Sunday, June 17, 2007

The Way We See It

We have all witnessed the incredible story of the development of China unfold over the last two decades, a story fueled by the affects of westernization. But westernization’s affects on the culture, business practices and the natural resources over time have varied. Consider its affects on three critical components of any developing country: human capital, manufacturing and the environment.

Human Capital
Thanks to western traditions, in the world of human capital, multinationals uncovered an early weak link in Chinese culture: an unfortunate lack of innovation and creativity among its people. Long known for their ability to replicate with great precision and efficiency, the ability to create and develop was virtually non-existence. Until now.

The Chinese are well aware of their “innovation gap” and have made the introduction of innovation into the culture a national priority, matched with vigorous initiatives designed to transform the Chinese workforce from a reactive, execution-orientation to one of creativity and innovation.

But this should be no surprise to the world. If you know any history of Chinese culture, innovation is not a new phenomenon. China is the birthplace of navigation and other world-altering innovations. Combine history with the will of the Chinese government and economic incentives for corporations to join in and the innovation priority is certain to be met.

The blog post entitled “Westernization’s Impact on Human Capital: Uncovering a Weak Link” discusses the specifics of westernization’s powerful impact on Chinese workforce issues.

In the beginning of China’s industrialization and development, most any observer would find an inadequate infrastructure coupled with a culture deeply rooted in the 19th century. How could best in class manufacturing ever find a home in such a setting?

Thanks to western influence, the infrastructure and the culture have changed over time. Processes typical of some of the best run factories in the world run rampant in manufacturing facilities in China. The result of this development? The quality of Chinese products have improved while remaining a relatively inexpensive place to manufacture, making what is produced in China truly globally competitive.

But why has this happened? Westernization has played a major role in the development of sound manufacturing practices. However, we find a culture eager to instill high standards and best practices into their manufacturing centers. Not every company has this desire – creating a continued risk inside of China – but over time many believe the desire to instill high quality practices will persevere.

For more on the westernization influences in manufacturing, visit the blog post entitled “Manufacturing in China: Too Cheap or Too Good? Is the Westernization on Manufacturing a Good Thing?”

While improvements in Chinese Human Capital and Manufacturing processes have resulted from heavy western influences, the environment in China has suffered. Some argue that western firms desiring cheaper manufacturing practices with lesser environmental regulations in China are partly to blame for the country’s dismal environmental record. Consider the data:
-China suffers from significant water, energy, soil erosion and air pollution issues.
-Five of the world’s 10 most polluted cities are in China.
-400,000 Chinese people prematurely die from air pollution every year, suffering from heart and lung related diseases.

Perhaps the greatest effect of westernization on the Chinese environment is that westernization has indeed had a negative impact on the environment. And the world, fortunately is beginning to notice. Fortunately, the Chinese government is responding. The government’s current 5 Year Plan invests $175 billion in infrastructure and technology geared to assist local political officials in environmental regulatory enforcement.

Read “China’s Environmental Response to Westernization: The Right Trade-Off or a Long Term Deal Breaker” for more context around this important subject.

In Summary
One thing is clear. Westernization has been a catalyst for change in China. For good or bad, it has caused the national government to take notice and make significant changes in some areas. Westernization has also opened the country to the scrutiny of the rest of the world. And for issues like human capital, manufacturing and the environment, world standards are becoming more critical and essential for countries – developing or developed – to operationalize should they hope to remain a relevant player in the global economy. This is the way we see it.

-Alyssa Williams, Laura Alvarado and Harris Vaughan

Sunday, June 10, 2007

Manufacturing in China: Too Cheap or Too Good? Is the Westernization Effect On Manufacturing A Good Thing?

Made in China” These days everything seems to have a little label with those words printed on it. You find them on clothing, furniture, toys, and computers…and the list goes on and on. The economic growth of China has had a huge impact on the world over the past decade; change that is only in its infancy.

When it all started? In 1978 China adopted the “Open-Door Policy” to promote foreign trade and economic investment.[1] This policy change was under the leadership of Deng Xiaoping which concluded that to modernize, China needed to tap Western technology, management and capital.[2] “It is time to prosper. China has been poor a thousand years,” Deng said. Deng did more than just start a new economic era. He changed the mindset of Chinese setting aside their personal welfare for the emperor or the state. He launched a social upheaval welling up from within each individual citizen.[3] By 1981, foreign investment into China rose to an estimated $1.2 billion.[4] Starting in the early 1990s, China attracted many multinationals as a sourcing base for low-cost and low-value products. Many textile companies and furniture manufactures relocated to China in the effort to reduce cost while increasing margins.

