:3, or up to 1:7 in key areas. Fifth, the lack of scientific research and innovative talents. In 2014, there were 75.12 million personnel engaged in sci-tech activities in China, and 31.7 million scientists and engineers, ranking 1st and 2nd in the world respectively. However, it was just 556.4/ten thousand and 234.8/ten thousand personnel engaged in sci-tech activities, scientists and engineers on average according to the national population. In 2017, graduates from colleges and universities numbered 7.95 million. The return of overseas students has accelerated in recent years. But, the indigenous innovation capacity of China suffers from a shortage of innovative talents (Xi Jinping, 2016).

4.2 China’s Strategic Objective System of Indigenous Innovation First, a medium-term strategic objective in the cultural dimension should be set in response to the perceived gap in innovation. Culturally, we should actively create an honest, relaxed and harmonious academic environment in order to raise the consciousness of innovation throughout the society. Second, a decision was made to increase investment in R&D in response to the lack of both quantity and quality of innovation investment. In the National Outline for Medium and Long Term Sci-Tech Development (2006–2020), it is mentioned that “by 2020, the proportion of social investment in R&D to GDP will be increased to more than 2.5%.” Third, reform for mechanisms and systems, where obstacles are located, will be deepened by the state. The National Outline for Medium- and Long-Term Sci-Tech Development (2006–2020) sets a medium-term goal of “building a number of worldclass research institutes and universities as well as enterprise research institutes with international competitiveness, to form a relatively complete National Innovation System with Chinese Characteristics.” Fourth, China will promote industrial upgrading, energy conservation and emission reduction, and vigorously develop strategic emerging industries with low energy consumption, high pulling coefficient, numerous employment opportunities, and favorable overall benefits, so as to ensure sustainable development in response to the gap of economic and industrial structures. The National Outline for Mediumand Long-Term Sci-Tech Development (2006–2020) proposes a medium-term goal

4 Strategic Objectives of China’s Indigenous Innovation

31

Sustained national advantage in international competition

To be an innovative country by 2020

Culture: Formation of an innovative atmosphere throughout society

Environment: Form a sustainable development of energy and resource system, and develop strategic emerging industries, to reduce China's unit carbon emission ratio by 40%-50% in 2020

Economy: Transform the model of economic development for industrial upgrading

Sci-Tech: 1. Contribution of progress in sci-tech and innovation to economic development will reach 60% in 2020 2. Proportion of social investment in R&D to GDP increases to 2.5% or more 3. External technology dependence reduce to less than 30% 4. Top 5 in the world in terms of the number of invention patents granted by nationals and citations of international scientific articles

Human capital: Cultivate senior experts and sci-tech leaders at the top level in the world

Fig. 8 Strategic objective system of indigenous innovation in China

of “achieving breakthroughs in energy development, energy conservation technology and clean energy technology to optimize the energy structure, and to reach or approach the world’s advanced level in energy consumption per unit of major industrial products.” As for the economy, optimization should be carried out on industrial structures to upgrade and transform the industry. A medium-term goal proposed by the National Outline for Medium- and Long-Term Sci-Tech Development (2006– 2020) is to “establish a technology development model of recycling economy in key industries and cities, thereby providing technical support for the construction of a resource-saving and environment-friendly society.” Fifth, for the lack of high-level talents in enterprises, a decision was made to cultivate senior experts and high-level sci-tech leaders with a cutting-edge level of scientific research in the world. The National Outline for Medium- and LongTerm Sci-Tech Development (2006–2020) sets the medium-term goal to “emerge a pool of world-class scientists and research teams, achieve an influential number of innovations in the mainstream of scientific development, and be advanced in information, biology, materials, aerospace, etc.” In summary, the strategic objective system of China’s indigenous innovation is shown in Fig. 8. The 13th National Five-Year Plan on Science, Technology, and Innovation, issued in July 2016, further proposed that the world ranking of China’s comprehensive innovation capacity should be among Top 15 by 2020 (see Table 5).

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1 Steps, Connotation and Targets of Indigenous Innovation

Table 5 Index and target of 13th National Five-Year Plan on Science, Technology and Innovation No

Index

Index in 2014

Target for 2020

1

World ranking of China’s overall innovation capacity

19*

Top15

2

Contribution rate of sci-tech progress (%)

54.2

60.0

3

Ratio of R&D expenditure to GDP (%)

2.05

2.5

4

R&D manpower investment per 10,000 employees/ (person-years/10,000 employees)

48.0

90

5

Exports of high-tech products (unit: $ hundred million)

6605

17,500

6

Proportion of value-added of knowledge-intensive services to GDP (%)

11*

≥14

7

Ratio of industrial enterprises’ R&D investment to main business income (%)

0.8*

1.2

8

Average citations of international scientific articles (time)

7.57

10.5

9

PCT (Patent Cooperation Treaty) international applications (piece)

25,538

58,000

10

Invention patents per 10,000 people (piece)

4.9

9.8

11

Total contract transactions in the national technology market (RMB hundred million)

8577

22,000

12

Proportion of citizens with basic scientific literacy (%)

6.2

10

Note * indicates data of 2013

Chapter 2

Path and Subject Evolution of Indigenous Innovation Model and Capacity

Over the 40 years of rapid economic development since the Reform and OpeningUp, China has developed an indigenous innovation model with Chinese characteristics and a mixture of government-orientated and market-orientated innovation in an open economy. Despite the tremendous achievements in industrial innovation in China, the innovation performance of different industries shows great differences: the telecommunications equipment industry has made great achievements, not only enabling two private enterprises, Huawei and ZTE, to grow into world-class enterprises but also forming the world technology standards for 3rd and 4th generation mobile communications. But foreign investment and joint ventures still dominate the Chinese car industry, which is reduced to just a manufacturing base of MNCs. There may be multiple reasons for such large differences in innovation performance across industries, such as differences in industrial technology paths and industrial organization models, but much depends on differences in industrial innovation governance mechanisms.

1 Model of Indigenous Innovation 1.1 An International Comparison of Indigenous Innovation Models So far, it is only Japan, South Korea, Singapore and Taiwan (China) in Asia that succeeded in forming competitiveness in high-tech industry through indigenous innovation. A comparison across the research results of scholars at home and abroad and results of this study reveals that significant differences exist in the innovation models of companies in these countries and regions, embodying as Technology Catching-up, Value Chain Upgrading, and Disruptive Innovation. © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_2

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1. Technology Catching-up, i.e. catching up or surpassing developed countries along the fixed industrial technology track It is a dominant model for South Korean and Japanese companies. For example, Japanese companies have started to catch up with technology in industries such as automobiles, consumer electronics, CNC machine tools, computers, and semiconductors since the 1960s and 1970s; South Korean companies did so in consumer electronics, semiconductors, automobiles, and communication equipment industries from the 1980s. Technology catching-up is characterized by a head-to-head competition with developed countries via the selection of specific industries and concentration of resources. R&D on advanced technologies has been initiated by some leading companies in South Korea, although it focused on imitation and improvement of products from developed countries in the 1980s. Specifically, companies such as Samsung, LG and Hyundai have been focusing their innovation on the development of new technologies since the 1990s. Despite being hit hard by the financial crisis, companies like Samsung have started to bear fruit at the beginning of the twenty-first century thanks to more than a decade of intensive investment and efforts in R&D. Today, Samsung has demonstrated strong technological capabilities in memory chips, flatpanel TVs (such as L-CD), and code division multiple access (CDMA), etc., making it a technology leader comparable to multinational companies in the United States, Japan, and Europe. Obviously, the South Korean development model is characterized by its lack of being stuck on comparative advantages. Even though South Korea does take full advantage of opportunities presented by its comparative advantage, it forms competitive advantages based on new technologies by surpassing its stage of development and actively pursuing autonomous R&D to shorten the natural development process. Therefore, catching-up is achieved by South Korea via following the comparative advantage development strategy determined by resource endowment in general but trying to shorten the development process in local areas by using government industrial technology policies and financial support from banks. 2. Value chain upgrading, i.e., forming a local technological advantage by gradually upgrading position along the industrial value chain It is the dominant model for companies in Taiwan (China), i.e. they first entered the manufacturing system of global electronic information products through OEM, and then gradually upgraded their positions along the value chain and formed local technological advantages in the design and manufacturing of some key components. For example, Taiwanese (China) companies progress from the manufacture to design of low-end computer parts to that of laptop computers, and from packaging and testing to precision manufacturing and design of semiconductor chips. This indigenous innovation model is characterized by a roundabout and encroaching strategy to integrate into global value chains and gradually upgrade its position (Amsden et al., 2003). In the 1970s, enterprises in Taiwan (China) entered an early stage of rapid growth, where they faced a significant latecomer disadvantage. They were isolated from external technological developments for a long time and incapable of identifying,

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absorbing and mastering advanced technologies under the prevailing conditions. Simultaneously, a rapid industrial upgrading could not be met due to their small market and low demand for high technology products, so OEM production came to be an inevitable choice (Hobday, 2003). Researchers (Amsden, 1989; Hobday, 2003) have found that the development of Taiwan’s (China) electronic information industry has gone through three stages, starting from Original Equipment Manufacturer (OEM) in the late 1960s to Original Design Manufacturer (ODM) in the 1980s and then to Original Brand Manufacturer (OBM) in the 1990s. Although enterprises in Taiwan (China) relied on MNCs to acquire technology and market knowledge in the early stages, they have gradually shifted to the path of relying on themselves or their research departments to achieve technological and industrial upgrading in the process of upgrading to ODM and OBM. The Industrial Technology Research Institute (ITRI), supported by the government, serves as a key role in the technological progress and industrial upgrading of enterprises. The technological strategies of enterprises and the R&D priorities of research institutes fitted at different stages of Taiwan’s (China) industrial technology development. Also, Taiwan (China) continues its model of SME specialization and continues its participation in the global division of labor to deepen its product value chain and strengthen its flexibility and adaptability in the fast-changing industries such as personal computers, etc. Especially after the Asian financial crisis in 1998, enterprises in Taiwan (China) show excellent competence. 3. Disruptive Innovation It is another enterprise-orientated model of innovation in Japan to make changes in indigenous user needs as an opportunity to fracture new directions in the original track of product and technology development. Innovation based on the domestic market is the most important inspiration for us from the innovation model of Japanese enterprises. Surely, catching-up and surpassing in technology is also a mode of innovation for Japanese enterprises. But the brilliance of Japanese enterprises lies in the fact that they are more concerned with using these advanced technologies to meet the unique demands of the Japanese market than with being stopped by technological progress. Japan enjoys a large population base and considerable development of its market economic system from the Meiji Restoration to the 1950s and 1960s, as well as a level of urbanization close to that of developed countries. As a result, the size and depth of its internal market is unmatched by South Korea and Taiwan (China) in the 1970s and 1980s. The Sony transistor radio in the 1950s, Toyota’s JIT (just-in-time) production method in the 1960s, Honda’s small high-powered engines and motorcycles in the 1970s, and Canon’s small photocopiers, Sony’s Walkman and game consoles in the 1980s are all fruits of the creative integration of the advanced technologies of their day with the unique demands of the Japanese market. It is thanks to a family of indigenous innovations based on domestic demands that overturned the monopoly of European and American enterprises (Christensen et al., 2003), that Japanese enterprises differentiate themselves and Japan to be one of the top three economies in the world.

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So, how did it happen that Japanese enterprises went from following European and American companies to successfully finding their unique model? One of the most direct and clear influences on Japan’s innovation model is the Japanese love of smallness and sophistication, which is the cultural root of Japan’s range of original products. Such a cultural identity probably stems from the Japanese island consciousness of living in a small area, from which a saving consciousness of space and resources gradually evolves into the aesthetic concept of “Smaller Can be Better as Well” and the endless pursuit of product miniaturization. None of the major U.S. electronics manufacturers saw the potential applications of transistors when they were invented by Bell Labs in the 1950s, but Sony’s Akio Morita immediately got an insight into its potential, which can be attributed to different cultures shaping the innovation decisions of U.S. and Japanese enterprises. It is the influence of concepts such as small sizes, sophistication, high quality and energy efficiency that has led Japanese companies to produce internationally competitive products in areas such as small and sophisticated consumer electronics and small and energy-efficient automobiles and motorcycles. The small size and sophistication of Japanese products coincide with an international trend that has been growing in influence since the 1970s, namely a shift from traditional Western aesthetics and consumer attitudes of luxury, spaciousness and grandeur to green living concepts of smallness, resource conservation and environmental protection. The oil crisis of the 1970s and humanity’s reflection on its own existential crisis contributed to the forming and deepening of this idea. So, people found that it was what they wanted when small, energy-efficient, high-quality cars from Japan entered the U.S. market in the 1970s. Therefore, the success of Japanese enterprises is not just about Japanese technology, but also about Japanese culture. Further study found that various innovation models also show significant differences in terms of innovation positioning and resource integration. Characteristics of three indigenous innovation models and their innovation positioning and resource requirements are shown in Table 1. (1) Innovation positioning, i.e., determining products or industries and locating the value chain of industries for innovation. For example, products or industries with rapid technological changes and stable technological trajectories, insights of future changes, were selected by South Korean companies in the technology catching-up model. They controlled the entire value chain from product branding, R&D, design, and manufacturing to sales. South Korean enterprises succeeded in innovating in the automotive, mobile communications, and memory industries, where the technology trajectory is stable and less successful in industries such as the PC and its components and notebook computers, where the technology trajectory is unstable. In Taiwan, enterprises in the value chain upgrading model choose industries or products with rapidly changing technologies and unstable technological trajectories that make it difficult to foresee the direction of future changes and compete at individual positions in the value chain. In addition, industries with diversity and geographical uniqueness are selected by Japanese enterprises for fissionable innovation.

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Table 1 Characteristics of three indigenous innovation models and their innovation positioning and resource requirements Factor

Technological catching-up

Value chain upgrading

Disruptive innovation

Technical capacity

High

Medium

Relatively high

Knowledge of customer Average demand

Average

High

Additional resources (brand and channel)

High

Low

Relatively high

Innovative positioning

Relatively fixed technological trajectory-full value chain

Uncertain technological trajectory

Local value chain

Industry diversity, geographical uniqueness

Resource integration

Centralized integration of resources

Decentralized integration of resources

Decentralized integration of unique market demand

(2) Innovation resource integration, that is, to determine the path to integrating corresponding innovation resources, such as capital, personnel, technology, and market, etc., to support the realization of indigenous innovation. Different models of indigenous innovation require fitting resource integration approaches. Like Japan and South Korea integrate innovation resources with conglomerates as the core, playing the advantages of scale and scope economy; Taiwan (China) integrates innovation resources through the close network of SMEs and research institutes (mainly ITRI), giving the advantages of network economy; Japanese enterprises, which implement domestic market-driven, integrate technology and market resources by combining imported and absorbed advanced technology with unique domestic market demand; and Singapore gives play to the leading role of MNCs by forming a cluster network with MNCs as the core and extensive participation of local enterprises. What makes the three models mentioned above the path to indigenous innovation for latecomer countries and regions? Further analysis shows that these models enabled enterprises in latecomer countries and regions to overcome their resource and capability deficits and effectively motivated them to strive for indigenous innovation. Initially, the technology catching-up model is strict with capital and technological capability, which is a big hurdle for enterprises in latecomer countries regions. Therefore, technological catching-up necessarily requires a special way of resource integration, i.e., resources should be integrated centrally through mega-conglomerates with government support, then concentrate a large number of resources in key breakthrough industries and technologies to form a local resource advantage. For example,

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conglomerates supported by the South Korean government control sufficient technological knowledge and complementary assets through their own integrated organization, creating a high synergy of industry and technology (Hobday, 2003). These mega-integrated organizations in South Korea are created and led by the government, which implements its development strategy through the monopoly position of the “national team” of these enterprises. They are no longer commercial profit-seekers, but the embodiment of the will of the Korean state and national spirit. Thanks to these super business giants, South Korea’s innovation resources are fully concentrated and integrated to support indigenous innovation. Of course, it is highly risky to choose key industries and technology fields and focus resources on breakthroughs. A bad choice of key fields will bring enterprises to collapse. Therefore, the technology trajectories of the industries chosen for innovation positioning will be relatively fixed, so prediction of the direction of industrial technology development is relatively easy, which greatly reduces the possibility of mistakes in the selection of key fields. Technological catching-up and its corresponding approach to innovation positioning and resource integration fail in addressing insufficient incentives for innovation, although they provide a solution to the shortage of resources. As a result, Japan and South Korea, which operate on a technology catching-up model, both rely on the government to provide sufficient incentives for enterprises for innovation. The South Korean government, for example, sends incentives and pressure to enterprises to increase their technological learning and innovation through outward-oriented industrial strategies and creative crisis generation. Compared with the technological catching-up, value chain upgrading requires fewer resources and capacities of enterprises. For example, the most successful field of upgrading in Taiwan, China, is the electronic information industry, for which the most important mechanism for successful implementation is the OEM system. In the process, MNCs transfer necessary technology to enterprises in latecomer countries or regions and sell their products under their own brands via their well-established international channels. Consequently, latecomer countries or regions skillfully utilize the technology and sales channels of MNCs to overcome their technological and market barriers, join the international production network, enter the global value chain, and thus begin their economic development and industrial upgrading process. The value chain upgrading model is also characterized by the interaction between global market demand and the value chain as an incentive mechanism. Since Taiwanese companies hold an important value chain position in the global electronic information industry, technological breakthroughs occurring at the front end (basically in developed countries) and changes in demand at the back end of the value chain will trigger the innovation drive of Taiwanese companies through the market. Clearly, such an innovation mechanism in Taiwan (China) is mutually supportive of its unique model of strategic technological innovation. Disruptive innovation requires resources and capabilities that fall somewhere in between the previous two models, neither competing and confronting MNCs head-on, nor willingly submitting to the value chain controlled by them. As a result, enterprises in latecomer countries or regions are able to meet the appropriate resource and

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capability requirements with effort and government assistance. Moreover, disruptive innovation is most notably characterized by the use of unique domestic or regional market needs as an incentive for innovation. Therefore, a market with a large scale, multi-layered depth in the country or region is a prerequisite for innovation to emerge.

1.2 Model of Indigenous Innovation in China As with all latecomer countries and regions, enterprises in China suffer from a lack of financial and technological capacities, which makes indigenous innovation a major obstacle. Most of the industries in China are characterized by ➀ a competitive industrial and enterprise organization structure with a low concentration and a dominance of SMEs; ➁ a hybrid mechanism of weak government-orientated and weak market-orientated innovation resource allocation. Such an organizational structure of industries and enterprises and resource allocation mechanism make it necessary for China to form a hybrid model of centralized and fragmented innovation resource integration, i.e., central government-orientated innovation resource integration, which gives full play to the advantages of China’s traditional planned economy to centralize resources for major events; simultaneously, allocate innovation resources through a network formed by enterprises, government, universities, research institutes and intermediary organizations, fully utilizing the advantages of network economy and innovation clusters. Therefore, technological catching-up can be the main mode of indigenous innovation in individual industries and for a few enterprises. Moreover, the fragmented approach to the integration of innovation resources faced by most enterprises in China dictates that another technological path to dominate innovation is value chain upgrading. The government’s centralized approach to resource integration targets on only a few key industries, but most enterprises face a fragmented, network-based approach to resource integration that prevents them from implementing technological catching-up, but is well suited to implementing indigenous innovation for value chain upgrading. In addition, what Chinese enterprises face is a huge domestic market. Guidance and incentives for Chinese enterprises to implement indigenous innovation will be strengthened gradually with the gradual improvement of China’s market mechanism and the integration of a unified domestic market, as well as the further deepening of China’s market and the emergence of its uniqueness. Therefore, based on the domestic market demand, driving innovation through the indigenous market should also be a dominant innovation path for Chinese enterprises. Analysis and summarization on cases of indigenous innovation by Chinese enterprises reveal following characteristics of the indigenous innovation model. First, diversity of technological catching-up. The technological catching-up of Chinese enterprises is diversified, both state-orientated and enterprise-led; both in cases of complete success and incomplete success. Foreign cases of technology catching-up are enterprise-led, in which innovation resources are integrated

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through giant conglomerates. In contrast, China’s government-orientated technology catching-up is dominated by research institutes, as exemplified by Datang and Loongson. Instead of exerting pressure on and sending incentives to enterprises, like the crisis generation by the South Korean government, China’s government has mainly stimulated innovation through the open domestic market and global competition. Second, falling into the lower-end in the global value chain. Many enterprises access the global production system and participate in the global division of labor, but fail to effectively use global technology and market resources for rapid improvement of their own innovation capability; meanwhile, the absence of government and public research institutes may be a major reason for the failure of Chinese enterprises to upgrade their functions and value chains. Third, disruptive innovation is limited to low-end market, without a disruptive breakthrough in the mainstream market. Although companies such as UTStarcom and Hasee have successfully achieved driving innovation by the indigenous market, they are limited to a low-end market and fail to advance from the low-end market to the mainstream market, to break through to the mainstream market. This is because the indigenous market driving innovation of Chinese enterprises is based on mature or outdated technologies, which lack the potential to functionally surpass mainstream technologies. In general, Chinese enterprises succeed in driving innovation in indigenous markets based on low-end destruction, while innovation in indigenous markets based on the unique needs of new markets fails and is still under further exploration. Chinese enterprises fail to make full use of the most advanced technology in the world, and fail to form core competencies through organizational and process innovation; in addition, they fail to dig deeper into domestic unique market demand and organizational behavior to form unique products and organizational processes, thus disrupting the mainstream market by creating new markets. Table 2 shows a comparison of typical cases for driving innovation through domestic markets by enterprises at home and abroad, according to the previous classification. Table 2 fully embodies the gap between enterprises at home and abroad. Table 2 Comparison of innovation driven by indigenous markets of Chinese and foreign enterprises Based on technological innovation

Based on business model innovation

Advanced technology Backward technology

Available core competence

Lack core competence

Discount retailing at Walmart

Hasee Computer

Low-end disruption New market disruption

Little Smart Phone of UTStarcom Sony Transistor Radio, Walkman, Canon Plain Paper Copier

Toyota Motor

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The analysis above shows that there is one dominant indigenous innovation model in South Korea and Taiwan (China), two dominant indigenous innovation models in Japan, and a mixed indigenous innovation model in the Chinese mainland, i.e., three innovation models are adopted by different enterprises or industries in the Chinese mainland. Obviously, there is an inherent logic to such a situation, which is determined by characteristics such as China’s multi-level market, diverse geographical features, and comprehensive industrial layout. So far, very few enterprises or industries have succeeded in achieving indigenous innovation and failed to continue the success of the corresponding models in South Korea, Singapore, and Japan, etc., although enterprises on the Chinese mainland have adopted three different innovation models. Therefore, tasks for further research are: ➀ Which of these three models is more in line with the indigenous innovation of Chinese enterprises today? How should different industries and different types of enterprises pick their innovation model? In a globalized, knowledge-based economy, exploration of new models of indigenous innovation that are more suitable for China’s environment should be carried out in addition to adopting these three models. What opportunities and possible directions do globalization and China’s special economic environment provide for Chinese enterprises to explore new models of indigenous innovation?

2 Model for Improvement of Indigenous Innovation Capability 2.1 Static Model A theoretical analysis framework is constructed in this chapter based on the theories of Kim (1997), Lee and Lim (2001) (see Fig. 1). In this framework, the formation of the innovation capability of enterprises depends on their technological capability and their efforts for innovation; technological capability is determined by technology acquisition, and innovation efforts depend on innovation opportunities and market opportunities in their industries, as well as their technological capability. In Fig. 1, effective external technology acquisition enables latecomer enterprises to overcome technological capability deficits, and abundant market opportunities enable latecomer enterprises to overcome innovation incentive deficits. Critically, enterprises’ ability to effectively acquire external technologies is influenced not only by elements such as their strategy, organization and culture but also by many external elements. To a certain extent, some external elements play a decisive role. In addition to elements such as culture, education, finance and market, technology spillover from wholly-owned MNCs and joint ventures, as well as government-promoted “industryuniversity-research” cooperation, are crucial for the acquisition and absorption of advanced technologies. Likewise, the innovation efforts of enterprises depend on the innovation and market opportunities they face, where a promoting role of innovation

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Government Role :

Environment such as culture, education, finance and market, etc.

Technology Spillover “Industry-University -Research” Cooperation

Technology Acquisition

Monopoly Breaking

Innovation Opportunity

Government Procurement Industry Creation

Market Opportunity

Technical Capability Indigenous Innovation Capability Innovation Effort

Fig. 1 Static model for improvement of enterprise innovation capability (TC-IC)

opportunities and a pulling role of market opportunities are the driving elements for indigenous innovation of enterprises. However, enterprises of developing countries, especially in the open market environment, face the monopoly of market and core technology by MNCs and the great risk of indigenous innovation, suffer from which they tend to lack the motivation for innovation, or merely imitate or perform some incremental improvements in traditional industries or low value-added products, failing to complete industrial or value chain upgrading, let alone master the core technology. Therefore, the Government can guide enterprises to enter new emerging technological industries by shaping a free competitive market environment, breaking monopolies, and giving priority to the procurement of our enterprises’ products, so as to upgrade industries and provide a lot of innovation and market opportunities for indigenous innovation of Chinese enterprises, and stimulate them to enter high-tech industries and high value-added value chain positions.

2.2 Dynamic Model A static model is developed to illustrate how external elements (mainly the government) contribute to the improvement of the indigenous innovation capability of enterprises. This model is static, but the indigenous innovation capability of industries and enterprises evolves gradually and dynamically, and keys are different for the improvement at different stages of the evolutionary process. Therefore, the role of external elements (especially the government) varies at different stages. (1) Evolution Path from Imitation Capability to Indigenous Innovation Capability Utterback’s (1975) model of technological innovation suggests that industries and enterprises in developed countries will pass through three main phases, i.e., the fluid phase, transitional phase, and specialized phase. The technological capacities of enterprises in developing countries evolve differently from those in developed countries, along opposite trajectories. Rather than

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catching up with developed countries in one generation of technology, developing countries generally need to go through multiple generations of technology to gradually catch up. Initially, developing countries enter product fields that are mature in technology through technology import (the specialized phase of first-generation technology); By this time, developed countries have entered a phase of new-generation technologies and products, developing countries, after digestion and absorption of the introduced technologies, leapfrog to product fields (second-generation technologies) in the transitional phase by acquiring new technological knowledge; Finally, developing countries will develop core technological capacities and unique product platforms in emerging technologies (a fluid phase of third-generation technologies) through the strengthening of basic research and formation of extensive knowledge networks. The growth of technological innovation capacities of enterprises in developing countries is a process of continuous accumulation of various elements of technological capacities and intermittent leaps in overall technological capacities. In this process, the technological innovation capability of enterprises generally goes through imitation capability, creative imitation capability and then indigenous innovation capability. Three stages of innovation capability evolution and their technical characteristics are shown in Table 3. 1. Imitation Stage The imitation stage is mainly about learning the technology, specialized knowledge and production management skills (e.g., quality management) in the production process through “learning by doing”, using mature production equipment. D this stage, the key in the technical capability is the technical equipment, especially technical equipment imported or improved is decisive. Also, it is critical Table 3 Three stages of innovation capability evolution and their technical characteristics Stages of capability evolution

Technical characteristics

Imitation

Use and simple imitation of proven technologies

Creative imitation: Nurture capability

Use and follow the advanced foreign enterprises to develop growing technologies and products on the imported technology platform, or integrate and creatively improve the mature technologies

Indigenous innovation

Form indigenous innovation capability

Integrate externally acquired technologies, so as to master core technologies, establish product technology platforms, and enter high-tech industries and high value-added value chain positions

Form core technology capability

Form a unique industrial technology development trajectory through indigenous innovation and technology catching-up, independent research and development of the latest technologies, mastering and controlling core technology intellectual property rights or technology standards

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to be skilled in the technology that is necessary to make the most of the equipment. The technology organization and management of enterprises are still initial, without the formation of standardized technology management and strategy system. External technological connections are limited to simple links to equipment imports, resulting in a minimal level of utilization of external technological resources. 2. Creative Imitation Stage In this stage, enterprises start to adapt and improve their products and processes according to indigenous characteristics, or further redesign their products. However, enterprises are still dependent on external technology sources for key technologies. The rapid improvement of technology at this stage is often attributed to collaborative R&D with advanced enterprises, in which latecomers are able to improve their innovative capability rapidly. Employee skills and technical organization are key elements of innovation capability at this stage, with product design know-how, external technology absorption, and the establishment of an innovative organization and coordination among departments as the key capability. Simultaneously, enterprises start various technological connections with external sources of technology, increasing their ability to utilize external technologies. What have been done by indigenous enterprises at this stage are only the import of equipment and assembly lines, mastering the basic peripheral and auxiliary technologies, with a dependence on foreign enterprises for core technologies and components. Creative imitation capability is essentially an enterprise’s ability to integrate innovation resources from inside and outside the enterprises and realize innovation, but it has not yet up to indigenous development, i.e., its development activities are still carried out on the technological platform established by foreign enterprises. Enterprises may imitate the latest generation of advanced international products, or extend or improve the performance of products based on the existing platform according to the domestic market demand. 3. Indigenous Innovation Stage At this stage, indigenous enterprises start to get rid of their dependence on foreign technology, surpass foreign technology, gradually master the core technology, form their own complete technology platform, and start to dominate the mainstream market. Moreover, they are committed to building a wide range of alliances and networks, to fully absorbing and utilizing external technical and market knowledge, and integrating external and internal knowledge into a powerful technological capability. This process begins with research to acquire new technologies or to acquire new foreign technologies for technology integration and then cultivates indigenous development capability through learning. The indigenous innovation stage is further divided into two sub-stages. Sub-stage 1, formation of indigenous innovation capability. Through independent creative imitation of internal and external technologies, indigenous enterprises gradually master the core technologies of the current generation of products and enter the domestic mainstream market. R&D capability of enterprises is already

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at a high level at this stage, and they start to form their own complete technology platform, thus entering the high-tech industry and high value-added value chain. Sub-stage 2, formation of core technology capability. By grasping the development trend of technology and market, indigenous enterprises are guided by a strategy of forming technology leadership and market dominance in newgeneration products and technologies, forming a perfect innovation organization and extensive innovation network, mastering; master and create newgeneration core technologies and dominate international markets or control technical standards through indigenous innovation and technological catchingup. Now, indigenous enterprises form core technology capability and establish unique platforms for their product and technology. (2) Dynamics of Indigenous Innovation Model Dominating Innovation Capability Development Process The development of innovation capability is a dynamic process, with changes of indigenous innovation models dominating various stages, as shown in Table 4. Developing countries master mature technologies in the creative imitation stage, and step to track the emerging frontier technologies to enter the high-tech industry; they also improve the products and process technologies according to the indigenous market demands. Therefore, the dominant indigenous innovation model is value chain upgrading and indigenous market orientation. During the first stage of indigenous innovation, developing countries are committed to breaking through and mastering the core technologies of the industry for technological leapfrogging, while performing technological integration and establishment of platforms for product and technology according to the characteristics of the indigenous market demand. Therefore, the dominant indigenous innovation model is technology leapfrogging and indigenous market-orientated indigenous innovation. During the second stage of indigenous innovation, emerging developing countries are committed to mastering and controlling the intellectual property rights and Table 4 Dynamics of indigenous innovation model dominating innovation capability development process Capability development stage

Dominant indigenous innovation model

Creative imitation: Nurture capability

Value chain upgrading and indigenous market orientation

Indigenous innovation

Form indigenous innovation capability

Technological leapfrogging and indigenous market orientation

Form core technology capability

Technological leapfrogging

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Imitation and Creative Imitation: Innovation by using mature technolog according to market demand

Innovation Capability Development

Innovation Incentives and Resource Integration

•

Market Incentives

•

Fragmented integration of resources: Import technology and “industry-universityresearch” cooperation

Form core technology capability: Create and control core technology or technology standards to form a unique trajectory of industrial technology development

Form indigenous innovation capability: Master the core technology for industrial upgrading

• •

Government and market incentives in parallel Centralized integration of resources: government-oriented indigenous development and “industry -university-research” cooperation

•

Government and market incentives in parallel

•

Centralized and fragmented integration in parallel

Fig. 2 Innovation incentives and resource integration for innovation capability development

technical standards of core technologies by developing and controlling the core technologies of emerging industries through original innovation, to form a unique industrial technology development trajectory. Therefore, technology leapfrogging is a dominant indigenous innovation model. (3) Incentives and Resource Integration in the Evolution of Innovation Capability The manifestation and intensity of insufficient technological capability and insufficient innovation incentives vary at different stages of innovation capability development, so the methods and measures required for innovation incentives and resource integration should also be different at different stages. Therefore, methods and measures of innovation incentives and resource integration at different stages should be in line with the obstacles to indigenous innovation at the corresponding stage (see Fig. 2). Obstacles to innovation in the imitation and creative imitation stage of technology development are not so serious, so innovation capability can be improved and innovation can be realized by relying on the enterprise’s own strength or “industryuniversity-research” cooperation dominated by enterprises. Enterprises at this stage are basically in labor-intensive industries or at the lower end of the value chain, so what they need is to master mature technologies and to apply and improve them based on their understanding of domestic market demand. Mature technology is about to be eliminated by advanced foreign enterprises, so it can be easily purchased from abroad or acquired through joint ventures, while enterprises can also achieve imitation and improvement of mature foreign technology through “industry-university-research” cooperation. Furthermore, China’s rapidly growing market demand provides ample opportunity and incentive for enterprises to imitate and improve innovation; imitation and improvement require little capital, so the expectation of quick results motivates enterprises to devote themselves to it with ability and willingness. The goal of public research institutes is to help enterprises digest, absorb, and reinvent imported technologies. At this stage, “industry-university-research” collaboration must be dominated by enterprises because imitation, improvement, and innovation must be based on the enterprises’ understanding of market demand, and innovation projects must

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reflect the enterprises’ expectation of short-term results. At this stage, innovation efforts are fragmented, and innovation directions and projects are always based on market demands. As a result, at this time, fragmentation is a reasonable way to allocate innovation resources. Enterprises will rationally select appropriate innovation resources from universities, research institutes, and various technology innovation platforms based on their needs, forming various “industry-university-research” cooperation methods and alliances, and providing appropriate resources for rapid spike innovation projects through continuous innovation resource aggregation. It is a leap of indigenous innovation capability for enterprises from creative imitation to indigenous innovation, which necessitates overcoming enormous technical and incentive obstacles. Although developing countries are required to master core technologies of industries, they are not required to create and control core technologies and technology standards through original innovation and technological catching-up in the first stage of indigenous innovation. Mastering core technology is not the same as mastering mature technology. The industry’s core technology is mostly controlled by a few MNCs, allowing them to monopolize the market and earn high returns. Therefore, core technologies will not be sold easily by MNCs. They try everything possible to control the technology development of the joint venture to prevent the spread of the core technology even if the developing countries have bought the core technology through joint ventures and other means. Also, the threshold and difficulty of the core technology are much higher than the mature technology, so the capital required for indigenous development is often much more, with a longer time required for development. In addition, enterprises in developing countries will encounter strong resistance and blow from MNCs when they start to enter high-tech industries and high value-added chains where the markets are already monopolized by MNCs. As a result, indigenous innovation by enterprises in developing countries can encounter great difficulties, these enterprises have to make efforts for many years and suffer losses for some time before getting market success and rewards. It is difficult to overcome the obstacles of resources to form an incentive for indigenous innovation by relying only on enterprises and market mechanisms. Centralized resource integration through government-oriented indigenous development and “industry-university-research” cooperation will be a natural choice. (4) Role of Government and Public Research Institutes in Upgrading the Indigenous Innovation Capability of Enterprises Drawing on the dynamic model of indigenous innovation capability development described above, innovation capability progresses from imitation capability to creative imitation capability to indigenous innovation capability. Indigenous innovation can be divided into two sub-stages: Firstly, the formation of indigenous innovation capability, i.e., to deepen capability and upgrade industry through creative imitation, which is embodied as mastering and using core technology; secondly, the formation of industrial technology development trajectory of core technology capability, i.e., to create and control core technology or technology standards through

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Imitation and Creative Imitation: Innovation by using mature technology according to market demand

Innovation Capability Development

Role of Government and Public Research Institutes

•

Import and diffusion of foreign technology

•

Contribute to enterprises’ mastery of mature technologies through “industry-academiaresearch” cooperation

Form indigenous innovation capability: Master the core technology for industrial upgrading

•

Government-oriented indigenous development and “industry-academia -research cooperation, committed to mastering core technologies

•

Market Protection

Form core technology capability: Create and control core technology or technology standards to form a unique trajectory of industrial technology development

•

Support enterprises for technological leapfrogging

•

Support enterprises to enter the international market

•

Dominant standard-setting

Fig. 3 Role of government and public research institutes in innovation capability development

indigenous innovation and technology leapfrogging, to form a unique industrial technology development trajectory. For developing countries, the dynamic upgrading of innovation capability cannot be accomplished by enterprises alone, nor, at some stages, by enterprise-oriented “industry-university-research” cooperation. Therefore, it is necessary at some stage to rely on government guidance, i.e., to achieve the improvement of indigenous innovation capability through “industry-university-research” alliances led by public research institutes (see Fig. 3). At the imitation and creative imitation stage, the market competition provides sufficient incentives for enterprises to innovate, while fragmented resource integration requires enterprises to be subjects of innovation. Government and public research institutes play a supportive role at this stage, assisting enterprises in importing foreign technology and in “industry-university-research” cooperation. Therefore, the government is not crucial to the improvement of innovation capability at this stage, but mainly to import technology and foreign investment through open policy, and facilitate enterprises’ access to mature foreign technology through financial support. In parallel, it promotes the improvement of market mechanisms to form incentives for innovation. The rising cost such as labor and land, as well as the gradual saturation of traditional industries and low-end markets, will lead to the gradual reduction of the development space for industries and enterprises when indigenous enterprises gradually dominate the labor-intensive industries and low value-added value chain. As a result, economic development is likely to stop here and fall into the trap of hovering and low growth. Argentina and Mexico in Latin America, and Malaysia, Thailand and Indonesia in Southeast Asia are typical examples of this situation. To escape this trap, innovation capability must be further enhanced in developing countries to enter the indigenous innovation stage timely. For example, South Korea and Taiwan (China) adjusted their strategies to gradually move into high-tech industries when the first signs of labor-intensive market saturation appeared in the late 1970s and made themselves the world’s leading high-tech industry powerhouses by the mid-1990s.

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Government and public research institutes must play a leading and direct role at the first stage of indigenous innovation. The government should step forward in planning and formulating industrial and technological policies at the stage of creative imitation, identifying long-term priority industries and technologies, and conducting R&D in advance through public research institutes and universities. For example, South Korea and Taiwan (China) identified the semiconductor industry, semiconductor manufacturing and design technologies as key industries and technology fields for the future as early as the 1970s, and initiated technology import, research and development. Then, the South Korean government urged enterprises such as Samsung and Hyundai to enter the semiconductor industry in the 1980s with financial and policy support. In Taiwan (China), the semiconductor technology research division of the Industrial Technology Research Institute (ITRI) was spun off to form a public–private joint venture, UMC, when it was found that no enterprises were willing to enter the semiconductor manufacturing industry, which is capitalintensive. Obviously, both South Korea and Taiwan (China) start their semiconductor industry journey under the leadership and direct participation of the government. The first stage of indigenous innovation is characterized with centralized integration of resources. It is this way for industrial upgrading in South Korea that many large enterprises, such as Samsung and Hyundai integrate resources at home and abroad with the support from the government to break through the control of foreign companies on core technologies. In Taiwan (China), the ITRI separates the technology research department to form enterprises after integrating resources and mastering core technologies, and gradually leads other private enterprises to enter the high-tech industry. Moreover, the government can protect the market to a certain extent at this stage by government procurement and restricting the import of foreign products, to leave room for weak indigenous enterprises. However, such market protection should not last too long, which should be removed as soon as such enterprises have gained a certain market position and competitiveness, so that they can develop further under fierce market competition. The growth of China’s switching industry illustrates it well. Indigenous enterprises would never get ahead without the initial market protection, but Huawei and ZTE would not enjoy further development and growth and eventually enter the international market without the timely removal of the protection policy. During the first stage of indigenous innovation, the intellectual property rights and technical standards of core technologies are still in the hands of foreign enterprises, which are controlling the whole industrial chain, and enterprises in latecomer countries are still followers, although they have gradually mastered the core technologies, as well as gained a certain market position and been more competitive. In this case, opportunities for further development of enterprises in latecomer countries will necessarily lie in the next generation of technology or discontinuous changes in the evolution of industrial technology. For example, the third-generation mobile communication technology provides an excellent opportunity for Chinese enterprises to achieve technological leapfrogging in the mobile communication industry. Therefore, enterprises in latecomer countries that have mastered the core technology of the industry at the second stage of indigenous innovation should take

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advantage of the evolution of industrial technology and discontinuous changes to develop indigenous technology in the field of new-generation products and technologies, and strive to control or partially control the intellectual property rights of the core technology, or propose and control new technical standards, so as to obtain a world-leading technology and market position. For example, Samsung took the world leader position in dynamic random access memory (DRAM) in 1993. By 2008, Huawei had acquired intellectual property rights for partially core technologies in third-generation mobile communications technology, making it a worldleading communications company. Therefore, some powerful enterprises in latecomer countries (e.g., Huawei, ZTE, Haier, and Lenovo, etc.) are already capable of mastering and controlling core technologies and being ahead of the world by this stage, for which what government needs to provide is active support without excessive intervention. It cannot rely solely on one or a few enterprises to a goal that the latecomer countries desire to propose and control new technical standards in the new generation of product technology, such as one of the third-generation mobile communication technology (3G) standards (TD-SCDMA) proposed by China. Here, it is necessary to form an industrial technology alliance led and coordinated by the government and integrate the advantageous resources at home and abroad in order to realize the breakthrough and industrialization of new technology standards.

3 Evolution of Indigenous Innovation Subjects in Chinese Industries Many scholars have argued in recent years that a key reason for the failure of indigenous innovation in Chinese industries is that enterprises fail to become subjects of indigenous innovation. The reason for this failure is the serious deficiencies in China’s national innovation system, which is made up of the economic, science and technology, and education systems. These deficiencies are reflected in the excessive government intervention in the economy at all levels, the administrative orientation of the science and technology and education systems, and the bias of the national investment system in favor of large state-owned enterprises (even Sino-foreign joint ventures) and against private enterprises and small entrepreneurial enterprises. Therefore, from the National Outline for Medium and Long Term Sci-Tech Development (2006–2020) formulated in 2006 to the Decision of the CCCPC on Some Major Issues Concerning Comprehensively Deepening the Reform of the Third Plenary Session of the 18th CPC Central Committee, it has been repeatedly emphasized that building a technology innovation system that combines enterprise as the subject, market-oriented, and “industry-university-research”, forming indigenous innovation capability, as well as building a national innovation system. In fact, as early as the 1980s and 1990s, an idea that entrepreneurs and enterprises should act as subjects of innovation was put forward by scholars such as Xu Qingrui and Fu Jiaji. In 1996,

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the “Ninth Five-Year” National Technology Innovation Outline (Guo Jing Mao Ji No. 996) issued by the State Economic and Trade Commission put forward a policy of “innovation with enterprises as the subject”. Enterprises in many industries fail to be the subject of innovation although more than 20 years have elapsed since then, during which the government and many scholars have repeatedly emphasized and government departments at all levels have continuously carried out economic, scientific and technological system reforms to create a favorable environment and conditions for enterprise technological innovation. It is worth exploring the reasons for this, which cannot be justified by simply attributing it to institutional deficiencies. This is because institutional reform is not a process of rational convergence with no basis for design, but a process of experimentation with cultural and historical path dependence, repeated exploration and error correction. Its complexity and enormity are not only reflected in the process of institutional reform from a planned economy to a market economy, but also in the process of overcoming the disadvantages of latecomers in developing countries. Although enterprises in East and Southeast Asian countries and regions, such as Japan, South Korea, Singapore, and Taiwan (China), have become subjects of innovation, the process of forming their subject positions and their innovation models are various due to the historical, environmental, cultural, and institutional elements in different countries and regions. So, for China, a country with more historical, cultural and institutional specificities, it is important to address what organizations have made major contributions to China in industries that have successfully achieved technological catching-up. In what way were these innovative players making indigenous innovations in the industry? How did such models overcome obstacles of resource constraints and lack of incentives? How is the subject position of enterprises formed during this process? What institutional elements led to this achievement?

3.1 Theoretical Model of Indigenous Innovation and Innovation Subjects A theoretical model of indigenous innovation and innovation subjects in China is developed based on innovation system theory, development economics and technology catching-up theory, and institutional transformation theory in China to analyze the evolution of indigenous innovation and innovation subjects in China’s communication equipment and automobile industries. To start with, the innovation system consists of system functions, innovation participants and their interconnections. The core functions of innovation systems in developing countries differ from those in developed countries because, at the beginning of their development, indigenous innovation in developing countries required far more technological capability, capital, researchers, and market knowledge than enterprises could provide, which is a major obstacle to the development of high-technology industries and indigenous innovation. Meanwhile, enterprises in developing countries

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lack incentives for indigenous innovation. This is because the comparative advantage of developing countries is still in labor-intensive industries when they start indigenous innovation, without comparative advantage in high-tech industries and high value-added positions in the value chain, so they fail to be the subject of industrial indigenous innovation (Lin Yifu, 2012). The resource and capability constraints and the lack of incentives for indigenous innovation create a significant obstacle to technological catching-up in developing countries, therefore, both the lack of innovation capability and the lack of driving force for innovation must be a shootdown for indigenous innovation. Findings by scholars show that innovation capability can be developed through the acquisition of advanced foreign technologies and the integration of innovation resources. A powerful innovation capability can only be formed when developing countries acquire advanced foreign technologies and integrate them with domestic innovation resources, such as human and financial resources, while the innovation driving force of participants needs to be formed through market competition and government innovation incentives. Thus, three core functions of indigenous innovation are proposed in terms of innovation capability and innovation driving force: (1) Foreign technology acquisition, i.e., acquiring and using advanced foreign technology; (2) Integration of innovation resources, i.e., to integrate and concentrate national and regional innovation resources, such as capital, personnel, technology and market, into strategic industries in the direction of industrial transformation and upgrading, to form a high degree synergy of industry and technology, and to realize indigenous innovation; (3) Innovation incentive, i.e., market demand, market competition and government industrial policy causes enterprises to overcome and share innovation risks, to form innovation desire and incentive, and to pursue long-term development. Theoretical Model of Indigenous Innovation in Developing Countries is shown in Fig. 4. Participants of indigenous innovation in developing countries consist of four categories: enterprises, public scientific research institutes, government, and consumers, of which enterprises include state-owned enterprises, private enterprises, large

Innovation Participants: Enterprises

Foreign Technology Acquisition Innovation Capability Indigenous Innovation

Public Sci-Tech Institutions

Innovative Functions:

Integration of Innovative Resources

Government

Consumers

Innovation Incentives

Innovation driving force

Fig. 4 Theoretical model of indigenous innovation in developing countries

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conglomerates, small- and medium-sized entrepreneurial enterprises, multinational corporations, and joint ventures. Such enterprises serve mainly to acquire advanced foreign technologies and to integrate innovation resources for the formation of indigenous innovation capacities. Public sci-tech institutions consist of research institutes and universities, whose function can be either to acquire advanced foreign technologies to facilitate the development of indigenous innovation capability in local enterprises, or to integrate innovation resources and carry out indigenous innovation activities through restructuring into enterprises or setting up their own enterprises. Key functions of the government are innovation incentives via financial support, market protection, and tax breaks, etc. However, the government can also integrate innovation resources and directly involve itself in indigenous innovation activities when developing countries or economies in transition lack innovation subjects. Customers serve as innovation incentives through the constant escalation of their demands. For developing countries, domestic customers can stimulate innovation by special demands generated from their unique economic, social and cultural conditions, providing a unique market space for indigenous enterprises. Since the innovation process is accomplished by an innovation system formed by multiple participants, the effectiveness of the systems and rules governing the relationships among these innovation participants is the key to the effective functioning of the innovation system. Innovation systems are coordinated in developed countries, either through market mechanisms or through large enterprises and regional innovation systems (such as the network of high-tech entrepreneurial firms and venture capital companies in Silicon Valley). But for developing countries, market mechanisms and regional innovation systems may not be well developed, nor do large enterprises possess indigenous innovation capability. Therefore, it is often necessary for the government to support large conglomerates and public scientific research institutes to coordinate innovation systems, or to govern innovation systems through coordination by the government itself, i.e., it may be that at a given time, it is not firms, public scientific research institutes and government departments that act as innovation subjects. Consequently, the concept of the innovation agent is that of an innovation governance mechanism, i.e., the innovation subjects are the innovation policymakers and coordinators who play a central role in the governance of the innovation system and who bear the economic consequences of innovation. In this sense, the subject of innovation should be the owner of the innovative products, who owns the intellectual property or brand of the innovative product, which is of course the enterprise. In the case of developing countries, however, where market mechanisms are imperfect or enterprises cannot innovate indigenously, innovation subjects may also public scientific research institutes or government departments. Thus, various innovation subjects and innovation governance models may emerge in different countries at different stages of development based on different cultural and institutional traditions. The theoretical model in Fig. 4 provides a baseline for thinking about innovation subjects and their formation mechanisms. Subjects of indigenous innovation are organizations that possess the capability, driving force for innovation and bear the economic consequences of innovation. For developing countries, the innovation subjects are organizations that are highly incentivized for innovation, able to acquire

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advanced foreign technologies, and then achieve indigenous innovation through the integration of innovation resources. As technology advances or paradigm shifts, economies develop and institutions transform, new innovation players emerge and enter the industrial innovation system; some of them start to transform and implement new strategies. Competition between existing and new innovation players allows more effective organizational strategies to be copied and imitated by other organizations. This replication and imitation is also a process of experimentation and selection, i.e., to retain and form innovation subjects and governance models that are more effective through market competition and the selection mechanism of customer demands. Participants of innovation, including state-owned enterprises, private enterprises, universities and research institutes, were basically not capable of innovation, much of which was not driven by innovation, under the planned economic system in the beginning of China’s Reform and Opening-Up. The lack of innovation capacity is reflected in two ways: first, China lags far behind in advanced technology; second, effective integration of key innovation resources, such as research personnel, capital, production, and sales, is impossible due to their dispersion among research institutes, government departments, and enterprises. The lack of a driving force for innovation stems from a lack of incentives from both domestic and international market competition, while the government has not established an effective mechanism to impose innovation incentives on enterprises. Although the reform of the economic and sci-tech systems, that began in the 1980s created a certain innovation incentive mechanism by establishing a market competition mechanism and orienting research institutes to the economic field, it is clear that an innovation incentive mechanism for high-tech industries cannot be formed by market competition alone, nor can an effective innovation resource integration mechanism be formed. As a result, forming a governance mechanism for innovation coordination and resource integration with the government as the dominance, based on the traditional planned economy system, is a starting point for the transformation of China’s innovation system. Innovation system transformation aims to foster domestic enterprises as subjects of indigenous innovation, i.e., domestic enterprises can coordinate and integrate innovation resources from public scientific research institutes, technologies at home and abroad, financial institutions, and customers for indigenous innovation with the support from the government (see Fig. 5). Transformation of the innovation system is a gradual process that cannot be achieved overnight. Who is going to assume the role of the innovation subject when the traditional planned system starts to disintegrate and the newly established market system is not yet fully functional? In what kind of system can domestic enterprises grow up to be the subjects of indigenous innovation in the fastest way? However, innovation system transformation cannot be achieved by prior design but is a path-dependent experimental process. In this process, experiments succeed in some industries (e.g., the communications equipment industry) and fail in others (e.g., the automotive industry). Success (or failure) depends on whether a balance can be struck between the planned and market systems in this process to create an effective governance mechanism for innovation incentives and innovation resource integration.

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Government Domestic Enterprises

Domestic Technologies

Financial Institutions

Public Sci-Tech Institutions

Integration

Domestic Technologies

Support

Integration Financial Institutions

Foreign Technologies

Fig. 5 Starting point and goal of transformation of China’s innovation system

3.2 Comparative Analysis on Innovation Process of Chinese Communication Equipment Industry and Automobile Industry Both China and several Southeast Asian countries and regions are successful in external technology acquisition (albeit in different ways), but they have very different approaches to innovation resource integration and innovation incentives (Zhao Xiaoqing et al., 2009). The failure of economic development in developing countries stems from two kinds of failures in coordination: the coordination of resource allocation between existing and new industries to eliminate underinvestment in emerging industries due to technological and market uncertainties; and the coordination of investment from domestic enterprises to eliminate excessive entry in emerging industries (Huang, 2002). Governments in developing countries, in order to develop new industries, must protect the development of naive domestic new industries from the failure of the first type of coordination by eliminating or mitigating underinvestment due to technological and market uncertainties through higher tariffs, import restrictions, and financial support. However, market protection and financial support by the government will generate high profits for the relevant industries, which will drive lots of enterprises to enter, thus failing to create scale economic effects and reducing the capability and willingness of enterprises to invest in innovation, which is the second type of coordination failure. Innovation resource integration was achieved through large conglomerates with forceful government coordination in both Japan and South Korea, with incentives for innovation created through market protection and government pressure. Also, Taiwan (China) achieved resource integration through its Public Technology Research Institute and created incentives for innovation by integrating into global value chains. Compared to South Korea and Japan, the Chinese government’s auto industry policy goes well in terms of import restrictions and policy support, avoiding the first coordination failure. However, the first coordinated policy resulted in market protection that turned China’s auto industry into a profitable industry, inducing local governments and enterprises at all levels to try to squeeze into the auto industry through joint ventures, to take advantage of the rapid market growth to develop the local economy and earn profits. A lack of the second kind of coordination prevents Chinese auto enterprises from having a de facto market

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monopoly, resources are not concentrated, and joint venture constraints exacerbate the loss of incentive for Chinese enterprises to innovate. This lack of coordination is a logical consequence of the administrative decentralization that has resulted from China’s institutional reform. The lack of coordination prevents the formation of a centralized coordination mechanism for innovation and the centralized integration of innovation resources. This theoretical perspective is capable of explaining the failure of the indigenous open development strategy due to the proliferation of joint ventures in China’s auto industry as a result of the lack of coordination by the Chinese government, and the failure in cultivating state-owned enterprises as indigenous innovation subjects. Due to a lack of coordination, both state-owned enterprises and public scientific research institutes failed to become innovation subjects at the second stage, as well as a failure to integrate innovation resources. At the third stage, as a result of the government’s market control, private enterprises were unable to enter the market, and state-owned enterprises were unable to be innovation subjects under the restriction of joint venture production, resulting in the loss of the Chinese auto industry’s indigenous innovation capability and its reduction to a foundry for foreign brands. As in the automobile industry, there was a second lack of coordination in China’s telecommunications equipment industry, which prevented state-owned enterprises from becoming innovation subjects in the 1990s. The key to the successful realization of indigenous innovation in the communication equipment industry is the formation of a multi-subject dynamic and synergistic innovation system, which has enabled the Chinese communication equipment industry to successfully overcome the barriers to indigenous innovation through the import of foreign technologies, the integration of innovation resources and effective innovation incentives by using different innovation organizations as innovation subjects at different times. Unlike the indigenous innovation in South Korea, Japan, and Singapore, which relied on one type of innovation subject under the coordination of the government, four types of organizations—MNCs (and their joint ventures with Chinese companies), stateowned enterprises, universities and research institutes, and private enterprises—all play a central role in the process of indigenous innovation in China’s communication equipment industry and become innovation subjects at different stages, as shown in Fig. 6. A multi-subject dynamic and synergistic innovation system in the communication equipment industry is characterized by the change and succession of two innovation subjects in two successive innovation stages: two generations of technologies are mature technologies (including fixed telephone SPC exchange technology and second-generation mobile communication technology) and emerging technologies (third-generation mobile communication technology), and two stages refer to the technological catching-up and the market-based indigenous innovation, respectively. The innovation process for mature technologies was completed in 1983–2001 and for emerging technologies in 1998–2009. The key task in the technological catching-up stage of mature technology (1983–1996) is to aim at international advanced technology and to form indigenous innovation capacity by acquiring foreign technology and indigenous development. In this stage, innovation incentives come mainly from strategic coordination, support and pressure from the government, as the domestic

3 Evolution of Indigenous Innovation Subjects in Chinese Industries

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Communication equipment industry (1978-1993) Joint

ventures

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state-owned

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Automobile industry (1984-1995) Joint ventures of MNCs and state-owned enterprises. Technology Importation and Diffusion

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Technology Importation and Diffusion

Communication equipment industry (1989-2000)

Automobile industry (1985-1999)

1. Innovation incentives: government coordination,

1. Innovation incentives: lack of government

market protection

coordination

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development

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Automotive industry (1999-Present) Communication equipment industry (1996-Present)

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1. Innovation incentives: open market competition

2. Private enterprises and domestic enterprises are

2. Emerging enterprises to be innovation subjects:

unable to compete with foreign brands that have

market-based indigenous innovation

formed a market monopoly and are unable to be innovation subjects

Fig. 6 Dynamics of innovation subjects: a comparison of two industries

market system has not yet been formed. The attractiveness of China’s vast market to MNCs is exploited by establishing joint ventures between state-owned enterprises and MNCs, which act as proposed subjects of innovation to acquire foreign advanced technologies, and the imported products and products produced by the joint ventures monopolize the Chinese market as well; efforts were also made to support universities and research institutes. These public scientific research institutes insisted on indigenous development and carried out “government-industryuniversity-research” cooperative innovation as innovation subjects under the strategic coordination of the Ministry of Posts and Telecommunications of the PRC. These institutions have developed a large digital SPC exchange with an advanced international level through the integration of technology and innovation resources at home and abroad, and have set up cooperative enterprises to replace Chinese and foreign joint ventures to capture the domestic SPC exchange market. During the marketbased indigenous innovation stage of mature technologies (1996–2001), government policy promptly shifted from supporting indigenous development of public scientific research institutes to incentivizing innovation through open market competition, and emerging enterprises engaged in market-based indigenous innovation. Emerging enterprises such as Huawei and ZTE have taken the lead in access networks, smart networks, optical communications, and personal access systems (PHS), etc., and became innovation subjects through market-based indigenous innovation although Chinese mobile equipment market was monopolized by joint ventures.

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3.3 Suggestions A basic framework for strategic industrial development and indigenous innovation is set by our analysis on China’s automotive and telecommunications equipment industries, which provides an idea for clarifying the relationship between government policies and market mechanisms. Today, significant changes have taken place in China’s enterprises, research institutes, universities, government and market systems. Private enterprises have grown powerful, while state-owned enterprises have largely completed the transformation of their management systems to meet demands of market competition and market innovation, and numerous research institutes have completed their restructuring into enterprises, while universities have become more oriented toward basic research. In such a situation, will innovation be undertaken exclusively by enterprises (state-owned or private)? No, enterprises are still unable to shoulder indigenous innovation alone, in our opinion. The development of emerging industries in developing countries can be divided into two stages: catching-up innovation (including re-innovation and integrated innovation) and original innovation. The key to the successful realization of indigenous innovation is the formation of a dynamic and synergistic innovation system, i.e., a dynamic and synergistic relationship among innovation subjects although they vary from stage to stage, and the key to government strategic coordination is to promote the formation of dynamic and synergistic innovation subjects and their timely transformation. Therefore, suggestions are made for the indigenous innovation and development of strategic emerging industries in China. First, form an innovation system coordinated by the government and centered on public research institutes for centrally integrating resources during the catching-up stage of strategic industrial development. During this stage, the short-term orientation of the market mechanism fails to incentivize enterprises for investing in a generation of emerging industries, and the decentralized allocation of resources by the market mechanism fails to centrally integrate innovation resources to meet the capital-intensive characteristics of emerging industries. Therefore, the dynamic improvement of enterprise innovation capability cannot be accomplished by enterprises alone, nor can it be achieved through the cooperation of “industry-universityresearch” led by enterprises. The government must make up for market failures with policies that centralize resource allocation and incentivize enterprise innovation, so as to enhance the indigenous innovation capability of enterprises. Therefore, China should establish independent public research institutes for strategic emerging industries to integrate innovation resources at home and abroad, and form a collaborative innovation system coordinated by the government, with public research institutes as the core to integrate innovation resources of universities and enterprises (including MNCs). Second, the innovation mechanism dominated by the government and public research institutes should be transformed into an enterprise-oriented innovation mechanism in time, to stimulate the innovation and development of indigenous enterprises through open market competition during the original innovation stage. The key

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to the development of strategic emerging industries lies in properly handling the relationship between the government and the market mechanism. Our emphasis on the role of government strategic coordination is not a denial of the fundamental role of market mechanisms in allocating resources. Market entry restrictions should be lifted as soon as possible to encourage private enterprises and new state-owned enterprises to enter the market although the government’s market protection and import restrictions are necessary for a certain period during the catching-up stage of industrial development; market protection by the government should not last too long and it should be lifted as soon as local enterprises acquire certain technological capability, market position, and competence so that fierce market competition takes the role to stimulate innovation and development of local enterprises and form an “industryuniversity-research” synergistic innovation system led by enterprises to realize original innovation. So, for each strategic emerging industry, a clear distinction should be made between the strategic priorities and innovation system characteristics of the catching-up stage and the original innovation stage, and a timely shift from the domination of the government public research institutes to that of the market mechanism, so as to form an innovative synergy and resource integration mechanism with enterprises as the core.

Chapter 3

Technical Standards and Indigenous Innovation

The standard is a kind of order for the industry and economy, as well as a dominant technical scheme for industrial development and an important technical system for regulating the economic order (Wang Junxiu et al., 2004). Its attributes such as advancement, dominance, scale, externality and economy constitute the basic elements of industrial competitiveness and enterprise core competitive advantage. It has been a major source of improving national competitiveness as economic globalization goes on. “Technology Patentability—Patent Standardization—Standard Industrialization” has turned into a competitive paradigm in the era of globalization (Wang Shanshan et al., 2013). To advance from “Made in China” to “Created in China”, opportunities provided by globalization need to be exploited for the development of technical standards in favor of national economic and security interests, to seize the high ground in international competition, to integrate technologies with China’s indigenous intellectual property rights into standards to enhance product competitiveness, to accelerate new product development and product upgrading, and to promote economic restructuring, industrial upgrading and foreign trade development.

1 Role of Technical Standards in Industrial Innovation 1.1 Enhance the Core Competence and Competitive Advantage of Enterprises Technical standards refer to unified regulations on repetitive technical matters within a certain range. It is an ownership of the technical elements and indicators in the standard and the intellectual property rights derived from them that make the standard

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a technical basis for indigenous innovation. Technical standards will play a role, both positively and negatively, in innovation. Promoting the industrialization, internationalization and marketization of standards are conducive to enhancing the international competitiveness of the industry. First, technical standards will perform guidance for innovation activities, reduction of costs, and efficiency, and coordinate the technological innovation of specific enterprises independently and provide services to end-users by giving a comprehensive and systematic framework (Fanning, 2007; Kano, 1999). Second, technical standards are a source of profit for enterprises. The systemic competitive advantages generated by standards will facilitate the sustainability of innovation and upgrading of industry chains. Third, technical standards as a form of international practice are capable of avoiding technical barriers to exports and reducing costs and risks for enterprises to export (Gandal, 1995; Lu Tie, 2005). Generation of standards also negatively affects innovation, which requires government regulation as well as the synergy of enterprise strategies for suppression. There is a tension among monopoly property of technology standards, exclusivity of intellectual property rights, and the knowledge sharing needed for innovation, and the inertia and monopoly created by standards may inhibit innovation. Scholars suggest that the side effect of technical standards is a reduction in product diversity, thereby reducing consumer utility. Especially for developing countries like China, technical standards may strategically enable both productive “technological catching-up” and “futile technological efforts and financial costs for the catchers” (Yang Wu et al., 2006). For example, as in a case of Cisco versus Huawei, the former holds the majority of the global market share and set up a considerable number of “private agreements” by using its dominant position to deny the use of third parties and monopolize the market by using de facto standards. To summarize, participation in the development and promotion of industrialization and marketization of technical standards through the synergy of industrial policy and corporate strategy is of significant importance to enhance the core competence and competitive advantage of enterprises. But various problems have been revealed in the development, industrialization and marketization of technical standards in China, which hinder the enhancement of core competence and competitive advantage of enterprises and even the country.

1.2 Status and Problems of Technical Standards Development, Industrialization and Marketization in China Although the development of international standards dominated by China experiences an increase in recent years, the quality and quantity are significantly behind those of developed countries. As for the fields in which China has taken the initiative to formulate international standards, it is basically blank in the fields of public

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safety, environmental protection, food safety, medical and health; insufficient exploration of the potential of forming international standards for the relevant advantageous and characteristic technologies in China, the lack of effective coordination between technology development and international standards, make it difficult to form international standards with strategic significance. In addition, the industrialization and marketization of standards are extremely difficult, for example, the international standard of an enhanced versatile disk (EVD) has gone down rapidly since its release, mainly due to the lack of integration of technology development, standard preparation, government coordination, and market expansion. The industry-standard system experiences great lag and unbalanced development, which fails to match with the rapid development of China’s overall economic and scientific strength. Therefore, “Chinese Standards,” “Chinese Brands,” and “Chinese Creation” have been called by some scholars as the three “Chinese Problems” for development of Chinese enterprises. They are both external elements such as scitech development and international competition, as well as internal elements such as enterprises’ own R&D, national standard strategies and institutional mechanisms. Therefore, the Standardization Administration of the PRC. proposed a standardization development outline, which plans to advance the overall standardization to an international advanced level by 2020 (5 years ahead of schedule), and technical standards in key areas such as household appliances advance to the international leading level, according to the Outline for the 14th Five-Year Plan for Economic and Social Development and National Outline for Medium- and Long-Term Sci-Tech Development (2006–2020). Therefore, this book focuses on an exploration of the synergistic development mechanism of industrial innovation and technical standards through the innovation development and standardization history of China’s manufacturing industries (communication manufacturing and home appliances).

2 Technical Standard Strategy and Its Capability Basis 2.1 Technical Standard Strategy Measures of technical standard strategies available for enterprises include creating standards, importing standards, improving standards, and releasing standards, depending on the circumstances of each industry (Deng Zhou, 2010). In light of the path and model of industrial standards development in China, focuses are on two approaches to standards acquisition: independent creation and joining standard alliances. Also, values of sci-tech innovation will not be truly reflected if indigenous IPRs are not industrialized and marketed, therefore this book only focuses on approaches to actively promote the industrialization and marketization of standards after they are acquired. First, technical standard strategies can be divided into government-led and enterprise-sponsored in terms of the endogeneity of the dominant player.

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Government-led strategy refers to the government directing the allocation of resources to develop or participate in the revision of international technical standards, and to promote the industrialization and marketization of standards. For example, Datang’s proposal TD-SCDMA was accepted by the International Telecommunication Union (ITU) in May 2000, with direct involvement of the Chinese government in the negotiations with the ITU during the application. The enterprise-sponsored strategy refers to enterprises to develop, or to participate in the revision of international technical standards through spontaneous allocation of resources, to promote the industrialization and marketization of standards. Second, technical standard strategies are categorized into the leading technical standard strategy and defensive technical standard strategy in terms of the degree of involvement in the standard-setting process. The leading technology standard strategy is also known as the offensive technology standard strategy. Its connotation is that enterprises apply for patents in time and transform them into industry technical standards, thus becoming the maker of industry standards to actively build industrial alliances to promote the industrialization and marketization of standards. Defensive technical standard strategy means that enterprises actively participate in the development or modification of industry technical standards, to give their technologies a role in the process, and actively cooperate with other enterprises in the industry chain to promote the industrialization and marketization of technical standards. For example, Samsung in South Korea was not the developer of the Code Multiple Access (CDMA) standard, but it was the first to industrialize the CDMA standard and became the leading company in CDMA by participating in the refinement and modification of the standard.

2.2 Technical Standard Setting and Its Capability Basis for Industrialization and Marketization The technical and market base of technical standards is derived from technological innovation. First, standards are a collection of patents based on technology. Second, the release of technology standards is more commercially motivated, and a trend toward monopolization of technology standardization is becoming increasingly apparent. For technical standards that are widely recognized by the market and accepted by users, they may still become “de facto technical standards” to monopolize the technical field and achieve incremental returns to scale, even if they are not optimal (Wang Liying et al., 2005). Therefore, innovation capability is required to support the formation of international technical standards and their industrialization and marketization. The technical and managerial capability of enterprises is the basis for the generation and renewal of standards (Gallagher et al., 2002). From a resource base perspective, the formation, industrialization, and marketization of technical standards should base themselves on three types of strategic elements: technological innovation and dominant design,

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first-mover advantage and switching costs, and complementary products and installed base. Functionally, a capability basis required by enterprises can be classified as the ability to shape an innovative culture, ability of strategic forecasting and planning, ability of technology development, ability of organizational management, ability of platform leadership, ability of industry chain alliances, ability of manufacturing, ability of marketing, and ability to influence government (Blind, 2004; Deng Zhou, 2010; Gallagher et al., 2002; Shu Hui et al. 2009). For different technology standard strategies, the categories and levels of the innovation capability basis vary for each of the three strategic elements. The capability basis required for various technology standards strategies will be discussed below in terms of the endogeneity of the dominant player and the degree of involvement in the standards development process. First, a government-led strategy requires that assistance from the government should be taken by enterprises to promote products or technologies in order to win the right to speak international standards (Shu Hui et al., 2009). In the case of the formation of the TD-SCDMA international standard, for example, China holds a strong bargaining power as a large market country, although it is less technically capable, so it is possible for China to promote the standard and thus be accepted by foreign standard organizations. Second, one of the commonalities between the leading and defensive technical standard strategies in terms of the degree of involvement in the standard-setting process is the requirement for excellent capability for strategic forecasting and planning. Both the development and the participation in the revision of international standards require the ability to track and forecast the latest standards, so as to analyze the technological trend and market, which will be combined for the selection of standards and the direction of technological R&D. Datang and Huawei actively participate in relevant standardization meetings [e.g., Long Term Evolution (LTE) Standard Conference] while staffing a large number of researchers to conduct technical research and validation to ensure the synchronization of TD-SCDMA LTE and Frequency Division Duplex (FDD) LTE. The second commonality between them is their ability to form industry chain alliances. In particular, the process of standards-setting and industrialization must involve multi-member cooperation. Building networks of complementary products is the most critical capability necessary for a technical standard strategy (Gallagher et al., 2002). For example, in the case of the TD-SCDMA international standard in China’s mobile communication industry, the interaction between the upstream and downstream industry links is so obvious that a more complete industry chain is a necessity to ensure the industrialization of the TD-SCDMA standard. Datang Telecom has enabled the formation and development of the TD-SCDMA industry alliance, and signed strategic cooperation agreements with well-known international enterprises such as Dell, Microsoft, Ericsson and Agilent to jointly undertake to promote TD-SCDMA industrialization by leveraging their respective advantages. The third commonality between them is the marketing capability required by marketability of standards. The third strategic element in technology standards is the complementary product and installed base (Gallagher et al., 2002). It requires an

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excellent promotion team, operational strategy, and marketing skills, with the basic capability to effectively shape market expectations and achieve an installed base of users speedily. Capability elements to differentiate a leading technical standard strategy from a defensive ones include a culture of innovation, technology R&D, and platform leadership. First, culturally, enterprises that pursue a leading technical standard strategy are more risk-tolerant than those that pursue a defensive technical standard strategy. The communication industry is highly standardized, with mainstream standard strategies accounting for over 90% of market share. Datang aims to “drive the overall progress of the industry” and “serve the country” in order to create more opportunities. This value proposition gives it a sense of long-term vision and a willingness to take more risks. It is inextricably linked to Datang’s corporate nature and ongoing government support for Datang’s research and development. Huawei believes that enterprise innovation should be based on customer needs and built on the shoulders of giants. Different values result in different standard strategies for these two companies. Second, market-oriented technical R&D capability. Standard-setting requires R&D capability and patent strength as a foundation. Industrialization and marketization of technical standards require that R&D must be oriented towards market demand. Equipped with market-oriented technology R&D capability, enterprises are able to introduce the first type of element required for standards, i.e., dominant design (Gallagher et al., 2002). The stronger the enterprise’s patent strength, the more likely it is to join the standard-setting process, which adds value to the patent portfolio (Blind, 2004). In the TD-SCDMA standard, for example, Datang and Huawei both maintain high R&D investment and patent applications. But Datang is ahead of Huawei in terms of R&D investment and control degree of core patents. It has invested more than 1 billion yuan in R&D on TD-SCDMA and controls more than 90% of the core patents on wireless access. Huawei, which adopts a defensive technology standard strategy, has long insisted on an annual R&D investment of at least 10% of sales revenue, but its market orientation is more visible, i.e., it spreads resources to multiple technology standards (WCDMA, CDMA2000, TD-SCDMA), so the total R&D expenditure on TD-SCDMA is not as much as Datang’s. In contrast to Datang, Huawei prefers to participate in the setting of multiple international standards, which it promotes its technology solutions into. Third, standard setters or participants differ from followers in the process of industry chain cooperation because of the former’s platform leadership, which enables them to play a leading role in the alliance. The key to platform leadership lies in occupation of the high-end and key links of the industry chain. For example, Datang focuses its resources on high-end industry segments with high added value by analyzing the industry chain it belongs to, allocates resources in key segments of major industries such as wireless subsystems, cell phone terminal solutions, chip design, and special communications, so as to form a competitive advantage in the industry and obtain the leverage benefit of resource synergy and integration with other segments. Eventually, Datang Group goes on as an industry chain leader. Capability basis and classification of technical standard strategy are shown in Table 1.

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Table 1 Capability basis and classification of technical standard strategy Capability basis Leading technical for technology standard strategy standard strategy led by government

Leading technical standard strategy sponsored by enterprises

Defensive technical standard strategy led by government

Defensive technical standard strategy sponsored by enterprises

Ability to shape an innovative culture

High risk tolerance

Medium risk tolerance

Ability for strategic forecasting and planning

Ability to track and forecast the latest standards, so as to analyze the technological trend and market, which will be combined for the selection of standards and the direction of technological R&D

Ability to track and forecast the latest standards, so as to analyze the technological trend and market, select standards to be participated and the direction of technological R&D

Technical R&D capability

Powerful technical R&D, equipping its products or technologies with originality and novelty in terms of performance

Technical capability is superior and irreplaceable in the field in which they are engaged

Ability of organizational management

Integrate standards, R&D and intellectual property work to ensure the novelty of patents and set new standards

Standardized operation processes for pre-research, product and standard systems to match technologies and patents according to requirements of existing standards

Platform leadership

Occupy the high-end and key links of industry chains

Occupy irreplaceable links and maintain a competitive advantage

Capability to form industry chain alliances

Build networks of complementary products to promote technology spillover and accelerate industrialization

Manufacturing capability

Acquire competitive advantages for costs and quality-control in advance of competitors

Marketing capability

An excellent promotion team, operational strategy, and marketing skills, with the basic capability to effectively shape market expectations and achieve an installed base of users speedily

Ability to influence government

Able to utilize efforts of the government to promote products or technologies for rights of speech of international standards

Understand and leverage government policies to win rights to speak on international standards

Able to utilize efforts of the government to promote products or technologies for adaption and revision of existing standards

Understand and leverage government policies to win rights for adaption and revision of existing standards

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3 Enhancement Mechanism of Technological Innovation to Technical Standards 3.1 Promotion Mechanism of Technological Innovation to Industry Standardization Technology standards are a combination of solutions containing a series of technologies, which is a combination of sets of intellectual property rights. Therefore, technological innovation is the basis of industrial standardization, in turn, industrial standards are the medium to promote the industrialization of technology (Yuan Jun, 2007). However, most enterprises in China perform insufficiently in the whole process from technology to standards, which are summarized in the following aspects. First, insufficient investment in R&D, resulting in a weak technological basis and lack of core technology. It lacks basic technology as support, let alone the development of industry standards that are more complex, systematic and high-level. Second, enterprises are not aware of patent application and protection, i.e., the lack of enthusiasm and initiative to develop standards. Enterprises focus on only the standards, but fail to keep an eye on supporting links behind the standards, such as the construction of technology R&D systems, patent technology protection systems, and mass production. Third, imperfect standardization system construction. China’s standardization authority is the government, which dominates the development of most standards, so enterprises, which are supposed to be market subjects, cannot assume the corresponding responsibility. This misalignment of subjects causes insufficient driving forces for Chinese enterprises to participate in international standardization activities. Fourth, an approach to the formation of standards lags behind the market demand, low degrees of enterprise participation in the standard-setting process, i.e., a model that “product comes first and then a standard” is unable to reflect future market demands, let alone a guiding role for the industry. Nowadays, “standard first” should be taken in the context of technology and economic integration. Thus, a new mechanism for participation in international standards competition is proposed in this book, which combines indigenous innovation, market orientation and standard-setting, by considering the history of innovation and standardization in the home appliance industry and its problems. The mechanism constructs a strategic system for China’s participation in international standardization activities through extensive cooperation based on indigenous innovation, with enterprises as subjects and the market as orientation. In Fig. 1, technology is the substance of industrial standards, with the core of standards based on core technology and indigenous intellectual property rights (Han Hanjun et al., 2005). Therefore, improving the indigenous innovation capability of Chinese enterprises is the basis for implementing the standardization strategy. The value of standards is realized through the market, and it is also the link between scientific R&D and products, and an effective path for industrialization of sci-tech

3 Enhancement Mechanism of Technological Innovation to Technical … Fig. 1 Principle of industrial standardization

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Government / Association License Technology Enterprises

Industrialization

Standard

Market

Cooperation

Network/Value Chain

achievements. User choice and market acceptance are important forces in the formation of standards. Therefore, the formation of standards is oriented to market demand, standards dominate the trajectory of technology development, and drive the overall development of the industry. Establish an open standards system. The standard system involves multiple parties such as technology owners, users, managers and customers, therefore, interests of all parties concerned should be coordinated in the development of industrial standards. For example, certain guidance and intervention measures can be adopted by the government during import of industrial technologies, so that technology can be imported systematically and in line with the direction of evolution of industrial standards. More importantly, it is to integrate resources through competitive cooperation to promote technological innovation and industrialization of standards. The cooperation between Siemens and China in TD-SCDMA and among China, Japan and South Korea in Linux (an operating system) show that international technology alliances contribute significantly to establishing a technical standard system in China. In the light of China’s national conditions, pre-competitive cooperation (cooperation before the formation of standards) should be the priority, to promote the “industryuniversity-research” alliance of enterprises in the globalized value network, and to establish a strategic system for China’s participation in international standardization activities through extensive cooperation.

3.2 Technical Standard Development Model of Haier Group Haier Group has always adhered to the principles of “indigenous innovation, indigenous intellectual property and indigenous brand” throughout its globalization, and has been able to transform its indigenous innovative technologies into indigenous intellectual property, and to exert its power in the market competition through indigenous intellectual property so that indigenous intellectual property rights take on greater significance for the globalization of its brand. Haier’s indigenous intellectual property

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strategy with Chinese characteristics is of great significance for Chinese enterprises in the globalization stage to participate in international market competition.1 1. History of Technical Standard of Haier Group Haier is a home appliance company that has participated in the development of the most international standards, national standards and industry standards in China. By now, Haier has gained the right to speak in many standards of the International Electrotechnical Commission (IEC). Haier’s experts serve in standard fields such as reliability of household appliances, audio, video and multimedia systems, making Haier a Chinese appliance company with the largest number of IEC experts. Its experiences are as following. (1) Consolidate the basis of standardization As early as the initial stage of technology import, Haier established the strategic position of standardization work, as well as an enterprise standardization system with product technical standards as the core. Group leaders personally participated in group standardization meetings, presided over standardization work. Also, an office was set up for standardization. This office is responsible for daily management of the standardization work and supervision and inspection of the standardization of each division, thus a perfect enterprise standardization system has been established. Integrate enterprise standard information resources. For proper implementation of standards, a shift was made in the integration of standard information resources from divisional collection and management of standard intelligence information to unified management by the Group Standardization Office. Establish a first-class testing system to effectively ensure the implementation of standards. During sampling, Haier invested more than RMB 300 million to purchase testing equipment for the Group’s testing center, forming a first-class testing capability that is compatible with the Group’s production. Among them, the Group’s IEC/CUL safety testing center is capable of meeting the requirements of the International Electrotechnical Commission (IEC) standard system and qualified for data mutual recognition with international authoritative certification organizations. In addition, the Group’s testing center has also been equipped with a high-standard electromagnetic compatibility laboratory, environmental simulation laboratory, noise testing laboratory and enthalpy different laboratory, which effectively ensure the implementation of product standards. (2) Master core technologies to lay the foundation for innovative international standards The key behind the standard is to grasp of the core technology and industrial direction, otherwise, many domestic enterprises would have fallen into a circle of “import, backward, re-import, backward again” due to the mentality of quick success. Haier has established the strategic goal of being a world-famous brand, so Haier is tracking and 1

Compiled from internal materials and research reports of Haier Group.

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focusing on technologies that are 10 or 15 years ahead of the industry. For grasping the innovation direction, a target Chinese and foreign patent database system was set up by Haier according to product categories and technology fields, so that Haier explores technological innovation points internationally and looks for technology cooperation and development partners, actively avoids and surpasses existing patents in development, and forms new intellectual property rights through effective innovation to improve its own development efficiency and level. Haier, the largest refrigerator brand in the world, has been committed to gaining a greater voice in the international standards for home appliances. Statistics show that Haier has presided over or participated in the development of 152 national standards and 425 industry and other standards in 2007, including 9 international standards and proposals. Four technical proposals involving safety, energy-saving, and environmental protection submitted by Haier refrigerators passed the examination and were included in the international standard at the relevant meeting of the International Electrotechnical Commission held in Norway on May 12, 2009. Since then, 10 proposals by Haier refrigerators have been included in international standards, marking Haier’s complete break with the long-standing monopoly of old European and American companies in the field of international standards. Especially at the 74th IEC Conference in 2010, the number of Haier refrigerator proposals surpassed that of European and American companies, achieving a leading position. The technology innovation is an excellent manifestation of Haier’s innovation capability in refrigerators. The “Haier Standard” has been included in the standards used by global refrigerator enterprises, reflecting the innovative strength and leading capacity of Chinese home appliance enterprises in the arena of international standards. (3) Realize synergy between globalization strategy, and technology strategy and intellectual property strategy A role must be taken, to be a participant and a leading force in the development of industrial standards, if domestic enterprises are committed to becoming leaders in the global industry. It is on such a forward-looking basis that Haier, while implementing its globalization strategy, has also clarified the direction of its technology strategy and intellectual property strategy to achieve synergy between its globalization strategy, and technology strategy and intellectual property strategy. 2. Haier’s Mechanism for Implementing Standardization Strategy (1) Establish a standardized strategic goal that creates value for users The core of Haier’s standardization strategy is to create value for customers, with the market as an orientation for technology strategy, to avoid mindless catching up and investment. Sustainable development of enterprises can only be achieved by setting up a standardized strategic goal that creates value for users, converting scitech achievements into productivity and industrialization. Haier Group always insists on the trinity of “market, technology and intellectual property” with user demands as the starting point, and develops products and markets according to the needs of users,

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Fig. 2 Haier standardization strategy framework

Patent Standardization

Technology Patentability

Customer Value

Internationalization of Standard

Brand Globalization

and seeks products for users. The “innovation-driven” Haier is committed to offering global consumers solutions that meet their demands, fostering new and dynamic markets in a win–win situation for both enterprises and users, and realizing the value of technological innovation through patent planning and application, industrialization and standardization. Its standardized strategy framework is shown in Fig. 2. (2) Set up a strategic platform for standardization A strategic platform for standardization was set up within Haier, which provides a strategic resource guarantee system for participation in international standardization activities. The conversion of Haier’s standardization is shown in Fig. 3. Haier ensures its technology leadership in the market by always maintaining innovation in technology and quality development, and ensures the implementation of standardization strategy by organically combining core technology, patents, intellectual property rights and standard-setting. A proposal was made by Haier management to build a borderless team, giving each R&D staff a strategic innovation platform. (3) Build an open innovation system Seeking and allocating R&D resources globally is a major reason why Haier stays ahead in technology. The internationalized technology network consists of foreign strategic alliance systems and industrial design systems and an extensive “industryuniversity-research” consortium in China to realize the personalization of Haier in technology and products to meet demands of every corner and every market segment in the world. To seek competitive resources, experts, technologies, and research institutes around the world, Haier has also established global laboratories, technology research institutes that meet the world’s advanced standards, and advanced resource integration centers to integrate and utilize global advantageous resources for the Haier Group’s global development. For example, Haier Central Research Institute

Core Technology

9258 Patents Accumulated

2532 Invention Patents

441 Industry Standards

Fig. 3 Conversion of Haier’s standardization

215 National Standards

19 International Standards

Globalization

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aims to support the Group’s global brand strategy, i.e., provide core technical support for Haier Group to create a global brand by dynamically tracking, collecting and analyzing global economic, market and technological developments. For example, the washing machine that is free of laundry detergent is a typical example of R&D with global resources, which was finally developed after 7 years of work by the R&D team. (4) Synergy of technology standard strategy and market strategy What can be changed by standards is not only the development path of a brand but also, more critically, the market share as well as the technology landscape. Haier washing machine has seized the high ground of the world washing machine industry by relying on the right of speech of the standard so that the washing machine industry got out of the trajectory drawn by the international washing machine giants and started to enter the standard route planned by China. Haier washing machines led the washing machine market in China with a 35% market share in 2006, of which the sales of high-end products accounted for about 50% of the entire market, with an increase of more than 20% in the sales price of Haier washing machines driven by indigenous intellectual property rights.2 The unit price of Haier products in the domestic market is 20% higher than that of its counterparts, and in areas such as electric water heaters and washing machines, Haier started to try to levy royalties on its foreign counterparts.

3.3 Development Model of Technical Standardization in China’s Communication Equipment Manufacturing Industry China’s communications equipment manufacturing industry has gradually increased its international competitiveness from following foreign technical standards in the era of 1G (1st generation mobile communication technology) and 2G to leading international technical standards in the era of 3G and 4G. This industry is characterized by “interconnection”, which means that: ➀ the industry shows significant network externality, so active participation in the formulation of international standards is important for the formation of competitive advantages of enterprises; ➁ there are few technological differences among countries in the same standard, so the barriers to internationalization for domestic communication equipment manufacturers are relatively weak, which is conducive to promoting the marketization of standards with indigenous intellectual property rights. The communication equipment manufacturing industry in China has gone through three stages of development according to problems faced and technical standard strategies. 2

Fa Peili. Haier Washing Machine Seizes the High Point of International Standard Competition: [N]. China High-Tech Industry Herald, 05-28-2007.

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Stage 1 (1982–1995): A follow-up technical standard strategy was adopted in the late 1G era and early 2G era because indigenous enterprises were unable to provide the equipment required for communication network construction due to their backward technology. Stage 2 (1996–2001): The backwardness of the 1G and 2G era further highlighted the importance of participating in the development of international standards in the late 2G era and the early 3G era. However, domestic enterprises were still lacking the market base required for standard-setting although they had accumulated certain technical knowledge. Therefore, indigenous enterprises further accumulated their technology and market base at this stage guided by the strategy of both defensive and leading technology standards, and indigenously developed the TD-SCDMA international standard for 3G. In May 2000, the TD-SCDMA standard proposed by Datang Group was incorporated as an international 3G standard. By now, China owned its first international standard for telecommunications. Stage 3 (2002–Present): The incomplete industry chain restricts the implementation of leading technology standards from the mid to late 3G era to the 4G era. Domestic enterprises further promote the industrialization of indigenous international standard TD-SCDMA through industrial alliance cooperation. The industry chain of 3G standard TD-SCDMA is taking its shape at this stage. In October 2009, the 4G standard TD-LTE-Advanced submitted by China with indigenous intellectual property rights has also been approved by the Third Generation Partnership Project (3GPP) of the European Standardization Organization. China’s enterprises adopted follow-up technology standard strategies in the 1G and 2G era, and leading and defensive technology standard strategies in the 3G and 4G era. Experiences and mechanisms to accomplish this transformation are described below. (1) Play the leading role of the government in the development of international standards China attaches great importance to the improvement of the international competitiveness for the communication equipment manufacturing industry and makes great efforts to guide the development of communication standards of indigenous intellectual property rights because the industry involves national communication security. First, policies on supply (joint ventures for importing advanced technologies, appropriation of funds, and guidance for technological research) are launched by China to accelerate the accumulation of core technologies of indigenous enterprises in response to the technology and knowledge basis necessary for their participation in the setting of technological standards. Second, demand-side policies (direct intervention in operator procurement) are launched by the State to develop markets for indigenous enterprises in response to the lack of a market scale base required by leading and defensive technology standard strategies.

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(2) Achieve synergy among the internationalization strategy, technical standard strategy and intellectual property strategy of domestic enterprises, so as to contribute to the setting of international standards First, coordinate the internationalization strategy and technical standard strategy. Chinese enterprises are strongly conscious of international competition and were aware of the importance of participating in setting international standards to get international competitive advantages in the communication industry at the early stage of their establishment. Guided by the government, Chinese enterprises took full advantage of the technological capability and market scale accumulated in the first two stages to compete for international rights of speech, and actively participated in the development of international standards for 3G and 4G. Second, coordinate technical standard strategy and intellectual property strategy through organizational processes. Most domestic communication equipment manufacturers have explicitly incorporated intellectual property rights and technical standards into their corporate strategic objectives since 2002, and coordinate the relationship between them through organizational processes. Datang, Huawei and ZTE already operated a standardized and coordinated process for patent applications and participation in standards development. (3) Integrate resources through cooperation among enterprises in industrial alliances, to form a complete industrial chain, facilitating the industrialization of international standards Datang took the lead in forming the TD-SCDMA industry alliance under the pressure of the national advanced technology (2G GSM and 3G TD-SCDMA). The TD-SCDMA Industry Alliance encourages mutual trust and cooperation among enterprises for patent licensing and authorization by establishing the principle of high-level sharing of intellectual property rights. The TD-SCDMA Industry Alliance promotes a development model shift of the upstream and downstream of the industry chain from the serial to the parallel, realizes the joint development of each link in a working group, solves the interconnection problem of each link, and reduces the internal meaningless competition and the transaction cost among enterprises at the early stage of industry development. The Industrial Alliance promotes the formation of a complete industrial chain through inter-enterprise cooperation, thus promoting the industrialization of international standards. (4) Private enterprises coordinate market-oriented strategy and technical standard strategy, with market demand as an orientation to conduct indigenous R&D and promote the marketization of international standards First of all, private enterprises such as Huawei and ZTE frequently communicate with operators at home and abroad during the development of technical standard programs, fully considering customer needs and grasping the proper direction, which ensures successful marketization of the standard at the source.

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Second, private enterprises realize technology indigenization in foreign markets by combining demands of foreign markets, facilitating the marketization of international standards of indigenous intellectual property rights. A combination of technology and market knowledge runs through the process. For example, dominant vendors such as Huawei and ZTE adopt a multi-level marketing strategy, and achieve customer demand feedback through the synergy of organizational structure (e.g., Huawei’s strategy and marketing department, three-tier marketing system, etc.), R&D processes (e.g., Huawei’s integrated product development process), and marketing strategies to ensure that their R&D teams customize products to meet different demands.

Part II

Study on Indigenous Innovation Path with Enterprises as Innovation Subjects

Overview Part II explores the path of indigenous innovation with Chinese characteristics from the enterprise level. It holds that the path of “secondary innovation-portfolio innovation-total innovation” is a dominant path of indigenous innovation with enterprises as subjects in China. Firstly, this part outlines three typical paths for the dynamic evolution of international innovation models, namely: (1) a path that goes from the R&D-dominated to portfolio innovation and total innovation; (2) a path that goes from integrated innovation to portfolio innovation and total innovation; (3) a path that goes from secondary innovation to portfolio innovation and total innovation. This study proposes a dynamic evolutionary path of indigenous innovation. Based on the development of innovation theories and trends at home and abroad, as well as China’s national conditions, typical indigenous innovation paths in China are drawn up in light of research on dozens of large enterprises and hundreds of SMEs in China in recent years: (1) Original Innovation-Portfolio Innovation-Total Innovation; (2) Integrated Innovation-Portfolio Innovation-Total Innovation; (3) Secondary Innovation-Portfolio Innovation-Total Innovation. Among them, “ Secondary Innovation-Portfolio Innovation-Total Innovation” is the most typical and common, which dominates indigenous innovation in China. The secondary innovation model is a technological innovation model based on further innovation on the basis of absorbing advances in overseas science and technology in the context of technological catching-up in developing countries, which remains a major model of indigenous innovation across a wide range of enterprises for a long time. Yet, secondary innovation stresses mainly the technological improvement of innovation capability of enterprises.

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The Portfolio innovation model is a further progression of the secondary innovation model of enterprises. The practice of portfolio innovation in China gradually evolves from a portfolio of internal technologies to that of technology and non-technological innovation elements such as system, strategy, management, and culture, and then to a portfolio innovation based on core capacities. The total innovation model is an inevitable result of the further evolution of secondary innovation and portfolio innovation. Given globalization, the total innovation model characterized by high involvement innovation, all-elements innovation, all-time and all-space innovation and total synergy is an important model for Chinese enterprises to improve their indigenous innovation capability. The path of “Secondary Innovation-Portfolio Innovation-Total Innovation” is in line with the Marxist dialectic.

Chapter 4

Enterprises as Subjects of Innovation

1 Connotation and Necessity of Enterprises as Subjects of Innovation 1.1 Connotation The National Outline for Medium- and Long-Term Sci-Tech Development (2006– 2020) proposed to establish a technological innovation system, in which enterprises serve as subjects and “industry-university-research” is integrated, as a breakthrough in the construction of the national innovation system, it is both in line with the general rules of technological innovation as well as national conditions and demands for national innovation system of China. The establishment of a technological innovation system with enterprises as subjects and a combination of “industry, university, and research” is a major initiative, which is of extraordinary significance, to implement indigenous innovation. Whether this technological innovation system can be succeeded or not will largely shape results of the indigenous innovation strategy. Enterprises, universities, research institutes, government and intermediary service institutions are all indispensable links or key elements in a national or regional innovation system, but in a market economy, it is inevitable that enterprises become the subjects of technological innovation. It is possible that research institutes to be a subject of knowledge creation due to their excellence in theoretical knowledge creation and in the tracking and R&D of frontier technologies, but they cannot be a subject of technological innovation. Obviously, the government cannot be the subject of technological innovation as its primary responsibility is to pursue the public welfare and serve the development of social organizations. For social progress, the government should be an active promoter or organizer of technological innovation. As subjects of the market, enterprises are in the best position to become subjects of technological innovation. They are close to the market, possess the sensitivity © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_4

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mechanism to directly face the market and insight market demands, inherent advantages to transform sci-tech achievements into products, and effective mechanism to reduce and bear risks. Technological innovation is essentially an economic process, by which market orientation can be truly maintained and market demand can be reflected only with enterprises as subjects. Enterprises being subjects of indigenous innovation means that they are the subjects of technological innovation topic, technological innovation decision making, innovation financing, innovation integration and integration, innovation risk-bearing and innovation revenue (Feng Zhijun, 2006).

1.2 Inevitability of Enterprises Becoming Subjects of Innovation It is an inherent law of the market economy and the development of sci-tech that enterprises act as subjects of technological innovation. Numerous innovative enterprises took the lead and backbone in the development of innovative countries, such as the United States, throughout the world’s industrialization process, in which sci-tech innovation served as a primary driver. (1) Reveal the inevitability of enterprises being subjects of technological innovation from the process of international industrialization Enterprises, especially large industrial enterprises, had been instrumental in the technological innovation and structural transformation of the economies in major countries since the Second Industrial Revolution in the second half of the nineteenth century. The history of industrialization shows that it is because of a large number of enterprises, driven by market competition, constantly engaged in technological innovation activities, making scientific and technological progress an endogenous element of economic development, that the efficiency of the economic development of the countries in which they are located is increased, the use of resources and the environment is optimized, and the mode of economic growth of these countries is transformed. (2) Reveal the urgency of enterprises to be innovation subjects from international competition status International sci-tech and economic competition is increasingly fierce in recent years, making sci-tech progress a dominant force in influencing and driving world economic development. The industrial competitiveness of the world’s economic powerhouses, such as the United States, Japan and Germany, is mainly reflected in the multinational companies and enterprises that possess core technologies.

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(3) It is an urgent requirement for enterprises to become subjects of innovation for building an innovative country Now, China is in a critical period of implementing the scientific concept of development, building a harmonious society and an innovative country. Enterprises are the cornerstone and pillars of national economic strength, thus their improvement in innovation capability is not only the fundamental driving force for their own development and growth, but also an influential element in strengthening national competence. Setting up enterprises as innovation subjects is conducive to improving their innovation capability and the construction of an innovative country. To cope with the international competition under the new situation of globalization, the key lies in enabling enterprises to be subjects of technological innovation and nurturing a group of innovative enterprises with core competence and continuous innovation capability. It is the only way that enterprises grow up as subjects of technological innovation so that China will raise its position in the international industrial division of labor, break new trade barriers such as intellectual property rights, patents and technical standards, generate endogenous economic driving forces, fundamentally transform China’s economic growth, achieve highspeed and effective development of the national economy, and uphold national economic security.

2 China’s Efforts in Promoting Enterprises as Innovation Subjects Measures have been taken by localities and government departments to strengthen support for enterprise technology innovation and implement the strategic decisions and deployments of the CPC Central Committee and the State Council since the National Conference on Science and Technology was held in 2006. Budgetary investments are provided by the National Development and Reform Commission (NDRC) to increase support for the digestion, absorption and re-innovation of imported technologies and equipment. A financial and taxation system to stimulate enterprise indigenous innovation is pushed by the Ministry of Finance. Indigenous innovation is included in the performance assessment index system for leaders of large state-owned enterprises by the State-owned Assets Supervision and Administration Commission. Breakthroughs are made by localities, as a result of refining supporting policies, in policies to increase investment in science and technology, create an innovative environment, and support enterprise technology innovation, etc. The “Technology Innovation Guidance Project” was jointly implemented, with carrying out pilots of innovative enterprises, by the Ministry of Science and Technology, the State-owned Assets Supervision and Administration Commission (SASAC), and the All-China Federation of Trade Unions (ACFTU) at the end of 2005, for guiding the setting up of a technological innovation system with enterprises as subjects and a combination of “industry, university, and research”. It seeks

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to drive enterprises to enhance their indigenous innovation capability, thereby setting up a mechanism conducive to indigenous innovation; guide formulation of proper technological innovation strategies for enterprises of all kinds to explore effective models of innovation development through demonstration; form a group of innovative enterprises to encourage and guide enterprises towards indigenous innovation and to enable them to be subjects of technological innovation. Since the launch of the pilot project, enterprises upgrade their focus on awareness raise of indigenous innovation, innovation as the root strategy of their development, more attention to improvement of R&D capability, more investment in R&D and cultivation of innovative talents, continuous perfection of innovation management and innovation mechanism, and creation of innovation culture. A number of innovative enterprises with exemplary significance are growing rapidly. Three conditions are generally required for enterprises to become subjects of technological innovation: enterprises should become subjects of, first, technological innovation investment, second, R&D, and third, innovation benefit distribution. The R&D expenditure of China is on an increasing pace in terms of R&D investment. Enterprises account for the highest proportion of R&D expenditure, with a growth in total, in China each year compared to research institutes and universities. Proportions of R&D expenditure of enterprises, government-owned research institutes and higher education institutions in the national R&D expenditure were 77.5%, 14.4% and 6.8% respectively by 2016, which are close to that of developed countries, according to the National Science and Technology Investment Statistics Bulletin 2016. In terms of manpower investment in sci-tech activities, there is a steady increase in the number of personnel in sci-tech activities in large and medium enterprises. 2.2015 million employees engaged in sci-tech activities in large and medium enterprises in 2014, reflecting that enterprises have already become subjects of human resources investment in technological innovation. Patents are an important indicator of technological innovation output, of which patents for inventions are the most important characteristic of indigenous intellectual property rights. China shows a rapid growth of invention patent applications and authorizations. Data released by National Intellectual Property Administration in 2017 showed that in 2017, it received a total of 1,382,000 invention patent applications, an increase of 14.2% year-on-year, ranking No. 1 in the world for seven consecutive years; a total of 402,000 invention patents were granted, of which 327,000 were granted domestically. Data show that, in recent years, enterprises have taken advantage compared with colleges and universities, and research institutes, etc. in various indicators of technological innovation activities, but there is a long way from being worthy of the name although their status is initially established. In general, China’s enterprises have not yet literally become subjects of technological innovation, due to their weaker technological innovation capability and being lagged far behind advanced countries. Statistics show that it is only 0.91% of the main business income of industrial enterprises in terms of R&D expenditure in China, far below the level of 2.5–4% in developed countries; 23.0% of enterprises with R&D activities in science and technology, and only 19.3% of them setting up research institutes. The National Outline for Mediumand Long-Term Sci-Tech Development (2006–2020) points out that for a long time,

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enterprises have not really become subjects of technological innovation. They are not yet strong enough, although the data show that they have become subjects of innovation in general and in form. Great efforts have to be made for enterprises to become real and strong technological innovation players. Therefore, a technological innovation system will be set up in China in the next few years with enterprises as subjects and a combination of “industry, university and research”. It is the inability of enterprises to act as subjects in technological innovation activities that directly restricts the enhancement of China’s indigenous innovation capacity. Now, China suffers from weak indigenous innovation capacity and high external technological dependence, which prevents a large number of scientific research results from being directly transformed into productivity. Most of the enterprise development is still in the state of relying on resource consumption for episodic expansion. Insufficient vitality of enterprise technology innovation has put China at a disadvantage in the international industrial division of labor system and prevented it from gaining the initiative in the process of economic globalization.

Chapter 5

Evolution of Enterprise Technological Innovation Model

1 Technological Innovation Models of Enterprises The model of technological innovation can be revealed with various perspectives, among which there are three types of models internationally over the past decades in terms of the source, basis and dynamic process of innovation.

1.1 R&D-Dominated Innovation Model (U/A Model) It is a model that was proposed by American scholars J. M. Utterback and Abernathy in the late 1970s and early 1980s. This technological innovation model, based on high R&D strength, often starts with basic research and original breakthroughs and then commercializes and achieves competitive advantages through the R&D process, characterized by a focus on product innovation at first, then a transition to a stage based on process innovation, and then a subsequent stage in which both product and process innovation develop smoothly (decay). The U/A model, although more widely accepted, is not universal, as many scholars have noted. For example, the U/A model is more applicable to markets with scale production but less explanatory for market segments without economies of scale and learning effects (Teece, 1986); furthermore, the U/A model is more likely to bring about original innovations, however, it presupposes high R&D capability so it is mainly applicable to developed countries rather than developing countries; etc.

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1.2 Secondary Innovation (Further Innovation Based on Absorbing Advances in Overseas Science and Technology) Secondary innovation can be defined as those innovations that follow the technological trajectory defined by primary (original) innovation due to technological paradigms that are stuck in existing technologies based on technology import (Wu Xiaobo, 1995). It is a technological innovation model that conducts re-innovation based on digestion and absorption of imported technologies. In general, it focuses on incremental innovation, a model that has been adopted by many developing countries. Typically, this model was used in post-World War II Japan, which later gained an overall competitive advantage in the 1980s. Opposite to the R&D-dominated model, it is characterized by a process of innovation that focuses first on the process innovation of imported products and technologies, and then on product innovation on that basis. Secondary innovation can be divided into three types according to the source of technology: import for mature technology, import for emerging technology and import for laboratory technology. It can be argued that innovation represented by the import of mature technologies (e.g., the introduction of technologies already commercialized by foreign firms) is the most typical type of secondary innovation, which is largely constrained by foreign technological paradigms. It is because of the process of “active imitation of import-absorption-improvement” rather than being stuck in the imitation production stage that the secondary innovation model can be considered as one of the indigenous innovation models. This process increases enterprise control over value activities, enables control over new products and their production processes and sales, and access to indigenous intellectual property in the product improvement process. However, its control over value activities and intellectual property rights should obviously still be in a primary stage of indigenous innovation due to insufficient core technology and limited market scope. It should be noted that a key of the current debate on secondary innovation in China lies in whether great efforts should be made for digestion, absorption and re-innovation, rather than in whether advanced technology should be imported.

1.3 Integrated Innovation In addition to the two models mentioned above, this study refers to the technological innovation model of a large number of enterprises between the R&D-dominated innovation model and the secondary innovation model as the integrated innovation model. It is characterized by a certain level of R&D capability, however, various technical elements are creatively integrated to enable the innovation elements to match each other, thus making a qualitative change in the overall function of the innovation

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system to form innovative products and industries with market competence. Simply put, it is the organic integration of existing technological elements and the creative application of existing knowledge to create market value. Strictly speaking, integrated innovation is based on secondary innovation (further innovation on the basis of absorbing advances in overseas science and technology) and is a product of secondary innovation at a certain stage. Because integrated innovation requires R&D capability, and most of the industries and enterprises in China often go on a process that acquires technical R&D capability after digesting and absorbing foreign advanced technologies, which provides the basis for integrated innovation. In 1998, Marco Lansiti of Harvard University introduced a concept, Technology Integration, in his book Technology Integration. He described the application of proper resources, tools and problem-solving methods through an organizational process as technology integration, which provides a great impetus to improve R&D performance. In case studies of technological innovation in China, it is gradually found that the integration of various technological elements in technological innovation is crucial to ensure the effectiveness of technological innovation. According to Prof. Li Baoshan et al. (1998), integration is a creative fusion process from a management perspective, where creative thinking is injected into the process of combining the elements. The key to integrated innovation is to take the demand-side of technological knowledge as a starting point and integrate various technological resources through an open product platform to achieve more successful innovation. Integrated innovation is a significant form of science and technology development, as shown by the trend of science and technology development today. The focus should be placed on the selection of major strategic products with high technological relevance and industry-driven, to facilitate the organic integration of various related technologies, thereby achieving breakthroughs in key technologies and integrated innovation. After World War II, Japan’s economy has gone through a path of indigenous innovation from import, digestion, absorption and imitation to integrated innovation. Japan was far behind the U.S. in original innovation due to its relatively weak basic research. No matter whether it is a “technology-based country” or a “patent-based country,” Japan emphasizes technology integration, which is product developmentoriented to integrate existing technologies to make commercially viable products. Japan enacted the Enterprise Rationalization Promotion Act after World War II, which provided for tax exemptions for enterprises importing machinery and technology. An average of 230 projects were introduced into Japan yearly from the mid-1940s to the end of the 1950s, with a maximum of 580 projects. In the 1950s, a number of modern enterprises emerged in Japan, which paid much attention to the digestion of imported technologies (such as tape recorders, semiconductor transistors, vinylon, oxygen top-blowing converters, etc.) and the digestion and absorption. Japan launched its industrial restructuring and upgrading in the 1960s, gradually shifting from import and imitation to innovation, and proposed the famous “Income

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Doubling Programme”, which shifted the introduction of entire projects to key technologies. In parallel, Japan started its focus on digestion and imitation, avoiding duplication of imports and putting forward the slogan of “prototype No. 1 by import, No. 2 produced domestically”. In the 1970s, large enterprises in Japan had accumulated considerable capability and turned their attention to the import of laboratory technology, with a significant reduction in the proportion of mature technology imported. By the 1990s, Japan had basically completed its mission of catching up with developed countries in Europe and America and had established the policy of a “technology-based country”. Japan’s enterprises went overseas during this period, with their domestic headquarters to carry out high-margin activities such as R&D and design, thus transformation from import and imitation to integrated innovation was realized. Nowadays, industries are increasingly interconnected with an increasing interdependence of technologies. The breakthrough of a single technology requires the innovation of related supporting technologies in order to function effectively; most technological innovations are partial innovations on existing technologies or portfolio innovations of existing technologies, and technical solutions such as integrating existing technologies into a system are commonly used for the organization and methods of technological innovation. Many innovations in the world are generated through technology integration of existing mature technologies, such as carrier rockets, aircraft, household appliances and razors, all of which involve a great deal of integrated innovation. It is a typical example that China’s high-speed railroads have rapidly reached the world’s advanced level in recent years through digestion, absorption and re-innovation on the basis of import, and further won the world-leading position through indigenous innovation based on the integration of high-speed rail technologies from advanced countries in the world, such as Japan, Germany and France, in combination with domestic conditions. The chief scientist of the Apollo lunar program has clearly stated that none of the Apollo lunar program technologies were new breakthroughs, they were all integrations of existing technologies. In general, the integrated innovation model emphasizes analysis of technological innovation from the perspective of technology integration and technology level.

2 Secondary Innovation and Post-secondary Innovation Secondary innovation is a major mode for enterprises in developing countries over a long period, with market as the driving force at its starting point. The secondary innovation process should be a combination of incremental accumulation and radical changes in a limited range.

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2.1 Three Sub-models of Secondary Innovation Three sub-models of secondary innovation are as follows (see Fig. 1): First, imitative innovation, refers to the re-organization of equipment and processes after the technology import, followed by production and sales; second, creative imitation, refers to adopting the domestic production process, on which innovation is carried out, followed by production and sales; third, incremental innovation, refers to innovation in the domestic production process after the technology import, and R&D improvement of the technology to launch improved products. It can be argued that imitative innovation is more of an “access” to the global manufacturing network, while creative imitation and incremental innovation have achieved an “expansion” of the network (Wu Xiaobo et al., 2007). In the early stages of connecting latecomers to global manufacturing networks, technologically backward latecomers will especially import advanced technologies from the system, including product design, manufacturing processes, testing methods, material formulations, technical standards, etc., which often include key equipment and prototypes. Tasks in this stage are feasibility study, negotiation, transaction, introduction of relevant drawings and equipment and even professional technical personnel into the receiving enterprise, and subsequent reorganization of the imported equipment with the original equipment according to the technical requirements. This stage is known as imitative innovation, which focuses on a simple imitation of foreign products and processes. In the Imitative Innovation stage, enterprises in the cluster import technologies that break their original technological paradigm, so their efforts are focused on process innovation and production according to the standards of the imported technologies. The dominant mode of organizational learning

Worldwide Sales Import

Re-organization of Equipment/Processes

Domestic Production Domestic Sales

(Domestic Sales)

Worldwide Sales Indigenization

Domestic Production Domestic Sales

(Creative Imitation)

Worldwide Sales Indigenization

R&D to improve products, processes

Domestic Production Domestic Sales

(Incremental Innovation)

Fig. 1 Three sub-models of secondary innovation. Source Wu Xiaobo, Liu Xuefeng. The Research of Technology Transfer Processes in Global Manufacturing Networks [J]. Technology Economics, 2007(2)

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in enterprises is adaptive learning, i.e., order adjustment so as to form a new system order that is relatively loose and adaptable to certain changes in order to adapt to the new technological paradigm as soon as possible. Enterprises import technology through technical licenses firstly, and then improve their technical skills through the “learning by doing”, i.e., workers’ proficiency gradually rises during the production process, and feedback to departments such as design, R&D and production technology management to facilitate their understanding and mastery of technical knowledge. After connecting to the manufacturing networks of multinational companies, enterprises start to expand the scope of their own manufacturing networks, in which the innovation process can be divided into two stages. Stage 1, Creative Imitation. Enterprises, with indigenization as the goal, will promote the adaptation and integration between the existing technology structure and that of the imported technology, try to adopt existing domestic raw materials and components while ensuring the performance of the products, thereby reducing the dependence on the technology home country. Stage 2, Incremental Innovation. Based on the accumulation of technical knowledge, enterprises gradually master the design principles and develop their own R&D capability so that they can improve their imported products and create new functions according to the market demand. During the creative imitation stage, enterprises experience the full application of the introduced technology, standardization of their processes and increasing stability of product performance, and the maintenance and improvement of the newly established technology system become the focus of their work. Accordingly, the dominant mode of organizational learning is maintenance learning, which is the accumulation of capabilities to make existing systems more effective while maintaining stability. Feedback from users is a key learning resource in this stage. Feedback from users is an important basis for improving products and processes, while users are a significant source of innovation and technology. In the stage of incremental innovation, enterprises already possess certain design and process capability, so developmental learning takes the lead in organizational learning, i.e., to improve product functions by strengthening the enterprises’ R&D in conjunction with national conditions, so that the enterprises’ technological system will go along the established technological trajectory. Specifically, enterprises can deduce the principles and know-how of the imported technology by reverse engineering to master the design principles. Aside from user feedback and reverse engineering, other significant ways of learning exist in the expansion period of the manufacturing network. Firstly, advanced technical knowledge can be accessed by enterprises from technical conferences and publications for a proper understanding and application of technologies imported; secondly, industrial information can be obtained from suppliers of raw materials and equipment as well as competitors to speed up the improvement of products and development of new functions; finally, mobility of personnel in the network accelerates the overflow of technical knowledge among various enterprises, which improves the technical capability of enterprises and enriches the knowledge base of the network.

3 Portfolio Innovation Model

91 Worldwide Sales

Investment in foreign factories

Production abroad Sales in host country markets

R&D abroad

Fig. 2 Post-secondary innovation model. Source Wu Xiaobo, Liu Xuefeng. The Research of Technology Transfer Processes in Global Manufacturing Networks [J]. Technology Economics, 2007(2)

2.2 Post-secondary Innovation The post-secondary innovation is a model that directly absorbs the laboratory technology and advanced process technology abroad, to realize transnational value activities control and indigenous intellectual property rights. This kind of innovation, represented by importing laboratory and emerging technologies, is less tied to the technological paradigm, and technology import tends to precede the establishment of the dominant design, so it can be considered as a “post-secondary innovation” different from the usual secondary innovation (Wu and Liu 2007). In the globalization, laboratory technologies and emerging technologies of postsecondary innovation are acquired through overseas R&D activities. This kind of innovation can be considered as an advanced type of secondary innovation because overseas R&D is conducted to seek technological resources in technologically advanced countries due to its technologies acquired from developed countries, although such overseas R&D activities show somewhat primary innovation characteristics. It is a model that relies heavily on investing in foreign factories to conduct R&D and production abroad, thereby driving global sales (see Fig. 2).

3 Portfolio Innovation Model The Portfolio Innovation model was proposed in the 1990s by a group of scholars represented by researchers from Stanford University Consulting (SDG) and Prof. Xu Qingrui from Zhejiang University. An awareness that technological innovation is not isolated, but a systematic corporate behavior is emerging as competition is getting fiercer and technological innovation activities are intensifying. Technological innovation behavior and its effectiveness are largely influenced and constrained by national strategies, the socio-economic environment, and enterprises’ conditions and strategic goals. Therefore, studies on the technological innovation behavior of enterprises must be systematical, strategical and portfolio-wise.

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“Taking Product as Forerunner” is a long-standing traditional concept of promoting technological innovation in China. The processes applied to ensure the production, especially concerning improving labor productivity and performance, are considered to be subordinate to needs of the product and are of secondary importance. A lack of coordinated consideration about the innovation of products and processes has seriously damaged the improvement of enterprise productivity, moreover, the backwardness of enterprise technology has become a bottleneck for the development of enterprise technology and the improvement of technological capability, thus widening a gap between the enterprise technology level and that of foreign advanced level. Such a tendency and behavior of focusing on product innovation and neglecting process innovation also exists in developed countries. According to the Commission on Industrial Productivity, Massachusetts Institute of Technology, a major reason why most U.S. industries and firms were defeated in the world competition of the 1980s was an imbalance in the investment in process innovation. Process innovation seriously lags behind product innovation, making its products fall behind Japanese and German companies in terms of quality, price, and efficiency (see Table 1). It has been found in practice that the overall benefits of a reasonable portfolio innovation are greater than that of the sum of individual innovations. Successful technological innovation requires a combination of product & process innovation, radical & incremental innovation, the ability to use existing technology & acquire new technology, and technological & organizational culture innovation, as well as the integration & coordination of all departments such as technology, production and marketing in innovation. Portfolio innovation is a systematic and collaborative innovation, which is in line with their environment, resources, organizational and technological elements, guided by their strategic objectives, to maintain sustainable competitive advantage. It is the concrete embodiment of the law of dialectical unity in innovation. Synergistic development of technological innovation portfolios is the basis for their overall effectiveness and an important condition for sustainable competitive advantage and long-term growth. Research and practice of portfolio innovation roughly go through four incrementally deeper stages (see Fig. 3). Table 1 Innovation investment ratio of product to process of enterprises in the U.S., Japan, Germany and China Enterprises in different countries

Innovation investment ratio of product to process

U.S. enterprises

2:1

Japanese enterprises

1:2

German enterprises

1:4

Chinese enterprises

2.6:1

Source Xu Qingrui. Basic Laws and Patterns of Business Management [M] Hangzhou: Zhejiang University Press, 2001

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Fig. 3 Four stages of portfolio innovation evolution Portfolio innovation based on core competencies since the mid-1990s Innovative mix in the 1990s Technology innovation mix in the 1980s Product portfolio innovation in the 1970s

(1) Product portfolio innovation (the 1970s). Research on portfolio innovation at this stage was focused on product innovation, i.e., research on the optimal portfolio of different categories of products for optimal utilization of limited resources and sustainable development of enterprises. How to reasonably match and combine product innovation was a major dimension of research at that time. (2) Technology innovation mix (the 1980s). The focus at this stage is on the relationship between product innovation and process innovation in technological portfolio innovation. (3) Innovation portfolio (1990s). Research now goes beyond the technological innovation mix to cover non-technological elements such as organization and culture and extends from the enterprise indigenous innovation to a comprehensive mix of external cooperation and innovation, which is a stage of synergistic innovation. (4) Portfolio innovation based on core capability (since the mid-1990s). Research and practice of portfolio innovation were further developed in this period, with the core competency theory represented by Prahalad and Hamel being widely accepted and introduced into the field of portfolio innovation research. It has been found that there is a strong link between core competencies and portfolio innovation for enterprises: the former is the cornerstone for improving the level and efficiency of the latter, in return, the latter is an essential tool for transforming the former into a competitive advantage, while at the same time contributing to the continuous improvement of the former.

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Portfolio innovation contains at least six aspects of portfolio relationships, i.e., synergy between incremental innovation and radical innovation, a synergy between product innovation and process innovation, a synergy between implicit and explicit benefits of innovation, a synergy between technological innovation and organizational culture innovation, a synergy between internal indigenous innovation and external organizational cooperative innovation, and synergy between continuous innovation and fissionable innovation, etc., as shown in Fig. 4 (Xu, 2007).

Corporate Development Strategy

Conditions

Enterprises

Environment

Incremental Innovation

Radical Innovation

Product Innovation

Process Innovation

Implicit Benefit

Explicit Benefit

Technology Innovation

Organizational Culture Innovation

Indigenous innovation

Collaborative Innovation

Continuous Innovation

Fissionable Innovation

Fig. 4 Structure of enterprise portfolio innovation

Chapter 6

Innovation Evolution Path of Typical Foreign Innovative Enterprises and Its Inspiration

1 Innovation Evolution Path of Typical Foreign Innovative Enterprises 1.1 Hewlett-Packard (HP): From R&D-Dominated to Portfolio Innovation and Total Innovation to Enhance Competence HP is known worldwide for its “Rules of the Garage” and technological innovation and has become a symbol of the entrepreneurial spirit of high-tech companies in Silicon Valley. The incessant drive for innovation has made HP the “evergreen” of Silicon Valley. HP’s key innovation synergy element in each era varies as well. HP, which started with technology, took the lead by relying on a series of advanced technologies in the early days of its business. HP’s technological innovations in computer peripherals, such as personal laser printers and inkjet printers, became a household name in the global marketplace in the 1980s as the information age dawned. But HP was frustrated that its personal computer products were not innovating at the pace of the market, which was made possible by an organizational restructuring in the early 1990s to fully maximize the potential of these products. Later, other products had to be developed to meet the needs of the growing enterprise as HP’s computer products reached maturity in the 1990s. The computer industry became HP’s target, followed by increased investment. Meanwhile, HP found that bureaucratic tendencies had emerged in its organizational structure, which led to a gradual flattening of the organization. Together with the innovation of the corporate system, significant results emerged.

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As previous changes failed to enable HP to be a mainstream information technology (IT) company, strategic innovation became the core of HP’s innovation in the early twenty-first century, proposing an adaptive corporate strategy, corporate diversity, as well as organizational, cultural and institutional innovation. In short, HP has evolved from a mere technology R&D-dominated approach to portfolio innovation and total innovation over its 70 years of growth. The positive interaction among strategic innovation, cultural innovation, market innovation, technological innovation, institutional innovation, organization innovation, etc. contributes to HP‘s overall innovation performance.

1.2 General Electric (GE): From the R&D-Dominated to Total Innovation General Electric is still on the Dow Jones Industrial Average and is a representative example of successful international and diversified operations. A huge crisis lurked in 1981 before Jack Welch took office although GE was apparently still in a period of prosperity, as evidenced by a declining trend in return on investment; a huge fragmentation of GE’s traditional businesses, few of which had become market leaders because most of the related technologies had entered maturity or decline; and, most seriously, an overly bloated bureaucracy with nine levels of hierarchy that not only consumed corporate resources but also gave rise to a lack of decision-making. The most serious crisis is that the company has formed a bloated bureaucracy with nine levels of hierarchy, which not only consumes corporate resources, but also makes corporate decisions tainted by bureaucracy, hierarchy, formalism, etc. that are detrimental to innovation. Against this Background, GE, headed by Jack Welch, reorganized itself in the early 1980s, with massive layoffs, streamlined management levels, and proposed the “Top Notch Strategy”; in the late twentieth century, it created a boundaryless organization, implemented innovation in strategy, organization, management, and system, such as Work-out, Activity Based Classification, etc. All of the above breathed new life into corporate management and contributed to GE’s success. From 1998 to 2002, GE was ranked No. 1 on Fortune’s “America’s Most Admired Companies” list for five consecutive years. GE’s three stages of innovation are described below. (1) Technological innovation-dominant stage (1878–1949) GE was strategically focused on the R&D of electrical technologies and related business development, with entrepreneurial spirit and scientific exploration leading its technological innovation at this stage. Its laboratory R&D staff conducted its own R&D and marketing of electrical products in the U.S. based on Edison’s innovations through lab-based, highly centralized management and developmental discussions. These technical staff produced a range of original

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innovations (primarily in electrical technologies) for the Center’s R&D activities, which remain part of GE’s business today, including lighting, transportation, industrial products, power transmission, medical devices, etc. In 1883, Edison’s experiments on incandescent lamps using plastic filaments led to the creation of GE’s first plastics division in 1930. The GE Aircraft Engine Division was born in 1917 when GE developed the first aircraft engine, the “booster,” for the U.S. aviation industry. (2) Portfolio Innovation Stage dominated by Strategic and Organizational Innovation (circa the 1950s to the 1980s). GE diversified its business during this period and went international. By 1978, GE had more than 100,000 employees overseas, 129 subsidiaries in 23 countries, and more than 350 marketing locations serving markets in more than 150 countries. GE formed a stability-oriented culture, working around financial indicators and conducting continuous innovation in products and related technologies, such as computerized tomography (CT), nuclear technology, satellites, and power equipment. A total of three organization innovations were made by GE, first, a reorganization of the corporate structure in 1952; second, the strategic business unit (SBU) in 1968; and third, the formation of a super divisional organizational structure in the early 1970s. Leaders at GE have built a portfolio of leading businesses; have undertaken a series of company-wide initiatives to drive growth and reduce costs; have allowed them to take advantage of opportunities to exercise financial control and investment review in their financial systems through multiple cycles. Distinctively, this stage is characterized by entrepreneur-led strategic and organization innovation. (3) Total Innovation Management Stage featuring highly involvement innovation (circa the 1980s to present). GE launched a comprehensive corporate management transformation against the background of the aforementioned innovation—Total Innovation Management based on highly involvement innovation. This stage is characterized by the following seven features. (1) All-involvement innovation for work-out in GE Welch believed that every employee should hold the value of innovation, and that organizations must show respect for each employee and an appreciation for any idea. Thus, Welch personally initiated and carried out the “work-out”, or highly involvement innovation campaign that has been ongoing since the early 1980s. Employees are encouraged to come up with creative ideas and are fully empowered through “work-out” meetings that involve employees and managers across departments closely related to the issue. To date, GE has held hundreds of “work-out” meetings involving hundreds of thousands of employees and all of its businesses worldwide. “Work-out” contributes to streamlining GE’s organization, authorizing employees, and revolutionizing many existing ways of trading, which makes highly involvement innovation part of GE’s “genes”.

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(2) Strategic Innovation—Strategic Positioning of “Top Notch”. For GE, the condition for the survival of any business unit is to take the top or second share of the global market, or be cut down (restructured, closed, or sold), which is GE’s “Top Notch” strategic positioning. Welch decided in the early 1990s to shift GE’s focus from product sales to providing solutions to customers. (3) Cultural Innovation—Setting of Innovation Values. Every GE employee is given a “GE Value” card. The card contains nine warnings for them: hate bureaucracy, be open-minded, be fast, be confident, be visionary, be energetic, be bold in setting goals, see change as an opportunity, and adapt to globalization. These values are themes that GE cultivates in its employees. There are three traditional, fixed principles that are at the core of GE’s values: insistence on integrity, focus on performance, and desire for change. In addition, adjustments will be made in GE’s values as its strategy evolves and as the competitive market environment changes. (4) Technological Innovation—Engine of Corporate Growth. GE has authored 67,588 patents since its founding, 2 of which were awarded the Nobel Prize. These inventions include modern X-ray tubes, tungsten filaments, breakthroughs in lighting efficiency, equipment used in radio broadcasting and the first television broadcasts, synthetic diamonds, engineering plastics, magnetrons, microwave foundations, improvements in CT scanning devices and magnetic resonance imaging (MRI). In the 1990s, GE invented digital X-ray imaging, 3D imaging, cold- and heat-resistant plastics, new combustion processes, AI for the audio-visual communications, and improved technologies for industrial and consumer product repair. Technology and innovation are the core of GE’s initiatives, because advanced technology assists companies in developing high-profit products, winning competition and developing new markets. GE’s global R&D centers are staffed by approximately 2,000 researchers who must be in close contact with market and customer requirements and in dialogue with GE’s business groups. In 2003, GE completed a $100 million project to upgrade its Global Research Center in New York, built a new research center in Shanghai, and started construction on another global research center in Germany. Global R&D continues to strengthen GE’s technology leadership. GE has made great strides in improving energy efficiency. GE launched four leading products in 2003: the HSystem gas turbine, the 3.6 MW power wind turbine, locomotives of GE System series and the GE 90-115B aircraft engine. These four products were 5 ~ 15% more energy-efficient than GE’s market-leading products at the time, equivalent to an annual savings of 500 million barrels of oil. These products, along with research on hydrogen, photovoltaic and fuel cell projects, have gradually established GE as a leader in solving energy consumption and supply problems.

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(5) Organizational Innovation—Construction of a Borderless Organization. GE is a large enterprise, but the market demanded that the organization must be simplified, so GE started a new reform since Welch to build a borderless organization, intending to eliminate all barriers that hinder communication. Welch had an analogy: “A building has walls and floors: the walls divide the jobs, the floors divide the hierarchy, and I will gather everyone in one big room that opens up.“ GE has been working to remove corporate boundaries on a large scale through work-out, enabling employees at all levels of the organization to suggest ways to remove unproductive work. This approach opens GE’s corporate culture to ideas from everyone and everywhere. An organizational structure based on teamwork and emphasizing crossdepartmental processes has been gradually formed during the construction of a borderless organization, which reduced the organizational structure from the original 9 levels to 4, greatly raising the efficiency of innovation synergy among employees from different departments and significantly reducing innovation costs. (6) Institutional Innovation—A Human Resource Management System that Facilitates Innovation In GE, various incentives such as material rewards, job promotions, and spiritual awards are used effectively to motivate employees for greater innovation. They are ➀ The wage increase plan. The salary increase is determined by the employee’s innovation performance at A, B and C levels. ➁ Stock and options. Employees with outstanding performance will be rewarded with GE stock and options. ➂ Flexible material incentives. Such incentives can be awarded by managers within each department at any time for outstanding performance. ➃ Promotion. Employees with outstanding performance will be given greater responsibility. ➄ Overseas work opportunities: GE will arrange for potential employees to work for some time in the U.S. headquarters or overseas GE branches. ➅Numerous employee awards, such as “Outstanding Leadership”, “Globalization Initiative”, and “Edison Award”, etc. (7) All Time and Space Innovation—Advancement of Globalization. All time and space innovation is a core competency of GE, which has been manufacturing and selling products outside the U.S. for more than 100 years, with 1/3 of GE’s leadership team holding global experience. GE believes that input is required to develop local operating capabilities and customer relationships in order to be successful in a market.

1.3 IBM: From Technological Innovation to Total Innovation in Strategy, Organization and Business Model IBM, or International Business Machines Corporation, founded in 1911 in the U.S., is the world’s largest information technology and business solutions company. IBM has

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been closely associated with technological innovation since its inception. In 1896, H. Hollerith, a statistician and inventor of the automatic tabulating machine, known as the “father of data processing”, founded the Tabulating Machine Company, a predecessor of IBM. IBM created a number of firsts in history: the invention of the first stored-program computer, the first high-level computing language Fortran, the first computer peripheral disk memory, the first laptop computer, the first computer with wireless communication capabilities …… IBM’s success depends on the courage to innovate and change at critical moments. The history of IBM’s innovation can be divided into a start-up stage, a development stage driven by technological innovation, a rapid growth stage where technological innovation and market innovation are closely integrated, and a total innovation stage. (1) Start-up Stage. In the punch-card-machine era was the start-up stage of IBM. IBM had not fully established its core competence at this stage, but it seized the opportunities in the external environment, and acquired the R&D capability of electronic computers rapidly through cooperation with Harvard University and external technical resources, and shifted its focus of technological innovation from traditional products to electronic computer. (2) An era of large, medium, and small machines: The development stage driven by technological innovation. IBM’s leadership in the computer field has grown rapidly over the past 30 years or so, following the accumulation of strong technological capacity. IBM’s R&D capability grew rapidly during this period, its core competence came from its leading technological strength, i.e. technological innovation drove IBM’s rapid development, while all other innovation elements served the technological element together. However, IBM focused too much on technology at this stage and showed a lack of sensitivity to the market. Also, the integration of technological innovation and market innovation was insufficient, resulting in many technological innovations with great market potential being buried in the patent pile. (3) Personal Computer (PC) Era: A rapid growth stage in which technological innovation (as dominant) is closely integrated with market innovation. In the PC era, IBM was getting aware of the constant changes in the market as an opportunity. Technology was developing extremely rapidly at this time, so IBM closely integrated technological development and market innovation, placing greater emphasis on the speed and efficiency of technological innovation. Also, IBM has further put forward more requirements for its organization innovation and culture innovation. It required a management model that integrated technological innovation and market innovation within the organization, rather than a single emphasis on technological innovation. In terms of non-technical elements, it stressed management efficiency, the exploration of customer demands, technological innovation as the

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core, organizational and cultural innovation as the support, and the establishment and improvement of a continuous innovation mechanism integrating technology and market and a sound development management system suitable for large tech-based enterprises. (4) Network Era: A Total Innovation Stage Oriented to Strategy and Business Model Innovation. IBM began to abandon the traditional PC manufacturing industry after the mid-1990s to shift to networking technology services, a high value-added business. The relationship among various elements within IBM changed accordingly due to changes in the main business. The network service is a typical industry where both market innovation and technological innovation are valued, and a significant combination of market innovation and technological innovation becomes an attractive feature of this phase of IBM. IBM conveys the idea of strategic transformation to employees by fostering a high-performance culture and customer-oriented culture; drives the implementation of transformation by pursuing efficiency and effectiveness of process integration and establishing a new global industry structure; and realizes the transformation of the service industry by encouraging employees to innovate and emphasizing the integration of core technologies with the market.

1.4 Samsung: From Import-Imitation to Total Innovation Based on Technology Leadership Samsung Group, founded in 1938, has become the largest conglomerate in South Korea. In its 80 years of development, Samsung has made remarkable achievements from a manufacturer that could only rely on technology import and imitation to a leading technology company that is capable of conducting its own R&D. Its corporate innovation can be divided into three stages: Foundation, Second Start-up, and Total Innovation. (1) Foundation (1938 to the mid-1980s). One of the keys in Samsung’s development was its decision to enter the electronics field in the 1970s. In January 1969, Korea implemented the Electronic Industry Promotion Act. Samsung took the opportunity and established Samsung Electronics in the same year. In 1974, Samsung Electronics acquired 50% of the shares of Korea Semiconductor Corporation, which led to a period of rapid growth. When Samsung Electronics entered the DRAM market in 1983, it adopted a tech import strategy to introduce DRAM designs from Micron and Zytrex in the U.S. and wafer production from Sharp in Japan due to its technical resource constraints at that time. To this end, Samsung set up DRAM design and production research teams in Silicon Valley and in Korea by recruiting Korean scientists and engineers in the U.S.

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and dispatching employees to study in U.S. and Japanese companies. Researchers in the U.S. focused on collection and study of the latest semiconductor design technologies in the U.S., while the team in Korea focused on information collection and imitation of U.S. and Japanese companies’ technologies for production development, as well as cooperation with production departments of domestic companies to solve production issues. Interaction between the two working teams in Silicon Valley and Korea provided a better preparation for the engineers of the Samsung Group to properly absorb the very large-scale integrated circuit (VLSI) technology imported from the U.S. company through training, joint research and consulting (Linsu Kim, 1998). Samsung Group’s R&D team decided to develop its own 1 M DRAM in September 1985 although the design technology could be purchased from American companies at that time, as mass production systems of 4 K, 16 K, 64 K and 256 K DRAMs were developed and put into operation. The task of technological development this time was still assigned to the two R&D teams in the US and Korea. In March 1986, the domestic R&D team completed the circuit design and produced a viable mold in June 1986, cutting the gap with the leading Japanese companies from 2 years for 256 K DRAM development to 1 year for 1 M DRAM development. The success of the Silicon Valley team in developing 1 M DRAM in about 3 months showed that the R&D center of Samsung Group had relocated from California to Korea and marked Samsung’s successful transition from imitative innovation to indigenous innovation. (2) Second Start-up (1988–1993). On November 19, 1987, Mr. Lee Byung-chul, the founder of Samsung, passed away, and Mr. Lee Kun-hee succeeded his father as the new chairman. At the celebration of Samsung’s 50th anniversary in 1988, Lee Kun-hee announced the Group’s second start-up and set the direction of Samsung’s development as “a world-class company in the twenty-first century. Samsung started to restructure its business aggressively in the course of its second start-up and expanded its business into new areas. In 1988, Samsung merged its electronics, semiconductor and communications companies into Samsung Electronics to join the top 5 electronics companies in the world. Samsung stepped to electronics and heavy industry in the late 80 s, building its reputation in the world of high technology. The key tasks of Samsung in its second start-up stage were business restructuring and reorganization, focused investment in promising businesses, and increased R&D efforts. (3) Total Innovation (1993 to present) 1. New Strategies for a World-class Enterprise. Based on its insights and forecasts of the current and future world markets, Samsung sets a goal to be a first-class company in the twenty-first century and focuses on implementing new business development strategies, quality strategies and internationalization strategies.

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2. Formation of People-centered Innovation Thought and Innovative Culture. Lee Kun-hee’s slogans, such as “change to survive,” “change everything except your wife and children,” and “self-improvement,” were put forward to emphasize employee innovation. An innovative value concept that is people-oriented and encourages employees to continuously innovate themselves has been gradually formed by Samsung after more than ten years of promotion, while inheriting the traditional people-oriented management concept. 3. Achieve Indigenous Technology Innovation. It is a journey of Samsung’s semiconductor industry from imitation to innovation that is the most typical of Samsung’s indigenous technology innovations and has been widely studied and promoted. In the book Imitation to Innovation: The Dynamics of Korea’s Technological Learning written by Linsu Kim, a famous Korean scholar in 1997, an in-depth analysis was made on the technological development of Samsung’s semiconductor industry, pointing out that Samsung Group has developed from imitation-based innovation in the past to technological innovation based on indigenous innovation now. 4. Institutional System Innovation that Reflects Value Recognition to Employee Innovation. New measures, such as incentives for employee innovation, the HRM system, and the most popular “7–4” work schedule, have been implemented to support Samsung’s “New Management Initiative” and to encourage continuous employee innovation. These institutional innovations fully reflect a recognition of Samsung Group to the value of employee innovation and reflect its cultural philosophy of respect for employees. Based on an in-depth analysis of content and characteristics of total innovation in each stage of Samsung Group’s innovation development and the detailed business performance of Samsung in each stage, the dimensions of Total Innovation Management (TIM) of Samsung Group were scored by Xu Qingrui (specifically, 5 points indicate a full score, and 1 ~ 5 points indicate the degree of innovation from bottom to top; each dimension of TIM in Stage 1 is the benchmark, which is calculated by 1 point, and those in Stage 2 and 3 are scored in comparison with Stage 1, with higher scores indicating a higher degree of innovation), as shown in Table 1 and Fig. 1. A summary of the innovation in TIM dimensions at different stages of Samsung Group according to Table 1 and Fig. 1 shows that Samsung Group shows a favorable momentum of innovation in all TIM dimensions, especially a great improvement in the integration of all innovation elements such as strategy, culture, technology, organization, and system, etc. in the later stage of comprehensive development emphasizing innovative management, especially after the “New Management Initiative” management was proposed. Continuous improvement of Samsung TIM also brings direct economic benefits. Samsung’s success in total innovation relies on a favorable atmosphere, created by total innovation elements, including strategy, culture, technology, organization, and system, for organization innovation, including realization of indigenous technological innovation, setting the strategic goal of being No. 1 in the world, establishment

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Table 1 Innovation scores of TIM dimensions at different stages of samsung group Dimensions of TIM

Foundation

Second start-up

Total innovation

Score

Score

Score

Strategic innovation

1

3

5

Cultural innovation

1

2

4

Technology innovation

1

2

5

Organizational innovation

1

1

4

Institutional innovation

1

1

5

All elements innovation

5

9

23

Highly involvement innovation

1

1

5

All time and space innovation

1

2

4

TIM

7

12

32

Innovation Score

Source Research Report on Samsung Case by Research Center for Innovation and Development (RCID), Zhejiang University, 2005

All Elements Innovation Highly Involvement Innovation All Time and Space Innovation

Foundation

Second Start-up

Total Innovation

Fig. 1 Innovation scores of TIM dimensions at different stages. Source Xu Qingrui. Total Innovation Management: Theory and Practice [M] Beijing: Science Press, 2007

of an innovative culture, formation of a team-based organization structure, and value recognition for employee innovation.

1.5 Sony: From Imitation to Total Innovation Characterized by Technology Leadership Sony grew towards the path of indigenous innovation and earned a title of “Sony of Technology” from the imitative innovation at its founding to numerous world firsts afterward. Since its founding, Sony has been “free and open-minded, pioneering innovation” as its business philosophy, and is the first in the world to offer various

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innovative electronic products, makes efforts providing consumers with various audio-visual enjoyment, and changing their lives and entertainment. For more than 70 years, Sony has consistently adhered to the principle of “Win through Innovation”, starting as a small company, then bravely moving out of Japan, and finally becoming an international company of global importance after all the hardships. Sony keeps on innovating, by which it impacts revolutionarily the world’s electronic entertainment industry again and again, and becomes the most fashionable and innovative company. Early in its history, Sony began its journey of imitation and innovation by producing Asia’s first tape recorder, “G-type”. Based on its innovation spirit, Sony has gradually shifted from imitative innovation to indigenous innovation, whereas it is the spirit and capacity of indigenous innovation that has propelled Sony to be a world leader in consumer electronics, industrial electronics, information technology industry and entertainment industry. Technological innovation can be argued to be the root of Sony, with its ongoing technological innovation as its base in the world. Sony’s process of its first product exemplifies the spirit of technological innovation. Sony made its decision on the tape recorder development based on just a simple description in the book Sound Engineering (音響工學) at that time when no other company in Japan had thought of producing it. Ibuka Masaru (one of the founders of Sony) had always thought of a product that would be different from government agencies and radio stations and would be available to the general public, so he came up with the idea of a tape recorder. This is the corporate spirit of TOKYO TSUSHIN KOGYO CO., LTD. (Tokyo Telecommunications Engineering Corporation, the predecessor of the Sony Group). After numerous experiments and failures, Tokyo Tsushin Kogyo mastered the essentials and finally succeeded in testing the first sample in September 1949, followed by the G-type and A-type samples. Thus, Sony took its first firm step toward the first domestic tape recorders. Through its persistent efforts, Sony finished the PV101, the world’s first transistorized compact tape recorder, in the 1960s, replacing the phonograph invented in the nineteenth century. Now, after decades of innovation, the 8 mm all-in-one camcorder, first developed by Sony, has emerged and become popular in ordinary homes. They change people’s lives with new technology and new products. Also, this business has been one of the pillar industries of Sony. After that, Sony achieves itself as “Sony of Technology” by creating world firsts one after another. Examples include the world’s first transistorized television TV-8–301, the world’s first transistorized video recorder, and Walkman TPS-L2.3, the world’s first stereo tape Walkman. As examples, Sony launched the world’s first transistorized television TV-8–301, the world’s first transistorized video recorder, the world’s first stereo tape Walkman TPS-L2, 3.5-inch floppy disk drive, and cooperated with Philips to launch the world’s first CD, released the CCD-TR55, a high-resolution 8 mm camcorder, and the PlayStation (PS), a 32-bit home game console, developed Plasmatron, the world’s first high-brightness, green LED plasma flat panel display, etc.

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For laptops, VAIO has always been one of the most innovative and representative brands. Sony has made VAIO a classic brand of laptops through market innovation in recent years, representing the highest achievement in the integration of industrial design and multimedia packages in consumer laptops.

2 Inspiration from Innovation Evolution Path of Typical Foreign Innovative Enterprises In summary, the analysis on innovation evolution path of typical foreign enterprises shows that they all go from a single focus on technological innovation to portfolio innovation of technology, strategy, culture, system, etc., and then to total innovation in globalization and networked era where the competition is increasingly fierce. In general, innovation paths can be drawn in several typical representations, as shown in the Innovation Path Diagram (see Fig. 2). Path 1: From R&D-dominated to portfolio innovation and total innovation, such as GE, IBM, HP, etc. Path 2: From integrated innovation to portfolio innovation and total innovation, such as Sony (Japan), etc. Path 3: From secondary innovation to portfolio innovation and total innovation, such as Samsung (Korea), Toyota (Japan), etc.

High GE

Degree of technological innovation

HP Path 1

R&D-dominated Innovation (U/A) Intel

Total Innovation

Path 2

Sony

Portfolio Innovation

Path 3

Integrated Innovation

Samsung Toyota Further innovation based on absorbing advances in overseas science and technology (Secondary Innovation) High

Low Scope and Breadth of Innovation

Fig. 2 Innovation path

Chapter 7

An Empirical Study on Indigenous Innovation Path of Chinese Enterprises

Ms. Chen Zhili pointed out that indigenous innovation consists of three aspects: first, to strengthen original innovation for more scientific discoveries and technological inventions; second, to strengthen integrated innovation for the organic integration of various related technologies to form products and industries with market competence; and third, to actively promote digestion, absorption and re-innovation based on the import of advanced foreign technologies.1 This definition leaves out the dynamic evolution of innovation. In fact, decades of innovation practices in developed and emerging countries show that three types of innovation—original innovation, integrated innovation, and further innovation on the basis of absorbing advances in overseas science and technology—exist simultaneously at various stages of national development progress, but their integration and focus tend to vary with growth stages and socio-economic development. In general, China should insist on a path of integrating original innovation, integrated innovation and further innovation on the basis of absorbing advances in overseas science and technology at this stage, but specific forms of indigenous innovation paths may differ from region to region and from enterprise to enterprise due to differences in development origins, development stages, strategic positioning and innovative culture. Typical paths of indigenous innovation are outlined in this study, based on the dynamic evolution of indigenous innovation at three levels and the dozens of large enterprises and hundreds of SMEs that have been studied in recent years: (1) Original Innovation—Portfolio Innovation—Total Innovation, e.g. Netac, FOUNDER, etc. (2) Integrated Innovation—Portfolio Innovation—Total Innovation, e.g. Lenovo, INSIGMA, etc. 1

Chen Zhili. Abstract of Chen Zhili’s speech at CAST 2005 Annual Meeting [EB/OL], (08-232005)[12-01-2018]. http://www.cctv.com/science/special/C14598/20050823/101257.shtml.

© Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_7

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(3) Secondary Innovation—Portfolio Innovation—Total Innovation, such as Haier, Baosteel, and Zhenhua Port Machinery, CIMC, Huawei, etc. It should be noted that, as mentioned earlier, integrated innovation is based on secondary innovation (further innovation on the basis of absorbing advances in overseas science and technology) and a result of secondary innovation development to a certain stage. Therefore, integrated innovation can also be regarded as a more advanced stage and an important path for secondary innovation.

1 From Secondary Innovation to Total Innovation 1.1 Haier Group: From Absorbing Advances in Overseas Science and Technology to Portfolio Innovation and Total Innovation Haier Group is a mega enterprise based on Qingdao General Refrigerator Factory, which was established in 1984 after the introduction of Liebherr refrigerator production technology from Germany. The small, collectively-owned factory with a loss of RMB 1.47 million has grown into the top brand of Chinese home appliances after more than 30 years of hard work and innovative development. In terms of Haier’s innovation path, it has gone through secondary innovation (further innovation on the basis of absorbing advances in overseas science and technology), portfolio innovation-dominant stage, and then gradually entered total innovation implementation. Definitely, secondary innovation and portfolio innovation in certain aspects and technology fields exist even in the total innovation-dominant stage. (1) Secondary Innovation Stage of Haier Haier starts by importing technical equipment in the stage of creating a famous brand and carries out further innovation on the basis of absorbing overseas advances in science and technology. A technical hurdle to cross in this stage is the imbalance between product and process innovation, which largely hinders the improvement of product quality and performance, so it requires a paradigm shift in technological innovation based on product and process integration. (2) Portfolio Innovation-dominant Stage of Haier Demands diversified as the market developed after the 1990s, so Haier started to carry out portfolio innovation in technology and the market in order to seek a differentiated competitive advantage. Haier continued its technological innovation advantage, such as the birth of the first fully automatic drum washing machine with a plastic shell that washes, dehydrates and dries in 1995. Moreover, Haier carried out the capital market

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operation to expand its business scale by providing quality after-sales service and establishing a comprehensive sales network, so that technology, market and capital could jointly drive its diversification path. In the late 1990s, home appliance MNCs that were internationally renowned entered China, making technological competition in China’s home appliance industry increasingly fierce, while the domestic market could not support the sustainable development of enterprises. In response, Haier took the initiative to expand the international market, which also raised further demands on the internal management of Haier. Organizational reform and process reengineering is essentially a portfolio innovation of management systems. Haier conducts SBU and reengineering of market chain business processes to simulate market transaction principles within itself. Market relationship takes each process, each procedure, and each person in Haier as a market relationship. It aims to improve the efficiency of the market chain and the integration of internal resources through continuous upgrading of information technology with order information as the center to drive movement of materials and capital, thus greatly improving the efficiency of innovation. In fact, Haier has gradually entered a total innovation-dominant stage since the implementation of its internationalization strategy in the late 1990s. In the stage of global brand strategy, Haier launched the RenDanHeYi (win–win Mode of Individual-Goal Combination) model, a new indigenous innovation model oriented to total innovation, which integrates technology management, organization innovation, management innovation, and business model innovation based on the global innovation in the whole industry chain, the whole process, and the whole staff. By a setup of an “inverted triangle” organization structure, Haier promoted “ZZJYT” internally, which broke the original functional division, and enabled a new innovation whole to be formed by each department in ZZJYT, with independent accounting and full responsibility for market indicators, so as to realize its worth while creating market value. Also, the “three forms” (income statement, daily activity summary form, and People-Goal-Wage incentive form) of ZZJYT is a new model of highly involvement innovation, which is an integration of internal venture capital mechanism with market and technology, and a management model that embodies the trinity of strategy, personal goal commitment (PBC) and daily activity summary. In the networked strategy stage, Haier transformed from a traditional manufacturer of home appliances to a platform for incubating creators for the whole society; it was committed to being an internet enterprise, so turned the self-contained closed system of traditional enterprises into a node in the network interconnection, interconnecting various resources to create a new platform for co-creation, multi-win and value-added of all parties involved. Thus, Haier has made a disruptive exploration in six areas: strategy, organization, employees, users, compensation and management, creating a dynamic cycle system to accelerate its transformation to the Internet. Strategically, a user-centered ecosystem, which is co-creative and multi-win, was established to realize the value-added of all stakeholders involved. Organizationally, it turned self-contained into an open Internet node and a hierarchical organization into a mesh organization. In the process, employees and executives turned to entrepreneurs and dynamic partners, aiming to

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build the best experience ecosystem for the community to meet the personalized demands of users. In terms of compensation mechanism, it changed “enterprise pay” to “ user pay”, driving the transformation of employees into real entrepreneurs and realizing their own value while creating value for users. As for management innovation, the self-evolution to lead goals was ultimately achieved through the exploration of non-linear management. The strategic direction of Haier in 2016 was to establish a new platform on co-creation and multi-win in the post-electronics era with integrity as the core competence and community as the basic unit. Haier focused on integrating “one pay, one statement, one framework” into the six elements of transformation. “One pay”, i.e., user-pay principle, drives the transformation to the Internet; “One statement” is a win–win value-added statement, aiming to promote incremental marginal effects; “One framework” is an interlock and commitment contract of microenterprises that leads to self-evolution of goals. They are interrelated and form a closed chain to jointly promote Haier‘s Internet transformation. (3) Total Innovation Implementation Stage of Haier It is precisely the effective synergy of the innovation elements during Haier’s 30 years of development that greatly contributes to its innovation performance, the accumulation and improvement of Haier’s core competence, and thus its rapid and sustainable development. Haier is a typical enterprise for total innovation management in China. Five stages of Haier’s strategic development are shown in Fig. 1. (1) Smash defective refrigerators—brand name strategy, i.e., creating well-known brands with excellent quality (1984–1991);

Five Stages of Haier's Strategic Development

Networking Strategy Create a management model in the connected era Globalization Strategy Internationalization Create a top brand of white Strategy goods in the world Create an International Brand Diversification Strategy Brand Strategy Created top brand of refrigerator

Create a top brand of home appliances

1984-1991

1991-1998

Overall Every Control and Clear Division (OEC) Self-management teams and SBU (Strategic Business Unit) groups

Inverted Triangle Organization

1998-2005

Market Chain

2005-2012

Ecosystem of co-creation and win-win

2012-2019

Microenterprises, creators (indigenous ZZJYT (rights of employment, decision-making innovation, indigenous intellectual and distribution) property rights and self-owned brand) RenDanHeYi (win-win Mode of Individual-Goal Combination)

Fig. 1 Evolution of Haier group’s strategic development stages. Source Haier group website

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Table 1 Formation process of haier’s total innovation management Dimension

Stage of brand strategy

Development of innovative element

Evolution of the core

Diversification strategy stage

Internationalization, globalization brand strategy Stage

Networking strategy stage

Construction of Technology culture innovation

Total innovation

Total innovation

Management, systems and organization

Market, strategy and organization

All innovative Users and elements, all time and suppliers space, all-employee participate in innovation

Non-technical element

Technical element Integration of non-technical and technical elements in all time and space

Space–time environment of innovation Employee participation

Low

All employees

All time and space environment

Complex network environment

All employees and whole value chains

High

(2) Eat shock fish—diversification strategy with low-cost expansion (1991–1998); (3) “Haier Road” in the U.S.—an internationalization strategy, which laid the foundation for a world brand (1998–2005); (4) Creating a world-class brand—globalization strategy (2005–2012); (5) Networking strategy (2012-Present). Formation process of Haier’s total innovation management is shown in Table 1 and Fig. 2.

1.2 Baosteel: From a “Follower”, Who Absorbed Advances from Foreign Science and Technology, to a Leader (1) Overview of TIM Stages of Baosteel TIM Stages of Baosteel are shown in Table 2. Nowadays, many enterprises fail in technology import, i.e., they imported one generation, are digesting one generation, will be behind one generation, and then import again. Baosteel absorbed advances of foreign science and technology when it started more than 30 years ago, but now, Baosteel has greatly improved its capability in indigenous innovation. Baosteel has joined the ranks of the world’s top 500 enterprises and has grown from a “runner-up” in terms of absorbing advances from foreign science and technology to a leader in terms of overall leadership. Importation shows its inability for core competence; thus, indigenous intellectual property

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Import and digestion

Internationalization Strategy More than 40 organizational innovations

Secondary Innovation Integrate global resources and leverage

Strategy

External competitive environment changes

Organization and Process

Technology

Involvement of people

TIM

Synergy

Everyone is innovative SBU Market

System

Play value war to redo the cake

OEC Management Culture

Haier's Innovative Culture All Space

Application of ICI Technology

Fig. 2 Formation process of Haier’s total innovation management. Source Xu Qingrui. Total Innovation Management: Theory and Practice [M]. Beijing: Science Press, 2007

can only be obtained by R&D. Innovation carries the dream and efforts of several generations of Baosteel people. (2) Contents, Operation Mechanism and Experience of Baosteel’s Highly Involved Innovation (1) Contents (a) Self-management Self-management is a mass basic work of modern enterprises to realize all-employee management. It aims to fully mobilize all factory workers to participate in activities such as production, operation, management and technical innovation of the enterprise, to stimulate their sense of ownership and responsibility to promote enterprise development. Since starting its self-management in 1985, Baosteel has seen considerable achievements and economic benefits. A centralized consistent system is placed at Baosteel. It is based on selfmanagement, in which grassroots workers propose their issues based on problems in their work, form groups, and apply their professional knowledge to solve problems and promote improvement of grassroots work. It is popular among workers and forms a basis for grassroots management because it focuses on giving full play to the enthusiasm and creativity of workers and attracting their participation in management.

Construction and Become a pilot of technological commissioning of innovation project Phase I and Phase II projects

High quality, high efficiency, high effectiveness for a world-class brand

Localization rate of cold rolling, hot rolling and continuous casting equipment in Phase II reached 88%

Strategy innovation

Technology innovation

Case

All elements innovation

High quality + scale strategy

Formulated the outline of technological innovation system plan; “China indigenous innovation capability no. 1 in the industry”; formed core technology chains

Localization rate of the 4,350 m3 blast furnace completed reached 95%; China ranked No. 1 in the industry in terms of innovation capability

Domestic mergers and acquisitions were frequently blocked. Large domestic steel companies are beginning to move ahead of Baosteel in terms of products and technology

Stage 3 (2007–2009)

Strategy of high quality

How to achieve import substitution (targeting technological innovation capability enhancement)

Targeted at improvement of production technology

Key

Stage 2 (1992–2006)

Stage 1 (1978–1991)

Stage

Table 2 TIM stages of Baosteel

(continued)

High quality + scale + environment management strategy

Challenge of leapfrogging from old domestic enterprises; sustainable development is challenged by energy and environmental pressure

Now (2010–Present)

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Stage

Start-up culture: the Gradually formed a customer “85–9” spirit is the satisfaction culture with Baosteel’s source of Baosteel’s characteristics culture

Culture innovation

Systematically implemented the concept of customer-centered marketing, insisting on the customer’s standard (quality and technology) is Baosteel’s standard, the same to plans (supply and logistics) and interests (economy and benefit). Produced in accordance with the purpose (standard + α, i.e. international product standard + user’s special requirements), seized the three links of quality, delivery date and service, regarded the contract as law, to which 100% completion is required

Stage 2 (1992–2006)

Made efforts to integrate market, which is passive and unplanned, with production, which is active and planned, with customer satisfaction as the standard

Stage 1 (1978–1991)

Market innovation

Table 2 (continued)

Culture of integration stage: gradually transferred the management model of Baosteel to an integrated enterprise and fused the culture of Baosteel and the integrated enterprise

The integration mechanism of “production, marketing and research”, in which product development served as the key and was conducted with concentrated technical strength around the hot spots of market demand, was an effective means for Baosteel to take the initiative in market competition

Stage 3 (2007–2009)

(continued)

A corporate culture with a “spirit of strictness and demanding, road of study and innovation, striving for first-class target” as the main thread and “good faith and synergy” as the core value

Progress from focusing on existing market demands to exploring potential demands of customers; jointly build laboratories with customers and establish a “university-industryresearch-application” strategic alliance

Now (2010–Present)

114 7 An Empirical Study on Indigenous Innovation Path of Chinese Enterprises

Stage 1 (1978–1991)

Introduction of management philosophy along with the import of technologies clarified responsibilities and related systems; importance of innovation and reform; influence of the idea that “workshop director will be fired if its workshop fails to progress for three years”

System development along with technology import, e.g., point inspection system for production equipment

Management innovation

System innovation

Stage

All elements innovation

Table 2 (continued) Stage 3 (2007–2009)

Station-graded wage system, chief expert system, TIMA, internal flexible mobility of sci-tech personnel

Baosteel development outline for technological innovation, blue book of Baosteel’s strategy for intellectual property

The operation head system for Management integration in the production management; intellectual face of economic crisis property management positions were established and gradually developed into intellectual asset management offices; five human resource management policies were introduced aiming at more incentives for scientific and technological personnel for innovation and development

Stage 2 (1992–2006)

(continued)

Now (2010–Present)

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Stage 1 (1978–1991)

Internal marketing system: set up production and sales division, sales company, sales section of production department, etc.

Rationalization proposal, indigenous management activities in 1985

Stage

All time and space innovation

Highly involvement innovation

Table 2 (continued)

Baosteel committee for rationalized proposals was set up in January 1993

Marketing supply chain system: set up Guangzhou Baosteel Southern Trading Co., Ltd., Baosteel Northern Trading Co., Ltd., Baosteel West Trade Co., Ltd. and Baosteel Trading Co., Ltd.; Prepared to establish four steel shearing centers in Tianjin, Guangzhou, Hangzhou and Baosen to improve the marketing supply chains Initial establishment of “industry-academia-research” cooperation: set up overseas joint ventures with Hamersley of Australia, Visa of India and FMG of Australia to co-develop iron ore, chromite, and magnetite

Stage 2 (1992–2006) Build a total marketing network: Acquired Xinjiang Ba Yi Iron & Steel Co., Ltd., established Han Bao Company as a joint venture between Handan Iron and Steel Group Co., Ltd. and Baosteel, restructured Guangdong Iron and Steel Ltd., and acquired Ningbo Iron & Steel Co., Ltd Promotion of “Industry-University-Research” cooperation: Cooperated on R&D with 74 universities and research institutes at home and abroad, and invested 74 million RMB in three phases with the National Natural Science Foundation of China to establish the Joint Fund of Iron and Steel Research, etc.

Stage 3 (2007–2009)

Form a marketing network covering five continents; step up international exchanges and cooperation, and take an active part in international “industry-academia-research” projects such as the International Iron and Steel Institute (IISI)

Now (2010–Present)

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Baosteel’s self-management follows the “Three P Theory”: “of the people”, “by the people” and “for the people”. This theory emphasizes autonomy and information feedback, which enables workers to transform repetitive, partial, and dull work into diverse and complete ones, thus bringing into play the motivation of workers and improving the effectiveness of management, meanwhile sublimate values of young workers a collective concept. Some young workers turned into active members who enjoy their work, explore technology and are enthusiastic about technical innovation. Since the pilot project in the coal preparation plant in 1985, Baosteel has seen a year-on-year increase in the number of groups registered for self-management activities, participants, selected topics and published results, as well as an increase in the economic benefits achieved. Baosteel’s annual report announced that Baosteel’s operating performance in 2017 was the best in the domestic industry, achieving operating revenue of RMB 289. 93 billion in 2017, an increase of 17.44% over the same period in 2016. (b) Rationalization Proposal Baosteel advocates the new concept of “highly involvement innovation has great potential”, and encourages employees to participate in invention and creation in every position, every process, and every department daily; it also advocates the new concept of “tolerating failure for an innovative atmosphere”, so that employees will boldly experiment and explore in new fields. Meanwhile, Baosteel encourages employees to put forward rationalization and innovative ideas, participate in scientific research projects and apply for patents by offering incentives for highly involved innovation. As a result, many excellent innovative employees with many inventions and patents emerged in Baosteel, moreover, thanks to the model innovators, there are increasingly more excellent and innovative employees. In 1984, Kong Liming, an inventor, made 263 rationalization proposals for Baosteel, 258 of which were adopted; succeeded in 14 scientific research projects, 5 technical secrets and 1 advanced operation method. Since 1995, he has applied for 47 patents, 40 of which have been granted. He won four consecutive gold medals at the China Patent New Technology Expo for his remarkable inventions, which became a much-told tale. Feng Guide, a coal blaster, developed the “M-M separator”. Du Guohua, a technician, held 7 national patents, 29 rationalized suggestions, applied for 1 technical secret and 1 advanced operation method each, which created RMB 22,842,000 benefits, and was honored as one of Shanghai’s top 10 “Worker Inventors”, Shanghai’s Outstanding Technician, Shanghai’s “Top Learner of Knowledge, Science and Culture”, and Shanghai’s “Advanced Individual in Industrial Innovation.” Wang Jun, a worker, held 6 confidential techniques, outlined 3 advanced operation methods, and declared 14 patents to the China National Intellectual Administration. Han Mingming, a worker, was granted 3 new utility patents and 2 invention patents.

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2. Baosteel’s Operational Mechanism for Highly Involvement Innovation. (a) Create an innovative culture that encourages risk-taking and tolerates failure, to promote highly involvement innovation Baosteel encourages risk-taking, tolerates failure and encourages highly involvement innovation. It shapes the corporate soul with cultural innovation and focuses on creating an innovative atmosphere so that every employee can drop their worries and be bold in practices. A culture of Baosteel creates a soft environment that attracts and retains talents, maximizes their enthusiasm and innovation, so as to enable a constant flow of product innovation, and thus gathers and cultivates a group of technical management talents with expertise. It is precise with this culture of encouraging innovation and attracting all employees to participate in innovation that the awareness that “innovation is possible in ordinary positions” and “innovation is encouraged in ordinary positions” has been universally recognized and the concept of promoting total innovation practices is established. (b) Innovative Learning and Training Basic innovation knowledge training is required for all employees to ensure full innovation. One of the corporate spirits is [to] “keep forging ahead”, i. e., employees should continuously learn innovative knowledge. Baosteel provides facilities for employees for study: science and technology center, reading room, science and technology library, etc.; long-term cooperation with well-known universities and institutes at home and abroad, such as Fudan University and Shanghai Jiao Tong University, and the establishment of the self-owned training center. It has become popular for employees to learn culture and technology, and nearly 1/3 of them use their spare time to carry out various learning activities each year, with about 60 h of training (excluding academic education) per capita each year. Baosteel has increased its investment in education and implemented a new training model of “offthe-job training, on-the-job practice”. Now, about 100 employees are dispatched to the education and training center every six months for centralized off-the-job training to improve their ability to master new technologies, new techniques and new knowledge, and to improve their knowledge structure, after which they will return to their jobs. The comprehensive competence of all employees is constantly improved through such continuous innovative learning and training. (c) Remind employees to keep innovating Baosteel’s practice shows that conceptual innovation must be based on highly involvement innovation. Many think that advanced thinking and innovative ideas are the business of senior management and experts, but Baosteel has planted the roots of innovation deep in all employees. From secretaries and ministers, to operation heads and operators, everyone is carrying a task for innovation. It is stipulated that employees who only complete the tasks but fail to achieve innovative results cannot get an “A” in the performance appraisal, and this appraisal standard is linked with salary allocation and combined with job competition, which effectively improves the innovation consciousness of cadres and employees.

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3. Baosteel’s Experiences of Highly Involvement Innovation (a) Attractive Incentives The amount of incentive is contributed as a percentage of the project’s benefit starting in 1995, without any cap. (b) Organizational Guarantee In January 1993, the Committee for Rationalization Proposals was established. The leaders of Baosteel at all levels attach great importance to the rationalization proposal activities, a rationalization proposal commendation meeting will be held once a year to reward the activists, and leaders will dine together with representatives of advanced individuals. Moreover, the first prize of each commendation meeting will be evaluated by leaders. (c) Innovation in Various Forms A discussion will be held on a specific topic to solve problems in production; rationalization proposals activities will be promoted through activities such as Energy Saving Month and Energy Saving Week. (d) Scientific and Reasonable Benefit Evaluation System A set of indicator evaluation systems, which is scientific and reasonable, has been formed after years of practice to facilitate a more scientific and reasonable calculation of benefits. Baosteel’s history is a microcosm of the development of large state-owned enterprises in China. Progress in science and technology and technological innovation are the soul of an enterprise, it is essential for an enterprise to reach the international level and strengthen its international core competence by carrying out science and technology work with intellectual property as the thread. Baosteel’s experience is worth learning from and referring to.

1.3 HangYang (Hangzhou Oxygen Plant Group Co., Ltd.): A Large Equipment Manufacturer Won Late-Mover Advantage by Relying on Secondary Innovation HangYang, a leading enterprise of air separation equipment manufacturer in China, has been improving the grade and quality of air separation equipment manufacture by going from technology import to indigenous innovation, and has gained fruitful economic benefits. HangYang went through a dynamic evolution with technology import as the starting point, technology learning and development as the focus, and technology upgrading as the goal. Overall, HangYang Group experienced four stages for secondary innovation as follows (see Table 3).

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Table 3 Process of HangYang’s secondary innovation Secondary innovation phase I

Secondary innovation phase II

Secondary innovation phase III

Secondary innovation phase IV

1956–1957: Imitation of Soviet 30 m3 /h air separation equipment Technology: International level in the mid-1940s

1958–1960: Fully indigenized Technology: International level in the late 1940s and early 1950s

1961–1967: Development and utilization of 600 ~ 3,350 m3 /h air separation equipment Technology: International level in the mid-1950s

1968–1977: Utilization of 6,000 m3 /h air separation equipment Failure, chaotic period caused by new technology paradigm Technology: International level in the mid and late 1950s

1978–1981: Imitation of FRG 6,000 m3 /h air separation equipment Technology: International level in the early 1970s

1982–1983: 80% Indigenization Technology: International level in the mid-1940s

1983–1985: Development and utilization of 6,000 ~ 10,000 m3 /h air separation equipment Technology: International level in the mid-1970s

1986: Import of new technology paradigms Technology: International level in the late 1970s

1987: R&D of 10,000 ~ 30,000 m3 /h air separation equipment in labs Technology: International level in the late 1980s

1988: Imitation of large air separation equipment Technology: International level in the 1980s

1989–1990: Indigenization based on joint production Technology: International level in the 1980s

1991–1995: Development and utilization of 60,000 m3/h air separation equipment Technology: International level in the mid-1940s

1996–2000: Cooperative R&D Technology: International level in the late 1970s

2001–2007 Indigenous Innovation Technology: In line with state-of-the-art technology

The Research of Technology Transfer Processes in Global Manufacturing Networks [J]. TECHNOLOGY ECONOMICS, 2007(2)

Dynamic development of knowledge in the secondary innovation process of Chinese enterprises is revealed by the secondary innovation progress of HangYang Group. Regardless of the development cycle, expansion and transformation of the organizational form and R&D approach of enterprises reflect obvious characteristics of transition from developmental learning to creative learning, and technological leap from mere imitation to indigenous innovation.

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1.4 Huawei: Transformation of Private High-Tech Enterprises from Imitation to Technology Leadership Huawei, a representative of national high-tech enterprises, has been insisting on indigenous innovation and practicing internationalization strategy, being a pivotal “Chinese Force” in the global communications industry, and has now risen to be the world’s top-ranked manufacturer of communications equipment. Huawei has been exemplified by Chinese high-tech companies committed to indigenous innovation. Huawei is leaping from a challenger to a leader. Cost and price are indeed a major advantage of Chinese communication companies such as Huawei, as well as an advantage created by China. Huawei is changing its image in recent years to one that offers not only “good value for money” but also is to be a leader in technology if it is still a “price butcher” in its initial stage of internationalization. Among domestic companies, Huawei is the first that insists on investing 10% of its annual revenue in R&D. By 2015, Huawei had ranked first in the number of patent applications by Chinese companies for many years. Huawei became the world’s top international patent applicant in 2008, when its number of international patent applications surpassed that of such internationally renowned companies like Panasonic and Philips of the Netherlands for the first time, signifying that Huawei has taken the lead in the international industry in terms of technological competence. 52,550 domestic patents and 30,613 foreign patents were filed by the end of 2015, making Huawei the world’s top patent applicant, far ahead of other domestic enterprises. Huawei’s path of indigenous innovation is to imitate international advanced information and communication technologies, then absorb them for re-innovation in line with Chinese conditions, and gradually accumulate the technology and market competence to compete with international industry giants by relying on low cost and market channels. Today, Huawei not only leads in market share but also takes the lead in technology competence represented by patents, standards and core technologies.

1.5 CIMC (China International Marine Containers (Group) Ltd.): An Equipment Manufacturer, Rising from Cost-Ahead to Overall Leadership CIMC, a logistics equipment manufacturer headquartered in Shekou, Shenzhen, is a global leader in containers and specialized vehicles. Its success in recent years has not only relied on market opportunities and low labor cost advantages, or excellent capital operation and market development capabilities, but also on open-indigenous innovation featuring comprehensive cost leadership and “importing advanced technologies, absorbing rapidly and surpassing greatly”, by which key technologies were gradually accumulated, thus enhancing its core competence.

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Strategic Innovation Create a world-class “all-around champion”

Absorb rapidly

Management Innovation

Institutional Innovation

Surpass greatly Import advanced technologies

Overall cost leadership Innovative culture

Fig. 3 Conceptual model of CIMC’s open indigenous innovation

CIMC’s conceptual model of open indigenous innovation, i.e., to implement open indigenous innovation, integrate global resources for improvement of systematic competence, with a global operating system based on China’s advantages and to be a world-class “all-around champion” as its goal, innovative culture as the basis, comprehensive cost leadership and “importing advanced technologies, absorbing rapidly and surpassing greatly” as the characteristics, institutional innovation and management innovation as support (see Fig. 3). Characteristics of CIMC’s Indigenous Innovation at Phases are shown in Table 4. In a general sense, CIMC takes a path from imitation to further innovation on the basis of absorbing advances in overseas science and technology, however, its model shows unique characteristics. CIMC’s open indigenous innovation model, featuring overall cost leadership and “importing advanced technologies, absorbing rapidly and surpassing greatly”, enabled it to grow rapidly in recent years and go on to be a world-class industry leader. CIMC indigenous innovation model inspires us that. (1) Cost leadership means not only reducing labor costs, but also achieving overall cost leadership in the whole value chain, such as R&D, production, marketing, logistics, procurement and management, through effective innovation, and realizing “low cost + technology leadership + differentiation”, thus greatly improving core competence. (2) Indigenous innovation means not only closed independent R&D and selfaccumulation, but also effective integration of external resources (e.g., technological M&A, “industry-university-research” cooperation, etc.) and open innovation, both of which are important ways to improve indigenous innovation capability rapidly.

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Table 4 Characteristics of CIMC’s indigenous innovation at phases Phase

Preparation

Expand

Globalization

Duration

1980–1992

1993–2004

2005–2008

Focus

To be excellent in TEU to survive

Achieved rapid scale expansion, product diversification and technological leapfrogging through M&A

Improved systematic competence globally through open innovation and overall cost leadership

Strategic innovation

Developed steadily by Low-cost M&A; Overall cost relying on low-cost labor diversification around core leadership in R&D, business manufacturing, management, marketing, etc.; “low cost + technology leadership + differentiation”

Institutional innovation

Rationalization proposals, cost-based refinement management

5.2.3 Clarity career development planning dual-channel career development plan; Annual innovation conference, awards center for excellence

“311” Talent cultivation program, “3 + 1” technology innovation project

Concept and cultural innovation

Efficiency, cost-based culture, to be powerful before being large (1990); unity, aggressiveness, efficiency, and innovation (1991); to be the world’s top, customer-centric (1991)

Quality-based culture: dedicated and perfect (1997); technology-driven (1997); self-improvement, challenge, innovation (2002)

Innovation-based culture: innovation drives values; be a responsible industry leader

Management innovation

Cost management: cost-based target appraisal (1992)

Total cost management: performance kanban; total information management platform

Total Innovation Management: one-stop service for design, manufacturing, maintenance, etc.

Organizational innovation

Unitary structure

Centrally managed, distributed R&D

Open networked innovation system (continued)

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Table 4 (continued) Phase

Preparation

Expand

Globalization

Market innovation

Take over the market with production scale and low cost

Technology-based M&A via outstanding capital operations

Developed international markets based on China’s advantages; opened up the “blue ocean market”

Technology innovation

Imported and imitated foreign advanced technology; incremental innovation of production processes

Further innovation based on absorbing advances in overseas science and technology; competition from the product to indigenous intellectual property and core technology

Open indigenous innovation; focused more on standards and intellectual property rights, mastered the core technology

Source Zheng Gang, He Yubing, Chen Jin, et al. How Chinese manufacturing enterprises improving their international competitiveness by indigenous innovation: A case study from CIMC [J]. Science Research Management, 2008 (4)

(3) Import of advances of science and technology is insufficient nowadays when it is increasingly fierce for competition and shortening for product life cycle. The capability to absorb advances for great surpass takes the key for the maintenance of competence. (4) Indigenous innovation is not stuck to technologies, a concept of TIM is necessary because non-technological factors such as strategy, culture, system, management and market and their organic synergy are the key to the effectiveness of indigenous innovation. Certainly, CIMC still suffers from problems in indigenous innovation, such as the lack of major breakthrough innovations that fundamentally affect the industry and the weakness of forward-looking basic research. CIMC executives are aware of these issues and are moving forward on measures. The Indigenous innovation model of CIMC is of great significance to numerous traditional Chinese manufacturers.

1.6 GEELY: A Chinese Auto Company Rapidly Improves Indigenous Innovation Capability Through Imitation and Secondary Innovation to Total Innovation Zhejiang Geely Holding Group Co., Ltd. (GEELY) is the only private car manufacturing and operating enterprise among the top ten in China’s domestic automobile

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industry. Founded in 1986, it has made brilliant achievements in automobiles, motorcycles, automobile engines, transmissions, automobile electronics and electrical and auto parts after more than 30 years of development. Especially since it entered into the car field in 1997, GEELY has achieved rapid development with its flexible management mechanism and continuous indigenous innovation, and is now worth more than 100 billion yuan in assets and ranked among the top 500 enterprises in China for four consecutive years, and it has been named as an enterprise with “best in speed and growth in China’s auto industry for 50 years” and ranked top 10 in China auto industry. Zhejiang Geely Holding Group ranked 343rd in the 2017 Fortune Global 500 list with revenue of USD 31,429.8 million, a sharp climb of 67 spots, marking its sixth consecutive year on the list since its first entry in 2012. On February 24, 2018, GEELY became Daimler’s largest shareholder when it acquired a 9.7% stake in Daimler for approximately USD 9 billion. It was ranked 267th on the Fortune 500 list in 2018. GEELY insists on indigenous innovation, and developing a self-owned brand based on indigenous innovation, which offers an experience of practical development and exploration of the path for the transformation of China’s auto industry from big to strong. GEELY goes through three phases of development, i.e., strategies of success through low-price, high-quality and brand, respectively. Throughout GEELY‘s indigenous innovation, it experiences imitation, absorption, and then indigenous innovation. From 1999 to 2002, the low-priced strategy based on imitative innovation, when GEELY was just entering the auto industry, not only gave GEELY cars a chance to gain market share but also made GEELY a facilitator in getting cars into the homes of ordinary Chinese people. From 2003 to 2005, GEELY implemented a high-quality strategy and invested heavily in a substantial transformation of the production process to make a qualitative leap in GEELY cars when the price war continued in the Chinese car market. In 2006, GEELY launched a strategy for success by brand based on indigenous innovation when the trend of homogenization in the Chinese car market was increasingly obvious. Via IPO in Hong Kong, China, establishment of a factory in Malaysia, participation in the Frankfurt Motor Show in Germany and Detroit Motor Show in the U.S., GEELY exported CK in large quantities, acquired Manganese Bronze Holdings, Australian DSI Automatic Transmission Company and Volvo car business, etc. As a result, GEELY rapidly raised its brand image and became an outstanding representative of Chinese auto brands.

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2 From Integrated Innovation to Total Innovation 2.1 Lenovo Group: Integrate Global Resources, From “Trade-Production-Technology” to “Technology-Production-Trade” Since its establishment, Lenovo Group has been taking innovation as the driving force for its development. It has been Lenovo Group’s pursuit to promote the overall development of China’s information industry by enhancing its competence through continuous innovation. Over 30 years since its founding, Lenovo Group has been adhering to the philosophy of indigenous innovation and constant surpassing, gradually transforming from a “Trade-Production-Technology” strategy to a “ TechnologyProduction-Trade” model, and grows to be the world’s largest PC manufacturer from a small company with a dozen people and RMB 200,000 investment, starting from technology trading. In its early days, Lenovo was blank in terms of core technology, capital and business management experience. Therefore, Lenovo formulated its strategy of “Trade-Production-Technology”, learning from international advanced enterprises, and started by distributing IT products from companies like IBM, AST, and HP, etc. It has not only acquired the original capital to support its future but also accumulated rich experience in product development, enterprise operation, marketing, and channel management, as well as building a team with specialized talents. Lenovo’s technology innovation model is generally characterized by incremental and integrated innovation. Lenovo creates a culture of incremental, continuous innovation and leveraging innovation. Yang Yuanqing, the CEO of Lenovo Group, would like to emphasizing that “we are progressing every year and every day”, stressing “90% inheritance and 10% innovation. Lenovo’s innovations, from technology to management systems, are rarely fundamental and original, most of which are integrated innovations based on imitation (including agency), with appropriate modifications. For example, the Chinese character card figured prominently in Lenovo’s products in mid and late 1980s. However, the Chinese character card is only a partial incremental innovation for the Chinese market in the whole field of computer technology. After the 1990s, Lenovo’s PC and board card industry grew rapidly, but it failed to grasp core technologies, just product design technologies for the Chinese market. As for distribution system and business unit organization structure, they were introduced from foreign companies such as Hewlett-Packard, etc. Lenovo was aware of the importance of portfolio innovation early on. As Yang Yuanqing said, “Lenovo’s innovation is not only in technology and products, but also in management and marketing.“ For technology and market, Lenovo developed Chinese character card in its early days, followed by various innovations in technology and products, developed in Hong Kong, China, and entered overseas markets; for management, it established a distribution-centered sales system, set up an orderbased safety stock production organization, and took the lead in implementing the

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division system in China; for system, Lenovo gradually established a modern corporate governance structure in the 1990s based on dividend rights, contributing to a smooth transition of personnel. It builds Lenovo’s core competency in its start-up and the foundation for sustainable development. In addition, the dual-channel career path, i.e., the professional innovation path and the administrative management path, creates an innovative environment for R&D. Besides, Lenovo focuses on building a first-class R&D environment, including a comfortable working environment and a flexible work schedule. Accordingly, incentives, an evaluation system for R&D projects and a strict project management system are in place to help R&D personnel realize self-development in a targeted manner. Culturally, Lenovo, in the spirit of being “people-oriented, realistic and progressive”, shows respect to every employee for their creativity, encouragement for innovation and tolerance for failure, and creates an innovative R&D atmosphere with both rigor and freedom.2 As Lenovo transforms from “Trade-Production-Technology” to “TechnologyProduction-Trade”, its strategic position of indigenous innovation is becoming increasingly important. The indigenous innovation also shifts gradually from the originally imported imitation and incremental innovation to the integrated innovation and total innovation, for which global resources will be integrated. Lenovo’s acquisition of IBM’s PC business in 2004 is a landmark to which global resources are integrated for open and integrated innovation. Lenovo has built a global R&D structure with Beijing, Shanghai, Chengdu, Shenzhen in China, Raleigh in USA and Yamato in Japan as the focal points, which Lenovo calls the “Innovation Triangle”. Lenovo simultaneously possess 46 world-class labs and more than 2,000 R&D professionals around the world, including the Lenovo Future Center with Intel, the joint lab with Microsoft, and the Lenovo Technology Innovation Center, etc., with 5 vendors, including Microsoft, Intel, LanDisk, IBM, and Symantec. Innovation and R&D enable Lenovo to launch sought-after products such as ThinkPad X300, ThinkPad T410S, IdeaPad U110 and Le Phone.

2.2 INSIGMA (Zhejiang University Network New Group Co., Ltd.): An Innovation Path of Integrated Innovation-Portfolio Innovation Featuring “Computer+X” Zhejiang University Network New Group Co., Ltd., founded in 2001, provides overall solutions for “mass entrepreneurship and innovation” based on the “industryuniversity-research” synergistic innovation system. It is committed to being an enabler of China’s green smart city industry. 2

Cai Min. Lenovo Group: Innovation is competence [EB/OL]. (06-13-2006) [12-01-2018] http:// www.china-woman.com/rp/fs/cp/140/222/20060613/2/2.html.

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Zhejiang University Network New Group Co., Ltd. provides support for industrial development with space, capital, technology, and talent through total management and service of “technology+finance+operation”. It has nurtured a number of listed companies such as INSIGMA and UNITTEC and more than 100 SMEs, promoting the integration of industries and cities, the efficiency of public services, the transformation of sci-tech achievements, the competence of enterprises, and China’s new urbanization in the fields of science and technology services, financial services, innovation research, smart parks, rail transportation, energy & environment protection, smart government, smart business and smart life. Born in the IT industry, INSIGMA adheres to a “Computer+X “ business philosophy in its diversification, i.e., to intervene in other fields with the advantages of the IT industry and to integrate various technologies, equipment and systems through information systems as the core. Guided by “Computer+X”, INSIGMA has, through years of practice, developed a unique model for integrated innovation and portfolio innovation, i.e., to drive technological innovation by business model. In other words, INSIGMA’s existing strengths and resources are used to systematically integrate traditional industries into a new business operation model that has the ability to break through and win in the marketplace. Meanwhile, thanks to international cooperation and “industry-university-research” cooperation, INSIGMA acquires core technology by further innovation on the basis of absorbing advances in overseas science and technology, systematic integration, etc. to improve the technological capability and promote rapid growth of the whole industry. INSIGMA validates advantages of its unique technological innovation model during its diversification. (1) INSIGMA’s M&E business pioneers the EPC (engineering, procurement and contracting) business model in the flue gas desulfurization (FGD) sector, and has made a market breakthrough in this new industry. The core competence lies in its excellence in design. Now, INSIGMA is a major contractor in the domestic FGD industry, and one of the top 2 companies in China’s FGD industry, with recognition and attention from international strategic partners. (2) New market opportunities for INSIGMA arise from the booming rail traffic in China. The EPC business model is also adopted by INSIGMA in the signaling market of rail traffic, which enables it to be a breakthrough in this industry. Currently, INSIGMA takes steps towards open total innovation based on integrated and portfolio innovation.

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3 From Original Innovation to Total Innovation 3.1 Netac: Original Innovation and Indigenous Intellectual Property Rights Raise Core Competence Netac Technology Co., Ltd., founded in May 1999, is a global leader in products and solutions for flash drives and flash memory applications, headquartered in Shenzhen, China. It has been listed on A-share GEM in January 2010 after more than 10 years of development and is known as “China’s First Mobile Storage Share”. As the inventor of the flash drive, Netac launched a new generation of storage products based on USB (Universal Serial Bus) interface and using flash memory media, which is the first of its kind in the world. Netac’s annual investment in technology development currently accounts for almost 10% of its total revenue, a significant investment that is rare even among foreign companies. In turn, it rewards Netac with a fruitful technology harvest as well. As a follow-up to its invention of the world’s first flash drive, Netac invented the world’s first bootable flash drive, the first dual-boot flash drive, the first encrypted flash drive, the first ultra-stable flash drive, the first intelligent dialog flash drive, the first flash drive that emulates an optical drive, and the only flash drive control chip in China. Thanks to indigenous technology innovation, Netac has been a global technology leader in flash drives and has significantly strengthened its core competence. As a technology leader in mobile storage, Netac adheres to three strategies of development—intellectual property strategy, talent strategy, and internationalization strategy, and has been upholding a business philosophy of “brand first and continuous innovation”, thus succeeding in establishing a three-in-one enterprise development model of R&D, patent and brand, and transforming intellectual property rights into sustainable patent revenue through continuous technological innovation, development and protection of indigenous intellectual property rights and effective patent operation, thus successfully creating a new business model of patent profit. Netac holds multiple patents for fundamental and core inventions in flash drives, flash applications and mobile storage. Now, Netac hires more than 100 talents with Ph.D. and M.S. degrees, and holds more than 500 patents and patent applications, covering dozens of countries and regions around the world. A total of 263 invention patents have been granted to date, covering multiple countries and regions. Patents enable Netac to defend its interests and expand its market share against strong competitors. It has been proved that Chinese enterprises can never escape from being “porters” of foreign enterprises, such as DVD (digital video disc), digital camera enterprises, etc. without indigenous technology. Thankfully, it is not the case in the domestic flash drive industry. After years of development, the domestic flash drive industry shows great growth potential instead of shrinking rapidly due to the constant renewal of new technologies. “Netac’s invention patents have somewhat deterred international giants from entering the Chinese market.“ Industry insiders argue that Sony was

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preparing to enter the Chinese flash drive market with great fanfare in 2004, but has slowed down significantly since it was hit by a patent lawsuit from Netac. Annual Report on China USB Flash Drive Market Research 2011–2012 shows that it was only 2.17% of Sony’s share in China’s USB flash drive market in 2011. Currently, 95% of the domestic flash drive market was held by domestic companies. It is a phenomenon that can be said to be unique in the field of computer products. As a side note, it illustrates the importance of indigenous technological innovation and holding indigenous intellectual property rights to safeguard the interests of Chinese industries.

3.2 FOUNDER: A Typical Representative of Original Innovation to Gain a Competitive Advantage FOUNDER is a high-tech enterprise with original core technology, whose laser phototypesetting system is an original technology with indigenous intellectual property rights and has been in a world-leading role. More than 900 years after the invention of movable type printing in China, this technology is the second revolution in Chinese printing technology, enabling the Chinese printing industry to change from letterpress printing to electronic publishing. It is a disruptive innovation in China’s history of technological progress. It is for this reason that Prof. Wang Xuan, the original creator of this technology, is known as the “Modern Bi Sheng”. As Wei Xin summarized, there will be no FOUNDER unless this technology is innovated, and it is the success of this original innovation in industrialization that enables FOUNDER to take a unique path of “ industry-university-research” integration.3 Innovation is a vitality of an enterprise and the driving force of its sustainable and healthy development. Indigenous innovation has been a strategic orientation of FOUNDER and fuses with FOUNDER’s genes. It is thanks to continuous innovation that FOUNDER keeps on its growth and development. In FOUNDER’s 30-year journey of innovation, two technological revolutions are the most representative: the birth of FOUNDER’s laser phototypesetting system, which enables China’s publishing industry to change from letterpress printing to electronic publishing; FOUNDER’s full-scale entry into online publishing. Laser phototypesetting technology from FOUNDER has been rapidly industrialized and widely accepted in the market since the late 1980s. The wide-scale rollout of this technology has brought FOUNDER more than RMB 1 billion in profits and laid a base for FOUNDER’s software industry. To date, FOUNDER’s Chinese character laser phototypesetting system occupies more than 80% of the domestic market and more than 90% of the overseas Chinese market, with the world’s largest market share in Chinese phototypesetting. 3

Hu Lishan. Founder Chairman Wei Xin: Chinese Enterprises Must Be the Subject of Indigenous Innovation [EB/OL]. (12–11–2004). Retrieved February 01, 2018, from http://business.sohu.com/ 20041211/n223442338.shtml.

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The laser phototypesetting system was deservedly recognized by the Chinese Academy of Engineering as the “Significant Engineering Achievements of China in the 20th Century” for its technological originality, successful industrialization, and tremendous economic and social benefits. Prof. Wang Xuan also received the highest national science and technology award, which was personally presented by Jiang Zemin, then General Secretary and President of the CPC Central Committee. An original core technology holds up an enterprise, creates a market and changes an industry. FOUNDER continues its indigenous innovation in laser phototypesetting technology and continuous industrialization while expanding to the international market horizontally and to the software field deeply. The indigenous development of technology proves that Chinese enterprises may enter special segments of high-tech fields by the accumulation of technological capability in the international industrial division of labor and competition pattern. Driven by technological R&D in indigenous intellectual property rights, Chinese firms are at the forefront of global technological development, integrating resources and serving the global marketplace through the launch of new products and services via technological innovation. But it should also be acknowledged that the road to indigenous R&D is a long and challenging one. It takes more than 30 years for laser phototypesetting technology to go from a national project and technical research to today’s widespread use worldwide. Recalling its decades of innovation, from laser phototypesetting to online publishing, FOUNDER gradually perfected its understanding and awareness of indigenous innovation, and advanced in the forefront of the “industry-universityresearch” development model with its technology and guiding ideology, and continuously summed up its experience in market demand insight, technology curve grasp, customer relationship creation, business model innovation, and overseas market development. FOUNDER is no longer limited to mere original innovation, but is now heading for total innovation as innovation management progresses and the competitive environment changes at home and abroad. Currently, FOUNDER innovates in four ways: indigenous R&D and originality; technological innovation; M&A and industry chain innovation; and platform integration and innovative industries.

Chapter 8

Dominant Path of Indigenous Innovation in China’s Enterprises

1 Dominant Path Choices of Indigenous Innovation by Chinese Enterprises: From Secondary Innovation to Total Innovation In the light of decades of development and current situations, “secondary innovationportfolio innovation-total innovation” should and will be a dominant path for indigenous innovation of Chinese enterprises for quite a long time, for the following main reasons.

1.1 Indigenous Innovation in China is Still in a Transition Stage from Absorbing Advances in Foreign Science and Technology to Indigenous Innovation When Enterprises are Weak in Original Innovation Original innovation is the core of the indigenous innovation models: original innovation, further innovation on the basis of absorbing advances in overseas science and technology, and integrated innovation. Original innovation refers to innovative achievements such as historical scientific discoveries, technological inventions, and theoretical leading technologies. Original innovation activities are concentrated in basic science and frontier technologies, which are the innovations that lay a foundation for tomorrow. The original innovation capacity will affect directly the continuous innovation capacity of China’s science and technology, in the long run, so the powerful capacity of original innovation is of fundamental importance to improving China’s indigenous innovation capacity. Original innovation often implies unique discoveries or inventions in R&D, especially in basic research and high-tech © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_8

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research. In terms of the degree of indigenous innovation, most enterprises in China are still insufficient in indigenous innovation capability and generally lack of original innovation capability. China is still far behind the developed countries in science and technology although some significant achievements have been made in original innovation research since the founding of the People’s Republic of China, such as synthetic bovine insulin, Chinese character laser phototypesetting system, hybrid rice, etc., all of which contribute significantly to China’s ability to foster original innovation in science and technology and enhance the comprehensive nation power. In particular, the deficiency of original innovation seriously restricts further leapfrog development of China’s economy and society as well as its strategy of building an innovative country, especially in the field of high technology, which fully demonstrates the comprehensive national power and core competence, there are so few high-tech achievements with indigenous intellectual property rights. Therefore, it is a strategic task to build an innovative country to enhance China’s original innovation capacity. Ke Jinsheng (2006) pointed out that multiple reasons cause the lack of original innovation in China’s scientific research, including its social environment such as government, society and humanities, as well as its scientific research strategy, scientific research system, scientific research institutes and scientific research personnel, etc., for example, low awareness of the pioneering nature and importance of basic research in scientific research strategies. Because of the system and mechanism, especially the economic system, education system and scientific research system, China suffers from a long history of weak basic research capability, in particular, the serious lack of investment in basic research by enterprises has resulted in a long-term low level in the original innovation capacity. Therefore, it should be soberly recognized that most enterprises are and will be incapable of original innovation for a long time because of the weakness of basic research although improvement in innovation capability is remarkable in recent years. A growing number of insightful enterprises with strength have been aware of the importance of original innovation capability and are gradually stepping up their original innovation capability, for original core technologies and leading the industry trend, such as Founder Group and Netac. In general, hoisting the original innovation capacity is the strategic goal of indigenous innovation in China, which, however, cannot be the dominant mode of indigenous innovation for a long time.

1.2 Integration Innovation Requires R&D and Technological Innovation Capability As mentioned earlier, integrated innovation is a model intermediate between the R&D-dominated innovation and the secondary innovation. Integrated innovation creates market value through the organic process of the existing technologies,

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elements and creative applications of existing knowledge. Integrated innovation seeks a “ 1 + 1 > 2” effect by optimally linking scattered technologies. Strictly, secondary innovation serves as the foundation and premise of integrated innovation, the latter is a more advanced stage and a significant means of the former. Integrated innovation requires a certain capability for R&D and technological innovation, as well as a high level of market analysis. In the era of the planned economy before the Reform and Opening-Up, enterprises were not yet established as the subject of innovation, which resulted in a very weak technological innovation capability of enterprises, and due to long-term closed innovation status, enterprises also lacked essential conditions for integrated innovation. Therefore, long-term self-accumulation or absorption of advances from foreign science and technology is required for integrated innovation capability. It was only after the Reform and Opening-Up, especially the economic system reform and the subject role of enterprises for innovation, that integrated innovation emerged as an important technological innovation mode for enterprises.

1.3 Secondary Innovation Dominates Enterprises’ Grandness in China Since the Reform and Opening-up Secondary innovation (further innovation on the basis of absorbing advances in overseas science and technology) is to upgrade the imported advanced technology, focusing on “absorption” rather than “import”, for “further innovation”, which is an important way for late-developing countries to catch up. In On the Ten Relations, Mao Zedong devoted a section to how to deal with the relationship between China and foreign countries, stating: “In the natural sciences, we are relatively backward, so special efforts should be made. However, it should also be critical instead of mindless. As for technologies, absorption will be proper, which we are in the absence of and have no idea about, so it is beneficial. As for those that have been mastered, our ideas shall prevail.” Most of leading industries in China, including home appliances, iron and steel, information and communication, equipment manufacturing, automobiles, machinery, chemicals, textiles, and aerospace, etc., have gradually grown up relying on secondary innovation, some of which even have turned from a “follower” to “leader”, from importing a full set of technology and equipment to mastering key core technologies and exporting a full set of technology and equipment, such as Baosteel, Haier, and Huawei, etc. (see Table 1). In summary, decades of innovation practice in China shows that secondary innovation is the dominant mode of rapid start-up, flourish of Chinese enterprises.

Japan, Germany

Germany, USA, Japan

Household appliances Secondary innovation

Secondary innovation

Secondary innovation

Secondary innovation

Secondary innovation

Automobile

Infocommunications

Equipment manufacturing

Steel industry

Japan, etc

USA, Germany, Japan

USA, France, etc

Origin of import

Innovation model

Industry

Strong

Weak

Strong

Intensity of further innovation

Import full set of production line and equipment

Strong

Importing advanced Medium technology and equipment, production lines

Imitation, introduction, “encircle the cities from the countryside “

“Exchange market for technology” through joint ventures

Advanced technology, equipment and production line

Form of import

Table 1 Dominant innovation patterns for partial industries after the reform and opening up

(continued)

Medium

Strong

Weak

Strong

Current level of indigenous innovation

Baosteel imported a full set of Nippon Steel Strong production lines and equipment, and then turned to be a “leader from follower” after absorpting the advances

CIMC, SINOTRUCK, Zhenhua Port Machinery, etc

Huawei, ZTE

Joint ventures between Shanghai Auto and Volkswagen, GM, etc

Haier‘s import of refrigerator technology and production line from Liebherr, Germany

Case

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Innovation model

Secondary innovation

Secondary innovation

Industry

Chemical industry

Machinery

Table 1 (continued)

USA, Japan, Germany, etc

Germany, Poland, etc

Origin of import

Import advanced technology

Import full set of production line and equipment

Form of import

Strong

Strong

Intensity of further innovation

XCMG, Zoomlion, Sany, LiuGong Group, etc. imported foreign technology & equipment, and conducted further innovation

YIZHENG CHEMICAL FIBRE imported polyester technology and realized its indigenization; most of technological innovations of China National Chemical Co., Ltd. belong to further innovation

Case

Strong

Strong

Current level of indigenous innovation

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1.4 An Upgrade from Secondary Innovation to TIM is Inevitable for Indigenous Innovation of Chinese Enterprises It should be noted that secondary innovation alone is insufficient for Chinese enterprises. Development of the times, changes in the competitive environment and customer demands, development of innovation theories, challenges faced by enterprises, and complexity of the innovation require that, in addition to improvement of technological innovation capability (i.e., secondary innovation, integrated innovation, original innovation, etc.) and traditional innovation management, enterprises must be equipped with a systemic and dynamic view for portfolio innovation and TIM. Ultimately, portfolio innovation and TIM are aimed at adapting to changes in the market environment and responding to and meeting personalized demands of customers faster and more effectively. An analysis on some enterprises that succeed in innovation in recently years, such as Haier, Hisense, Baosteel, TCL, Lenovo, 3 M, HP, Xerox, etc., shows their characteristics as follows: (1) All-round innovation rather than just technical innovation is carried out; (2) Effectiveness of portfolio innovation and synergistic match between technical and non-technical factors (e.g., strategy, organization, culture, system, market, etc.) of innovation; (3) Expand the time–space dimension of innovation, enabling continuous innovation, integration of external resources, and even globalization of R&D. Practice on “secondary innovation-portfolio innovation-total innovation” of enterprises such as Haier proves that portfolio innovation, especially TIM, will step up their innovation management, which enables it to be possible for innovation to be the key for improving core competence and international competitive ability in new economic conditions. However, it is worth noting that most enterprises in China currently display weak technological innovation capacity, are still in the traditional innovation management, unaware of the importance and urgency of portfolio innovation and TIM. We hold that the shift from traditional innovation management to portfolio innovation and TIM is a logical choice for enterprises in the knowledge economy to face the challenges from fierce market competition and increasingly diverse and personalized user demands. Practically, a few leading firms in China have been aware of the critical role of TIM in boosting their core competence, and have already started their exploration. For example, Haier Group in recent years, based on its idea of total innovation and guaranteed by its innovative culture, has implemented process reengineering innovation with the market chain as the link, which advocates and ensures that “everyone is an innovative SBU” from the organizational management system, and established a business model of “RenDanHeYi (win–win Mode of Individual-Goal Combination)”, which greatly improved the enthusiasm of all employees for innovation and Haier‘s technological innovation capability, and

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ultimately its core competence. Baosteel Group promotes Enterprise System Innovation (ESI) based on the idea of total innovation, followed by ideal achievements in recent years. While TIM theory and practice are still in their infancy in China and abroad, the framework we propose is also preliminary and requires continuous improvement. For Chinese enterprises, which are generally weak in innovation capability, mastering and implementing the connotation of portfolio innovation and TIM as soon as possible is essential for narrowing the gap with international advanced enterprises and improving indigenous innovation capability so as to maintaining sustainable competitive advantage.

2 Inevitability of TIM for Enterprises 2.1 Required by Enterprises for Further Technological Innovation Furtherly, economic globalization shows its trend since the 1990s, new science and technology revolution marked by the widespread application of information and communication technology and the Internet has brought about fundamental changes in the development environment, business objectives and methods of enterprises. Enterprises are increasingly challenged by a more volatile and competitive environment and requirements by the personalization, speed and sensitivity of customer demands. Merely depending on high productivity, high quality and even high flexibility is no longer sufficient for sustainable competitive advantage in the market. More and more enterprises find that total innovation is increasingly an inexhaustible source and driving force for corporate survival as an era of knowledge economy approaches. Traditional innovation management theories failed in providing a scientific and effective innovation management paradigm to guide enterprises in the new situation due to their lack of insight into the drastic changes and increasing complexity of the innovation process given the limitations of the time. Enterprise’s practices in technological innovation is urgent for new theoretical guidance to provide a new concept, paradigm and framework for scientific and efficient innovation management, improving innovation performance and thus gaining sustainable competitive advantage in the turbulent and fierce market competition (Zheng, 2006).

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2.2 Required by Further Refinement of Innovation Management Theories New thoughts on innovation management have been put forward by scholars who are aware of the importance of total innovation, which enriches innovation management theories. These thoughts can be grouped in nine categories (Zheng, 2006). (a) Creativity and Ecosystem View on Innovation Management In Mechanism, employees are regarded as uncreative machines that do what they have to do mechanically and passively, while in innovation management, they are seen as organisms and subjects of creativity. As Dundon (2002) argued, everyone is unique in his or her creativity, even though it varies. A company should be a diverse ecosystem because an overly homogeneous organization will fail to adapt to an environment where changes go on rapidly. It is the diversity of organizations that provides the conditions for innovation. (b) Integrated Innovation Lansiti introduced the concept of Technology Integration in 1997. It is gradually found in case studies of technological innovation in China that the integration of various elements in technological innovation is a key for ensuring innovation effectiveness (Guan Jiancheng et al. 2002). Here, integrated innovation is regarded as a necessary stage of indigenous innovation, a creative process for integration, which organically integrates all existing technologies or elements to form a new product or a new management model to create new economic growth points. Integrated innovation is more practical, more relevant to production and management, and easier for enterprises to find entry points. (c) Systemic View of Innovation Christopher Freeman, a British economist, first proposed the National Innovation System in 1987. Nelson (1993) and Lundvall (1992) explored linkages and interactions among elements of the innovation system in a macro perspective. In-depth research on elements and mechanisms that influence innovation effectiveness was conducted by Fu Jiaji, Xu Qingrui, et al. from which many findings containing the idea of systematic innovation were obtained, thus further enriching the connotation of innovation management. Chen Jin (1999) carried out a study on “Enterprise Innovation System” by using system dynamics, etc. based on the system view. Dooley and O’Sullivan (2000) integrated the systemic view and proposed the “system innovation management” and its Pentagram Model framework (see Fig. 1). In his point of view, there are five levers for systematic innovation: Organization & Leadership, Strategy & Performance, Empowerment & Groups, Re-Engineering & Improvement, And Learning & Communication. Dundon and Pattakos (2001) put forward the Innovation System Architecture (ISA) model, which consists of eight pillars of continuous innovation, such as shared

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All Time Innovation Innovative Culture

Technology Innovation

Highly Involvement Innovation

Market Innovation

Globalized Innovation

Core Capability

Value Creation / Addition

Institutional Innovation

Strategic Innovation

Organizational Innovation

All Process Innovation

Innovative culture

All Value Innovation

Fig. 1 TIM Pentagram model of enterprises. Source Xu Qingrui. Total Innovation Management: Theory and Practice [M]. Beijing: Science Press, 2007

innovation vision and strategy, innovation environment support, innovation process network, etc. In addition, the “Harmonious Management Theory” proposed by Xi Youmin and Shang Yuniu (2002) also emphasizes the importance of synergy in management from a systemic perspective. (d) Innovation via Users and Suppliers The role of customers in generating new product ideas has been explored by many scholars, for example, von Hippel emphasizes the importance of a user-centered innovation system in his book, Democratizing Innovation. Shapiro (2001) developed von Hippel’s “lead user” and further proposed to find the source of innovation from “discourage customers” and “potential customers”. In short, the adoption of new technologies has shifted the interaction between enterprises and users from “enterprises develop customer knowledge” to “enterprises and customers create knowledge together”.

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Here, users and suppliers are considered to be involved in the innovation process of enterprises and to be a source of innovation. (e) All-Time Innovation Increasing market competition and user demand for faster responsiveness make it necessary to innovate all the time. It is required to strive for “24/7 innovation” (i.e., innovation 24 h a day, 7 days a week). Innovation is not a one-off event, but rather a year-round, never-ending, daily activity involving all departments. Many scholars argue that all time innovation stems primarily from the increasing pressure of time-based competition in recent years. (f) All-Process Innovation U.S. scholars Michael Hammer, James Champy, T. H. Davenport, et al. put forward the theory of Process Re-engineering in the late 1980s and early 1990s, which set off a global craze for enterprise process re-engineering. It aims to revolutionize existing functional business processes to improve organizational efficiency, flexibility and responsiveness to the marketplace in order to adapt to changes in the environment and the increasing personalization of customer demands. (g) Highly Involvement Innovation It has been theoretically and corporately concerned in recent years to stimulate creativity in every employee for high involvement in innovation. Numerous scholars point out that innovation is no longer the sole preserve of corporate R&D personnel; it should be the joint behavior of all employees. Dundon (2002) opines that all employees need to be involved in the process of finding new ways to strengthen organizations as they grow in complexity. Everyone is unique in his or her creativity, even though it varies. The broad definition of all employees also includes stakeholders such as users, suppliers, and shareholders. (h) Globalized (Territory-wide) Innovation As a result of economic globalization and the prosperity of the network economy, the organizational boundaries of many enterprises have transcended geographical areas, or even blurred, achieving global development. The emergence of organizational forms such as outsourcing, co-competition, strategic alliances, and virtual teams has enabled enterprises to cross the boundaries of regions, industries, and even countries, facilitating the globalization of R&D, manufacturing, and marketing. It has been studied by scholars in China and abroad. For example, Chiesa (1996) investigated how multinational firms can effectively manage international R&D activities, which, according to his analysis, indicates that the performance of international R&D depends on the extent, to which external knowledge sources and internal R&D resources are dispersed. The “Indigenous” strategy of R&D is implemented by many enterprises, which set up R&D departments around the world to leverage local intellectual resources for innovation. Globalized (territory-wide) innovation also involves all departments and workstations along the internal value chain of enterprises.

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(i) Total Innovation Over the years, scholars have been aware of the importance of total innovation and have conducted preliminary studies. As early as the 1970s and 1980s, some scholars proposed and developed the “Dual Core Model” theory of innovation, which already embodies total innovation. According to this theory, innovations in firms can be divided into two categories, i.e., technological innovation and management innovation, and accordingly, firms have two cores, i.e., technological core and management core. Here “management innovation” is a broad concept that includes social and nontechnical aspects such as organizational structures, processes, culture, management systems, control systems, and synergy mechanisms (Daft, 1978). The “Dual Core Model” theory suggests that innovation performance will be maximized only when two kinds of innovations are synergistic with each other. Tidd (2000) pointed out that “the intrinsic characteristics of innovation management are manifested as interdisciplinarity and multifunctionality, but just one dimension was paid attention to such as R&D management, new product development management, etc. In our opinion, innovation management requires an integrated view, i.e., an effective integration of disciplines, functions, …… It is far from sufficient to emphasize only one dimension of innovation due to the interaction among technology, markets, and organizational evolution.” Total innovation across the enterprise, according to some scholars, requires that innovation must be a capability that exists in every department, in every corner of the enterprise, and in every employee, rather than an incidental activity or a reactive process. Xu Qingrui et al. concluded that, after summarizing the latest innovation theories at home and abroad and lessons from numerous experiences on business management of enterprises in China, they pointed out that total innovation centered on technological innovation and led by corporate strategy should be carried out continuously to upgrade the technological innovation capability of enterprises, thus adapting to changes in the environment. In addition, the total innovation law of enterprise management was systematically proposed for the first time, based on which an innovation management paradigm, “Total Innovation Management (TIM)”, was further proposed (Xu, 2007).

3 Connotation, Characteristics of TIM and Its Differences from Management of Traditional Innovation and Portfolio Innovation 3.1 Connotation of TIM TIM targets innovation by all employees, throughout all processes, at all times and in all spaces, with the cultivation of core competence and continuous improvement of competitiveness as the orientation, value creation/increase as the ultimate goal,

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and the organic integration and synergistic innovation of various elements (such as technology, organization, market, strategy, management, culture, system, etc.) as the means, through effective innovation management mechanisms, methods and tools (Xu, 2007). TIM can be summarized as all-elements innovation, highly-involvement innovation, all-time and all-space innovation, and total synergy (see Fig. 2). 1. All-Elements Innovation All-elements innovation refers to a systemic view for innovation, which requires the synergy of technology, market, culture, system, organization, strategy, etc. that are closely related to innovation performance to maximize innovation performance. 2. Highly-Involvement Innovation Highly-involvement innovation means that innovation is no longer the sole preserve of R&D and technical staff, but should be a joint effort of all employees. Everyone, from R&D, sales, manufacturing, after-sales service, management, finance, etc., can be a great innovator in their own positions. The broad definition of all employees also includes stakeholders such as users, suppliers, and shareholders. 3. All-Time-and-Space Innovation All-time-and-space-innovation is divided into all-time innovation and all-space innovation (or globalized innovation and territory-wide innovation). Globalized innovation means that enterprises break through the limitations of their existing resources and capability internally by using external linkages and acquiring and deploying resources globally to expand, enhance and create enterprise capacity by leveraging external networks and resources.

Total Synergy

TIM

Fig. 2 Connotation of TIM

Highly-Involvement Innovation

All-Time-and-Space Innovation

All-Elements Innovation

Total Synergy

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4. Total Synergy Total synergy refers to all-round synergy of all innovation elements (such as strategy, organization, culture, system, technology, and market, etc.) in a framework of all employee participation and all time & space, enabling a synergy effect of “2 + 2 > 5” that cannot be done, individually, thus promoting innovation performance.

3.2 Characteristics of TIM (1) Strategic TIM is designed with corporate management strategy as the basis and starting point, and with core competency development and improvement as the centerpiece; to simultaneously support the improvement of current business performance and maintain sustainable competitive advantage through cultivation and accumulation of dynamic core competence. (2) Comprehensiveness TIM is a system project that requires coordination of all departments and elements. (3) Extensiveness Innovative activities permeate all processes, all matters, all employees and all spaces of the organization. (4) Dominance TIM underlines the predominance of innovation activities in corporate operations and sets the business guidelines to be followed by enterprises. (5) Openness TIM emphasizes that innovation should rely not only on internal employees, but also on all stakeholders (including upstream and downstream of value chain and strategic partners), to integrate them for all-round innovation.

3.3 Differences of TIM from Management of Traditional Innovation and Portfolio Innovation TIM replaces the original innovation management mindset, which was based on mechanism and linearity, with an ecological view and complex system theory as its

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theoretical basis and starting point. Essentially, it differs from traditional innovation management both in its theoretical foundation, objectives, strategy, structure, elements, spatial and temporal scope, and management style. In particular, it breaks through the original space–time domain and the framework, in which innovation is limited to R&D departments and researchers, and highlights the importance of alltime innovation, globalized innovation and highly-involvement innovation in the new context, thus greatly expanding the subject, elements and spatial and temporal scope of innovation. The significant difference of total innovation from traditional innovation is that it breaks through the previous pattern of isolated innovation by R&D department only, highlights the people-oriented innovation eco-view, and greatly expands the elements and spatial and temporal scope of innovation. TIM is a further stage of traditional innovation management and is a joint result of the increasingly fierce market competition and the development of innovation management theory. Portfolio innovation can be considered as a transitional stage from traditional innovation to total innovation. Differences among them are shown in Table 2. Table 2 Differences among the management on traditional innovation, portfolio innovation and TIM Differences

Traditional innovation management

Portfolio innovation management

TIM

Contents and elements Focus on individual innovations; emphasize technological innovation at the expense of other innovations

Focus on portfolio innovation; focus on portfolio innovation (in technology, organization, culture, etc.)

Focus on the integration and synergy of innovation elements; emphasis on total innovation

Coordination of product/process innovations

Merely emphasize the importance of product or process innovation

Emphasize the coordination of product and process innovation

Emphasize the coordination of product and process innovation

Innovation benefit evaluation

Limited to explicit innovation benefits

Measure explicit and implicit innovation benefits in balance

Measure explicit and implicit innovation benefits in balance

Strategic of innovation Less

Subordinate to business strategy

Innovation is oriented by and interact with strategies

Space for innovation

In-house focus; indigenous and cooperative innovation complement each other

Emphasize the integration of global resources for innovation

Intra-firm; emphasis on self-reliance; insufficient awareness of collaborative innovation

(continued)

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Table 2 (continued) Differences

Traditional innovation management

Portfolio innovation management

TIM

Relationship between innovation and core competence

Lack of attention to the interaction between innovation and core competence

Focus on the integration of innovation and cultivation of core competence

Centered on cultivation of core competence and value creation

Innovation subject

Sole emphasis on innovation by R&D departments, researchers

R&D department and researchers as key players, supported by other departments

Stress highly involvement innovation, all time innovation, all space innovation

Speed of innovation

Low speed to response to market

High-speed requirement for market response

Extremely high-speed market response requirements

Innovative organization form

Typically, unitary structure

Typically, matrix organization structure

Flat, networked, processing organization structure

Innovation source

Single source of Diversification of innovation (in-house innovation sources, R&D) such as external sources of innovation through collaborative innovation

Diversification of innovation sources, including stakeholders and the entire value chain

Communications with other departments

Once in a while

Close

Frequently

Project management style

Internal project R&D teams

Cross-functional teams

Cross-functional, cross-organizational teams, virtual teams, key teams, etc

Objectives of innovation

To fulfill tasks from above-passive innovation

Innovation targeting business goals-reactive innovation

Aim at value addition (improve business performance)-active innovation

Source Xu Qingrui. Total Innovation Management: Theory and Practice [M] Beijing: Science Press, 2007

Part III

Building Indigenous Innovation Capacity and Technology Catching-Up in China’s Industry

Overview Multi-level and diversity are defining features of China’s drive for industrial growth and building of indigenous innovation capacity. Towards technology catching-up, a discussion on building indigenous innovation capacity of the Chinese manufacturing industry in its development is presented in Part III. As a first step, an analysis of existing literature is conducted, which illustrates the importance of the technology gap, time window, national innovation system, and technology system as influencing factors of sectoral innovation and catch-up. Accordingly, a quantitative analysis is made on the changing trend of indigenous innovation capacity in China’s manufacturing industry, followed by a measurement method of industrial innovation capacity, which is a solution for an issue that existing researches fail to measure indigenous innovation capacity quantitatively at the industry level. Moreover, an analysis on the dynamics of industrial innovation capacity by industry type is thus carried out. Secondly, typical enterprises in China’s iron and steel industry, white home appliances, and communication manufacturing industry are selected for a typical case study on the improvement of indigenous innovation capability in manufacturing enterprises in order to corroborate with the quantitative analysis at the industrial level, so as to explain changes in capabilities and environment occurring in the evolution of China’s sectoral indigenous innovation capability and the contribution of total innovation to the development of sectoral indigenous innovation capability. As foreign direct investment (FDI) is big for China’s manufacturing innovation capability, an empirical analysis is conducted using FDI’s technology spillover effects. Findings indicate that the spillover effect of inter-industry FDI is a crucial factor in the development of China’s manufacturing industry’s indigenous innovation capability, and the threshold effect of independent R&D is critical in the transition between the complementary relationship and substitution effect in foreign technology transfer and independent R&D. Therefore, attention cannot be focused solely on FDI in a given industry and technology spillover from foreign-funded companies during

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industrial policy formulation to promote the innovation capability and further competence of indigenous manufacturing enterprises in that industry. As well, reasonable use of foreign capital within adjacent industries (especially those supporting industrial sectors with close production and technological linkages) and corresponding sectoral innovation policies are warranted to promote the innovation capability of indigenous enterprises. Finally, it’s about conclusions and summaries of the model choices and enhancement mechanisms for building the indigenous innovation capability of industries in the light of the study above. At industrial level, three types of formation mechanisms of indigenous innovation patterns are at play: (a) institutional constraints in a country or region shape the resource integration model of indigenous innovation; (b) resource integration determines the technological path of innovation (indigenous innovation models); (c) the technological path positions innovation (including industry options). Historically, it is evident that cultivation of indigenous innovation capability, rational use of FDI, special catch-up opportunities based on the domestic market environment, technology deconstruction based on the sectoral innovation system, and full learning and utilization of secondary innovation are the key experiences of China’s manufacturing industry in building and upgrading indigenous innovation capability and forming a sustainable sectoral indigenous innovation path.

Chapter 9

Factors Influencing Industrial Indigenous Innovation and Technology Catch-Up

1 Technology Gap and Time Window Technology Gap Theory was born in the 1960s, in which three key arguments, i.e., technology catch-up, technology accumulation, and new accumulation theory, were formed with the watershed question of whether the technology gap would converge in the long run (Zhou, 2009). Proponents of the catch-up theory argue that, in light of the history of countries’ development, the strategic deployment of technological late-comer advantage through technological imitation and technological innovation is still an effective path for developing countries to achieve technology catch-up although the path of technology catch-up varies greatly among them (Fu et al., 2013). Instead, scholars of the accumulation theory hold that there is no such thing as a latecomer advantage and that there will always be a persistent technological and economic gap between developing and developed countries. For example, real-life experience shows that the majority of developing countries failed to narrow the gap with developed countries through technological imitation or even widened the gap in some cases (Ji et al., 2011). In other words, mindless technology import and imitation are likely to make developing countries fall into the vicious circle of "import—backward—re-import—backward again". Largely, it originates from a fact that advanced technologies in developed countries may not be suitable for developing countries due to their own factor endowment structure (Lin et al., 2005). The new cumulation theory reconciles the above arguments to some extent by stating that whether the technology gap eventually converges or not is uncertain and depends largely on the time window for technology import by developing countries and their technological potential. A developing country’s space for technological progress is often a determinant of the technology gap compared to developed countries: imitation is more efficient than innovation capture when the gap is large; innovation is more efficient in case the gap is small (Lu et al., 2014).

© Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_9

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2 Role of National Innovation System in Industrial Technology Catch-Up High risks of R&D failure and high costs of continuous investment can hardly be borne by a single enterprise on its own as global competition intensifies and strategic investment in high technology increases rapidly in various countries. As a result, governments play an important role in facilitating cooperative innovation. The National Innovation System (NIS) is a proposal in this context, which shifts the research perspective away from enterprise-level technological innovation toward a NIS, a more macro-level system. The NIS refers to networks of innovation, which are made up of private enterprises and public institutions, whose interactions determine the capacity of knowledge and innovation in a country, and thus the pace and direction of innovation activities within the country (Liu & Chaoma, 2006). The Organization for Economic Cooperation and Development (OECD) describes three main types of players in the NIS: innovative enterprises focusing on knowledge dissemination and application; universities and research institutions with a mission of knowledge creation; and public sector institutions such as education and finance with a mission of supporting knowledge innovation. As the NIS theory puts it, synergistic interactions among participants such as enterprises, universities, and governments are crucial for the innovation performance of the whole country (Lundvall, 1992; Nelson, 1993). Afterward, an empirical study corroborated this view. System design is the key to better performance of a NIS. First of all, the participants of NIS should have their own roles: enterprises are primarily engaged in technology transfer and knowledge application, research institutions and universities are primarily involved in knowledge creation, governments coordinate “industryuniversity-research” collaborative innovation activities, education institutions mainly provide educational programs and training, and financial institutions fund innovation. Second, interconnections of elements within the NIS are formed through the production, dissemination, and use of knowledge with economic benefits. Therefore, reasonable systems and policies should be designed by governments to encourage “industry-university-research” cooperation.

3 Key Role of Technological Regime in Industry Technology Catch-Up Initially, the technological regime was proposed by Nelson and Winter (1977) as a framework for analyzing and explaining the variability of new models in various industries. Malerba and Orsenigo (1996) found that there are two primary models of innovation in various industries: Schumpeter Mark-I (creative destruction) and Schumpeter Mark-II (creative accumulation), providing empirical support for Nelson

3 Key Role of Technological Regime in Industry Technology Catch-Up

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and Winter’s (1977) theoretical hypothesis. Schumpeter Mark-I shows low innovation concentration and instability in hierarchical order, and more new innovators; while it is the opposite in Schumpeter Mark II. There are two perspectives on the understanding of the technological regime (Liu, 2013): A. an environmental view represented by Malerba and Orsenigo (1996), who define the technological regime as the technological environment in which enterprises operate, including technological opportunities, the appropriability of innovations, the cumulativeness of technological advances, and the properties of the knowledgebase. Additionally, Lee and Lim (2001) add factors more consistent with catch-up scenarios in developing countries, such as fluidity of technological trajectory. B. The rule-based view, represented by van den Ende and Kemp (1999), defines a technological regime as a set of laws or regulations. According to Liu Yi (2013), a rule-based view may be more explanatory than an environmental view of why different innovation paths emerge in different industries in the same environmental regime (Liu Yi, 2013). A rule-based view is more valuable to the government for predicting and gaining insight into the trend of industrial development through the design of a technological regime.

Chapter 10

Measure and Trend of Industry Indigenous Innovation Capability in China

1 Measure of Indigenous Innovation Capability in China’s Manufacturing Industrial indigenous innovation capability is necessary for local industries to catch up technologically. Despite the various views among scholars on the connotation of indigenous innovation capability, it can generally be understood by three dimensions: indigenous enterprises; ➀ control of core technology in the industry; ➁ control ability in the industrial chain; and ➂ control ability in the market (especially whether they enjoy a competitive advantage and a market share in high-end markets). Accordingly, the following indicators are picked to measure China’s innovation capability: ➀ R&D intensity. It refers to the proportion of internal expenditure on science and technology activities in product sales revenue. An important factor leading to the selection of this indicator is that enterprises’ investments in R&D represent the foundation for indigenous innovation capability development. ➁ Patent intensity. It refers to the number of patent applications divided by product sales revenue, which indicates how well an enterprise is controlling its core technology. ➂ Output value rate of the new product. It refers to the proportion of new product output value to a total industrial output value. It is picked because enterprises need to continuously launch new products to effectively meet the changing demands of the market while a higher rate of new product output also reflects the position of the enterprise in the market. ➃ Labor productivity. It refers to the value-added of industry divided by the number of employees at year-end. Usually, manufacturing enterprises with higher labor productivity are more likely to be in a favorable position in the whole industry chain. ➀ principal component analysis (PCA) is performed on these four quantitative indicators. For the generated principal components, they are transformed into non-negative data according to (x-min)/(max–min). Hence, the indigenous innovation capability of China’s manufacturing industry can be comprehensively measured using the base indicators shown in Table 1.

© Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_10

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Table 1 Selection of base indicators for indigenous innovation capability measures in China’s manufacturing industry Indicator

Measured by

Data source

R&D intensity

Internal expenditure on scientific and technological activities/product sales revenue

China statistical yearbook on science and technology

Patent intensity

Number of patent applications/ China statistical yearbook on product sales revenue science and technology

Output value rate of new product

New product output value/ gross industrial output value

Labor productivity

Industrial value-added/number China statistical yearbook of employees at year-end

China statistical yearbook on science and technology

The data consists of large- and medium-sized manufacturing enterprises from 1999 to 2007. A major reason for choosing the 1999–2007 period is that China’s manufacturing industry was in the process of shifting from imitation to indigenous innovation during this period and the data quality is consistent. The three industries of tobacco processing, petroleum processing and coking, and other manufacturing industries are excluded owing to factors such as government controls and changes in the scope of data. Their names are not shown here and are represented by figures. Among them, the data of industrial value-added are from CHINA STATISTICAL YEARBOOK, while the rest are from CHINA STATISTICAL YEARBOOK ON SCIENCE AND TECHNOLOGY Calculated indigenous innovation capability indices of manufacturing in sectors are shown in Table 2. A correlation analysis between sectoral indigenous innovation capability and FDI share is also performed, as shown in Table 3. Both intra-industry and inter-industry FDI share is significantly correlated with sectoral innovation capability. Industry indigenous innovation capability shows a significant negative correlation with intraindustry FDI share and a positive correlation with inter-industry FDI share. The negative correlation between industry indigenous innovation capability and intraindustry FDI share may be due to two factors: first, indigenous enterprises are less likely to invest in R&D since FDI can provide technology and knowledge. FDI is also more likely to be generated within industries where indigenous enterprises are less innovative, to optimize their advantages in terms of capital and technology. Additionally, this result suggests that inter-industry FDI enhances the innovation capability of indigenous enterprises.

1 Measure of Indigenous Innovation Capability in China’s Manufacturing

157

Table 2 Indigenous innovation capability index of China’s manufacturing in sectors 1999–2007 Industry

2007

2005

2004

2003

2002

2001

2000

1999

1

21.91

2006 18.58

13.67

9.66

7.82

8.47

6.25

4.01

0.00

2

32.35

28.57

22.47

25.05

20.00

20.14

20.01

27.63

16.33

3

48.26

47.99

56.22

42.78

32.08

27.29

25.49

25.41

19.64

5

26.33

21.30

21.13

22.51

18.39

24.08

18.67

16.69

14.69

6

16.33

13.53

18.31

18.59

11.89

21.97

12.67

8.96

4.10

7

9.09

7.02

6.50

7.58

4.88

12.30

18.87

3.42

4.04

8

26.14

27.58

29.05

26.02

11.21

12.89

23.42

12.69

6.97

9

22.84

14.15

13.67

13.70

7.05

24.51

33.05

18.86

20.98

10

43.19

42.62

27.58

33.97

29.51

32.06

27.25

27.93

19.29

11

32.36

24.94

26.42

20.55

17.60

19.15

21.28

19.23

19.53

12

21.82

21.75

25.33

20.02

21.18

30.92

35.09

42.10

36.34

14

56.48

47.42

47.90

47.10

40.84

37.53

31.31

35.28

25.95

15

83.54

78.17

74.96

76.98

65.23

48.88

56.34

55.41

39.50

16

52.77

46.24

45.63

40.34

44.46

48.32

59.30

33.02

28.75

17

67.47

57.47

55.83

48.36

33.38

41.86

33.14

32.15

25.54

18

31.93

28.01

27.25

30.17

23.90

33.17

36.17

38.68

31.05

19

28.68

28.53

28.19

22.87

21.34

22.98

25.85

27.64

17.75

20

64.00

56.31

51.87

46.92

40.30

41.73

30.65

28.96

20.93

21

54.90

53.81

42.54

33.15

28.43

30.17

28.52

24.91

11.58

22

35.87

29.17

34.03

28.58

24.19

26.36

24.10

20.94

19.81

23

76.03

74.21

72.01

67.19

64.07

66.38

64.95

68.11

56.78

24

90.74

77.62

69.37

67.60

66.94

65.01

65.59

63.95

58.32

25

98.72

100.00

94.13

84.65

81.10

84.54

74.99

72.18

57.53

26

78.43

73.95

80.12

80.92

86.05

98.09

93.18

83.51

77.80

27

65.49

63.41

64.62

65.75

75.63

93.82

90.05

99.12

79.56

28

57.08

43.95

44.19

46.41

35.22

60.97

45.66

57.95

57.16

Table 3 Results of correlation analysis of industry indigenous innovation capability and FDI participation FDI share

Indigenous innovation capacity

Inter-industry FDI share

Intra-industry FDI share

−0.1244 (0.0575)

−0.1966 (0.0025)

Inter-industry FDI share

0.1102 (0.0925)

158

10 Measure and Trend of Industry Indigenous Innovation Capability in China R&D intensity

High

Knowledge-intensive industries

R&D-intensive industries

Low

Labor-intensive industries

Capital-intensive industries

Low

High

Capital intensity

Fig. 1 Manufacturing industry type division

2 Changes of Indigenous Innovation Capability in Various Types of Manufacturing Industries To analyze the differences in changes in indigenous innovation capability among types of manufacturing industries, 26 manufacturing industries are divided according to two dimensions of capital intensity and R&D intensity, resulting in four types of industries, as shown in Fig. 1. Capital intensity and R&D intensity will be classified as high or low when they exceed or equal the average of all industries, and as low when they are below the industry average. Where the capital intensity is obtained from dividing the original cost of fixed assets by the number of employees at year-end. ➀ In accordance with the divided principles above: ➀ 10 labor-intensive industries, including food processing industry, food manufacturing, textiles, clothing and other fiber products manufacturing, leather, fur, feathers (down) and its products, wood processing ,and bamboo, rattan, palm, grass products industry, furniture manufacturing, teaching and sporting goods manufacturing, plastic products industry and metal products industry; ➁ 6 knowledge-intensive industries, including pharmaceutical manufacturing, rubber products industry, general machinery manufacturing, special equipment manufacturing, electrical machinery and equipment manufacturing and instrumentation and culture, office machinery manufacturing; ➂ 5 capitalintensive industries, including beverage manufacturing, papermaking and paper products, printing and reproduction of recorded media, non-metallic mineral products and non-ferrous metal smelting and rolling processing industry; ➃ 5 R&D-intensive industries, including chemical raw materials and products manufacturing, chemical fiber manufacturing, ferrous metal smelting and rolling processing industry, transportation equipment manufacturing and electronic and communication equipment manufacturing.

Innovation capacity index

2 Changes of Indigenous Innovation Capability in Various Types …

159

Labor-intensive industries R&D-intensive industries Knowledge-intensive industries Capital-intensive industries Average for all industries

Year

Fig. 2 Average industrial indigenous innovation capability for industries

The sectoral innovation capability of each industry under the above four industry types is averaged to obtain the average sectoral innovation capability of the four industry types, as shown in Fig. 2. On average, the sectoral indigenous innovation capability of all four types of industries declined in 2003 but, except for labor-intensive industries, all industries demonstrated a significant increase in 2003. Additionally, knowledge-intensive industries are outstanding in industry indigenous innovation capability, followed by R&D-intensive industries, then labor-intensive industries. ➀ The original price of fixed assets is deflated using a fixed basis of the exfactory price index for industrial products. The data are all from the CHINA STATISTICAL YEARBOOK.

2.1 Labor-Intensive Industries Most labor-intensive industries saw their industrial indigenous innovation capability decline after reaching a peak around 2001, and then rose slightly after a low point in 2003, but the overall performance remains low (see Fig. 3). The food manufacturing and wood processing and bamboo, rattan, palm, and grass products industries, in contrast, have been hovering at a low point (see Fig. 4). Only the food processing industry, the textile industry, and the metal products industry have maintained an increasing trend of sectoral indigenous innovation capability year by year (see Fig. 5). Industrial indigenous innovation capability will be transformed into data from 0 to 100 according to (x-mm)X100/(max-mm) after the principal components are obtained by principal component analysis.

10 Measure and Trend of Industry Indigenous Innovation Capability in China

Innovation capacity index

160

Clothing and other fiber products manufacturing Leather, fur, feathers (down), and related products industry Furniture manufacturing industry Cultural, educational, and physical goods Plastic products industry

Year

Innovation capacity index

Fig. 3 Labor-intensive industries with year-on-year decline in industrial indigenous innovation capability

Food manufacturing industry &Wood processing & bamboo, rattan, palm coir, and grass products

Year

Innovation capacity index

Fig. 4 Labor-intensive industries hovering at a low point of indigenous innovation capability

Food processing industry Textile industry Metal products industry

Year

Fig. 5 Labor-intensive industries with a year-on-year rise in indigenous innovation capability

2.2 Knowledge-Intensive Industries For most of the knowledge-intensive industries, their sectoral indigenous innovation capability has been rising at a very high rate year by year (see Fig. 6). It is only the electrical machinery and equipment manufacturing industry and the instrumentation and cultural and office machinery manufacturing industry that have been hovering

Innovation capacity index

2 Changes of Indigenous Innovation Capability in Various Types …

161

Pharmaceutical manufacturing Rubber products industry General machinery manufacturing Special equipment manufacturing

Year

Innovation capacity index

Fig. 6 Knowledge-intensive industries with a year-on-year rise in industrial indigenous innovation capability

Electrical machinery and equipment manufacturing industry Instruments and cultural & office machinery manufacturing

Year

Fig. 7 Knowledge-intensive industries with industrial innovation capabilities hovering in place

in place in terms of sectoral indigenous innovation capability, but they remain at a high level overall (see Fig. 7).

2.3 Capital-Intensive Industries A trend of year-on-year increase for industrial indigenous innovation capabilities in all capital-intensive industries is shown in Fig. 8.

2.4 R&D-Intensive Industries The sectoral indigenous innovation capability of R&D-intensive industries such as chemical raw materials and products manufacturing, ferrous metal smelting and calendering, and transportation equipment manufacturing shows a rising trend year

10 Measure and Trend of Industry Indigenous Innovation Capability in China

Innovation capacity index

162

Ferrous metal smelting & rolling processing industry Paper making and paper products industry Printing industry and reproduction of a recording medium Nonmetallic mineral products industry Beverage manufacturing industry

Year

Fig. 8 xxx

Innovation capacity index

by year (see Fig. 9), with a big increase. The industrial indigenous innovation capability of chemical fiber manufacturing hovers at a low level, while that of electronic and communication equipment manufacturing is declining (see Fig. 10).

Chemical raw materials and products manufacturing Ferrous metal smelting & rolling processing industry Transportation equipmentmanufacturing

Year

Innovation capacity index

Fig. 9 R&D-intensive industries with steadily rising indigenous innovation capability year by year

Chemical fiber manufacturing Electronic and communication equipment manufacturing

Year

Fig. 10 R&D-intensive industries with indigenous innovation capability hovering at low level and declining year by year

Chapter 11

Case Study of Industrial Indigenous Innovation Capability Enhancement in China

1 Indigenous Innovation in China’s Steel Industry, Such as Baosteel, etc. 1.1 History of Steel Industry in China It is roughly divided into four stages: Stage 1, the planned economy period with high centralization (1949–1978); Stage 2, the transition period at the beginning of Reform and Opening-Up (1979–1992); Stage 3, the early stage of the establishment of the socialist market economy system (1993–2000); and Stage 4, a global competition era (2001-present). (1) Stage 1 (1949–1978) The Chinese steel industry was built by copying the Soviet model wholesale at the start of this stage. From 1953 to 1957, China implemented eight major steel projects supported by the Soviet Union, along with nearly 20 enterprise renovation and expansion projects. After 1956, China’s iron and steel development saw the need to combine different steel plant sizes, so constructed steel plants, “three large, five medium, and eighteen small”. In 1964, China started the Third-line Construction again. As of that point, China’s steel industry system had its own layout. In the first phase of steel industry construction, the government played a dominant role in investment, so its operation was strictly limited by the national political and economic system. (2) Stage 2 (1979–1992) The Reform and Opening-Up brought a hug of development to China’s steel industry. China’s steel industry imported more than 700 technologies in the 1980s and used 6 billion dollars of foreign investment from 1979 to 1992, with steel enterprises like Shanghai Baosteel and Tianjin Seamless Steel Tube Company. The steel industry © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_11

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expanded in scale in the second phase, with the appearance of some township enterprises; in addition, technical renovation started to be emphasized, to enable steel enterprises to go on an intension development of expanded reproduction. (3) Stage 3 (1993–2000) The establishment of the socialist market economy system changed the focus of the Chinese steel industry to market demand, which manifested in two changes:1 a shift from scale expansion to structural adjustment and optimization:2 steel products from a long-term shortage of quantity to a periodic, structural surplus. (4) Stage 4 (2001 to present) In the twenty-first century, China’s steel industry has entered a stage of global competition. During this period, China’s steel production broke 200 million tons, 300 million tons, 400 million tons, and 500 million tons marks in succession, but in parallel, high-end products are still dependent on imports. The “big but not strong” further highlights the great challenge to a further development of China’s steel industry.

1.2 Status of Innovation Capability Development of Major Steel Enterprises in China After years of development of China’s steel industry, the steel self-sufficiency rate increased from 61.25% in 1952 to more than 106.3% in 2017, with year-by-year growth in export scale, it has been a fact that China stands as a major steel country. However, high-end products are still dependent on imports for some products. China’s steel enterprises will focus their efforts on product upgrading and industrial transformation in the next stage, with the improvement of sectoral innovation capability as the core. In this book, innovation capability is measured by patents, with a balance of data availability. Four steel enterprises are picked for analysis. Figure 1 presents their patent trends (design is not included). (1) Since the Patent Law of the People’s Republic of China was officially promulgated in March 1985, the data collected were also retroactive to 1985. (2) All four steel enterprises show some degree of growth in patent development after 2000 though they had been slow before. In general, the increase in innovation capability of the four steel enterprises after 2000 could be attributed to the fact that China formally joined the World Trade Organization (WTO) in 2001, where the intense international competition forces China’s steel enterprises to innovate so as to effectively cope with the competition, as well as attention to the protection of indigenous IPR. 1

History and Achievements of China’s Steel Industry [EB/OL]. (10-18-2018) [12-01-2018]. http:// www.sunnychina.com.cn/index.php/index-view-aid-418.html. 2 Steel in 40 Years since Reform and Opening Up: Self-sufficiency Rate [EB/OL].

Number of patents (excluding design)

1 Indigenous Innovation in China’s Steel Industry, Such as Baosteel, etc.

165

Anstell WISCO Baosteel Shougang Total

Year

Fig. 1 Patent trends of four steel enterprises in China 1985–2017

1.3 Innovation Capability Structure of Major Steel Enterprises in China An insight into the internal structure of China’s steel sectoral innovation capability can be gained by an analysis on the structure of the three types of patents owned by four steel enterprises (ANSTEEL, WISCO, Baosteel, and SHOUGANG) (see Fig. 2). Among the four steel enterprises, it is 65.81% that invention patents of SHOUGANG account for its total patents, 47.25% that of WISCO, and 36.26% and 29.99% that of ANSTEEL and Baosteel respectively. A preliminary judgment can be made that there is still a large shortage of indigenous innovation capability in the four steel enterprises. For further analyzing the intrinsic structure of innovation capability in the steel industry, an analysis on the specialized distribution structure of patents held by the above four steel enterprises is conducted according to Derwent Class Code and using DII (Derwent Innovations Index, an international authority) database, so as to discover the distribution of innovation capability in the field of technology classification within the steel industry in China.3 The patents are classified according to the Derwent Class Code, and the top 10 are selected from highest to lowest patent numbers for analysis. Patent numbers of ANSTEEL, WISCO, Baosteel, and SHOUGANG in the top 10 specialties according to Derwent Class Code reach 97.67%, 66.90%, 95.67%, and 78.03% of total patents of their companies respectively. There is a large proportion of patents not closely related to the main steel industry in the four steel enterprises selected, except for specialized patents not listed. 3

Data from the DII database, as of May 9, 2010.

Utility Model Patent

Utility Model Patent

Utility Model Patent

Design

Invention Patent

Utility Model Patent

d. Structure of SHOUGANG’s Three Type Patents (1985-2017)

Design

Invention Patent

c. Structure of WISCO’s Three Type Patents (1985-2017)

Fig. 2 Patent structure of ANSTEEL, WISCO, baosteel and SHOUGANG 1985–2017

Design

Invention Patent

b. Structure of Baosteel’s Three Type Patents (1985-2017)

Design

Invention Patent

a. Structure of Ansteel’s Three Type Patents (1985-2017)

166 11 Case Study of Industrial Indigenous Innovation Capability …

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167

(1) Patents of the four steel enterprises are more reflected as process incremental innovation, primarily focusing on the auxiliary process innovation that serves the core process, such as innovations related to monitoring instruments, computer peripherals, etc. (2) Specialty categories of non-main business patents of four steel enterprises are primarily concentrated in fields such as scientific instruments, engineering instruments, industrial electrical equipment, computers and engineering machinery tools, reflecting that absorption has been carried out in China’s steel industry based on technology import, with a learning model of “learning by using”. It is a passive learning, solution-oriented learning, so the innovation carried out is a secondary innovation of non-core technology and lower level, which plays a relatively minor role in terms of importance and breakthrough. Patents on computers as well as their peripherals account for a significant proportion in all four steel enterprises, which may be related to China’s industrial policy of vigorously promoting the construction of information technology in the steel industry since 2000, thus contributing to a certain amount of computer specialty patents generated by steel enterprises during the design, development, and construction of information technology.

1.4 Evolution of Industrial Innovation Capability of China’s Steel Industry ANSTEEL, WISCO, Baosteel, and SHOUGANG are representative from the perspective of innovation capability development based on the above analysis together with materials of their history. Therefore, this book will derive insight into the evolution of China’s innovation capability in the steel industry based on the analysis of these four steel enterprises. (1) Investment and import capacity are keys to the early development of China’s steel industry The steel industry is both capital-intensive and R&D-intensive. The growth of China’s steel industry initially benefited from planning and investment from the government. Scale investment is a resource element for the development of the steel industry. China’s steel industry primarily aims to solve inadequate supply in the domestic market from copying the Soviet model to importing technology after the reform and opening up, so it is primarily investment-driven scale expansion in the first two stages, and technological innovation is mostly reflected in the ability to import technology and some incremental small improvements in the process of adaptive use.

168

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(2) The key to secondary innovation is the ability to couple the “learning by using “ of technology with the social-technical system of enterprises Localization issues of foreign technology and equipment are mostly involved in the construction and operation of steel enterprises in China, mainly including two types: (1) localization issues brought by changes in the physical environment of foreign technology and equipment operation, which is a problem within the technology system; (2) localization issues brought by changes in the social, humanistic and management environment of technology and equipment operation, which is a problem of social-technological system synergy of enterprises. The process of solving these two types of issues is an ongoing process of adaptation, adjustment, and innovation for enterprises. Among them, the localized application of technology is primarily manifested in process adjustment and associated innovation in engineering components that assist in process adjustment. This type of innovation is incremental, localized, and fine-tuned. However, it will be a larger degree of innovation, a process of portfolio innovation, when issues involving the coordination of a social subsystem with a technological subsystem within the enterprise are addressed. As the above-mentioned data shows, innovations such as “engineering instruments” and “mechanical tools”, which are auxiliary to the process adjustment of enterprises, are fruits of the first type of issue. The portfolio innovation for the second issue above breeds more important and significant technological innovation, including process innovation and product innovation, as well as management innovation, for example, the “An’gang Constitution”, a major innovation in management. To a certain extent, this view is supported by the fact that the analysis of the specialized structure of patents held by four major steel enterprises in China mentioned earlier shows that there are more patents in the category of auxiliary and engineering components. (3) Integration capacity is the key to indigenous innovation in China’s steel industry In 1992, China established the socialist market economy system, then steel enterprises gradually took the dominance of investment. As a result of economic globalization, China’s steel industry is at the forefront of global competition. New emerging fields such as information technology, networks, new materials, and new energy sources are constantly going forward, bringing opportunities for sectoral innovation and development. Innovation in China’s steel industry comes with external pressure, intrinsic motivation, and opportunities. As shown by the previous data analysis, China’s steel industry has increased its number of patent applications at a faster rate in the twenty-first century but the specialized structure of patents reveals an immature innovation capability in the main steel industry, while the number of patents for IT-related computers and their peripherals, as well as scientific instruments related to photoelectric measurement technology, occupies a certain proportion. To a certain extent, it shows a further embedding of information technology in the steel industry after China has vigorously promoted the construction of enterprise information technology. As a result, the possibility of driving sectoral innovation by using information technology increases. Similarly, it is the key for China’s steel industry to seek a new path of development by incorporating emerging technologies into its

2 Industrial Indigenous Innovation of Home Appliance in China: Washing …

169

innovation scope for effectively integrated innovation. Therefore, the integration of new emerging technologies, such as information technology, is the key to achieving indigenous innovation in the steel industry during this period. (4) The overall innovation capability of the steel industry is also influenced by the innovative development of major enterprise Leading enterprises in China’s steel industry, such as Baosteel, take an active role in promoting innovation throughout the industry. Baosteel defines its direction of technological innovation through its strategic innovation, i.e., shifting from the strategy of high quality to the strategy of “high quality + scale”, which improves its overall technological innovation capability and enables it to make a breakthrough from “a follower” to a “leader” in the industry, and plays a leading role in the innovation of the whole steel industry. Moreover, Baosteel jointly set up an R&D fund with the National Natural Science Foundation of China, together with the relevant universities to formulate a fund project guideline to select R&D projects in the steel industry for funding from the perspective of sectoral innovation. Now, Baosteel has put forward a green innovation strategy, “environmental operation”, under the overall strategy of “high quality + scale”, which lays the foundation for Baosteel to promote sectoral innovation more effectively.

2 Industrial Indigenous Innovation of Home Appliance in China: Washing Machine as an Example The development process of China’s home appliance industry centrally reflects the course of Reform and Opening-Up. During the transition from a planned economy to a market economy, the home appliance industry continues to adapt to market demand, such as continuous adjustment of product and industrial structure, “bringing-in” and “going global” strategies, as well as technological advances to achieve rapid development. Thus, the industry is going from strength to strength. The production of major household appliances such as refrigerators, washing machines, air conditioners, microwave ovens, and electric fans has been ranked among the top in the world (see Fig. 3), and well-known brands such as Haier, TCL, KELON and Hisense have been established in appliance markets at home and abroad. A mature industry is forming in the home appliance sector in China, which is characterized by high product variety, reliable quality, high-cost performance, a complete industrial chain, and a strong capacity for integrated innovation and indigenous innovation. The industrial innovation capability of the white appliance industry is divided into three stages according to the characteristics of industrial technology innovation, i.e., industrial start-up stage, expansion stage, and development stage. Throughout the history of the world’s washing machine technology development, several major technological changes and disruptive innovations can be seen. Despite performance improvements such as energy-saving, noise reduction, and intelligence

11 Case Study of Industrial Indigenous Innovation Capability …

Output/10,000 sets

170

Washing machine Refrigerator Air conditioner Total

Year

Fig. 3 Output scale of China’s home appliance industry (washing machines, refrigerators, air conditioners) 1985–2015. Source China Statistical Yearbook and Chian Appliances

throughout the development of washing machines, such as the use of sensor technology to improve the washing effect of drum washing and the combination of steam technology and dual-sensor drying technology to improve the efficiency of washing and drying, none of them have caused an overall change in the industry or dominated the development trajectory of industry technology. In line with the reform and opening up, the Chinese washing machine industry has advanced from the import and imitation to indigenous innovation, from single-cylinder to double-cylinder to full-automatic, catching up with and surpassing the international technology level, and took a major share of the domestic and foreign markets with the advantage of cost performance. As washing machine technology evolves, such as with new eco-friendly and energy-saving washing machines, Chinese enterprises launch relevant products timely with mass production and are in a position of developing breakthroughs, such as dual-powered washing machines. Therefore, the process and pattern of technology advancement in China’s washing machine industry will provide a closer insight into the mechanism of innovation and capacity enhancement in China’s white appliance industry.

2.1 Industry Start-Up (1979–1989): Technology Import and Imitation Beginning The home appliances industry in China started from almost nothing. China, which had just reformed and opened up, was in a shortage economy with scarce materials. It also coincides with the international industrial shift of high-cost industries from developed countries to low-cost space. A group of state-owned collective enterprises in the

2 Industrial Indigenous Innovation of Home Appliance in China: Washing …

171

Table 1 Characteristic and contents of innovation capability development in the washing machine industry during stage 1 Element

Characteristics

Content

Technology

Import, imitation

Import of production line, technology, and equipment

Government

Manage, guide, and regulate the industry Standards, fixed production, regulation, planning

Market

Shortage economy, demand liberalization

The whole industry is in short supply

Structure

Multi-introduction, initial industrial scale

Full import, widespread, and repeated construction

Orientation

Reform and opening up, revitalize the economy

To lay the foundation of the white goods industry in China

planned economy system initiated the primary development of the home appliance industry by importing foreign technology and equipment guided by national policies, whereby import and imitation emerged as a dominant model for the home appliance industry (Zhen et al., 2009). For example, the first batch of washing machine production lines were imported from Toshiba, Japan in 1980; more than 40 manufacturers across China imported more than 60 advanced technologies from Japan, Britain, France, Italy, etc. in 1983; the “Little Swan”, a fully automatic washing machine, was put into production in Wuxi in 1987 as a national scientific and technological research project. For example, the first batch of washing machine production lines were imported from Toshiba, Japan in 1987; more than 40 manufacturers across China imported more than 60 advanced technologies from Japan, Britain, France, Italy, etc. in 1983; the “Little Swan”, a fully automatic washing machine, was put into production in Wuxi in 1987 as a national scientific and technological research project. The entire washing machine industry was in short supply, for which strict macro-control was exercised by the state on industrial development. Since 1985, the production of refrigerators, washing machines, and air conditioners required a fixed production license issued by the state. Characteristics and contents of innovation capability development of the washing machine industry in the first stage are shown in Table 1.

2.2 Industry Expansion (1990–1998): Portfolio Innovation and Market Expansion China’s domestic home appliance market gradually expanded after entering the 1990s, as its economy went on reforms and opened to foreign influences. In the midto-late 1990s, home appliance production lines were launched around the country after the abolition of the fixed-point production system for home appliances, since which the market started to shift from undersupply to oversupply, with household

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appliance sales such as refrigerators and air conditioners shifting from a seller’s market to a buyer’s market, prompting enterprises to carry out technological R&D and upgrade to differentiate production to meet more individualized demands. There was a wave of joint ventures between Chinese and foreign home appliance brands as a result of the influx of home appliance products from developed countries into our market while domestic brands started to explore the market nationwide and started entering overseas markets. There was a wave of joint ventures between Chinese and foreign home appliance brands as a result of the influx of home appliance products from developed countries into our market while domestic brands started to explore the market nationwide and started entering overseas markets. Numerous home appliance enterprises were engaged in developing new products. In 1994, the situation of exclusive production of drum washing machines by Jinan Washing Machine Factory in the washing machine industry had been broken, i. e. drum washing machines started to be produced by enterprises such as Little Swan, Haier, Meiling, and Lanju, relying on the technology imported. Wave washing machines tended to be large in the capacity as well. In 1995, the use of microcomputer technology to enhance home appliances was a trend, of which fuzzy control technology was applied to washing machines. The first automatic drum washing machine with an all-plastic shell and three-in-one, washer-dehydration-dryer, was born in Haier of the same period. Haier launched the first domestic inverter washing machine in 1998, kicking off the washing machine industry into the era of an inverter. As competition intensifies, the concentration of the entire industry started to increase. In 1996, the first round of price war and asset reorganization in China’s home appliance industry kicked off, with enterprises such as Haier Group, TCL, Konka Group, Changhong Group, KELON Group, and GREE Electric starting largescale mergers and reorganizations to form large groups. In the wake of the introduction of the competitive industrial policy, the market took over resource allocation and the superior survival mechanism came into effect. As a result, the washing machine industry, on the contrary, accounted for the major domestic market in the fierce competition and gradually extended to the global market as an influential, thus increasing industrial technology and competence. Characteristics and contents for the development of innovation capability in the washing machine industry at Stage 2 are shown in Table 2.

2.3 Industry Development (1999 to Present): Indigenous Innovation and Globalization As China entered the WTO in the twenty-first century, domestic enterprises were confronted with the global market, and foreign brands flowed into the Chinese market; MNCs moved their factories and R&D centers to China, resulting in a loss of the original manufacturing cost advantage of home appliance enterprises. The energysaving and eco-friendly become a trend in the industry, which accelerates the speed of

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Table 2 Characteristics and contents for development of innovation capability in the washing machine industry Element

Characteristic

Content

Technology

Absorption, secondary innovation

Technology R&D and upgrading, differentiated production (process innovation)

Government

Guide and standardize the industry

Shift from scale management to technical guidance, to promote the establishment of a modern enterprise system by policy

Market

Undersupply turn to oversupply

To rational competition from the disorderly competition, from domestic saturation to overseas markets

Structure

Asset reorganization and industrial concentration increased

Industry pattern changed; international competition; the market pattern reshuffled

Orientation

Establishment of a socialist market system

The home appliance industry developed healthily enabling China to be a major player in the home appliance manufacturing

product renewal in the market, and gradually improves the level of industry standards, thus making the standard a booster for domestic brands to improve product quality (Han, 2008). Diversification of market competition began to manifest, and since then product development, new technology application, marketing, brand integration, and access to international markets take the focus of concern for manufacturers. In 2002, a new round of reorganization and integration within the home appliance industry was initiated, which emphasizes the cooperation of complementary advantages and resource sharing, unlike the previous ones. Several rounds of restructuring and adjustment have rapidly concentrated the production capacity of the white goods industry, which has been increased by agglomeration and integration gradually (Ju et al., 2009). Indigenous innovation serves as the main theme of enterprise technology development. Lots of enterprises accelerate the technical transformation of the traditional production line of home appliances, improve the innovation capability of the process, and combine integrated manufacturing, industrial automation control and information technology into home appliances, which improves the technological content and technology level of home appliances comprehensively. The entire white appliance industry is advancing from “Made in China” to “Created in China.” Little Swan launched China’s first DC inverter washing machine in 2000; the EU introduced the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and Waste Electrical and Electronic Equipment Directive (WEEE) in 2004, while China implemented an energy labeling system, starting a new round of green competition in China’s home appliance industry. The first generation of Haier’s cross-border washing machine, which combines GE technology, Mercedes-Benz manufacturing and the P&G laundry care program, was unveiled in Qingdao in September 2008; in 2010, Haier’s Casarte advanced drum washing machine, which integrates the wisdom of users, was launched, marking the

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Table 3 Characteristics and contents for development of innovation capability in the washing machine industry Element

Characteristics

Content

Technology

Advance from portfolio innovation to total innovation, indigenous innovation

Upgrade from foreign technology import to all-round cooperation in the capital, R&D, manufacturing, procurement and even global marketing

Government

Guide and standardize the industry

Shift from scale management to technical guidance, to promote the establishment of a modern enterprise system by policy

Market

Oversupply

Regulate disorderly competition to rational competition, set industry standards

Structure

Asset reorganization and industrial concentration increased

Industry pattern changed; international competition; the market pattern reshuffled

Orientation

Industrial structure upgrading

Forward from made in China to created in China, improve the industrial value chain

white goods industry has officially entered the “compound era”; as of 2014, Haier developed a cleaning-free washing machine, with its first “wisdom ball” technology, which can realize “barrel-washing in parallel with cloth-washing” through physical cleaning; in 2016, Haier innovated the “no water between barrels” technology, so that a “full isolation” is kept between the inner and outer barrels of washing machines, thus avoiding a second pollution of clothes by dirt entering the inner barrel. The latest technologies such as fuzzy control technology, frequency conversion technology and magnetized ozone have entered the masses’ homes, during which domestic brands have endured severe market tests, i. e. improvements are rapidly made in capacity scale, technology R&D, product promotion speed and internal management. Characteristics and contents for the development of innovation capability in the washing machine industry at Stage 3 are shown in Table 3.

2.4 A Summary of Innovation Capability Development Process of the Washing Machine Industry China’s white home appliance industry has gone through a path of development from absorbing advances from foreign science and technology, secondary innovation to open indigenous innovation (Zhen et al., 2009), during which: (1) Innovation elements interact to form an overall synergistic development model in which technology continuously drives the development of washing machine products, performance, etc. (Xu et al., 2000). The acceleration of the global economic integration process makes the development of the home appliance

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industry gradually transcend the boundaries between countries, and the boundaries, models and contents of innovation are also greatly expanded. Many huge home appliance manufacturers are making strategic deployment of production and markets globally, while technology cooperation is also evolving into global resource integration in a broader sense. (2) Chinese manufacturers are well-positioned to take advantage of this huge market. Technology and markets interact with each other, the national macrocontrol also has a significant impact on the development of the white goods industry, by which a shift from control to liberalization and then to guidance. Enterprises are integrated and restructured following the laws of the market, whereby resources are optimally allocated, which ensures the healthy development of China’s washing machine industry. Innovation in science and technology has gradually reduced the vicious competition caused by product homogenization, replaced by a faster rate of innovation in home appliances. (3) Indigenous innovation is backed by solid technological innovation capabilities. The competition in the washing machine market is going from the era of price competition to that of value competition, towards an era of high quality and high technology competition, and heading towards the high point through disruptive innovation and technological leap. The technological progress of household appliances in line with the trend of social life is moving towards safety and health, energy-saving and eco-friendly, and economic efficiency. Intelligent technologies based on eco-design and IoT are leading the way in the development of washing machine technology.

3 Indigenous Innovation in China’s Communication Manufacturing Industry: Datang, ZTE, and Huawei as Examples 3.1 Late 1G to Pre-2G Era (1982–1995) Domestic enterprises adopt foreign standards to absorb advances in foreign science and technology aiming at shaping original innovation capability and then indigenizing foreign technologies through reverse engineering to build a technical knowledge base. A primary contradiction at this stage was a conflict between large demands for telecommunications brought about by the Reform and Opening-Up with the technological backwardness of local enterprises. Developed countries have commercialized a widespread digital communication network, while our country was still at the simulation technique stage. Local enterprises with outdated technology were unable to provide the equipment required for the construction of the communication network. Therefore, an industrial policy on the supply-side was formulated by the Ministry of Posts and Telecommunications of the People’s Republic of China in 1982, namely,

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“combining introduction, absorption and innovation, with emphasis on innovation”, aiming at promoting technology transfer and enhancing R&D capability through the FDI model. First, the large-scale introduction of advanced SPC exchange to equip the communication network; second, imported advanced technology through foreign investment under an “exchanging market for technology” principle, and accelerated the absorption; third, speed up the original innovation based on absorption, so as to build the communication network with domestic equipment. This initiative aims to take advantage of the imperfection of the patent law to indigenize foreign technology through reverse engineering, accumulate local technical knowledge, and lay the foundation for the formation of technologies and products with independent IPR. Here is the mechanism of innovation capability improvement of enterprises in this stage. (1) Strategic orientation influences the direction of resource allocation, which then contributes to the accumulation of technological knowledge. Guided by the policy of “combining introduction, absorption and innovation, with emphasis on innovation”, local enterprises devote their major resources to import and absorption. It accelerates the absorption of SPC exchange technology through the introduction of technology along with equipment through joint ventures with advanced foreign-funded companies. (2) Private enterprises are market-oriented and keenly aware of the market demand for SPC exchange, which spontaneously combine independent R&D and market demand to accumulate a technological base. A former electrical marketing manager of Huawei said: “Huawei is going on ‘ Trade-Production-Technology’, i.e., to be aware of market demand through trade, and then perform production and R&D.” Group breakthroughs were gradually formed in the field of large SPC exchange in China at this stage. HJD04 digital SPC exchange, jointly developed by the Information Engineering University and the Post and Telecommunications Industry Corporation, succeeded in 1991; ZXJ10 was launched by ZTE in 1995; C&C08B was launched by Huawei in 1996. HJD04 digital SPC exchange, jointly developed by the Information Engineering University and the Post and Telecommunications Industry Corporation, succeeded in 1995; ZXJ10 was launched by ZTE in 1995; C&C08B was launched by Huawei in 1996.

3.2 Late 1G to Pre-2G Era (1982–1995) Domestic enterprises developed TD-SCDMA international standards for 3G independently by combining technology and market knowledge through open integrated innovation and disruptive innovation to form core competence and international standard.

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A primary challenge at this stage was the contradiction between the domestic market demand and latecomer disadvantages of domestic enterprises caused by the lack of core competencies. Domestic enterprises missed the early opportunities of 1G and 2G because: (1). mobile terminal equipment manufacturers in China failed to master the core technology in the 1G era, but were stuck in the imitation of mobile phones; 2. a following technical standard strategy was adopted in China in the early 2G era, as product development was carried out under foreign standards. Domestic enterprises missed the early opportunities of 1G and 2G for the following reasons: 1. mobile terminal equipment manufacturers in China failed to master the core technology in the 1G era, but were stuck in the imitation of mobile phones; (2). a following technical standard strategy was adopted in China in the early 2G era, as product development was carried out under foreign standards. It underscores the importance of building core competence for participation in the development of international technical standards. The formation of core competencies requires not only a technical knowledge base but also a market base. For Chinese manufacturers, it is not only technical issues that need to be solved in the innovation process but also market issues. In response to this contradiction, policies were set by the Ministry of Posts and Telecommunications of the People’s Republic of China from both supply and demand sides to promote technical capacity development of domestic enterprises and develop the domestic market. On the supply side, joint ventures (Shanghai Bell) were supported to introduce advanced technologies to break the technological monopoly of MNCs. Meanwhile, 5% of the telephone initial installation fund was taken by the State Council from 1999 for the R&D of mobile communication technology equipment so as to promote indigenous innovation capability. In early 1998, the TD-SCDMA draft was researched based on SCDMA technology by the Institute of Telecommunication Science and Technology, former Ministry of Posts and Telecommunications of the People’s Republic of China. On the demand side, communication equipment enterprises with independent IPR were supported to develop the market in order to enhance the competence of domestic enterprises. From 1996 to 1998, user coordination meetings were continuously held by the Ministry of Posts and Telecommunications of the People’s Republic of China to guide a purchase of China Unicom’s CDMA system equipment to encourage its positive purchase of domestic equipment. It was more visible atn this stage that enterprises behaved more freely and competitively than state-led behaviors. It is a decreased proportion of government funds in R&D expenditure and an increase in enterprise, as shown in Fig. 4. Since 1996, it has been a parallel process of technology introduction and original innovation in order to form the core competence of the company, without shortsighted strategy due to the rapid benefits generated by technology introduction. It was a parallel innovation model of open integrated innovation and disruptive innovation during this stage. Here are mechanisms of innovation capability improvement of enterprises during this stage.

11 Case Study of Industrial Indigenous Innovation Capability … Proportion (%)

178

Proportion of government funding to the amount raised for R&D Proportion of enterprise funding to the amount raised for R&D

Year

Proportion (%)

Fig. 4 Comparison of R&D funding sources in China’s communication equipment manufacturing industry 1995–2001. Data source China Statistics Yearbook on High Technology Industry 1996– 2002

Proportion of R&D input to sales revenue Proportion of Non-R&D input to sales revenue

Year

Fig. 5 Proportion comparison of R&D and non-R&D inputs to sales revenue in China’s communication equipment manufacturing industry 1995–2001. Data source China Statistics Yearbook on High Technology Industry 2006–2009

(1) Domestic enterprises acquire technology through foreign cooperation as a basis for rapid access to domestic rural markets for their products. Since 1997, joint R&D labs and business partnerships have been established between Huawei and ZTE with leading international companies such as Microsoft and IBM, as well as extensive technical cooperation with many domestic universities. Domestic enterprises, with low-cost and high-quality services represented by Huawei and ZTE, started from the low-end market when GSM technology entered maturity, capturing the market neglected by foreign-funded companies based on technical improvements and “encircling cities in rural areas”. (2) Coordinate corporate and technology strategies, carry out independent R&D strategies under the corporate strategy of “developing core competencies”, and redeploy resources to original innovation. It is firstly manifested in the funding input, the intensity of R&D funding input was always higher than that of non-R&D funding input after 1995, as shown in Fig. 5. It has been over RMB 1 billion in R&D investment by Datang in TD-SCDMA, and about 15% of sales revenue is invested by both Huawei and ZTE in R&D respectively. Second, there is a continued increase in the number of scientists and engineers, as shown in Fig. 6. (3) Diversification strategies of major enterprises in combination with the characteristics of the communications industry promote the accumulation of core competencies.

179

Proportion (%)

3 Indigenous Innovation in China’s Communication Manufacturing …

Year Fig. 6 Proportion of scientists and engineers to total S&T personnel in China’s communication equipment manufacturing industry 1995–2001. Data source China Statistics Yearbook on High Technology Industry 2006–2009

Liu Yubo, former ZTE IPR Director, said, “The transition from 2G GSM to 3G WCDMA is smooth and similar in basic principle.“ Accumulation of core competence will be achieved through either Huawei’s focused “the principle of intensity of pressure” or ZTE’s “phone sea tactics” because existing products are originated from incremental innovation of previous products, and the direction of core competence accumulation continues. (4) Guided by market-oriented strategies, enterprises grasp customer (operator) demands to direct technology R&D and adjust R&D management processes to facilitate the integration of technology and market knowledge. First, direct the technology R&D based on customer demands. Datang, Huawei, and ZTE all actively participate in relevant standardization conferences (e.g., ITU standard conferences). Fang from Huawei’s Enterprise Development Department said, “The standard that customers (operators) think highly of will be picked. Because it might be the direction that customers need.” Fang from Huawei’s Enterprise Development Department said, “The standard that customers (operators) think highly of will be picked. Because it might be the direction that customers need.” Second, meet customer demands during R&D. Huawei’s traditional R&D model targets product delivery, but fails to provide quick feedback on issues reflected by customers. So, Huawei introduced IBM’s Integrated Product Development (IPD) process in 2000. After IPD is implemented, a concept model of the product will be formed by R&D members such as marketing representatives and R&D representatives facing various customers through all-around market research and analysis of future products, and then it will be repeatedly verified to direct users. The IPD process solved the uncertainty of Huawei’s past demands, which ensured the implementation of Huawei’s market-oriented strategy. Local enterprises have achieved product diversification (data communication, mobile communication, optical transmission) based on SPC exchange technology at this stage, joining the second echelon of the global communication equipment manufacturing industry. TD-SCDMA standard proposed by Datang Group was accepted as the international 3G standard by the ITU in May 2000, together with WCDMA proposed by Europe and CDMA2000 proposed by the United States. By then, China had indeed taken possession of its first international standard for telecommunications.

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3.3 Mid-Late 3G to 4G Era (2002 to Present) Domestic enterprises promote the industrialization of independent international standards and enter the international development stage to form international competence. The industrialization of TD-SCDMA standard, which was developed and completed initial commercial trials at last stage, was not satisfactory, however. It was only 5%, 4%, and 9% of the market share for Chinese enterprises in cell phones, base stations, and mobile switches, respectively, by the end of 2000. Therefore, what we face in this stage is the contradiction between the fierce competition of globalization and the lack of core patents (affecting the discourse of technical standards), the incomplete industrial chain (affecting the industrialization of technical standards) and consequently the lack of international competitiveness of domestic enterprises. Much attention has been paid to the improvement of the industry chain by the Ministry of Information Industry in order to solve this contradiction, and antivicious competition regulations were introduced in 2008. Dominance turns from joint ventures to domestic private enterprises during industrialization, and the proportion of innovation investment increases significantly by enterprises and decreases significantly by government and financial institutions. Therefore, an innovation model paralleling the defensive technical standard strategy and the leading technical standard strategy was picked by domestic enterprises to make local breakthroughs and drive the whole while actively following advanced foreign technologies. Most domestic communication equipment manufacturers have explicitly included IPR and technical standards in their company’s strategic objectives. Here are mechanisms of innovation capability improvement of enterprises during this stage. (1) Establish organizational processes to coordinate IPR strategy and standards strategy and direct R&D An example is Datang, which implements a leading technical standard strategy. Patent information will be collected first during the process of setting 3G and 4G standard proposals or new products, followed by periodic analysis, which requires a high degree of novelty for the patents. While process discipline is more concerned by Huawei and ZTE, which practice a defensive technical standard strategy. (2) A Cost leadership strategy through improved management processes Communication equipment manufacturing is an industry characterized by high R&D investment, but in the process of internationalization, both ZTE and Huawei enjoy significant cost advantages. Huawei‘s period expenses are 1/6 of those of western companies in R&D and 1/3 of those in marketing, partly because of the relatively low cost of labor in China, and partly due to the improvement of management processes in China to improve internal operational efficiency and ensure the implementation of cost leadership strategy. Liu Yubo, former director of IPR at ZTE, said, “cost

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control will not be made from R&D funding, instead efficiency will be improved through management.” Many rules and thresholds were set for ZTE when applying for patents, and reviews were organized to determine patent deployment, as the cost of patent applications varies from country to country. (3) Technology indigenization during internationalization through market strategy, organizational structure adjustment, and process management First, major enterprises such as Huawei and ZTE adopt the multi-level market strategy of “encircling the city with the country”. India and Africa are similar with China in terms of technology and market environment in the 2G era, so the mature domestic technology will be used primarily for improvement in line with local market demands (e.g., temperature). The European and American markets, however, have higher requirements for technology, generally requiring 4G LTE. By competing in the EU and US markets, the latest technologies can be tracked and learned through contact with operators and equipment manufacturers, which in turn supports the development of the market, in addition to grasping market demands. Second, provide feedback on customer needs through a synergy of organizational structure and marketing strategy. First, build a three-tiered marketing system to ensure that information on unique market demands in different regions is collected. Second, conduct R&D layout globally by major enterprises under the guidance of internationalization strategy to keep up with international advanced technology. There is an increase in enterprises setting up research facilities abroad. Third, the IPD process ensures that the R&D team can customize the product to meet the different demands of our customers. The TD-SCDMA industry chain takes shape at this stage. Driven by the 3G industry, the profit margin of the communication equipment manufacturing industry in 2009 was 5.3%, an increase of 1.7% year on year. In October 2009, the 4G TDLTE-Advanced technology program with indigenous IPR submitted by China has been recognized by 3GPP, a European standardization organization. It, taking in the main technical elements of TD-SCDMA, was the latest achievement of China in the field of broadband wireless mobile communication at that time.

3.4 Summary of Innovation Capability Development in China’s Communication Equipment Manufacturing Industry Experiences are extracted from the above analysis on the development of China’s communication manufacturing industry and indigenous innovation capability enhancement.

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(1) Institution and industrial policies from Chinese government play an influential role in driving industrial development as enterprises in China are at a latecomer disadvantage (backward technology and market failure) First of all, supply-side policies are introduced to the state step by step to speed up the accumulation of core technology of local enterprises in response to the backward technology of local enterprises. (1). import advanced technologies by using joint ventures and encourage indigenization of foreign technologies by local enterprises through reverse-seeking engineering, which builds up a technological knowledge base; (2). taking advantage of government funding and research tasks for advanced technologies (2G GSM and 3G TD-SCDMA), Datang takes the lead in forming the TD-SCDMA industry alliance, and drives the improvement of indigenous innovation capability of enterprises in the alliance through “learning by doing”. Second, demand-side policies are introduced to open up the market for local enterprises in response to the monopolization of the domestic market by foreign manufacturers. Operators are encouraged to purchase domestic equipment, thus breaking the lock on the market by MNCs and encouraging healthy competition among indigenous enterprises. Finally, linkage policies are launched by China in response to the contradiction between the monopolistic nature of patents and the openness of standards, leading to formation of industrial alliances and sharing of IPR. (2) Cultivate a sense of international competition and participation in international standard-setting, and indigenize technologies by full use of cost leadership and market demands at home and abroad First, the weight of the international standard discourse depends on the technical capacity and market size. China’s enterprises participate in setting international standards for 3G and 4G by making full use of the capabilities accumulated in the first two stages, and coordinate strategies for IPR and standards through process transformation. Next, Chinese enterprises create and play a cost advantage in the international competition, and realize technology indigenization in foreign markets by adopting a multi-layer market strategy of “encircling cities with the country” combined with the characteristics of communication technology (no much difference in technology in the same standard). It is a process where technology and market knowledge are combined, enabling major enterprises such as Huawei and ZTE to meet customer demands through synergy among organizational structures, R&D processes, and marketing strategies.

Chapter 12

Impact of FDI on Innovation Capability and Performance of China’s Manufacturing Industry

1 Divergence Among Existing Studies Foreign direct investment (FDI) plays an important role in promoting economic growth and technological development in developing countries. It is a wellestablished fact that FDI promotes job growth and capital inflows, which are necessary for economic development in host countries. More importantly, for indigenous firms in developing countries, FDI can bring intangible productive assets, such as technological know-how, markets and management skills (Aitken et al., 1999). Therefore, policymakers in developing countries tend to attract foreign investment through generous treatment and special incentives, expecting local enterprises to benefit from technology transfer and external benefits of FDI. Various forms are possible for FDI to affect the productivity of indigenous enterprises in addition to technology transfer and licensing. In general, they come in two categories, i.e., intra-industry spillovers (or horizontal spillovers) and inter-industry spillovers (or vertical spillovers). Intra-industry spillovers will take place when the presence of FDI enterprises benefits competitors in the same industry, including ➀ Competitive benefits. The significant increase of competition in the host country’s market brought about by FDI forces indigenous firms to increase productivity by improving allocative efficiency and accelerating the transfer of technology and expert skills (Caves, 1974; Kokko, 1996). FDI increases the rate of technological development in host countries through the demonstration effect of advanced technology and management practices of foreign-invested enterprises. Indigenous enterprises increase productivity through close observation in foreign-funded companies and technological imitation (Caves, 1974; Aitken et al., 1999). ➂ Skill diffusion resulted from labor mobility. Local enterprises increase productivity in labor mobility as indigenous employees who have learned specific skills from foreign firms move to indigenous enterprises or go into entrepreneurship (Chen, 1983; Kokko, 1996; Aitken et al., 1999). Inter-industry spillovers may occur between foreign-funded companies and their indigenous suppliers or customers through technological know-how © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_12

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transfer and employee training (Lim et al., 1982; Chen, 1996; Cheung et al., 2004). Similarly, firm-specific knowledge of foreign-funded companies may spill over to indigenous enterprises as they encounter new production and market technologies or acquire technical support from upstream and downstream foreign-funded companies (Aitken et al., 1999). Also, indigenous enterprises benefit from rental spillovers, which improve product quality and productivity (Griliches, 1979). Interestingly, different evidence has been obtained from existing empirical studies, which came to somewhat opposite conclusions, although early studies have argued for a positive effect by FDI on productivity improvement of indigenous enterprises. Caves (1974) studied manufacturing in Australia and Canada, revealing a positive effect of Foreign Share (FSHA) on indigenous enterprises and drawing conclusions about the potential benefits of FDI on allocative efficiency, technical efficiency, and technology change. A study on Mexican manufacturing by Blomstrom and Persson (1983) found that FSHA could affect positively the productivity of indigenous enterprises. They used data from four Mexican manufacturing enterprises from 1970 to 1975, by which Blomstrom (1986) concluded that: FDI increases efficiency of indigenous enterprises through increasingly fierce competition although FSHA fails to accelerate technological change. While an opposite conclusion was found by Aitken and Harrison (1999), Haddad and Harrison (1993), and Kathuria (2000) by their observation on manufacturing in Venezuela, Morocco, and India. Especially, a finding by Aitken and Harrison (1999), who used panel data on Venezuelan heavy machinery, is that foreign equity participation in small enterprises is positively related to productivity, while foreign investment negatively affects the productivity of indigenously heavy machinery. Existing studies have also empirically examined FDI in China at multiple levels of focus (at the industrial level, provincial level, and corporate level). Chen et al. (1995) reviewed the evolution of China’s policy toward FDI and analyzed the role of FDI on China’s economic development since 1978. It shows a significant positive linkage between FDI and economic growth and total fixed-asset investment. Some other empirical studies on the role of FDI in Chinese industries focus on the relative effects of foreign-funded companies and their impact on Chinese domestic enterprises. A feedback effect was found between per capita foreign investment and labor productivity by Zhu and Tan (2000) using a mixed city-level dataset to test the causal link between the intensity of FDI and the growth of technical efficiency. It was found by Li et al. (2001), based on China’s 1995 industry statistics, that collectively owned enterprises and private enterprises benefit from the demonstration and contagion effects of FDI, while the productivity gains of state-owned enterprises (SOEs) are largely a result of competing with foreign-funded companies. Hu and Jefferson (2002) studied the effect of FDI on the total factor productivity of Chinese electronics and textile enterprises. Liu (2002), based on the data of the manufacturing industry in Shenzhen Special Economic Zone from 1993 to 1998, found a significant positive linkage among FDI, productivity, and productivity growth rate in the electronic components industry, however, it was not significant in its recipient industries. Based on Chinese inter-provincial data from 1995 to 2000, Cheung and Lin (2004) found a positive effect of FDI on domestic patent filings and concluded that the spillover is

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dominated by a demonstration effect of FDI. Still, much effort is required to figure out the logic behind these complex results in existing studies and to reach consistent conclusions to comprehend more clearly interactions between foreign presence and industry characteristics.

2 Study Methodology, Sample and Data 1999–2003 is picked as the time window in this chapter for a study about the impact of FDI on the innovation capability and performance of China’s manufacturing industry. Three reasons for this period are as following: ➀ The 1997–1999 financial crisis in Southeast Asia saw a significant impact on FDI and the transformation and upgrading of China’s manufacturing sector, for example, an 11.3% drop in foreign investment in China in 1999 compared to 1998, after which many manufacturing enterprises have increased their investment in technology and innovation. In parallel, foreign investors were allowed to enter the relevant industries and markets in forms like mergers, acquisitions, and other forms of restructuring since 1999. ➁ Query and reflections on the effectiveness of the “exchanging markets for technology” policy have emerged from industry and academia since the mid-1990s, raising concerns about whether there is a crowding-out effect of foreign investment, especially the market entry of MNCs, on the innovation and capacity development of indigenous enterprises. Also, a trend emerged in China’s foreign investment policy from encouraging the introduction of foreign investment to promoting indigenous innovation during this period. For example, it was proposed by the CPC Central Committee and the State Council in April 1998 in the Opinions on Further Expanding the Opening-up and Improving the Utilization of Foreign Investment that “adhere to the policy of exchanging the market for technology, increase the introduction of high-tech industries and advanced and applicable technologies, to drive industrial upgrading”. As China’s emphasis on indigenous innovation grew, however, the “exchanging market for technology” was gradually diluted in the central government’s policy documents after 2001. ➂ Another reason for picking this period lies in data availability and comparability. In 1998, the scope of industrial statistics in China’s statistical yearbook was revised to all SoEs and non-state enterprises with annual product sales revenue of more than 5 million RMB. FDI has undoubtedly played an important role in China’s manufacturing industry in the last 20 years or so. The total foreign investment was $25.8 trillion, $36.8 trillion, and $36.9 trillion in 2000, 2002, and 2003, respectively (National Bureau of Statistics, 2004). As shown in Table 12.1, the median and mean of FSHA were 0.308 and 0.318, respectively, in terms of total assets, and 0.180 and 0.246, respectively, in terms of the number of employees in China’s manufacturing sector from 1999–2003. Referring to empirical studies conducted by Caves (1974), Blomström and Persson (1983), and Kokko (1994, 1996), a similar statistical model is applied in this book, assuming that labor productivity of indigenous enterprises is an interactive outcome

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Table 12.1 Sectoral distribution of foreign capital in China’s manufacturing industry 1999–2003 No

Manufacturing sector

Proportion of foreign capital measured by total assets

Proportion of foreign capital measured by the number of employees

1

Food processing

0.244

0.155

2

Food manufacturing

0.378

0.245

3

Beverage manufacturing

0.280

0.169

4

Textile industry

0.218

0.147

5

Clothing and other fiber products manufacturing

0.448

0.478

6

Leather, fur, feathers (down), and related products industry

0.539

0.607

7

Wood processing and bamboo, rattan, palm coir & grass products

0.349

0.220

8

Furniture manufacturing industry

0.474

0.419

9

Paper and paper products

0.343

0.153

10

Printing and recording media reproduction industry

0.314

0.191

11

Cultural, educational and physical goods manufacturing

0.610

0.621

12

Chemical raw materials and products manufacturing

0.172

0.081

13

Pharmaceutical manufacturing

0.185

0.125

14

Chemical fiber manufacturing

0.248

0.158

15

Rubber products industry

0.381

0.259

16

Plastic products industry

0.456

0.376

17

Non-metallic mineral products

0.203

0.093

18

Ferrous metal smelting and rolling processing industry

0.055

0.032

19

Ferrous metal smelting and rolling processing industry

0.112

0.064

20

Metal products industry

0.387

0.239

21

General machinery manufacturing

0.206

0.102

22

Special equipment manufacturing

0.140

0.076

23

Transportation equipment manufacturing

0.254

0.121

24

Electrical machinery and equipment manufacturing industry

0.302

0.278

(continued)

2 Study Methodology, Sample and Data

187

Table 12.1 (continued) No

Manufacturing sector

Proportion of foreign capital measured by total assets

Proportion of foreign capital measured by the number of employees

25

Electronic and communication equipment manufacturing

0.578

0.545

26

Instruments and cultural and 0.386 office machinery manufacturing

0.433

Median

0.308

0.180

Average

0.318

0.246

Note Foreign-funded enterprises include foreign-invested enterprises and enterprises founded in the form of joint ventures, cooperative investment, and sole proprietorship by Hong Kong, Macau, and Taiwan (China). The tobacco products, petroleum processing, coking, and nuclear fuel processing, and other manufacturing industries are excluded from the analysis because of strict government regulations and missing data Data source CHINA STATISTICAL YEARBOOK ON SCIENCE AND TECHNOLOGY

of a series of factors such as FSHA and other industry characteristics; linear evaluation is used for the analysis. Specifically, a logical identification is faced by existing studies that attempt to measure spillover effects using foreign investment (Aitken et al., 1999). Namely, what might be reflected by an observed link between the level of foreign presence and the productivity of indigenous enterprises if external investment prefers more productive industries will be that FDI is just a contributor to productivity rather than a cause of high productivity, which will inadvertently exaggerate the positive impact of external investment. As such, the spillover effect of foreign investment is seen as narrowing the productivity gap between foreign and indigenous enterprises, rather than merely increasing the productivity of the latter. In some cases, spillover effects of FDI cannot be identified even after a significant positive linkage between foreign presence and productivity of indigenous enterprises in Chinese manufacturing is noted. The positive linkage between foreign presence and productivity of indigenous enterprises may indicate an interest of FDI in higher productivity industries, a positive linkage that is unable to truly capture the effective impact of external capital. Therefore, the spillover will be analyzed in this study using the following model: ΔP E Rit = f (ΔS I Z E it , ΔC A P Iit , T , F O R1it , F O R2it )

(12.1)

where i refers to the i-th manufacturing industry, t refers to the t-th year of each variable. ΔPER is the relative performance of the domestic industry, measured by the labor productivity gap (ΔLP) or the gap of the ratio of income as a percentage of sales (ΔROS) between foreign and SOEs. Labor productivity is expressed as the ratio of value-added to year-end employment, while the ΔROS is calculated by the ratio of profit before taxes to sales. FOR1 indicates that in the same industry, the foreign presence in domestic enterprises is used to test the spillover between industries, which can be called “direct FSHA”. Foreign presence can be indicated by

188

12 Impact of FDI on Innovation Capability and Performance of China’s …

labor employment or capital use within the industry (Li et al., 2001). Caves (1974) uses the share of industry assets to indicate the foreign presence. Since foreignfunded enterprises are more capital intensive than indigenous enterprises, the share of foreign-funded enterprises would be significantly higher than that of indigenous enterprises if tangible capital is used as a measure (Aitken et al., 1999). Two variables are used in this study to measure the foreign presence in order to test the robustness of the empirical results. FOR1_Empl denotes the ratio of employment by foreignowned enterprises to total employment in each industry, and FOR1_Assas denotes the ratio of capital by foreign-owned enterprises to capital in the whole industry. As for FOR2, it is used to test the spillover effect (i.e., inter-industry spillover) of FDI in each industry, which can also be called “indirect FSHA”. The “indirect FSHA” was obtained in previous studies by calculating a weighted average of FSHA and employment shares in all other manufacturing industries [e.g., in the papers by Liu (2002) and Aitken and Harrison (1999). It is not applicable for industry-level studies. First, using industry aggregated data on registered capital to measure FSHA may be unreliable because the registered capital owned by foreign investors used to measure enterprise level may not always be proportional to the actual impact of foreign investment. ➀ Second, this measure may be misleading if it is more concerned with spillovers from foreign to domestic firms in the same industry than with spillovers from the foreign to the local component in joint ventures [what Aitken et al. (1999) call the “own-plant effect”]. The former type of spillover from FDI makes a greater contribution to technological development and productivity improvement than the “own-factory effect” for Chinese manufacturing. Third, intermediate input coefficients from input–output tables are more appropriate for the analysis at the industry level than indirect FSHA calculated using employment share as a weight. This is because the intermediate input coefficient captures inter-industry linkages and the extent to which one industry actually affects the other. Equation 12.1 represents the capital intensity gap between foreign and indigenous enterprises, which is the difference between the average firm scale (or the relative scale of indigenous enterprises) of foreign and indigenous enterprises. Both variables are frequently used to control for the effects of capital intensity and economic scale on the relative performance of domestic enterprises. In general, foreign-invested enterprises enjoy economies of scale relative to domestic players and a higher capital intensity (meaning higher technological content in the production process) compared to domestic enterprises in China’s manufacturing sector (Sun, 1998). Capital intensity is defined as the ratio of the real value of fixed assets to total employment. The methodology used by Chow (1993) and Liu (2002) is followed to construct a series of real capital stock with 1999 as the base year. Company scale is expressed by the logarithm of sales revenue. When a negative and significant coefficient for FSHA is found in the regression analysis of Eq. 12.1, it indicates that there is a positive spillover effect of FDI on the relative performance of domestic enterprises. Meanwhile, a similar value-added Cobb–Douglas production function is specified and estimated for the Chinese manufacturing industry according to Liu (2002) and Aitken and Harrison (1999), where the total factor productivity index is assumed to be influenced by direct FSHA (FOR1) and indirect FSHA (FOR2).

2 Study Methodology, Sample and Data

189

lnYit = lnξi + λT + αlnK it + βlnL it + ρlnF O R1it + ϕlnF O R2it + εit (12.2) where Y, K, and L are the industry value-added, tangible capital, and year-end employment of domestic enterprises, respectively. The subscript i denotes the i-th industry and t denotes the year; α and β are the output elasticities of physical capital and labor, respectively; and ξ represents the extrinsic technology factor with annual growth rate λ. Conversely, ρ measures the direct effect of FDI on the productivity of industry i; ϕ is the inter-industry spillover effect of FDI received in manufacturing; ε is a random error term. As recounted in the literature review, a strong impact might be found in some industry characteristics on whether and how significant and positive the spillover effects of FDI occur. Therefore, analysis of covariance (ANCOVA) is applied for testing the potential interaction effect between direct FSHA and technology gap (or speed of technology development). The sample is first divided into two subsamples according to direct FSHA, i. e., a subsample below the average FSHA (Factor_FOR1 = 1) and one above (Factor_FOR1 = 2). Likewise, the sample is then sorted into two groups according to the technology gap, i.e., a subsample below the average technology gap (Factor_TechGap = 1) and a subsample above the average technology gap (Factor_TechGap = 2). The technology gap is proxied by the ratio of the labor productivity gap between foreign and indigenous firms and the average labor productivity of the industry as a whole since value-added per capita can be expected to increase with the use of better production technology (Caves, 1974; Li et al., 2001). After that, the sample is divided into two subsamples according to the rate of technological development, i.e., a subsample below the average rate of technological development (Factor_NPSR = 1) and one above (Factor_NPSR = 2). The rate of technological development (or the rate of technological degradation) is obtained by the ratio of sales revenue from new products to sales revenue from industry-wide products. In ANCOVA, ΔLP is used as the dependent variable and also includes ΔSIZE, ΔCAPI, and T (time trend) as covariates. For example, some FIEs have a smaller registered capital than state-owned LMEs (Large and Medium Enterprises) but have a larger sales revenue and added value than state-owned LMEs in the same industry. In ANCOVA, ΔLP is used as the dependent variable and also includes ΔSIZE, ΔCAPI, and T (time trend) as covariates. Factor_FOR1 and Factor_TechGap (or Factor_NPSR) are used as factors, and a factor interaction is included in the ANCOVA analysis to capture the interaction between FSHA and the technology gap (or the rate of technology development). Finally, regression analysis is used in Eq. 12.1 and the sample grouping above, in consideration of the potential impact of industry characteristics (e.g., R&D intensity, capital intensity, labor quality, and technology gap) on inter-industry spillovers to FDI. Samples picked for this study are primarily from the CHINA STATISTICAL YEARBOOK and CHINA STATISTICAL YEARBOOK ON SCIENCE AND TECHNOLOGY issued by the National Bureau of Statistics. CHINA STATISTICAL YEARBOOK

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12 Impact of FDI on Innovation Capability and Performance of China’s …

includes annual data for 29 manufacturing industries at the industry level (doubledigit standard industry codes), including entire industries and foreign-funded companies. Foreign enterprises in this book refer to joint ventures, Sino-foreign cooperative enterprises and wholly foreign-owned enterprises with capital from Hong Kong, Macau and Taiwan, China. The data collected include the number of enterprises, industrial value-added, number of year-end employees, total assets, net fixed assets, sales revenue, total profit, sales tax and surcharge, and VAT payable for the year. Industry-level data about domestic enterprises is obtained by subtracting the data of foreign-funded companies from that of the whole industry. Intermediate input coefficients used in the calculation of FOR2 are obtained using the input–output tables from the Statistical Yearbook. A panel data set is constructed, including a crosssection of industry-level data over 5 years from 1999 to 2003. Data before 1999 is unavailable due to changes in statistical practices. Considering the availability of data, R&D intensity (RDI), technology development speed (replaced by new product sales rate) and employee competency are calculated from the data of LMEs in the CHINA STATISTICAL YEARBOOK ON SCIENCE AND TECHNOLOGY. The YEARBOOK publishes sales revenue, internal expenditures for technology development (internal R&D expenses), new product sales, total year-end employees and the number of technology developers for LMEs. R&D intensity is the ratio of R&D expenditure to sales revenue. New Product Sales Rate (NPSR) is a ratio of new product sales revenue to total sales revenue. Employee competency, according to Liu and White (1997), is replaced by the Technical Personnel Ratio (TPR), which is a ratio of technical personnel numbers to the total employees in the previous year. Industry-level aggregates are normalized according to the number of enterprises in each double-digit standard code industry, by which average enterprise value for each industry is obtained, in order to make the industry-level variables and crossindustry variables meaningful in the regression models (except for the total factor productivity model). It should be noted that all monetary variables in the regression analysis are measured in thousands of RMB, and 1999 is used as the benchmark to control for the effects of price inflation. Price indices for fixed asset investment and ex-factory price indices for products are used to calculate deflators, from the CHINA STATISTICAL YEARBOOK, for physical capital and other output-related variables, respectively. ➀ 29 manufacturing industries are: food processing industry, food manufacturing, beverage manufacturing, textiles, clothing and other fiber products manufacturing, leather, fur, feather (down) and their products industry, wood processing and bamboo, rattan, palm, grass products industry, furniture manufacturing, paper and paper products industry, printing and reproduction of recorded media, education and sporting goods manufacturing, petroleum processing and coking industry, chemical raw materials and products manufacturing, pharmaceutical manufacturing, chemical fiber manufacturing, rubber products industry, plastic products industry, non-metallic mineral products industry, ferrous metal smelting and rolling processing industry, non-ferrous metal smelting and rolling processing industry, metal products industry, general machinery manufacturing, special equipment manufacturing, transportation

3 Results of Empirical Analysis

191

equipment manufacturing, electrical machinery and equipment manufacturing, electronics and communication equipment manufacturing, instrumentation and culture, office machinery manufacturing, and other manufacturing.

3 Results of Empirical Analysis 3.1 FDI and Intra-Industry Spillover Effects Regression analysis was performed to test whether FDI conducted by domestic enterprises will cause significant intra-industry spillover and inter-industry spillover for the Chinese manufacturing industry as a whole, with ΔLP and ΔROS as dependent variables, respectively. Results of regression analysis for ΔLP and ΔROS are shown in Table 12.2 and Table 12.3, respectively. Ordinary least squares (OLS), random effects, and fixed effects are presented in the table for comparison. The Breusch and Pagan Lagrangian Multiplier test (BP-LM test) and Hausman test are applied to find a preferred model. It can be found from the analysis that both models yielded similar results and consistent relationships. Regardless of whether FSHA is measured by total assets data or employment data in the model, the test results for the coefficient of direct FSHA (FOR1) are negatively correlated, at 5% and 1% levels, respectively. A higher FDI share in the industry, the smaller the productivity gap between foreign and domestic enterprises becomes according to this result. It suggests that FDI share (which can also be considered as intra-industry spillovers caused by FDI) is able to contribute to the reduction of productivity and rate of return gap between foreign and indigenous enterprises. However, coefficients on FOR2 are insignificant in the case of FSHA measured by either total assets or employment data with ΔLP or ΔROS as dependent variables. It indicates that no consistent or significant proof is found that FDI can cause inter-industry spillovers for the Chinese manufacturing industry as a whole. To further test the validity of the above findings, a production function, Cobb– Douglas, is used to analyze the effect of FSHA on total factor productivity, as shown in Table 12.4. Similar to the previous results, just direct FSHA shows a significant positive impact on total factor productivity for the Chinese manufacturing industry as a whole, a result that holds when direct FSHA is measured by either total assets or employment data. The empirical analysis above shows that, firstly, for the Chinese manufacturing industry as a whole, FDI is verified to cause intra-industry spillover, but it is not proved by the test results that FDI can cause inter-industry spillover. This conclusion differs from the findings of Liu (2002). Liu (2002) merely confirms a significant positive relationship between FDI share and productivity of its component industries, which is not verified in recipient industries. The sample used by Liu (2002) consists of manufacturing industries in the Shenzhen Special Economic Zone of China, a sample with above-average productivity and a smaller gap in its technology level compared to the Chinese manufacturing industry as a whole. Thus, SOEs in the

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12 Impact of FDI on Innovation Capability and Performance of China’s …

Table 12.2 Results of foreign participation and labor productivity analysis ΔLP

OLS

Fixed effect

Random effect#

ΔLP

OLS

Fixed effect#

Random effect

Constant

0.308 (0.29)

−3.076 (−0.73)

−0.744 (−0.45)

Constant

0.284 (0.28)

3.192** (2.33)

2.084 (1.59)

ΔSIZE

2.435*** (3.88)

5.694*** 3.625*** (2.99) (3.51)

ΔSIZE

2.078*** (3.49)

9.133*** (7.32)

5.307*** (5.41)

ΔCAPI

0.346*** (7.70)

0.359*** 0.359*** (4.28) (5.80)

ΔCAPI

0.298*** (5.89)

−0.044 (−0.55)

0.107 (1.52)

Time Trend

0.317** (2.18)

0.346 (1.88)

Time Trend

0.421*** (2.86)

0.757*** (8.76)

0.564*** (6.63)

FOR1_ Assets

−7.443*** −4.637 (-4.03) (−0.50)

−7.033** FOR1_ Empl (−2.18)

−6.415*** −28.341*** −16.770*** (−3.86) (−8.50) (−6.36)

FOR2_ Assets

8.074 (1.88)

8.920 (0.31)

7.970 (0.98)

FOR2_ Empl

6.205 (1.52)

0.748 (0.20)

2.660 (0.68)

R2

0.57

0.45

0.55

R2

0.56

0.39

0.47

0.337*** (3.41)

Hausman 3.99(Prob > chi2 = 0.4070) test BP-LM test

chi2(1) = 96,12 (Prob > chi2 = 0.0000)

Hausman 39.45(Prob > chi2 = 0.0000) test BP-LM test

chi2(1) = 117.03 (Prob > chi2 = 0.0000)

Note Observed number = 130, values in parentheses are t-values for OLS and fixed effects models, z-values for random effects, and # indicates test values for BP-LM and Hausman test values are listed in the preferred model table. ** and *** represent 5% and 1% significance levels, respectively

Shenzhen Special Economic Zone benefit significantly from inter-industry spillovers rather than intra-industry spillovers. Second, differences in findings may be related to the methodology used to measure FSHA in Liu’s (2002) study. A methodology similar to that of Aitken and Harrison’s (1999) study was used by Liu (2002). It should be noted that the measure of Aitken and Harrison (1999) is applicable to firm-level studies, but may not work at industry level. Finally, differences in the period in which the study was conducted may also account for the different findings. Foreign direct investment accompanied by technology transfer in the early 1990s was often constrained by the way in which hardware was transferred. Lan and Young (1996) analyzed FDI-based technology transfer through a case study in Dalian, China. It shows that technology transfer was constrained by the way in which hardware was transferred, while little transfer of technology related to technological innovation was achieved. Focus of technology transfer has gradually shifted from hardware transfer to know-how transfer and R&D indigenization since the late 1990s, along with the development of the Chinese market and its increasing strategic importance to MNCs. Accordingly, the role of FSHA in China’s manufacturing sector has shifted.

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193

Table 12.3 Results of foreign participation and profitability analysis ΔROS

OLS

Fixed effect

Random effect#

ΔROS

OLS

Fixed effect#

Random effect

Constant

−0.047*** (−3.84)

0.018 (0.46)

−0.025 (−1.33)

Constant

−0.035*** (−3.01)

0.016 (0.99)

0.005 (0.35)

ΔSIZE

0.023*** (3.27)

0.014 (0.83)

0.022 (1.95)

ΔSIZE

0.023*** (3.36)

0.021 (1.48)

0.023** (2.14)

ΔCAPI

0.002*** (3.56)

0.0004 (0.58)

0.001 (1.43)

ΔCAPI

0.001 (1.21)

−0.001 (-1.07)

−0.001 (-0.66)

Time trend

0.002 (1.31)

0.004** 0.002** (2.11) (2.37)

Time Trend

0.005*** (2.83)

0.004*** (3.49)

0.004*** (4.15)

FOR1_ Assets

−0.084*** (−3.91)

−0.034 (−0.41)

−0.091** FOR1_ Empl (−2.44)

−0.088*** (−4.51)

−0.098** −0.095*** (−2.52) (−3.32)

FOR2_ Assets

0.272*** (5.47)

−0.177 (−0.68)

0.189 (1.93)

FOR2_ Empl

0.207*** (4.34)

−0.050 (−1.12)

−0.008 (−0.19)

R2

0.38

0.01

0.36

R2

0.36

0.18

0.24

Hausman 3.91(Prob⟩chi2 = 0.5631) test BP-LM test

chi2(1) = 148.53 (Prob > chi2 = 0.0000)

Hausman 11.24(Prob > chi2 = 0.0468) test BP-LM test

chi2(1) = 132.39 (Prob > chi2 = 0.0000)

Note Observed number = 130, values in parentheses are t-values for OLS and fixed effects models, z-values for random effects, and # indicates test values for BP-LM and Hausman test values are listed in the preferred model table. ** and *** represent 5% and 1% significance levels, respectively

3.2 Interaction Effect Between FDI and Industrial Technology Characteristics In terms of the relationship between FSHA and the technology gap, varying conclusions have been provided by earlier studies. Findlay (1978) and Wang and Blomstrom (1992) argued that as the technology gap between indigenous enterprises and FIEs widens, the spillover effect between them is increased. Conversely, the spillover effect is negatively correlated with the technology gap between indigenous and foreignfunded companies, according to other studies. For example, Haddad and Harrison (1993) argue that an excessive technology gap will inhibit the spillover from FDI. According to Kokko (1994), a large technology gap will not prevent spillovers, but spillovers will be less likely to arise in industries with a large technology gap and a high foreign share. Therefore, ANCOVA is first used in this book to investigate whether there is an interaction effect between FSHA and the technology gap. In the ANCOVA model, ΔS1ZE, ΔCAP1, and time trend (T ) are covariates. As shown in Table 12.5, empirical results show that the interaction variables of FSHA and TechGap raise a significant interaction effect on the productivity gap between foreign and indigenous enterprises. The F-value of the interaction variable between FOR1_Assets and TechGap is 4.373 with a significance level of 5%. The estimated marginal means of the covariates are 3.488 (both FOR1_Assets and TechGap of the

194

12 Impact of FDI on Innovation Capability and Performance of China’s …

Table 12.4 Results of foreign participation and total factor productivity analysis lnY

OLS

Fixed effect#

Random effect

lnY

OLS

Fixed effect

Random effect#

Constant

0.413 (1.15)

5.547*** (3.75)

1.455** (2.22)

Constant

−0.440 (−1.27)

5.918*** (3.96)

1.056 (1.61)

lnK

0.485*** (9.50)

0.492*** (4.65)

0.686*** (11.60)

lnK

0.587*** (12.64)

0.409*** (3.74)

0.656*** (12.86)

lnL

0.504*** (10.29)

0.178*** (3.36)

0.223*** (4.53)

lnL

0.469*** (10.73)

0.221*** (3.24)

0.297*** (5.64)

Time trend 0.128*** (9.50)

0.112*** (9.60)

0.110*** (14.88)

Time Trend

0.102*** (8.16)

0.120*** (15.18)

0.103*** (15.46)

lnFOR1_ Assets

0.153*** (2.84)

0.282*** (3.58)

0.240*** (3.60)

lnFOR1_ Empl

0.232*** (6.13)

0.136** (2.09)

0.183*** (3.78)

lnFOR2_ Assets

−0.093 (−1.90)

0.177 (0.73)

−0.020 (−0.19)

lnFOR2_ Empl

−0.090** (−2.50)

0.080** (2.63)

0.044 (1.45)

R2

0.95

0.90

0.94

R2

0.96

0.93

0.95

Hausman test

31.57(Prob > chi2 = 0.0000)

Hausman test

3.88(Prob > chi2 = 0.5673)

BP-LM test

chi2(1) = 197.77 (Prob > chi2 = 0.0000)

BP-LM test

chi2(1) = 185.35 (Prob > chi2 = 0.0000)

Chow test

F(25,99) = 56.82(Prob > F = 0.0000)

Chow test

F(25,99) = 44.21(Prob > F = 0.0000)

Note Observed number = 130, values in parentheses are t-values for OLS and fixed effects models, z-values for random effects, and # indicates test values for BP-LM and Hausman test values are listed in the preferred model table. ** and *** represent 5% and 1% significance levels, respectively

subsample are below average), 5.509 (subsample is below average in terms of FOR1_ Assets and above average in terms of TechGap), 2.422 (subsample is above average in terms of FOR1_Assets and TechGap below average), and 2.386 (both FORl_Assets and TechGap of the subsample are above average). Visually, indigenous enterprises will benefit more from intra-industry spillovers in industries with a large technology gap as well as large FSHA. The possible reasons are that opportunities increase for indigenous enterprises to adopt advanced management practices from foreignfunded companies when FSHA increases, and opportunities increase for indigenous enterprises to learn advanced technologies from foreign-funded companies when the technology gap gets larger. The possible reasons are that opportunities increase for indigenous enterprises to adopt advanced management practices from foreignfunded companies when FSHA increases, and opportunities increase for indigenous enterprises to learn advanced technologies from foreign-funded companies when the technology gap gets larger. So, the market capture effect of FDI as suggested by Aitken and Harrison (1999) is present insofar as this book is concerned; however, what dominates are the positive effects such as knowledge spillovers and learning effects brought about by FDI. So, the market capture effect of FDI as suggested by Aitken and Harrison (1999) is present insofar as this book is concerned; however,

3 Results of Empirical Analysis

195

what dominates are the positive effects such as knowledge spillovers and learning effects brought about by FDI. The empirical results also suggest that what determines spillovers from FDI share is interactions between FSHA and the technology gap rather than the size of the technology gap alone. In addition, ANCOVA is used in this study to investigate whether there is an interaction effect between FSHA and a new product sales ratio. ΔSIZE, ΔCAPI and time trend (T ) are covariates. As shown in Table 12.6, a significant interaction effect of the interaction variables of the rate of technological development and FDI share, as measured by the new product sales ratio, is found on the productivity gap between indigenous and foreign-funded companies. The F-value of the interaction variable between FOR1_Empl and new product sales ratio is 4.123 with a significance level of 5%. The estimated marginal means of the covariates are 3.356 (both FOR1_Empl and new product sales ratio of the subsample are below average), 6.633 (subsample is below average for FOR1_Empl and above average for new product sales ratio), 2.226 (subsample is above average for FOR1_Empl and below average for new product sales ratio), 3.746 (subsample is above average for both FOR1_Empl and new product sales ratio). It suggests that indigenous enterprises will benefit more from intra-industry spillovers in industries with slow technological development but large FSHA. This finding can be attributed to the following factors: more learning opportunities will emerge for local enterprises to imitate foreign technology and innovate through incremental improvements while FSHA is large; compared to the case of fast technological development, it will be easier for indigenous enterprises to avoid the “FDI-based disruption of the learning process” that Lail (1992, 2000) suggests hinders technology accumulation in developing countries. This finding can be attributed to the following factors: more learning opportunities will emerge for local enterprises to imitate foreign technology and innovate through incremental Table 12.5 Results of ANCOVA: foreign investment and technology gap Source

Class III sum of squares of deviations

Model

2789.550

ΔSIZE

61.501

ΔCAPI

Degree of freedom

Mean square

F-value

Significance

7

398.507

84.044

0.000

1

61.501

12.970

0.000

164.260

1

164.260

34.642

0.000

Time trend

20.276

1

20.276

4.276

0.041

FOR1_Assess

80.750

1

80.750

17.030

0.000

TechGap

12.018

1

12.018

2.535

0.114

FOR1_Assets × TechGap

20.736

1

20.736

4.373

0.039

Error

583.223

123

4.742

Total

3372.774

130

Note The explained variable in ANCOVA is ΔLP

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12 Impact of FDI on Innovation Capability and Performance of China’s …

Table 12.6 Results of ANCOVA: foreign participation degree and technology development speed Source

Class III sum of squares of deviations

Model

2855.380

ΔSIZE

39.326

ΔCAPI Time trend

Degree of freedom

Mean square

F-value

Significance

7

407.911

96.973

0.000

1

39.326

9.349

0.003

247.788

1

247.788

58.907

0.000

21.572

1

21.572

5.128

0.025

59.009

1

59.009

14.028

0.000

139.341

1

139.341

33.126

0.000

17.342

1

17.342

4.123

0.044

Error

517.394

123

4.206

Total

3372.774

130

NPSR FOR1_Empl × NPSR

Note The dependent variable is ΔLP

improvements while FSHA is large; compared to the case of fast technological development, it will be easier for indigenous enterprises to avoid the “FDI-based disruption of the learning process” that Lail (1992, 2000) suggests hinders technology accumulation in developing countries. Therefore, indigenous enterprises in the host country can build up their technological innovation capability while enjoying the advantages brought about by low labor costs during the competition with FIEs.

3.3 FDI and Inter-Industry Spillover Effects First, capital intensities of all industries (including indigenous and foreign-funded companies) are calculated in order to investigate the effects of industry characteristics on inter-industry spillovers. Then, the sample is classified into two groups: one with below-average capital intensity and the other above. The regression model of Eq. 12.1 analyzes the effect of indirect FSHA on the differences in labor productivity and profits between two groups of enterprises with different capital intensities. The results shown in Table 12.7 indicate that indirect FSHA is negatively related to the performance of the corresponding indigenous enterprises in highly capital-intensive industries. The reason for this negative effect of indirect FSHA is the crowding-out effect of FDI and the segmenting effect of supplier networks. As the industry is capital intensive, its component industries also tend to be capital intensive, which is the crowding-out effect. Thus, indigenous enterprises will suffer from a weak bargaining power in terms of access to raw materials and parts when there is a high level of indirect FSHA. It results in indigenous enterprises being forced to cut back on production, which leads to higher average costs and lower productivity and profitability. The segmenting effect of the supplier network is that part of the supplier

3 Results of Empirical Analysis

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Table 12.7 OLS regression results for subsamples above average capital intensity Dependent variable: ΔLP Independent ΔSIZE variable

0.601***

ΔSIZE

(3.38)

Dependent variable: ΔROS 0.451**

ΔCAPI −0.052 (-0.41)

ΔCAPI −0.191 (−1.21)

Time trend

Time Trend

0.216 (1.82)

ΔSIZE

(2.69)

0.355*** (2.74)

0.352*** (2.71)

ΔCAPI 0.100 (1.09) Time Trend

−0.016 (-0.18)

ΔSIZE

0.204 (1.42)

ΔCAPI −0.028 (−0.20) Time Trend

0.194 (1.76)

FOR1_ −0.735*** FOR1_ −0.592*** FOR1_ −0.623*** FOR1_ −0.453*** Assets (−3.82) Empl Assets (-4.43) Empl (-3.10) (-2.78)

Model

FOR2_ 0.525*** Assess (4.02)

FOR2_ 0.303** Empl (2.23)

FOR2_ 0.867*** Assets (9.10)

FOR2_ 0.653*** Empl (5.64)

Adjust R2 as

Adjust R2 as

Adjust R2 as

Adjust R2 as

0.40

0.28

0.68

0.48

Note Observed number = 45, values in parentheses are t-values; ** and *** represent 5% and 1% significance levels, respectively

network is controlled by foreigners due to large technology gaps and excessivequality requirements, thus preventing the entry of indigenous producers or suppliers. In some cases, the negative impact of indirect FSHA is more likely to be spawned by this segmenting effect. Especially in capital-intensive industries, the supplier networks of foreign-funded companies are more likely to hinder the participation of indigenous suppliers. On average, suppliers of foreign firms are more efficient and skilled than indigenous ones, and thus higher productivity will be earned by foreign-funded companies through access to high-quality and low-cost intermediate inputs. R&D intensities are then calculated for all industries (including both indigenous and foreign-funded companies), by which sample enterprises are divided into two groups: a group with below-average R&D intensity and the other above. The model in Eq. 12.1 tests the effect of indirect FSHA on the performance of corresponding indigenous enterprises in the low R&D intensity group. Table 12.8 shows that indirect FSHA exerts a significant positive effect on the narrowing of the labor productivity gap between indigenous and foreign-funded companies. Moreover, productivity spillover effects exist in labor-intensive industries where R&D intensity and capital intensity are below average. Possible explanations for this result are, first, that indigenous enterprises in low-tech industries with low R&D intensity (especially in labor-intensive industries) are more effective in learning manufacturing skills and management techniques from foreign-funded companies. Together with the advantage in labor cost, local firms will be in a more favorable position to compete with foreign firms, and the aforementioned segmenting effect will be limited in this case. Second, enterprises will be more efficient in producing high-quality products by using intermediate and capital goods from foreign-funded companies, as suppliers inside the components industry, and thus benefit from rent spillovers (Griliches, 1979). Finally, component industries often tend to be low-tech and labor-intensive

Time trend FOR1_ Empl FOR2_Empl

0.105** (2.55)

−0.280*** (−4.62)

−0.234*** (−4.61)

0.87

Time trend

FOR1_Assets

FOR2_Assets

Adjust R2 as

Adjust R2 as

ΔCAPI

ΔSIZE

0.468*** (7.96)

(6.04)

ΔCAPI

ΔSIZE (4.49)

0.85

−0.183*** (−3.82)

−0.353*** (−5.35)

0.088 (1.96)

0.454*** (6.63)

0.224***

Adjust R2 as

FOR2_Assets

FOR1_Assets

Time trend

ΔCAPI

ΔSIZE

0.24

0.224 (1.83)

−0.390*** (−2.66)

0.214** (2.17)

−0.181 (−1.28)

0.584*** (4.85)

Dependent variable: ΔROS

Adjust R2 as

FOR2_Empl

FOR1_Empl

Time Trend

ΔCAPI

ΔSIZE

Note Observed number = 80, values in parentheses are t-values; ** and *** represent 5% and 1% significance levels, respectively

Model

Independent variable

0.301***

Dependent variable ΔLP

Table 12.8 OLS regression results for subsamples below average capital intensity

0.31

0.218** (2.13)

−0.522*** (−3.71)

0.276*** (2.89)

−0.345** (−2.36)

0.544*** (5.12)

198 12 Impact of FDI on Innovation Capability and Performance of China’s …

3 Results of Empirical Analysis

199

for industries that are low-tech and labor-intensive as well. As a result, indigenous suppliers in the components industry can gain technical know-how and management techniques from their foreign competitors. Thus, as those local suppliers improve their productivity through learning, they, as downstream manufacturers, will benefit from a rent spillover. Thus, the entire industry is divided into two groups according to the labor quality (expressed by the technologist ratio), as well as the sample: one group with a technologist ratio below the average and the other above. As shown in Table 12.9, the indirect FSHA affects negatively the labor productivity and profitability of the corresponding indigenous enterprises in the group with a high technologist ratio. In contrast, the impact of FDI is not significant. Possible reasons for the negative impact of indirect FSHA are as follows: for those industries with high technologist ratios, their component industries also tend to be technology-intensive. In this case, the bargaining power of indigenous enterprises over suppliers in component industries is greatly weakened compared to enterprises in industries with low technologist ratios. Moreover, the breaking effect of the supplier network tends to become severe in competition with foreign-funded companies as discussed earlier, thus increasing the negative impact on labor productivity of indigenous enterprises. The reason why the effect of direct FSHA turns out to be insignificant in this case is that it is the crowding-out effect of FDI that dominates, despite the presence of positive spillover effects of FDI. Aitken and Harrison (1999) argue that foreign investment reduces the productivity of indigenous enterprises by forcing their output down and average costs up. In addition, the crowding-out effect is also dominated by the way talent competition between indigenous and foreign-funded companies: foreign-funded companies are more attractive to highly qualified technologists, managers and skilled workers. These well-educated employees are more productive and play a key role in FIEs (Li et al., 2001). Table 12.9 OLS regression results for subsamples above average technologist ratio Dependent variable: ΔLP Independent ΔSIZE variable

0.131 (0.98)

ΔSIZE

Dependent variable: ΔROS 0.319***

ΔSIZE

(2.78)

0.038 (0.23)

ΔSIZE

0.359** (2.48)

ΔCAPI 0.895*** ΔCAPI 0.619*** ΔCAPI 0.489*** (3.06) ΔCAPI −0.039 (6.90) (4.49) (−0.23) Time trend

0.249*** Time Trend (2.89)

FOR1_ 0.043 Assets (0.28)

Model

0.349*** Time trend (4.13)

FOR1_ −0.307 Empl (−1.93)

0.082 (0.77)

FOR1_ −0.013 Assets (−0.07)

Time Trend

0.251** (2.36)

FOR1_ −0.610*** Empl (−3.04)

FOR2_ 0.359*** FOR2_ 0.243** FOR2_ 0.659*** Assess (3.10) Empl Assets (4.62) (2.45)

FOR2_ 0.359*** Empl (2.87)

Adjust R2 as

Adjust R2 as

0.54

Adjust R2 as

0.57

Adjust R2 as

0.30

0.32

Note Observed number = 65, values in parentheses are t-values; ** and *** represent 5% and 1% significance levels, respectively

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12 Impact of FDI on Innovation Capability and Performance of China’s …

4 Policy Significance of the Findings FDI has two effects on the innovation capability development of the manufacturing industry in China: First, the impact of FDI from the same industry on indigenous enterprises is called the “intra-industry spillover effect of FDI”; second, for a specific industry, the impact of FDI in neighboring industries with industrial and technological linkages on indigenous enterprises in the industry is called “inter-industry spillover effect of FDI”. Our study shows that the inter-industry spillover effect from FDI is an important influence mechanism of FDI on indigenous manufacturing enterprises, which has not been fully recognized in previous studies. In the past 20 years or so, too much attention has been paid to the impact of intra-industry FDI in both theoretical studies and policy formulation regarding the promotion of China’s manufacturing innovation capability development through FDI. However, our findings show that the spillover effect of inter-industry FDI has a significant contribution to the development of indigenous innovation capability in China’s manufacturing industry. Consequently, the focus should not only be on the introduction of FDI into the industry and the use of technology spillover from foreign firms to promote the capacity development of indigenous enterprises in order to drive the capacity enhancement of local manufacturing enterprises in a specific industry during the formulation of industrial policies. In parallel, it is necessary to make rational use of foreign capital in adjacent industries (especially those supporting industries with close production and technological ties) and to adopt corresponding sectoral innovation policies to upgrade the absorptive capacity of indigenous enterprises, so that FDI can be used more effectively to contribute to the construction and development of indigenous innovation capability of indigenous enterprises in the process of catching up with manufacturing technology. As for the interaction utility between FSHA and the technological characteristics of the Chinese manufacturing industry, the empirical results of the study indicate that there is a significant interaction utility between FDI share and the technological gap as well as between the rate of technological development and FDI share, thereby shaping the productivity gap between indigenous and foreign-funded companies. Indigenous enterprises largely behind technologically will benefit more from intraindustry spillover when there is large FSHA, while indigenous enterprises with slower technological development will benefit more from intra-industry spillover when there is increased FSHA. Our study is insightful in explaining why the literature on complementary or substitution effects in foreign technology transfer and autonomous R&D has shown different results in developing country contexts. It suggests that complementary relationships and substitution effects coexist in manufacturing industries of developing countries, while the threshold effect of indigenous R&D plays a key role in the transition between complementary relationships and substitution effects in foreign technology transfer and indigenous R&D. Strong complementarities will be shared with foreign technology transfer only when internal R&D exceeds a specific threshold,

4 Policy Significance of the Findings

201

which enables usage of self-own R&D expenses by domestic manufacturing enterprises to pursue higher growth and more efficient knowledge production. Otherwise, the crowding-out effect will take the lead. This threshold for internal R&D is influenced by the nature of external knowledge, the gap between domestic and foreign counterparts, and the knowledge complexity of industries.

Chapter 13

Model Choice-Making and Enhancement Mechanisms for the Industrial Indigenous Innovation Capability Building

1 Framework for Choice-Making of Manufacturing Indigenous Innovation Model The diversity and complexity of innovation models have been identified in the previous chapters through comparative studies of innovation processes in different countries and regions, different industries, and different enterprises. Industries in different countries or regions (e.g., South Korea, Japan, and China’s Taiwan) have succeeded greatly in indigenous innovation through various innovation paths and resource integration approaches in different innovation positionings. Industries such as home appliances and communications manufacturing in China have also formed competitive advantages in their respective product markets or value chains. So, why do they succeed with different choices? It depends on their respective resource endowments and institutional constraints, as our study finds. Institutional constraints have been brought to the fore by scholars who have studied these issues. Institutional constraints behind indigenous innovation models and mechanisms should be analyzed otherwise the diversity of innovation models cannot be grasped, let alone reasons for their respective successes or failures. The typical innovation model of many industries (or enterprises) in China is to carry out secondary innovation based on absorbing advances from foreign science and technology, from portfolio innovation based on integration to indigenous innovation based on total innovation. Like the early Japanese and Korean enterprises, a transformation from labor- and resource-intensive low-end exporters to high-valueadded manufacturers and service providers is unfolding in China; in particular, many SMEs are making efforts to acquire advanced technologies, production knowledge and skills, access original design stage, gradually establish their brands and explore international markets while OEM production (Beebe et al., 2006). Institutional constraints affecting enterprise indigenous innovation include the industrial organization (dominated by large conglomerates or SMEs) and resource allocation (relationship with banks, government, and market mechanisms), according © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_13

203

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13 Model Choice-Making and Enhancement Mechanisms for the Industrial …

to existing research. The choice of a country or region’s dominant innovation model depends on the corresponding institutional constraints, whereby the identified dominant innovation model sets the innovation positioning (including industrial positioning) of the country or region. For example, Japan’s centralized industrial structure dominated by large conglomerates shapes its indigenous innovation model dominated by technological leapfrogging, so they hold competitive advantages in fields with economies of scale and stable technological trajectories, such as consumer electronics, large computer hardware manufacturing and semiconductor memory chips, and have succeeded in technological overtaking of European and American enterprises. However, they fail to make a leap and remain a follower in fields such as computer software, PCs, and microprocessors, which are characterized by network economics and uncertain technological tracks. As for Taiwan (China), its industrial structure dominated by SMEs and resource allocation of network economy determines a pick of indigenous innovation model focusing on value chain enhancement, so they have formed great competitiveness in the fields with network economy and uncertain technology trajectories, such as PC parts manufacturing, semiconductor manufacturing and design. Therefore, the basic framework for choosing an indigenous innovation model is that the institutional constraints of a country or region shape its approach to resource integration for indigenous innovation, the approach shapes the technological path of its innovation (indigenous innovation model), and then the path locates innovations (including industry choice). Based on the analysis of China’s current resource and capacity constraints and institutional constraints, the dominant model of indigenous innovation for Chinese enterprises can be analyzed and derived according to the selection framework of indigenous innovation models established earlier. It is the innovation resource integration led by the central government, with SOEs as the policy tool for technology catch-up, and the mode of “concentrating on accomplishing major tasks” for the large-scale development of key and generic technologies of the industry. In parallel, it is the usage of networks formed by enterprises, governments, universities, research institutes and intermediary organizations to allocate innovation resources, making full use of the advantages of network economy and innovation clusters. Therefore, technology leapfrogging may serve as a major indigenous innovation model for a few enterprises in some strategic emerging industries. For example, the conversion of mobile communication from 2G to 3G, the conversion from voice communication to data communication, and the integration of communication and the Internet provide opportunities for Chinese enterprises to leapfrog technology. Also, most Chinese companies face a fragmented approach to the integration of innovation resources, which determines another technological path of leading innovation, i.e., Value Chain Upgrading. First, a decentralized, networked approach to resource integration, faced by most enterprises because the centralized approach to resource integration by the government only targets a few key industries, prevents them from implementing technology leapfrogging, but is ideal for value chain upgrading; second, the market that Chinese enterprises in is a huge one, its gradual improvement of a market mechanism, unification of domestic market and the further deepening of

2 Mechanism for Industrial Indigenous Innovation Capability …

205

market degree and its uniqueness will gradually strengthen the guidance and incentive for Chinese enterprises to implement indigenous innovation (Zhang & Zeyi, 2009). Therefore, disruptive innovation based on domestic market demand should also act as a dominant innovation path for Chinese enterprises. Initially, the market for disruptive innovation is the existing low-end market or the new niche market, so, enterprises implementing value chain upgrading, like those implementing disruptive innovation, are not required to go head-to-head with powerful MNCs. Meanwhile, a decentralized network-based innovation resource integration model is more conducive to disruptive innovation as enterprises face new and uncertain technological trajectories in the low-end markets or new niche markets. Then, different choices of technology paths by different enterprises locate their innovation. Enterprises that tend to leapfrog technology must be in industries with stable technology trajectories and compete with MNCs along the full value chain. Enterprises that carry out value chain upgrading are integrating themselves into the global value chain, where they are generally positioned only in manufacturing and designing products. Enterprises in latecomer countries are able to get new information shortly along with the value chain and participate in the technological or market-industrial changes brought about by developed countries because the new technologies that cause market and industrial changes that enterprises are oriented towards are found in enterprises in developed countries, so value chain upgrading is of great advantage in industries with uncertainty trajectories. For industries where the value chain upgrading is implemented, encouragement and guidance should be given by the government to enterprises in the corresponding industries to enter the global manufacturing network through cooperation, OEM, etc., and then gradually upgrade their position in the value chain through assistance from universities and research institutes. Similarly, disruptive innovations are equally advantageous in industries with uncertainty trajectories because the markets they initially address are existing low-end markets or new niche markets. Another prerequisite for disruptive innovation is a unique demand in the corresponding industry, which creates a unique opportunity for disruption in the technology trajectory.

2 Mechanism for Industrial Indigenous Innovation Capability Enhancement with Enterprises in Dominance First of all, in light of a view of dimensions and fields, a synergy of innovation elements is emphasized to enhance indigenous innovation capability as it has evolved from technological innovation to multi-dimensional innovation such as organization innovation, management innovation and cultural innovation; Viewed from the innovation process, innovation goes along the path of the internal value chain and gradually expands to the outside of the enterprise, throughout the business process. Total and open innovation is emerging as a new trend in innovation.

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Secondly, insofar as the innovation milieu such as a knowledge-based economy, the trend of globalization and the shortening of a product life cycle is concerned, both design-driven and user-driven innovations require more for the transformation and upgrading of enterprises and new product development; Besides, environmental changes and resource constraints have led to a deep understanding of sustainable development, so green innovation has become the dominant goal of corporate social responsibility. Finally, as technology, knowledge and information advance rapidly, knowledge is transformed into new products, processes, and services. It encompasses not only science or technology but also the identification and satisfaction of customer demands, which require the use of advanced technologies (e.g., IT) to improve management while requiring more from the innovator—human, i.e., focusing on factors such as leaders, promoters and the high involvement innovation. A matrix of mechanisms to enhance the overall sectoral innovation capability is presented by combining the sectoral innovation enablers with the corporate innovation elements, as shown in Table 1. Expanding this matrix, it can be found that there are nine factors (dimensions) of innovation capability including vision and strategy, technology management, etc., while the driving and guaranteeing mechanisms of innovation consist of entrepreneurs/innovators and employees, new product development, policy and environment, etc., which transform current innovation capability into sustainable one; their joint efforts form a model to enhance innovation capability, as shown in Fig. 1. Therefore, structure upgrading and innovative development of industries should be viewed in globalization and the transformation of economic development, moreover, performances such as indigenous innovation as a core of sectoral innovation, and effective integration of industrial cluster optimization and upgrading (based on indigenous innovation), and that of industrial structure with technological progress, Table 1 Matrix of enhancement mechanism for industrial innovation capability Industry Environment and policy Cultural spirit Industry Standards Core Technology for New Products Innovator

Strategy Technology Market Organization Network Culture Creativity

3 Experiences of Indigenous Innovation and Technology Catch-Up …

207

Creative Management

Organizational management capabilitiesImprovement

Consolidate the capacity basis

External Source & Network

Cultural Atmosphere

Market & Customer Orientation

Organizational Structure & System

Management of Technology

Vision & Strategy

Innovation Capability

Entrepreneurs/Innovators & employees New Product Development Policy & Environment

Fig. 1 Innovation capability enhancement model by TIM

etc., should be carried out. Currently, solutions to issues related to indigenous innovation capability should be provided primarily by enterprises, within industries, inside clusters (regions), and via open innovation.

3 Experiences of Indigenous Innovation and Technology Catch-Up in China’s Manufacturing Industry 3.1 Hinge on the Importance of Indigenous Innovation Capability Cultivation in Technology Catch-Up of China’s Manufacturing The “exchanging market for technology” strategy was widely adopted early on to seek technology catch-up due to a large technological gap between enterprises at home and in developed countries in the early stage of the Reform and OpeningUp according to the technology gap theory. The “technology import-absorptionreinnovation” approach has been proved to be effective, which has maximized China’s latecomer advantage and enabled effective technology catch-up of a large number of industries. As China grows in technology and economy, the technology gap between enterprises in China and developed countries is shrinking year by year, thus bringing the ceiling effect of technology introduction increasingly obvious, and the importance of indigenous innovation gradually emerging. It is largely because 30 years of technology catch-up has significantly improved China’s technological backwardness dilemma, so the traditional path of improving technological competence via technological imitation has hit a bottleneck, so indigenous innovation will become a key driver to further improve technological competence.

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3.2 Rational Use of FDI: Complementary and Substitution Effects The complementary and substitution effects of FDI should be dialectically comprehended according to the technology gap theory, to maximize the rapid catch-up and development through the rational use of FDI. MNCs aim at profit maximization, so they take a strategic control and dominance of the market by their strong technology and market power as they take root and expand in China, which in turn challenges the vitality of indigenous enterprises and sustainability of profitability improvement for Chinese enterprises; on the contrary, direct investment by MNCs in China may lead to technology spillover effects, which are conducive to promoting the diffusion of technology and knowledge from MNCs to Chinese enterprises and thus improving their competence. The former is known as the substitution effect of FDI and the latter as the complementary effect. Therefore, MNCs should be reasonably guided to directly invest in industries with higher technology levels, to avoid duplication of low-level imports as far as possible, thereby promoting industrial structure upgrading. In addition, the import of soft technologies such as management and services should be highlighted in addition to attracting foreign direct investment with high technology content or technology-intensive, which is the only way to maximally advance the industrial catch-up.

3.3 Unique Opportunities for Catching-Up Formed By a National Market Environment The market demand is a major driver for innovation. Enterprises in late-developing countries with large market sizes show a marked tendency toward market-oriented product innovation. The huge market increases the possibility and scale of profitability, in turn, the accumulation of financial resources will enable further strategic investments in emerging technologies by Chinese enterprises. Therefore, full use of Chinese huge market will contribute to the structural adjustment and sustainable development of industries in China. The high degree of market segmentation in China is also considered by many scholars as a key factor in achieving effective industrial catch-up (Mu et al., 2005). A low-end market with large capacity exists in China, which provides the possibility for the survival of latecomers (Chen, 2013). Specifically, low-technology links in the industrial chain can be taken up by enterprises, they can go progressively to the high-end market by improving product performance and quality along with the gradual accumulation of capital and the increasing improvement of technology.

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209

3.4 Technology Deconstruction Based on a Sectoral Innovation System is a Significant Mechanism for the Construction and Enhancement of China’s Sectoral Indigenous Innovation Capability Technology deconstruction mechanism based on sectoral innovation system takes on a vital role in the evolution of indigenous innovation in China’s manufacturing industry. Latecomers suffer from some difficulties in absorbing and utilizing advanced technology and knowledge from outside due to the limitations of their internal absorption capacity, especially in the early stage of technology catch-up. As such, China is in an ideal position to catch up on manufacturing technology: First, a fairly complete industrial chain has been gradually formed in many manufacturing industries in China, so the import, absorption, and utilization of foreign technology occur in the form of groups rather than individuals, such a division of labor in industrial technology development not only lowers the threshold of technological learning but also greatly enhances the efficiency of technological learning at the industrial level. Secondly, universities and research institutions also serve as technology intermediaries in manufacturing technology catch-up, especially they can bridge a gap between advanced foreign technologies and domestic enterprises’ absorption capacity in some projects led or supported by the government in industrial alliances or joint technology development. Third, some large enterprises (especially large SOEs) act as an important policy tool for technological and industrial catch-up, playing a vital role in the development of China’s manufacturing industry, especially in industries where there is a scale bottom-line (i.e., where there is a threshold for investment in innovation resources as well as innovation capability). It is as observed in the development of industrial systems such as high-speed rail and large aircraft. It is those advanced technologies from developed countries and MNCs that are usually first imported by large SOEs, then absorbed, after which they are gradually transferred and spilled over to other indigenous enterprises.

3.5 Inspiration From and Full Use of Secondary Innovation, Taking a Sustainable Sectoral Indigenous Innovation Path Steps taken by steel industry and white home appliance industry reveal that the key to effective industrial catch-up lies in full use of dynamic technology imports from a high starting point, proactive absorption, and differentiated re-innovation. To begin with, a high starting point and the dynamics of technology imports will facilitate a lot: imports from a high starting point are more conducive to technology catch-up, while dynamic ones will prevent enterprises from falling more behind technologically. Accordingly, enterprises that embark on positive absorption of advances are

210

13 Model Choice-Making and Enhancement Mechanisms for the Industrial …

Effective industrial catch-up path

Innovation performance

Dysfunctional industry catch-up path

Catch up actively Differentiated re-innovation Dynamic import at a high starting point

Static import at a low starting point

Catch up passively Mindless imitation

Fig. 2 Comparison on models and performance of effective and dysfunctional secondary innovation

more capable of mastering and breaking through the core technology and enjoying a latecomer advantage, rather than passively falling into a vicious circuit, i.e., “importfalling behind-import again-falling behind”. Note that absorption is not an end, but a means for re-innovation. It is the differentiated re-innovation based on absorption that can win the market and improve performance. Then, three elements for sectoral innovation path by technology imports are the starting point and mode of technology imports, the orientation of absorption, and differentiated secondary innovation strategy. It is such a path of sectoral innovation that can contribute to the restructuring of Chinese industries. Otherwise, enterprises that conduct catch-up that is static, negative, and mindless imitation will be trapped in the “catch-up trap”, i.e., a circle of “import-falling behind-reimport-fall behind”, as shown in Fig. 2.

Part IV

Cluster Indigenous Innovation Based on Regional Networks

Overview The industrial cluster is one of the most dynamic and special forms of innovation organizations in the regional innovation system (RIS). Compared with the sectoral innovation system, the RIS is characterized by not only industrial and regional attributes but also, more importantly, embedded institutional attributes. Part IV focuses on the regional innovation system from the perspective of clusters innovation networks and then proposes the paths and policies to enhance the cluster indigenous innovation capability (CIIC) based on regional innovation networks. Firstly, industrial clusters are taken as the core elements embedded in RIS through fieldwork in Part IV, which reveals three key issues of the existing RIS: dependence on low-end resource paths in the innovation base system; inefficiency of chain synergy innovation in the innovation synergy system; a weakening leadership on innovation by flagship enterprises in the innovation motivation system, etc. As a solution to issues in RIS, a regional innovation network with multi-layer and multi-factor synergy is required to fundamentally enhance the indigenous innovation capability of industrial clusters in the region. Secondly, an open RIS with orderly governance, perfect elements, and multilevel integration is built. Based on the total innovation theory, RIS is proposed to be composed of four subsystems: innovator network, innovation service network, innovation network structure, and innovation governance mechanism, and thus forms a synergic innovation system composed of cluster enterprises, innovation service enterprises, public service, and cluster agents. RIS forms a multi-level organic system with corporate innovation system, sectoral innovation system, and national innovation system, and presents an open innovation pattern with dual embedding of regional local and hyper-local networks. It is also proposed in this part, for an orderly development of RIS, that the essence of RIS is institutional attributes and that innovation actors should be regulated by formal and informal governance mechanisms in the region. Thirdly, it reveals the mechanism underlying the role of open RIS in enhancing the CIIC. It is proposed that indigenous innovation capability development of clusters

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should be based on: synergy of cluster, regional, and national innovation policy systems; synergy of local and hyper-local networks; and synergy of cluster enterprises and innovation service systems to break the lock on intra-regional innovation paths. In particular, as for building an open regional innovation network in China nowadays, focus should be placed on expanding the hyper-local innovator network and hyperlocal service network to achieve a breakthrough in the innovation basis system. Local networks facilitate the integration of the knowledge base of different innovators in the region and improve the capacity for exploitative innovation; hyper-local networks facilitate the input of analytical knowledge, emerging innovation models and highend resource elements to enhance exploratory innovation capabilities. Finally, it reveals the correlation mechanism between innovation service system and cluster indigenous innovation. The innovation service system includes local and hyper-local innovation basis service system, production service system, R&D service system, and business service system. It constructs the inner mechanism to promote the perfect innovation service system and realizes the embedded interaction between manufacturing industry and service industry, and puts forward the countermeasure suggestions of multi-level participation, multi-player cooperation, and multi-element integration. A long-standing issue has been the exploration t the path to indigenous innovation in China. Experiences from some emerging countries suggest an existence of different technology catch-up strategies—following catch-up, leapfrogging catchup, and creating new technology paths (Lee et al., 2000). However, many realistic factors influence the choice of national innovation model (Kim, 1997). It is a common issue for both practitioners and theorists to come up with an indigenous innovation path with Chinese characteristics. Practice of the Reform and Opening-Up shows that China continues its exploration to indigenous innovation. Based on the study in the experience of indigenous innovation in China, a total innovation theory is proposed by Academician Xu Qingrui and his team for analysis of the path of indigenous innovation in China. The technological innovation carried out by Chinese enterprises at early stage of Reform and OpeningUp was mostly re-innovation based on imported technology, so a “secondary innovation” theoretical model was proposed by Wu and Xu Qingrui (1995) based on the reality of enterprise technological innovation in China and developing countries in general. Various existing resources should be integrated during innovation, Chen Jin (1999) argued that enhancing integrated innovation is a new way to achieve indigenous technological innovation, and a key for enterprises to gain competence and adapt to the development of knowledge-based economy. As innovation theory evolves from a linear model to a systemic innovation one, indigenous innovation is also constrained by the national and regional innovation milieu. Based on the actual regional innovation in China, Wei Jiang (2004) proposed a cluster innovation system theory with industrial clusters as the research object. Based on a continuous study on Chinese practice and theoretical development, Total Innovation Management was proposed by Xu Qingrui (2002): oriented to cultivate core capabilities and improve competence, with value increase as a goal and the organic combination and synergistic innovation of various innovations (organizational innovation, market

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innovation, strategic innovation, management innovation, cultural innovation, institutional innovation, etc.) as a means, and integrate innovation resources nationally and globally through effective innovation management mechanisms and methods to increase the added value of products, master core technologies and indigenous IPR, and even the discourse of standards, to enhance the sustainable competitiveness of enterprises. It is more obvious that the total innovation theory system is characterized by multi-level, multi-subject, and multi-elements as the total innovation theory goes on. Multi-level is reflected in the national guidance, regional system, and enterprise practice; multi-player is expressed in a structure with enterprises as the principal role and government, universities, research institutions, and service as auxiliary; and multi-element means a requirement to integrate and utilize innovation resources from all over the world during total innovation to realize indigenous innovation. Multi-level is reflected in the national guidance, regional system, and enterprise practice; multi-player is expressed in a structure with enterprises as the principal role and government, universities, research institutions, and service as auxiliary; multielement means a requirement to integrate and utilize innovation resources from all over the world during total innovation to realize indigenous innovation. Industrial clusters gradually take the lead in regional economic development. Over the past 40 years after Reform and Opening-Up, clusters grew rapidly and have come with a major position in the national economy and industrial development. Clusters have stepped to be the mainstay of regional economic development, especially in the core regions of the Yangtze River Delta, Pearl River Delta, and the Bohai Bay region, where more than 50 percent of the regions’ industrial output are already accounted for by clusters. Clusters have covered most of the traditional industries, high-tech industries, and emerging industries such as cultural and creative industries. Currently, the cluster is undergoing its transformation and upgrading, facing a weak innovation basis system, weak innovation synergy system, insufficient innovation motivation system, etc. Usage of total innovation theory to enhance the CIIC appears to be a necessity. We conduct an in-depth study, based on comprehensive innovation theory, targeting multi-level, multi-player, and multi-factor characteristics of enterprises, industry clusters, and regions. First, to build an open cluster innovation system from multi-level and multi-element. Second, to analyze interactions among multi-level networks and the mechanism of cluster innovation capability enhancement from multi-level and multi-player. Third, to analyze the correlation mechanism between knowledge service system and indigenous innovation of cluster based on multi-level and multi-element. Finally, policy recommendations are made to enhance CIIC from multi-level, multi-player, and multi-element aspects in the analysis on the inner structure of CIIC and the coordinated development of clusters and regions.

Chapter 14

Construction of RIS Theory

Innovation theory, in terms of research levels, focuses on the guidance of innovation policies at the national level, as well as product and process innovation at the micro level. Besides macro- and micro-level, total innovation focuses more attention on the meso-level that is of operational significance. The RIS theory, the NIS theory, and the innovation theory at corporate level constitute a multi-level structure of the total innovation theory. The chapter focuses on element integration in RIS and the enhancement mechanism of indigenous innovation capability.

1 Introduction “State of the nation” in the economic sense has increasingly given way to “state of the region” as the globalization goes on, making the region a real economic interest, thus increasing attention is being paid to studies of the region by theoretical researchers and policy makers. Realistically, in the light of the competition for global economic discourse and control, the importance of regional competence formed by multinational alliances is going to outweigh that of national competence, and the same goes for the regional competence across provinces (region, municipality) to individual ones. However, as for existing definitions of region scope, they are various from different scholars. A region is a concept with a very fuzzy boundary, which can be supranational (e.g., EC, NAFTA), cross-provincial (region, municipality) (e.g., Yangtze River Delta) or within an administrative boundary (e.g., province, autonomous region, municipality), or a county (district) or a town. Due to the multi-level nature of regions, the scope of research on regional economies and RIS tends to vary by the focus of the researcher or the jurisdiction of the policy maker. In China, the region is defined by scholars as a provincial (region, municipality) or cross-provincial (region, municipality) economy (e.g., Yangtze River Delta, Pearl River Delta, Bohai Bay Rim, etc.), while this book focuses on the region at a county © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_14

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(city, district) level. This selection of regions depends on: (1) this study bases on intra-regional industries and industrial clusters, while massive economy in China are prominently represented in such small regions. (2) Regional economic policies and industrial policies are characterized by local government dominance due to the administrative system in China. (3) Clear administrative boundaries exist between or among counties (cities, districts) and such boundaries will significantly affect the competitive behavior of industries (clusters) between or among different regions, which is particularly evident within the Yangtze River Delta region. Studies of RIS by Cooke (2001, 2002), Asheim (2002), Porter (1990) et al. are linked to industries (clusters) in the region. It is in line with logic of industrial development, because the construction and improvement of RIS fundamentally is to contribute to regional economy development and regional industrial competence enhancement, therefore, the study of RIS should be based on the industrial ecosystem embedded in the region. Significant variability exists among different regions within a country in terms of economic development patterns, while local or regional factors contribute significantly to the activities of enterprises within these differentiated regions, according to Padmore and Gibson (1998), Tëdtling (1994), and Storper (1997). Long-standing challenges can be found when we focus on the regional economy to figure out the current state of industrial development. Like Zhu Gaofeng, who proposed how to build the innovation system of SMEs at the Engineering Science and Technology Forum on “Indigenous Innovation Road with Chinese Characteristics” of the Chinese Academy of Engineering, and Wang Yingluo, who talked about how the service industry and the manufacturing industry can develop synergistically and interactively. For solutions, these issues should be treated within RIS construction, where significant issues such as the combination of SME innovation system with RIS and the construction of RIS and innovation service system are studied. These issues along the regional economic development are urgent to be addressed. Certainly, these issues can be discussed and treated at different regional levels (e.g., globally, nationally, cross-provincially, provincially, and county-wide) or in different industrial forms (e.g., industrially, cluster-wise, alliance-wise, etc.). This chapter will start with exploring cluster-based RIS at the sub-regional level within the province, and then a discussion will be made on the relationship between the industrial cluster level and innovation systems at different levels, such as regional, national and global, followed by an analysis with a multi-level integration perspective. Specifically, three aspects of the study are included in this chapter: (1) Background. Three key issues of sectoral innovation development in the regional economy are revealed to provide a starting point for the study in this chapter. (2) Theory construction. It focus the connotation, elements and system construction of an open RIS in light of the evolution of RIS research. (3) Multi-level architecture. Focus is on the relationships and interconnections in the multi-level architecture from cluster innovation system (CIS), RIS, NIS to the global innovation system (GIS).

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2 Three Issues of Industrial Innovation Development in Regional Economy For study on issues confronting regional economic development with the perspective of industries or industrial clusters, discussions are conducted in this book in three dimensions: innovation basis system, innovation synergy system and innovation motivation system. Relationships among these three dimensions are shown in Fig. 1. The innovation base system refers to concentration degree of various resources within the region, including knowledge, human resources, science and technology, etc. Innovation synergy system refers to cooperation status and synergy innovation degree among innovation players in the regional industry. The innovation motivation system is primarily embodied by the innovation incentive level of major enterprises in the industry cluster as well as their motivation to the whole industry cluster. An analysis on issues faced by the innovation development of industrial clusters in the region according to three dimensions mentioned above are specified as followed:

2.1 Innovation Basis System: Stuck in Low-End Resource Paths Development of regional economy bases on that of regional industries, and the same to regional industries (clusters) on innovation resources. The innovation resource basis here is mainly reflected in the innovation infrastructure. Traditionally, innovation infrastructure refers to hardware infrastructure, such as “be prepared in electricity, road, water supply and land leveling” and even “communication, drainage”. According to RIS, what is more significant than hardware infrastructure is all kinds of innovation resources, i.e., software and knowledge infrastructure with organic

Insufficient motivation from major enterprises (weak motivation)

Innovation motivation system

Insufficient synergy of chain innovation (low synergy)

Stuck in a low-end resource path (weak foundation)

Innovation synergy system

Innovation basis system

Fig. 1 Three dimensions of analysis on innovation development issues within regional industry clusters

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integration of knowledge, talents, technologies, etc. Being stuck in low-end resource paths occurs in most regions of China in such a perspective to examine the innovation basis system, moreover, it is of great difficulty to break through such a lock, and even reverse transformation and upgrading occurs in some regions. It is manifested in the following aspects: a. In general, the manufacturing industry remains at the low side of the value chain China is large but not strong in manufacturing industry, with which solutions have not been provided although great progress has been made in the past 40 years. It is the insufficient supply capacity of intelligent manufacturing technology that explains why industries remain at the low end of the value chain for the long-term. Now, the unbalanced and insufficient development of China’s manufacturing industry is highlighted, i.e., backward overcapacity, higher emissions, weak innovation capability, weak basic core technology and innovative design capabilities, undesirable quality and effectiveness of development in general (1). b. Resource flows are manifested as outflows from industries at the high end of the value chain and inflows into that at low-end The law of industrial transformation and upgrading is that a pattern will emerge that resources will flow out from low-end industries in the region accompanied with resources flowing into high-end industries due to the constraints of cost factors, etc., when the economy goes to a certain level. However, there are areas in Zhejiang where pattern is the opposite of the law, but the manufacturing level in Zhejiang is significantly lower than that in Jiangsu and Shanghai. For example, Wenzhou, where lots of capital and high-end talent outflow, the profits earned through low-end manufacturing are invested abroad or overseas, but leave the low-end manufacturing in local. Industry in Wenzhou had not significantly improved as of 2010. c. Anomalous value allocation in global markets Due to the vicious competition among peer enterprises in the region, their pricing power in the market has declined instead, despite the increasing size and market share of the cluster. Such as pearl industry cluster in Zhuji, 70–80% of the global production of freshwater pearls accounts just for about 20% of the value, they fail to transform the scale advantage into a price advantage because of the low-price competition among peers. Another example is that Shengzhou’s market share in the necktie industry has reached 70% of the world, but the OEM price is only about 1/ 10 of the sales price. It is the vicious price competition caused by the homogeneous products, low brand, and scarce talents within the industry, and the low added value of the products caused by “internal dissension” that reduces the global price discourse instead of rising.

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2.2 Innovation Synergy System: A Chained Innovation Based on Division-Cooperation, Which Is in Mire Industrial clusters are competitive because of collective learning and efficient division of labor and cooperation within the cluster, especially the clustering of enterprises in the industrial chain in a narrow geographical area, which enables the synergistic advantage of the whole cluster based on the scale advantage of individual businesses. However, it was found in the survey that an internal integration situation has emerged within the quasi-market organization form that could have synergized out advantages due to a short industry chain, where cluster enterprises are largely in a middle link, the manufacturing industry. So-called internal integration means continuously acquiring and merging in the front and back node enterprises. Why M&A? Because partnerships among these cluster enterprises, that rely on low-cost competition and desperately try to squeeze out the limited profit margins of the front and back node enterprises, can no longer be maintained, thus they can only turn to M&As to internalize the profit margins of the front and back links into a single enterprise, thereby continuously dismantling chain innovation activities. For example, several of the largest cable and low-voltage electrical manufacturers (including Chint, Delixi, PEOPLE, TENGEN, XINGLE, etc.) within the Wenzhou low-voltage electrical industry cluster have gone from innovative synergy to internal integration for competitive advantage in terms of scale and cost. Even for high-tech industry clusters, like software industry clusters in Hangzhou, enterprises work individually with low proportion of chain synergy innovation due to short industry chain, weak platform and basic software. It is just about 5% of the output value of the whole industry cluster that basic software and platform software account for respectively, about 20% that embedded software account for, however, over 70% that application software account for. Obviously, it is difficult to form a synergistic system based on division-cooperation in accordance with such an industrial structure, because it is difficult to form a division-cooperation system within the software industry cluster, like “waterfall”, given the short industrial chain of application and embedded software. (1) Xie Yuxin. A New path for transformation and upgrading of China’s manufacturing industry is in urgent as it remains at the lower end of the value chain [EB/OL]. (07–19-2018) [12–01-2018].http//www.cinn.cn/headline/201807/t20 180719_195580.html.

2.3 Innovation Motivation System: Weakened Leadership By Major Enterprises in Innovation Top and backbone enterprises are one of the most critical factors that drive the development of regional industrial clusters. In a global manufacturing network, a flagship company in the U.S. or Europe may lead or drive a global industry. It is a global situation, but the road is still long for Chinese enterprises. In spite that Haier,

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Huawei has gone ahead, a lot of efforts will be taken to cultivate an enterprise that can lead the development of global industry in Zhejiang. Zhejiang Province is one of the most developed regions of industrial clusters in China, the value added of which accounts for about 60% of the province’s GDP. If this 60% could be created by major enterprises embedded in regional clusters to drive the formation of leading enterprises, backbone enterprises and multi-level subcontracting system, then it would be conducive to the formation of an effective industrial ecosystem. Unfortunately, major enterprises in the cluster suffer from a weak innovation capability, low value-added products, and in turn a failure to form a linkage of “design—manufacture—service” between major enterprises and their neighbors, which makes it difficult to drive the development of the cluster. For example, major enterprises such as CHINT, Delixi, PEOPLE, TENGEN, etc. exist in Wenzhou low-voltage electrical industry cluster, but they tend to win by brand and scale, and lack self-innovation motivation. “It is the small and medium-sized supporting enterprises, rather than major enterprises, that are innovative in the region”, said the vice president from a top enterprise. It is the desire for survive that drives small enterprises to innovate to win orders from major enterprise. But they benefit from a limited profit margin under the procurement cost control of major enterprises, which in turn causes failure to invest sufficiently in large-scale innovation. For example, there are two major enterprises in the Shaoxing textile industry cluster, i.e., JIANGLONG HOLDING and TANGLONG Group. They expanded via capital market operations, but were not sufficiently active in innovation investment, failing to fulfill the leading role of sectoral innovation, and even went bankrupt with the advent of financial crisis. RIS, with a proper innovation basis system, innovation synergy system and innovation motivation system, is required to resolve the three issues of the innovation system of industrial clusters mentioned above. It is in such a system that the hyperlocal (1) expansion of the innovation knowledge network and its service network can be continuously realized, supporting enterprises in the region to participate in synergistic innovation with a more mature innovation governance mechanism. Such a system is referred to below as an open RIS that is “well-governed, element-sufficient, and multi-level integrated”.

3 Evolution of RIS and System Construction 3.1 Evolution of RIS Theory RIS is proposed after NIS in terms of innovation system research paths. Moreover, the concept of RIS tends to be linked with industries in the region, such as from the theory of Innovative Industrial District by Marshall to the regional innovation system by the Groupe de Recherche Europen sur les Milieus Innovateurs (GREMI). The background of “hyper-local” is that intra-cluster knowledge networks will contribute to the efficiency of leveraging learning by cluster enterprises, which is also prone to

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the decline of clusters due to local stuck-in. Recently, scholars suggest that complementary knowledge should be acquired by cluster enterprises via systematically constructing a network related to the external part of the cluster, so as to give impetus to innovation of cluster enterprises. It is in such a case that the concept of “hyper local” emerges as an effective path to acquire, transfer and accumulate knowledge outside the cluster. A brief review of RIS theory is presented here to distill the characteristics of RIS so as to provide a theoretical basis for subsequent research. It was in the late 1980s and early 1990s that innovation research really evolved into a “systems paradigm”, at which time NIS theory received widespread attention from academics and the government. Key representatives of NIS research are Freeman (1987), Lundvall (1992), Nelson (1993), et al. Later, RIS received attention from the field of innovation systems research as the systems paradigm expanded. Ohmae (1993) argued that regions will become economic interests in the true sense of the word as global economic integration develops. A regional character is presented in crucial business linkages of enterprises against a background of economic globalization, suggested by Cooke et al. (1997). As a result, RIS theory emerges based on NIS theory, including European innovation environment theory (Aydalot et al., 1988) and “technology regions” (Saxenian, 1994) represented by Silicon Valley in U.S., all of which can be unified in regional innovation theory. As for the definition of RIS, Cooke et al. (1997) suggested the role of production culture, i.e., financial capital, institutional learning, and systemic innovation, in the construction of RIS from the perspective of “region,” “innovation,” and “system.” Krugman (1991) argued that the regional governance system goes to be the key to the organization and promotion of economic development. Via an analysis of elements and structure of RIS, Howells (1990) pointed out that bureaucracy in local government, long-term development of local special industries, variability in the core and periphery of industrial structure, innovation performance, etc. are the analytical factors of RIS. While emphasizing the multi-level nature of innovation systems, Howells suggested that geographically, national, sub-national, regional and local innovation systems are overlapping partially or completely. In addition, Cooke et al. (2000) argued that the geographical concept of RIS consists of innovation networks and institutions with well-defined geographical and administrative arrangements that enhance interactions in formal and informal ways to continuously increase the innovation output of firms within the region. Institutions within this innovation system include research institutes, universities, technology transfer agencies, chambers of commerce or industry associations, banks, investors, government departments, individual firms, and networks of firms and industry clusters. They also proposed that the structure of RIS can be analyzed from two sub-systems: one for knowledge application and development, and the other for knowledge generation and diffusion. In summary, RIS theory can be regarded as an innovation system cross national, sub-national or even local scale, the study on which may provide new theoretical cornerstones for regional economic development research. For further clarification of the subject and object of research, RIS tends to be based on industries or industrial clusters in the region. The region is regarded as a network of enterprises based on cooperation and competition rules, which is connected with

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higher innovation systems, such as national innovation system and global innovation system, to build up industrial competence in the region at the national or even global level. But issues will arise on the road of RIS theory goes, such as how should the boundaries of RIS be defined? What are the conditions under which an innovation system emerges? What is the function of RIS? What is the impact on regional innovation performance? How can RIS be organically connected and integrated with higher-level innovation systems? Further studies are necessary on these issues. In this section, local regions, mostly counties, are targeted to research basic characteristics of their innovation systems and construction rules of open innovation systems.

3.2 Connotation and Characteristics of RIS In light of the above brief process of RIS theory evolution, several questions should be answered for the establishment of a RIS: (1) How is a region scoped? (2) Who are the innovation players within and outside the region? (3) How do they link with each other? (4) What are the rules that constrain and regulate the linkages of innovation members? Based on these four questions, RIS can be defined in terms of regional boundaries, innovation players and innovation service, innovation network structure, and innovation governance mechanisms, etc. First, the regional boundary refers to what a kind of region it is, a region, subnation, nation or supra-nation? RIS is still discussed in this study based on industries (industry clusters), so the smallest range of places where industry clusters are located is picked as the region, principally a town or a city. Second, the innovation player and service. Innovation participants refer to enterprises in the upstream and downstream of the industrial value chain, and innovation service include those that support the realization of innovation internal and external the region. For structural analysis, the network composed of innovation players involved is referred to as the innovator network, while the network composed of service is termed the service network. Third, how are these participants linkaged? In other words, the linkage pattern within the region, primarily including the internal knowledge activity pattern, such as the mechanism of division-cooperation, synergistic innovation mechanism, etc. Fourth, the rules of linkage, including the basic rules and governance mechanisms that govern the behavior of all innovation players and service, both internal and external to the region. Based on the evolution of RIS theory and the analysis of basic issues, RIS is defined in this book as the network relationships and institutional norms formed by various innovation players (e.g., local governments, enterprises, public services, and agents) in a given region through formal or informal governing mechanisms to achieve knowledge communication and innovation cooperation. In line with such a definition, the innovation system in a given region is decomposed into four elements—innovator network, innovation service network, innovation network structure, and innovation governance mechanism—and thus further reveals the basic characteristics of RIS.

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(1) Characteristic in elements. Key components of RIS are the innovator network and the innovation service network, i.e., the total-factor synergistic innovation network constituted by all innovation actors such as enterprises, acting as a principal role, and innovation service in the region. (2) Characteristic in structure. RIS is founded on the basis of structured operation system, i.e. the innovation actors form a structural system and operation mode that runs through the whole process of knowledge production, application and diffusion through innovation cooperation and synergy. (3) Characteristic in institution. Essentially, RIS is an institutional environment in which innovation actors are subject to formal and informal governance mechanisms in the region, with all actors generating interdependent relationships according to common norms. No region is closed. The three characteristics above are based on a “given region”, which is for the convenience of deconstruction. Indeed, there are a large number of complex relationships internal and external to the region. It is precisely the existence of such relationships that can constantly break the equilibrium of the RIS, facilitating the development of the region. So two extended characteristics are introduced on top of the previous three basic characteristics. (1) Multi-level synergy. RIS is multi-level, which requires an integration of the innovation system in a given region with higher-level innovation systems (e.g. sectoral innovation system, national innovation system, global innovation system) to realize synergistic innovation. Thus, RIS in a small scale (e.g., county) can be embedded in a larger one (e.g., provincial, national or even global) to realize open innovation. (2) Hyperlocal network. RIS is an open innovation system, where innovation actors in a certain region extend to the outside via a network to access external heterogeneous innovation resources and achieve cross-regional development of innovation capabilities. Such a system is referred to below as an open RIS that is “well-governed, elementsufficient, and multi-level integrated”.

3.3 Elements and Construction of Open RIS The elements and construction of open RIS can be analyzed from three aspects: first, analysis on participants of innovation activities (network elements); second, analysis on interrelationship among participants of innovation activities (network structure); and third, analysis on governing mechanism of innovation system (institutional norms). Interrelationships among participants in innovation activities (network structure) governing mechanisms of the innovation system (institutional norms). Figure 2 is a construction model for the open RIS proposed based on the analysis of RIS components and basic characteristics.

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Hyperlocal Knowledge Network (Domestic Network)

Formal system regulations

Innovation Service Network: Knowledge Production Universities

Research Institutes

Innovative Service Network Knowledge Diffusion & Transformation

Clients Cooperation

Talent Training Institutes Service Support

Marketization

Technology

Research

Transfer

Suppliers Enterprises

Technology and Resource Inflow

Labor Intermediaries

Market Service Provider Cluster Agencies

Complementary Enterprises

Related Enterprises

Information Consulting Agency

Informal System Regulations

Governing Mechanisms for Regional innovation

Innovator Network

Knowledge Flow

Innovative Service Network: Service Support

Venture Capital Institutions

Internal Value Chain

Technology and Resource Inflow

Internal Knowledge Sources

Hyperlocal Knowledge Network (Global Network)

Technology Intermediaries Technology Incubator

Government

Moderately Root of Regional Culture

International Market Expansion

Fig. 2 Construction model of open RIS

(1) Participants in innovation activities (network elements) Participants in innovation activities include innovator networks and innovation service networks. The innovator network is the kernel of the participant network in RIS, which includes upstream and downstream enterprises along the industry chain that carry out innovation activities around a specific industry, such as suppliers, customers, complementary enterprises and other related enterprises both internal and external to the region. Innovation service network refers to all service organizations inside and outside the region that support sectoral innovation activities in a given region, including knowledge production-oriented service system, knowledge diffusion and transformation-oriented service system and other public service-oriented service support system. (2) Interrelationships among participants in innovation activities (network structure) In Fig. 2, innovation players (including enterprises and service along the industrial chain) are interconnected through technology and resource input, value synergy along the industrial chain, and marketization of innovation achievements, and use knowledge flow, information flow, logistics and capital flow as organic linkage means. For open RIS, innovation synergistic networks include local innovation networks

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composed of innovators and service providers within the region and external innovation networks composed of innovators and service providers outside the region. Local and external innovation networks are collectively referred to here as hyperlocal innovation networks. Obviously, innovation networks are constituted through various relationships, so a network structure is used in this book to analyze the interrelationships among participants in innovation activities. (3) Governing mechanisms of the innovation system (institutional norms) Regardless of whether it is among innovation players internally or externally, the corresponding regional governance mechanisms are formed through formal and informal institutional regulation, including the governance for major enterprises within the cluster, the governance for industrial associations (such as industry associations, etc.), and the informal governance for regional culture.

4 Contributions of Open RIS to Innovation Capabilities An analysis on connotations, characteristics and construction of open RIS enables us to address a key proposition: why does open RIS contribute to the enhancement of regional innovation capabilities? An analysis focusing on three issues ongoing in the development of regional industrial clusters in China is carried out from three aspects.

4.1 Contribution of Open RIS to Breakthrough Innovation Basis System Innovation basis system includes hardware infrastructure and software (knowledge) infrastructure, of which the key is the latter, such as knowledge, human resources, and technology, etc. A closed RIS is often concerned with hardware infrastructure, lots of efforts are spent by Chinese local governments at all levels to prepare hardware infrastructure such as water, electricity, gas, plants and roads for attracting investments, for which Dongguan City in Guangdong Province is typical. However, it a hard work to uplift the level of software infrastructure in the region shortly within a county due to outdated urbanization in China. As such, open RIS enables a breakthrough in the software basis system by inflowing high-end technology and knowledge via importing external R&D services, business services, design services and financial services to enhance the knowledge base support capability and innovation capability of major enterprises, as follows: (1) Expand hyperlocal innovator network 1. Set up headquarters and branches external to the region (even leading industrial regions abroad) by major enterprises or backbone enterprises in the

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industry cluster. It is a practice that has been adopted widely in industrial clusters of various regions in Zhejiang Province. 2. (2) Cooperative innovation jointly by the enterprises internal and external to the industry cluster. It is also primarily found in top and backbone enterprises. 3. (3) Attract external (including overseas and extra-regional) enterprises to set up joint ventures, partnerships and wholly-owned companies within the industry cluster. These “foreign” companies bring new technology, knowledge of management, etc., breaking the original balance within the cluster and enabling breakthrough innovation. For example, the joint venture between Delixi and Schneider within the low-voltage electric appliance industry cluster in Wenzhou City, Zhejiang Province, triggered changes in the market and product structure throughout the region. Although many local low-voltage electrical appliance manufacturers in Wenzhou jointly hinder cooperation between the two major companies, the practical effect is that their cooperation stimulated changes in the innovation basis and motivation. (2) Expand hyperlocal service network 1. Enterprises within the industry cluster cooperate with external research institutes, universities and colleges, which is common in Zhejiang Province. 2. Seek cooperation with external innovation service providers and expand external innovation network. for example, cooperation with R&D institutions, consulting institutions and financial institutions in big cities, or cooperation with foreign R&D institutions, marketing institutions and information institutions. 3. Enterprises set up service in regions with leading industrial development at home and abroad to develop their own innovation capabilities by taking advantage of the concentration of talents, technology and markets in these regions.

4.2 Contribution of Open RIS to Innovation Synergy System There are positive synergies and negative synergies in innovation. Positive synergy means that all participants in innovation break through constraints from traditional paths through collaborative innovation, enabling innovation capabilities to grow spirally; Negative synergy means that the innovation players carry out innovation activities traditionally in a closed environment, resulting in a lock-in of innovation paths and capabilities. Of course, the innovation synergy refers to here is the former. The reason of the open RIS is conducive to the enhancement of the intra-regional innovation synergy system is that the open innovation network facilitates the input of analytical knowledge, emerging innovation models and high-end resource elements to achieve exploratory innovation and break the lock-in of innovation paths within the region. It can be based on “structure-behavior” or “ relationship-resource” analysis.

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1. “Structure—Behavior” Open RIS has changed the structure of the innovation player network. As external networks expand, changes will occur in the scope of nodes, the strength of network relationships, network density, network intermediation, etc., and will inevitably occur in the cooperation objects, cooperation mechanisms, and cooperation behaviors of enterprises within the network. Zhu et al. (2009) found that the structural attributes of regional innovation network structure, as the basis and platform for knowledge flow, are decisive for knowledge acquisition and knowledge diffusion behavior. The network structure that promotes cluster capacity enhancement should develop in the direction of moderate density, low intermediation and high cohesiveness, which is the trend of cluster network structure evolution generated by the introduction of external innovation players. 2. “Relationship—Resource” Characteristics of relationships among participants involved within the network will affect the resources available to the innovator. Open innovation networks facilitate firms within regional clusters to locate external partners with various types of strong and weak relationships, thus providing the possibility to obtain heterogeneous resources, just as Granovetter (1973) suggested that the strength of the relationship affects differences of the resources acquired. As Zhu Haiyan and Wei Jiang (2009) revealed, the embedding of external knowledge providers has a negative impact on knowledge acquisition capability by influencing cluster network intermediacy, which increases the possibility of product upgrading in clusters, whereas certification institutions, consulting institutions, and testing institutions are more likely to bring information on new technologies, equipment, personnel, and so on, serving as significant channels for clusters to learn about the outside world.

4.3 Contribution of Open RIS for Improving Innovation Motivation System Inadequate innovation motivation of industrial cluster enterprises in the region lies crucially in that of major enterprise. The reasons is two-fold: first, the leading enterprises within labor-intensive industrial clusters can squeeze the profit margins from SMEs by virtue of their low cost and scale advantages; second, the “improper use of knowledge” is caused as technology and knowledge spill, which is almost impossible to protect by IPR because it will take two to three years to apply for IPR, during which the technical imitation is already finished, making the application worthless. Improvement of innovation motivation mechanism requires an improved mechanism of innovation governance within the region. Governance can be governmental, but it is the major enterprise governance, community governance (i.e., the role of local personalized trust mechanisms), and association governance (i.e., the governance of regional industry associations, entrepreneur associations, etc.) within the

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cluster that is more effective. It is the primary solution to internal IPR infringement and external anti-dumping as shown by the model of industrial cluster development in Wenzhou. Enterprises set local rules by utilizing their local industry associations and combat technical imitation via joint efforts by local association-related departments in Yongkang City, Zhejiang Province. Improving the innovation service system can also be used to improve the innovation motivation system, i.e., to realize rapid industrialization of scientific and technological achievements through collaboration and technology transfer with external service providers, lowering the possibility of peer imitation and increasing the cost of imitation. Due to the high mobility of talents and information flow of enterprises, it is difficult to hold the core technology within traditional industry clusters in general, but cooperation with external research institutions, which requires high technological capability, instead actively protects the IPR of enterprises. Open RIS disrupts the original network structure and governance model, which helps to alleviate the negative incentives for innovation caused by technology imitation and knowledge spillover while also increasing the possibility of innovation synergy among enterprises. As a result, a fundamental solution to the environmental constraint mechanism for innovation players is required for innovation motivation.

5 Integrations of Multi-leveled Open RIS The preceding discussion on how to enhance regional innovation capabilities by constructing an open RIS at a specific regional level focuses on synergistic innovation between enterprises within the region and external enterprises and institutions. However, due to characteristics such as the multi-level definition of regional boundaries and the inherent embeddedness of the region with larger external regions, it is also necessary to provide solutions for integrations of open RIS with external higherlevel RIS, such as the cluster innovation system, RIS, sectoral innovation system, and national innovation system (NIS), etc. Figure 3 shows the conceptual regions, structured by the cluster innovation system, RIS, sectoral innovation system, and national innovation system, all of which contain their own boundaries, but are also interconnected and mutually inclusive, and jointly build up a spatial structure for a multi-level innovation system. As shown in Fig. 3, NIS is a highly complex and innovative system consisting of large number of subsystems. These subsystems can be classified in two dimensions, regional and industrial, where NIS can be described as a two-dimensional matrix consisting of RIS and SIS, as pointed out by some scholars (Chung, 2002). The Figure represents geographical boundaries horizontally and industry or technology boundaries vertically, with the entire NIS consisting of multiple RISs or SISs. CIS is embedded inside a vertical and horizontal system, and is an economic geographic phenomenon formed by the clustering of same or related industries in a certain region, whose boundaries are restricted by both geography and industry. However, a small square in Fig. 3 is not a CIS in every case unless an industrial sector is

5 Integrations of Multi-leveled Open RIS Fig. 3 Multi-level innovation system architecture. Note Abbr. RIS is for regional innovation system, SIS for sectoral innovation system, and CIS for cluster innovation system

229 Regional innovation System (RIS) sectoral innovation system (SIS) 1

sectoral innovation system (SIS) 2

sectoral innovation system (SIS) 3

sectoral innovation system (SIS) n

National Innovation System (NIS) 1

National Innovation System (NIS) 2

cluster innovation system (CIS)

National Innovation System (NIS) 3

National Innovation System (NIS) n

sufficiently clustered in a particular region to form a real sense of CIS by networking and innovating. Essentially, the innovation system in the spatial domain will consist of regions bounded by clusters, horizontal regions (e.g., provincial or cross-provincial), regions bounded by nations, etc., if each small square in Fig. 3 is considered a region. Inherent integration relationships among innovation systems at different levels will be further analyzed hereafter.

5.1 NIS with RIS The NIS can be viewed as a matrix consisting of RISs and SISs intersecting horizontally and vertically. Theoretically, RIS is based on NIS and is an evolution of NIS. The integration relationship of NIS with RIS is inclusive of two aspects. (1) RIS is a subsystem of NIS. Despite the persistent uncertainty about regional boundaries in RIS research, regions are generally considered to be meso-administrative units between the state and the local level (Cooke, 2001). The culture, institutions, and administration of regions within the same country play an extensive role in innovation, a role that is particularly evident in federal states. Chung (2002) went further by suggesting that NIS consists of RIS and that the competitiveness of the former depends on an effective RIS. 2) RIS will be influenced by the NIS where it is located. RIS, as a subsystem of NIS, is not an independent individual or closed system, but is inextricably linked to spatial systems of higher levels (Tödtling et al., 2005). Given the increasingly fierce global competition and the accelerating pace of technological progress, it is far from sufficient to acquire sustainable competitiveness by relying solely on intra-regional connections, so external regional linkages are required as a necessary complement to internal ones, to access various resources such as knowledge, technology and capital from the outside of the region. For the operation of open RIS, national administrative support for the opening and integration of RIS should take its role in policy (Cooke, 2002).

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5.2 NIS with SIS The integration of SIS with NIS holds some complexity, due to the dynamics of the SIS boundaries. There are two cases for integration relationship of SIS with NIS. (1) SIS can be considered as a subsystem of NIS. The innovation system of a country contains number of SISs, which can be considered that NIS consists of SISs (Chung, 2002). (2) Boundaries of a SIS are not limited to a country, but even span several NISs, when a super-macro (1) innovation system is possible. It was more common in Europe and North America in the early days (Autio et al., 1995), and is now present in all corners of the globe. But the dynamic nature of the sectoral innovation boundary in no way implies that a SIS can be completely separated from the national environment. As many technological infrastructures are public or semi-public goods, they inherently possess regional or national characteristics; while participants in SIS innovations are usually influenced by technological infrastructures, whose innovation activities are not only subject to technological and industrial contexts, but also geographically influenced. Thus a SIS tends to show distinct regional or national characteristics, forming national or regional SIS.

5.3 RIS with CIS Studies on RIS abroad are generally closely integrated with SIS and CIS, and it is believed that the formation of RIS is an objective requirement for a developing industrial cluster (Porter, 1990; Saxenian, 1991; Cooke et al., 1993), and Asheim (2002) even argued that it is the intervention of regional theory into industrial clusters in the region that RIS has really gained attention. Storper (1997) suggested that industry clusters are regional innovation networks that emerged in response to technological innovation in the “post-Fort system” era, where the nodes of the regional network (enterprises, universities, research institutions, governments, etc.) are networked synergistically and integrated into the regional innovation environment to form a system. Accordingly, the RIS is a system that consists of a cluster innovation network effectively overlaid with the regional innovation environment. Evenly, a theory model of relationships of RIS with industrial cluster regions is constructed, thereby analyzing the mechanism of formation and evolution of innovation systems in new industrial regions (Saxenian, 1994; Grossman et al., 1995; Ge Wenqi, 2002). 2. “Super-macro” SISs are those that transcend national borders, such as some SISs from organizations or regions such as the EU and North America. There are three types of integration relationships of CIS with RIS: (1) Multiple CISs exist in a RIS. CISs are based on a shared regional socio-economic and cultural foundation and share the knowledge production and diffusion subsystem in RIS, forming the flow and interaction of knowledge, resource flow and human capital among them. Enterprise innovation systems in the CIS can also be supported by the

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RIS to expand the innovation network. (2) The RIS overlaps significantly with the CIS. Because: (1) The original industrial chain extends upstream and downstream during the evolution of traditional industrial clusters to innovative industrial clusters, forming a complete “Smiling Curve” in the region. (2) As ICT (information, communication, and technology) and modern logistics industries advance, the cluster industry chain is further fragmented in the region, with multiple sub-clusters holding segments of the industry chain assembled into “large clusters” regionally, when boundaries are blurred between CIS and RIS. (3) Social economy and culture within the RIS is a key contributor to the development of CIS. For example, the spontaneous generation mechanisms of customs, practices, social order, and informal constraints in the region act on the behavior of firms, governments, and individuals in CIS, which significantly influence the innovation learning patterns, mechanisms, and drivers of clusters. In turn, corporate learning and innovation synergy within a CIS is a fundamental way to improve the technological innovation capabilities of the entire region and its industry clusters, and is a fundamental driver for evolution of the RIS.

5.4 Relationships Between Innovation Systems at All Levels with the Global Innovation System (GIS) In light of each level of innovation system mentioned previously into the GIS, their relationships are primarily reflected in the increasingly obvious openness of the innovation system. A growing emphasis is being placed on building open innovation systems during global economic and technological integration. For example, Asheim (2002) once divided RIS into locally rooted RIS, regional networked innovation systems, and regional NIS. The regional NIS he defined represents an idea to integrate regions with higher-level innovation systems. He believed that in such RIS, parts of the industrial and public institutional base have been integrated into the SIS and GIS, and that innovative behavior is achieved to a large extent through cooperation with participants outside the region. It is a view that represents an open development path for innovation systems. Especially as globalization facilitates the international flow of goods and services and enables the easy transfer internationally of proven technologies, MNCs act as a major player in GIS, which significantly influences the multi-level innovation system (Archibugi et al., 1999). Academic research has also come to focus on positive and negative effects, such as technology transfer, technology spillover, etc., generated by MNCs in innovation systems at all levels. First, the NIS should be founded on integration and benign interaction of CIS, SIS and RIS based on an analysis about relationships among multi-level innovation systems. Policy design should be fully coupled with its innovation requirements for innovation systems at different levels, to achieve coordination and interaction among cluster, regional and NIS policies. Second, the key to setting up an open RIS lies in a choice of economic development model for the region. The RIS model is a crucial factor influencing the regional

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economic trend, because the development pattern of the region is primarily shaped by the relationship between the system and its surroundings (spatial location factor) and development stages (network development factor). Therefore, each region should formulate its unique RIS strategy based on its own location, the development of its dominant industries, and the development stage of its regional innovation network. Third, the CIS is located at the junction of RIS with SIS in the multi-level innovation system architecture, which is a key point in the multi-level architecture of the innovation system. As the Industrial Competitiveness by Porter (1990, 1998) and the Industrial District by Marshall (1964) have been widely noticed, the theory of cluster innovation has been used by many countries as the basis for formulating innovation policies. Open RIS should likewise be studied and designed from the perspective of fostering industrial clusters in each region of China. Finally, future studies on open RIS are suggested to be conducted in three aspects to deepen: (1) It is about the evolution of CIS and how it can be integrated with RIS organically. (2) Further exploration of knowledge platform building and hyperlocal innovation network structure within RIS. (3) It is about the role of GIS in the multi-level innovation system, a strategic mindset of establishing an open production system, and how to break technology lock and innovation rigidity via international cooperation (e.g. strategic alliances with large international enterprises) to achieve a paradigm shift in technological innovation and trajectory.

Chapter 15

Enhancement Mechanisms for Cluster Indigenous Innovation Capability (CIIC) with Synergy of Multi-level and Multi-player Networks

The improvement of CIIC relies on the multiple innovation networks formed by various innovation players. Multiple innovation networks are developed and improved, especially manufacturing and R&D networks promote cluster upgrading through diverse evolutionary paths. Thus, this chapter analyzes paths for synergistic evolution of cluster organizations and mechanisms for enhancing indigenous innovation capability based on the construction of multi-level open innovation networks.

1 Construction of Open Clustered Enterprise Network Based on Multi-level Network Industrial clusters are characterized by both geographical and relational proximity (Keeble et al., 2002). Weber pointed out in his discussion of the agglomeration economy that maximum cost savings can only be obtained by concentrating industries with various internal and external links in a specific location according to a certain scale, i.e., inter-industry linkages and inter-enterprise interactions are a necessity for the existence of agglomeration economy. While the characteristic of relational proximity among cluster organizations has been neglected in long term research, it was not until the introduction of Granovetter’s (1985) embeddedness theory and the rise of the social network analysis (SNA) method that another important characteristic of industrial clusters, relational proximity, regained the attention from academics. An inspiration from embeddedness is that analyzing the emergence and development of industrial clusters at the geographical level is insufficient; instead, cluster analysis must be rebased on the analysis of social relations, in which studies on the type, nature, and structure of inter-organizational relations play an important role in understanding industrial clusters and their competitive advantages.

© Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_15

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Varieties of interpersonal relationships in economic life contribute not only to the understanding of the motivations for vertical integration but also to the awareness that various transitional forms of network organization exist between markets of isolated factors and highly integrated enterprises, as assumed in economics (Granovetter, 1985). A cluster, in terms of social network analysis, is a network system composed of multi-players such as producers, consumers, suppliers, government departments, and intermediaries (Powell et al., 1996; Gordon et al., 2005).

1.1 System Architecture of Cluster Enterprise Network In this regard, a cluster enterprise network system is constructed in this book based on the cluster system model in cluster studies by Wei Jiang (2004), Wolter (2004) et al., with an overall analytical framework for the cluster enterprise network system proposed (see Fig. 1). The analysis of cluster networks is classified as: micro-level, enterprise network level, and cluster level. The micro-level, i.e., analysis based on individual firms or institutions within the cluster, for example, to analyze the competitive advantage of cluster enterprises from the perspective of shared resources of the cluster (Geng Shuai, 2005). The enterprise network level is an analytical perspective used in this book to explore the mechanism of its role in relation to the competitive advantage of the cluster as a whole based on the core level characteristics of the cluster network. Cluster level is a common analytical framework used in studies so far, such as Saxenian’s (1994) analysis on Silicon Valley and “Route 128”. However, this framework currently is stuck at a functional analysis level of the cluster as a whole, without in-depth analysis and description of the cluster network system and its structure.

1.2 System Elements of Clustered Enterprise Networks Clustered enterprise network analysis is the one that takes enterprises and their interaction within a cluster as the subject of study, with system elements including environment, participant, and structure: (1) uncontrollable factors in the clustered enterprise network constitute the environmental elements of the clustered enterprise network, which consists of resources, infrastructure structure, and auxiliary network system. (2) Participants, i.e., the enterprise network. It is an element, consisting of supplying enterprises, demand enterprises, and related enterprises, that determines the productivity of a cluster. It is a challenge for suppliers who are external to the cluster to substitute for internal supply firms due to cost and quality factors, in terms of diversity of supply, quality, cost, supply efficiency, etc.; it is about related enterprises, including those that hold similarities in technology, products & services, and shared infrastructure. (3) Structural elements. Resources owned by members in the cluster

2 Paths of Synergetic Evolution for Cluster Indigenous Innovation … External Environment

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External Environment Auxiliary Network

Core Network

Cluster

Supply Enterpriset

Related Enterprises

Competitive Enterprise

Complementary Enterprises

Enterprise Network

Demanding Enterprise Public Institution

Individual Businesses

External Environment

Research Institutes

Microcosmic

External Environment

Fig. 1 System architecture of cluster network. Source Wu Xiaobo, Liu Xuefeng. Source Wei Jiang. Evolution of Innovation System and Cluster Innovation System Building [J] Dialectics of Nature Newsletter, 2004, 26 (1) 58–64; The rise and fall of regional agglomerations: Structure internal dynamics and change[C]. Paper presented at the DRUID PhD Conference, 2004

and the way the cluster is structured influence its competitive advantage, creating a synergistic effect of resource integration in the cluster’s structure.

2 Paths of Synergetic Evolution for Cluster Indigenous Innovation and Multiple Networks 2.1 Theory Background Multiple network relationships are the frontier in the progress of network research. Network attributes in various networks differ in their impact on firm behavior and performance due to the variability in generation and operation mechanisms (Bell et al., 2007). Manufacturing networks and R&D networks are considered to be important aspects influencing corporate innovation, with studies making separate arguments on their role in corporate innovation. For example, among the effects of manufacturing networks on firm innovation, suppliers are seen as a key external source of knowledge for corporate technological innovation (Kessler et al., 1996), while collaboration with customers is regarded as another significant way to improve a firm’s innovation performance (Gupta et al., 2000; Kandemir et al., 2006). However,

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different conclusions came from other studies, which suggest that it is a weak influence of manufacturing networks on the firms’ technological innovation (Eisenhardt et al., 1995), and even that they are not necessarily related, whereas R&D networks may also be negative for firms’ innovation performance (Caloghirou et al., 2004). As for the influence of manufacturing network and R&D network on firm innovation, findings of existing studies are still somewhat mixed and inconsistent, which warrant further in-depth studies. In addition, existing studies focus on either the manufacturing network or the R&D network alone to analyze their influence on enterprise innovation, but no available studies are carried out on the interaction between them.

2.2 Multiple Network Mechanisms of Cluster Indigenous Innovation A multiple network perspective shows that network attributes in different networks have different effects on enterprise behavior and performance. Manufacturing networks and R&D networks are influential to cluster innovation, functioning in process innovation and product innovation, respectively. Both of them show multiple network morphological changes as the cluster evolves, where interactions between manufacturing and R&D networks drive a multi-stage development of the cluster transition from resource element concentration and elastic specialization to an innovation system. Rather than an alternating evolution between manufacturing networks and R&D networks during the evolution of cluster networks, multiple network changes emerge with the expansion of enterprise network relationships, reflecting the adaptive behavior and network construction strategies of cluster enterprises at different stages. Of studies on network embeddedness, Andersson et al. (2002) classified embeddedness into business embeddedness and technology embeddedness and empirically investigated that the embeddedness degree of business and technology in a firm is positively related to its performance.

2.3 Case Study on Paths of Cluster Indigenous Innovation and Multiple Networks Synergistic Evolution Due to the different roles of the manufacturing network and R&D network in cluster technology innovation, the evolution of the industrial CIIC unfolds primarily along paths such as upgrading of manufacturing network, expansion of R&D network, upgrading of R&D network, and expansion of manufacturing network. The industrial CIIC evolved in four paths, as shown in Fig. 2 below:

2 Paths of Synergetic Evolution for Cluster Indigenous Innovation … Fig. 2 Evolutionary path of industrial CIIC

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Product Innovation / R&D Network

High

Low Low

High

Process Innovation / Manufacturing Network

Path 1: Process innovation and further innovation on the basis of absorbing advances in overseas science and technology in manufacturing networks. For example, the initial development of the textile industry cluster in Shaoxing, Zhejiang. In the 1990s, Shaoxing’s technical equipment, mainly the GK615 and other looms produced in the 1970s, was already lagging far behind the international textile industry. After the introduction of the first shuttle-less loom in 1991 in Guangming Silk Weaving Factory, textile enterprises in Shaoxing performed the import of advanced equipment and improvement of production process to lower production costs and improve product quality. The textile cluster in Shaoxing has embarked on rapid growth with the input of proprietary equipment, expansion of production scale and development of a manufacturing network. By 2003, a full industrial chain has formed in the Shaoxing textile cluster from PTA raw material production upstream to home textile and garment downstream, including textile machinery, dyestuff and auxiliaries. A large number of proprietary equipment has greatly improved the specialization of enterprises in production, making most of them concentrate on a certain part of the industry chain and collaborate with each other in the division of labor, thus forming a production system combining elastic specialization and mass production, which contributes to a continuous improvement in the efficiency of resource allocation within the cluster. Path 2: Open innovation enables the role of technology intermediary organizations. For example, the Zhejiang Institute of Modern Textile Industry (“ZIT” for short) performs R&D on generic textile technologies, based on which to serve textile enterprises by the Shaoxing Textile Science & Technology Center, with 6 research institutes and 10 technical service centers, integrating universities and research institutions such as Zhejiang University and Donghua University, with corporate technology. Not only does its intermediary role reduces the cost of product innovation for enterprises, but also greatly improves the efficiency of R&D cooperation among enterprises and universities and research institutions. The expansion of R&D cooperation and R&D network promotes the cluster’s product innovation capability, with a speedy increase in the number of patents and new products within the cluster since 2006. Path 3: Diffusion of Innovation and Modular Innovation by Localized Universities and Research Institutions. A typical example is the Zhongguanchun region in

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Beijing. Zhongguancun is the R&D base of China’s electronic information industry and the cradle of China’s private technology enterprises, which started its breeding for indigenous innovation back in the 1980s. Due to the limited technology of domestic enterprises in the past, MNCs in Zhongguancun held the core technology and highend market, while domestic enterprises concentrated on low-end products, marketing, services, and system integration. Domestic enterprises gradually began to cooperate with MNCs. In addition to cooperation in marketing, MNCs also outsource part of the peripheral software development to local enterprises and train local technical personnel. Also, well-known MNCs such as Intel, Microsoft, Lucent, Sun, IBM, Motorola, and Oracle, etc. set up R&D centers in Beijing, where local enterprises perform introductions and innovations to external advanced technologies through cooperation with and learning from MNCs. Moreover, enterprises in Zhongguancun are active in cooperating with universities and research institutes such as Peking University and Tsinghua University for innovation. Now, many high-tech enterprises that are innovative in Zhongguancun have made their way to the international market. Path 4: Investment attraction and enterprise cultivation for industry chain innovation. For example, the digital TV industry cluster in Shenzhen. In the early stage of development, serious issues on product quality were experienced by Shenzhen digital TV industry cluster, while key industry chain links such as integrated circuits and digital TV content were missing. In response, great efforts were made by the Shenzhen Municipality in building a digital TV experimental zone, attracting related enterprises and encouraging business start-ups, as well as planning a science and technology park through the municipal allocation of land to provide policy support for the settlement of enterprises. Since 2000, an average of more than 180 digital TV-related enterprises settled in Shenzhen every year. The expansion of the manufacturing network is conducive to the collaborative solution of generic technical issues among enterprises, which promotes the process innovation of the industry and drives an accelerated development of the digital TV industry in Shenzhen. In conjunction with theoretical analysis and industrial cluster practice, an exploration of cluster innovation network mechanisms and evolutionary paths was presented in this section. It is found that ➀ the manufacturing network promotes cluster process innovation, while the development of R&D networks is an influential factor in driving cluster product innovation; ➁ The evolution of technological innovation in industrial clusters primarily follows paths such as upgrading of manufacturing networks, expansion of R&D networks, upgrading of R&D networks, and expansion of manufacturing networks.

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3 Composition and Enhancement Mechanism of CIIC 3.1 Connotation and Components of CIIC In essence, CIIC is the sum of procedural knowledge conducive to interactive innovation activities embedded in an industrial cluster’s overall organizational structure, which is reflected in cluster enterprises’ overall capability in searching and acquiring external knowledge, sharing and exchanging internal knowledge, collaborating and integrating complementary knowledge units, and creating and accumulating new knowledge on this basis. CIIC vehicles are primarily multilevel inter-organizational networks between cluster enterprises: enterprises and knowledge-based organizations; and enterprises and extra-cluster participants. The connotation of CIIC is characterized by ➀ abstract potential. Essentially, CIIC is a set of public knowledge assets embedded in the relational structure of a cluster, whereby enterprises and institutions in the cluster intentionally or unintentionally use this procedural knowledge to find sources of knowledge needed for innovative activities or to build collaborative relationships with others, thereby enabling interactive innovation. ➁ Systematic emergence. As a specific social system, the innovation capability of an industry cluster “emerges” from interactions among its individuals, i.e., cluster enterprises and related institutions. ➂ Self-continuity. Organizational capabilities tend to be analogized to “organizational memory” or “organizational routines” in the evolutionary perspective. CIIC, as a kind of organizational capability, is also capable of self-continuity and self-replication and can be “re-produced “ in the participant over time. ➃ Dynamic evolution. CIIC is usually extended and enhanced over time as it is applied. Components of CIIC are structures and specific elements that are operationalized from a particular perspective (see Table 1). In sum, specific elements of CIIC include: ➀ imitation and reverse engineering; ➁ inter-enterprise talent mobility in a cluster; ➂ informal interpersonal communication; ➃ Local supply chain relationships; ➄ Collaborative linkages of firms with knowledge-based institutions such as universities, etc.; ➅ local horizontal interenterprise cooperation; ➆ personnel mobility between enterprises and universities; ➇ out-of-cluster (domestic/foreign) supply chain linkages of enterprises; ➈ Out-ofcluster (enterprise/institution) partnership of enterprises; ➉ In- and out-of-cluster talent mobility. Structured classification of CIIC elements. Two CIIC classification dimensions are abstracted by applying both deductive and inductive thinking: ➀ the degree of linkage collaborativeness; ➁ the degree of linkage openness. Degree of linkage openness Among them, the degree of associative collaborativeness refers to the degree of dynamic thinking and strategic awareness of both (or more) parties required for such an associative mechanism to be established and maintained, e.g., informal exchanges between cluster firms are hardly collaborative, while cooperation between parallel firms is often more proactive and collaborative. The degree of linkage openness refers to whether the linkage exists primarily within the cluster or involves participants

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Table 1 Studies on CIIC elements No. Key linkage mechanisms of clusters 1

• Business relationships among vertical corporations • Frequent sharing of devices • Jointly take-on big orders • Mobility of skilled labor

• • • •

2

• • • •

• Mechanisms non-based on tangible links • Imitation and emulation • Reverse engineering

3

Linkage-based mechanisms Supply chain linkage Inter-enterprise labor mobility Corporate spin-off activities

Horizontal inter-enterprise partnerships Sharing of technical information Horizontal outsourcing of production Jointly curb unhealthy competition

• Mobility of skilled labor in local markets

• Informal cafeteria-diet effect

• Customer–supplier interaction

• Localized generic technologies

• Simulation process and reverse engineering

• Complementary information and specialized service offerings

4

• Formal and informal collaboration and information networks • Interaction through local labor markets • Share customs and rules

5

• Customized functions in local labor markets • Informal inter-enterprise networking • Collaboration for integrating diverse knowledge

6

• • • • •

7

• Inter-enterprise business transactions (i.e., localized purchaser-supplier linkages) • Inter-enterprise cooperation in non-transactional form (e.g. joint development projects) • Collaborative links or partnerships between enterprises and neighboring R&D institutions, universities, etc. • Inter-firm mobility of key personnel and migration of personnel between academia and industry

8

• Availability of skilled labor • Social capital • Linkages (upstream and downstream supply chain relationships and business-to-institution cooperation) • External network effect

Supplier-customer linkage and manufacturer-user linkage of capital equipment Formal and informal cooperation and other linkages among enterprises Mobility of high-skilled workers in local labor markets Derivation of new businesses Linkages between enterprises and labs in universities and public sectors

external to the cluster, e.g., the linkage between cluster enterprises and MNCs is a typical one. A classification of the generalized CIIC elements based on these two dimensions yields the results shown in Fig. 3. Each of the four quadrants in the Figure contains four different types of CIIC carrier elements: Class I capability elements, also known as knowledge diffusion capability carriers, serve a primary function of knowledge sharing and diffusion among cluster enterprises via a spillover mechanism; Class II capability elements,

Outward

3 Composition and Enhancement Mechanism of CIIC

Class III Capability Elements

Class IV Capability Elements

External (domestic) supply chain

Degree of linkage openness

Trading relationships with foreign customers

Class I Capability Elements

Cross-field talent exchange in "industry, university, and research" Cooperation and exchange between enterprises and

Class II Capability Elements

Simulation and reverse engineering Inter-enterprise personnel mobility

Inward

241

Informal interpersonal communication Local supply chain linkages

Cross-field talent exchange in "industry, university, and research" Cooperation and exchange between enterprises and universities or technical/business training institutions. Project-based cooperation or strategic alliance among local horizontal enterprises.

Unconsciousness

Degree of linkage collaborativeness

Conscious

Fig. 3 CIIC element structure

also known as knowledge complementary capability carriers, serve primarily to organize enterprises and institutions with diverse knowledge bases within a cluster in a specific way through active collaboration, achieving complementarity and integration of diverse knowledge; Class III capability elements, known as knowledge penetration capability carriers, primarily serve to realize the gradual penetration and integration of external knowledge into the original ones of cluster enterprises, as well as to promote their gradual growth on the basis of supply chain relationships between cluster enterprises at home and abroad; Class IV capability elements are primarily functions of external collaborative relationships established by cluster enterprises with the intention of achieving active search and absorption of external knowledge by the cluster, so they will be referred to as knowledge search capability carriers.

3.2 Indigenous Innovation Capacity Carrier elements in each CIIC class also represent a specific sub-capability, which is an essential component of the CIIC. Enhancing CIIC necessitates not only the development of each of the four sub-capabilities, but also their optimization, so that

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the industrial cluster can continuously improve its innovation capability in a dynamic balance of homogenization and heterogenization, localization and openness. Theoretically, the enhancement of CIIC goes on two paths: ➀ Spontaneous activities of cluster enterprises. Influenced by geographic proximity and local social culture, cluster enterprises weigh the advantages and disadvantages and carry out innovative activities in accordance with market laws, thus gradually forming specific linkage mechanisms within the cluster, such as mutual monitoring and imitation among enterprises, local talent flow, informal exchanges, and local supply chain relationships. In other words, industrial clusters are able to form and develop the Class I CIICs during their evolution, as defined in this book, through unconscious behaviors of local enterprise clusters. ➁ Conscious collective activities of strategic subjects within a cluster. It is designed to build and develop Cluster II, III and IV capabilities for indigenous innovation, and to synergize them. However, in practice, both paths have inherent risks and practical difficulties. At the first path, different linkage mechanisms, which are the carriers of cluster innovation I capabilities, are built primarily on geographical proximity and local social capital, with no specialized investment required by cluster enterprises. However, as the competitive environment becomes more intense and the cluster matures, cluster enterprises tend to rely too heavily on such a path, putting the cluster as a whole at risk of capacity rigidity and path locking. In the second path, the relationship-specific investments are required for all creations of relationships between cluster enterprises and out-of-cluster enterprises or institutions, cooperation between cluster enterprises and universities and other knowledge institutions, and creation and maintenance of inter-enterprise horizontal collaborative relationships (Capello et al., 2005). Due to the uncertainty of innovation benefits, SMEs in clusters are generally unable or unwilling to bear such additional costs, thus inefficiencies tend to be found in most traditional clusters in building these new linkages and corresponding innovation capabilities, resulting in so-called “market failures” and “community failures”. In summary, conscious actions of key strategic players in a cluster (e.g., major enterprises, local governments, public agencies, and local industry associations) contribute significantly to the improvement of CIIC. 1. Major enterprises in a cluster Major companies in the cluster enjoy more human and material resources than SMEs, making them more capable of strategic planning and relationship investment. As a result, major companies often act as pioneers in creating new forms of cooperation within the cluster and setting up various collaborative relationships with participants outside the cluster. They take common forms in practice, such as enterprise groups, strategic alliances, and project cooperation initiated by major companies, purchases of technology, hiring of experts, creation of procurement and sales channels by major companies from out-of-cluster (foreign) enterprises, and exchanges and collaborations between major companies and universities, R&D institutions and other technical or business service providers. Thanks to these activities, many internal and external linkage mechanisms are created by the major companies, which are key members of the cluster; also, many knowledge-creating institutions and even agents

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of MNCs gradually develop the concepts, elements and structural studies of industrial CIICs that are introduced into the cluster, thus giving other companies in the cluster opportunities to work in cooperation with them. Obviously, innovation capabilities of Class II, III and IV for the cluster are likely to develop gradually during this process. In addition, integrations both horizontally and vertically within the cluster by major enterprises can reorganize the internal organization of the cluster, especially the supply chain, and thus affect the innovation capability of Class I. 2. Local government and public institutions Although the strategic activities of major enterprises function objectively to build and renew the cluster’s overall innovation capability, it remains an origin of the enterprises’ interests. Thus, cluster development strategies that focus solely on top local enterprises tend to bring about overall negative effects, the most significant of which are the over-concentration of cluster innovation benefits in a few major enterprises that discourage SMEs from innovating, and the control of major innovation resources such as technology, markets and talent by major enterprises that hinder the development and innovation of SMEs (Cord et al., 2001). Innovative public policies from local governments and related public institutions can be of great value in correction and supplementation, in following forms: reinforcement of local innovation infrastructure and personnel training institutions, formulation of local regulations to protect the innovation benefits for enterprises and coordination of inter-enterprise relations, the establishment of public innovation platforms, promotion of information exchange and innovation collaboration between cluster enterprises and various knowledge creation (service) institutions, provision of technology and market information for cluster enterprises, and matching of exchanges and cooperation between cluster enterprises and extra-cluster enterprises or institutions, etc. In particular, it is important to emphasize that during the design and implementation of local innovation public policies and specific measures, attention should be paid to the needs of SMEs, as well as to the search and transmission of external information, to enhance the overall collaboration and openness of innovation activities of cluster enterprises by providing SMEs with relational investments that they cannot afford. 3. Local industry associations The function of local industry associations or chambers of commerce in facilitating the creation and development of CIICs is still a topic under study. However, multiple studies reveal that industry associations in some cases will substitute for many public governance institutions and service providers to perform some of their functions (Ma Bin et al., 2006). Here, the focus is on three key roles of local industry associations in structuring the CIIC: (1) To achieve industry self-regulation by setting industry norms and acting as an industry arbiter, thereby harmonizing inter-firm relations and promoting inter-firm cooperation within the cluster; (2) to initiate and orga-

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nize collective actions for multilateral cooperation among cluster enterprises, such as preparation of exhibitions, regional branding, response to emergencies, etc.; (3) An indirect role, i.e., to connect local governments and enterprises, thus indirectly influencing the construction and renewal of CIIC by influencing local public policies and industrial strategies.

Chapter 16

Multi-level, Multi-element Knowledge Network to Cluster Indigenous Innovation

Total innovation requires not only integrating resources in manufacturing but also absorbing innovative resources in the service industry. Among them, venture capital integrates diverse production service resources to provide a full range of services for startups in the cluster. Interaction with the production service industry is conducive to indigenous innovation in manufacturing, accelerating the regional production service industry, and enhancing the indigenous innovation capability of the cluster.

1 Integration of Productive Service Resources to the CIIC: A Case of Venture Capital Venture capital institutions provide productive services such as financing and management consultation for cluster enterprises, as well as “package” solutions for SMEs, which facilitate the commercialization of their inventions. In turn, when the startup succeeds, the venture capital firm will cash out for a high return on capital. However, venture capital firms are currently small in size and number, making it a challenge to meet the financing needs of new start-ups. Therefore, the CIIC should be enhanced via diversification of venture capital institution participants, improvement of venture capital mechanism, and construction of cluster financing platform, to promote the growth of enterprises and commercialization of technological inventions.

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1.1 Venture Capital Institutions Are Conducive to the Innovation Capability of Cluster Start-Ups Venture capital is the preferred form of financing for entrepreneurial SMEs (Tykvova, 2000). Startups in the seed and start-up stages encounter difficulties in obtaining financing support from banks due to their small size and high risk. The short-term and safe nature of traditional indirect financing fails to match the long-term and high-risk capital needed by start-ups. Venture capital is a professional investment that combines knowledge and finance to provide equity capital investment to startups or SMEs with growth potential, which meets the financing needs of start-ups, reduces the risk of innovation and its commercialization process while fulfilling the management experience needs of new businesses to increase the success rate of start-ups. Venture capital contributes to the innovation capability of cluster start-ups. (1) The financial and managerial support (Engel et al., 2007) provided by venture capital to enterprises, such as product marketability and human resource strategies (Hellmann et al., 2002), guarantees financial stability and smooth organizational processes in technological innovation and business processes, which are fundamental for innovation capability enhancement. (2) Reduce the risk of innovation and its commercialization. Venture capital can identify and invest in new technologies that are potential for development and will show high performance when uncertainty and information asymmetry are very serious, which is in line with market requirements for technology inventions and can reduce market risks in technology commercialization. (3) Offer the information needed for innovation. Mature venture capital firms tend to maintain well-established relationships with other venture capitalists, intermediaries, financial institutions, and government departments, aided by their vast social networks to bring quality professional services and business growth information to enterprises. (4) Build external links for enhanced cooperation with other institutions. Using their networks, venture capital firms assist their portfolio companies in establishing links with upstream and downstream companies and related organizations, such as research institutions and channel companies, to form business alliances (Gans et al., 2002), which increase the success rate of technology inventions and their commercialization.

1.2 Improvement of Venture Capital System for Cluster Financing Platform Building To improve the venture capital system for enhancement of innovation capability of startups and promotion of clusters or industries. Currently, venture capital suffers issues such as funding sources, operational regulations, institutional restrictions, etc. Therefore, given the current laws and regulations permitting, improvement of the venture capital system should be made in three aspects: diversifying financing channels, regulating investment operations, and expanding investment business, so

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as to realize the joint development of entrepreneurial SMEs and venture capital, as shown in Fig. 1. (1) Diversify risk financing channels. Risk capital from private enterprises is insufficient to meet large numbers of entrepreneurial SMEs. Therefore, it is a necessity for a risk fund financed by government agencies or a joint venture capital between the government and private individuals to absorb private capital, broaden the source channels of the risk fund, and make every effort to meet the demand for risk capital. (2) Regulate the investment operation to reduce the risk of venture capital enterprises. Efforts should be made by venture capital enterprises to screen and select SMEs, and identify enterprises with broad market prospects. For enterprises invested in, supervision should be strengthened to regulate the operation and minimize the risk of investment. Reasonable exit times and channels such as sale, transfer, etc. should be designed to ensure the return and cash out of venture capital and to realize the sustainable development of venture capital. (3) Expansion of investment business. Besides high-tech startups, venture capital should focus on fast-growing companies, such as companies for creativity, logistics, networking, etc. Diversification of new investment targets is beneficial to the growth of venture capital firms. In the cluster, the financing platform will be perfected to integrate bank financing, venture capital, securities market, and government funds to serve the financing needs from enterprises of different scales and growth stages, so as to ensure the technological innovation of cluster enterprises and their commercialization: (1) Combination of industrial policy and venture capital. For emerging or creative industries with development potential supported by local governments, favorable support comes from government funds, which also guide the participation of venture capital firms to ensure the incubation and growth of new start-ups; (2) Couple bank financing with venture capital. Advantages of bank financing, such as low-cost and long-term Government venture capital fund Private venture capital fund Hybrid venture capital fund

Diversify Access to finance Selection mechanism Audit supervision Exit mechanism

Venture capital system

Regulate investment & operation

Fig. 1 Venture capital system

High-tech industry Other fast-growing industries Expand investment business

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venture capital, are exploited to meet diverse needs from enterprises of various sizes; (3) Match financing methods to business development stages. Government funds and venture capital are mostly used for companies in the incubation and start-up, while the stock market is suitable for companies in their growth. The secure exit of venture capital and access of alternative financing ensure stability of capital flow to the business; (4) Combine financing methods with policy incentives. Diverse concessions are provided for different financing methods by all-size enterprises in different stages together with the characteristics of the industry, to facilitate enterprises in the cluster.

2 Mechanisms for Linking Open CIS and Knowledge Networks While local networks play a decisive role in the innovation and growth of cluster enterprises, localized cluster learning approaches such as inter-enterprise cooperation, human interaction, and labor mobility contribute to the transformational growth of cluster enterprises (Grabber et al., 2006). However, as the cluster grows, there is increasing homogeneity among local institutions, making it a poor source of knowledge necessary for transformation and upgrading of the cluster. So, as the cluster develops, a breakthrough is required to break through geographical and industrial boundaries by creating open knowledge networks to seek, discover, experiment and use new knowledge on a larger scale to stimulate and promote enterprise innovation and continuous growth (Benner et al., 2003). Knowledge networks are vehicles for the production and dissemination of scientific knowledge, encompassing network institutions and activities among them (Beckmann, 1995). Basic elements of cluster knowledge networks include node elements, inter-node relationships and various resource elements carried by these relationships, which are classified into knowledge application networks and knowledge service networks. Among them, the knowledge application network reveals the linkages between the cluster enterprises and other players along the value chain in and out of the cluster, reflecting the knowledge application and development process of the enterprises in interaction; knowledge service networks reveal that cluster enterprises promote their efficient application and development of knowledge through production factors such as information flow, knowledge flow, technology flow and human resource flow in interconnection with educational and research institutions and knowledge service providers in and outside the cluster, as shown in Table 1.

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Table 1 Division of cluster knowledge network Local knowledge network

Hyperlocal knowledge network

Knowledge service network

Educational and research institutions (universities, scientific research institutions), knowledge-based service (public service systems such as industry associations, talent training institutions, investment and financing institutions, law firms, accounting firms, etc., as well as technical support platforms such as incubators, product assessment and certification institutions, IPR protection institutions, consulting institutions, etc.) within the cluster

Educational and research institutions (universities, scientific research institutions), knowledge-based service (public service systems such as industry associations, talent training institutions, investment and financing institutions, law firms, accounting firms, etc., as well as technical support platforms such as incubators, product assessment and certification institutions, IPR protection institutions, consulting institutions, etc.) out of the cluster

Knowledge application network

In-cluster enterprises at upstream and downstream, in competition as well as relationships

Out-of-cluster enterprises at upstream and downstream, in competition as well as relationships

2.1 Local Knowledge Network Structure and Innovation System Local knowledge networks are knowledge networks and institutions that are clusterbased, in combination with regulatory arrangements, and that contractual or noncontractual relationships exist among them. Wherein, member enterprises are represented either as vertically interacting supplier-customer relationships along the chain or as cooperation-competition relationships between competing or complementary enterprises horizontally. Interactions among these participants, and between them and knowledge service providers, and educational and research institutions, form an interlocking local knowledge network centered on enterprises, as shown in Fig. 2. Geographical and cognitive proximity among enterprises in cluster local networks enable cluster enterprises to build dense non-contractual networks with other participants in the cluster, which facilitate the dissemination and sharing of tacit knowledge; then, tight social networks contribute to easier construction of contractual networks by participants within the network, thus conducive to the flow of explicit and tacit knowledge and further increasing the closeness of social networks. Geographical and cognitive proximity act as “fences” that isolate out-of-cluster participants from local knowledge networks (Wu Bo, 2007).

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Fig. 2 Formation logic of local knowledge network for cluster enterprises

Explicit knowledge

Tacit knowledge

Knowledge spillover

Non-contractual network

Contract network

Shared industrial atmosphere

Shared cultural background

Geographical proximity Cognitive proximity

2.2 Embedment of Hyperlocal Knowledge Network and Innovation System The hyperlocal knowledge network is defined as the sum of relationships formed to facilitate the creation, storage, transfer, and application of knowledge in internal and external networks of the cluster, led by the cluster enterprises, through the exchange of various knowledge resources with the external knowledge application and knowledge service network actors of the cluster both formally and informally. Members of hyperlocal knowledge networks tend to differ geographically and cognitively from each other, so their differences in cultural backgrounds and language systems limit the formation of inter-firm cooperation practices (Wu Bo, 2007), thus making their construction risky (Bathelt et al., 2002). As a result, a lot of time and money is required for the building and maintenance of hyperlocal knowledge networks over time, and long-term interaction between both sides of firms is required to shape practices in order to enable adequate and accurate knowledge exchange, integration, and sharing. Accordingly, hyperlocal knowledge networks require long-term, formal contractual networks to be realized, with strong connections among their internal nodes, which are primarily achieved via technology migration, strategic alliances, building hyperlocal pipelines, embedding in global value chains, etc. CHINT Group is illustrated as an example to show more clearly the composition and implementation of a hyperlocal knowledge network (see Fig. 3). Firstly, construct an application network of hyperlocal knowledge via a contractual network. (1) CHINT establishes a wide range of international technology alliances and initiates technology transfer and learning based on joint ventures. For example, CHINT Group, based on its own extensive sales network, integrates into hyper-local knowledge networks by taking advantage of advanced technology, and management from MNCs, such as GE via teaming up with them. As one of its vice presidents believes, “Cooperation with leading international companies is needed, through

Knowledge service network

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Local contract network: "Industry-UniversityResearch" cooperation in information, technology, consulting, training, etc.

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Hyperlocal contract network: "IndustryUniversity -Research" cooperation in UniversityResearch" cooperation in information, technology, consulting, training, etc.

Local non-contractual network Personnel mobility

Hyperlocal non-contract network

Enterprise derivation

Knowledge application network

Informal communication

Local non-contractual network Personnel mobility Hyperlocal non-contract network Enterprise derivation Informal communication

Local contract network:

Hyperlocal contract network:

Industrial chain cooperation vertically

Industrial chain cooperation vertically Competitive cooperation horizontally

Competitive cooperation horizontally

Local knowledge network

Hyperlocal knowledge network

Fig. 3 Network foundation and implementation approach for bi-embedded knowledge networks of cluster enterprises

which advanced technology can be obtained as well as advanced management models and brand effects.” (2) Enterprises are further embedded in hyper-local knowledge networks through a large number of supporting facilities and collaborations upstream and downstream. The downstream sales network is no longer made up of individual companies, but direct sales outlets or agents in each region, thus ensuring a direct and proactive sales team to be in touch with market information and technical resources in each region and to feedback speedily to the parent company to get hold of scarce resources. Secondly, expand the hyperlocal knowledge services network by leveraging the contractual network. It is primarily manifested in forms such as “industry-universityresearch” cooperation, in which knowledge service and education and research institutions offer enterprises with information, technology, consultation, and other kinds of services, aiming to provide a guarantee for smoother knowledge exchange and interaction within the knowledge application network and between it and the knowledge service network. For example, CHINT initiated cooperation with Nanjing University of Science and Technology at the end of 2005 to set up an industrial design research center and has founded stable research and talent training relationships with Xi’an Jiaotong University, Hebei University of Technology, Fuzhou University,

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Shanghai Electrical Apparatus Research Institute, and Xi‘an High Voltage Apparatus Research Institute (XIHARI), which contributes to the structural adjustment in quantity, quality and age of talents and guarantees human resources for enterprise technological innovation and new product development. Thirdly, CHINT builds up a non-contractual network by setting up research centers abroad, “poaching” technical experts or management staff, partnering with research institutes for technology development or purchase, and recruiting highly educated personnel from universities, while striving to build up a hyperlocal contractual network. For example, CHINT set up a high-voltage electrical R&D center in Shanghai, an industrial automation research center in Hangzhou and an electrical frontier technology R&D center in Silicon Valley, USA, which has extended the tentacles of indigenous innovation to the forefront of the international industry; the entry into Songjiang Industrial Zone in 2006 open opportunities for CHINT to exchange and cooperate with other enterprises in the park. The non-contractual network created thanks to these means has significantly improved CHINT’s capabilities technologically and managerially, while also inspiring new ideas, thus fostering innovative activities.

2.3 Embedment of Hyperlocal Knowledge Network and Evolution of Cluster Innovation Network (1) Adaptation of cluster firms to changes in the environment Network organizations of SMEs are less organizationally competitive than they used to be with the rise and maturity of production operations such as lean manufacturing and subcontracting systems in large companies. The traditional cluster model of organizational structure is no longer a fit for the existing competitive environment in terms of efficiency. Practically, numerous cluster enterprises which are more strategically aware are seeking reform. It has led to ➀ Responses such as improvement of product quality, shortening of production cycles or search for niche markets are preferred by many cluster firms as a direct response to the congestion of low-priced markets outside the cluster and homogeneous competition from firms within the cluster; ➁ also, a number of cluster enterprises opt for commercialization and internationalization strategies based on enhancing their branding and marketing, while, they, limited by their size and relevant experience, tend to accelerate the implementation of their strategies by partnering with large distribution companies outside the cluster or with MNCs; ➂ In contrast to enterprises above, which focus on market strategies, some cluster enterprises take a transformation strategy that centers on technological R&D. They tend to draw on universities, research institutes and non-productive knowledge institutions to enhance their R&D capabilities, in addition to joining forces with firms outside the cluster that enjoy strong technological capabilities (Fig. 4).

2 Mechanisms for Linking Open CIS and Knowledge Networks

Educational Research Institute

Tsinghua University

Zhejiang University

Shanghai Electrical Apparatus Research Institute

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Xi`an High Voltage Apparatus Research Institute

Knowledge application network

R&D Center

Cooperative plant Other enterprises along with upstream and downstream Member enterprises

Low Voltage Electrical Industry Association

Related Enterprises

CHINT Group

Demanding Enterprises

GE

Liushi Town Chamber of Commerce

Supplying Enterprises

Related Enterprises

Complementary Enterprises

Technology Incubation Center

Clients

Customers in China

Yueqing Association for Electrical Industry

Customers abroad

Electrical Technology Development Center

Knowledge service network

Knowledge Service Provider

KEMA-KEUR Certification Authority

R&D centers of MNCs such as GE, etc.

Fig. 4 Model for bi-embedded knowledge network of CHINT

(2) Evolutionary characteristics of cluster network form The spread of individual behavioral effects inevitably leads to structural changes in the cluster as a whole, although adaptive behavior in response to environmental changes is initially reflected in the behavior of some pioneer firms. From the observation, changes in network form characteristics are the most direct manifestation in this regard in a general evolutionary trend of traditional manufacturing clusters over recent years. Along with an increased hierarchy of cluster networks, increased openness of cluster networks, and increased types of network nodes, the current cluster network form differs from the traditional closed “local network” that focuses on local enterprises, but evolves into an “innovation network” that involves more different types of nodes, is more open, and is structured with a certain internal hierarchy. A general evolution trend of clusters from “Marshallian” to “hub-and-spoke” occurs in traditional manufacturing clusters in recent years, in accordance with the classical classification of clusters by Markusen (1996), as shown in Fig. 5. (3) A case of Yueqing low-voltage electrical cluster The trend of cluster network evolution mentioned above has been partially confirmed by the evolution of the low-voltage electrical cluster in Yueqing, Wenzhou in recent years. Yueqing’s low-voltage electrical cluster is one with a relatively high degree

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Suppliers

Customer

A. "Marshall" cluster

B. “Hub-and-spoke” cluster

Fig. 5 Trend of cluster network form evolution

of hierarchy, which is characterized by the local enterprise grouping led by the major enterprise. However, the network form of the Yueqing cluster in its early stage also showed typical “Marshallian” characteristics, i.e., a large number of SMEs or family workshops producing low-voltage electrical parts existed in the cluster; inter-enterprise relations were dominated by informal exchanges or loose supply chain transactions; sales of cluster products relied on a network of “locals” scattered nationwide; most of the sales personnel outside the cluster were relatives or friends of firm owners in the cluster; beyond that, there were few other external network relations. As the 1990s progressed, some enterprises in the cluster gradually widened their gap in size and market share with ordinary SMEs, mainly by leveraging their successful market operations. They gradually matured as the main sellers in the cluster, and further realized their control over the product suppliers in the cluster by relying on their control over the market channels. Starting in the mid to late 1990s, group transformation was generally implemented by large enterprises in the cluster, mostly the major enterprises in the cluster today came to prominence at that time. However, intra-cluster grouping at this stage aimed mainly at diversifying products and venturing into larger market areas, so the integration was dominated by member companies’ agreement to join, with limited involvement in equity relations. However, equity participation or holding has generally been adopted by major enterprises in the Yueqing cluster to strengthen their control and integration with member enterprises in recent years for product quality and brand building. As the TENGEN Group interviewee stated, “(member companies) were originally loose, they produced, labeled and sold respectively. Now they are all tightly knit because they can’t unify quality control, like a local miscellaneous army, without integration, how can it work? They differ among themselves in terms of packaging and signage size, and want a unified corporate image.” Ongoing enterprise grouping within the cluster enables the network structure of Yueqing cluster to be characterized by a very obvious “polycentric” hierarchy at present. Among over 4,000 enterprises in the cluster, more than a dozen major enterprises with an annual output value of over RMB 1 billion, such as CHINT, DELHI, CHINT and PEOPLE ELE.APPLIANCE, are dominant end-product manufacturers as well as sales/brand operators, which control the major sales channels and brand assets of the cluster. These enterprises coordinate production operations within the group by setting production standards and

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direct supervision of low-voltage electrical component suppliers or assembly subcontractors, but also, whenever necessary, they seek out third-tier external component manufacturers and transmit production orders. It is an increase in the openness of the cluster network that goes in parallel with growth and cascading trends of major enterprises within the cluster. Admittedly, subject to traditional outward-looking culture in Wenzhou, the Yueqing cluster has focused on the construction of external market channels since its inception, but it has always failed to break away from the influence of geopolitical concepts. However, some hyper-local partnerships emerging in recent years have gradually broken this shackle, the most typical of which is the equity or project-based cooperation between some cluster enterprises and foreign SOEs and their strategic cooperation with MNCs. The research results show that SOEs, because of their rich technology and talent resources, are a priority target for Yueqing cluster enterprises to carry out strategic cooperation outside the cluster. Such as the interviewee of the CNC ELECTRIC Group said, “the key to group company (CNC ELECTRIC Group) is to unite in the structure of the product, technology, like the cooperation with enterprises in Hubei Xianning, and that with WISCO and Siemens last year … The cooperation with WISCO focuses on high-voltage electrical appliances because WISCO has a huge internal demand, so it has a lot of projects to start.” The joint venture between Delixi Group and Schneider is the most typical for expansion of the transnational network relationship of Yueqing cluster enterprises in recent years. Although the pros & cons of the cooperation have not yet been verified, it reflects the eagerness of top cluster enterprises to improve their technology, marketing and management capabilities through cooperation with MNCs. As stated by the interviewee of Dexia Group: “…For both quality and management considerations, a JV was made at last, leveraging the advantages and experience of MNCs to supplement its main industries.” Previous products of the Yueqing cluster were an imitation of foreign products of low-end or even low-voltage electrical components on the verge of elimination, but more large-scale enterprises in recent years gradually have started their exploration on production of complete sets of equipment and high-voltage appliances. In this process, universities, research institutes and technology agencies serve as vital partners in technology development for cluster enterprises. Of these, cases are numerous, among which the statement made by a HEAG interviewee when talking about new product development is typical: “(‘Industry-University-Research’ cooperation) also involves XIHARI and the Chinese Academy of Sciences, mainly in the area of high-voltage electrical appliances. The core controller of the wind turbine is also in cooperation with the Chinese Academy of Sciences … There is also a (joint) R&D center in Beijing, without which it will seldom be possible.” In light of this, Knowledge-based institutions have been a key node type in the innovation network of Yueqing cluster.

Chapter 17

Measures to Improve CIIC Based on Total Innovation

Enhancement of indigenous innovation capability by using the theory of total innovation requires a multi-level, multi-player and multy-factor approach. A framework of the total innovation system is followed to propose countermeasures and suggestions for improving CIIC based on the building and hierarchical analysis of RIS at the meso-level.

1 Measures to Guarantee Driving Force of Independent Innovation by Involving Multi-level Subjects Fit incentives should be taken for participants at different levels of the cluster innovation system to promote total cluster innovation: ➀ Diversification of innovation players. All kinds of participants, such as cluster enterprises, local governments and public institutions, and local associations, should fulfill their innovation functions in the cluster innovation system. A structure characterized by the pluralism of participants will ensure that major strategic decisions within the cluster are in line with the interests of all kinds of participants, thereby realizing the sustainable development of the cluster; ➁ Synergizing innovation mechanisms. Function fields of different synergistic mechanisms differ from each other and are systematically linked in a complementary and mutually reinforcing way, enabling the highest efficiency to be achieved in the case of synergistic development.

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1.1 Upgrade Major Enterprises to Concentrate Innovation Resources First, the role of major enterprises in the cluster should be properly perceived by local governments. Regardless of cases, enterprises are always the active participants of production and innovation in clusters, while local governments should not be the “parents” and managers of them, nor should they be players of interest. What local public policy should be about is offering fair opportunities for cluster firms that are conducive to innovation and growth. It is a result of market laws at work that the cluster economy is moderately concentrated and major enterprises emerge on a leveled playing field. However, overly centralized hierarchical governance will disproportionately concentrate the economic benefits of the cluster in a few top firms, thus undermining long-term development of the cluster as a whole. Therefore, a “multi-heading system” that tends to balance the cluster’s interests may be a more desirable development model. Second, special attention should be given to local public policies to support the “upgrading” activities of major companies. As mentioned previously, expansion of traditional product output and competition for existing market share are still key competitive tools for most of the major companies in the cluster in China, which makes it difficult for the competitive horizon to go beyond the surrounding areas, especially within the cluster. To this end, a shift is required for local governments to make from their traditional evaluation system, in which the scale of production is the main indicator, to establishing a statistical caliber and evaluation method oriented to innovation performance, specifying support for indigenous innovation activities of major enterprises. Also, local governments and their public institutions can perform to a large extent the functions of information provision, intermediation, and coordination for major innovation projects of major enterprises, especially for out-of-cluster cooperation projects and “industry-university-research” cooperation projects, which are significant innovations.

1.2 Support SMEs to Stimulate Innovation Potential First, resources available for local public finance are limited in number, and incentives and subsidies are often a drop in the bucket for larger, major enterprises, but significant for SMEs. Therefore, local public innovation incentives that are appropriately biased towards the SMEs in the cluster shall take effect, in advance of which a scientific and rational assessment system shall be established to evaluate the innovation potential of the SMEs for selection. Second, step up in innovation infrastructure within the cluster. In particular, it is advisable to focus on joint demands of SMEs in terms of technology and market information supply, talent training, etc., and to solve a series of practical and critical problems.

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Third, activate service functions of public service as well as innovation platforms. Continue to implement the market-oriented operation of public service based on clearly defined systems; matching with demands of SMEs needs to be emphasized in the initial stage rather than seeking perfection. Besides boosting their capabilities in technology and market services directly, it is especially necessary to cultivate indirect service functions in facilitating exchanges and cooperation between cluster enterprises with knowledge-based service providers and enterprises outside the cluster, because the “investment in relationships” required is beyond the affordability of SMEs.

1.3 Develop Industry Associations to Promote Collective Self-management First, the institutional construction of local industry associations is generally sluggish. A key reason, besides external macro system reasons, is the poor handling of relationships between local government functionaries and associations. It is a feasible idea to step up cooperation between the government and associations, given the lack of relevant regulations to support the reality that it is difficult for local governments to directly authorize industry associations. A more formal and long-term approach should be adopted for these collaborations, and if necessary, local regulations can be established to guarantee their well-run collaborations institutionally. Second, the independence of associations should be supported by local policies. Over interference by local governments in the operation and functioning of the association should be avoided, but functions such as industrial self-management and arbitration of the association should be encouraged and supported consciously. Especially, interference in the staffing of associations should not be made by local governments, while cluster enterprises should be encouraged to elect or hire full-time staff for internal management spontaneously and democratically. Third, rather than seeking mindless full coverage, local trade associations should be appropriately centralized. Systematic coordination for local industry associations can be carried out by local governments through the qualification approval of new associations and enhancement of cooperation and organization of various associations in related industries.

2 Measures to Enhance CIIC via Multi-entity Cooperation Globalization accelerates the opening of cluster innovation systems, so cluster networks need to expand their local knowledge service networks and embed them in a global knowledge network, from which they can acquire scarce technology, information, knowledge, etc. to enhance CIIC. The key to playing the innovation function

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in the hyperlocal knowledge network lies in exerting functions of each node that makes up the knowledge network, such as enterprises, universities, research institutions, governments, intermediaries, and MNCs, etc., to surpass boundaries of clusters geographically and industrially, acquire key resources to enhance cluster innovation capability, and promote its transformation and upgrading.

2.1 Drive Cooperation of Cluster Enterprises with External Organizations (1) Encourage the cooperation of cluster enterprises with external R&D institutions such as research institutes and universities to jointly develop new products and processes and accelerate their innovations; (2) encourage studies by external institutions to acquire state-of-the-art technology and management experience for self-improvement; (3) encourage cluster enterprises‘ M&A to external enterprises to increase production scale and enter their local market; (4) encourage cooperation of cluster enterprises with external testing and certification institutions to obtain relevant qualifications and certifications to speed up their entry into the international market; (5) encourage cluster enterprises to set up R&D centers and marketing centers in developed regions to speed up their derivation process to both ends of the value chain.

2.2 Create a Favorable Environment for Hyper-Localization Development (1) Increase external communication, i.e., create opportunities for local cluster enterprises to communicate with external institutions by using relevant exhibitions, fairs, etc.; (2) increase financial security, i.e., set up related financing platforms or funds to provide financing facilities and incentives for local cluster enterprises to cooperate with external institutions; (3) strengthen the cooperation of “government-industryuniversity-research”, i.e., participate in the cooperation between local cluster enterprises and external research institutions to work out common and key technology in cluster growth; (4) improve infrastructure, i.e., refine local information network and Internet platform to facilitate cluster enterprises in acquiring external information.

2.3 Accelerate Steps of Local Knowledge Service (1) Develop local knowledge-intensive service industries, including production services such as technology, information and business, to provide the knowledge

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necessary for cluster development; (2) strengthen their cooperation with external institutions to introduce new knowledge necessary for cluster transformation; (3) introduce external service to serve local cluster enterprises; (4) interact the productive service industry with the manufacturing industry to upgrade the CIIC.

3 Measures of Multi-factor Integration Platform to Promote Cluster Indigenous Innovation The cluster production service system builds a well-run foundation for interactions between productive service enterprises and manufacturing enterprises in the cluster. The productive service system consists of four major platforms, i.e., basic services, production services, R&D services and business services, according to service contents or functions. Special financial funds direct the establishment of various basic service platforms, production service platforms, R&D service platforms, business service platforms, etc. to create an interactive and favorable environment within the cluster, linking up cluster participants closely and enhancing the competitiveness of the cluster.

3.1 Improve a Series of Basic Service Platforms Efforts are to be made to improve public service platforms, improve infrastructure levels such as transportation, electricity, water supply and drainage, and pollution control; focus on the construction of many information service infrastructure platforms, acceleration of integrated communication network construction, construction of e-commerce parks, information service parks, software outsourcing parks, and construction of third-party information service platforms; develop some commodity wholesale markets based on special industries, and accelerate the establishment of a modern logistics service network system that is socialized and specialized.

3.2 Cultivate a Bunch of Production Service Platforms A financing platform for industrial clusters is to be built to step up the docking and cooperation between industrial clusters and various financial institutions. To construct a number of service platforms that are socialized, specialized, and functional for SMEs, by which to drive servitization of manufacturing enterprises and realize increase both in a total volume of service industry and in production efficiency. Develop a bunch of common and key service technologies for the modern

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service industry by a project-driven approach to support outsourcing of the service industry, technologically.

3.3 Cultivate R&D Service Platforms Financial investment should be increased to speed up new science and technology incubation bases for further utilization of incubators and technology intermediaries. Collection and dissemination of relevant scientific and technical information are to be carried out to facilitate transactions in the technology market and accelerate the commercialization of relevant patents. Performances such as setting up R&D centers, encouraging enterprises to establish post-doctoral workstations, etc., are to be done to strengthen the cooperation of “industry-university-research” with famous universities and colleges. The cooperation and exchange of science and technology are to be carried out to bridge the cooperation between enterprises and universities and colleges, followed by high-quality service for both sides. Industrial clusters are relied on to establish vocational and technical institutes and technical schools, and introduce vocational training institutions at home and abroad to strengthen vocational education. Establish a platform for technology R&D exchange, by which to actively facilitate the establishment of technology alliances between the productive service industry and the manufacturing industry, enrich their cooperation in technology exchange and R&D, to enable their technology innovation strategies and R&D measures to be more fittable, and reduce the uncertainty of technology R&D.

3.4 Cultivate a Group of Business Service Platforms Cultivations are to be performed for platforms, such as business platforms, i.e., to attract large enterprises at home and abroad to set up various branches in the cluster, by which to offer services such as enterprise management consulting, human resource training, marketing channel design and brand operation management for manufacturing enterprises in the cluster; information exchange platforms, to collect and exchange product, market and technology information at home and abroad; professional market platforms and commodity wholesale markets based on industries with characteristics, to promote the diversification and modernization of trading methods, enlarge the scale of online trading, and realize joint development of tangible and intangible markets; technology trading platforms, to support patent technology trading required for cluster development and promote the industrialization of patent technology.

Part V

Secondary Innovation and Surpassing Catch-Up in the Global Value Network

Overview Part V focuses on indigenous innovations and approaches by Chinese enterprises in globalization. As latecomers to the global market, Chinese enterprises are left with a weak resource and capacity basis, the study noted. Entry into the global market by Chinese enterprises aims to leverage the rich resources of the global value network to boost indigenous innovation capabilities. In parallel, Chinese enterprises must avoid the trap of “catching up” and upgrade from “catch-up” to “surpassing catch-up”, thereby seeking a sustainable competitive edge. First, two scenarios of indigenous innovation by Chinese enterprises, which emerge into the global value network with a weaker resource and capability base, are delineated: (1) local enterprises enter the global value network led by foreign MNCs as suppliers to gradually internalize technologies from the network and strive to act as contract manufacturers; (2) they gradually build up self-centered global value networks, indigenous innovation technologies, and strive to act as brand leaders. It is concluded that, based on the theory of secondary innovation management, it is the “secondary innovation” that takes place during the catch-up in Scenario 1 and the “post-secondary innovation” that is characterized by overseas investment and acquisition of new technologies in Scenario 2. Second, it outlines upgrade paths for indigenous innovation in the global value network, (1) coupling increase of network evolution and innovation capability; (2) interactive upgrade of organizational learning and enterprise innovation capability through global value network, thus enabling the evolution of product innovation model; (3) upgrade from product innovation to the industrialization of indigenous technology standards, i.e., upgrade from product innovation to standard innovation. Third, it proposes a path for business model innovations in the global value network, integration of value-creating links in the network, such as design-makeserve, to enable the matching of new value activities, i.e., the construction of a new high value-added business model based on the DMS framework. During integration, the key lies in effective cooperation and complementary advantages between large and small enterprises for “synergistic innovation”.

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Fourth, it illustrates the model and initial mechanism of upgrading indigenous innovation capabilities through overseas investment, such as delineating types of strategic asset acquisition for innovation-related technologies and markets, which shows that outward direct investment (ODI) by late-developing enterprises in a globalization context enhances indigenous innovation capabilities by facilitating learning and asset control. Finally, in sum, indigenous innovation paths in the global innovation network can take the form of “secondary innovation” based on technological innovation, “business model innovation” based on non-technological innovation, and then “open total innovation” based on a combination of technological and non-technological innovation through “catch-up”. According to this study, suggestions are made on enterprise management practices and government policies as followed: (1) Under globalization, enterprises execute global value network planning based on indigenous innovation, so as to obtain and integrate innovative resources in the value network; (2) efforts should be made by the Chinese government to offer opportunities, support, and services for manufacturers, regardless of whether they enter the global value network led by MNCs to serve as suppliers or build their self-directed global value network to be brand leaders, to guide their upgrading of indigenous innovation capability, so as to surpass catch-up and reinforce their own strategies for a sustainable competitive edge in the global market.

Chapter 18

Catch-Up Scenarios and Indigenous Innovation Dimensions in the Global Value Network

1 Challenges and Opportunities by Division of Labor in the Global Value Network 1.1 Challenges (1) Value Network Control by MNCs MNCs are speeding into a new stage in their investment and technology transfer strategy to China as China takes an increasingly prominent role in the global manufacturing chain. MNCs are increasingly clear in their intention to separate production from technology, e.g., their control over the manufacturing industry chain is shifting from indirect control based on joint ventures and cooperation to direct control combining “asset control” and “technology control”, as well as strengthening their control over core technologies; furthermore, they step up adjustments to their strategy of technology transfer and R&D investment in China based on the global value chain. It is reflected in setting up wholly-owned enterprises (or reinforcing control over joint ventures by increasing capital and equity to facilitate technology internalization strategies), setting up independent R&D organizations (to prevent technology spillovers, extend the technology payoff period, and strengthen control of global R&D activities by the head office), increasing patent protection, and adopting internal transfers for technology transfer. Partially, the current international expansion of China’s manufacturing sector, especially for the more labor-intensive production segments and processes in high-tech industries, can be attributed to the establishment of foreign-invested enterprises in China by MNCs and their import/ export activities. As a result, MNCs reinforce their overall control over the Chinese industry and, to a certain extent, deepen the dependence of all segments in related industries in China on MNCs’ technology transfer.

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Therefore, local enterprises will encounter difficulties in absorbing usable knowledge from foreign companies and gaining negotiation power and initiative in cooperation but just “import-falling behind-reimport” and fall into passivity if they fail to further increase their independent R&D and control over the upstream and downstream of the value system as MNCs strengthen their control over the network. (2) Global Value Network and Dependence on Foreign Trade Chinese enterprises in the local manufacturing industry are integrated into a value network dominated by foreign MNCs, by which a typical business model featuring low-end export orientation and high-end import dependence are formed. These enterprises in the field of high-end products, equipment, and components in China are highly dependent on imports, such as 89% of the manufacturing equipment for integrated circuits and chips and 80% of the petrochemical equipment in heavy chemicals are imported; an export-oriented economy is also highly vulnerable to shocks from foreign economies and enterprises. The U.S. subprime mortgage crisis erupted in the first half of 2007, which has since grown into a global financial crisis with increasing intensity. Since 2007, China has experienced a yearly decline in economic growth. In terms of foreign need on the demand side, global export growth topped out in 2010 and continued zero growth in 2007–2010 period, making it harder for China to survive alone, and the low-cost advantage is no longer, resulting in an inevitable shift of low-end manufacturing to Southeast Asia. In terms of domestic demand, it is reflected by a demographic inflection point in 2011, a bottoming out of the population dependency ratio in 2012, a continued downward trend in the growth rate of real estate sales in 2013, and a continued downward trend in the growth rate of investment as industrialization enters an advanced stage. The export of China was hit somewhat due to the high external dependence on its economic structure. China suffers from a combination of external export constraints and internal consumption shortfalls, putting its economic growth and employment issues to a severe test. It fully illustrates that as a result of the dominance by MNCs and foreign enterprises in trade, the resources of Chinese manufacturers are heavily used to satisfy foreign industries and consumer demand, which is very detrimental to the expansion of domestic demand and the formation of a domestic demand-driven economy. In the absence of indigenous innovation, we will be trapped at the mercy of MNCs’ technological and marketing resources, resulting in products that can just serve foreign needs, by which profits can only be made through sales to foreign players. (3) Division of Labor and Marginalization in Global Value Networks As pointed out by scholars, Chinese enterprises are generally at a low- to mid-range in the global manufacturing chain. China lags far behind the UK, the US, and Japan, which have been called the “world factories” in the history of the world economy, in terms of key indicators and factors such as economic scale, manufacturing scale, import & export scale, industrial structure, market structure, and technological innovation capacity of enterprises, and has not yet become the fourth world manufacturing center because of its scale and level in manufacturing industries that are capital- and

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technology-intensive. According to a case study of the electronics sector, Ma Jiantang et al. (2003) concluded that there are few products with independent intellectual property rights (IIPR) or core technologies due to weak R&D and indigenous innovation capabilities and that key components of China’s electronics sector rely on imports. China is neither an R&D center nor a profit center, many of its enterprises remain marginal in the global value network. Wu Xiaobo (2004) argued that four deep-seated reasons underlie the marginalization: weak technological sophistication; ineffective technology diffusion; insufficient technology absorption capacity; and strengthening control over Chinese industries by technology transfer within MNCs. Unless manufacturers engage in indigenous innovation, they will always be unable to capture greater profits from the global value network and will fail to enter a manufacturing sector with higher added value.

2 Opportunities (1) Learning and Upgrading in Global Value Networks Ernst (2002) argued that a global production network is also a network for knowledge transfer and value creation. Knowledge transfers can be used by latecomer enterprises to benefit and create new value in the global production network. Ghoshal and Bartlett (1990) argued that one of MNCs’ network learning is knowledge diffusion and spillover to host countries through FDI, which usually involves two stages, i.e., knowledge transfer from MNCs’ headquarters and/or sister enterprises to host country branches (internal network knowledge sharing), and spillover from host country branches to their industries (external network knowledge sharing) so that enterprises in host countries can obtain technology spillover from MNCs’ networks. Wu Xiaobo and Liu Xuefeng (2006), domestic scholars, described development opportunities provided by the global production network for developing countries at the enterprise, industry, and national levels. For enterprises in developing countries, significant advances can be made in resource acquisition, logistical support, learning, agility, and flexibility by being part of a global value network led by MNCs, which facilitates the absorption of knowledge, rapid innovation, and upgrading in the network by latecomer enterprises. (2) Outbound Investment and Network Integration by Chinese Enterprises A global value network architecture for China’s manufacturing industry is beginning to emerge. It is by positively joining the global value network of MNCs that enterprises in developing countries, including China, are able to accelerate their competitiveness when global manufacturing has been a key strategy for multinational manufacturing companies in developed countries to capture the world market. However, there is no shortage of pioneering leaders among them. Chinese manufacturers, such as Haier, Lenovo, Huawei, ZTE, Shanghai Electric, and CIMC, etc., have also started to actively layout and expand their global R&D and manufacturing networks, and

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are going into a new stage of building global value networks through outbound direct investment (ODI) to make full use of global resources and develop global markets. ODIs from Chinese manufacturers are growing sharply although they are not yet large in total. Despite the increasing downward pressure on the Chinese economy, there is an exponential growth in the number of Chinese enterprises in ODIs, as well as in investment flows & stocks. According to the Ministry of Commerce, it reached $120.8 billion of non-financial ODI from China in 2017. At the end of 2017, China’s ODI was $158.290 billion, down from 2016 but still the second-highest in history. As for M&A, local enterprises account for nearly 80% of the value. As of Dec 25, 2017, according to the Ministry of Commerce, there were 573 overseas M&A transactions initiated by Chinese enterprises, with a total disclosed amount of about $296.109 billion, involving almost all sectors of the national economy. So, actively building a global value network is a strategic choice for Chinese enterprises, which is very beneficial to accessing innovation resources and opening international markets. In summary, a global value network is a major context factor for indigenous innovation, for which it is both a driver of pressure and a new platform and opportunity. It is required to analyze and compare situations in order to arrive at a proper management framework and recommendations. As a result, in-depth analysis and discussion are required on indigenous innovation in the context of global value networks.

2.1 Classification of Catch-Up Situations in the Global Value Network The global value network is a high overview of the globalized organization of manufacturing that has emerged from the 1980s to 1990s. Ferdows (1989) defined international manufacturing systems as the factory network, each of which plays a different role in the network strategically. This definition focuses more on the connection between the network and factory but ignores the overall functionality of the network after integration. The International Manufacturing Network (IMN), proposed by Cohen et al. in 1989, includes suppliers, factories, and markets. Yongjiang Shi, Mike Gregory, et al., from the Institute of Manufacturing, University of Cambridge, proposed the concept of IMN in 1998 and the concept of Global Manufacturing Virtual Network (GMMN) in 2002. They believe it is a new manufacturing structure, based on collaborative infrastructure and information support technology, that can adapt to the rapid changes in the niche market. As IT goes ahead and business models get more innovative, the division of labor in international industries continues its deepening and refinement, and a trend of fragmented production and intra-product division of labor becomes increasingly evident, all of which enable an increasing replacement of traditional vertically integrated value chains by virtual value networks composed of specialized companies scattered around the world. Ernst (2002) proposed the Global Production Network (GPN), which includes intra- and inter-enterprise transactions and various forms of coordination, linking core

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enterprises’ branches, and subsidiaries with independent suppliers, strategic partners, etc. In short, a global value network is a cross-company organization that coordinates the value creation activities of overseas branches, subsidiaries and partners around the world supported by information technology. Further, Nohira and Ghoshal (1997) pointed out two major advantages that such a network can bring to MNCs: (1) Crosscountry coordination enables MNCs to fully leverage their locational advantages through a specialized division of labor across countries or regions; (2) global integration within MNCs enables a synergistic effect derived from the scale economy, scope economy and learning effect. Such advantages have been further validated by subsequent case studies and large-sample empirical studies. Given the trend of globalization, it is required for Chinese enterprises to either join the foreign-led global value network or set up their global value network to catch up with technology; otherwise, they will lose their advantages in cost and flexibility in competition as specialized companies, making their manufacturing operations and competition in international markets harder. Even they will lose their domestic markets to competitors who enjoy global advantages in resource integration in an open environment after joining WTO. So, catch-up in a global value network can be classified as: (1) it is a gradual upgrade for local enterprises by joining the global value network led by foreign MNCs; and (2) it is to start building a self-centered global value network by local enterprises.

2.2 Dimensions of Indigenous Innovation in the Global Value Network Indigenous innovation is an ongoing issue for technological innovation in developing or emerging industrialized countries. Prof. Linsu Kim of Korea, in his analysis on mechanisms of technological learning and innovation of Korean enterprises, proposed several key elements of technological catch-up and indigenous innovation of Korean enterprises, namely, absorptive capacity, technological demand, technological supply, and motivation of technological learning (Kim, 1997). A “secondary innovation” theory model based on the reality of technological innovation of enterprises in China and developing countries, in general, was proposed by Prof. Wu Xiaobo (1995) after noting the reality that most of the technological innovations carried out by Chinese enterprises are reinventions based on imported technologies. He pays special attention to a leap of enterprises from “secondary innovation” based on imported technology and absorption and integration to “primary innovation” based on original innovation, so as to boost the autonomy of enterprises. According to domestic research, the strategy of indigenous innovation aims at setting up an idea of “self as a primary”, i.e., enterprises take a major role, to master

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core technologies and boost IPR reserves, and operationally, proper handling of relationships between the introduction of advanced technology and indigenous innovation, integrating original innovation, integrated innovation and re-innovation based on the absorption of imported technology, to integrate local innovation resources effectively (Liu Xielin, 2006), thereby raising the capacity of indigenous innovation comprehensively. In addition, technical standards are increasingly becoming the high point of world industrial competition, according to numerous experts. In addition to breakthroughs in IIPR and core technologies, indigenous innovation aims more at mastering the discourse of standard-setting (Lu Yongxiang, 2007; Mao Yunshi et al., 2006). According to Lu Feng (2006), indigenous innovation must be the basic starting point and core content of China’s development strategy. Academician Guo Chongqing (2004) believes that opportunities brought by the decomposition of the product value chain must be fully utilized, in parallel, overseas resources must be utilized and the “Latin Americanization trap” must be avoided, and policies must be arranged for the long-term development and who should lead the Chinese economy. In sum, the autonomy of innovation in global value networks is reflected in two dimensions: (1) control of “core technology” and “intellectual property”, i.e., mastering core technical knowledge and IPRs; and (2) control of “value activities”, i.e., those that enable commercialization of technology via self-coordination. Both dimensions are notably important in the context of global value networks. R&D will tend to be constrained in the absence of core technology IPR, and innovation activities will be constrained in the absence of control over value activities (e.g., succeed in lab technologies, but not in industrialization). Autonomy of both aspects is mutually integrated in the global value network, given that the global value network serves as both a production network and an essential function of knowledge transfer. Large- and medium-sized enterprises (“LMEs”) are increasing their efforts to invest in innovation resources and implement indigenous innovation measures, making significant improvements in their performance since an innovative national strategy was proposed in China that promoted indigenous innovation with enterprises as major players. Recently, LMEs in the industry have further strengthened their investment in sci-tech personnel and funding (such as R&D, technological innovation, and marketing, etc.), by which sci-tech resources are further optimized and indigenous innovation capability is significantly enhanced. As a result, both the innovation capability of LMEs in the industry in China and their international competitiveness in new products have been further upgraded. It is increasingly visible that globalization is impacting Chinese enterprises to carry out indigenous innovation after China acceded to the WTO. Local enterprises absorbed the technology overflow via joint ventures, imitation, etc. and also directly imported technology from foreign enterprises during the first 20 years following the Reform and Opening-Up. Over half of the innovation expenditure by Chinese enterprises is spent on purchasing machines, equipment and software, while over 60% of that of EU countries is spent on R&D. It indicates that import of technologies is the major source of innovation for Chinese enterprises in the industry at the current stage, which has not yet entered a stage of indigenous innovation in general. However, there is a visible trend of decreasing technology dependence: for the first time in 1999,

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it was less than 1 in the expenditure ratio of purchasing technologies at home and abroad to R&D for LMEs in the industry in China; enterprises are decreasing their dependence on external technologies in recent years, among which a few largescale manufacturers consider that they possess novel products even in international markets.

Chapter 19

Learning Mechanism and Evolutionary Path for Enterprise Indigenous Innovation in the Global Value Network

1 Learning Mechanism The network is an influential carrier for the absorption and transfer of technology and knowledge in the secondary innovation model and the embedded mechanism in the global value network is crucial for innovation in a secondary innovation model featuring the import of foreign technology or the absorption of technology spillover. The study of embeddedness among network participants has evolved into 2 typical directions: structural embedness and relational embedness (Gulati, 1998). The structural embedness focus is on the whole network system, in which the relationships are multidimensional, and it emphasizes the density of networks and the impact of enterprises’ position in the network. By using network analysis on the social structure of competition, Burt (1992) introduced a “Structural Hole”, i.e., social network nodes without redundant information (Gulati et al., 2000). Relational embeddedness focus on binary transactional relationships, which emphasize the role of a direct cohesive tie as a mechanism for exchanging fine-grained information. Most scholars believe that a stronger binary relationship results in a more frequent exchange of information and more knowledge and resources acquired (Uzzi, 1996; Hansen, 1999). As a result of the study on learning mechanisms in value networks, we arrive at following conclusions. 1. Corporate networks act on technological innovation performance by influencing exploitative learning and exploratory learning Structural equation modeling for data from 235 enterprises reveals that it is exploitative learning and exploratory learning that mediate the impact of the enterprises network on technological innovation performance. Specifically, a more centralized position of enterprises in the knowledge network will enable them to carry out effective exploitative and exploratory learning, by which they can facilitate knowledge transfer and accumulation so as to increase innovation performance. It is an

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Problem-solving by network knowledge Extensive network knowledge

Location centrality

Exploitative learning

Products reflect existing strengths Adopt past successful practices

Steady network tie

Number of patent applications Technological innovation performance

Frequency of communication with suppliers Frequency of communication with customers

Create fresh product concepts

Exploratory learning

Number of major suppliers Network scale

Proportion of new product output value Speed of new product development

Tie strengthening

Communication frequency among other enterprises

Number of major customers

Number of new products

Success rate of innovative products

Try new working methods

Challenge traditional technology areas

Number of general partner enterprises

Fig. 1 Model of network location, learning model and technological innovation performance

effect, by tie strength among enterprises in the knowledge network, that is just positive for exploitative learning but obstructive for exploratory learning. It means that the strengthening of ties between enterprises and their partners can facilitate technology commercialization, but stable, close ties are inefficient for enterprises to get the latest technology information. It is also found that exploitative learning is positive for exploratory learning, which effectively illustrates that the market-pull model is more pronounced than the technology-push model in the context of China’s late-developing enterprises and that the commercialization of technology in turn creates a demand for further technological advancement. Exploitative learning boosts innovation performance by promoting exploratory learning (see Fig. 1). 2. Environment dynamics and strategic technology orientation play a major role in regulating mechanisms of networked learning for enterprises Empirical evidence shows that a greater dynamicity of the environment in which the enterprises are located contributes to a lower impact of location centrality on exploitative learning and a greater impact of weak ties on exploratory learning. It means that, in the context of rapid technological and market changes, attentions of major enterprises should not only be focused on building their network of business partners, but also on expanding the informal exchange of knowledge and information, so that they can go beyond the existing framework and make new leaps. Also, the contribution of networks to learning is significantly enhanced when the strategic orientation of enterprises is focused on technological development, which means that enterprises are most beneficial from technological learning in case their strategic orientation matches the location of their networks.

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3. Coupling and co-evolution exist between the structure of the enterprise network and the type of learning Changes will occur in the environment and the strategies adopted by enterprises at different stages of development. Enterprise network and organizational learning can evolve together through a longitudinal case study of Haitian Machinery, a largescale private enterprise in the injection molding machine industry of China. The dynamics of the enterprise network structure will influence types of organizational learning and the choice of enterprises for different types of organizational learning requires corresponding adjustments in the network structure. The match between the enterprise network structure and organizational learning can sustainably improve enterprise innovation performance. Haitian Machinery built a network dominated by weak ties during its first stage of development, namely the secondary innovation stage. Weak ties enable unfamiliar knowledge to be brought to original enterprises, thus promoting exploratory learning, imitation and the introduction of external technology, such as the visit of Haitian to Ningbo Dongfeng Machinery Factory. At its second stage, i.e., portfolio innovation stage, Haitian initiated its improvement in product quality and process and learning of knowledge utilization. Haitian joint ventured with some enterprises in Hong Kong and Germany for process improvement and product development, by which strong ties based on long-term cooperation were established. At the third stage, i.e., total innovation stage, Haitian has built a dual network with strong ties to a few core enterprises and weak ties to a large number of peripheral enterprises, covering information and knowledge in multiple fields. This network can bring heterogeneous information to Haitian through weak ties as well as strong ties to realize the potential value of such information. For example, executives of Haitian grasp new information by participating in activities of Ningbo Plastics Industry Association and China Plastics Machinery Industry Association, and also cooperate with enterprises and research institutions such as Haier, and Beijing University of Chemical Technology, etc. Meanwhile, a similar conclusion was reached with the typical case of HISUN. The evolution of HISUN’s network goes through three stages as followed: at the first stage, i.e., Secondary Innovation, HISUN was in a quadrant where the external business environment is highly dynamic, enterprises are weakly endowed with resources, exploratory learning is the main focus, and the network is dominated by weak ties; During the second stage, i.e., Portfolio Innovation, enterprises increase their resource endowment, close their links with partners at the first stage, and adopt exploitative learning, with a focus on strong ties for the network. At the third stage, i.e., Total Innovation, enterprises adopt exploratory learning and a network based on crossdomain weak ties in a balance of strong vs weak networks embedded in a global manufacturing R&D network due to the further increase in resource endowment, the enhancement in exploitative learning, and an increase in the dynamics of the external business environment as a result of the development of biotechnology (see Fig. 2). In light of these three conclusions, three suggestions for enterprises are presented as following: first, to balance exploratory learning and exploitative learning based on characteristics of their locations in the networks; major enterprises should enhance

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Haier

Hisense TCL BYD DONGFENG PEUGEOT CITROEN AUTOMOBILE (DPCA)

Zhejiang University Beijing University of Chemical Technology

3rd-generation injection molding machine in China 2000 - Present

Ningbo Plastics Machinery Industry Association

Leading customers Domestic colleges and universities

Guangqi Honda Harbin Pharmaceutical Group Holding Wuliangye

Suppliers

CHINT Group

TECHMATION China Plastics Machinery Industry (Taiwan, China) Industry Association Associations Verband Deutscher STAFFA Hydraulic Maschinenund Components Inc. HAITIAN Anlagenbau (VDMA) ZHAFIR/ North American PRECISION Germany Plastic Machinery Association (-Plastics Ning Shing Industry Association) Dual network (Hongkong) Zhejiang Taiwan JON University

2nd-generation injection molding machine in China 1980s to late 1990s

Stage 3 (2010-Presen)

WAI (China)

Beijing University of Chemical Technology

Ningbo Plastics Machinery Industry Association 1st-generation injection molding machine in China From late 1950s to early 1970s

Beijing University of Chemical Technology

Germany Demag Group STAFFA Hydraulic Components Inc. China Plastics Machinery Industry Association

Stage 2 (1990-2000)

Strong Tie Network

Shanghai LIRI

Ningbo Plastic Machinery General Factory

Shanghai Plastic Machinery Factory

Weak Tie Network

Stage I (1966-1989) Time

Fig. 2 Three-stages evolution of network and innovation learning of Haitian machinery

exploratory learning and expand their network fields; In general, small enterprises should strengthen their connection with major ones, perform conversion effectively, and enhance exploitative learning; second, the construction of knowledge networks should be in line with the requirements of exploratory learning and exploitative learning. Enterprises should maintain a close group of partners for technology commercialization and exploitative learning, as well as a loose group of peripheral partners to enhance the breadth and novelty of knowledge and enable exploratory learning; third, upgrade innovation by matching networks and learning models. Encourage ongoing adjustments to the network structure and learning models of enterprises to drive innovation performance and upgrade from secondary innovation to portfolio innovation and finally to total innovation. Encourage large enterprises to form their own industrialized alliances and strengthen formal partnerships; small enterprises to draw closer to major enterprises for continuous exploration and absorption in the knowledge network. Enterprises in technology and market change should be motivated to expand their horizons and enhance weak ties building and exploratory learning; those in stable environments should be encouraged to build formal manufacturing business alliances on a contractual basis.

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2 Evolutionary Path of Indigenous Innovation from “Catch-Up” to “Surpassing Catch-Up” The dynamics of technology make innovation behavior somewhat cyclical. Anderson and Tushman (1990, 1991) propose the “Technology Lifecycle” based on the concepts of “Technology Paradigm” and “Technology Trajectory”. They argue that new technology emerges from a technological discontinuity, and a dominant design paradigm will emerge from fierce competition among technologies and then enter an incremental change phase until a new technological discontinuity emerges. The lack of innovation autonomy of latecomer enterprises is typically due to the lock-in effect of technological evolution and innovation cycles. Lee and Lim (2001) proposed the path-following and leap-frogging I and II paths for technology in the context of the “technology life cycle” theory and the comparative analysis of technology evolution paths between innovators and introducers (or catchers and followers). Therefore, an indigenous innovation path in the process of growth and internationalization of latecomer enterprises is formed by the evolutionary relationship among the various indigenous innovation models described above. (1) Technically, the indigenous innovation path is a process of continuous upgrading of technology sources. Indigenous innovation is a process of moving from being based on mature foreign technologies as the source of technology and catching up, to being based on laboratory and emerging technologies as the source of technology and catching up, and finally, through “overtaking and catching up” to “primary innovation” based on enterprises’ exploratory R&D (see Fig. 3). Technology capability accumulation of the technology importer Technology development stages of the technology exporter

Production operation Support Linear learning

Management focus Utilization R&D Management Linear application

Exploratory R&D Produce Non-linear creation Primary innovation

Lab technology

Exploratory R&D

Emerging technology

Mature technology

Import II: Post-secondary innovation Accumulation of knowledge & experience

Imitation & Absorption Import I: Secondary innovation

Utilization R&D

Fig. 3 Evolutionary path of innovation: from a technology source perspective

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(2) In terms of enterprises’ strategy, the path of indigenous innovation in the global value network is unified with that of upgrading the internationalization level and international competitiveness of enterprises. A dynamic evolutionary path with four stages can be outlined from the model transition of the three types of secondary innovation to post-secondary innovation (see Fig. 4). Among them, imitation innovation and creative imitation take indigenization as a major interface; creative imitation and incremental innovation take product incremental R&D as a transition milestone. Outbound investment is a key step in the post-secondary innovation stage. What is conducted in the first three stages is mainly domestic sales and exports, and realized in the fourth stage is the local adaptation in the host (overseas) market and the integration into the global market. (3) The path of indigenous innovation is a process of co-evolution of network and innovation capability from the perspective of coupling and synergistic evolution of network and innovation. Enterprises join the foreign-led global value network (network docking period) when what can be performed is imitative innovation due to callow innovation capability. As innovation capabilities of enterprises grow, the value network will expand gradually. Enterprises start to reconfigure their value networks and acquire cross-border and global innovation capabilities (see Fig. 5). (4) From the perspective of innovation autonomy boost, the path of indigenous innovation of Chinese enterprises can be described as a process as following: Initially, they hold a low control over IPR and value networks. The IPR control is gradually increased as parts of the enterprises start their expansion from technical purchase to development and from mature technologies to emerging technologies; The control

Global Market Demand & Competition

Stage 1

Import

Re-organization of Equipment/Processes

Stage 2

Indigenization

Stage 3

R&D to improve products, processes

Stage 4

Overseas investment and facility-building

Domestic Production

Domestic Sales

Global Markets

Production abroad

Host Market

R&D abroad

Status & Trends of Global Sci-Tech Progress

Fig. 4 Indigenous innovation paths in global value networks—a four-stage evolutionary model

Innovation Capability

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Post-secondary innovation Incremental Innovation

Creative Imitation

Imitative Innovation

Matching Phase

Expansion Phase

Reconstruction Phase

Fig. 5 Coevolution of value networks and innovation models (capabilities) embedded in enterprises

over value networks will also go up significantly as Chinese enterprises improve their position in the global value network, integrate into MNCs’ value networks at a higher level, and build their core value networks. A variety of specific paths are available to Chinese enterprises for increasing their innovation autonomy (see Fig. 6). For example, it is urgent for some enterprises in the high-tech sector to increase their IPR autonomy and gain a foothold in the IPR field to compete globally. For sectors with a high degree of the manufacturing division, where the technology is mature and innovative, the focus of Chinese enterprises is on rising control over the value network, capturing high-end and monopolistic segments, among which the priority is to achieve a higher degree of control over the value network. Of course, just a handful of Chinese enterprises succeed in increasing their IPR and value network control during transformation. Both IPR and value network control are also mutually supportive during the process of increasing innovation autonomy. After the IPR control is improved, greater benefits can be obtained only by improving control over the value network. The degree of IPR control will also contribute to that of value network control in the process of value network enhancement.

3 Case Studies of Indigenous Innovation Implementation Systems and Paths 3.1 Evolution of Innovation Model: Haier Washing Machine The history of Haier’s washing machines illustrates clearly how indigenous innovation can be achieved. Haier is currently the only professional manufacturer in the world that can simultaneously offer a large-scale production of Asian wave type,

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Fig. 6 Evolutionary path of innovation autonomy enhancement

IPR Control

High IIPR-LowValue Network Control

High IIPR-High-Value Network Control

Low IIPR-High-Value Network Control

Control Over the Value Network

European drum type, American agitator type, and dual-powered washing machines, with 18 series, more than 5,000 varieties of products, and over 10 production bases globally with an annual output of 13 million units. Haier’s washing machine was awarded the first batch of CHINA TOP BRAND in 2005 and is a brand with the most steady and competitive development, which is regarded as the bellwether in China’s washing machine industry. Haier, along with Whirlpool and Electrolux, ranks Top 3 in the global washing machine market. Haier’s washing machine goes through four stages: Stage 1, Technology Import, when Haier mainly carried out technology import, starts to produce wave and drum washing machines, for which process indigenization took place; Stage 2, Technology Absorption, Haier conducted product improvement based on the imported technology; Stage 3, Integration of various imported technologies, by which novel product innovation was achieved; Stage 4, Post-secondary Innovation, or even Primary Innovation, based on the importation of new technologies, by which innovation autonomy is indeed improved. (1) Stage 1: A Technology Import Stage (prior to 1994) It refers to the joint venture between Haier Group and Italian Melloni Design Co., Ltd in July 1993 to establish Qingdao Haier Melloni Co., Ltd, which started the production of drum-type washing machines. Also, Haier imported wave technology and set up the production line for wave washing machines, using foreign technology. At this stage, it focused on the mass market, meeting the domestic demand for high-quality washing machines. (2) Stage 2: Advance Absorption Stage (1995–2000) It is a stage where Haier further developed improved products and expanded production based on the technology import. In 1995, Haier developed a fully automatic

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drum washing machine with a fully plastic casing, three-in-one washing, dehydration and drying. In the same year, Haier air bubble double drum washing machine won the gold medal of the invention in the 9th National Exhibition of Inventions. In July 1995, the former Qingdao Red Star Electric Co. Ltd was transferred to Haier Group as a whole. Red Star Electric Co. Ltd. was one of the most famous enterprises, which enjoyed equal popularity with Qingdao Refrigerator Factory in Qingdao, its washing machines, manufactured with technologies introduced from Japan’s Sharp, were one of the three most famous washing machines in China at that time. However, its debt was almost 133 million yuan by 1995, although the enterprises’ equipment and sales network were still relatively perfect due to a series of years of decline in benefits as a result of improper management and lack of cohesion. Haier enabled Red Star Appliances to escape from its difficulties in a short time and to be a major part of Haier’s washing machines by importing Haier’s culture and revitalizing Red Star in the way of “eating shock fish”. During the absorption stage, Haier continued its breakthroughs in product specialization and miniaturization technologies for domestic niche markets. In 1996, the first “Mini Whiz Kid” was launched in Haier, which filled the gap of mini automatic washing machines in the world, and the Haier Mini Washer series started to dominate the mini washing machine market. In 1997, Haier realized the technology of “10 Water Level Selection” and “Quick Wash in 10 min”, and developed the world’s first washing machine with faster washing speed and multiple water level alternatives. Moreover, Haier developed the first computerized drum washing machine in the same year. In 1998, Haier’s first special product, a washing machine for washing groundnuts, was launched, marking its start in personalized washing machine production. Since then, it has developed a “ghee” washing machine, “buckwheat pillow” washing machine, a special “shrimp washing machine”, the first roller washing machine “dream” available for washing cashmere, the first washing machine available for “washing blankets”, Haier personalized products are endless. In the home appliance industry, there is traditionally a popular saying “washing machine will be off when an electric fan is on”. It means that in summer, people are used to washing clothes by hand and will suspend the use of washing machines, which leads to the low season of washing machine sales. However, Haier found through investigation that it is not the case that people are unwilling to use washing machines, but that large washing machines of 5 kg are sold in the market, which are uneconomical to wash a small number of clothes every day and will cause a waste of water and energy. In fact, consumers are used to changing clothes every day in summer, even if they are not dirty, washing clothes is greatly more frequent rather than less frequent. Accordingly, Haier conducted innovations on the frame of the washing machine based on a technical feasibility study, and scaled down the functional components of the original washing machine to launch a 15 kg “Mini Whiz Kid” with three water levels, which enables even a shirt or a pair of socks to be washed instantly. After “Mini Whiz Kid” was put on the market, it was popular among consumers and enjoyed great market benefits. So far, it has launched nine generations of products such as automatic type, full-automatic type, computer type,

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transparent window type, etc., and occupies more than 98% market share in the domestic mini washer market. (3) Stage 3: Integrated Innovation Stage (2001–2003) A dual-powered washing machine was invented by Haier in the integrated innovation stage, by integrating the two technologies absorbed from the drum washing machine and the wave washing machine. The core technology of the washing machine, the motor that coordinates rotation of the drum and wheel, is a breakthrough achieved through R&D in cooperation with foreign enterprises. Before Haier’s innovative dual-power washing machine, the world’s washing machines could be divided into three types: wave washing machines in Asia, drum washing machines in Europe, and agitator washing machines in the United States. Each of these three types of washing machines features its own pros and cons in terms of laundry characteristics, suitability for laundry, wash rate, wear rate, water consumption, and power consumption. In 2001, to meet new demands from users on the effectiveness of automatic wave washing machines, i.e., how to effectively increase the washing power to improve the washing degree, Haier initially focused on reviewing similar technologies to locate relevant technology areas and implementation methods, and identified that it is the dual-powered washing method that can increase the strength of water agitation and also solve the tangled clothes. In 2002, Haier innovatively adopted one-motor into two power outputs, by which a two-way rotation was achieved and a boiling water flow was formed, thus absorbing advantages of wave-wheel type, agitator type and drum type washing machines, thereby innovating a new type—dual power washing machine. The dual power washing machine technology is regarded as being “typical in laying a high-end win with technological innovation”, with the identity of “4th type of washing machine in the world” to break the long-standing triangular situation of agitation type, wave wheel type and drum type washing machine. Thanks to its large basin-shaped wave wheel, special inner drum agitation blade, and unique features, it realized 50% of water-saving, 70% of time-saving, 50% improvement in washing ratio, and 60% reduction in wear rate, which maximized the solution for users’ laundry issues and enabled energy saving. Double Power Washing Machine created the new standard of “XQS” in China’s washing machine sector, which is declared as a patent of the invention of the Patent Cooperation Treaty (PCT). In the same year, Haier‘s Mini Whiz Kid won the G-MARK award in Japan. Haier’s the dual-power washing machine won the sole gold medal for its groundbreaking innovation in novelty, creativity and practicality at the International Invention Fair in Lebin, France in May 2004. In addition to consolidating the domestic market, Haier has also stepped to enter the international mid- to high-end market with its dual-power washing machines. (4) Stage 4: Post-secondary Innovation and Primary Innovation Stage (2004-Today) In March 2003, Haier launched the “Health Care Dual Power” washing machine featuring germicidal and disinfection functions, which created a sales miracle during the SARS epidemic, by which it became the only bright spot in the washing machine sector at that time. In the same September, Haier launched its unique dual-power

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washing machine, which is the first one in the world that is washing powder-free and eco-friendly, setting a new trend for the sector’s advancement. It became the most promoted new product in China within two months of its launch, and the first and only “China Green Star” product in the Chinese home appliance industry. The technology won the first prize of the Science and Technology Progress Award of Shandong Light Industry. Also, China’s first “Auto-gear 1268”, which can sense the weight of clothes and identify laundry habits, and the international 3A class drum washing machine are developed successfully in Haier. In September 2004, Haier launched the inverter A8 dual power washing machine. It boasts eight industry-leading technologies that enable a stylish appearance and break the industry’s minimum limits for water and energy savings. In addition, being washing powder-free means that it is healthy and eco-friendly, and its 8 technical advantages are irreplaceable in the industry, which has been hailed as the “Perfect” washing machine by industry experts. In 2004, Haier’s dual-power washing machine and eco-friendly dual-power washing machine won the first prize of Shandong Province Light Industry Science and Technology Progress respectively. In January 2006, Haier won the 2nd prize of the National Science and Technology Progress Award for its washing powderfree washing machine, and also passed the CAS certification for Chinese electric washing machines in December of that year thanks to its unique anti-bacteria and mold removal effect. In 2005, the Haier washing machine, which pioneered the trend of “Healthy Wash”, won the Chinese Patent Excellence Award again. What was awarded this time was the automatic addition technology and the double spray technology, which enable the washing machine to accurately sense the hardness of the water and the weight of the clothes and add the right amount of detergent. An alarm will notify the user when the detergent is running low. Haier has formed a global innovation system of R&D-design-production and sales for washing machines. Relying on its integration of global R&D capabilities and “industry-university-research” cooperation, Haier’s innovation in washing machines has gradually moved to the fast track of high IIPR, high-value network control and high added value.

3.2 Industrialization of Indigenous Technical Standards: TD-SCDMA Standard China’s TD-SCDMA standard went through standard application, standard R&D, and standard implementation before being the first international communication standard with IIPR in China’s communication history. During the standard application stage, Datang Group formally submitted the TD-SCDMA technology proposal to ITU in June 1998. It was officially accepted as an international standard by the International Telecommunication Union in May 2000. In March 2001, the TDSCDMA standard was formally accepted by 3GPP (3rd Generation Partnership Project). Datang Mobile Communication Equipment Co., Ltd. was established in

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March 2002, which kicked off the full-scale industrialization of TD-SCDMA technology in China. Meanwhile, 8 famous communication enterprises, including Datang Telecom, SOUTEC, HOLLEY, Huawei, Lenovo, ZTE, CEC and Potevio, initiated the establishment of the TD-SCDMA Industry Alliance (TDIA) on October 30, 2002, marking that TD-SCDMA, the first international standard with IIPR in China, has gained the overall response from the industry. In November 2004, Datang Mobile signed a strategic cooperation agreement with Shanghai Alcatel, which invested 250 million RMB to promote R&D and industrialization of TD-SCDMA (see Fig. 7). In terms of R&D of the TD-SCDMA system, Datang launched the world’s first TD-SCDMA LCR cell phone solution in March 2004, based on which the world’s first TD-SCDMA LCR cell phone was launched. In August 2004, Datang launched the first TD-SCDMA LCR PCMCIA wireless network card in the industry. TD- SCDMA passed the 3G MTNet field test organized by the Ministry of Information Industry in November 2004. In December 2004, TD standard realized a video call and passed the overseas service call test. Datang launched TD-SCDMA data cards in 2005 and developed 20 cell phones jointly with 14 manufacturers. Also, the first TD-SCDMA repeater in the industry was launched by Datang. Thus, Datang has taken the lead in forming a complete solution for TD-SCDMA indoor and outdoor wireless coverage, with microcells, repeaters and trunk amplifiers as the main products. On January 20, 2006, TD-SCDMA was officially established by the Ministry of Information Industry as China’s 3G communication industry standard. In 2008, the Ministry of Information Industry issued network access licenses for the relevant vendors of Datang Industry Alliance. In 2009, China issued 3G operating licenses for the relevant telecom service providers, of which China Mobile was permitted to operate services under the TD-SCDMA standard. As the 4G era approached, China Mobile will no longer make additional new investments in TD-SCDMA. TD-SCDMA network was targeted for maintenance for network stability and to gradually transition users of TD-SCDMA developed in the past to the 4G network.

Finalized 1st edition of China Communications Standards Association (CCSA) HSDPA TC5TD industry technology standard was introduced into RS (R5 protocol End of 2004 in WCDM) Accepted by 3GPP International 3G standard May 2000

March 2001

3GPP finalizes TD-SCDMA LTE scheme

TD-SCDMA takes the lead in being the line standard 2006

End of 2005

2002 TD-SCDMA is the first international communication standard with full intellectual property in China's communication history, the emergence of which is described as a major breakthrough for the whole Chinese communication sector.

June 1998

Fig. 7 Steps of TD-SCDMA standard to maturity

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TD-SCDMA standard went through three stages. Stage 1 was prior to 2002 which focused on the development of technical standards and initial commercial trials. It is a period in which few vendors adopted the standard and many MNCs expressed doubts about its commercial prospects. Stage 2, i.e., 2002–2005, during which the industrial chain of TD-SCDMA took shape, core technologies and products also experienced initial commercial trials, and vendors expressed certain expectations for the commercial prospects of TD-SCDMA. Stage 3, i.e., since 2006, the standard has been officially recognized by China and turned into a commercial standard, with dozens of vendors providing products based on this standard, and the market share of TD-SCDMA has gradually increased (see Table 1). Three key factors contribute to the success of the commercialization of TDSCDMA standard: (1) Participate actively in the setting of international standards and obtain the recognition of international standards organizations; (2) Establish an industry alliance based on the development of standards, which promotes the control of auxiliary assets required for commercialization; (3) Obtain the support and recognition from relevant government departments. Growth of the standard can be seen as a process of standard development-acquisition of auxiliary assets-standard implementation. Advance of the TD-SCDMA industry is inseparable from the development of the Industry Alliance. In 2002, the TD-SCDMA Industry Alliance was established with 11 members. Members of the Industry Alliance had grown to over 20 by 2004, over 30 by 2005, and over 40 by 2006 (see Table 2). On July 12, 2008, TDIA announced another expansion, with 10 enterprises, including China Mobile, PTAC, Wuhan Dopod, and Lianfa Technology, officially joining the TD-SCDMA Industry Alliance. Thus, the total number of TDIA members reached 58, covering all links of the industry from production to market, such as operation, manufacturing, and channels. Great attention was paid to the establishment of the whole industry chain and industry group and coordination of the whole industry in various fields in the organization and promotion of TD-SCDMA industrialization, so that the principle of high IPR sharing is established within the Alliance, as well as a realization of mutual licensing and transfer of core technologies and platforms. Anti-hostile competition regulations were introduced by the Alliance in 2008. The Industry Alliance accelerates the close cooperation of the systems vs chips, the chips vs terminals, and the terminals vs systems, and transforms serial to parallel development models in the upstream and downstream of the industry chain through creative cooperation; expert group guidance and operator support are practiced to jointly organize network trials and accelerate product maturity, and MNCs are actively promoted to enter the TDSCDMA industry in the form of development and investment through government guidance, technology exchange, and cooperation among enterprises. In addition, the TD-SCDMA industry cooperation network extends to universities and research institutions, realizing innovation by “industry-university-research” cooperation. In 2008, Datang Group officially established a strategic partnership with 17 institutions of higher education, including Tsinghua University, Peking University,

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Table 1 Progress of TD-SCDMA Stage

Standard control features

Item (reference)

Number of TD-related adopters and market sales

Potential profit expectation

Stage 1 (prior Set technical to 2002) standards, initial commercial trials

In June 1998, the TD-SCDMA standard, researched and drafted by China Datang Group, was submitted by the Chinese government to the International Telecommunication Union. TD-SCDMA was approved by the International Telecommunication Union as the international standard for third-generation mobile communications in May 2000. TD SCDMA was officially accepted as one of the international 3G standards in 2001

Unknown

Unclear, the MNCs predicted that TD-SCDMA would not succeed

Stage 2 (2002–2005)

ZTE participated in the drafting of the TD standard, which further solidified the cohesion of the TDIA, and tested the core technology more fully; “Chinese Standard” transformed from science and technology to productivity; IPR was further shared

The TD-SCDMA industry chain took shape in China. A multi-vendor supply environment has been formed for all aspects of the system equipment, from core and access networks to end chips, commercial terminals and test instrumentation. 300 base stations tested nearly 20 communication enterprises at home and abroad

Yang Hua, the secretary-general of TD Industry Alliance, declared for the first time in 2005 that TD would obtain 1/3 of the market share in China

Continued R&D on commercial technologies, established a high IP sharing principle within the Alliance and realized reciprocal licensing and transfer of core technologies and platforms

(continued)

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Table 1 (continued) Stage

Standard control features

Stage 3 (2006 Core onwards) technology patents are recognized by China as official commercial standards and developed to 4G

Item (reference)

Number of TD-related adopters and market sales

Potential profit expectation

Datang Group held over 6,000 domestic patent applications by the end of 2009, with a 40% yearly growth rate on average, of which over 90% were important invention patents, and nearly half of the patents were applied for around TD-SCDMA, TDLTE, and subsequent evolutionary technologies; By the end of April 2007, enterprises of the Alliance had submitted more than 300 LTE contributions to 3GPP; On January 20, 2006, the Ministry of Information Industry officially established TD- SCDMA as China’s 3G communication industry standard

The Olympic project; system equipment bidding of China Mobile; and cell phone bidding of China Mobile; China Mobile purchases about 2 million TD cell phones to the market with 4 to 6 billion yuan of funds According to Datang Group, over 200 manufacturers participate in the TD-SCDMA industry chain, of which system equipment manufacturers cover more than 10 million channels per year, 6 system equipment manufacturers are granted HSDPA network access licenses, over 30 terminal manufacturers, 38 terminals have been granted network access licenses, and 39 member units were established in 2007

The market scale of TD SCDMA reached nearly 7 billion RMB in Q1 2007, with ZTE, Datang, and TD Tech taking the top three market shares, and their cumulative market shares (based on the number of sectors) were 46.3%, 26.8%, and 14.8%, respectively ZTE and Datang families took the lead in the first and second phases of construction, respectively China Mobile’s 3G strategy has also gradually surfaced, with a total of 145,000 TD base stations in 2011 and an investment of about 58.8 billion RMB in 2009, and about 60,000 new TD base stations

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Table 2 Distribution of TDIA (2006) Key links in the TD-SCDMA industry chain

Alliances Enterprise Distribution

Control level by Datang

System equipment

Datang, ZTE, Huawei, China Potevio and XINYOUTONG

Middle

Core baseband chips

T3G, Spreadtrum, Kaiming, CYIT

High

Core RF chips

COMLENT, RDA

Terminal solutions

Datang, LONGCHEER, SIMCom

High

Terminal

Huali, Lenovo, ZTE, Amoi, Bird, Hisense, Avida, DBTEL, Guangzhou Xinyoutong, TCL, Haier, Yulong, UT

Low

Test instruments

Hubei Zhongyou, ZHONGCHUANG TELECOM TEST, No. 41 Institute of CETC, StarPoint

Middle

Operating system software

Shanghai Ketai

High

Antenna

Haitian, Tongyu, Mobi, Andrew, 十四年

High

Repeater, trunk amplifier

FiberHome, COMBA, ACE Achieve, Datang, Zhongxing

High

Beijing University of Posts and Telecommunications, etc., by entering into cooperation agreements in the field of wireless mobile communications, in which these institutions participate with Datang Group in national major projects. Lou Qinjian, Vice Minister of the Ministry of Industry and Information Technology, said at the signing ceremony that a discussion on TD core technology, chip development, future TD technology evolution and development mode will be conducted by Datang Group with these institutions through the cooperation.

Chapter 20

Business Model Innovation Based on DMS Integration in the Global Value Network

1 Value Network Based on DMS Framework The Institute of Manufacturing (IFM) at the University of Cambridge has conducted ongoing in-depth research on global value networks. They see manufacturing as a process that begins with understanding the market, going through a whole process of product and process design, to production, distribution and service. As the focus of global economic competition shifts from resources to knowledge, the value of manufacturing no longer depends solely on production, but on complex processes including R&D, design, production, logistics and service activities. The design-make-service (DMS) framework proposed by the UK Manufacturing Professor Forum in 2006 reveals a key trend in the development of manufacturing from resource-intensive to knowledge-intensive, reveals a high value-added international network where various types of enterprises collaborate in various value-added activities such as R&D, design, production, logistics and services, etc., and foreshadows a future global manufacturing system in which more small specialized enterprises will benefit from the new operating platform and a wide range of fragmented resources can be integrated. For example, the electronics manufacturing industry. A transformation to a full solution provider and service provider has been achieved by traditional cross-border manufacturers, represented by IBM, as a result of rapid development of the EMS (electronic manufacturing and service) model based on business outsourcing and networking. The traditional foundry enterprises, represented by Foxconn, are rapidly evolving into providers of specialized manufacturing services. They became a new generation of global leaders capable of providing integrated manufacturing-services value across multiple product-life cycles by rapidly expanding their strengths in a narrow manufacturing segment to the whole value chain and value network of manufacturing and services in various directions.

© Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_20

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2 Business Model Innovation in the Global Value Network This book proposes solutions to improve industrial competitiveness by focusing on the portfolio innovation that matches the “Design-Make-Service” (DMS) chain in manufacturing. First, it is a match between Design and Make. The design function in the value network is usually led by a major enterprise, or outsourced to a specialized design provider, which requires a close match between the enterprise production and supply manufacturer and the design function, for example, Foxconn is close to Apple to seek the latest design. Second, it is a match between Design and Service, mainly the design function should dovetail with the market and customer service to upgrade customization by the cooperation of design enterprises with channel manufacturers, and to step up product improvement. Third, it is a match between Make and Service, to reduce inventory and wait by strengthening the seamless connection between manufacturing and service providers via modern supply chain and logistics management (see Fig. 1). In short, the enterprise portfolio innovation network should be organized around the match within the DMS, so as to expand the competition among individual enterprises into that among networks, and expand the innovation of a single aspect into a portfolio innovation of DMS capabilities, so that we possess an advantage of unique local network synergy facing foreign and multinational enterprises. We reached some conclusions in two areas based on the existing research. First, enterprises in the manufacturing chain, especially SMEs of OEM production in mainland China, get information and knowledge from upstream and downstream

Match between Design and Make

Match between Design and Service

Match between Make and Service

Fig. 1 Innovation of high value-added business model based on DMS integration

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by strengthening relational embeddedness into them, and carry out synergistic innovation with enterprises upstream and downstream, which is the key to the success of their innovation activities. We conducted a multivariate statistical regression analysis on a sample of 157 manufacturing enterprises in Zhejiang Province, from which it was found that relational embeddedness such as trust, information sharing, joint problem solving, etc., between enterprises and networks of upstream and downstream is beneficial for enterprises to acquire and utilize new knowledge through interactive exploratory learning and enhance technological innovation performance. Second, in some industries where market-driven innovation is conducted, such as the home appliance industry, a synergy of brand service vs. scale manufacturing, value network optimization and control, M-S matching network, and portfolio innovation of manufacturing vs. service are the key to enterprise innovation in China in a case where core technology is absent. Rather than following the path of OEM production, which was commonly adopted by enterprises in Ningbo at that time, AUX Air Conditioner started a self-owned brand production path directly; it is only in the case of safeguarding its status as a self-owned brand manufacturer that a further expansion will be made through OEM on the economy of scale, thereby enabling better support for the enterprise. AUX has perfectly combined the seemingly contradictory OEM and self-owned brand production, by which an enterprise with a self-owned brand can get orders for OEM, which illustrates the success of AUX sidely. Also, it is precisely because AUX insists on taking the route of a self-owned brand that it has won the pre-emptive opportunity and space in its internationalization. It also indicates that it is not required for Chinese enterprises to go through OEM production first and then gradually develop to original design and manufacturing or self-owned brand production, indeed, the AUX model provides a new dimension of rapid development for Chinese enterprises. The choice to start with a self-owned brand requires a well-developed marketing network, a high cost of channel building, and far more efforts than OEM and original design and manufacturing. AUX does not go straight to the costly path of branding—a costly way to build the brand before applying its power to expand sales, which is often the practice of major foreign companies. AUX saves huge advertising costs, which are invested in the scale of construction, by making clever use of event marketing to rapidly expand brand awareness. As IT popularizes, the traditional vertically integrated business model is replaced by enterprises’ cooperative virtual network, where each enterprise in the value chain focuses on one or several sub-labor links; whereas, AUX breaks the industry rules and enters the manufacturing of AC parts, lengthening the supply chain of its air conditioners and implementing a combination of self-production and procurement of parts, thus further lowering costs and releasing new profit margins, while also providing advantages for its OEM. The success of the portfolio innovation of AUX air conditioners is contributed mostly by its success in cost control and brand marketing. In terms of cost control, the most significant thing is to achieve economies of scale through OEM, by which to exchange the market advantage with low-price competition, in addition to using an advanced enterprise management system, such as enterprise resource planning (ERP) system, etc. In December 2003, AUX “allied” with Samsung of South Korea

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to provide 200,000 sets of split wall-mounted air conditioners to the latter in the form of OEM production each year. In July 2005, AUX reached an agreement with York Corporation, the world’s largest refrigeration enterprise, to produce room air conditioners for it in bulk by OEM. In terms of brand building, AUX builds up its brand influence gradually and shapes an international image of AUX as a self-owned brand manufacturer by publishing a series of air conditioning industry white papers, inviting Milutinovic to endorse the brand, spending RMB 80 million on CCTV advertising and non-Olympic marketing events, which greatly supports AUX’s further competition for the domestic high-end market and international development. Meanwhile, AUX, as a self-owned brand manufacturer, hires Japanese technical experts with high salaries, establishes post-doctoral workstations and engineering technology centers, and imports state-of-the-art production testing equipment in order to make up for its shortage in product design. It is just by leveraging a dual role as an OEM manufacturer and a self-owned brand manufacturer that AUX has achieved rapid catch-up.

3 Synergy and Integration Between Large Enterprises and SMEs in the Value Network Currently, Chinese enterprises are still competing mainly with a low-cost strategy. For cost-cutting, large enterprises raise tough cost requirements for supporting SMEs but fail to focus on improving quality, technology, organizational management, and cultural development together with them. SMEs lack innovative vitality, thus turning a large number of supporting enterprises into low-ranking suppliers and presenting a “flat” industrial ecosystem. These local SMEs with weak indigenous innovation capabilities are more vulnerable to financial crisis and elimination due to their lowtech capabilities and negative financial position to adapt to market and technological changes and face an uncertain external environment. In turn, large enterprises lack competitive and innovative supporting manufacturers, due to which they fail to realize technology industrialization rapidly in the local market, and even lack enterprises sharing their risks in the face of crises, and examples of large enterprises’ capital chains breaking due to new business, raw material costs, exchange rates, trade barriers and policy adjustments are common. Therefore, it will be advantageous to build effective local indigenous innovation networks for large enterprises, especially for network-core enterprises, which is also a major issue and shortcoming for indigenous innovation of large enterprises in Zhejiang. Large enterprises generally focus only on the selection of local partners but ignore mutual support and co-development, and even in their cooperation with local vendors, they are stuck in just a single aspect of technology or business, lacking all-factor interaction. For example, Zhejiang Geely Automobile Company cooperated with thousands of supporting parts suppliers, about 430 in 2009. Geely constantly upgrades its requirements to realize economical car production, and strengthens the “integration” of supplier resources, due to which Geely gradually eliminates local auto

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parts suppliers in Zhejiang but cooperates with those, which are barely qualified, in Jiangsu, Shanghai, etc. It is a short-term benefit to Geely, as it enables it to obtain compliant parts and components at a lower cost, but it tends to increase systemic risk and worsen the innovation performance of the entire Zhejiang auto parts ecosystem, making it unsustainable for Geely’s indigenous innovation in the future. In the long run, low-cost qualified suppliers can be found in the market, while it is unfeasible to tie a strong co-innovation relationship by market but requires long-term relationship cultivation; the ultimate inimitable competitiveness comes from co-innovation partnerships, rather than from short-term market contracts. Geely can only promote a regional innovation system for the local auto sector, whose development and maturity will in turn improve Geely’s productivity and product innovation. Therefore, a strategic mindset needs to be developed, while focusing on the development of innovation capabilities of large enterprises, to help large enterprises develop an expanded awareness of the need to focus on the cultivation and development of local innovation networks while operating in a networked economy. For lasting success, a contribution from large enterprises to system-wide prosperity while making full use of network resources is required. For example, in 2007, Zhejiang Xizi United Holdings Group published the first CSR Report for Chinese private enterprises, expressing its determination to work with customers, employees, suppliers, partners and the government for mutual development and promotion, which enables Xizi to effectively control the industrial ecosystem, independently create a mutually beneficial and win–win enterprise network, thereby creating a sustainable indigenous innovation environment. Collaboration with various partners in a series of full-factor innovations, such as technology, strategy, organization, culture, etc., is a key approach for total innovation, but a full factor and high involvement innovation will hardly be driven without a value network as a platform. In this regard, Chongqing Gearbox Co., Ltd (“CQ-Gearbox” for short) is at the forefront of the industry, driving a joint innovation with SMEs in Chongqing, which builds a sustainable local innovation network that is difficult for imitation by rivals, in parallel, it drives industries and the regional economy. It is a worthy example for large enterprises in Zhejiang. In April 2008, CQ-Gearbox learned of the latest breakthrough, a spectrum harmonic timing technology, in thermal ageing technology for stress relief in mechanical engineering, which reduces over 90% of energy consumption and costs compared to conventional thermal ageing technology. In 2009, CQGearbox adopted the technology which resulted in 12 million kWh of electricity savings. A head of CQ-Gearbox believes: “It is just figures of CQ-Gearbox, estimated saving of energy will be astronomical if the thermal aging technology is adopted by the enterprises nationwide… The technology should be used not only by ourselves but also by the supporting factories, for which we will advance the cost.” It was then that the company’s technical director suggested that all of CQ-Gearbox’s supporting factories should be on the spectrum harmonic aging technology. To dispel worries about the new technology from them, firstly, CQ-Gearbox took the first step to prove the feasibility of the new technology with actual benefits; secondly, CQGearbox proposed that it will advance the cost of local supporting enterprises to use the technology. CQ-Gearbox pays for the equipment in advance and puts them in

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supporting factories for free use, and then deducts the cost from their payment after they have got the benefit of the new technology. It was begun in early 2009 when the technology was adopted by supporting manufacturers, and over a decade of since their adopting the technology in June 2009. The head of CQ-Gearbox said of this strategy that CQ-Gearbox is playing the role of the “eldest son”: “What does it mean to be the eldest son and what is its mission? Traditionally, the eldest son is given the role of being an authority for his younger siblings; the eldest son is expected to set an example in every way, regardless of the cost, in case the country is in trouble and the economic situation is in crisis.” The case of CQ-Gearbox shows that large enterprises in China should also build their local indigenous innovation network, to drive local SMEs to jointly adopt new technologies and standards, to form a supporting division of labor system based on new products and processes, and to form a virtuous interaction between large enterprises and SMEs in a synergistic and complementary way. Efforts should also be made by Zhejiang province in promoting positive interaction between large enterprises and their supporting SMEs, building an indigenous innovation network with large enterprises as the core with local SMEs as participants, by which Zhejiang enterprises can form unique competitiveness in synergistic innovation and acquire a greater advantage in national and international competition. The interaction between large and small enterprises should penetrate cooperations in organizational management, cultural construction, and human resources, etc., not just in technology so that total innovation cooperation can be formed between enterprises and a close innovation alliance with large enterprises as the core and small enterprises as the support.

Chapter 21

Mechanisms and Evolution of ODI’s Impact on Indigenous Innovation Capabilities

1 Model Choice for ODI While cross-border investment activities worldwide have reduced as a result of the international financial crisis, Chinese outbound investment has surged into a rapid development phase. Outbound investment has been one of the key ways for Chinese enterprises to accelerate their internationalization, and also a new way for them to enhance their indigenous innovation capability. An in-depth study on types of outbound investment by Chinese manufacturing enterprises, the relationship between outbound investment and the enhancement of indigenous innovation capabilities, and institutional factors influencing outbound investment has been conducted, resulting in the following key findings: (1) Types of outbound investments that promote indigenous innovation capabilities of Chinese enterprises are usually market-seeking and strategic asset-seeking; (2) indigenous innovation capability requires to be enhanced through effective learning in overseas markets in case of market-seeking as the motive of outbound investments by Chinese enterprises; (3) indigenous innovation capabilities should be enhanced through learning in overseas markets and control over strategic assets if Chinese enterprises are motivated to invest abroad by seeking strategic assets; (4) gradual improvement in policy system to promote outbound investment by Chinese enterprises has been started in the past five years, but the service system is an exception. Transnational investments are classified by Dunning (1993), a leading scholar in the field of international business, into four types according to their motivation: (1) Resource-seeking ones, motivated by the acquisition of natural resources as well as human, land, and capital, etc.; (2) Market-seeking ones, motivated by market expansion; (3) Efficiency-seeking ones, motivated by achieving optimal factor allocation and economies of scale on a global scale and reducing various operating costs; (4) Strategic asset-seeking ones, motivated by acquisition of technical knowledge, learning experience, management skills, and organizational capabilities, etc. based

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on strategic considerations. Such a division provides a basic theoretical reference for our analysis of types of ODI for Chinese enterprises. 1. Further Development of Resource-seeking ODI A shortage of supply is being faced by China as it emerges as the world’s largest consumer of tin, iron ore, zinc, aluminum, copper and nickel, and the second-largest consumer of lead and oil. In the early 1990s, China’s oil industry started to go for overseas investment and development of overseas oil resources. Initially, Chinese oil companies cooperated with resource countries in the form of cooperative exploitation and production sharing. 2. Emergence of Efficiency-seeking ODI The “Made in China” benefit from low production costs has existed for a long time. However, rising oil and steel prices in recent years have increased the cost of raw materials; the implementation of the Labor Contract Law of the People’s Republic of China has significantly increased the employment costs of enterprises while safeguarding workers’ rights and interests and improving farmers’ income. The low-cost advantage of “Made in China” is gradually losing ground, so Chinese enterprises are moving out of the country to seek new opportunities for productivity improvements. Data released by the Department of Commerce of Zhejiang Province shows that there were 760 overseas enterprises and institutions approved by the province in 2015, with the ODI amount exceeding US$10 billion for the first time, reaching US$13.988 billion, up 1.5 times year-on-year. The cross-border merger became the new highlight of offshore investment in Zhejiang Province in 2015 against the backdrop of falling international asset prices. There were 135 overseas investment projects in the form of M&A in Zhejiang Province, with a total of US$5.109 billion. ➀ The labor-intensive industry with a high correlation with Zhejiang’s regional economy is the hot spot for Zhejiang’s investment. SMEs in Zhejiang have formed the overseas investment featured by “grouping together”, i.e., a leading one sets up an overseas industrial park or trade center, attracting domestic enterprises to move in together. For example, Yuemei Group, as a response to Nigeria’s special policy of forbidding the import of textile fabrics, set up a textile development zone in Nigeria and introduced 15 enterprises upstream and downstream of the industrial chain into the zone, thus forming a complete industrial chain from spinning, weaving, embroidery, knitting to the production of complete sets of garments and improving the overall efficiency of local production. Meanwhile, Zhejiang enterprises accelerate the implementation of international production capacity cooperation. The annual outbound investment in the manufacturing sector was USD 2.987 billion, up 2.23 times year-on-year. TSINGSHAN Holdings Group set up a stainless-steel company in Indonesia, and HONGSHI Cement set up cement production lines in Myanmar and Nepal. ➁ Overcapacity in Zhejiang Province, such as iron, and cement, etc., has been effectively solved by ODI.

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3. Rapid Growth of Market-seeking ODI China has already overtaken USA and Germany to be the top exporting country in the world. However, China, as a major exporter globally, has been facing restrictions on quotas and anti-dumping due to trade protectionism, which have seriously hindered and restricted the development of China’s export-oriented industries. The home appliance industry, which has been exporting a lot every year and has been subject to anti-dumping investigations for the past 10 years, is also taking active steps to enter overseas markets by investing abroad. Chinese appliance enterprises have entered a phase of the self-owned brand in developing markets although they are still struggling to break through from OEM in mature markets such as the EU and US. GREE built a factory in Brazil in 1999, which was officially put into production in 2001 and realized a profit of RMB 25 million three years later and was awarded the title of “Most Satisfied Brand of Brazilians” by the INBRAP. In 2007, Gree has ranked No. 2 in Brazil in terms of market share. For six years in a row, Gree has been awarded the highest energy efficiency certification by the Brazilian government, the “Class A Energy Label” certificate and the “Star of Savings” trophy by 2009. It means that GREE has not only successfully set up a factory in Brazil and achieved profitability, but also exported its energy-saving technology of independent R&D to Brazil, which has been highly recognized by the Brazilian government. TCL invested in Vietnam in 1999 and started its international operation. It aims to learn how to operate its brand in an unfamiliar market in addition to making Vietnam a bridgehead for expanding into the ASEAN market. In 2008, TCL ranked Top 3 in Vietnam with over 1 million units of color TV sales, accounting for 13% of the market share in Vietnam, becoming a high-end brand enterprise in the Vietnamese market alongside Japanese, South Korean, European and American enterprises. 4. Emergence of Strategic Asset-seeking ODI The “Strategic Assets” was developed as a result of the development of the resourcebased view of enterprises. Strategic Assets are defined as resources and capabilities that are scarce, special and hard to acquire through trade & imitation and that can be a competitive advantage for enterprises, such as technological capabilities, rapid product development cycles, brand management, control of distribution channels, favorable cost structures, and buyer–seller relationships, etc. Strategic Asset-seeking ODI is proposed from the motivation of acquiring an advantage. Currently, technology and brand are the key advantages that Chinese enterprises hope to gain for internationalization. It is clear from the “Go global” strategy that Chinese enterprises are encouraged to go abroad and make full use of foreign advanced technologies to enhance their international competitiveness. Also, it is proposed to make full use of the “resources of both international and domestic markets” to cultivate selfowned brands with an international reputation and Chinese MNCs with world-famous brands. ➀ Zhong Wen. From Wanxiang Group to Geely Automobile: Dynamic Zhejiang Enterprises’ Overseas M&A Fusing Advanced Management & Excellent Technology [N], CHINA ENTERPRISE NEWS, 09–06-2016 (04).

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➁ Supply-side efforts, making to make up for the shortcomings of Zhejiang’s foreign exports to achieve a counter-trend upturn [EB/OL]. (2016–02-24) [01–122018]. http;//www.chyxx.com/difang/201602/388775.html. Market-seeking and Strategic Asset-seeking are the most closely related to innovation. Innovation issues such as technology transfer and product development are involved in both Market-seeking and Strategic Asset-seeking. By engaging in ODI, enterprises acquire the technological and branding resources necessary for innovation but also increase their assets and experience in cross-border innovation while seeking markets. In the article International Channels for Chinese Enterprises to Enhance Their Technological Capabilities, Yi (2003) said that the biggest disadvantage of Chinese enterprises is the lack of core technologies that enterprises rely on for survival and development, and the lack of sustainable competitiveness, i.e., core competitiveness, compared with international enterprises. A viable and fast way to enhance the core competencies of enterprises is to upgrade their technological capabilities through foreign investments. Du and Cheng (2005) point out that R&D resource transfer generated by the evolution of MNCs’ competitive advantage caused by technology globalization has created opportunities for developing countries to realize technology acquisition outbound investment and capture reverse technology spillover. Xianming (2007) suggests that reverse investments by Chinese enterprises in developed countries in the form of local factories, technology monitoring posts, and cross-border mergers are strategic investments with the specific goal of seeking creative assets. Creative assets are the accumulation of knowledge, skills, learning and experience, and organizational capabilities that are embedded in human, proprietary, institutional and physical capabilities. In essence, creative assets are the synergistic elements required throughout the innovation process. The technology-seeking ODI, which is a strategic asset-seeking ODI, can be an effective way for Chinese enterprises to acquire technology and thus promote their technological innovation capabilities, based on the above study. We also grouped the strategic asset-seeking ODI motives of Chinese enterprises into three categories: (1) technology-seeking. SHANGHAI ELECTRIC GROUP PRINTING & PACKAGING MACHINERY CO., LTD acquired Japan Akiyama Printing Machinery Co., Ltd. in 2002 in order to acquire the world’s leading offset printing machine technology and thus substitute imports with domestic production. The acquisition has greatly narrowed the gap between SHANGHAI GUANGHUA PRINTING MACHINERY CO., LTD, which also belongs to SHANGHAI ELECTRIC GROUP PRINTING & PACKAGING MACHINERY CO., LTD., with international advanced technology, which also makes Guanghua the first to possess the production capacity of medium- and high-end offset printing machines in China; (2) Brand acquisition. By acquiring the ownership of the Japanese KOYO blanket brand, Ningbo VEKEN Group took over the operation and became the direct owner of this top international blanket brand, thereby changing the case lacking a wellknown brand in the international market. In addition, VEKEN holds famous home textile and apparel brands such as GIOVEKENI from Italy and V18 from Denmark. VEKEN has also acquired distribution assets through brand acquisitions, enabling its sales share in international markets to grow. The rapid acquisition of overseas brand

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equity and related resources has become a major strategy for VEKEN to accelerate its internationalization of brands and enterprises; (3) Mixed motivation. For Lenovo’s acquisition of IBM PC Division, both technology and brand acquisition were key motivations for this cross-border merger. The technology advantage of Lenovo before the merger was mainly in the middle- and low-end personal consumption computer products, and it hoped to acquire IBM’s leading technology in high-end enterpriseuser products through the merger. Simultaneously, the merger brought Lenovo 5 years of ThinkPad brand rights and IBM’s global distribution channels, enabling Lenovo, which just enjoys an advantage in domestic sales channels, to conduct a full-scale layout in the international market. Currently, studies and research on China’s ODI are focused on international business and macroeconomics, with only a few exceptions conducted at the micro-level in terms of technology. Some scholars believe that ODI is becoming a powerful tool and instrument for MNCs in technologically disadvantaged developing countries to seek technological advantage in the international arena, and that technological disadvantage is one of the driving forces behind ODI for Chinese enterprises. The choice of a target market is an important decision for outbound investment and international business. A typical case study shows that target markets for Chinese enterprises’ outbound investments may be either mature or emerging markets, or even domestic markets, as shown in Fig. 1. (1) Market A1. Chinese enterprises that are motivated by the need to exploit advantages and aim to enter mature overseas markets will tend to adopt marketseeking ODI, where advantages can be exploited mainly in terms of product manufacturing and cost control. Target market Overseas market Domestic market

Emerging markets

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Fig. 1 Matches of ODI types and motivations

Product design Cost control

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(2) Market A2. Chinese enterprises that are motivated to exploit their advantages and aim to enter emerging markets overseas will also be more inclined to adopt market-seeking ODI, where the advantages they can exploit are mainly reflected in product design and cost control. (3) Market B1. Chinese enterprises are more likely to adopt strategic asset-seeking ODI if they are motivated by gaining advantages and aiming to expand the domestic market, with a focus on acquiring product designs and core technologies. (4) Market B2. Chinese enterprises, motivated by the desire to gain advantages and enter mature markets overseas, tend to adopt strategic asset-seeking ODI, seeking access to international brands and distribution channels in addition to product design and core technologies. Thus, market-seeking ODI can also serve as an effective way to promote the innovative capabilities of enterprises.

2 Mechanisms of ODI’s Impact on Indigenous Innovation Capability Both market-seeking and strategic asset-seeking ODIs serve only as a way for enterprises to enhance their innovation capabilities. It also requires effective learning to enhance their capabilities for indigenous innovation. For strategy-seeking ODI, effective control over acquired assets is required in addition to effective learning. Therefore, we propose a fundamental relationship between ODI and the enhancement of indigenous innovation capabilities. Where market differentiation and dynamics influence what and how enterprises learn with market-seeking as the motivation for ODI. Transferability and complementarity of assets affect the control style and learning efficiency of enterprises motivated by strategic asset-seeking for ODI (see Fig. 2).

3 Evolution of ODI and Indigenous Innovation Capabilities: Exampled by Haier 3.1 Integrate ODI with Innovation to Enhance Global Innovation Capabilities In the age of globalization, active R&D abroad and the acquisition of advanced technologies from abroad are critical for indigenous innovation. In general, enterprises will prefer an inward technology transfer model to meet in-country technology needs; ODI overseas innovation and expansion of overseas markets will occur after technological capabilities have grown; and, finally, it is a globally integrated innovation

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Market difference

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Fig. 2 Mechanism of ODI in enhancing indigenous innovation capability

to complete a global strategic layout. Many enterprises have started their innovation upgrading path as “overseas R&D - technology transfer - overseas application global integration”. Politically, policy support should be offered by the government for transnational innovation models and internal & external networking mechanisms. Practices of indigenous innovation in globalization conditions have been initiated by some of the leading enterprises in the Chinese manufacturing sector. In the home appliance sector, Haier has implemented a transition from a brand-name strategy to an international and finally global strategy. It is overseas R&D and innovation that are driving this transformation. Three steps were taken to upgrade Haier’s innovation: first, a transformation from domestic R&D to an overseas one; second, a leap from the domestic market to the international one; and third, an integration of global resources to build Haier’s global innovation system.

3.2 Technology-Seeking ODI: Drive All Time and Space Innovation In its 30 years of innovation, Haier has transformed its innovation strategy in tandem with the shift in development stage: during the brand-name phase, Haier created products that satisfied customers by utilizing the import-digestion-absorption mechanism but lacked indigenous innovation capability. During the diversification phase, Haier established a technology center to develop a full range of products.

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In the internationalization phase, Haier set up a Central Research Institute to further improve its capabilities in product design. It also integrates global technology resources and establishes a global technology alliance. In the global branding phase, Haier has established an R&D organization model based on “Central Research Institute + Localized Design Center”. Haier Group actively integrates global resources to develop a global design resource network, e.g., setting up design R&D centers in Japan, Korea, Italy, the Netherlands, and the USA, and establishing Haier Group’s overseas R&D system, e.g., setting up 18 design centers, 15 information centers, 48 R&D entities, and 13 overseas industrial parks worldwide, thereby realizing localized employees, localized design R&D, localized production and localized sales, which drive the rapid implementation of Haier’s global brand strategy.

3.3 Market-Seeking ODI: Drive Overseas Production and Sales Haier, the world’s fourth-largest home appliance manufacturer, expanded its global presence in 2008, the third year of its global branding strategy. It has acquired a refrigerator plant in Thailand from Japanese Sanyo, with an annual production capacity of about 1 million units, to produce washing machines in addition to refrigerators, of which 40% are sold in Thailand and 60% are exported to other Southeast Asian countries. Haier launched its first manufacturing base in India by acquiring a refrigerator plant in India with a capacity of 350,000 units. By now, Haier has established 30 overseas manufacturing bases, 22 trading companies and 8 design centers in North America, the European Union, Japan, South Korea, Africa, the Middle East and Southeast Asia, enabling localized R&D, manufacturing and marketing in major economic regions around the world. In 2007, Haier’s overseas turnover reached US$4.1 billion, with overseas revenue accounting for more than 20% of that in total, and a 1.5 times faster growth rate in profits overseas than at home.

3.4 Total Factor Integration and Innovation Capability Boosting Haier sets up a global design management system, establishes the Haier Group Global Design Management Committee to advance the establishment of the Haier Group global design management platform, and designs the Haier Group global design specification & promotion system to standardize the Haier Group’s product brand image; establishes Haier Group’s global design promotion evaluation platform and sets up a product design competitiveness evaluation system to promote Haier Group’s product competitiveness.

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Thanks to the PLM (product lifecycle management) platform, Haier shortens the time to market, improves quality, reduces costs, achieves global development, and is responsive to the individual demands of the market. For example, Haier’s Frenchstyle side-by-side refrigerator, which was launched globally in April 2007, is a fruit of Haier’s global R&D. Its design concept is derived from the actual needs of highend consumers in Europe and America. It took Haier’s 150 R&D staff 2 years to develop this product, they formed a “borderless” team across borders, including 12 sub-teams in R&D, marketing, logistics, manufacturing, and finance, etc. The R&D team conducted a lot of research starting from the customer end, and many of the differentiating features were designed as a result of user testing. This all-new product for the mainstream market retails for more than $2,000 in the U.S., while Haier has previously sold refrigerators in the U.S. for a maximum retail price of $500. To summarize, Haier successfully established a global innovation system and realized indigenous innovation in a globalization context. The Haier experience deserves a theoretical overview that that can serve as both a new theory for the field and a new guide for indigenous innovation in the context of Chinese enterprise globalization. It is a topic of great interest and potential that deserves to be explored collaboratively by Chinese scholars and enterprise managers.

Chapter 22

Strategic Measures for Indigenous Innovation and Surpassing Catch-Up in the Global Value Network

China’s economy is still experiencing a transition process. The Chinese economy is gradually entering the process of global economic integration. A sharp increase in the number of Chinese enterprises conducting ODI, as well as in investment flows and stocks, is taking place despite the intensifying downward pressure on the Chinese economy. A large number of Chinese enterprises have emerged on the Fortune 500 list in recent years, which continue to grow rapidly. However, it is indisputable that Chinese enterprises lack global branding and innovation capabilities, resulting in an absence of Chinese enterprises in the corresponding international rankings. The stark contrast shows that many Chinese enterprises, especially large enterprises, neglect to be “strong” while pursuing to be “big”, and neglect “surpassing catch-up “while pursuing “catch-up”, which is a lack of innovation capability of the enterprises, essentially, thus making it hard for them to win sustainable advantages in the international market. Global value networks bring both opportunities and challenges for enhancing the innovation capabilities of Chinese enterprises, which urgently require more oriented and targeted policy support from the government and strategic responses from enterprises. Given the preceding research, following suggestions are made in this chapter for enterprise management practices and government policy formulation: ➀ Against the globalization, a global value network plan based on indigenous innovation should be implemented by enterprises to acquire and integrate innovation resources in the value network; ➁ Opportunities, support and services should be actively provided by the government for Chinese enterprises in manufacturing to guide these enterprises to enhance their indigenous innovation capability, and to develop in the strategic direction of strengthening themselves and surpassing catch-up, so as to win a sustainable competitive advantage in the global market, regardless of whether they enter the global value network led by MNCs as suppliers or build a global value network led by themselves as brand-name leaders.

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1 Policy and Service System for ODI Contextual factors, especially institutional factors, must be fully considered in the study of Chinese enterprises’ innovation activities. Two key institutional factors affect the outbound investment of Chinese enterprises: the policy system; and the service system.

1.1 A Policy System Formation and development of China’s outbound investment policy since the Reform and Opening-Up can be defined into two stages roughly. Stage 1, strict restriction. It was pointed out in the Opinions on Strengthening Overseas Investment Project Management submitted by the State Planning Commission to the State Council from 1979 to the early 1990s that China was unprepared for large-scale overseas investment and that focus of enterprises’ overseas investment should be on using foreign technology, resources and markets to supplement domestic ones. This policy has severely constrained the scale and volume of ODI from China. Stage 2, encourage “Going Global”. In October 2000, the Proposal of the Central Committee of the CPC on the Tenth Five-Year Plan for National Economic and Social Development proposed for the first time the implementation of the “going out” strategy, which led to a major shift in the strategy of opening up to the outside world, shifting from restricting to encouraging overseas investment by enterprises. Given the “go global” strategy, China subsequently launched policies for outbound investment to provide a more complete institutional environment to support Chinese enterprises’ outbound investment. (1) The Ministry of Commerce issued the Provisions on Approval of Investment in and Establishment of Overseas Enterprises in 2004, and the National Development and Reform Commission promulgated the Verification and Approval of Overseas Investment Projects Tentative Administrative Provisions, which turned the government’s authority to approve overseas investment projects into verification, which simplifies the review process and clarifies the government’s role in guiding, serving and supporting overseas investment. (2) Government increases its financial support for outbound investment. The “Notice on Giving Credit Support to the Key Overseas Investment Projects Encouraged by the State” issued by the National Development and Reform Commission and the Export–Import Bank of China specifies that financial support will be given to four types of overseas investment projects, such as overseas resource development projects that can make up for the relative lack of domestic resources, overseas production projects and infrastructure projects that can drive the export of domestic technology, products, equipment, etc., and the export of labor services.

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1.2 A Service System The service system is a key support system to promote enterprises’ outbound investment. So far, government departments that can provide support services for outbound investment by Chinese enterprises mainly include the Ministry of Commerce, Chinese embassies and consulates abroad, and local foreign trade and economic departments. It was the “Catalogue of Countries and Industries for Guiding Investment Overseas (I)” issued by the Ministry of Commerce and the Ministry of Foreign Affairs in July 2004, and the “Catalogue of Countries and Industries for Guiding Investment Overseas (II)” issued by the Ministry of Commerce and the Ministry of Foreign Affairs in October 2005, the “Catalogue of Countries and Industries for Guiding Investment Overseas (III)” jointly issued by the Ministry of Commerce, the Ministry of Foreign Affairs and the National Development and Reform Commission in January 2007, and the “Statistical Bulletin of China’s Outward Foreign Direct Investment” issued by the Ministry of Commerce regularly. Nonetheless, research revealed that issues exist in relevant government departments, particularly in local foreign trade and economic departments: ➀ incomplete data and lagging information; ➁ lack of special research and studies; ➂ lack of professional talents. In general, local foreign trade and economic departments are not yet able to provide enterprises with the information and consulting services needed for investment decisions and operations. Information and consulting services for enterprises ODI have long been emphasized by various countries. For example, the U.S. has an information network consisting of five departments, namely national intelligence agencies, international intelligence agencies, economic & business intelligence centers set up by embassies abroad, the United Nations Development Program, and overseas private investment companies, to offer various information and consulting services to overseas investment enterprises for investment decision making and operation. In comparison, China currently lacks a mature and effective service support system for the promotion of overseas investment by enterprises.

2 Bottlenecks and Strategic Solutions to Indigenous Innovation It is a significant practical task that enterprises must complete in order to gain access to and integrate global innovation resources and accelerate the development of indigenous innovation capabilities. Enterprises must improve their indigenous innovation capabilities through effective learning, and for strategy-seeking ODI, effective control over acquired assets is required in addition to effective learning. The bottleneck for enterprises is balancing effective learning and asset control in order to acquire appropriate resources, and then integrating those resources to form indigenous innovation capabilities.

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Bottleneck 1: How to enhance the effectiveness of asset acquisition? Existing research reveals that ineffectiveness in acquiring technology assets and brand assets is not conducive to the improvement of indigenous innovation capabilities of many enterprises, as shown below. (1) Lack of long-term planning in asset seeking, resulting in frequent failure to acquire strategic core assets. Some enterprises fail to gain control of IPRs, brands, etc. that they need via M&A activities, and even if they do, it is difficult to gain access to R&D processes and organizational systems. Asset acquisition by some enterprises is aimed at short-term needs but not a long-term plan to enhance indigenous innovation capabilities. (2) Lack of complementarity in an asset acquisition. Some enterprises fail to acquire the strategic assets needed for each step of the innovation process starting from the complementary of the innovation process but just focus on the acquisition of technology assets or brand assets. (3) Lack of awareness of global layout for asset acquisition. Parts of enterprises fail to proactively search for strategic assets on a global scale, and fail to take into account location advantages of each region on a global scale and draw on the strengths of others. Bottleneck 2: How to integrate assets? Once strategic assets for innovation that enterprises require have been acquired, they must be integrated and coordinated through internal and external organizational networks, which many Chinese enterprises have yet to do. To successfully commercialize new technologies, it is necessary to integrate and coordinate all aspects of innovation. The integration of assets creates a unique innovation capability that is unattainable through purchase or imitation. Many large- and medium-sized businesses must urgently implement intra- and inter-enterprise asset integration to capitalize on synergistic innovation. We propose a global value network plan based on the implementation of indigenous innovation, which consists of following three aspects: (1) In terms of objectives, value network planning should target indigenous innovation and industrial upgrading in the global value network. The indigenous innovation upgrading path of manufacturing enterprises from technology import, absorption and integration to original innovation corresponds to the industrial upgrading path from OEM to ODM and OBM. Technology assets and brand assets are strategic assets that indigenous innovation needs urgently, and they are the key for industrial upgrading. (2) In terms of general characteristics of the value network, optimization should be made for the division of labor and collaboration on innovation in the value network. The synergy among different value chains in the manufacturing sector should be used as a breakthrough to build a high-value-added innovation network with “design-make-service” synergy. The entire manufacturing process, which will be carried out by multiple branches within the enterprise and by partners, can be distributed in different regions globally. It requires control and integration over strategic assets covered by the entire process.

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(3) Location advantages of major global economies should be analyzed in detail from a regional perspective to realize an optimal location layout for each link of “design-make-service”. In particular, it is required to analyze the innovation base and dynamics of each region in terms of R&D, product design, production processes, and services from an innovation perspective. A synergistic innovation policy system that links large, medium, and small enterprises in a value network is proposed at the meso-level, in addition to policies at macro-level and responses of enterprises at micro-level. (1) Guidance and encouragement should be made by the government for the formation of a cluster matching network of major enterprises and supporting enterprises, associated enterprises and both upstream and downstream enterprises. For example, the government subsidizes the support of major enterprises that purchase products from local suppliers. Furthermore, the SMEs that are wellmatched with large enterprises shall be supported in the policy. For innovative projects jointly undertaken by local enterprises, key sci-tech projects will be supported if they are verified to be related to long-term cooperation with supporting enterprises. (2) For large enterprises, efforts shall be made to strengthen a co-win industrial chain, enhance the overall competitiveness of the chain, develop strategies to facilitate joint development of local cluster networks, and form stable regional alliances for supply and innovation. (3) For SMEs, efforts are required to accelerate the formation of indigenous innovation capabilities, which enable the formation of product series innovation and upgrading capabilities to match with major enterprises; to proactively connect with major enterprises and enhance the embeddedness in the value network, so as to boost the development of indigenous innovation capabilities of the cluster.

Part VI

Study on Path and Policy of Indigenous Innovation with Chinese Characteristics

Overview This part analyzes the essence of an indigenous innovation path based on total innovation at the national level, in which original innovation is of the utmost importance, while a re-innovation based on absorbing advances in sci-tech developed countries and the integration innovation are both major means of accumulating innovation capabilities, with a major goal of maximizing original innovation. Accordingly, we define the indigenous innovation path with Chinese characteristics as an innovation process that takes TIM as a guide, portfolio innovation as a platform, absorbs advanced foreign technologies through secondary innovation, achieves technological paradigm breakthroughs through integrated innovation and original innovation, forms technological inventions and applications with IIPR, and creates significant benefits to the economy and society for national development. Deep total innovation requires a well-developed innovation ecosystem and NIS for support. The corporate innovation system has to evolve from a closed R&D system to an innovation ecosystem that enables the integration of various innovation units, resources, and elements to meet the requirements of total innovation with all elements, all employees, and all time and space. In the further construction of NIS, efforts are required to further clarify the functional positioning of various innovation entities, such as enterprises, research institutions, universities, and social organizations; build an open and efficient innovation network; and construct a synergistic innovation platform for military-civilian integration in defense sci-tech. In particular, innovative governance should be improved to further clarify the division of labor between the government and the market to build a mechanism for the coordinated allocation of innovative resources; improve innovation strategies, policy systems to stimulate innovation and legal systems to protect innovation; and build a social environment that encourages innovation to stimulate the vitality of innovation throughout society. Innovation policies are required to be improved in the following aspects for promoting total innovation: ➀ To enhance the government’s leadership in indigenous innovation, especially in ideology, strategy, unified deployment & planning,

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and to build strategic target management and performance assessment incentive system oriented to indigenous innovation according to China’s reality. ➁ To optimize the environment for innovation and entrepreneurship to improve indigenous innovation capabilities of enterprises. ➂ To raise the contribution of universities to indigenous innovation as well as to go forward with the construction of research universities with an entrepreneurial spirit. ➃ To increase national research capacity with a focus on basic research capabilities with public characteristics, R&D capabilities for industrial generic technologies, and engineering research capabilities. ➄ To foster synergistic innovation by building an “industry-university-research” cooperative innovation system with deep cooperation, integration of science & education and synergy. ➅ To accelerate the transfer and transformation of scientific and technological achievements, and further enhance the capability for technology transfer and cooperative innovation among universities, research institutions, and industrial sectors. ➆ To advance policies of the venture capital industry to increase the investment in industries with IIPR and cultivate professional talents for venture capital. ➇ To accelerate the cultivation of high-level innovative talents. These are requirements for total innovation to achieve synergy nationally between institutional innovation and technological innovation.

Chapter 23

Indigenous Innovation Path with Chinese Characteristics Based on Total Innovation

1 Indigenous Innovation: The Core of Quality Improvement for Economic Growth in China Since the founding of the People’s Republic of China, the driving force of China’s economic growth has gone through two transformation phases: from a low-cost labor force to capital accumulation and then to innovation in the knowledge economy. China’s economic growth from 1953 to the Reform and Opening-Up was primarily driven by low-cost labor. Increased capital investment, structural upgrading of the economy, and productivity gains drove China’s economic growth over the 20-year period from 1979 to 1998, allowing for an average annual growth rate of more than 2% points, which is among the highest in the world. As a response to the globalization of the economy and restructuring of global industrial chains, China has become a part of the global division of labor and industrial chains of developed countries, based on its advantages in resources, low cost, huge market potential and industrial supporting capabilities, which has driven the rapid growth of China’s exogenous economy. Given the lack of capital, advanced technology, or the capacity to integrate into the global economy, China embarked on a path of attracting advanced foreign capital elements with low-level domestic elements. As China participates in the global economy, it is increasingly aware of the importance of knowledge and technology for economic growth, and as a result its approach to economic growth starts to change. China shifted its driving force of economic growth to technological innovation in 1999, when the Central Committee of the CPC and the State Council issued the Decision on Strengthening Technological Innovation, Developing High-Tech, and Realizing Industrialization, making it an important task to promote NIS construction. As a result of the financial crisis, issues in the structure of China’s economic development not only cannot be solved by lowering interest rates and expanding domestic demand alone, but also by the increase of investment in technological innovation, the increase in the number and level of specialized technical talents in © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_23

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China, the transformation of the economic growth mode led by institutional improvement and technological innovation, and the cultivation of an endogenous economic growth model. P. Romer developed his model of endogenous growth in the mid1980s, which starts with the endogenization of technology and keeps emphasizing innovation and knowledge growth as the key to long-term economic growth. Smick (2009), in The World Is Curved: Hidden Dangers to the Global Economy, argues that “in the long run, the future of China’s economy depends on neither structural stimuli, nor a strong government push and support for the stock market. Conversely, the future of China depends on innovative ideas and increasing IPR creativity. China can no longer rely on a model that exports cheap products to the world but must rely on a new generation of products and services based on science and innovative ideas.” A great strategy of indigenous innovation was proposed in 2006, which led to a boom in technological innovation. The 18th CPC National Congress further proposed that “science and technology innovation is a strategic support for improving social productivity and comprehensive national power, and must be positioned at the core of the overall national development”. At the Conference of Academicians of the Chinese Academy of Sciences and the Chinese Academy of Engineering in 2014, General Secretary Xi Jinping stressed the need to adhere to the indigenous innovation path with Chinese characteristics and accelerate the implementation of the innovation-driven development strategy. Thanks to the strategic design and effective organization by the Communist Party of the CPC and the government, innovation in China is gaining momentum and receiving widespread attention and full recognition internationally. The growth of R&D investment in China from 2000 to 2013 has kept pace with or slightly higher than that of GDP, with a total social R&D investment accounting for 2.01% of GDP in 2013.➀ As a major player in technological innovation, enterprises’ investment in R&D largely represents innovation activity; R&D expenditure by enterprises in China reached RMB 784.2 billion in 2012, accounting for 76.2% of the total R&D expenditure, an increase of 19.2% over the previous year, which is higher than the increase in R&D expenditure by higher education institutions (13.3%).➁ It fully indicates that the investment activity of R&D in China enterprises is increasing, and a lot of preparations have been made both in the construction of R&D platform and the reserve of researchers, and increasing attention is paid to enhancing the core competitiveness of enterprises through sci-tech innovation. The total number of HR in sci-tech in China and the scale of researchers engaged in R&D activities each year have been ranked top in the world in recent years, and it was an annual average growth rate of 3.7% for global researchers from 2007 to 2011; China kept an average annual growth rate of 13.5% for researchers in the same period, which is the highest growth rate of researchers in the world, with a total of researchers accounting for 25.3% of that of the world, surpassing the U.S. (17% of the global total) to be the first in the world.➂ Total number of researchers in China reached 6.214 million in 2017.➃ As China increases its investment in sci-tech in recent years, it has made remarkable achievements with an increase in the number of patent applications received and

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granted, ranking among the top in the world in terms of patents. Thanks to the accumulation of innovation resources and the transformation of innovation achievements, the contribution rate of China’s sci-tech progress to economic growth has increased from 39% in 2001 to 57.5% in 2017.➄ Enabling the contribution of sci-tech progress to economic growth in a markedly higher degree, and playing a key role in national major projects such as manned spaceflight, deep-sea engineering, high-speed railroads, high-speed computing, and west–east power transmission, etc., China’s hybrid rice, hydropower equipment, high-speed trains, and ultra-high voltage power transmission and transformation to be ranked among the world leaders and to be at the top of the world in the application & innovation capabilities of e-commerce and Internet. China ranked 35th in the Global Innovation Index (GII), jointly released by Cornell University, INSEAD and World Intellectual Property Organization (WIPO) in July 2013, based on data comparing 142 economies, with Switzerland, Sweden, the United Kingdom, the Netherlands and the United States in the top 5. However, the GII ranking ignores the qualitative characteristics of innovation. Studies in this book show that China has significantly improved its innovation competitiveness, with a noticeable narrowed gap between its scores and those of developed countries. For example, China has been ranked top 10 in the world in terms of overall innovation competitiveness, even more so if the huge innovation capabilities of China in hybrid rice, high-speed rail, the internet, electric cars, etc. are taken into account, making China a major innovation power. China has paid continuous attention to innovation capacity-building before the top-level design of policies to promote the implementation of innovative country and innovation-driven development strategy; however, insufficient support for innovation achievements, insufficient motivation of innovation subjects, lack of innovative talents, etc. are hindering indigenous innovation in China, resulting in four major dilemmas that need to be solved in China’s current innovation. Dilemma 1: The status of national competitiveness fails to match that of national innovation capacity, and innovation is still insufficient in driving China’s economic development. ➀ Social R&D expenditure in China exceeds 2% of GDP for the first time, may surpass US by 2022 [EB/OL]. (10–02-2014) [12–01-2018]. https://www.gua ncha.cn/Science/2014_10_24_279207.shtml. ➁ National Bureau of Statistics, Ministry of Science and Technology, Ministry of Finance. Statistical Bulletin of National Science and Technology Investment in 2012 [EB/OL]. (09–26-2013) [12–01-2018] http://www.mof.gov.cn/zhengwuxi nxi/caizhengshuju/201309/t20130926_993359. html. ➂ Researchers of sci-tech in China surpass the US for the first time, ranking top of the world, accounting for 25.3% of the global total [EB/OL]. (09–04-2014) [12–01-2018]. https://www.guancha.cn/Science/2014_09_04_263981.shtml. ➃ Researchers in China exceed 6 million in total [EB/OL]. (09–12-2018) [12–012018]. http://www.xinhuanet.com//fortune/2018-09/12/c_1123420679.html.

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➄ Contribution rate of China’s scientific and technological progress reached 57.5% in 2017 [EB/OL]. (01–10-2018) [2–01-2018]. http://www.cinic.org.cn/xw/tjsj/ 416935.html. Despite the fact that China leads the world in total economic volume, its economic growth is still primarily driven by investment and trade; while a certain amount of national wealth has been accumulated as a result of the rapid growth of total economic volume, it is insufficient for economic quality development; challenges such as environment, resources, and labor cost in sustainable and healthy development will become increasingly serious, resulting in heavy environmental and health losses, and the role of innovation in driving economic development is clearly insufficient. Some dominant industries are heavily dependent on a path driven by production factors and are still struggling to explore a strategic transformation path from “Made in China” to “Created in China”. Many key core technologies have been developed in several industries, such as communication equipment, high-speed railroads, and hydropower equipment, etc., by which international competitiveness has been achieved, however, in terms of industrial chains and related industrial development, major original innovation achievements are still insufficient, which is less than obvious in terms of economic breakthroughs and driving effects. The central government-owned enterprises, the foundation of the national economy, saw over 20% for average annual growth in sci-tech investment, and over 40% for average annual growth in patents granted from 2006 to 2012, however, they are still lacking breakthroughs in the process of steadily improving their sci-tech innovation capabilities to lead the development. Dilemma 2: The improvement of innovation capabilities is far from enough, despite the continuous improvement of the social environment to encourage innovation and the increase of innovation investment year by year. The environment for innovation has been continuously improved and resources for innovation have been further accumulated as the country and localities vigorously implement the innovation-driven development strategy and vigorously encourage sci-tech innovation and investment; however, the rate of improvement and room for growth of China’s enterprises’ innovation capacity are still limited from an overall perspective, which is not in line with the urgency of promoting the construction of an innovative country. Enterprises in China, excluding a few outstanding innovative enterprises such as Huawei, Haier, China Electronics Technology Group, CSR (now merged with the CNR to form the CRRC), Alibaba, and Baidu, etc., suffer from a weak resource base for innovation investment, limited space for accommodating innovation failure, and insufficient confidence in R&D investment in core technologies. The path of the corporate innovation system and capacity building is still unclear, for which insufficient attention has been paid, so the innovation capability of Chinese enterprises for original innovation and core technology is in urgent need of improvement. Dilemma 3: Although total human resources in sci-tech rank the first in the world, the per capita output efficiency is far behind that of developed countries, with a shortage of high-end innovative talents.

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In 2012, the GDP per labor (in purchasing power parity) was US$15,868, ranking 57th, while the GDP per labor in agriculture, industry, and service sectors were US$4,263.4, US$23,344.4, and US$17,942.3 respectively, ranking 55th, 55th, and 56th. The number of researchers per 10,000 labor force in China is 38, which is much lower than that in Japan (133 per 10,000), South Korea (135 per 10,000), Germany (132 per 10,000), and Russia (111 per 10,000). China ranked 34th in workforce efficiency and only 70th in quality of higher education in the 2013 Global Competitiveness Report published by the World Economic Forum (WEF). Just 10% of China’s graduates in engineering and finance are worthy to be employed by global enterprises, and less than 20% of local MBA graduates are capable of management, according to McKinsey’s Emerging Markets Talent Report. For example, 65% of the total revenue of the IT service industry in China comes from the low-value-added Japanese market due to a lack of innovative talents, while the revenue of high-valueadded multinational services just accounts for 10% of the total revenue, compared to 75% in India. The shortage of high-end innovative talents is the bottleneck that restricts innovation. ➁ Dilemma 4: Problems such as scattered innovation resources and inefficiency of innovation are in urgent need of solutions. NIS theory suggests that the strength of a single innovation player is not sufficient for ensuring a high innovation efficiency of the whole innovation system, but only when the players are widely connected and interact. The long-standing pattern of separate construction and decentralized management for innovation by various ministries and commissions has resulted in a lack of systematic design and unified planning for innovation as a whole. Such as basic and applied research, each department is equipped with its own key laboratories; as for engineering technology, there are National Engineering Technology Research Center, National Engineering Research Center, National Engineering Laboratory, etc. Constructions of innovation bases in the same type by multiple departments fragment the limited science and technology resources, resulting in weakened innovation capability and increased coordination costs in some innovation bases. Besides, the sectoral interests have caused problems of management coordination in the evaluation, input, regulation and constraint of innovation bases, resulting in the deviation of the proper public interest and public nature, the decline of public sci-tech capacity, and the inefficiency of resource allocation. As an influential organization in the NIS, an innovation base is a long-term object of continuous national investment, so it is more important to emphasize openness and public welfare, i.e., to enhance capacity through open innovation and to diffuse technology to other innovation entities to achieve public welfare. However, the innovation bases in China are still relatively closed to each other, among which effective connections are unavailable, followed by insufficient knowledge flow, personnel flow, and result transformation. Major innovation bases (including the National Laboratory, National Key Laboratory, National Engineering Laboratory, National Engineering Technology Center, and State Key Laboratory of Enterprise) are still quite far behind developed countries in terms of staff scale, leadership capability, innovation capability, public welfare, comprehensiveness, and openness, etc. Resource pooling is especially important, given the current premise

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that large-scale science and technology innovation needs to be organized and implemented on a larger scale and in groups. However, part of the innovation bases has not been able to independently undertake major research tasks that require crossdisciplinary, cross-industry, and cross-disciplinary organizations. Therefore, laboratories or engineering centers in a single discipline or subdivision of industry are not capable of taking up the important role of industrial technology innovation for leading industries with more complex technologies, higher system integration and longer industrial chains, such as automobiles, aircraft, and ship-building, etc. ➀ Per labor, GDP refers to the GDP created per unit of labor, i.e., total GDP divided by total employed population. ➁ First BLUE BOOK OF NATIONAL INNOVATION (2014) [EB/OL]. (09–012014) [12–01-2018], http://news.china.com.cn/rollnews/news/live/2014–09/01/ content_28525924.html.

2 Essence of an Indigenous Innovation Path Based on Total Innovation Comrade Hu Jintao elaborated on the comprehensive connotation of the Indigenous Innovation Strategy at the National Conference on Science and Technology in early 2006: “to build an innovative country, its core lies in boosting indigenous innovation capacity as the strategic base for development in science and technology, for which to realizing leapfrog development via an indigenous innovation path with Chinese characteristics; to treat enhancement of indigenous innovation capacity as the central link in adjusting the industrial structure and transforming the growth model to build a resource-saving and environment-friendly society and speed up the national economy both in quantity and quality; to boost indigenous innovation capacity as a national strategy, which will be conducted through every aspect of modernization, to inspire the spirit of national innovation, to cultivate high-level innovative talents, to form an institutional mechanism conducive to indigenous innovation, to vigorously promote innovation in theory, system, sci-tech, thus continuously consolidating and developing the great cause of socialism with Chinese characteristics.” Since the 18th CPC National Congress, Comrade Xi Jinping has made innovation a central position in the overall development of China, attached great importance to science and technology innovation, and put forward a series of new ideas, new assertions, and new requirements around the implementation of the innovation-driven development strategy and acceleration of total innovation with sci-tech innovation as the core. Excerpts from Xi Jinping’s Discourse on Science and Technology Innovation were published by Central Party Literature Press in January 2016. Publication of this book is of great significance for realizing the Two Centenary Goals and the Chinese Dream by adopting and leading the new normal of China’s economic development, enabling science and technology innovation to perform as a leading role in total innovation, to accelerate the formation of an economic system and development model led and supported mainly by innovation. Development of sci-tech innovation

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has been a topic attracting common attention in face of the new trends and characteristics under the new normal of economic development and the historical task and requirements of realizing the Two Centenary Goals. “Innovation is the soul of a nation’s progress and the inexhaustible power of a country’s prosperity.” Sci-tech innovation is strategic support for improving social productivity and comprehensive national power and has been a common choice for many governments around the world. An acceleration of the shift from factor-driven to innovation-driven development is required to give full play to the leading role of sci-tech innovation and promote quality, effective and sustainable development given new situations and challenges. Sci-tech innovation is fundamental to the shift from a factor-driven path to an innovation-driven one. Sci-tech innovation is the “primary driving force” of economic transformation & upgrading, and improvement of quality & effectiveness.” The Chinese government implements indigenous innovation as a national policy. So, what exactly is it? What are its major characteristics? The concept of indigenous innovation is diverse, but in general, it can be defined on macro and micro levels, including national indigenous innovation and enterprise indigenous innovation. In micro terms, indigenous innovation by enterprises is characterized by the endogeneity of technological breakthroughs, technological & market leadership, intrinsic knowledge & capability support, etc. Essentially, core technologies required for indigenous innovation come from technological breakthroughs within enterprises, which are acquired via independent R&D activities by enterprises (Longcan 2006). National indigenous innovation refers to the innovation characteristics and development path of a country’s industrial technology from the view of national strategy, specifically, technological innovation activities of a country without relying on external technology imports, but its capability to conduct technological innovation independently. It is generally agreed that indigenous innovation covers three aspects: (1) Set up original innovation for more scientific discoveries and technological inventions; (2) strengthen the integrated innovation, so as to enable an organic integration of various related technologies to form products & industries with market competitiveness; (3) Promote the re-innovation based on absorbing advances in foreign science and technologies. We believe that the concept of indigenous innovation in a general sense is logically flawed, i.e., the three aspects of indigenous innovation are not juxtaposed. We believe that re-innovation and integrated innovation are key tools for latecomers to accumulate innovation capabilities, and to maximize original innovation. These three aspects are different in status. The primary purposes of innovation are to enhance the country’s indigenous innovation capacity, to break through the original technology paradigm, to break away from the control of technology exporting countries, to upgrade the country’s economic growth model, and to create more value during the implementation of the indigenous innovation policy; where original innovation is a major means to achieve the technological paradigm breakthrough, thus original innovation ranks as the most important, for which the re-innovation and integrated innovation will be tools.

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Similarly, Chinese enterprises experience an innovation path from re-innovation based on absorbing advances from imported advanced technologies, to integrated innovation emphasizing the integration of various technologies, and to original indigenous innovation with Chinese characteristics. A “3 ‘i’ model” (i.e., imitation-improvement-innovation) is adopted for the reinnovation model of Chinese enterprises. Two types are included in this model: (1) Learn advanced technology through imitation of imported ones; (2) enable it to be adapted to the Chinese market by improving the production process or products, and transform technologies based on domestication improvements in line with national conditions to ultimately achieve reinvention based on absorption. BOE is typical in achieving the re-innovation based on absorbing advances from foreign science and technology. BOE, founded in April 1993, is a leading global provider of semiconductor display technology, products, and services. BOE covered 39% of starting products worldwide in 2015, with 6,156 new patent applications and over 40,000 available patents, ranking among the top in the industry globally. BOE achieves technology imports via early technology M&A, absorbs them based on import and imitation, adapts them to the domestic market and achieves collaborative innovation. Specifically, BOE’s re-innovation on the basis of absorbing advances in overseas science and technology can come in three stages: Imitation stage (1993– 2003) based on technology M&A and production line imitation; Improvement stage (2004–2010) based on domestic market improvement and independent construction; and Innovation stage (2011-present) focusing on technology alliances, cooperative innovation, and development of international leading products (see Fig. 1). The key to BOE’s success in achieving innovation from imitation rather than falling into a circle of “import-failure in absorption-failure in innovation-reimport”

Innovation

Improvement Imitation-based development of AFFS technology

Imitation Technology M&A of TFTLCD business of Hyundai, Korea Imitation of Production Line

1993-2003

Improvements in line with the domestic market Self-constructed 5th generation production line

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Beijing 8.5-g production line opens an era of large-size LCDs Technology alliance with IBM 5 overseas R&D centers for collaborative innovation International leadership in high-performance display products of small and medium size

2011

-Present

Fig. 1 BOE’s road of re-innovation based on absorbing advances in overseas science and technology

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is: (1) ensuring heavy R&D investment; (2) engaging in strategic emerging industries and receiving significant support from the government; (3) driving upstream manufacturers to co-innovate in addition to development; (4) focusing on “learning by doing”; (5) attaching great importance to HR training; (6) emphasizing learning and “industry-university-research” cooperation during technology M&A process. During the process of integrated innovation, which emphasizes the organic integration of various related technologies, Chinese enterprises pay attention to knowledge integration and organizational integration (Jin 1999) as aspects of integrated innovation that cannot be ignored based on technology integration (Iansiti et al. 2004), which enables enterprises to establish their knowledge base via systematic integration of knowledge resources & activities and realize effective cross-departmental communication. CRS ZHUZHOU ELECTRIC LOCOMOTIVE RESEARCH INTITUTE, a typical representative of integrated innovation, that is worthy of attention and has an innovation model that is market-oriented and driven by open technology. CRS ZHUZHOU ELECTRIC LOCOMOTIVE RESEARCH INTITUTE, founded in 1959, is a professional research institution under the Ministry of Railways. The leading high sci-tech industry group of CRS achieved revenue of RMB 30 billion in 2015, enabling CRS ZHUZHOU ELECTRIC LOCOMOTIVE RESEARCH INTITUTE to be a driver of core technology for China’s high-speed rail. In terms of technology integration, CRS ZHUZHOU ELECTRIC LOCOMOTIVE RESEARCH INTITUTE emphasizes the centrality of scientific research. CRS ZHUZHOU ELECTRIC LOCOMOTIVE RESEARCH INTITUTE has insisted on investing 7%-8% of its sales revenue in scientific research in recent years, which is two to three times the average level of the sector. Moreover, CRS ZHUZHOU ELECTRIC LOCOMOTIVE RESEARCH INTITUTE emphasizes technology-driven innovation, i.e., an integration of multiple existing technologies is highlighted throughout the scitech innovation, from idea & opportunity development to new product & technology development, and then to technology application & diffusion. In terms of knowledge integration, CRS ZHUZHOU ELECTRIC LOCOMOTIVE RESEARCH INTITUTE has achieved effective knowledge flow and application among departments through a rapid summary of new knowledge generated in culture, system, planning and design, and cross-departmental learning. As for organizational integration, CRS ZHUZHOU ELECTRIC LOCOMOTIVE RESEARCH INTITUTE emphasizes the establishment of a closed-loop ecosystem from manufacturing, design to product, the full utilization of advantages of systematic cooperation and integration among various departments within the organization. In terms of original indigenous innovation, only a minority of enterprises are capable of realizing breakthroughs and original innovation from scratch, while the majority of enterprises merely improve on foreign advanced technologies. iFLYTEK is typical among them. iFLYTEK, founded in 1999, is a leader in China’s intelligent voice and AI. It is also the only national “863 Program” industrialization base with speech technology as the direction of industrialization, a key software enterprise within the national planning layout, and a national high-tech industrialization demonstration project,

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and has been identified by the former Ministry of Information Industry as the leader of the Chinese Speech Interaction Technology Standard Group to take the lead in formulating Chinese speech technology standards. iFLYTEK has won two National Science and Technology Awards in 2003 and 2011 for groundbreaking and original indigenous innovation. As for the indigenous innovation, iFLYTEK goes through three phases: (1) Policy Support Phase from its early set up as a national “863 Program” fruit industrialization base to 2004, during which iFLYTEK built labs jointly with the University of Science and Technology of China and Chinese Academy of Social Sciences, thus the strategy of integrating core resources came to fruition; (2) Basic Research Layout Phase from 2005 when iFLYTEK established its research institution to 2008, during which iFLYTEK’s basic research entered a golden period, i.e., patent applications were filed based on the accumulation of academic research in the early stage, and papers publication peaked in 2008, thus enabling iFLYTEK to realize mature intelligent voice technology and complete basic research layout; (3) A blowout in patents since 2008. Thanks to its initial investment in basic research, iFLYTEK enjoyed rapid growth in patents and technology during this phase. Specifically, four factors contribute to iFLYTEK’s success in achieving a breakthrough and original indigenous innovation: (1) pioneer basic research; (2) focus on the core capability of speech recognition; (3) highlight “industry-university-research” cooperation; and (4) set standards based on its industry status, thus being a leader in the intelligent speech industry. However, China’s current overemphasis on integration and re-innovation makes it difficult to shift away from the notion that technological innovation in China is found in the application of technology in developed Western countries. China is ranked 33rd, a lower level, in innovation and international competitiveness by the Information Technology & Innovation Foundation (ITIF), a non-partisan think tank in Washington, D.C. China scores 36 points, which is 37.4 points lower than Singapore (73.4 points), the first country in this category, using the US and EU as benchmarks. It suggests that the share of innovations in China remains far from being significant in terms of its economy, although considerable modernization and technological development have enabled the country to build up some innovation capacity over the past decade. Attraction of China to other countries lies primarily in low cost, rather than innovative infrastructure. This case will go on unless China makes a major upgrade in sectoral productivity, according to ITIF scholars. More efforts are required for China to become the world’s leading player in the knowledge and innovation economy. A projection by Chen Jin et al. (2009) on innovation capacities of China and OECD members such as the United States, Japan, etc. based on three indicators: innovation capital investment, talent investment, and innovation output, found that by 2020, China’s innovation investment would exceed that of developed countries such as the United States, Japan, etc., but its innovation output would lag significantly behind that of those. We believe that indigenous innovation in China is a process of evolution from secondary innovation to portfolio innovation and finally to total innovation.

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2.1 Secondary Innovation Innovation along the established technological trajectory, based on imported technology and existing technological paradigm, i.e., secondary innovation, which is a shortcut for the technologically late developing countries to catch up with advanced countries. Secondary innovation enables technology latecomers to gain a noticeable “latecomer advantage,” i.e., to gain years of experience and knowledge from technology exporting countries at a short notice, save R&D costs (especially basic research costs), reduce the risks and uncertainties of developing new markets, and save market development costs. The latecomer advantage comes mainly from the relatively high productivity and low costs resulting from the adoption of new production equipment and technologies. Secondary innovation requires substantial investment as well as highly qualified talent. Secondary innovation at any level is not a breakthrough from the original technology approach. Technological latecomers seek to become global technology leaders by catching up with advanced technology via secondary innovation activities on their original technology trajectories. But the “latecomer advantage” of technology latecomers will turn into a “latecomer disadvantage” when new technologies emerge that break original technological paradigms, resulting in a complete failure to generate new benefits from investments in original technologies (Wu Xiaobo et al., 1995). A new round of “secondary innovation”, i.e., import and absorb advanced technologies, will take place in tech-advanced countries that lack basic research strength, no matter how advanced they are. Therefore, secondary innovation cannot enable a country to be a “technology exporter” in a real sense. Efforts must be made to explore new ways of innovation to continue the breakthrough based on the absorption of new technologies and the accumulation of certain technological capabilities.

2.2 Portfolio Innovation Latecomer advantages brought by secondary innovation for enterprises are increasingly less effective as a result of economic development and increasingly fierce competition as well as the shortening of the technology lifecycle (TLC), which will eventually lead enterprises into a vicious cycle of “import-absorb-catch uplag-import”. Secondary innovation alone cannot any longer meet the needs of the sustainable development of enterprises. So, enterprises must focus on the combination of secondary innovation with innovations in other forms; Bin, Qingrui et al. (1997) proposed portfolio innovation accordingly. They argued that portfolio innovation refers to the systematic synergistic innovation behavior guided by enterprises’ development strategies and constrained by organizational & technological factors, with a focus on the portfolio of incremental innovation vs. major innovation, product

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innovation vs. process innovation, technology innovation vs. cultural and organizational innovation, and technology innovation vs. strategic innovation (Qingrui et al. 1997). From the technological steps of developed countries all over the world, it can be seen that almost no country has failed to pay attention to the synchronization of product and process development in the process of economic growth. A study of industrial innovation in Japan and the United States found that the emphasis on process innovation is the primary driver of Japan’s rapid economic growth. Coordination of product and process innovation is the fundamental level of enterprise portfolio innovation and the foundation for achieving corresponding benefits. It has a direct impact on the technological and production efficiency of enterprises, which determines their competitiveness. Portfolio innovation has changed the traditional technology management mindset that just focuses on individual innovation, product innovation, major innovation and mere technological innovation, and started to organize and coordinate technology innovation activities from a systemic perspective, strategic & institutional level, and dynamic operation of innovation stages. Portfolio innovation is a dynamic process in which the organizational structure, organizational culture, and information flow networks of enterprises are constantly and dynamically adjusted to maximize the efficiency of innovation, and its effective implementation requires the synergy of strategic, organizational, financial, and cultural elements within enterprises. Core competencies and portfolio innovation are interdependent and intertwined in a competency-based portfolio innovation paradigm. Portfolio innovation can be used by enterprises to cultivate and enhance core competencies that can be translated into market advantages. Sany Heavy Industry Co., Ltd. (“Sany” for short) adopts an “unconventional innovation route” based on the triad of service innovation, conceptual innovation, and technological innovation in accordance with its development strategy to conduct integrated and coordinated innovation of technology and non-technology. Innovation in concept is the forerunner. “ Value Creation for Customers” is the core of the service concept of Sany, which forms IIPR based on the integration of existing advanced background technology and reaches the international level. Sany introduces the 4008call service system in service, as well as the concept of the “6S” store in China’s construction machinery industry.

2.3 Total Innovation The changing environment, increasing competition, and diversifying customer demands require enterprises to compete on all fronts and to respond to the full range of customer demands faster than their competitors. It requires enterprise to make effort not only for technological innovation but also for total, systematic and sustainable innovation with the former as the core.

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Xu Qingrui et al. of Zhejiang University have been exploring the laws of total innovation since 1998; they point out, based on the latest innovation theories at home and abroad and the lessons learned from the successes and failures of a large number of enterprises in China, that total innovation-oriented by enterprise strategy is required to cultivate and improve the technological innovation capability so as to adapt to the changes in the environment. The concept and theoretical framework of TIM were formally proposed by Xu Qingrui et al. in 2002, which has attracted widespread attention from scholars in China and abroad. General Secretary Xi Jinping pointed out: “the competition of comprehensive national power is, in the final analysis, the competition of innovation. The strategy of innovation-driven development should be thoroughly implemented to boost innovations in sci-tech, industry, enterprises, markets, products, business models and management, etc., so as to accelerate the formation of an economic system and development model with innovation as a major orientation and support.” Thus, the key for China to step up from being a large innovation country to power lies in implementing the strategy of innovation-driven development, for which the integration of innovations in theory, system, sci-tech and culture is inevitable. Theoretical innovation based on practice is the precursor of social development and reform; institutional innovation is a major guarantee for all other innovations; sci-tech innovation is the core of national competitiveness; great efforts in promoting cultural innovation are necessary for prosperity and development of advanced socialist culture. Solutions for challenges in the development of China require a development philosophy of innovation, coordination, green, openness, and sharing, adherence to the strategy of innovation-driven development, and integrated innovation, thereby enabling an advantage to be built for securing a decisive victory in building a moderately prosperous society in all respects. Therefore, the total innovation in all fields, such as theory, sci-tech, institution, and culture, etc., should be promoted under the framework of TIM and guided by the development concepts of innovation, coordination, green, openness, and sharing advocated by the State, so that innovation can permeate all the work of the Party and the State and be a popular trend throughout the society. 1. Theoretical innovation provides theoretical guidance for implementing the strategy of innovation-driven development The miracle of China’s rapid growth in economy cannot be separated from its insistence on development. Today, the international situation continues to undergo profound and complex changes, such as multi-polarization of the world, deepening of economic globalization, cultural diversification and continuous advancement of social informatization. China must avoid falling into the trap of middle-income countries by adapting to and leading the new normal of economic development. This process requires new rational analysis & answers to new cases & problems, new revelation & foresight to the essence & laws & trends for development & changes of objects of knowledge or practice, and new rational sublimation of human historical & real experiences, which means theoretical innovation in line with the times is required

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to provide theoretical guidance for implementing the strategy of innovation-driven development. 2. Institutional innovation is a guarantee for sci-tech innovation and all other innovations, and enables the vitality of all kinds of innovation players, and is also the key to orienting economic and social development The core of institutional innovation is national governance innovation, which advances the modernization of the national governance system and governance capacity to form an institutional mechanism conducive to innovation and development. Presently, sci-tech innovation has and faces many issues in institutions, mechanisms, policies, and regulations, etc., solutions for which rely on institutional innovation. It is necessary to establish an institutional environment that effectively shares innovation risks, further the transformation of government functions and policy innovation, give full play to the decisive role of the market in stimulating innovation, perform more effectively the government’s role in supporting high-risk innovation activities, and improve the rule of law and policy environment in which government and the market effectively complement each other, so as to promote the smooth implementation of the innovation-driven development strategy. 3. Sci-tech innovation is a major choice for China to meet future challenges, a strategic thread that will lead China’s future sci-tech development, and a fundamental way to implement the innovation-driven strategy Enterprises are subject to sci-tech innovation; however, their innovation capability is still far from sufficient. It has conducted improvement for innovation environment and further accumulation & amplification for innovation resources as China and its local governments vigorously implement innovation-driven development strategy, encourage sci-tech innovation and increase sci-tech investment. However, China suffers from a slow pace of improvement in the innovation capability of enterprises, and fewer innovative leading enterprises with international competitiveness, which is not in line with the urgency of promoting the construction of an innovative country and is not conducive to the effective promotion of the innovation-driven development strategy. Therefore, it is necessary to allocate more prominence to sci-tech innovation in important fields, implement many major sci-tech projects of long-term significance that are related to overall national conditions, and cultivate products, enterprises and industries with international competitiveness via sci-tech innovation. 4. Cultural innovation is a guarantee of a nation’s vitality and cohesion, and a guarantee for implementing the strategy of innovation-driven development Today, cultural innovation in China suffers from a lack of systematization, a lack of awareness about the importance of cultural innovation, and a lack of inheritance and promotion of traditional Chinese innovation culture and spirit. Also, it suffers from a lack of interest from society in cultural innovation, a lack of enthusiasm from the people to participate in innovation, and a lack of support and promotion by cultural innovation for innovations in other aspects. Only cultural innovation based

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on inheritance will contribute to the prosperity and development of advanced socialist culture, and enable and guarantee the smooth implementation of sci-tech and other innovations. 5. Integration of theoretical innovation, institutional innovation, sci-tech innovation, and cultural innovation Theoretical innovation belongs to a basic innovation, which is the precursor of social development and reform, as well as the ideological soul and source of guidance for other innovations. Institutional innovation is a guarantee innovation, which is the power source to stimulate the creativity and enthusiasm of all kinds of innovation players, and a guarantee to promote the implementation of innovation-driven development strategy and modernization of national governance. Sci-tech innovation is a decisive innovation, which is the primary purpose of other innovations and is central to enhancing national competitiveness and promoting economic & social development. Cultural innovation is a supportive innovation, which is a guarantee of a nation’s perpetual vitality and cohesion, and a requirement for the prosperity and development of advanced socialist culture. It is the integration of theoretical innovation, institutional innovation, sci-tech innovation and cultural innovation that will facilitate the smooth implementation of the innovation-driven development strategy. Theoretical innovation based on practice is the precursor of social development and reform, as well as the core and soul of promoting institutional innovation, sci-tech innovation, cultural innovation and innovations in all other aspects. As Comrade Xi Jinping stresses, “The key to the Communist Party of the CPC‘s capacity to success through trials and tribulations lies in its continuous theoretical innovation based on practical innovation”. Theoretical innovation in combination with China’s new normal economy can bring about a profound revolution in China’s productive forces vs production relations, economic foundation vs superstructure, promote China’s sustainable and healthy development of economy and society, and play a leading and promoting role in new advances in socialism with Chinese characteristics. It also requires keeping pace with the new normal economy of China, and to keep on innovating with the times due to the practical and open nature of theoretical innovations. History fully illustrates that theoretical innovation has a significant pioneering role in practical innovation, as each significant theoretical innovation would promote economic and social development and achieve a new historical leap. Institutional innovation is a guarantee for sci-tech innovation and innovations of all other aspects, i.e., the government acts as a major player in designing systems and institutional mechanisms that are conducive to deepening reform, expanding openness, promoting innovation and entrepreneurship, and building a beautiful China. Theoretical innovation, sci-tech innovation, and cultural innovation all rely on the accumulation and continuous stimulation of institutional innovation to be consolidated and continue to play their institutional roles. Facilitation to implementation of the innovation-driven development strategy requires structural reform and innovation to further streamline the government, delegate power, and improve government services, as well as to upgrade the supply of entrepreneurship and innovation systems and improve related laws and regulations, support policies and incentives.

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Therefore, efforts should be made to deepen the reform of the sci-tech innovation system, improve the level playing field of the market, deepen reform of the business system, optimize the allocation of public innovation resources, strengthen the institutional protection of IPR and technology trading, improve the mechanism for cultivation and flow of innovative talents, increase financial support for innovation & entrepreneurship, strengthen investment & financing support for entrepreneurship, and improve the synergistic innovation system with “industry-university-research” as the core. Institutional Economics Theory suggests that institutions are set up in line with real-life needs and are constantly adjusted to changes in the environment so that a complete institutional system can be formed to facilitate the modernization of the national system. Sci-tech innovation is the core of national competitiveness, a major choice for China to meet future challenges, a strategic thread that will guide sci-tech development in the future, and a fundamental way to implement the innovation-driven strategy. The role of enterprises acting as major players in innovation must be adhered to in order to implement the innovation-driven development strategy, transform innovation results into productivity and turn innovation results into tangible industrial activities. The pioneering role of SOEs during sci-tech innovation requires the integration of SOEs, especially central government-owned enterprises, into the NIS, so that major strategic, cutting-edge, and fundamental innovation projects are undertaken and completed by SOEs. Consolidation and development of continuous innovation in terms of policy, organization, system, and law, etc., including the establishment of a special fund by central government-owned enterprises for technological innovation, the establishment of enterprise research institutions and enterprise engineering research centers based on enterprise technology centers, etc., the cultivation, introduction and development of a multidisciplinary and hierarchical team consisting of innovative talents, and the formation of innovation teams with crossover and breakthrough capabilities. Efforts should be directed at supporting a group of innovative leading enterprises with international competitiveness and building crossorganizational or border-less innovation networks to promote cross-sectoral and industry synergistic innovation, thereby fostering and developing high-end industries with competitive advantages to forming a new driving force for China’s economy. Inherently innovation-driven is indigenous innovation. The high-end technologies, core technologies and key technologies that China needs cannot be acquired by purchase, nor through cooperation, but only by breakthroughs in the field of key core technologies as enterprises, targeting the world’s leading sci-tech fields and top levels, get major innovations in basic sci-tech fields. Comprehensive, coordinated, and sustainable economic and social development, as well as the continuous improvement of comprehensive national power, can only be realized by fully utilizing the supporting and leading role of enterprises’ sci-tech innovation in the economy and society, as well as significantly improving enterprises’ and China’s original innovation capability. As for the essence of cultural development, it lies in cultural innovation. Cultural innovation comes from social practice and in turn provides guidance and constraints to the development of the latter. Meanwhile, cultural innovation is also an inevitable

2 Essence of an Indigenous Innovation Path Based on Total Innovation Fig. 2 Connotation of indigenous innovation path

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TIM

Portfolio Innovation Absorb advances from foreign science and technologies

Indigenous R&D

Secondary Innovation

Integrated Innovation

requirement for the development of social practice and intrinsic motivation for the advancement of culture. Only cultural innovation based on inheritance will contribute to the prosperity and development of advanced socialist culture, so the traditional innovative culture and innovative spirit such as “the pioneering and enterprising spirit”, and “constant self-improvement” should be vigorously promoted, based on which to form a favorable development situation in which the whole society cares about and participates in innovation, and to build a cultural innovation system with Chinese characteristics. Development of culture requires the support of sci-tech, innovation of the latter plays an important catalytic role in the evolution of social and cultural forms, while the innovation of the former holds an important role in supporting and facilitating the process of sci-tech innovation. Therefore, deep integration between cultural innovation and sci-tech innovation should be promoted in theoretical exploration and concrete practice to carry forward the excellent cultural traditions of the Chinese nation, actively innovate in content and form to foster a new glory of Chinese national culture. Here, the Indigenous Innovation Road is defined as an innovation process that takes TIM as a guide, portfolio innovation as a platform, absorbs advanced foreign technologies through secondary innovation, and achieves breakthroughs in technological paradigms via integrated innovation, thereby forming technological inventions and applications with IIPR and creating significant benefits in economy and society for national development (see Fig. 2).

Chapter 24

Enterprise Innovation Ecosystem and NIS for Total Innovation

1 Enterprise Innovation Ecosystem Schumpeter was the first to systematically define Innovation in 1912. Innovation is considered to be a one-way, progressive, linear process that begins with basic research and progresses through applied research, design and prototyping, manufacturing, and marketing, etc. However, innovation is not a simple linear process, but a multifaceted process that combines complex and inter-factor feedback mechanisms, thus the Systemic Innovation theory (Freeman, 1987a; Lundvall, 2009; Chen, 1999) and the Total Innovation theory (Xu, 2004) emerged. The concept of Systematics was first introduced in the field of biology by the biologist Bertalanffy in 1952 in his “Systematics of Antibodies” and has since been introduced into the field of innovation. Freeman (1988, 1995), Lundvall (1992), and Nelson (1993) proposed the concept of the National Innovation System (NIS), and thereafter Regional Systems of Innovation (Cooke, 1992; Cooke et al., 2004), Sectoral Systems of Innovation (Malerba, 1996, 2002) and Firm Innovation System (Chen, 1996; Liang et al., 2014) have been proposed (see Fig. 1). Prior to the 1980s, enterprises were usually in competition with each other, but as a result of a knowledge-based economy, the advent of the big data era, and the increasing individualization of product demand, the business environment has become increasingly complex and volatile, requiring enterprises to re-examine their values, social responsibilities, and sustainability issues, thus further challenging the traditional corporate innovation system. The theory of innovation is further refined by the introduction of a Business Ecosystem Theory (Moore, 1993, 1996) and an Open Innovation Theory (Chesbrough, 2003a). In terms of evolution, 5 generations of models for the technological innovation process are proposed: G1, the technology-driven model (1950s to mid-1960s); G2, the market-pull model (1960s to 1970s); G3, coupled technology-market interaction model (late 1970s to mid-1980s); G4, integration (parallel) model (early 1980s to early 1990s); and G5, system integration and networking model (1990s). The model © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_24

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24 Enterprise Innovation Ecosystem and NIS for Total Innovation National Innovation System (NIS) Reginal Innovation System (RIS) Sectoral Innovation System

Enterprise Innovation System

Fig. 1 Evolution path of innovation system

has since been refined and developed into G6, i.e., the National Innovation System, NIS (21st Century). A three-generation model for the evolution of the enterprise innovation ecosystem for total innovation is presented in this book, as described below. 1. G1: An Internal R&D-centered Innovation System Thanks to developments in new technologies such as materials technology, biotechnology and electronic information technology in the 1950s and 1960s, the status and role of science and technology in innovation were recognized, followed by the internal R&D system of enterprises representing the corporate innovation system, such as the Palo Alto Research Center (PARC) of Xerox, Bell Labs of AT&T, and T. J. Watson Laboratories of IBM. Enterprises conduct R&D in-house for technological breakthroughs, design and develop new products, prototype, manufacture, and bring them to market through internal channels, as well as provide services and technical support, thus holding the market by technology. Strict patent control over all key elements is enforced to enable in-house R&D dominance to be a barrier in technology against entry by competitors. The corporate innovation system is considered to be a valuable strategic asset and a reliable guarantee for enterprises, which can ensure technology confidentiality and technology exclusivity, thus enabling enterprises to maintain technological leadership, a key factor for enterprises to enhance their core competitiveness and maintain their competitive advantage, and even a great obstacle for competitors to enter many markets (Chen Jin et al., 2007). It is characterized by tight control and vertical integration of innovation, which is a closed indigenous innovation model. The corporate innovation system in this context is called an internal R&D-centered innovation system, with an underlying idea that more R&D means more innovation (see Fig. 2). It is a period when the role of the market in enterprise innovation has not been taken seriously, nor have enterprises fully recognized the

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Development

Market

Enterprises

Fig. 2 An internal R&D-centered innovation system

importance of breaking down enterprise boundaries to initiate external cooperation for their innovation. The internal R&D-centered innovation system lays a solid foundation for the improvement of enterprises’ innovation capabilities. For example, Sany and CSR pay great attention to their construction of an internal R&D system. Sany has established a global R&D system structure based on the idea of a “specialized layout with multi-location distribution”, with research academies and institutions as major institutions, and over 30 specialized research academies set up by various business divisions, which are engaged in the R&D of various products. Under each academy, 221 research institutes have been established according to different specialties. The General Research Academy is set up in the headquarters to unify the public business management of R&D projects, patents, technical standards, testing & inspection, and industrial design, etc., thus forming a dual-track matrix R&D management model combining vertical management of business divisions and horizontal management of the General Research Academy, which realizes effective allocation of innovation resources and ensures high efficiency of R&D innovation. Based on the research academies and institutes, Sany has built a cluster sci-tech platform, consisting of 1 national enterprise technology center, 3 provincial enterprises technology centers, 3 engineering technology research centers, 2 post-doctoral research stations, and 2 academician (expert) workstations, etc. It enables the synergy design of 32 research academies around the world; innovation knowledge sharing and R&D digital management are realized through the establishment of the industry’s first “sci-tech information port” and R&D management systems such as R&D project management platform, standardization information management platform, and patent application management platform. CSR Group gives full play to its advantages in mechanism, talents, technology and capital to build a joint R&D fleet and continuously support technological innovation. CSR’s R&D system is centered on the Central Research Academy of CSR

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Central Research Academy

Technical Research Department

Economic Research Department

Overseas R&D Institutions

R&D Institutions at National Level

Enterprise Technology Center at National Level

Sci-Tech Management Department

R&D Institutions at Provincial Level

Enterprise Technology Center at Provincial Level

Postdoctoral Workstation

R&D Center for Industrial Power Electronics (USA)

Engineering Technology Research Center for High-speed Train Assembly

Technology Center of CRS Zhuzhou Locomotive CO.,Ltd.

Jiangsu Provincial Engineering Technology Research Center for Rail Transit Traction Power Equipment

Technology Center of CRS YANGTZE CO., LTD

CRS Zhuzhou Locomotive CO.,Ltd.

R&D Center for High Power Semiconductors (UK)

National Engineering Laboratory for High-speed Train System Integration

Technology Center of CRS ZIYANG CO., LTD.

Sichuan Province Engineering Technology Research Center for Rail Transit Braking

Technology Center of CRS Sifang Co., Ltd.

CRS ZIYANG CO., LTD.

National Engineering Research Center for Variable Flow Technology

Technology Center of CRS QISHUYAN CO., LTD.

Engineering Technology Research Center for Locomotive and Rolling Stock in Henan Province

Technology Center of CRS YANGTZE CO., LTD

Technology Center of CRS YANGTZE CO., LTD

State Key Laboratory for Traction and Control of Locomotives and Rolling Stock

Technology Center of CRS QINGDAO SIFANG CO., LTD.

Engineering Research Center for Large-scale Traffic Electrical Equip -ment Composites in Hunan Province

Technology Center of CRS Chengdu Co.,Ltd.

CRS QINGDAO SIFANG CO.,LTD.

Technology Center of CRS NANJING PUZHEN CO., LTD.

Engineering Technology Research Center for Vibration and Noise Reduc -tion Materials in Hunan Province

Technology Center of CRS Shijiazhuang Co.,Ltd.

Jiangsu Rail Transport Key Parts& Components and Material Process Engineering Research Center

Technology Center of CRS QISHUYAN INSTITUTE CO.,LTD

Engineering Technology Research Center for Key Components of Highspeed Train Foundation Braking Relationships in Jiangsu Province

Technology Center of CRS ZHUZHOU ELECTRIC CO.,LTD.

Technology Center of CRS Meishan Co., Ltd. Technology Center of Zhuzhou Times New Material Technology Co.,Ltd.

JIANGSU ENGINEERINGRESEARCH CENTER FOR TRACK MAINTENANCE MACHINERY IN RAIL TRANSIT

NDT Tech -nical Comm -ittee

Techni -cal Co -mmittee on Wel -ding

CSR Mater -ials & Process Resear -ch Cen -ter

Technic -al Stan -dardiz -ation Comm -ittee

CSR Techni -cal Expert Comm -ittee

CRS QISHUYAN CO., LTD. CRS Meishan Co., Ltd. CSR Zhuzhou Motor & Rolling Stock Research Institute Co.,Ltd.

Technology Center of South Huiton Co.,Ltd.

Fig. 3 Internal R&D-centered innovation system of CSR

Group, which has overseas R&D institutions, national R&D institutions, national enterprises technology centers, provincial R&D institutions, provincial enterprises technology centers and postdoctoral workstations. So far, CSR has formed five core technologies (vibration damping technology, noise reduction technology, lightweight technology, insulation technology, and water treatment technology) and seven core capabilities (polymer material synthesis, polymer material compound modification, system structure simulated analysis, vibration analysis, noise control, process equipment design, detection & analysis evaluation, etc. capabilities) with the engineering application of polymer materials as the core (see Fig. 3). The sci-tech investment of CSR Group exceeded 5% of sales revenue from 2008 to 2012. It reached RMB 4.7 billion in 2012, and received over RMB 800 million in government funding and tax incentives, with a contribution rate of 70% for new products. The internal R&D system built by CSR contributes to the subsequent import and absorption of new technologies with favorable conditions as well as a solid foundation. So far, CSR has achieved remarkable innovations, for example, the total patents owned by CSR ranks No. 1 in the same industry in China, and also ranks ahead among the central government-owned machine-building enterprises, with 4,840 valid patents, and 1 Special Prize, 2 First Prizes and 6 s Prizes of the State Science and Technology Advancement Award. 2. G2: Innovation System Based on Synergy/Integration In the late 1960s, the increasing competition among enterprises and remarkable increase in production efficiency enabled them to be aware that the market played an important role in the innovation process, and market demand was seen as a source of ideas to guide R&D. Enterprises started to focus on how to leverage existing

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technological advances to realize economies of scale in diversity and get more market share. The impact of the market on enterprises escalated in the 1970s with two oil crises and a severe oversupply of products. Mowery and Rosenberg (1979) found that enterprises innovation started to integrate production and market resources based on R&D and to obtain potential sources of ideas from multiple sources and that a shift in the corporate innovation system from a single R&D system to one in which science, technology, markets and manufacturing are interlinked in order to respond to markets rapidly and accurately. The uncertainty of enterprise innovation is not only in technology but also in markets, strategies, and finances, etc. Teece (1986) explained why technology leaders may not always achieve first-mover advantage, while fast followers may win by imitation, and suggests that innovation should focus not only on R&D but also on complementary assets, including manufacturing and marketing capabilities. Innovation management must synchronize R&D, marketing and production properly, any of which is essential. It is the interaction of the three management modules that enable new ideas to be put into valuable practice. In addition, the closed internal innovation model has turned to be inefficient, hardly meeting the requirements of enterprise innovation and even hindering it to a certain extent due to the increasingly open business environment and fierce market competition. Chesbrough formally introduced the Open Innovation Theory in 2003, which has been applied in practice to enable enterprises to build open innovation systems. The second-generation corporate innovation system is a synergy/integration-based innovation system. Compared to the first-generation system, it integrates not only internal resources in production, manufacturing and marketing but also external innovation resources through the penetration of organizational boundaries. Innovative ideas come from the R&D, manufacturing and marketing departments within an organization, enterprises collaborate with internal innovative ideas on strategy, talent, and data, etc. to carry out innovative activities; and from outside of enterprises via innovative ideas and market access from leading external customers, service organizations, research institutions, universities and other organizations in the industry. The G2 corporate innovation system combines internal and external ideas into the corporate structure; Innovative ideas within an enterprise can also be brought to market through external channels, externalizing existing businesses of the enterprise for additional value generation. Haier’s innovation system is a typical example of a G2 innovation system: Haier establishes strategic cooperation with global first-class suppliers, research institutions and famous universities by using five global R&D centers as resource interfaces. On the Internet, Haier has built a “P + D” innovation portal and established partnerships with 36 top suppliers, 4 innovation media, 6 expert networks, 29 associations, 32 academic institutions and 360 technology companies for global R&D resources. Haier’s internally and externally integrated open innovation system has become a key driver for the transformation and upgrading of the traditional home appliance industry by leading it toward digitalization, informatization, and networking while achieving self-reform and upgrading (see Fig. 4).

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Integrate Global Innovation Resources

Overseas R&D Institutions

Technology Center (R&D Headquarters)

Technology Info Site at home and abroad

Research Institutes

Technology Companies highly involvement innovation: Everyone is an innovation SBU Design Centers at Home and Abroad Integrate Global Innovation Resources

Fig. 4 Haier’s open innovation system integrating internal & external resources

3. G3: Innovation Ecosystem The theory of the Corporate Innovation Ecosystem was proposed by Moore (1993, 1996). The corporate ecosystem is a dynamic system of organizations or groups with certain interests, such as customers, suppliers, major manufacturers, investors, trading partners, standard-setting entities, labor unions, governments, public services, and other stakeholders. Iansiti and Levien (2004), Peltoniemi and Vuori (2004), Den and Asseldonk (2004), and Zahra and Nambisan (2012) also provided insights into corporate ecosystems from perspectives of ecological niche, ecosystem dynamic structure, and corporate ecological networks, respectively. Systematically, enterprises are no longer members of a single sector, but part of an ecosystem that spans multiple sectors. First, the way that elements within an enterprise ecosystem interconnect and interact with each other is the basis for the existence and development of the system, as well as the guarantee of system stability (Hu Bin, et al., 2013). Second, an interlocking, multidimensional network structure is formed among enterprises of the same and different types, as well as among business chain members upstream and downstream. This network differs from traditional networks in its complexity, dynamism, and cross-cutting nature. As Victor et al. (2012) argue, n × (n − 1)/2 collaborative nodes may be generated among innovation players in the innovation ecosystem if there are (n − 1)/2 collaborative nodes among innovation players in a traditional innovation network, so the network nodes of the innovation ecosystem are n times more than that of a traditional innovation, which is the network multiplier effect of the innovation ecosystem.

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The advantage of inter-organizational cooperation brought about by the network multiplier effect can be explained by transaction costs, resource perspective, and strategic decisions. As far as transaction costs are concerned, inter-organizational cooperation can improve return on assets, increase inter-organizational efficiency, and reduce unit costs by internalizing and minimizing external transaction costs. From a resource-based perspective, inter-organizational cooperation contributes to an organization’s control over key resources and integrates complementary resources held by multiple organizations. Inter-organizational cooperation enables synergy and expansion of market capabilities in terms of strategic decision-making, thereby improving organizational performance. For example, as for the design of the innovation ecosystem of Haike Group, it takes the Innovation Committee as the core, and builds a favorable ecosystem with venture capitalists, peers, government, universities, research institution, and consulting firms to promote innovation (see Fig. 5). The success of enterprises such as Apple, IBM, Procter & Gamble, and Eli Lilly, etc. shows that merely focusing on internal capabilities is insufficient; it is required to take into account the characteristics and demands of ecological partners within an ecosystem and to build a dynamic and open business ecosystem centered on the enterprise. The innovation ecosystem is a coordinated system of all factors and resources for innovation, involving not only an inter-enterprise ecosystem but also internal highly involvement innovation. Enterprises that have achieved high results in total employee innovation are Haier, Baosteel, and Geely, etc. The “Meta Power” project, which represents highly involvement innovation, was launched in 2005, before Geely’s strategic transformation. The “meta-motivation” project is a series of management methods, ideas and concepts to improve employees’ satisfaction, enhance their sense NDRC

Government

Suppliers

China University of Petroleum

Bureau of Science and Technology

Boston Consulting Group

Tsinghua University

Colleges and Universities Haike Group

CNOOC

Chemical Industry Association

Customers Peer PetroChina

Sinopec CHAMBROAD

Fig. 5 Innovation ecosystem design of Haike group

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of ownership and stimulate their enthusiasm and creativity. Efforts must be made to incent, and integrate employees to give full play to their vitality. All possible methods and measures should be taken to maximize employee satisfaction, enable them to be the real masters of the enterprises, to fully mobilize their initiative, enthusiasm and creativity in the management of the enterprises, to fully exploit their wisdom and potential, to transform their thoughts and ideas into the driving force of the development, into the competitiveness of the enterprises on the market, by which to promote the sustainable development of the enterprises. Employees are the specific point for the transformation of Geely Automobile’s strategy of “ To make best cars of safety, environmental protection and energy-saving, and to enable Geely Automobile to travel all over the world”, and to practice the quality policy of always being responsible for the brand and always satisfying the customers. The “Meta Power” project has greatly accelerated the strategic transformation of Geely Automobile. As for enterprises in the twenty-first century, strengthening technology accumulation and forward-looking deployment is a prerequisite for grasping new opportunities of the era, i.e., they should not only focus on the development of new technologies but also make greater contributions to national industrial security, information security and even national economic and military security. Strengthening the core competence and control of enterprises is their focus of indigenous innovation development. Therefore, efforts are required for being centered on building innovation capabilities, integrating innovation resources, and focusing on building the core capabilities of enterprises while structuring the innovation ecosystem. A strategic goal of “domestic excellence & world-class” is proposed by CETC to fulfill the mission and responsibility of the “national team” and continue the concept of national interest over everything. Focusing on the strategic goal, CETC conducted a science and technology system reform project “Reconstruct the Technology Innovation System for a Technology Innovation Pattern”. (1) Highlight technical and cutting-edge research. Boost technological innovation shift from a follow-up to selfdependent, to upgrade the original innovation capability. It invests more in key technologies by theme and in a systematic way, with a focus on the basic, frontier, marginal and penetrating technologies, and maintains a heavy investment in sci-tech, as well as continuously optimizing the direction of sci-tech investment. As for basic technologies, it promotes more pure innovation and avoids a market-based approach to measuring the value of technology. (2) Highlight the system elements to carry out technological innovation systematically. It is a systematic technological innovation to form the greatest value and avoid the fragmentation of technological innovation; it sets up an innovative development plan for the group companies and decomposes the key technologies of the system level by level; it evaluates the maturity of the key technologies by using the work breakdown structure (WBS) and technology maturity; upon that, it increases the integration of internal scientific resources, i.e., reconstructing the system of sci-tech innovation by system elements and laying out key technologies to ensure the completeness of the key technologies required for major systems. Interface and synergy of system technologies along with upstream and downstream are focused on in practice to achieve cluster breakthroughs in key

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technologies. (3) Highlight the synergistic innovation of multi-disciplinary and resource. Synergistic innovation is required to build NIS and to implement a strategy of innovation-driven development. Attention is given to cooperation and exchange with universities, enterprises and innovation institutions at home and abroad, and the establishment of technology-industry innovation alliances in key areas to form close technological innovation cooperation. For example, it has jointly developed radar technology with 11 units, such as Xidian University, and has also established stable strategic partnerships with other enterprises and research institutions at home and abroad for long-term cooperation on specific technologies and projects, forming a flexible innovation model. (4) Explore actively the market-based allocation of innovation resources. CETC takes the initiative to change the traditional model of project declaration, expert evaluation and decision making, and holds creative innovation competitions in its member firms to motivate youth science and technology talents to innovate and create a culture of innovation from top to bottom throughout the system; it achieved favorable performance over two years and expanded the scope of the Creative Innovation Competition to the world in 2014.➀ In addition to highlighting enterprises’ focus on core competencies and core technologies, CETC’s approach emphasizes synergistic innovation to integrate “industry-university-research” innovation resources and employees’ passion for innovation, which is a major benchmark for enterprises’ technology innovation system construction. Therefore, besides the construction of the enterprise technology center, the corporate innovation system should also be targeted at an enterprise research academy for the sci-tech frontier, high-end R&D and innovation talents, and the development and upgrading of skilled employees. In addition, efforts are required to enhance cooperation with leading universities, research institutions and users beyond the external boundaries, and to carry out technology M&A in order to enrich and improve enterprises’ access to innovation resources and actively integrate discrete technological innovations. The future competition for enterprises’ innovation capability will be whether they can build an innovation ecosystem based on their core competencies.

2 National Innovation System (NIS) for Total Innovation 2.1 Connotation of NIS The national innovation system is the organizational vehicle for the development of national innovation capacity and is a theoretical elaboration of national innovation capacity components and their interactions. The Outlines on National Strategy for Innovation-driven Development issued by the Central Committee of the Communist Party of China (CPC) and the State Council in May 2016 explicitly proposed to build a systematic system as a new power system for economic development, i.e., to build a NIS with Chinese characteristics, to build an ecosystem for the synergistic

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interaction of various innovation subjects and the smooth flow and efficient allocation of innovation factors, and to form a practical carrier, institutional arrangement and environmental guarantee for innovation-driven development. The concept of the National Innovation System (NIS) was first introduced by Freeman in 1987 in Technology Policy and Economic Performance: Lessons from Japan, which was mainly used to analyze the reasons for Japan’s success in economic growth and technological catch-up, for which he considered NIS as a network between public and private sector institutions (Freeman, 1987b). Many scholars have argued from the perspective of institutional design that NIS is a portfolio of institutions or agencies constructed by a country to promote technological innovation and that the institutional setting is a key factor in determining the efficiency of NIS operations, which adjusts the socioeconomic paradigm to requirements of the techno-economic paradigm through institutional design or a series of institutional components. For example, Freeman considered NIS as all institutions in the national economy, including processes and systems involved in the introduction and diffusion of products (Freeman, 1995), institutional catch-up is not only a consequence of technological innovation but also includes many institutional and organizational innovations. Nelson (1993) saw NIS as a set of institutions that interact to determine the innovative performance of a country’s enterprises. NIS can be viewed as the interaction and feedback among all constituent elements from an element interaction perspective. In the opinion of Lundvall (1992), NIS is the interplay of elements and their interconnections during generation, diffusion, and use of new knowledge that is economically applicable. Saviotti et al. (1993) argued that the NIS can be defined as the organizational agents and their interactions that are formed to achieve the shared ultimate goal of generating and applying innovation. Kumaresan and Miyazaki (1999) argued that NIS includes complex interactions among various agents and institutions, degrees of which determine a country’s innovation performance to a large extent. Connections among the various agents in the innovation process are key to the NIS, and the system’s performance depends heavily on how they are linked together as a collection of innovations. Edquist et al. (1999) considered the National Innovation System as a set of organizational systems and linkages for the generation, diffusion, and application of scientific and technological knowledge in a country. Padmore et al. (1998) stated that NIS is the design of an innovation process in which everything is connected to everything else, and describes the innovation system through connections among elements of the system. In the view of OECD, NIS reflects an increasing focus on the significance of knowledge, and the NIS is a network system of interactions among government, enterprises, universities, research institutions, and intermediaries for a series of common social and economic goals; the “knowledge deployment capability”, which is the circulation of sci-tech knowledge within a country, is the determinant of economic growth and competitiveness of NIS. It has also been argued that the NIS is an innovation resource allocation system. ➀ Li Fang, Xiong Qunli: Give full play to the role of large enterprises as major innovators to enhance their core competitiveness [EB/OL]. (05–15-2014)

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[12–01-2018]. http//www.ce.cn/cysc/newmain/yc/jsxw/201405/15/t20140515_282 1115.shtml.

2.2 Functions of NIS NIS is primarily concerned with promoting and conducting the production, diffusion and application of new knowledge and technologies. Specifically, NIS performs functions such as execution & evaluation of innovation activities, supply & allocation of innovation resources (including HR, financial resources, and information resources, etc.), construction of innovation system & policies, and construction of innovation infrastructure (see Fig. 6). (1) Execution & Evaluation of Innovation Activities Enterprises act as a major player in the generation, dissemination, and application of new knowledge and technologies, together with educational and training institutions and research institutions. Intermediaries provide a favorable environment for innovation. The government may promote innovative activities by means of multiple forms, such as major innovation programs and projects, “industryuniversity-research” cooperation, promotion of innovation results, and international cooperation and exchange, in accordance with national goals. (2) Supply & Allocation of Innovation Resources The market acts as a major role to carry out the generation, supply, and allocation of innovation resources by a joint role with the government. The innovation resource system should include a financial and fiscal management system for innovation activities, an education and training system for innovation talents, an innovation information service system and an innovation resource allocation system. Execution & Evaluation of Innovation Activities

Construction of Innovation Infrastructure

Key Functions of NIS

Construction of Innovation System & Policy

Fig. 6 Key functions of NIS

Supply & Allocation of Innovation Resources

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(3) Construction of Innovation System & Policy NIS bears responsibilities for providing a favorable institutional environment for innovation activities throughout society, specifically, including the formulation of policies & laws, the protection of IPR, the establishment of a social security system & innovation risk insurance system, the protection of national & public interests, and regulation of the behavior of innovation agents. (4) Construction of Innovation Infrastructure NIS should be able to provide favorable conditions for innovation activities, which are required for innovation activities and impossible to be solved by individual players, including national sci-tech infrastructure, educational infrastructure, or intelligence information infrastructure, etc.

2.3 Elements of NIS NIS consists of six elements: players of innovative activities, internal operating mechanisms of players, effective linkages among players, innovation policies, market environment, and international linkages. (1) Players of Innovative Activities They are mainly enterprises, research institutions, education and training institutions, and government departments, etc. Enterprises act as the backbone of innovation inputs, outputs and benefits, and therefore play a key role in the NIS. (2) Internal Operating Mechanism It is a major factor in determining the efficiency of NIS operations. The system consists of elements and the interrelationships among them, whose self-optimization is the basis for the overall strength and efficiency of the system. Operation efficiency will not be improved unless enterprises, research institutions, education and training institutions, and the government share an effective operating mechanism, thus ensuring the overall efficiency of NIS. (3) Effective linkages among Players The effective linkage among players is a significant factor closely related to the efficiency of NIS operation. Efficient flow of innovation resources among players contributes to dispersion of innovation risks, reduction of innovation costs, acceleration of innovation speed and improvement of innovation efficiency, and the close linkage among various players facilitates the improvement of overall NIS efficiency.

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(4) Innovation Policy Innovation policy refers to the laws, regulations and policies that influence innovation activities. The policies are usually divided into several aspects, such as supply, demand and environment. Innovation policy is closely related to national policies on sci-tech, economy, industry, finance, taxation, and education, etc. (5) Market Environment The market environment is the background of enterprises’ innovation activities, and the market, as a way of allocating resources, plays an important role in influencing the innovation activities of enterprises and other actors. The development, regulation, and efficiency of a country’s markets are critical to the scale, benefits, and efficiency of a country’s innovation activities. (6) International Linkages International linkage is an important link for resource exchange between each country’s NIS and the international environment, and it is also a way for players in each country’s innovation activities to compete and cooperate internationally. The domestic market of each country is increasingly integrated with the international market as a result of an increasing trend of integration of the world economy and internationalization of science and technology. Therefore, the international linkage is more meaningful for each player to compete in the international market and carry out international business.

2.4 NIS in China and Improvement Measures for NIS with Chinese Characteristics As shown in Fig. 7, NIS in China has gradually improved after years of development, e.g., interactions among innovation players are frequent, enterprises have emerged as the core of innovation players, and the “industry-university-research” system among enterprises, universities, and research institutions has been gradually improved, and a triple helix system has been formed between enterprises, the government and universities to promote the progress of sci-tech. Furthermore, cooperative innovation networks, sectoral innovation systems, and regional innovation systems have emerged for enterprises. Innovation support such as financial technology, technology intermediaries, and infrastructure has taken shape, which can effectively support the innovation activities of innovation players to promote the transformation of sci-tech achievements. As for the innovation environment, China has initially formed an environment that is conducive to innovation in culture, economy, and politics. Various players’ functions, such as enterprises, research institutions, universities, and social organizations, must be further defined during the NIS’s further development in order to build an open and efficient innovation network, as well as a

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Form an environment gradually conducive to innovation

Economic environment

Rapid growth of the national economy

Political environment

Government

Gradually sound policies & regulations

Stable political environment

International situation An increased international environment as well as international cooperation in science and technology trade for development

Progressive growth in innovation revenue

Innovation support Fund policy Financial Institutions

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“Industry -University -Research”

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Colleges and Universities

Scientific research institutions

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Tr ip l

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Users

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Resource support Stakeholders Enterprises innovation network

Infrastruc -ture Talent & Technology Other support

Enterprise for R&D cooperation

Sectoral Innovation System

Enterprises (Competitors)

Enterprises upstream and downstream

Other institutions Talent & Technology

Fig. 7 Status of NIS in China

defense sci-tech synergistic innovation platform for military-civilian integration. For enterprises, it is to enhance the backbone leading role in R&D of basic frontier and industry common key technologies, and to build the enterprises innovation ecosystem; improve the R&D organization system of research institutions and cultivate core technologies; give full play to a basic role of universities to form clusters of superior disciplines and high-level innovation bases; fully play the role of social organizations to build a professional technology transfer system, and promote the transformation and absorption of innovation fruits. It is also necessary to reform innovation governance, i.e., to clarify the division of labor between the government and the market in order to build a mechanism for the integrated allocation of innovation resources; to improve the policy system to stimulate innovation, the legal system to protect innovation, and to create a social environment that encourages innovation in order to stimulate the entire society’s innovation energy. Specifically, NIS with Chinese characteristics can be improved in five aspects as follows. 1. Enhance the technological innovation system with enterprises as a major player The role of economic and science and technology policies should be fully played to stimulate and guide enterprises to act as the major player in R&D investment, technological innovation activities and application of innovation results. Adjustments

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should be made to the implementation mechanism of national sci-tech programs to increase their support to the technological innovation of enterprises. Information communication mechanisms with enterprises are required, as the national sci-tech program should fully reflect the needs of enterprises and industrial development, and project evaluation should involve more participation of enterprise peers. Enterprises shall be encouraged to participate in the implementation of national sci-tech programs, wherein for major projects with industrialization prospects in major special projects and sci-tech programs, priority shall be given to qualified enterprise groups or enterprise alliances, or jointly undertaken by enterprises and universities and research institutions to establish a new mechanism of project implementation with enterprises as the major player and the conjunction of “industry-university-research”. The “technological innovation guide project” is to be implemented to support enterprises to establish and improve all kinds of R&D institutions, especially to encourage large enterprises or major enterprises in key sectors to establish enterprise technology centers, to build enterprise technology innovation & industrialization platforms, and to strive to form a number of large backbone enterprises integrating R&D, design and manufacturing in one with international competitiveness. Innovative enterprise pilot projects should be carried out to promote the formation of a number of innovative enterprise clusters with unique characteristics. High-level overseas talents can be attracted back to China to set up high-tech enterprises. Foreign enterprises shall be encouraged to set up R&D centers in China to strengthen cooperative research. Enterprises shall be encouraged to join hands with research institutions and colleges and universities to enhance the construction of engineering laboratories, engineering centers, enterprise technology centers and industrial technology alliances, to increase the integration of existing R&D bases with enterprises, and to establish basic support platforms for indigenous innovation of enterprises. Furthermore, special attention shall be paid to the establishment of an effective mechanism, which is open, shared and enterprise-oriented, to integrate sci-tech resources to serve the technological innovation of enterprises. A technology transfer system that meets the characteristics of a market economy shall be improved, in which technology transfer will be an important element of sci-tech plans and public sci-tech resource allocation, so as to promote the flow of knowledge and technology transfer among enterprises, higher education institutions and research institutions. A fair competition environment should be established for all types of enterprises to break the monopoly in the industry and market, and attention should be paid to the role of private sci-tech enterprises in indigenous innovation and the development of high-tech industries. Support from national programs should be increased for sci-tech SMEs, to establish investment and financing mechanisms that meet the innovation needs of SMEs, to establish and improve platforms for information, technology trading and industrialization services that support SMEs’ technological innovation, and to create a favorable environment that supports SMEs’ technological innovation. Transformation and reformation of technology development institutions into enterprises should be deepened to encourage and support them to play a backbone role in R&D and application of common key technologies in sectors and promote the construction and development of national engineering technology innovation bases.

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2. Build a knowledge innovation system with organic integration of scientific research and higher education Deepen the reform of the scientific research system to clarify the responsibilities and positioning of scientific research institutions in different types. The establishment of an open, mobile, competitive and collaborative operation mechanism should be the focus to explore the implementation of the council system, improve the responsibility system of the director, expand the management autonomy of research institutions, improve the management system of scientific research, and establish a modern system of research institutions. Reform of the classification of social public welfare research institutions should be carried forward to raise the per capita cost standard after the reform and acceptance, improve the management and operation mechanism, and form a group of high-level public welfare research bases that can steadily serve the national goal. Phase III of the Knowledge Innovation Project of the Chinese Academy of Sciences can be carried out to form a number of world-class research institutions in multiple key fields of basic research and strategic high-tech. Reform of the research management system of universities can be deepened to strengthen a combination of sci-tech innovation and talent cultivation and to build a number of high-level research universities. Cooperation in sci-tech innovation and talent training among research institutions, higher education institutions, and enterprises should be promoted further, based on national goals and industrial needs, in order to promote resource sharing and improve the capability of original innovation and transformation of sci-tech results. Gaps in research fields should be filled in order to build a number of high-level national research bases in response to major national demands. Stable avenues for basic research, cutting-edge high-tech research, and socially beneficial research can be explored. It is necessary to conduct research in order to establish an evaluation index system and a regular evaluation mechanism for the innovation performance of research institutions that receive financial support, with the evaluation results serving as an important basis for adjusting the intensity of financial support. 3. Build a national defense sci-tech innovation system that integrates civilian with military purposes and combines military efforts with civilian support Deeper reform of the national defense scientific research system is required, with a focus on promoting the integrated allocation and effective sharing of military and civilian sci-tech resources, as well as the development of a national defense sci-tech innovation system that integrates civilian and military goals and combines military efforts with civilian support. Coordination of military and civilian sci-tech development strategies and sci-tech policies should be improved, with the organization and implementation of major special projects as the breaking point, to coordinate military and civilian sci-tech programs, in which private enterprises and research institutions will be more involved in national defense sci-tech programs, so as to promote organic ties between military and civilian sci-tech from basic research, applied R&D, product design & manufacturing to technology & product procurement. Technology R&D for dual-use for military and civilian purposes should be expanded to encourage

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the two-way transfer and industrialization of military and civilian technologies. The effective integration of military and civilian sci-tech resources can be improved in order to establish a mechanism for the effective allocation and reasonable sharing of military and civilian sci-tech infrastructure and conditions platforms. Acceleration of institutional reform of defense research institutions should be conducted, in which the enterprisization of qualified defense research institutions should be promoted to explore management models for promoting the integration of military and civilian research, and to promote the orderly flow and optimal combination of military and civilian innovative talents. 4. Build RISs with unique characteristics and advantages Build RISs with unique characteristics and advantages to improve regional sci-tech capabilities in all aspects around the needs of regional and local economic and social development based on the principles of coordination, classification, characteristics and advantages, with a focus on promoting the organic combination of central and local sci-tech forces, close regional cooperation and interaction, and the rational allocation and efficient use of sci-tech resources in the region. Regional sci-tech planning should be strengthened to give full play to the guiding role of the central financial allocation of resources to coordinate regional sci-tech resources, thus forming a reasonable layout for regional sci-tech development. In eastern China, to enhance the R&D and base construction of high- and new-tech to vigorously promote the upgrading and leapfrogging of China’s indigenous innovation capacity and industrial technology, thus forming industries with advantages in international competition; in the middle-China, to give full play to the comprehensive regional advantages with a focus on improving the technology level of a pillar and emerging industries such as agriculture, energy, etc.; in eastern China, multiple sci-tech means can be applied for protection and management of the ecological environment, rational development of advantageous resources, development of industries with regional characteristics, to shape regional innovation and new economic growth poles; In northeastern China, greater effort should be made to transform traditional industries with high-tech and actively explore new industries to revitalize the old industrial bases of northeast China. Cross-regional innovation cooperation and innovation alliance can be facilitated through the guidance of major projects. Colleges and universities, research institutions and national high-tech industrial development zones should play a leading role in regional sci-tech innovation and a radiating role in regional knowledge diffusion; pilot cities of sci-tech innovation should be actively promoted to strengthen the role of regional central cities in driving regional innovation activities and cohesion of regional sci-tech resources. The guidance for local sci-tech work should be strengthened, in which the responsibilities of local sci-tech management departments should be reinforced. Integration of central and local sci-tech resources can be established to form an interaction mechanism between the central and local governments, which enables qualified local governments to implement major national sci-tech projects. Local sci-tech work should focus on enhancement of indigenous innovation capacity, transformation and industrialization of sci-tech results, acceleration of the application of advanced and applicable technologies, to contribute to the development of

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local industries with advantages & characteristics and social progress. A program of action for enriching citizens and strengthening counties with sci-tech can be implemented, by which to strengthen support for the construction of sci-tech infrastructure such as sci-tech information platforms in counties (cities), enhance sci-tech services and support capabilities in counties (cities), improve sci-tech institutions in counties (cities), to promote the construction of grassroots sci-tech teams. 5. Build a sci-tech intermediary service system with socialization and networking Build a sci-tech intermediary service system with socialization and networking in accordance with a principle for a combination of government promotion vs. market regulation, development vs. regulation, comprehensive promotion vs. classification guidance, and professional division of labor vs. network collaboration, with a focus on promoting the transformation of sci-tech achievements and strengthening innovation services. Tax policies that support development of sci-tech intermediaries should come into effect to create an operational mechanism and a policy & regulatory environment conducive to the development of various sci-tech intermediaries. Investment entities under diverse forms of ownership should be encouraged to participate in sci-tech intermediary services, thereby giving full play to an important role of colleges and universities, research institutions and various associations in sci-tech intermediary services. Improving management and services by relying on intermediaries can be taken as an important part of transforming government functions, in which responsibilities that are capable of being undertaken by sci-tech intermediary services should be entrusted to qualified sci-tech intermediaries. Approaches such as entrustment can be adopted to cultivate the backbone of sci-tech intermediaries and bring into play their demonstration role. Great effort should be devoted to training to qualify practitioners in sci-tech intermediaries. Construction of industry associations should take effect to give full play to the service and coordination functions of industry associations in promoting technological innovation. Efforts should take steps to promote the application of advanced and applicable technologies, accelerate the reform and innovation of the agricultural technology promotion system, and encourage various agricultural technology education institutions and social forces to participate in diversified agricultural technology promotion services.

Chapter 25

Policy System for Total Innovation

The function of innovation policy lies in the establishment of effective innovation ecosystems nationwide to form an indigenous innovation system with complementary differences, synergy, coexistence and evolution among innovation organizations, given the diversity of indigenous innovation models based on total innovation in China. The policy system for promoting total innovation in China is shown in Fig. 1.

1 Strengthen Government Guidance on Indigenous Innovation Guidance by the government on indigenous innovation is primarily reflected by theory, strategy, overall deployment and planning, target management and performance evaluation, etc.

1.1 Guidance by Theory (1) It is necessary to follow the guidance: Deng Xiaoping Theory, the Theory of Three Represents, the Scientific Outlook on Development, and Socialism with Chinese Characteristics for a New Era; implement the strategy of innovationdriven development comprehensively from the perspective of the overall and long-term development issues of China; coordinate the layout of innovation capacity building with the guarantee of institutional mechanism reform; strengthen the construction of material and technological base and human resources for indigenous innovation to promote rational allocation of innovation resources, and enhance the motivation of innovation players and innovation vitality of the whole society; pay more attention to synergistic innovation to © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_25

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Strengthen government leadership Optimize the innovation environment Increase university contribution Strengthen national research capacity

The policy system for total innovation

Construction of NIS with Chinese Characteristics

Promote synergy innovation

Accelerate the transfer and transformation of research achievements Improve the policy and mechanism for venture capital

Accelerate the cultivation of innovative talents

Fig. 1 Policy system for promoting total innovation in China

upgrade the capability and performance of original innovation, integrated innovation and re-innovation based on absorption; accelerate the construction of an innovative country to provide an efficient guarantee for economic and social development. (2) It is required to adhere to a basic guideline of “Indigenous Innovation, Leapfrog in Key Fields, Support Development, Lead the Future”, to greatly promote original innovation, integrated innovation, and re-innovation based on absorption, and to master the core and key technologies of IIPR. Great efforts should be made in high-tech development, and construction of high-tech R&D bases and achievement transformation bases to achieve leapfrog development of indigenous innovation capability in key fields so as to promote optimization and upgrading of industrial structure. Energetically, progress of sci-tech throughout society should be promoted to improve the scientific quality of citizens, thereby enabling technical and intellectual support to accelerate the construction of a resource-saving and eco-friendly society. Integration of sci-tech resources should be vigorously pursued, as well as the construction of a public service platform for sci-tech innovation, the improvement of RIS, and the implementation of an indigenous innovation strategy. (3) To insist on the all-round promotion of indigenous innovation, it is, therefore, necessary to fulfill the following: ➀ Improve the legal guarantee, policy system, incentive mechanism and market environment to encourage indigenous innovation; improve the industrial technology innovation system with enterprises as a major player, the market as an orientation, and a combination of

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“industry-university-research”; promote enterprises to serve as a major player in technological innovation decision-making, investment, R&D and application of achievements. ➁ Implement an enterprises innovation capability building program, by which enterprises will be supported to build enterprises technology centers, industrial design centers, key laboratories, engineering laboratories, engineering (technology, research) centers, etc., and strengthen the innovation capability of key research institutions and colleges and universities. (4) To give full play to advantages of human resources in science and technology, it is necessary to ➀ implement a plan to industrialize and scale-up scientific and technological achievements to accelerate the transformation of scientific and technological achievements, and vigorously build a service system for the transformation of achievements; ➁ build technology transfer centers according to the mode of professional management and market-oriented operation, establish service platforms for results transformation such as results information, investment and financing, engineering and incubator, and establish a service system of “discovery, screen, match and transformation”. They will increasingly strengthen the role of sci-tech in supporting and leading economic development. To follow the government’s theory-based guidance on indigenous innovation, it is necessary to base on scientific development, focus on indigenous innovation, and promote increased capacity for indigenous innovation through institutional mechanisms improvement. As a result, the Scientific Outlook on Development should serve as a guide to reject ideologies that stifle the development of independent innovation capacity. Steps should be taken to continue conceptual change and increase R&D fund investment, to accelerate the development of a talent team, and to seek breakthroughs through major efforts in a number of key technologies related to people’s livelihood and the sustainable development of society. In this regard, the mindset of focusing solely on capital imports while ignoring core technology, should be changed, particularly when dealing with the relationship between immediate and long-term interests. The concept of simply following and imitating foreign technology rather than indigenous innovation should be abandoned; while it is less risky to follow and imitate foreign technology, we will always lag behind others in the road of technology development and fail to grasp the fundamental initiative of technology development, as well as the risk of potential IPR disputes. As a result, we will never take the lead in technological development unless we develop it independently in order to avoid all kinds of risks and achieve greater economic benefits and sustainable development.

1.2 Strengthen the Government’s Guidance by Strategy in Indigenous Innovation In this regard, the path of indigenous innovation with Chinese characteristics must be adhered to, in which strategies such as the innovation-driven strategy, the strategy

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of building an innovative country, the strategic adjustment of economic structure, and the transformation of development mode should take the lead. (1) Strengthen the strategic guidance of the indigenous innovation path with Chinese characteristics Science and technology have gone through hard times over the past 40 years since reform and opening up, experience acquired from which is esxtremely valuable. Theories of the Communist Party of the CPC are both inherited and advancing with the times from “the march to science” to “science and technology constitute a primary productive force”, from “national rejuvenation through science and education” to “improving the capacity of indigenous innovation to build an innovative country”, and then “innovation-driven innovation”. The path of indigenous innovation with Chinese characteristics requires adherence to institutional strengths of China. The form of government in a socialist market economy should be further improved, thereby giving play to the leading and driving role of major projects and sci-tech projects in accordance with the strategic needs of national development, integrating resources and making key breakthroughs to achieve leap-forward development. As proposed by Comrade Hu Jintao in his speech at the National Conference on Science and Technology in 2006: “Take the road of indigenous innovation with Chinese characteristics, the core is to adhere to the guidelines of Indigenous Innovation, Leapfrogging in Key Fields to Support Development for Future. The Indigenous Innovation is to strengthen the original innovation, integrated innovation and re-innovation based on absorption, to upgrade the national innovation capacity. Leapfrogging in Key Fields is to get breakthroughs in key fields that hold certain foundations and advantages and are related to the people’s livelihood and national security, so as to achieve crossover development. The Support Development is to support a sustainable and coordinated development of the economy and society by breaking through major key and generic technologies to meet the urgent needs of the reality. The Lead the future is to focus on the long term, advance the deployment of frontier technologies and basic research, create market demand, cultivate emerging industries, to bring the economy and society a bright future.” (2) Play a leading role of the strategy of innovation-driven development The basic framework of the strategy of innovation-driven development consists of following components: ➀ Sci-tech innovation as a pioneer. Sci-tech innovation is the underlying condition of the strategy of innovation-driven development, consisting of original innovation, integrated innovation, re-innovation, and synergistic innovation in an organization. ➁ Construct and improve NIS with “industry-university-research” cooperation as a major component. NIS with “industry-university-research” cooperation as a major component is the core of the strategy of innovation-driven development. So, measures should be taken: The technology innovation system with enterprises as the major player, the market as the orientation and a combination of “industry-university-research” should be built with great efforts now and a period ahead; improve the knowledge innovation system and strengthen the research on

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basic, frontier, key technologies, etc.; promote vigorously the reform of the science and technology institutions for relevant innovation and close integration of sci-tech and the economy, by which to improve the level of scientific research and the ability to transform results. ➂ Construct an innovative system and policy support system. The innovation system and policy support system are a key guarantee for the innovationdriven strategy, which requires acceleration of R&D and application of new products, technologies and processes; improvement of sci-tech innovation evaluation standards, incentive mechanisms and transformation mechanisms; strengthening of technology integration and business model innovation; implementation of IPR strategy, and strengthening of IPR protection; etc. (3) Play a leading role of the strategy to build an innovative country The core of playing a leading role in the strategy of building an innovative country is to establish indigenous innovation capacity as the strategic foundation for the development of sci-tech, to explore an indigenous innovation path with Chinese characteristics in order to promote the leapfrog development of sci-tech; to regard indigenous innovation capacity as a central link in adjusting the industrial structure and changing the mode of growth, to build a resource-saving and environmentally friendly society, for both quality and quantity of development; to regard the enhancement of indigenous innovation capacity as a national strategy throughout all aspects of modernization, to stimulate the spirit of national innovation, to cultivate highlevel innovative talents, to form an institutional mechanism conducive to indigenous innovation, and to advance theoretical innovation, institutional innovation, and scitech innovation, for a continuous development of the great cause of socialism with Chinese characteristics. (4) Play a leading role in strategic adjustment of economic structure and the strategy of development mode transformation It calls for the enhancement of indigenous innovation capability, with a focus on the central task of serving economic and social development, and sci-tech development as a strategic priority, in order to address major sci-tech issues that impede economic and social development. Building and strengthening innovation capacity is critical for accelerating economic transformation. The competition of sci-tech progress and innovation ability has been a focus of economic and industrial competition, especially as industrialization in China goes on, which results in the continuous increase of production costs such as labor, raw materials, environmental protection, etc., and further increase of pressure on resource consumption, energy production and ecological environmental protection faced by economic and social development, making it urgent to achieve economic and social transformation and development by relying on sci-tech innovation. China has leaped to No. 2 globally in terms of economic volume, while its major sectors are in an urgent task to grow from large to strong. It is urgent to change the original development mode, to improve the quality and efficiency of economic growth, i.e., to accelerate the optimization and upgrading of industrial structure and the rapid transformation of economic development mode with the innovation-driven strategy.

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Acceleration of transformation of economic development mode requires that the adjustment of an economic structure must be the strategic focus, the acceleration of strategic adjustment of the economic structure must be the primary direction, and the optimization of industrial structure, promotion of regional coordinated development and urbanization must be key tasks, especially focusing on solving the major structural problems that restrict sustainable and healthy economic development: (1) Grasp the strategic focus of expanding domestic demand to boost the domestic market with the real economy as the basis and demand as an orientation to promote the healthy and sustainable development of strategic emerging industries and advanced manufacturing industries; (2) Accelerate upgrading and transformation of traditional industrial structure, to promote the growth of the service industry, especially modern service industry. Acceleration of the transformation of economic development requires efforts in drafting development plans scientifically, vigorously promoting the transformation and upgrading of traditional industries oriented by energy conservation and emission reduction, speeding up the formulation and implementation of industrial policies oriented by energy conservation and emission reduction, accelerating the elimination of outdated production capacity, encouraging technological innovation and the development and application of new technologies and processes, accelerating the upgrading of product structure, increasing the added value of products, developing a green economy, low-carbon economy and circular economy, enabling technological progress to gradually play a leading role in the improvement of labor rate and economic growth, and ultimately promoting the transformation and upgrading of traditional industries; (3) Measures are required such as promoting the development of strategic emerging industries, with a focus on increasing R&D investment to enable strategic emerging industries to take the lead in the development of the national economy shortly. Focus should be on cultivating industries such as next-generation information technology, energy conservation and environmental protection, biology, new energy, new materials, high-end equipment manufacturing, and alternative-energy vehicles, etc. The development of strategic emerging industries requires insisting on parallel approaches of technical innovation, business model innovation and institutional mechanism innovation, building diversified financing channels to play the enthusiasm of various innovation players, and creating a favorable development environment; (4) Modern agriculture is by no means neglected while accelerating the transformation of economic development. Speeding up the structural adjustment of industry and service sectors must be based on great attention to the transformation of agricultural development mode to accelerate the strategic adjustment of agricultural structure, accelerate the construction of a modern agricultural industrial system, and adhere to the road of agricultural modernization with Chinese characteristics, which is key support for accelerating the transformation of economic development mode.

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1.3 Strengthen the Government’s Overall Deployment of Indigenous Innovation The guidance of the government on indigenous innovation is also manifested in the overall deployment, without which the overall optimization of indigenous innovation cannot be realized. As such, the following is required: (1) Improvement of indigenous innovation capacity should be always at the priority of all science and technology work Strive to grasp a number of core technologies in several key fields, possess batches of IIPR, cultivate groups of enterprises with international competitiveness, to significantly improve national competitiveness. (2) Sep up the overall deployment and guidance of the government on indigenous innovation ➀ Increase the systematic overall plan of the government, specifically, to give full play to the fundamental role of the market mechanism in resource allocation, focus on promoting the construction of scientific research experimental facilities and various innovation bases, guide social innovation players for participation, strengthen the integration, sharing and high-efficiency utilization of sci-tech resources, and improve the national standards, metrology, testing and certification technology systems to support leapfrog development of sci-tech; ➁ accelerate the R&D and engineering capacity building for core and generic technologies in key sectors, improve the technological innovation capacity and public service in key social fields, build RISs with distinctive characteristics and a comprehensive and coordinated development to support the development of economic and social innovation; strengthen the construction of innovation environment such as capability, talent team and system of innovation players and deepen international exchange and cooperation so as to strengthen their capabilities of IPR generation, application, protection and management, stimulate the innovation vitality of the whole society and improve the efficiency and effectiveness of innovation. (3) Policies are required to guide a smooth implementation of indigenous innovation ➀ Preferential policies should take effect to attract enterprises in increasing their investment and capability of R&D; ➁ a shift in functions of the government should be carried out as soon as possible, by which to highlight the service function, and attract social funds and various venture capital funds through the formulation of laws and regulations, so as to vigorously develop the venture capital business; Joint approaches, such as guarantee mechanisms, and venture capital, etc., can also be adopted by the government to improve the innovation efficiency of enterprises and other R&D institutions. In addition, the limited R&D funds should be reasonably allocated, of which a reasonable adjustment is warranted in the ratio of investment among basic research, applied research and experimental development, especially the

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proportion for basic research should be increased to drive the overall development and progress of China’s indigenous innovation through major innovations in key basic research fields.

1.4 Build Strategic Goal Management and Performance Systems-Oriented by Indigenous Innovation As a major point goes on, creativity is spontaneous, but innovation, especially complex, knowledge-based innovation, must be organized in order to be truly mature. China has made great achievements in economic construction over the past 40 years since the Reform and Opening-Up. However, its indigenous innovation remains in slow steps with indigenous innovation capabilities still very much in infancy. It is primarily manifested by a dominance of the traditional sloppy economic growth method, which results in bottlenecks and serious challenges to sustainable development. One of the key causes for problems encountered is the lack of strategic goal management and performance systems, which are sound and oriented to indigenous innovation from an organizational management perspective. Indigenous innovation is a strategic and systematic project where government, enterprises, universities and research institutions are major players. These players and their chief leaders insist on indigenous innovation in accordance with the macro-will of innovative provinces, regions and counties, which is a cornerstone for the success of the strategic goal of indigenous innovation in China. According to Strategic Management Theory, performance management is a management process that promotes the continuous performance improvement of participants and their chief leaders and ultimately achieves the indigenous innovation strategic goals. It emphasizes the improvement of the performance of these participants and their chief leaders through management actions such as planning, organizing, directing, coordinating, and controlling, etc., to ensure strategic goals for indigenous innovation. Performance Management covers evaluation system design and adjustment, appraisal, design and adjustment of incentive and compensation system, and management by objectives (MBO), etc. However, China has not yet established a sound MBO system, performance appraisal system and motivation system among government, enterprises, universities and research institutions with the mission of achieving an indigenous innovation strategy. Therefore, it is the primary task to accelerate indigenous innovation in China by building indigenous innovation-oriented systems for MOB, performance appraisal, motivation based on realities. The performance appraisal system for chief leaders of Chinese governments, enterprises, universities and research institutions at all levels should include an appraisal index system for indigenous innovation. In particular, the innovation index system for governments at all levels should be further clarified. In addition to GDP, three key indicators, i.e., the proportion of values created by new products, processes and services to GDP, the proportion

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of income from various types of sci-tech and knowledge transfer to GDP, and the number of invention patents per million people in the region, should be taken as important elements in the evaluation indexes of various governments and should be evaluated and analyzed regularly. The appraisal system for state-owned and private enterprises in China should be improved to give play to the guiding role of performance appraisal, of which the appraisal system for indigenous innovation should be further improved in the appraisal of business performance of heads of enterprises. In particular, as for backbone enterprises, their brand value, the number of industrial standards they preside over or participate in, the proportion of annual revenue from new products, new processes and new services in their sales revenue, and the number of annual invention patents should be taken as important indicators in their annual evaluation, for which a list of the most innovative enterprises in China should be published regularly.

2 Optimize the Innovation and Entrepreneurship Environment to Enhance Indigenous Innovation Capability of Enterprises Vigorously strengthening the capability of enterprises indigenous innovation is the cornerstone of building an innovative country. Enterprises act as major players in technological innovation, the level and capability of which are solid guarantees for sci-tech innovation in China. Huawei, Alibaba and Tencent made the list of the top 50 most innovative enterprises by the Boston Consulting Group in 2018. But there are fewer companies selected than from the United States. In the coming era of Big Data and the Internet, informatization conditions for innovation have further matured and large-scale crowd creation has come into reality, which will greatly promote breakthrough or disruptive innovation in various sectors; factors such as urbanization, upgrading of traditional industries, and high demands on health and the environment in China provide great demands for technological innovation in Chinese enterprises. Therefore, a big opportunity comes to enterprises in China for technological innovation. China’s enterprise innovation faces challenges, such as how to generate more major “world-changing” technological innovations, and how to further improve the decision-making, motivation, and incentive mechanisms for enterprise innovation? Mass innovation and integrated innovation should become two major paradigms of indigenous innovation in China. The widespread entrepreneurship and innovation is a new paradigm of indigenous innovation in the new era. Micro innovations are largely small improvements in technology and commercialization, but they can make a huge difference. In general, indigenous innovation requires an indigenous management model, and a key point is to open up more, especially for some spaces in sectors to be opened to microinnovation. We used to focus more on the innovation of large state-owned research institutions and SOEs, but now a shift is needed to focus on the innovation by folk,

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individuals, etc. grassroots organizations, including encouraging innovation from non-R&D sources. In particular, participation of the general public in the innovation process is needed, including innovation by both users and workers. The evolution of innovation from experts and scholars to workers is significant, as the participation of working people in innovation is the basis for achieving an innovative country. For this evolution, individual or private innovation systems should be integrated into the NIS to encourage contributions from all people in society to build an innovative country. Integrated innovation and aggregated development are also key paradigms for indigenous innovation in the new era. In addition to focusing on new technologies, central government-owned enterprises and large SOEs must contribute more to national industrial security, information security, and even national economic and military security. Strengthening the core competence and control of enterprises is their focus of indigenous innovation development. Accordingly, innovation capacity-building should be centered, for which resource integration and core capacity building of enterprises should be both concerned, as well as highlighting technical and cutting-edge research. The evolution of technology innovation should be promoted from follow-up to indigenization to enhance original innovation capability. Great efforts should come to effect, such as sorting out key technologies by theme and system, emphasizing basic, frontier, marginal and penetrating technologies, with heavy investment in and clear investment direction for sci-tech, and highlighting system and systematic technological innovation. Integrated innovation and aggregated development will form a more systematic innovation, which enables to avoid the fragmentation of innovation.

3 Increase Contribution of Universities to Indigenous Innovation Universities are bases for cultivating high-level innovative talents in China, one of the major forces of original innovation in basic research and high-tech fields in China, and a force for solving major sci-tech issues in the national economy and achieving technology transfer and transformation of results. Speeding up to build sets of high-level universities, especially world-renowned high-level research universities, is required for accelerating sci-tech innovation and building NIS in China. It is required to give full play to talent cultivation, scientific research and social services (see Table 1) to enhance the contribution of universities to indigenous innovation. Talent cultivation is the core task of universities; scientific research is an important function of universities and a carrier of talent cultivation; social service is a functional extension of talent cultivation and scientific research.

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Table 1 Manifestation of university contribution to indigenous innovation University function

Contribution to independent innovation

Carrier and manifestation

Talent cultivation

Increase contribution to indigenous innovation by fostering creative, innovative and entrepreneurial talent

Talent, knowledge

Scientific research

Increase contribution to indigenous innovation via sci-tech innovation activities such as basic research, applied research, development, etc. application research

Knowledge, technology, infrastructure, platforms, etc.

Social services

Increase contribution to indigenous innovation via activities such as entrepreneurship, social service, etc

Support conditions such as capital, intermediary services, entrepreneurs, etc.

3.1 Increase via Talent Cultivation Three major functions of universities are interrelated and inseparable, highlighting the basic idea that talent cultivation is the primary function of universities. As higher education comes closer to society, functions of universities are diversifying, with talent cultivation modes growing from a single one in the past to being diversified at present; regardless of how many social roles or responsibilities universities assume, cultivating talents is their eternal historical mission, and an obvious difference between universities and other academic organizations. Functions of universities evolve around the construction of a knowledge system, and its emergence is not only a necessity of human desire for knowledge but also a necessity of social progress. The social value of the university lies in its contribution to the development of social civilization and progress of society, which is reflected in its contribution to construction of material civilization, and in microcosm, the role of the university is to create people with high moral and cultural caliber. Over the years, university education in China has followed the Marxist theory of all-around human development and set the core of university to promote students’ all-around development via education. All of these show that the core mission of universities is talent cultivation, specifically to cultivate high-level talents of various types for the society while strengthening the function of talent cultivation is inseparable from scientific research; therefore, universities cannot cultivate all-round talents more effectively for China unless they improve the level of scientific research. Therefore, the increase in contribution of universities to indigenous innovation via talent cultivation requires a comprehensive coverage of universities at all levels based on “Project 211” and “Project 985”, as well as the coordination and improvement of discipline construction, faculty, scientific research, and infrastructure conditions. Additionally, innovation must take effect in the talent cultivation model, focusing on the cultivation of creative, innovative, and entrepreneurial talents.

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3.2 Increase via Scientific Research Several trends emerge toward formation of research-based universities while the level of sci-tech strength and competitiveness of China’s universities has been greatly improved since the Reform and Opening-Up: colleges and universities have rapidly become the main force of sci-tech innovation in China, especially basic research; sets of colleges and universities with comparatively strong sci-tech strength and high sci-tech level are gradually formed; the way of cultivating talents in colleges and universities tends to be diversified. Basic research is the precursor of sci-tech progress and the source of indigenous innovation. The major field of scientific research in universities is basic research, strengthening of which is an essential way to improve China’s original innovation capacity and accumulate intellectual capital, a necessary condition for being among the world’s sci-tech powers, and a fundamental motive and source for building an innovative country. Results of basic research are ahead of their time, and major breakthroughs in basic research will bring profound influence and leadership to people’s ability to understand and transform the world, to the formation of high-tech industries, to the economic development and social progress, and even to the people’s way of life. Basic research is a source of high-tech, opening up new directions for technological progress and promoting the formation for new sectors. Concurrently, technological advances bring new demands as well as new research tools and methodologies for basic research, which will drive accelerated development of basic research. From this, it can be seen that universities, especially research-based universities, contribute greatly to indigenous innovation in China through scientific research; therefore, it is necessary to focus on cultivation of talents, improve the layout of disciplines, cultivate and support new interdisciplinary disciplines, to achieve key breakthroughs in several frontier areas of science, and to solve a number of key scientific problems in national economic and social development; to build a high-level basic research team to lay a solid foundation for building an innovative country and for China to be a world sci-tech power by 2050. China has formed batches of high-level universities with appropriate scale, comprehensive disciplines and convergence of talents, and their roles in science and technology innovation should be given full play. Efforts should be made in such aspects: Support the original innovation of universities in the fields such as basic research, frontier technology research, and social welfare research; promote comprehensive cooperation among universities, enterprises and research institutions, to increase university services for national, regional and industrial development; speed up the construction of key university disciplines and sci-tech innovation platforms; cultivate and gather numbers of discipline leaders, who are of internationally outstanding, to build a team of university teachers with excellent academic style, innovative spirit and international competitiveness; further accelerate reforms of the university’s internal management system; optimize the educational structure and scitech organizational structure within the university, innovate the operation mechanism

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and management system, establish a scientific and reasonable comprehensive evaluation system, and establish an operation mechanism that is conducive to improving quality and innovative capability of innovative talents cultivation, so that everyone can make the best use of their talents and more birth will be given to talents. To explore a modern university system with Chinese characteristics, efforts are expected to be concentrated on the following aspects: (1) Strengthen the construction of “Project 211”, with key disciplines construction as the core, to plan the talent team and clarify the direction of disciplines; encourage universities to be oriented to the frontiers of international sci-tech development and national strategic needs, by which to set their directions of discipline development, strengthen interdisciplinary cross-pollination and interdisciplinary cooperation and research, with a focus on improving the level of sci-tech innovation and social service capacity; (2) Proceed with “985 Project” to strengthen the construction of research university bases, for which measures are required as following: Increase the planning and organization of scientific research and discipline development for strengthening the construction of sci-tech innovation platforms and philosophical and social science innovation bases; innovate the organizational form, step up coordination, and actively strive to be listed in the construction sequence of national laboratories and national engineering research centers, based on the comprehensive sci-tech platform of the “985 Project”; (3) further qualify academic teams in research universities, thus we have to support programs such as the Program for Changjiang Scholars and Innovative Research Team in University and the Program for New Century Excellent Talents in University, promote the reform of primary academic organizations, and attach importance to cultivation and recruitment of young teachers; go on to implement the “Programme of Introducing Talents of Discipline to Universities” to enhance the sci-tech innovation capacity and international influence of academic teams; explore actively approaches for classified management of faculty positions; (4) Innovate the “industry-university-research” organization model to promote technological innovation, so available measures are to encourage cooperation between research-based universities and enterprises, by which to set up strategic alliances for industrial technology innovation, enable the connection between experimental research systems and engineering development systems to be more effective, build numbers of sci-tech achievement transformation bases and technology transfer centers with competitiveness and influence, and breakthrough key technologies in major engineering issues of global and strategic importance.

3.3 Increase via Social Services The entrepreneurial university is a new model of schooling that emphasizes a more important role for universities in social and economic development. In addition to knowledge generation and technology transfer, universities should be directly involved in and serve entrepreneurial activities. Universities are not only about imparting knowledge to students, but also about fostering entrepreneurial skills.

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In the late twentieth century, universities in Europe and the United States, represented by MIT and Stanford, got directly involved in the great practice of serving the local economy and promoting self-development, which triggered another major shift in the social function of universities, i.e., the new entrepreneurial function included not only selling technology to enterprises at top prices but also creating new knowledge-based enterprises in local areas, thus giving rise to the development model of entrepreneurial universities. The universities, with their great variety of disciplines and their young, dynamic research talents, will furthermore serve as a major driver of indigenous innovation and as the main source of original innovation in a country. Thanks to the high priority given by China to the construction of world-class universities, many universities countrywide have developed into research-oriented universities with significant R&D capabilities. As the evolution of university functions goes on, the entrepreneurial function is emerging, i.e., the contribution of the university research function to the economy is changing from indirect to direct. Therefore, many universities have stepped their transformation from research universities to entrepreneurial universities. However, Chinese universities are not yet strong enough to translate research results, so encouragement is needed for some research universities to progress to entrepreneurial universities with an entrepreneurial spirit. Entrepreneurial universities must be capable of commercializing their knowledge actively through patenting and technology trading, based on high research capabilities. The Massachusetts Institute of Technology (MIT) in the United States is considered a model of both a research university and an entrepreneurial university. Its professors are excellent not only in basic research but also in translating the results of basic and applied research into marketable products and services, which is precisely what Chinese universities lack. (1) It is necessary to redesign and redefine contents of academic services through the motivation system, and build a triple-combination appraisal system for “scientific research value”, “commercial value,” and “innovation value” of sci-tech achievements of universities; (2) Form a management system that is compatible with an entrepreneurial research university, and establish research centers and laboratories that focus on cross-disciplinary research projects. Form an entrepreneurship education ecosystem with positive interactions among schools, communities and enterprises by establishing a wide network of external links with society, such as various incubators and sci-tech parks, venture capital institutions and entrepreneurship training institutions, by which entrepreneurship resources of all kinds can be effectively developed and integrated; (3) Promote education and teaching reform to cultivate students’ entrepreneurship. Efforts should advance forward to form a curriculum with an entrepreneurial spirit that meets the basic requirements of a research university, so as to cultivate students’ entrepreneurial consciousness and skills through classroom teaching. Therefore, an entrepreneurial research university is less about commercializing its research but more about providing development strategies and cooperation plans for economic and social development, especially at a regional level, to develop potential partners in related sectors such as industry, government, etc. to become entrepreneurial research universities with functions of teaching, research and service.

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4 Further Strengthen National Research Capacity Now, China is in a key period of further enhancing its international competitiveness, accelerating the transformation of its economic growth model, and moving from a large sci-tech country to a strong one. So, a long-term mechanism for the continuous accumulation of a high level of sci-tech requires sci-tech support to ensure smooth realization of major tasks for national economic growth and social progress, which requires even more strengthening of national research capacity, especially in international frontier areas and major sci-tech fields. The national research capacity refers to the capacity for basic research, generic technology R&D, and engineering and technology research that focuses on frontier issues of world disciplines and major theoretical and practical issues in national economic and social development intending to promote technological progress and enhance indigenous innovation capacity (see Fig. 2). Many large-scale research institutions at the national or industrial level have been split up or converted during the reform process of the existing research system. The scientific and technological system reform, which is based on “Ensure Support to Small Part of Scientists and Engineers, While Regulate Majority by Market Forces” has weakened the national public research capacity, although it has reduced the burden on the scientific and technological system. Existing research institutions in China suffer from small-scale and duplicated construction, as well as functional convergence with enterprises, which not only fail to provide effective technical

Frontier Issues in World Disciplines

Public Basic Research Capacity

Major Issues for National Development

Generic Technologies R&D Capacity

Synergistic Innovation Mechanism

Large-scale National Laboratory

High-level Industrial Research Institute

Fig. 2 National research capacity building

Engineering Technology Development Capacity

Modern Research System

National Engineering Research Center

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support to enterprises but also needlessly consume scientific and technological resources. Industrial research institutions that can support various sectors and provide a stable guarantee for major industrial technology development are required during scientific and technological system reform in the future. Efforts should focus on the following aspects to strengthen national research capacity. 1. Nationally, build groups of major basic research labs in key fields at the frontier of science and technology, which will focus on enhancing national capacity for public basic research Sets of large-scale national laboratories of world-class level should be built with concentrated resources in universities and research institutions rooting the existing national key and related labs based on research universities and research institutions, which are well-founded, competitive, and of high standard so that they can reach the capability of pure basic research and demand-oriented basic research similar to the Cavendish Laboratory of Cambridge University, and engage in basic, long-term, forward-looking and public welfare basic research and frontier work of science and technology. Major basic research labs should be oriented to the major needs of national modernization and social development, carry out basic and applied basic research, actively undertake major national research tasks, come up with major research results with original innovation and IIPR, to support technology for economic construction, social development and national security, and contribute prominently to the technological progress of related sectors. For major basic research experiments, universities, research institutions and enterprises should be encouraged to participate in a variety of ways for joint construction and management. Attracting, aggregating, and cultivating international first-class talents should take priority. Attention is required for cultivating research teams to form groups of innovative teams with large size, reasonable age and knowledge structure, cohesiveness, and vitality. 2. Industrially, build a high-level industrial research institution to solve major technical challenges Industrial generic technologies are those that have been or may be widely adopted in many fields in the future, whose R&D results can be shared by and will profoundly affect an industry or multiple industries and enterprises, and bring great benefits economically and socially. It has become a major issue concerning the overall situation of China’s industrial development to establish a sound research platform for industrial generic technologies, which will promote the optimal allocation and open sharing of sci-tech resources and provide strong technical support for continuous innovation in various sectors. R&D of industrial generic technologies must focus on the integration and synergy of industrial entities, for which organization modes such as major special projects, industrial technology innovation strategic alliances, pubic technology service platforms, etc. can be used to further promote industrial technology innovation, especially the enhancement of R&D capability for industrial generic technologies.

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It must be comprehensible that the organization of R&D in industrial generic technologies is extremely well defined in terms of technical and industrial characteristics. Organizational models of generic technologies in different industries can vary greatly and are characterized by diversity in practice. The following measures are recommended: (1) set up batches of industrial technology research institutions representing national advance by relying on converted industrial research institutions to establish an organizational guarantee system for the supply of major industrial generic and key technologies; (2) guide the establishment of a number of industrial technology research alliances that will be conducive to improving industrial technology, by which to further promote industrial innovation capacity and industrial technology advancement for pillar industries related to national security and livelihood, emerging industries related to new economic growth points and high-tech industries related to industrial structure optimization and upgrading; (3) for construction of research bases for industrial generic technology, universities and research institutions should be relied on in principle, but also leading enterprises representing the technical level of the industry will be available; (4) encourage the establishment of private generic technology research institutions, to which a special support or policy preferences will be assigned for the establishment of private generic technology research institutions. Furthermore, research institutions that are already in business can be reorganized and restored to their industrial research functions, and non-profit organizations should strengthen the country’s public scientific and technological services. Highlevel industrial research institutions that integrate technology diffusion, system integration, and public technology services and operate in a public, open, basic, and diversified mode with social benefits as the primary focus should be established, with original research on applied technologies and breakthroughs in key applied technologies as the core, and with a focus on strengthening breakthroughs in key technologies and R&D of originally applied technologies as the primary focus. 3. Build up Engineering Research Center (ERC) at the enterprise level ERC is an important part of the national science and technology innovation system, which is an R&D entity jointly constructed by universities, research institutions and enterprises with strong R&D capability and comprehensive strength according to the major strategic needs of building an innovative country and optimizing and upgrading industrial structure, to improve indigenous innovation capability, enhancing core competitiveness and development strength of industries, aiming at fostering indigenous innovation capability by establishing a mechanism conducive to technological innovation and transformation of achievements, to bridge industries and scientific research, and to promote technological progress and core competitiveness of industries. ERCs go hand in hand with industrial companies, based on research institutions or universities, to form a national ERC. In line with industry development plans and requirements, the ERC directly serves industrial companies and is supposed to have a three-pronged mission: crossdisciplinary research, education, industrial cooperation and technology transfer. The ERC’s primary task is to conduct engineering validation and continuously provide engineering research results in sets for industrial-scale production, while the task

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of industrialization should be performed by enterprises in the industry. The establishment is carried out within the enterprise for first-class engineering experimental conditions, such as enterprise technology center, engineering technology research center and engineering lab, to promote the industrialization of sci-tech and form a base for scientific research, technological innovation and industrialization in China. A primary goal of the ERC is to facilitate the application of university academic research resources to industrial product innovation via government policy guidance to assist in the development of next-generation critical technologies for industry to solve major industrial and engineering problems. In addition, ERC acts as a catalyst for the change of engineering education in universities to a cross-disciplinary and broad-based direction through the association of universities and industries, thus promoting integration of education and research and the cultivation of new cross-disciplinary engineering talents. 4. Construct synergistic innovation mechanism to drive optimal coordination of innovation resources Synergistic innovation is a more complex innovation organization method. Its key lies in the formation of a network innovation model in which universities, enterprises and research institutions are the core elements, and the government, financial institutions, intermediary organizations, innovation platforms and nonprofit organizations are the auxiliary elements, which can generate a non-linear effect of “1 + 1 + 1 > 3” via in-depth cooperation and resource integration among knowledge creation and technology innovation players. An open, cooperative and shared innovation model has proven to be an effective way for improving innovation efficiency in a globalized technology and economy. Implementation of in-depth cooperation and open innovation across disciplines, sectors and industries by fully mobilizing the enthusiasm and creativity of enterprises, universities, research institutions, etc. is more important to speed up the technology integration and diffusion among different fields, industries and links of the innovation chain. Thus, synergistic innovation is an organizational model for innovation in which firms, governments, knowledgeproducing institutions (universities, research institutions), intermediaries, users, etc. are integrated across large spans to achieve major technological innovations. Synergistic Innovation is a new paradigm for scientific and technological innovation that promotes enterprises, universities and research institutions to give full play to their respective capabilities, integrate complementary resources, to accelerate technology application and industrialization, and to collaborate in industrial technology innovation and industrialization of scientific and technological achievements via the guidance of national will and institutional arrangements. Strengthening synergistic innovation involves the synergy between sci-tech and the economy, i.e., increasing the contribution of sci-tech to economic growth. A synergistic innovation mechanism, among national effective guidance, industrial demand-pull, creative inspiration from universities, and in-depth technical support from research institutions, should be actively utilized to encourage open, sharing and in-depth cooperation of “government-industry-university-research” with major special projects as pulling force to further improve the international competitiveness of industries.

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Implementation of synergistic innovation requires a synergy between sci-tech and education, to accelerate the establishment of an interactive mechanism for organic integration of scientific research and higher education. Systematical cultivation should be carried out for a group of scientific and technological leaders who can break through key sci-tech challenges, develop high-tech industries and drive the development of new disciplines, by means of major sci-tech projects and integration of projects-bases-talents at a high level. Efforts are required for strengthening the documentation of scientific and technological achievements, the development of lesson plans and teaching materials, to enhance the major role of scientific research in knowledge accumulation, education and teaching and talent cultivation, thus ensuring more qualitative improvement of higher education. 5. Set up a Modern Research and Innovation System Institutional innovation is the key to promoting the reform of the scientific and technological system. The modern enterprise system, with “clear property rights, exact rights and responsibilities, separation of government and business, and scientific management” as its core, has played a decisive role in the reform and development of Chinese enterprises. However, establishment of a modern research system with reform of the scientific and technological system as the core has failed to achieve optimization. Therefore, it is imperative to establish a modern research and innovation system that fits the requirements of globalization, thus, we need to do the following: expand the management autonomy of research institutions, develop a research management system to establish a modern system for research institutions; deepen the reform of research management system of universities, with a focus on the operation mechanism, which is open, mobile, competitive and collaborative, to strengthen the combination of sci-tech innovation and talent cultivation, for building a number of high-level research universities; cooperation in sci-tech innovation and talent training among research institutions, higher education institutions and enterprises should be further promoted based on national goals and industrial needs, so as to promote resource sharing and enhance the capability of original innovation and transformation of sci-tech results. (1) A basic idea that talent cultivation must be highlighted in a modern research and innovation system Building a high-level research team that serves national goals and is dedicated to the cause of science and technology is fundamental to the development of science and technology in China. Scientists and engineers engaged in basic research, frontier technology research and social welfare research, are particularly one of the key forces of scientific and technological innovation in China. (2) Speed up setting up a modern research institution that is of “clear responsibilities, scientific assessment, open and orderly, regulating management” Strengthen construction of research institutions in accordance with scientific development to improve the current situation that some research institutions are unclear

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in duties, scattered in strength and weak in innovation capability, so as to optimize the allocation of scientific and technological resources and concentrate efforts on forming superior fields of disciplines and research bases. Full support should be given by China to a group of lean research institutions that have taken shape. Full play of core roles of these research institutions requires a goal to improve innovation capacity, a focus on sound mechanisms, further deepening the reform of the management system and accelerating the establishment of a modern research institution system. Research institutions in social welfare should give full play to the technical advantages of the industry to improve scientific and technological innovation and service capabilities, thereby solving major scientific and technological problems in social development; research institutions in basic science and frontier technology should give full play to their disciplinary advantages to raise the level of research, by which to achieve theoretical innovation and technological breakthroughs and solve major scientific and technological issues. (3) Modern research and innovation system requires a mechanism for stable sci-tech investment that supports innovative activities of research institutions The discipline and team-building and major innovative achievements are outcomes of long-term and continuous efforts. It requires relatively stable and significant financial support for research institutions engaged in basic research, frontier technology research, and social welfare research. Targeted support should be provided according to different types and specialties of research institutions, especially for discipline building, basic work and talent teams that require long-term accumulation. (4) Modern research and innovation system requires the establishment of operational mechanisms and innovation capacity evaluation systems that are conducive to original innovation Autonomous topic selection in scientific research is crucial to improving original innovation capabilities and fostering a talented workforce. Therefore, it is crucial to strengthen support for research institutions to carry out an auto topic selection in scientific research and to create a space and environment for free scientific exploration. In addition, the decision-making autonomy of research institutions in terms of sci-tech funding and personnel systems should be further expanded to improve the coordination and integration of innovation activities within research institutions. Besides, an evaluation system for the overall innovation capability of research institutions should be established, as well as a comprehensive evaluation system that is scientific and reasonable, so as to conduct a comprehensive evaluation of overall innovation capability in terms of talent team building, quality of research results, and management operation mechanism, thus promoting research institutions to improve their management level and innovation capability.

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(5) An effective mechanism for open cooperation among research institutions is required for a modern research and innovation system A combined employment system of fixed and mobile staff should be in place. Employment system and position management should be fully implemented to openly recruit research and management talents from the whole society. An effective mechanism is required to facilitate various forms of alliances among research institutions, enterprises and universities to enable knowledge flow, talent cultivation and sharing of sci-tech resources.

5 Great Efforts for Synergistic Innovation Also, the key to building an innovative country covers in-depth cooperation of “industry-university-research”, synergistic innovation and the design of a synergistic innovation system based on strengthening the scientific and technological innovation capabilities of enterprises, universities and research institutions.

5.1 Establish a National Innovation Committee to Further Reform the Science and Technology System and Foster Synergistic Development of “Industry-University-Research” A flat and autonomous “joint innovation network” has emerged in Silicon Valley, which brings together innovative companies, research universities, research institutions, industry associations, and service companies. The success of China’s TDSCDMA industrialization special project also stems from a highly synergistic innovation among government, industry, university, and research institutions. An innovation model that is open, collaborative and shared has proven to be an important way to effectively improve innovation efficiency in a globalized technology economy. Implementation of in-depth cooperation and open innovation across disciplines, sectors, and industries by fully mobilizing the enthusiasm and creativity of enterprises, universities, research institutions, etc. is more important to speed up the technology integration and diffusion among different fields, industries, and links of the innovation chain. Thus, synergistic innovation is an organizational model for innovation in which firms, governments, knowledge-producing institutions (universities, research institutions), intermediaries, and users, etc. are integrated across large spans to achieve major technological innovations. Set up a National Innovation Committee, which is jointly organized by the National Development and Reform Commission, Ministry of Science and Technology, Ministry of Industry and Information Technology, and Ministry of Education, etc. to carry out major national sci-tech innovation projects and build major

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national innovation bases, etc. Attention is required to be paid to the construction of a governance system for scientific and technological innovation while implementing synergistic innovation. To meet the requirements of national governance capacity and modernization, major tasks of future scientific and technological system reform are to cultivate R&D institutions with public sci-tech characteristics and the innovative organizational system of synergistic innovation, which are open and cooperative, while these new R&D and innovation organization systems include national public research institutions and “industry-university-research” cooperative organizations for synergistic innovation. A decision-making committee system should take shape with the participation of ministry leaders, scientists, entrepreneurs, investors, management experts, and economists, etc. to enable more effective integration of sci-tech versus the economy, sci-tech versus education, sand ci-tech versus social progress, etc.

5.2 Build a Market-Oriented Mechanism to Enable Synergistic Innovation Following measures are available, i.e., establish a sound institutional mechanism that encourages original innovation, integrated innovation, and re-innovation by import and absorption, improve the market-oriented mechanism for technological innovation to give play to a guiding role of the market on the direction of technological R&D, route selection, factor prices, and allocation of various innovation factors; establish a synergistic innovation mechanism for “ industry-university-research”, to step up enterprises’ major role in technological innovation, to give full play to the innovative backbone of large enterprises, and to stimulate innovative vitality of SMEs; develop the technology market with a sound technology transfer mechanism, and innovative business model to facilitate the capitalization and industrialization of sci-tech achievements, so as to enable the market to be a real decisive force in the flow of sci-tech innovation factors. So, here are steps that must be taken. (1) Large enterprises go further in the role of innovation backbone, and SMEs are stimulated Large enterprises, which are the backbone of technological innovation, enjoy a far greater ability to integrate innovation resources such as technology, talent, capital, and business models, etc. They should not only be the backbone of innovation in their sectors but also be able to take the lead in leading the SMEs to form innovation clusters. Meanwhile, innovation support for SMEs should be stepped up, such as being to create a fair and competitive market environment to support the innovation activities of small, medium and micro enterprises, specifically, build a public innovation service platform oriented to enterprise demands, via which to provide technological innovation services for them; actively implement preferential policies to encourage enterprise innovation, specifically, further step up the implementation

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of policies such as deduction of R&D expenses and tax incentives for high-tech enterprises to improve the return on investment in enterprise technological innovation, for the formation of a fair and inclusive policy environment. (2) Explore a technology exchange marketplace to stimulate synergistic innovation Exploration of market potential release in various aspects such as display and docking, technology evaluation, technology trading, factor allocation, etc. of sci-tech achievements to explore the business model of sci-tech achievement transformation service in a context of further the reform of the scientific and technological system. (3) Sound synergistic innovation mechanism to boost capitalization and industrialization of sci-tech achievements Accelerate the reform of the scientific and technological system, sound the mechanism of synergistic innovation by enterprises, universities and research institutions, and set up policies and measures conducive to the flow of innovation resources, the gathering of high-level talents and the transformation of scientific and technological achievements, so as to provide a favorable institutional guarantee for the synergistic innovation by enterprises, universities and research institutions. (4) Build a long-term mechanism for synergistic innovation Further the exploration on the operation and benefit distribution mechanism of “Industry-University-Research” synergistic innovation platform, for example, for cooperation among enterprises, universities and research institutions, multiple approaches, such as operation via project entities, the joint establishment of public R&D platform, attracting venture capital, etc. to realize the bundling of benefits and form a new mechanism of risk-sharing, benefit-sharing, shared development and long-term cooperation. In addition, set up a Technician System, by which technicians will be encouraged to go closer to the industry to solve issues in development, and enable research to be more effective and relevant, so as to improve the effectiveness of sci-tech investment and contribute to the formation of a long-term mechanism for “industry-university-research” cooperation.

5.3 Improve Institutional Mechanisms for Synergistic Innovation For the sake of this mechanism, give full consideration to market guidance on allocation of various innovation factors such as technology R&D direction, route selection, factor prices, etc.; reform the research system that supports researchers to set up spin-off companies for motivation; establish public technology service centers to share scientific and technological resources; give full play to the dominant role of enterprises in innovation decision-making, R&D investment, research organization,

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and transformation of results; form a long-term mechanism of “industry-universityresearch” cooperation, to create a new pattern society-wide to jointly promote the transformation of sci-tech achievements. (1) Establish a mechanism to guarantee the benefits of “industry-universityresearch” synergistic innovation The key to promoting “industry-university-research” synergistic innovation is to establish an effective mechanism for mutual benefits. A fundamental solution is required for the interest mechanism. A real synergistic innovation among enterprises, universities and research institutions will not be formed unless interests of all parties are fully guaranteed because they are different entities with different organizational goals and interests. Moreover, the benefit mechanism and the evaluation mechanism are closely linked. Therefore, targeted evaluations in various types for “industry-university-research” synergistic innovation should be conducted based on the characteristics and differences of players. (2) Build a benefit-risk balance mechanism for synergistic innovation A balance between benefits and risks in the synergistic innovation of “industryuniversity-research” is crucial, so it is necessary to conduct a risk assessment and supervision timely on the production factors such as technology, capital, talents, etc. invested by all parties in “industry-university-research”, and to predict the possible risks in advance. Also, all parties are urged to carry out an assessment and identification on development trends of “industry-university-research” synergistic innovation by using advanced tools such as technical search, technology road-map, and technology route. A focus is to given for addressing issues like incomplete information disclosure, and asymmetric information distribution, etc. in synergistic innovation, thus correctly assessing the technological value and risk generated by the innovation. (3) Build a diverse system for synergistic innovation Synergistic innovation is essentially a systematic reform and innovation, involving the reorganization of innovation factors and resources, organizational reform and restructuring. Therefore, further reform in a personnel management system, research organization mode, talent training mode, resource allocation mode, and quality evaluation mechanism, etc. must be carried out to reasonably allocate and effectively integrate innovation factors such as talent, capital, and information, etc., and to carry out joint research and in-depth cooperation based on fully releasing the vitality of all parties in “industry-university-research”. (4) Build a diversified input system and a venture capital mechanism for synergistic innovation Furthermore, increase the investment in “industry-university-research”. The proportion of social investment in R&D to GDP will be increased to over 2.5% by 2020 according to the National Outline for Medium- and Long-Term Sci-Tech Development (2006–2020). Simultaneously, multiple approaches should be adopted for

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guidance of financial capitals such as banks, insurance firms, and venture capital, etc. to participate actively in “industry-university-research” cooperation, to build a diversified synergistic innovation investment system, which combines enterprise as the dominant role, market orientation and social financial capital, thus solving the bottleneck of capital in the current “industry-university-research” synergistic innovation. In addition, a special fund for synergistic innovation should be set up to build an interactive mechanism between the funds for transformation of achievements and venture capital, access conditions of which should be appropriately relaxed to encourage venture capital funds to participate in all aspects of “industry-universityresearch” synergistic innovation. In parallel, a registration system for IPR mortgages and pledges should be sound to foster joint insurance and loans by commercial banks to support “industry-university-research” synergistic innovation projects.

5.4 Further the Reform of a Synergistic Innovation System and Refine the Scientific and Technological Innovation Policy System We should conduct measures available as followed: carry out joint sectoral investigations around the National Outline for Medium and Long Term Sci-Tech Development (2006–2020) and Law of the Peoples Republic of China on the Progress of Science and Technology, to analyze the status quo and main problems of “Industry-UniversityResearch” in China, and learn from experience of “Industry-University-Research” during the “12th Five-Year Plan”; formulate supporting policies and implementation rules to promote the integration of “industry-university-research” and improve mechanisms and policies, in accordance with the implementation of the “13th Five-Year Plan” for science and technology; guide local governments to carry out regional “industry-university-research” synergistic innovation pilot projects in conjunction with their regional strategies for economic development, to jointly improve the guiding documents for promoting the integration of “industry-university-research”, targeting to improve the science and technology innovation policy system; speed up legislation on “University-Industry-Research” cooperation to create an external policy environment that facilitates “University-Industry-Research” synergistic innovation, such as the distribution and protection of IPRs, financial and tax support for “University-Industry-Research” cooperation, and the cultivation of innovative talents as required to promote industrial development; improve the legal and policy system for scientific innovation by promoting a nationwide or regionwide synergy of “industry-university-research” development policies.

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6 Accelerate Transfer and Transformation of SCI-TECH Achievements Science and technology constitute a primary productive force Direct transformation of scientific and technological achievements into productivity is of great significance to promoting socio-economic development and progress, and is also crucial to building an innovative country. In general, China suffers from an insufficient combination of science and technology and economy in research institutions and universities, inefficient transfer and transformation of achievements, unfit matching of research and market demands in research institutions and universities, unfavorable channels for transformation of scientific and technological achievements, among which, barriers still exist in the system and policies that hinder the transformation and industrialization of sci-tech achievements, as well as inadequate measures to promote the application of sci-tech achievements. Given the new economic normal, a new mechanism and system for the transformation of achievements should be formed from the top-level design, enabling research institutions and universities to focus their research achievements on national demands and industrial development needs, so that they can grasp core technologies of industries and provide strong support for national innovation-driven development. The transformation of scientific and technological achievements into economic and social fields should be accelerated, to release the vitality and potential of the huge research achievements stored in research institutions, universities and large SOEs. It is an important supply-side structural reform, which is of great significance for enhancing scientific and technological innovation and playing a leading role in supporting the accelerated transformation of the mode for economic development. Therefore, it is necessary to further the integration of sci-tech with economy and education, for example, to encourage IPR owners to actively focus on technology transfer, for which their reasonable rights and interests should be protected while preventing the improper loss of state assets. Innovation for research transfer and service mechanism. The previous model focusing on single technology transfer and promotion should be upgraded to the one that combines the construction of an innovative service platform and national or regional major research projects to achieve technology integration and large-scale transfer. The mechanism of implementing the IPR strategy should be innovated, where the acquisition, protection and application of IPR will be taken as a major task and evaluation index of research management. Further enhancement should be given to the transfer capability of research achievements to vigorously promote strategic cooperation alliances with venture capital institutions at home and abroad to greatly improve the transformation efficiency. Moreover, we should strengthen the construction of an intermediary service system for science and technology, e.g., research achievements incubation, transfer and transformation institutions such as national university sci-tech parks, etc. to form a socialized intermediary service network for sci-tech covering key regions in China.

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Significant improvements should be made to the professionalism of technology transfer institutions and personnel, their treatment, knowledge transfer proceeds, and scientist and engineer motivation, in order to realize the transformation of development mode driven by the great transformation of research. Efforts are required to actively introduce financial capital into technology transfer, which is expected to enable the transfer of knowledge and technology to be more efficient in all aspects, to improve technology incubation and entrepreneurship in both quantity and quality, so as to form a high-level and strong radiation-based innovation system for science and technology services that will provide enterprises with sufficient and favorable knowledge sources for technological innovation and achieve open innovation efficiently. A synergy of scientific and technological achievements with education and talent training should be fostered to speed up the establishment of an interactive mechanism for the organic integration of research and higher education. Policies should be applied to encourage teachers, who are outstanding in science and technology to engage in teaching, to enable research achievements to be more written and to encourage high-level curricula offered by high-level research institutions in science and technology, to boost the role of research in knowledge accumulation, education and teaching, and talent training, and to further improve the quality of education. Moreover, the role of synergistic innovation of the university versus university, university versus institution, university versus enterprise, university versus local government and university versus international players should provide a new model and platform for the cultivation of innovative talents to achieve simultaneous improvement of innovation capability and talent cultivation quality.

7 Policies and Mechanisms for Improvement of Venture Capital Venture Capital, as a type of innovative financing source, enables to make up for defects of the current financing system, provides a channel to transform research results and technology projects with a certain market prospect, and can turn the technological innovation ability of enterprises into productivity and commercial outcomes. What venture capital focuses on is the future profitability of an innovative project, the overall development of an enterprise and the potential of an entrepreneur, so it enables SMEs that are innovative to be financed. Generally, venture capital is raised through private placements, etc., to incubate and nurture high-tech SMEs with innovative technologies and high growth potential, and listed them in the small-cap market (or growth enterprise board market) for further growth and public refinancing, with a view to their eventual maturity and access to the general capital market. Venture capital previously invested will be withdrawn in the form of share transfer, while proceeds will be reinvested in new high-tech enterprises to promote new technological innovation, thus realizing an efficient cycle of investment-exit-reinvestment

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for venture capital, by which financing is continuously provided for technological innovation of high-tech enterprises. Venture Capital is an investment activity that provides equity capital to highgrowth entrepreneurial enterprises, primarily of the technology type, and provides management and consulting services to them, intending to obtain medium- to longterm capital appreciation through equity transfer after the invested enterprises have matured. The venture capital mechanism requires a favorable external environment and a reform system to cultivate an economic operating system that adapts to laws of the socialist market economy, is conducive to the acceleration of technological innovation and transformation of achievements, and enables the function for advancing technology by the economic sector and guaranteeing support by the financial sector. Its major contents include investor, investment target, exit channels, intermediary service institutions, and supervision system. Venture Capital is a new mechanism that combines capital and technology management with entrepreneurship to encourage technological innovation and support the development of hightech industries; a major complement to traditional investment and financing mechanisms such as bank loans. It has dramatically changed the original style of thinking and production society-wide. Venture capitalists integrate elements such as market, entrepreneurs, technology, capital, and so on, to optimize resource allocation, financially support high-tech enterprises, and actively guide the flow of idle capital in society, which guides idle funds, thereby boosting the innovation and development of high-tech industries, promoting the upgrading of industrial structure and productivity development, and ultimately the development of economy and society.

7.1 Create a Favorable Environment for Venture Capital A favorable institutional environment for venture capital development is part of the government’s function, including the setting of preferential policies, construction of technology parks, legal support, etc. (1) Tax incentives are the key to government support for venture capital, for example, the impact of the ongoing process of adjusting the U.S. capital gains tax on the development of the venture capital industry. Tax policies are available to direct venture capital funds to invest in early-stage projects, for example, as for a policy that provides tax incentives to certain forms of organizations, the 75% investment credit policy already in place can be extended to all forms of organizations, and various tax incentives and preferential policies can take their role in accordance with the investment stage and cycle of ownership held by venture capital institutions, so that more institutions may be available for projects in the early stage, thereby forming a well-defined and functional system consisting of angel investment funds, venture capital funds, M&A funds, and pre-IPO (investment before listing) funds.

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(2) The intrinsic property of regional concentration of venture capital enables technology parks to be an effective social organization for supporting venture capital in high technology. Technology-park construction is a key entry point for the government to support venture capital, such as the development of high-tech parks represented by Silicon Valley and Route 128 in the U.S. are closely related to a significant role of venture capital. (3) Legal support from the government for venture capital covers multiple aspects such as intellectual property law, securities law, anti-trust law, science and technology law, and immigration policy, etc.

7.2 Cultivate Professionals in Venture Capital to Create a Culture Conducive to Venture Capital The professional is the primary element of venture capital. Venture capital, a type of investment and financing that involves high risk, high return, and high intelligence, requires a very strict caliber of talent. It has been proved by the venture capital practice in developed countries that well-qualified professionals depend on a sound social talent training system. Training systems for professionals in venture capital have been mature, which enable a large number of qualified professionals to be available for their countries every year, as well as forming a large professional pool by attracting talented venture capital professionals from other countries, especially developing countries, to devote themselves to the venture capital business. Besides, a mature market system and competitive business environment in developed countries provide a conducive environment for the growth of venture capital entrepreneurs. A favorable environment for talent contributes to the development of the venture capital industry, as a driver for technological innovation and a call for more talent to join, thus forming a virtuous cycle in which venture capital drives the economy and economic growth promotes the growth of venture capital talent. It is the operation of venture capital by professionals that will help entrepreneurs to start their businesses and attract investors. A mature venture capital professional should come from a wide range of disciplines, with knowledge of both technology and management; experience in corporate management; familiarity with capital market operations; well-developed skills in communication and negotiation; capability in resource integration; and a unique insight in identifying prospective projects and decision-making for entry and exit (Cheng Siwei, 1999). Experience in outlining a company, in general, is the most important one of these requirements, so professionals in venture capital come not from school, it is time and practice that cultivates the most important professional investment skills. In addition, different professionals are required at different stages of venture capital development, as the experience of the U.S. venture capital industry shows. Angel investors are usually entrepreneurs, venture capitalists are usually from the background of Chief Financial Officer (CFO), Chief Technology Officer (CTO), venture capitalists, private equity investors are

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mostly financial investors, and pure private equity investors are very knowledgeable about the IPO process. As a result, the development of China’s venture capital industry necessitates a culture conducive to venture capital in order to foster innovation and entrepreneurship; additionally, the professional investment ability of venture capitalists should be purposefully cultivated in tandem with the practice of venture capital at various stages. As venture capital places a special focus on innovative ideas, the so-called “unconventional ideas” should be accepted rather than rejected by society. The social and cultural environment for venture capital require encouragement in innovation, risktaking, and responsibility for all. This environment must also breed a strong sense of trustworthiness, which depends on the restraining and long-term development of other supporting mechanisms in society. An effort is required in building a culture for innovation and entrepreneurship and pragmatism, which is conducive to innovation, thus stimulating the spirit of innovation and entrepreneurship and generating a cohesive and affinity culture; encouraging a culture of entrepreneurship and innovation and tolerance of failure, organizational atmosphere of internal and external consistency, harmony and cooperation in entrepreneurship and innovation, which is favorable to an external culture of innovation and entrepreneurship, pragmatism and tolerance of failure.

7.3 Establish a Multi-level Capital Market The exit of venture capital is a key component of proper functioning of venture capital. A multi-level venture capital market in China should include the main-board market, the SME board market, the GEM market and the equity market to optimize the market environment for venture capital exit in China (Xu Guanhua, 2009). Establishment of a multi-level capital market requires the GEM market to be actively promoted because the main-board and SME board markets are highly demanding for the listing of enterprises and unable to effectively solve the financing and exit issues of SMEs. The GEM was founded on the idea of growth as a criterion to serve innovative SMEs with “technology or model innovation + prospective growth”, placing more emphasis on the growth and future of enterprises. However, the GEM currently puts forward profitability requirements while focusing on growth of enterprises to be listed, and appropriately raises the entry criteria by setting financial indicators, resulting in little variation from the SME Board, which is not conducive to the formation of a multi-level capital market. Therefore, regulators’ consideration of the GEM should focus on the ability of enterprises for independent innovation and development potential, rather than the traditional judgment focusing on profitability indicators but not growth potential; moreover, the property rights market should be regulated and developed, i.e., the unlisted equity transactions should be regulated by including them in the scope of property rights transactions or technology property

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rights exchanges. Property rights transactions via property rights exchanges or property rights intermediaries enable integration of the property rights trading market and the M&A market, thus improving the trading function of the equity market.

7.4 Cultivate Diversified Venture Capital Investors A focus during constructing a sound venture capital mechanism must be on cultivating diversified subjects of venture capital, not only cultivating venture capital companies and venture capital funds but also actively supporting the growth of other types of venture capital investors. Venture capital companies and venture capital funds are in a dominant position among venture capital investors. They serve various types of high-tech MLEs and SMEs by the function of absorbing venture capital from various investors to provide support, such as capital, management, etc., for high-tech industrialization. Venture capital companies are non-financial enterprises focusing on venture capital, with business being investing in high-tech enterprises and technology-based SMEs, transferring the equity formed by the investment, providing financing consultation for high-tech enterprises, participating in the management of the invested enterprises, etc. Therefore, a principle of the separation of government administration from enterprise management shall be adhered to in the cultivation of venture capital companies, and non-SOEs, foreign investors and private institutions can be encouraged to invest in the shares. Forms such as Limited Liability Company, Joint Stock Company, etc. are available for venture capital companies, while new modes of operation should be actively explored. The venture capital fund is an investment fund that specializes in venture capital to promote the development of technology-based SMEs. The private placement shall be adopted by the venture capital fund to issue fund shares to identified investors. Individuals, enterprises, institutional investors, and foreign investors are possible fund-raisers, and the sources of private capital should be broadened; also, certain risk tolerance should be required of investors. A venture capital fund should be set up on a closed-end basis, i.e., total issuance and duration are determined in advance, and shares are not redeemable during the duration of the fund. A sound internal incentive and constraint mechanism shall be designed according to a principle that enables and encourages the participation of production factors (capital, technology, etc.) in the distribution of returns, in order to guarantee a smooth operation of these two types of venture capital institutions. In addition, steps should be taken to perfect the investment and financing institutions and mechanisms, thereby fostering a multi-channel approach to venture capital funding. A principle of “multi-investment, shared risk and benefit” shall be adhered to for broadening the investment and financing channels and realizing the full marketization of financing, which will enable the full utilization of the stock of SOE assets and also make full use of the science and technology development plan or projects already in progress. The establishment of a sound venture capital operation mechanism covers strengthening the project selection and evaluation mechanisms of venture

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capital. For example, measures such as selecting a group of technical and financial professionals in the scientific and financial sector and establishing a set of strict project evaluation and selection procedures to set up specialized market intermediaries such as venture capital consulting and management companies and corporate financial advisory companies to give full play to their advantages in evaluating investment projects and channeling venture capital into promising and potential high-tech enterprises that have been nurtured.

7.5 Build a Sound Venture Capital Exit Mechanism The exit mechanism of venture capital is one of the key aspects of venture capital, as it gets its income not by sharing the operating profit of the enterprise, but by going public, being acquired by other enterprises, or in the process of equity liquidation. The smooth exit of venture capital is of great importance to compensate the risk taken by venture capital, accurately evaluate the value of entrepreneurial assets and venture capital activities, and attract social capital to join venture capital. Exit routes are as followed, depending on the operating conditions of the investee company and the external financial environment: (1) initial public offering (IPO). IPO is the best exit route for venture capital and is the goal sought by venture capitalists; (2) Mergers and Acquisitions. The venture capital company transfers its holdings to other investors, in which case the venture company generally cannot meet the requirements to be listed and cannot sell its equity publicly. But the company will be taken over by another company or investor who is interested in it if it features a unique technology and has bright prospects. The venture capital company can take the opportunity to exit with not only a full recovery of its investment but also a significant return; (3) Share repurchase. Capital and market prospects of a venture company have been ideal when the venture company grows to a certain stage where venture entrepreneurs may prefer not to be subject to venture capitalists and may not be willing to see their shares taken by a third party, so they buy back the shares held by venture capitalists at their own expense; (4) Bankruptcy liquidation. The last thing a venture capital company or venture company wants is for the venture company to go into liquidation due to poor management. The venture capital company should decisively withdraw the venture capital and use what it can recover for the next investment cycle, in case the venture company loses its growth potential or fails to grow fast enough to give the expected high return.

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7.6 Establish a Policy and Regulatory System to Guide Rapid Development of Venture Capital Formulation of policies conducive to venture capital covers loan guarantee policies, tax incentives, financial approval, and expansion service policies, etc. For a sound venture capital mechanism to be established, measures should be taken by the government, such as specific rules and regulations for the application, approval and management of venture capital companies and venture capital funds; formulate support policies such as fiscal, financial and taxation that are conducive to the development of venture capital, with focus on the implementation plan for the establishment of a “high-tech enterprise board” on the main board market (Shanghai and Shenzhen Stock Exchanges), policies and regulations related to the issuance, listing and trading of stocks of technology-based SMEs; policies related to the listing of technology-based SMEs on the GEM and listing on overseas GEMs; approval and management methods for venture capital industry associations. As well, approval and operation systems should be established to encourage foreign venture capital‘s entry into the Chinese venture capital market. First, the legislation on venture capital should be accelerated, i.e., to amend, supplement and improve the existing laws and regulations, and to add laws and regulations on venture capital objects. Standards for high-tech enterprises can be defined by that of the industry or the product. The SMEs here are those with high technology, which can be defined by their paid-in capital or the value of output or the sales of high technology products. Second, we should improve the laws and regulations related to the source of venture capital funds. Government funding and corporate funding are the main sources for venture capital in China, which greatly limits the development of venture capital and concentrates the investment risk of venture capital. Therefore, it is necessary to broaden sources of venture capital and allow entry into the venture capital market for social funds, such as insurance funds, pension funds, bank funds, etc., which requires amendments and improvements to relevant laws and regulations, involving the Commercial Bank Law, the Insurance Law, the Regulations on Social Security Funds, etc.

8 Speed up Cultivation of High-Level Talent for Technological Innovation The key to building an innovative country is talents, especially those in innovative science and technology fields. It is impossible to achieve the goal of building an innovative country unless a strong team of innovative scientific and technological talents is in place. The worldwide competition for comprehensive national power is ultimately the one for talents, especially innovative talents. Those who can cultivate, attract, unite and employ talents, especially innovative talents, will be the ones seizing

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the first resource to grasp the strategic initiative and achieve development in the fierce international competition. Cultivation of innovative talents is of great strategic importance for upgrading China’s science and technology, advancing the industrialization process and economic and social development, thus enabling the goal of constructing China as an innovative country. It is required to take the cultivation of innovative talents as a major issue and priority strategic choice at present and in the future, whether to realize the major historical mission of China’s Reform and Opening-Up to the new stage or to cope with the fierce international competition against globalization. The construction of an innovative country urgently needs innovative talents of multiple levels and types. It is recommended to give priority to the development of human resource capacity building for science and technology to nurture a large number of high-level scientific and technological talents with innovation spirit and capability in light of Chinese economic development and the inherent demand for upgrading industry and enhancing international competitiveness (see Fig. 3). High-level and -tech talents refer to high-level technical talents who are engaged in R&D and other work in the field of high-tech. We define high-level and -tech talents as those who have achieved breakthroughs, which have been recognized by academia and society, in the field of high technology, and lead the team carrying out further exploration and research in a certain direction in their field, including scientific and engineering talents. Specifically, it can be divided into the following groups: ➀ academicians of the two academies (Chinese Academy of Sciences and Chinese Academy of Engineering), with profound attainments in the field and a certain degree of influence in the international arena, are the strategic scientist or leaders in sci-tech; Fig. 3 Mechanism for cultivating scientific and technological talents Top scientist

Top engineering expert

Various types of sci-tech and technological innovation talents

High-level Talent Training Program

Scientific talent

Technical talent

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➁ leading figures or chief scientists in major scientific fields; ➂ national experts with outstanding contributions, winners of major national science and technology awards; ➃ experts who are entitled to special allowances from the State Council; ➄ chief scientist of major projects, innovator of major scientific and technological achievements, and technical leader of famous enterprises, such as “National Hundred, Thousand, and Ten Thousand Talents Project”, “Chinese National Programs for High Technology Research and Development (863 Program)”, and “Key Project of Chinese National Programs for Fundamental Research and Development (973 Program)”. The cultivation of high-level and -tech talents is a strategic demand for China’s economic and social development, and a team of high-level and -tech talents is closely related to China’s overall construction of a well-off and harmonious society, the construction of an innovative country, and the realization of sustainable economic growth. High-level and -tech talents are the carriers of scientific knowledge, engineering technology, practical experience, engineering design ability, innovative consciousness and capacity, as well as patriotism and dedication. The innovation team composed of high-tech talents is a major form of organization for R&D and innovation in science and technology.

8.1 Adhere to the Concept of Talent as the Primary Resource and Seek to Realize the Strategy for Making China Strong Through Training Competent Personnel Nowadays, science and technology constitute a primary productive force, while talented personnel are the primary resources. High-level and -tech talents are the creators of new knowledge, inventors of new technologies, creators of new disciplines, pioneers of new industries and leaders of major science and technology projects, who play a key role in enhancing the economic and technological development of China and its international competitiveness. Rapid growth of human resources is the most direct and important driver of modernization. This experience and the current situation of the Chinese talent pool require that a model of human resource development must be implemented as a precursor during the strategy for making China strong through training competent personnel, so as to effectively improve the overall quality of human resources. The concept of talented personnel is the primary resource must be established so that the development of human resources and the improvement of their overall quality can be prioritized at the top of all work, with constant attention. To this end, we will implement the following measures: Increase the investment in education and training to effectively improve the efficiency of education and training funds; continue reform for the education and training system, establish the concept of big education and training, build learning society, learning organization and learning community, so as to enable the education and training system to output high qualified talents early and abundantly; Speed up the construction of teams of various talents with emphasis on high-level and -skilled

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personnel so as to cultivate a group of leaders of indigenous innovation and young and middle-aged senior experts; build an team of high-level professional and technical personnel with great efforts and a focus on the construction of an innovative technical talent team; adhere to the strategic idea that talented personnel are the primary resources, take the cultivation of innovative technical talents as a strategic initiative to build an innovative country, and step up the construction of a strong team of innovative technical talents. Implementation of the strategy for making China strong through training competent personnel requires: (1) to establish a talent concept of “people-oriented”. Talent is the only resource with mobility and high added-value, while high-level talents are the root of indigenous innovation. Increasing indigenous innovation capacity requires efforts to discover, cultivate, attract and hold talents so that the creativity of talents can be maximized. So, key obstacles in the development of technical talents must be solved to create a relaxed environment for their advancement; (2) High-level talent planning must be given priority. Plan strategically for high-level talents by region and industry according to national science and technology development strategies and plans; formulate plans and preferential policies for the introduction of high-level technical talents according to specific plans for China’s macroeconomic restructuring and industrial structure optimization and upgrading; avoid talent loss while performing introduction of key talents; (3) Cultivate batches of talents with innovative spirit and capability. Great efforts are required to foster innovation and entrepreneurship education in order to cultivate high-level talents with an innovative and entrepreneurial spirit, flexible knowledge and outstanding social adaptability, and to cultivate new talents with persistent pursuit of science and truth, lifelong learning capability and international communication; (4) Strive to create an innovative atmosphere that is equal, open and tolerant to failure.

8.2 Implement the National High-Level Talent Training Program to Accelerate the Training of Top Scientists The serious shortage of high-level talents has become a common problem in countries all over the world as a result of economic globalization and the development of high technology. Developed countries, with their superior economic strength and excellent talent environment, have become formidable competitors and winners in the competition for high-level talents. It is the high caliber of talent from around the world that has made the United States the world’s top innovation powerhouse. The rise of innovative countries such as Japan, Korea, Finland, etc. is also closely related to the strength of their high-level talent pools. Chian has made a series of major achievements in science and technology since the founding of New China, especially since the reform and opening up, such as the “two bombs and one star”, manned spaceships, hybrid rice, high-performance computers, synthetic bovine insulin, etc., which have attracted the attention of the world, and indicate that China is more

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powerful in science and technology. All of these achievements are from the tenacious efforts of high-level talents in China. But we must be aware that China is still far behind innovative countries such as the United States, Japan, and South Korea, etc. High-level talents generally refer to the more prominent talents in a talent pool, who are of high quality, capability, and contribution, are at the forefront of various fields and are of greater influence at home and abroad. However, a description like this is far from sufficient for senior-ranking personnel in the National High-Level Talent Training Program. High-level talent in the National High-level Talent Training Program, as a strategic scientific and technological capital in the first line of national science and technology, is characterized by independent innovation capability. Therefore, increasing the indigenous innovation capacity should be the strategic base of the National High-level Talent Training Program, with the indigenous innovation capacity as a core for the cultivation institution and system to cultivate high-level talents, so as to improve their capability in original innovation, integrated innovation and re-innovation. The implementation of the National High-level Talent Training Program must enable a significant increase in the capacity for indigenous innovation, in the comprehensive strength of basic science and frontier technology research, in the capability of science and technology to promote economic and social development and safeguard national security, and must ensure that a number of sci-tech achievements with significant impact in the world can be made. As such, the core of the National High-level Talent Training Program is to enhance the capacity of indigenous innovation, aiming to cultivate groups of top scientists who can represent the fundamental interests of the Chinese nation, are world-class cutting-edge, and can drive the development of the national talent pool. In conclusion, it is imperative for China to cultivate many high-level talents by implementing the National High-level Talent Training Program, to build an innovative country; increase indigenous innovation capability to cultivate a group of top scientists with world-class level. This requires further policies and measures to strengthen the construction of innovative technical talents, to speed up the training and continuing education of various professionals, especially projects such as the “New Century Million Talents project”, the “Project of Creative Talents of the Highest Caliber at Colleges and Universities”, and the “Hundred Talents Program”, etc., to broaden the open training channels of high-level talents, by which to build a large pool of innovative senior experts. The National High-level Talent Training Program is to cultivate not a loner, but a team of high-level innovative experts, requiring cooperation and team spirit. Candidates to join the National High-level Talent Training Program, are required to be team players, but more importantly, also capable of organizing and coordinating, taking ownership of situations, and have strong solidarity The National High-level Talent Training Program is designed not only to enable the formation of such a team of experts but also to promote their competencies and build outstanding personalities that will empower them to become the core and leaders of the team. Diversified innovation training bases can be established to equip highlevel talents with knowledge, technology and innovation capability deeply through multiple channels, and wide fields. Various forms such as mentoring system, visiting professor system, cooperative development system, dispatch system and refresher

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courses for young cadres are available to strengthen the cultivation of high-level talents to meet diverse situations. Moreover, attention should be paid to enhancing the output effectiveness, where as high-level talent cannot just be expressed by major innovative achievements, but more importantly, these achievements should be transformed into productivity as soon as possible. State key laboratories and engineering (technology research) centers hosted by high-level talents should be open not only to the whole society, including enterprises, but also form a close innovation network system with them, in order to speed up the flow of knowledge and technology transfer so that research achievements can be transformed. In addition, the National High-level Talent Training Program must focus on training young and middle-aged high-level talents as primary subjects, to build up a pool of young and middle-aged scientists with innovative vitality, and then a pool of cutting-edge level scientists in the world.

8.3 Make Great Efforts to Cultivate Innovative Engineering and Scientific Talents The strategy for a talent-rich country is required for indigenous innovation capacity improvement and an innovative country, which has put forward urgent requirements for the reform and development of higher engineering education. The indigenous innovation path with Chinese characteristics requires the higher engineering education in China to gather a large number of engineering scientists who are capable of adapting to and supporting industrial development. For building an innovative country, many innovative engineering talents shall be cultivated as soon as possible, aiming at enhancing the innovation capability of a team of Chinese engineering scientists. For the indigenous innovation path with Chinese characteristics, it is essential to actively deal with the challenges of economic globalization by training a large number of engineering scientists who are competitive internationally. Both the inherent characteristics of engineering technology and the law of growth of technical talents should be grasped in order to cultivate high-qualified innovative engineering scientists. As our study shows, the optimal age range for growth of talented engineering talents is 25 to 45, peaking at 37. Excellent engineering and technical talents will take about 5 to 10 years to excel themselves than excellent engineering talents. Thus, the first 10–20 years serving in a company after graduating from school is crucial for engineering talents. How to scientifically use various incentives in these precious 10–20 years for more major achievements in their golden stage of life is the focus of the training plan for high-level and -tech talents. It shows that the growth of innovative engineering and technical talents is a combination of the accumulation of scientific and technical knowledge and the gradual development of innovative capabilities. In short, the growth of innovative engineering and technical talents is a process of improving knowledge, competence and quality together. Engineering scientists have to keep abreast of the most advanced scientific and technical

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knowledge, and engage in continuous engineering practice if they are to remain at the forefront of engineering innovation. An engineer is not an applied scientist; knowledge of a single technology field is just one weapon for an engineer; an innovative engineer has to integrate multiple weapons. Therefore, scientific knowledge, technical knowledge, humanities and social science knowledge and experience knowledge are basic knowledge necessary for innovative engineering and technical talents, i.e., capabilities of innovative engineering and technical talents must be based on the intersection and synthesis of a wide range of knowledge and experience. It is the multifaceted knowledge and cross-cutting innovation capability that enable innovative engineering and technical talents to solve the complex and comprehensive engineering issues that emerge in the course of rapid economic and social development. The state-of-the-art technology may not be required for each part of a project, but the integrated whole is required to be the best. Therefore, integrated innovation capability is the capability base of engineering technological innovation. Innovative engineering and technical talents also need to be highly qualified. Innovation is uncertain and risky, and its resources are limited in a given space and time. Therefore, management for engineering sci-tech innovation strategically is the primary condition to ensure innovation is of high quality, high speed and high efficiency. The following aspects are necessary to foster innovative engineering and technical talents: (1) Build an educational method that combines the teaching of broad basic knowledge, specialized knowledge, and cross-cutting knowledge sequentially. This method, coupled with other forms of teaching, such as seminar courses, research training programs for undergraduates, and encouraging students in project research, contributes a lot in developing students’ innovative capabilities; (2) Set up a curriculum structure that combines research and teaching. Integration of research and teaching is one of the key methods for innovative talent training. Research, especially for research universities, is also beneficial for teaching; (3) Explore teaching platforms where engineering design and integrated innovation are closely integrated; (4) Explore a system of industry-university cooperation in cultivating innovative engineering and technology talents. It is a large system consisting of an engineering education system, engineering practice system and global economic system that are interrelated. Engineering education is required to reflect its essence of training engineers, with more attention to engineering practice and research, as well as seeking deeper cooperation with the engineering sector; (5) further the reform of engineering education, for example, the implementation of the “Excellent Engineer Training Program” for adjustment of talent cultivation structure, innovation of talent cultivation mode, exploration for a new mechanism of joint cultivation for postgraduate students by universities and research institutions, stepping up the construction of internship and practical training bases, to improve students’ innovation spirit and practical capability; to focus on training a large number of high-quality innovative engineering and technical talents; to carry out continuing education for engineering and technical talents actively, in order to improve the international competitiveness of China’s industries. In conclusion, enterprise indigenous innovation requires effective state guidance, an environment conducive to enterprise innovation and entrepreneurship, inspiration

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by active university creativity, as well as national research capacity, an “industryuniversity-research” synergistic innovation mechanism, a sound mechanism for transferring scientific and technological achievements, and the support of venture capital and high-level innovation talents, all of which are necessary to further promote comprehensive indigenous innovation.

Chapter 26

Holistic Innovation: An Emerging Innovation Paradigm

1 Research Background Innovation has been widely regarded as the central process driving economic growth and the sustainable competitive advantages of both companies and nations, in addition to driving global sustainable growth (Hu & Mathews, 2005; Chen, 2017a).1 With the recent advancement of the global and regional economies, the orientation towards Grand Challenges➁ creates a big challenge for science, technology, and innovation (Kuhlmann & Rip, 2014). Though researchers in the field of innovation made many advances (Martin, 2016), issues such as the Sustainable Development Goals (SDGs)➂ induced more reflection on the paradigm of innovation and development (Kuhlmann & Rip, 2014). The traditional paradigms of innovation typically introduced by Western scholars are rooted in the industrial revolution and information technology. These traditional paradigms focus mostly on science, technology, and the economy, and has limited responses the process of global economic and institutional change (Jay, 2013). The recent paradigm of technological innovation shifted towards a broader dialogue between scientific research, technological innovation, and social development (Stilgoe et al., 2013). Additionally, beyond achieving scientific and technological progress and economic growth, the goals aim for ethical and social fulfillment (Pandza & Ellwood, 2013), therefore achieving a sustainable transformation. ➁ The Grand Challenges defined by the European Union are: health, demographic change, and wellbeing; food security, sustainable agriculture, marine and maritime research, and the bio-economy; secure, clean, and efficient energy; smart, green, and integrated transport; climate action, resource efficiency, and raw materials; and inclusive, innovative, and secure societies.

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Full text of this chapter was published IJIS Volume 2, Issue 1, page 1–13 (https://doi.org/10.1016/ j.ijis.2018.02.001). © Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4_26

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➂ As of January 1st, 2016, the 17 SDGs of the 2030 Agenda for Sustainable Development adopted by world leaders in September 2015 at an historic UN Summit officially came into force. As presented by the Unite Nations, in the next fifteen years these new goals will apply universally, and countries will mobilize efforts to end all forms of poverty, fight inequities, and tackle climate change while ensuring that no one is left behind. Even it takes a long time for a country to reach the technological frontier, where innovation becomes a principle driver (Hu & Mathews, 2005), innovation has undoubtedly become an important theme in economic and social development. All developed economies are aware that only innovation can continuously stimulate new economic growth, while developing countries are also pushing toward continuously upgrading its industrial structure through innovation to improve their national competitiveness (Acs, Audretsch, Lehmann, & Licht, 2017). As a representative emerging economy, China replies on its continuous investment in its national capabilities and public governance based on wisdom rooted in Eastern philosophy (Jin, 2017). In 2017, General Secretary Xi Jinping declared that China will enter a new era at the 19th National Congress of the Communist Party of China, in which the principal contradiction facing Chinese society evolved into one “between unbalanced and inadequate development and the people’s ever-growing need for a better life.” The original development mindset of “the rich first pushing those being rich later” turned into a balanced development mindset. Even worldwide, following the financial crisis of 2008, the main measurement of development, GDP, ignores social costs, environmental impacts, and income inequality (Costanza et al., 2014). We see that economists and national leaders are increasingly talking about measuring a country’s status with other metrics, and even with a soft concept like “happiness” (McGregor & Pouw, 2017). National development currently shifts its focus from economic needs to the people’s needs for a better life, which calls for more attention to an overarching, balanced, and systematic innovation paradigm and innovative thinking. To effectively implement an innovation-driven development strategy in the new era of development requires a more comprehensive way of innovation with a larger scope and a strategic vision to support and improve the regional innovation system (Su & Chen, 2015) and technology transfer system (Cowan & Zinovyeva, 2013). Thus, we can combine the vison of “truth-seeking” through science and technology development and the vision of “beauty-seeking” through art and social science development to meet the longing for well-being or “happiness” by applying the new vision of “innovation for well-being” (Costanza et al., 2014). However, there is growing concern that currently dominant frameworks in economics and innovation no longer provide a way to adequately address and analyze the problems of today’s globalizing and rapidly changing world (McGregor & Pouw, 2017; Martin, 2016). On the one hand, most countries rely on the traditional Western paradigm of innovation to discuss and govern major global challenges. Although developed economies refined their major innovation paradigms –- such as the role of organized innovation for renewing America’s prosperity (Currall, Frauenheim, Perry, & Hunter, 2014), and the strong national innovation systems in Finland and

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Sweden (Acs, Audretsch, Lehmann, & Licht, 2017) –- they ignored the innovation governance experience from emerging economies, such as China and India. On the other hand, the contribution of Asian civilizations represented by China to global development has been gradually increasing. For example, after the global economic crisis of 2008, China contributed to the growth and stability of the international economy. The value of China’s innovation and governance, represented by the new “One Belt One Road” strategy and well-developed internet-based shared economies such as Alibaba and Tencent. Regarding China’s innovation practice and its promising theoretical contribution to international development, scholars need to refine and summarize the innovation paradigms emerging from China relevant to promoting the scientific and technological innovation capacity of emerging economies. In doing so, scholars can provide a more comprehensive theoretical framework and strategic tool for both China and other emerging economies to create world-class innovation enterprises, and to enhance and consolidate China’s global innovation leadership, which in turn provides knowledge and wisdom for firms and new ventures worldwide to build sustainable competitive advantages.

2 Literature Review: Innovation Paradigm Shift While the word “innovation” is derived from the Latin noun innovates, the modern interpretation and traditional paradigms of innovation originates from Schumpeter’s work (1934). Schumpeter defined “innovation” as “new combinations” of new or existing knowledge, resources, equipment, and other factors. It is about the new changes that occur in the development of products, production processes, markets, resources, materials, and organizational forms. Beginning with Schumpeter’s (1934) definition of innovation, innovation as a scientific discipline emerged in the late 1950s, and has been developing rapidly, with thousands of researchers now forming part of this community (Jin, 2017).

2.1 Innovation Paradigm Shift by Country/Region Scholars Thomas Kuhn’s (1962) book, The Structure of Scientific Revolutions, brought about a paradigm shift in how philosophers thought about science. Drawing from Kuhn’s classical perspective of a paradigm shift, we can here observe paradigm shifts related to innovation by country or region (Table 1). Since Schumpeter introduced his theory of the innovation economy (1934), American scholars conducted the first research and exploration from the perspectives of the economics of technological change (Edwin Mansfield, 1968a); that is, the relationship between industrial research and technological innovation (Edwin Mansfield, 1968b). They also focused on the driving effect of technological innovation on economic growth and social competitive advantage (Crossan & Apaydin, 2010),

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Table 1 Paradigm shift of innovation by country or region Country/region

Main innovation paradigm

Scholars

North America

User innovation

von Hippel (1986)

Disruptive innovation

Christensen et al. (1997)

Open innovation

Chesbrough (2003)

Design-driven innovation

Verganti (2009)

Social innovation

Nicholls and Murdock (2012)

Common innovation

Swann (2014)

Responsible innovation

Owen et al. (2012) Stilgoe et al. (2013)

Lean production

Womack, Jones, and Roos (1990)

Knowledge-creating company

Nonak and Takeuchi (1995)

Jugaad innovation

Radjou, Prabhu, and Ahuja (2012)

Imitation

Linsu Kim (2000)

Convergence innovation

Kong-rae Lee (2015)

Indigenous innovation

Jin Chen (1994)

Total innovation

Qingrui Xu (2006)

Secondary innovation

Xiaobo Wu (2009)

Embracing innovation

Richard Li-Hua (2014)

Europe

Asia

value gain in the process of innovation (Teece, 1986), and so on. Among them, typical innovation paradigms such as user innovation (Von Hippel, 1986), open innovation (OI) (Chesbrough, 2003), and disruptive innovation (Christensen et al., 1997) emerged. User innovation focuses on the importance of users in the innovation process and argues that the goal of all innovation activities is to meet the value needs of users. Users, especially leading users, can be the core source of innovation, such as for new products (Von Hippel, 1986). OI focuses on knowledge interaction both inside and outside the enterprise, emphasizing that enterprises enhance their technological level and competitive advantage by opening the organization’s border barriers, gaining external knowledge, and spreading knowledge internally (Chesbrough, 2003). Disruptive innovation, a term coined by Clayton Christensen (1997), explains the phenomenon by which an innovation transforms an existing market or sector by introducing simplicity, convenience, accessibility, and affordability where complication and high cost are the status quo. These typical innovative paradigms that emerged in the United States are more market-oriented and target economic needs (Reinecke & Ansari, 2015). Recent innovation paradigms originated from the European context, such as design-driven innovation (Verganti, 2009), social innovation (Nicholls & Murdock, 2012), public innovation (Swann, 2014), and responsible innovation (Owen et al., 2012; Stilgoe et al., 2013), which emphasize the integration of technological innovation paradigms and humanitarian, social, and value attributes. Design-driven innovation refers to the novelty of product-delivered information and its design language

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innovation beyond technological novelty and product functionality (Verganti, 2008, 2009). It integrates technology and culture with a focus on the design elements outside of the product’s technical attributes, where the added value of the product output ultimately fulfills customer needs by guiding the user’s vision of demand and willingness to buy. Social innovation was an era of the sixth macro wave of social change since the industrial revolution (1771–1829); the steam and railway era (1829–1875); the era of steel, electricity, and heavy industry (1875–1908); the era of oil, automobile production, and mass production (1908–1971); and the postindustrial era of information and communications (1971-present). It is fundamentally different from economic innovation. Instead of introducing new products or entering new markets, it aims to meet new demands that the market cannot meet through innovation; or to create more a satisfactory business model to give people a better position in the production process to give them a greater role. Social innovation pays more attention to the social attributes of innovation besides the economic attributes (Nicholls & Murdock, 2012). Public innovation differs from traditional economic and business innovation paradigms. It involves non-commercial innovation paradigms that focus on the value of innovators and innovative communities outside of noncommercial innovation paradigms (Swann, 2014). Responsible innovation is also known as responsible research and innovation, which refers to exploring an innovative future through collective management of existing science and innovation (Stilgoe et al., 2013). Social innovation emphasizes that innovation is ethical and social, as well as technologically advanced and viable, efficient, and effective. Different from these innovation paradigms emerging from the United States that focus primarily on the attributes of markets and commercialization, paradigms emerging in Europe focus more on the innovation mission beyond economic attributes and pay more attention to the broader macro-value at the social level (Reinecke & Ansari, 2015). In addition to the United States and Europe, scholars from major Asian countries proposed autonomous innovation paradigms based on their own national innovation practices. For example, Japanese scholars proposed knowledge-based innovation (Nonaka & Takeuchi, 1995; Nonaka & Konno, 2000) and lean production (Womack et al., 1990). Knowledge innovation mainly emphasizes the key role of knowledge elements in value creation. Among them, knowledge can be divided into explicit knowledge and tacit knowledge. Through the interaction of the four modes of socialization, externalization, combination, and internalization of knowledge, a firm can achieve knowledge innovation (Nonaka & Takeuchi, 1995). Lean production represents a mode of production that involves the pursuit of eliminating all “waste,” including inventory, and developing a series of concrete approaches around this goal to create a production and management system that targets “just-in-time” manufacturing (Womack et al., 1990). Korean scholars mainly focus on the catch-up process among enterprises in late-developing countries and advance the “inverse A-U model” path of catch up. The core argument is related to innovation to catch up among newer enterprises, which is an evolution from production ability to engineering ability to innovation ability (Kim & Nelson, 2000). Recent paradigm introduced by Korean scholar is convergence innovation (Lee, 2015). The process of convergence innovation is a continuous disequilibrium between reference technology and its matching

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technology, which adjusts optimal balance between the functions of the two technologies (Lee, 2015; Lee, Han, & Sohn, 2015). Jugaad Innovation is a representative innovation paradigm that emerged from the Indian context, originating in India’s far-reaching “Jugaad” culture, which means “breaking through various constraints and improvising effective solutions using limited resources"(Radjou et al., 2012). Compared with the traditional innovation paradigm, the attributes of Jugaad innovation are mainly durable, lightweight, flexible, and convenient; humanized and simplified; represent a new distribution mode; and emphasize applicability, local resource dependence, green technology, and affordability (Basu, Yoffe, Hills, & Lustig, 2013). China, as one of the most important emerging economies, also proposed indigenous innovation paradigms, such as indigenous innovation (Chen, 1994), which mainly includes three aspects: introducing technology through digestion and absorption, integrating innovation, and original innovation. Another example is total innovation (Xu et al., 2006), consisting of three main elements: the total strategy of the market, technology, organization, and culture of all-element innovation; full-time staff for the organization’s innovation; and organization-oriented regional and time–space innovation. Wu (2009) has put up with a typical catch-up path with “Made in China” named secondary innovation, which is based on foreign imported technology but is fundamentally different from simple imitation and adaption of imported technology (Wu et. al, 2009), for the latecomer firms in emerging economies, though disadvantaged in technological capabilities and market resources, can successfully introduce disruptive technologies from advanced economies into emerging economies through secondary business-model innovations (Wu, Ma, Shi, 2010). Recent paradigm that tries to explain China’s rise and development model is embracing innovation (Li, 2014), which is a strategic model of the wise who are seeking common development, sharing resources and win–win solutions. It is a social innovation with Chinese characteristics. It refers to a novel and innovative solution to a complicated social problem (Li, 2017).

2.2 The Deficiencies of Existing Innovation Paradigms Reviewing the evolution of the innovation paradigms, we can divide the existing innovation paradigms into three main categories. The first is based on partial elements such as user innovation (Von Hippel, 1986) and disruptive innovation (Christensen et al., 1997) proposed by American scholars; design-driven innovation (Verganti, 2009) and public innovation (Swann, 2014) advanced by European scholars; knowledge innovation proposed by Japanese scholars (Nonaka & Takeuchi, 1995); and imitation-based innovation introduced by Korean scholars (Kim & Nelson, 2000)) and secondary innovation by Wu et.al (2009). The second category includes paradigms focusing on the horizontal interaction and integration of factors such as knowledge, resources, and so on. The second category of paradigms, such as OI by American scholars (Chesbrough, 2003) and total innovation by Chinese scholars (Xu et al., 2006), convergence innovation by Korean scholar (Lee, 2015)

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does not consider vertical integration, and may therefore risk being overly open and lacking a core competence. The third category includes responsible innovation and public innovation by European scholars (Owen et al., 2012; Stilgoe et al., 2013; Nicholls & Murdock, 2012) and Jugaad innovation by Indian scholars (Radjou et al., 2012), embracing innovation by Chinese scholar (Li, 2014) focus merely on the conceptual, cultural, or societal aspect of innovation, thus ignoring the importance of technological factors. Existing innovation paradigms focus on understanding the innovation process from the perspectives of specific innovation behaviors, methods, or different aspects of innovation, and so on, while they cannot escape the atomistic innovative thinking mindset. Reviewing the road to innovation of world-class enterprises, new products, new elements, new methods, and new processes, and even new ways of organizing do not depend on individual improvements or enhancements, nor are they spontaneous, but result from organized innovation (Currall, Frauenheim, Perry, & Hunter, 2014). These three types of traditional innovation paradigms ignore the leading and essential role of strategic design and strategic implementation in promoting the implementation of ideas, obtaining innovation, and transforming innovative values. Gary Hamel (2008), the guru of modern management, introduced an innovative four-level model in his book, Big Future of Management, including technological innovation, operational innovation, strategic and business model innovation, and management innovations, which call for more emphasis on strategic design for innovation in terms of important leadership and driving value. Phillip et al. (2017) also point out the holistic thinking is very important to leverage correctly both sides of the brain for knowledge workers from a consulting perspective, which predicts the importance of strategic integration for enterprises. In addition, these three traditional innovation paradigms lack the long-standing global view of Eastern philosophy (Chinese traditional culture, Buddhist wisdom, etc.), such as overall thinking, unity of opposites, organic integration, and dynamic development. They fail to embody the dynamic integration of Yin-Yang evolution, the harmony between man and nature advocated by Taoism, the “middle course (Zhong Dao)” philosophy advocated by Confucianism, the concept of “harmonious but different (He Er Bu Tong),” and the overall strategic concept introduced by the Chinese ancient book Art of War (Tzu, S., 2005).

3 Holistic Innovation: An Emerging Innovation Paradigm Based on Eastern Wisdom 3.1 Defining Holistic Innovation In light of the deficiency of existing innovation paradigms in the Chinese context, and drawing from the advantages of Eastern philosophy and traditional Chinese culture, we propose a new paradigm of innovation, Holistic Innovation (HI), which is total and collaborative innovation driven by a strategic vision in an era of strategic innovation,

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which aims for a sustainable and competitive advantage. An innovative management paradigm based on HI is called Holistic Innovation Management (HIM).

3.2 Core Elements of HI The four core elements of HI are strategic, total, open, and collaborative; that is, total innovation, open innovation, and collaborative innovation driven by the strategic vision. The four elements are interrelated and indispensable pillars within the helix of HI. The Strategic Element The term “Strategy” has a long history. It is generally acknowledged in the West that the term strategos, originating in ancient Greece, means that military commanders command the strategy of military operations and was later used in business management. In China, The Art of War by Sun Tzu during the Spring and Autumn Periods, is considered the earliest book on overall planning for strategy in ancient China, in which “Zhan” refers to the English word “war,” and “Lue” refers to the English word “strategy” or “strategic vision.” Although the term “strategy” now extends from military terminology to economic and political fields, its meaning always contains the notion of “unification, overall, and integrity.“ In the technological innovation management in enterprises, a strategic vision requires that business leaders cannot just regard technological innovation as a single activity, but should embed it in the overall goal of enterprise development and the entire management process. The top management team should consider global economic, social and technological trends and combine these with cross-cultural strategic thinking (Ming-Jer Chen, 2014; Chen & Miller, 2010) to determine the direction of business and ecosystem development so as to “catch the future via strategic vision” (Adner, 2006). Industries and countries also need to formulate global strategies based on the environment and the innovation system to connect the various elements together in order to build competitive advantages (Porter, M.E., 1980, 1985, 1990, 1998; Adner & Kapoor, 2010; Euchner, 2014). Take China’s high-speed railway (HSR) industry as an example. Since its establishment in 2000, the China CRRC Corporation Limited (CRRC), which is the world’s largest supplier of railway transit equipment with the most complete product lines and most advanced technologies, took advantage of the national strategy of The mid- and long-term railway network program (Sun, 2015). CRRC combined foreign technology with independent design and production, driven by the strategic mission of connecting the world through better mobility and the aim of innovation, reform, and internationalization. Based on an objective analysis of internal and external opportunities and challenges, CRRC formulated and vigorously implemented its strategy for internationalization, diversification, and collaborative development. By integrating of internal and external resources among macro-level strategic coordination, CRRC achieved a global competitive advantage.

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Huawei is another typical example. Since its establishment in 1998, Huawei Technologies Co., Ltd. (Huawei) gradually grew from a private communications technology company to the world’s largest provider of telecommunications network solutions and telecommunications base station equipment after nearly 30 years of accumulating and developing technologies. Ren Zhengwei, CEO of Huawei who has military service experience, is a typical example of an executive who successfully applied military strategic thinking to firm innovation management. He repeatedly emphasizes that Huawei “should never invest the company’s strategic competitive power in non-strategic opportunities.“ Huawei formulated a product development strategy, a talent strategy, and an organizational management incentive strategy that adapts to global development around technological R&D to help itself maintain its global leading position in telecommunications. For example, Huawei integrated a product development strategy consisting of three modules: market management, process reengineering, and product reorganization. Implementing this strategy shortened the product development cycle by 50% and instability by 67%, which is an important source for Huawei to win the global leading edge in technological innovation (Chen, 2017b). The Total Element “Total” refers to TIM, that is, “the reorganization of various factors of production related to the production process.“ TIM relates to innovation in all organizational sectors and all employees, and covers all time and space dimensions. Total innovation was first introduced in 2002 by academician Xu Qingrui, a founding scholar in China’s field of innovation management. In his book, Total Innovation Management: Theory and Practice (2002), he pointed out that “Total innovation management should be guided by the cultivation of core competencies and sustainable competitiveness, with the goal of increasing the value creation, combining the organic combination of various innovative elements, and collaborative innovation as a means of innovation through innovative management mechanisms, methods, tools, and strive to achieve participation among all members, and covers all time and space innovation” (Xu et al., 2007). China’s high-speed railway enterprises represented by CRRC, effectively integrate internal and external resources, and create an enterprise innovation ecosystem based on core competencies to achieve the total innovation of group elements and all member participation covering all time and space. CRRC created a technologybased enterprise core technology system, including shock absorption technology, noise reduction technology, lightweight technology, insulation technology, and water treatment technology. In addition to the core technology system, CRRC also invests in scientific and technological personnel training, simulation ability, experimental ability, and the core business development of innovative products to extend business development and obtain competitive advantage (Chen, 2017b). The Open Element “Open” refers to OI. Henry Chesbrough formally proposed OI in his 2003 book Open Innovation: The New Imperative for Creating and Profiting from Technology,

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which refers to “enterprises use external resources to innovate and enhance their capability of technological innovation.“ OI focuses on the interaction between the internal and external knowledge of enterprises, emphasizing that enterprises should go beyond the existing closed innovation mode and achieve the goal of “acquiring knowledge from the outside” and “exporting knowledge” to make up for the lack of internal innovation resources, thereby improving innovation performance. In an OI environment, the boundary between business and the environment becomes blurred. An increasing number of enterprises are building an OI ecosystem through crossboundary cooperation to gain a sustainable competitive advantage (Chesbrough, 2003, 2006a, b; Gassmann, Enkel, & Chesbrough, 2010). Taking Haier Group Corporation (Haier) as an example in the new competitive environment of OI. In addition to continuing to strengthen its multi-level R&D system based on core technologies, the Haier Open Partnership Ecosystem (HOPE) formally launched in October 2013. Through the “Individual-Goal Combination” model and years of practice in constructing and developing innovative ecosystems, Haier built an innovation ecosystem that stimulates interaction between enterprises and users based on the HOPE innovation platform. To comply with the Win–win Model of Individual Goal Combination➃, Haier flattened the organization into a dynamic network organization and achieved an interactive model of eco-members with user participation and full innovation to further optimize Haier’s enterprise innovation ecosystem (as in Fig. 1). ➃ According Haier’s definition, “Individual” refers to an employee while “Goal” is not order in the narrow sense; rather, it refers to user demand. “Individual-Goal

Fig. 1 Haier’s strategic vision driven HI

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Combination” aims to let employees and users unite into one entity, while “Win– win” manifests itself in employees realizing their own value in the process of creating value for users. The Collaborative Element “Collaborative” refers to CI, which Chen Jin (2012) formally proposed in his paper, The Theoretical Basis and Connotation of Collaborative Innovation. CI refers to “an innovative organizational model that takes knowledge increment as the core of innovation, enterprise, government, and knowledge production in institutions (universities, research institutes), where intermediaries and users work in a highly collaborative way in large-scale integration to achieve major technological innovations.“ CI has two characteristics. First, it emphasizes the integrity of science and technology innovation; that is, the innovation ecosystem is an organic collection of elements rather than a simple summation, and its existence, objectives, and functions all show a unified integrity. The second is dynamic, which means that the innovation ecosystem is constantly changing. Given the globalization of science and technology, the CI model featuring openness, cooperation, and sharing has proven effective in improving the efficiency of innovation. Fully mobilizing the enthusiasm of various innovative entities such as enterprises, universities, and research institutes, and organizing in-depth cooperation and OI across disciplines, departments, and industries is particularly important to speed up technological integration among different fields, industries, and all aspects of the innovation chain and proliferation. In order to overcome the technical difficulties with the alliance and yield breakthroughs in technological innovation Enterprises are expected to establish the dynamic collaborative alliances with outside partners as well as ensuring integrity and coordination of all the internal sub-systems (Sun, 2015). Take CRRC as an example. By building an innovation platform, CRRC promoted collaboration among all of the firm’s internal and external resources. After years of accumulating innovative resources and building capacity, CRRC set up the major components as fixed equipment, mobile equipment, train operation control system, and operation management system, achieving effective coordination among the these major systems. In addition, as the core organization of indigenous innovation for CRH380A, CRRC autonomously synergized the four major theories➄ and ten core technologies➅. ➄ This mainly includes wheel-rail relationship theory, arch network relations theory, control theory, and aerodynamic theory. ➅ his includes system integration technology, lightweight technology, safety and air-tightness technology, product reliability technology, comfort technology, electric drive and control technology, information technology, and electromagnetic compatibility test verification techniques and technologies.

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A Dynamic, Integrated Strategic Method HI is a new paradigm driven by strategy that cultivates vertical integration, horizontal interaction, and dynamic development. In a strategic innovation environment, managing technological innovation no longer means the combination, management, and coordination across single technical factors. The enterprises, universities, research institutes, and individuals cohabiting the OI ecosystem should look at innovation from a holistic, strategic, and global perspective. They should integrate strategy, science and technology; consider both humanities factors and market factors. What’s more, employing the vitality of mass innovation and entrepreneurship is also a strategic power of achieving sustainable technological innovation. The China International Marine Containers (Group) Co., Ltd. (CIMC) is a typical example. As a diversified multinational industrial group serving the global market, it deals with the changing external environment through continuous organizational and technological changes. The CIMC released the “CIMC Upgrade Platform (2010 Edition),” and launched a strategic initiative under the guidence of innovation and upgrading. As for horizontal integration, the CIMC integrated all levels of submodules, information, and cooperation resources. Vertically, the CIMC integrated all support systems such as its financial system, human resource management system, culture, and information platform. Figure 2 illustrates the CIMC’s innovation architecture driven by strategy. Guided by the HI strategy, the CIMC optimized its management, customer service, and sales networks in more than 300 member enterprises over 100 countries, which comprehensively enhanced its global competitiveness, consolidated and strengthened its leading advantages in the logistics equipment and energy equipment supply industries.

Fig. 2 CIMC strategic vision driven HI

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As a new paradigm consisting of total, open, and collaborative innovation driven by strategic vision, HI emphasizes efficient and organic unification, vertical integration, and the dynamic development of strategy leadership and full coordination. It goes far beyond the partial, horizontal, and static innovation management paradigm. As mentioned above, leading global innovative enterprises such as the CRRC, Haier, Huawei, and CIMC built and perfected their own innovation system under the guidance of an HI framework. While integrating internal and external resources, they achieved multi-dimensional integration across strategy, technology, markets, and culture. By applying HI, they applied all elements and all members participate, covering all time and space of innovation. It also represents an upgrade of TIM through organizational innovation that coordinates internally and externally to create a sustainable competitive advantage.

3.3 HI: A Theoretical Framework In the era of innovation driven era, HI is a new paradigm of innovation rooted in overall management change. It is a trinity based on the integration of the natural sciences and social sciences under the guidance of Eastern and Western philosophies. The helix concept of HI embodies a global outlook, an overall outlook, and a peaceful outlook, which is in line with the common core values across Eastern and Western philosophies. It is conducive to achieving organic co-evolution among engineering, technology, science, and humanities, arts, and markets in a cross-cultural competitive environment. Additionally, HI goes beyond the traditional boundaries of organization, pushing the company to interact with the external partners, including demand side, the supply side, and even the domestic and foreign policy-side and other relevant subjects and interests. By doing this, companies can build a vertical and horizontal innovation ecosystem. This system aims to exploit and create market opportunities and technology potential in a dynamic collaborative model to enhance product and technology novelty through cross-border innovation and competitioncooperation. Finally, HI could contribute to the goal of “Innovation for Peace” (Miklian & Hoelscher, 2017), innovation to achieve global sustainable development, and fulfill the value of humanity (Pandza & Ellwood, 2013). Companies should think big and aim high, and try to lead their own internal evolution and that in their ecosystems through forward-looking strategic design. Moreover, companies should also act boldly in their strategic implementation. Through horizontal resource integration, longitudinal vertical integration of capabilities, and relying on collaborative innovation thinking, companies can achieve overall technology integration and product innovation and a competition-cooperation win–win situation (Ming-Jer Chen, 2008, 2014; Chen & Miller, 2010). At the regional and national level, governments should realize that in the strategic fields of major scientific and technological innovation such as aerospace systems, high-speed railway technology, quantum communication, artificial intelligence, and industrial internet, they need more than simple technological innovation, they also

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need a long-term development strategy that embedded with innovation strategy for the nation. Only through such a holistic thinking process can we achieve the organic integration of science and technology strategy, education strategy, industrial strategy, financial strategy, and talent and diplomatic strategy. At the same time, a strategic vision can drive the horizontal integration and vertical promotion of all elements to provide an inexhaustible source of power to build the most innovative nation in the world. This will serve as a powerful engine for global career of anti-poverty and peace. Finally, it will make a significant leading contribution to global sustainable development (Miklian & Hoelscher, 2017) (Fig. 3). From the Eastern culture and the practice of enterprises with Chinese characteristics, we can see that in an era of knowledge economies and big data, enterprises develop resources through five stages: data perception, data interconnection, information integration, knowledge aggregation, and wisdom insight. This five-stage model of enterprise innovation resource development is also an important idea for building smart enterprises and smart cities in the future. At the highest level, wisdom insight, the top management team should fully mobilize and utilize systematic scientific concepts to surpass knowledge itself. Furthermore, when formulating an innovation strategy, company leaders should account for the design of the organizational structure, including resource development, utilization and create an innovation culture.

Strategic Vision Driven Eastern Philosophy

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Fig. 3 Theoretical framework of HI: an emerging innovation paradigm in open environments

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For the country, HI embodies the concept of peaceful development with Chinese characteristics, the advantages of strategy implementation through national and regional innovation system, the system-driven experience and wisdom of Chinese innovation. At the same time, it conforms to the demands of China’s national innovation strategy that China should no longer rely solely on industrialization but on innovation to achieve social and economic transition and development. We should look globally and pay attention to the overall situation while considering the issues of poverty eradication, environmental protection, health promotion, national defense building, and international relationship promotion. Organic integration contributes to the goal of enriching the people and the road towards global technological innovation leadership, as well as promoting global peace and development.

3.4 HI: Three Connotations HI has three key connotations as an emerging innovation paradigm driven by strategic vision. First, HI is a helix of strategic innovation, collaborative innovation, total innovation, and open innovation. The common features of the innovation path of world-class enterprises are that all enterprises should mobilize all factors in the overall innovation of strategic design in a complex environment to achieve the collaboration among internal departments and with various external stakeholders. Under the HI paradigm, the innovation path of an enterprise includes four aspects: strategic leadership, organizational design, resource allocation, and cultural construction, which we can describe as “strategy foresees the future,” “organizational design emphasizes knowledge,” “resource allocation focus on quality,” and “culture construction motivates creativity.“ The organic integration of strategy, organization, resources, and culture, as well as the long-term perspective of dynamic innovation will enable enterprises to build stable, flexible, and sustainable core competitiveness. For example, Midea Group Co., Ltd. (Midea Group), established in 1968 in Guangdong province, China, is a leading global technology group for consumer electronics, HVAC, robotics and automation systems, and intelligent logistics (supply chain). Based on their core technologies, R&D system, and other technical elements, Midea Group further enhanced its innovative capabilities by strengthening its nontechnical elements such as technological innovation management and strategic innovation. First, Midea Group promoted the strategic transformation and innovation from top down. Drawing insights from the long-term strategy of domestic industry giants such as Haier Group and Gree, Midea Group proposed the “333 Strategic Transformation” plan in 2012, which focused on building consumer-centric core competencies and clarifying the strategic positioning of the company; that is, using about 3 years to make products, consolidate the foundation and enhance operational quality, become the leader among the top three companies in home appliances within 3 years, and gain a higher position in the global home appliance industry within about 3 years. Driven by its strategic vision, Midea Group further built a global innovation

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ecosystem for R&D and production. At the same time Midea Group build an innovation ecosystem based on collaboration among industry, universities, and research institutes. It further created an innovation ecosystem based on the “Media Innovation Platform” to realize resource convergence, value interaction, and innovation spillover among innovative ecosystem partners and resources. Through this process, Midea Group formed an inclusive and innovative culture, greatly enhanced the group’s manufacturing efficiency, resource utilization efficiency, automation level, and stock optimization. Through HI, Midea Group achieved a competitive edge and industry leading position in the global home appliance market, as well as enhanced its own brand value. Second, HI organically integrates the convergent thinking of the natural sciences with the divergent thinking of the social sciences under a global philosophical perspective guided by strategy. It not only embodies the value of Asian culture, but also combines the innovative practical experiences with Chinese characteristics and meets China’s strategic needs for innovation. Specifically, HI is based on systemic science and global insight. Through top-level goal determination and strategic design, HI transcends knowledge management and breaks through the organizational boundaries of traditional enterprises. At the same time, it focuses on the supply of external resources that are closely related to enterprise innovation and development (such as universities, research institutes, suppliers, technology, and financial services institutions), innovation policy and institutional support (government, domestic and foreign public organizations, and industry associations, etc.), the demand side of innovation (consumers, leading users, competition rivals, and niche market users, etc.). Also, HI connects technology elements (R&D, manufacturing, human and capital, etc.), and non-technical elements (organization, process, system and culture, etc.). Through this process, HI helps firm to build and strengthen the core technological capability, and create the dynamic and sustainable competitiveness in an open innovation ecosystem. For example, Alibaba Group, based on the philosophical wisdom of the global outlook of the East and relying on the Damour Research Institute, gradually formed a technology based on Ali-cloud Big Data Technology. Using business ecosystem (including Taobao, Tianmao, Juhuasuan, Ali-press, Ali Global e-commerce group, etc.) and science and technology ecosystem (including Alipay, micro-loans, online insurance, Ant Financial Services Group, and Cainiao Logistics) as the main bones of the “Vertical & Horizontal” innovation ecosystem, Alibaba gradually built a “city brain” system based on the digital economy throughout China, as Fig. 4 shows. By promoting ecological synergy of innovation and coordination of management, Alibaba established an innovative ecosystem. This open ecosystem creates business opportunities for individual entrepreneurs, small and medium-sized enterprises, and the communities, which finally greatly improve production efficiency and economic benefits. At the same time, Alibaba’s HI promotes the anti-poverty process in China and globally, which has a positive contribution to both commercial and social value creation. Third, HI is a kind of innovative thinking model of overall and big innovation. Its essence lies in the holistic view, the systematic view, and major innovation. HI

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Fig. 4 Alibaba’s HI ecosystem based on the city brain strategy

breaks through the traditional atomic thinking paradigm of indigenous R&D, manufacturing, marketing, and strategic management. Through strategic leadership and strategic design, it integrates many aspects of business management and contributes greatly to enterprises and countries. The HI mindset contributes to major technological breakthroughs and innovations, and is an innovative concept consistent with the idea of quantum management (Ortiz & O, 2016) in the era of quantum theory. Take China’s aerospace industry as an example. Under the guidance of top-level design and top-down large-scale system thinking, with the advantages of a nationwide system, China focused on the strategic objectives of national development. The central government allocates resources across the country and launches innovative projects at national key projects as a research and operation platform. For example, in the process of choosing the “Long March III” rocket third-stage engine, it aimed to realize innovation in the low-temperature and high-energy liquid-hydrogen liquidoxygen engine with larger thrust, by using its systematic advantages to coordinate and gather R&D across the country. It drives innovative superior resources to effectively collaborate with top R&D institutes, including the First Research Institute of China Aerospace Science and Technology Corporation (703 Institute), Lanzhou Institute of Space Technology Physics, Steel Research Institute, Beijing Nonferrous Metal Research Institute, and so on. They also integrate the relevant experts in Shanghai, finally formed a state-sponsored technical innovation research organizations to improve the whole process, and ultimately formed a welding technology solution to create an engine of R&D innovation. As a developing country, integrating the institutional advantages of national resources under the guidance of overall and great innovation is conducive to overcoming the relative disadvantage of China’s core technologies and the shortcomings in basic R&D industries. This is the core reason of why China can promote and develop industrial competitiveness.

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China, as a developing country, made a breakthrough in spaceflight with the background of a relatively backward industrial base and has become the third country to send astronauts to space independently after the former Soviet Union and the United States, is mainly because of its superior institutional advantages. This superiority is reflected fully in the efficiency and capability to mobilize resources in a given economic and social environment, as the national system demonstrates. It also illustrates the full mobilization of the passion for mass innovation and entrepreneurship. One nation or one regional requires a public policy based on its social reality and match the industrial development level. Therefore, whether it is in the early days of China’s space development or in the twenty-first century, resolving the issue of China’s basic industrial shortcomings through the national system, mass innovation and entrepreneurship has always been one of its best weapons for continued success in the aerospace industry.

4 Conclusion and Discussion This chapter systematically reviews the current typical innovation paradigms worldwide and their shortcomings. Based on Eastern wisdom and best innovation practices, this chapter introduces a new paradigm of innovation, HI. We describe the definition and theoretical framework of HI, discuss its implications, and summarize the theoretical contribution and policy implications. This chapter has the following three main contributions: First, based on a systematic review of the evolution of innovation paradigms and from the perspective of paradigm shifts, this chapter proposes the unique and innovative HI paradigm in light of the existing paradigm deficiencies. This new paradigm is rooted in the national situation of China’s development. This paradigm is a complex helix of strategic innovation, collaborative innovation, total innovation, and open innovation, which embodies the value of the overall Eastern culture and the characteristics of China’s national innovation system that accounts for the mass line. HI is an original theoretical paradigm that conforms to the background of open innovation, global peace, and sustainable development; meets firms’ needs to manage technological innovation; and supports the implementation of the national innovation-driven development strategy. Furthermore, HI optimizes and promotes China’s enterprises to build global innovation leadership, which will help boost the country’s ability to innovate in science and technology. Second, the HI paradigm emphasizes the importance of strategy driven, top-level design and a long-term development orientation in the process of innovation, emphasizing the importance of a global, integrated, and peaceful perspective on the innovation pattern. It emphasizes the relationship between the Eastern culture and the role of the Chinese context. This innovation theory has important practical value for understanding the innovative practices of China’s major scientific and technological

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fields and typical enterprises, helping them to implement strategies to upgrade technological innovation capability based on strategic innovation and maximize their innovation performance. Third, HI has policy-oriented implications and is of great value to the government and regional departments in optimizing top-level strategic design, improving the science, technology and innovation policy. HI made important contributions to China’s high-speed rail and aviation sectors since the reform and open policy. This theory is a summary and sublimation of the experiences of China’s achievements and global leading-edge in major scientific and technological innovations. It also guides our country in accelerating the establishment of a national technology transfer system and improving national and regional innovation systems, strengthening the advantages of the aerospace and high-speed rail industries, and promoting major technological innovations in areas such as artificial intelligence, industrial internet, quantum communications, and astrophysics. In the era of globalization and the fourth industrial revolution, HI accelerates the promotion of industrial internet, quantum communication, artificial intelligence, and health care through strategic design by connecting industries, enterprises, and innovators at the national level. In doing so, HI can be an important power that drives the country, industry, and enterprises to obtain a sustained competitive advantage. The HI paradigm calls for more attention from academics and public policy areas. Because HI provides enterprises with a systematic and holistic view of combining strategic management, organizational design, cultural construction, and industrial trends, and realizes the divergent thinking of engineering and social science in the natural sciences. It will help enterprises to seize the “window of opportunity” during the process of industrial transformation and technological innovation. It is a new paradigm for enterprises to reshape their sustainable innovation capability and core competence. It is worthwhile for enterprise managers to engage in practical exploration and for scholars to follow up. As for the policy aspect, the HI paradigm provides an innovative policy design perspective based on the global and integrated views. Innovation policy should not be limited to science and technology. Science and technology, education, economy, culture, people’s livelihood, and ecology should be combined to create synergy to promote total and collaborative innovation driven by strategic design. Only in this way can China realize the national, industrial, and enterprise innovation strategies. We can then systematically upgrade the national and regional innovation system and technology transfer system to provide the nation with assistance in major technological fields, strategic industries, and empower Chinese enterprises to win the advantages of global innovation and leadership.

Summary and Outlook

The path of indigenous innovation for China is studied both chronologically (evolution of the dominant path for Chinese indigenous innovation, i.e., secondary innovation—portfolio innovation—total innovation) and hierarchically (at levels such as enterprise, industry, region, country, etc.). Knowledge in multiple disciplines, such as innovation theory, strategy theory, innovation system theory, industrial economics theory (including international competitiveness theory), etc., is integrated to address the complexity and multi-disciplinarity. As for the research methodology, combinations of quantification with qualification, theories with empirical evidence, the static with dynamic analyses, and the general with typical surveys are applied in conjunction with literature research, hypothesis testing, case study, questionnaire measurement (statistical analysis), etc. This book innovatively proposes the dominant path for indigenous innovation with Chinese characteristics, i.e., secondary innovation—portfolio innovation— total innovation. Secondary innovation-portfolio innovation-total innovation is the dominant path of indigenous innovation for Chinese enterprises. Among them, the secondary innovation is in line with development characteristics of the majority of enterprises in China now, and will dominate their indigenous innovation model over a long period. The innovation portfolio enhances synergy by dialectically integrating various innovation elements, so it is a major model for improvement of innovation efficiency and effectiveness. The institution is superior to technology during a transition period and is a primary source of driving force for innovation. The total innovation is in line with a trend of open innovation through highly involved innovation based on the integration of all innovative elements. It realizes all-time-and-space innovation persistently by integrating various innovation resources and strengths globally to the maximum extent possible with the advantage of the network to ensure the advantage of sustainable innovation and to meet market and social demands to the maximum extent possible. It is because the secondary innovation - portfolio innovation - total innovation is in line with the Marxist dialectic and the Scientific Outlook on Development that this path is highly viable, thus great effort must be

© Zhejiang University Press 2023 Q. Xu and J. Chen, Indigenous Innovation Pathways with Chinese Characteristics, Qizhen Humanities and Social Sciences Library, https://doi.org/10.1007/978-981-99-5199-4

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made to implement the open total innovation guided by the Scientific Outlook on Development. Accordingly, conclusions and policy suggestions are described below. 1. About the basic theory of indigenous innovation and the path of indigenous innovation with Chinese characteristics (1) Clarify the connotations of indigenous innovation Against misconceptions such as “IPR acquired through purchase is indigenous innovation”, our study believes that indigenous innovation, which takes self as priority and enterprises as subjects, is to integrate resources effectively for overall improvement of innovation capacity via an organic combination of technological innovation (original innovation, integrated innovation, re-innovation on the basis of absorbing advances in overseas science and technology) with management innovation and institutional innovation, with a goal to master core technology and IPR of key technology and participate in high-value-added value chains and markets. (2) Stages and multi-levels of the path of indigenous innovation with Chinese characteristics (1) Stages are reflected in the fact that indigenous innovation in China has gone through three stages with secondary innovation—portfolio innovation—total innovation as the main line, and it trends now toward the total innovation. (2) Multiple factors such as the vast territory, unbalanced regional development, variance in industrial layout, and regional cultural diversity contribute to the diversity of China’s indigenous innovation capacity and level, thus, China’s national innovation system is a three-dimensional and networked structure consisting of four levels: corporate innovation system, sector (cluster) innovation system, regional innovation system (RIS), and national innovation system. 2. Corporate Level: building innovative enterprises based on total innovation is the cut-off point for the implementation of an indigenous innovation path with Chinese characteristics Innovative models internationally take three typical paths of evolution: ➀ from technology R&D-led to portfolio innovation and total innovation; ➁ from integrated innovation to portfolio innovation and total innovation; ➂ from secondary innovation to portfolio innovation and total innovation. Several typical paths of indigenous innovation in China are outlined in this book based on investigations of dozens of large enterprises and hundreds of SMEs at home and abroad in recent years: ➀ original innovation—portfolio innovation— total innovation; ➁ integrated innovation—portfolio innovation—total innovation; ➂ secondary innovation—portfolio innovation—total innovation. Among them, secondary innovation—portfolio innovation—total innovation, which is most typical and common, is the dominant path of indigenous innovation of Chinese enterprises.

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3. Sector Level: Primary approaches, mechanisms, and models of indigenous innovation for manufacturing enterprises in China (1) Paths of indigenous innovation in various contexts of the global manufacturing network are revealed. The study in this book divides embeddedness in global manufacturing networks into two scenarios and two stages: (1) Indigenous enterprises join the global manufacturing network dominated by MNCs abroad and upgrade gradually from the network, where the secondary innovation is generated based on absorbing advances in science and technology; (2) Indigenous enterprises start to build a global manufacturing network with themselves as the core. It is a scenario where indigenous enterprises take self as priority while integrating overseas R&D resources to promote innovation. A mechanism to enhance indigenous innovation capacity based on ODI is proposed in the study on this scenario. The upgrading path of indigenous innovation for manufacturing enterprises involves three aspects from the perspective of total innovation elements: ➀ Technologically, upgrade gradually from efficient use of exogenous technologies to fully stimulate endogenous technologies and full integration of internal and external technologies; ➁ strategically, upgrade gradually from participation in global value chain division of labor to innovation based on globalization strategy; ➂ market perspective, upgrade gradually from innovation in domestic low-cost markets to that in regional niche markets, and finally in global markets. (2) A co-evolution mechanism for innovation learning, innovation capacity, and innovation network is proposed, based on which, a path for coupling improvement of global manufacturing network evolution and innovation capacity is drawn up. (3) Reveal the necessity of interactive innovation between large firms and SMEs. Efforts should be made by large enterprises to build their indigenous innovation network, drive the adoption of new technologies and standards by local SMEs, by which to form a supporting division of labor system based on new products and processes, thus forming unique competitiveness of “solidarity for innovation” of enterprises. 4. Region and Cluster level: The system and mechanism to enhance sectoral innovation capacity are proposed. (1) Build a multi-level, multi-factor, and open framework for the regional innovation system “Multi-level” focuses on the organic linkage among corporate-, sectoral-, regional-, and national innovation systems; “multi-factor” focuses on a synergistic structure of “innovation foundation system—innovation synergy system—innovation driver system”, which is composed of cluster enterprises, innovation service enterprises, public service institutions and cluster governance institutions; “open” focuses on the dual embeddedness of regional local network and hyper-local network.

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(2) Reveal an inner mechanism of the open regional innovation system functioning to enhance the cluster innovation capability. Proposes that the development of cluster indigenous innovation capabilities should be based on: ➀ Synergy among policy systems of a cluster-, regional-, and nationalinnovation; ➁ synergy between local- and hyper-local networks; and ➂ synergy between cluster enterprises and innovation service systems to break innovation pathlock within the region. (3) Reveal a correlation mechanism between the innovation service system and cluster indigenous innovation. The innovation service system covers local and hyper-local innovation service systems, among which the hyper-local innovation service network with multiple levels and elements is the key carrier to boost interactions between manufacturing and service sectors, to break innovation path-lock and realize cluster indigenous innovation. 5. National Level: Propose total innovation-oriented paths, systems, and policies for innovation (1) Analyze the essence of the indigenous innovation path based on total innovation at the national level. Original innovation matters the most, while re-innovation and integrated innovation are major tools to accumulate innovation capacity in latecomer countries, aiming to achieve original innovation to a maximum extent. Accordingly, we define the indigenous innovation path with Chinese characteristics as an innovation process that takes TIM as a guide, portfolio innovation as a platform, absorbs advanced foreign technologies through secondary innovation, achieves technological paradigm breakthroughs through integrated innovation and original innovation, forms technological inventions and applications with IIPR, and creates significant benefits to the economy and society for national development. (2) Deep total innovation requires a well-developed innovation ecosystem and NIS for support. The corporate innovation system has to evolve from a closed R&D system to an innovation ecosystem that enables the integration of various innovation units, resources and elements to meet the requirements of total innovation with all elements, all employees, and all time and space. In the further construction of the national innovation system, efforts are required to further clarify the functional positioning of various innovation entities, such as enterprises, research institutions, universities, social organizations, etc., build an open and efficient innovation network, and construct a synergistic innovation platform for military-civilian integration in defense sci-tech. Innovative governance, in particular, should be improved to further clarify the division of labor between the government and the market in order to build a mechanism for the coordinated allocation of innovative resources; improve policy systems to stimulate innovation and legal systems to protect innovation; and create a social environment that encourages innovation in order to stimulate the vitality of innovation throughout society.

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(3) Great efforts to promote total innovation require improvement in innovation policy in China. (1) Step up government leadership and macro regulations for indigenous innovation; (2) Optimize the environment for innovation and entrepreneurship to improve indigenous innovation capabilities of enterprises; (3) Increase contributions of universities and research institutions to indigenous innovation, especially for the role of basic research; (4) Promote the transfer & transformation of scientific and technological achievements and synergistic innovation by building an “industry-university-research” cooperative innovation system with deep cooperation, integration of science & education, and synergy; (5) Pay further attention to financial innovation to boost the venture capital industry, especially to increase investment in industries with independent intellectual property rights (IIPR); (6) Speed up the training of innovative talents of all levels. In a word, this book theoretically illustrates the meaning of indigenous innovation and its path, as well as its strategic importance for China to implement the Scientific Outlook on Development, transform the development mode, build an innovative country and increase international competitiveness; and theoretically, this book is unique in its theoretical exploration and distillation of practical experience on how to implement indigenous innovation strategies and follow the path of indigenous innovation with Chinese characteristics at the national, regional, industrial and enterprise levels. Furthermore, through empirical research, this book is not only of practical significance, it also identifies key factors, bottlenecks, supporting conditions, and so on of the indigenous innovation path with Chinese characteristics, and reveals various paths & models, as well as relevant countermeasures and policy recommendations for the indigenous innovation path at levels ranging from enterprise, sector, region, to nation. The book will undoubtedly be refined further to address issues such as how total innovation can be applied in various regions and industries, and how total innovation synergy among multiple levels such as enterprises, sectors, regions, and countries can be more effective. It is recommended that the concept of Total Innovation be incorporated into national major plans in the future so that it will become more deeply rooted and become a new breakthrough on the path of indigenous innovation with Chinese characteristics. Reason 1: The comprehensiveness of innovation is the core and driving force for economic development mode transformation. In addition to knowledge and technological innovation, service innovation, organizational innovation, and institutional innovation should be prioritized to match scientific discovery and technological development. Over the years, innovation development has been insufficient due to a lack of integration, comprehensive arrangement, and coordination, the failure of indigenous innovation ideas and concepts to take root in hearts and minds, the lack

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of popularization of indigenous innovation culture, insufficient organizational mechanisms, a lack of solid basic research, a lack of popularization of innovation among all employees, and a lack of integration of innovation resources on a national and even global scale. To accelerate the pace of indigenous innovation in China, early realization of transformation for economic development, and further enhancement of China’s international competitiveness in science and technology, it is necessary to thoroughly understand and implement innovations with all elements, all staff, and all time and space. Reason 2: Innovative activities are required to further reflect the government’s leadership role and to provide a comprehensive coordination role to effectively link public R&D activities to innovative organizations throughout society. Core capacity formation will not be accelerated unless total innovation is achieved, as demonstrated by China’s success with “two bombs and one satellite” and the high-speed railway. So, two suggestions are available: (1) Integrate the concept of Total Innovation into the national indigenous innovation strategy. The development of a comprehensive indigenous innovation system, with enterprises as the major player, can be enhanced further, with all elements of society being guided to inject into enterprises to carry out total innovation, enterprise technology centers being upgraded to enterprise innovation centers, major innovation leaders being established in enterprises, and a total innovation model, in which management innovation, institutional innovation, and technological innovation interact, with Chinese characteristics will be implemented. (2) Establish a goal system for indigenous innovation that is oriented toward total innovation. Developing international standards and independent brands will be a top priority of indigenous innovation, and will be included in key indicators of indigenous innovation to guide the development of innovative enterprises. Building a stronger industrial R&D system oriented toward industrial needs, with the goal of driving corporate total innovation by fully utilizing scientific and technological resources both at home and abroad. Bathes of strategic, comprehensive, public-beneficial, and open national innovation platforms, such as The National Center for Nanoscience and Technology and the National Engineering Research Center, should be built over the next period through scientific planning and unified deployment to accelerate the construction of an innovative country and further enhance indigenous innovation capacity.

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