Western manufacturers were allowed to enter China to help create competition for Chinese State Owned Enterprise (SOE.) In fact for the first 15 years China required any multinational to establish its Chinese footprint via joint ventures (JV.) Through these JVs Chinese SOEs garnered the knowledge and processes to compete globally.

However it was not an easy transition for many of these multinationals. Chinese infrastructure was inadequate and the cultural environment was still rooted in the 19th century. Under the realization that both areas needed to be addressed in order to meet Deng’s vision, the government initiated the process of rebuilding its sea,air ports, and roads. The lack of a precedent based legal system was slowly addressed and free flow of information, formally obstructed, was encouraged as significant investment was made in telecommunication networks.
Through these efforts China evolved into the world’s manufacturing center while simultaneously becoming a large imported of finished goods. Today, manufacturing is driving the growth of China’s economy. It accounts for approximate 50% of its gross domestic product (GDP).[5] China is now the world largest exporter of clothing and textiles.[6] It has diversified its manufacturing capabilities and is no longer solely focused on the textile and furniture industries but rather moved upscale in its capabilities in a similar fashion as the Asian tigers in the 1990’s. It now produces:

· 55% of the world’s laptop computer
· 60% of the world’s air conditioners
· 70% of the world’s DVD players
· 50% of the world’s cameras

China has focused its infrastructure development in support the supply chain and logistics needs of large multinationals companies. It now has over 45,000 kilometers of highways that connect the major coastlines cities and provinces while providing deep links into the rural, western China. In our recent visit to Volvo Corporation, we learned that China projects to have 50,000 kilometers of highway by 2010. Additionally, Erik Bethel from ChinaVest, described the scale of annual Chinese infrastructure growth equating it to building two Boston-size cities every year.

Low-cost, Low-value? Cheap and shoddy is the associated perception many have of Chinese manufactured products. Multinationals outsourcing products from China were driven by a cheaper labor force that gave them a competitive cost advantage over competitors. Many of these companies sacrificed, at one point or another, the quality of their products for this lower cost. Since then, the growing competition has forced many companies to search for the lowest cost while simultaneously not compromising on quality. The balanced requirements of western companies have started to show in the transformation of the Chinese manufacturing industry.

Western Influence? During our visit to manufacturing facilities such as Corning, ISTC/IBM, Eaton and Lenovo we found a very different picture than what was expected from “low-cost/low-value” factories perceived to exist in China.

The majority of the factories visited had many, if not all, of the processes that are commonly used by manufacturing companies like John Deere in the U.S.A. The following are some of the similarities of these Chinese facilities in comparison to U.S. manufacturing sites:

- Use of the 5 “S”s - Most production lines were using this system. It is based on the organization of the work place to promote cleanliness and orderliness, thus improving productivity and quality. The main idea is that everything has a place and identification. The 5S’s stand for: Sort, Set in order, Shine and inspect, Standardize and Sustain.

- Use of Lean manufacturing principles – Many of the charts and documents on bulletin boards were listed with information typically associated with lean manufacturing principles. Value Stream Maps, Continuous Improvement Forms, Productivity Gain Reports to name a few were consistently present.

- Use of Operational Method Sheets (OMS) – In Lenovo, assembly lines displayed monitors at each work station where the assemblers could see assembly instruction in pictorial written form. The technicians would know exactly what components were needed and how to assemble the proper configuration for the product by looking at the OMS displayed at their work station.

- Use of 6 Sigma Quality metrics - Lenovo and ISTC/IBM measured First-Pass-Yield, Quality audit points and Non-conforming defects. Each production line was rated accordingly to its performance and all results were display for general viewing.

- Structure of workforce – The production lines were structured into three layers of personnel responsibilities; the production supervisor, a team leader and line fills.

- Safety measurements – Many of the facilities had on display the non-recordable hours worked and their requirements for use of Personal Protective Equipment (PPE). However, it was interesting to observe that although the requirements of PPE existed the enforcement of such measurements was very lenient.

I am certain all these processes and guidelines were introduced by western multinationals in an effort to maintain the product quality and consistency expected of their brands. These are proven processes based on the Toyota Production System (TPS) established by the Japanese and used widely today by multinational manufactures. An interesting fact to consider is that Japan struggled to produce quality products for many years. Its was only through strong processes like TPS that Japanese companies eventually increased their level of manufacturing quality to meet or exceed global standards. Today Japanese systems have become a benchmark for many international factories.

The spotlight is now on China. Will Chinese manufacturing systems be able to revolutionize the manufacturing world as the Japanese did? Time will tell. What is evident is all of the above processes already introduced into China will certainly increase quality, making Chinese products more globally competitive. The perception of poor quality will slowly wane and China will emerge as an even stronger force in the global economy; combining both low cost manufacturing with high quality.

A good example of this improvement in quality is the presence of Honda in China. Honda’s Jazz subcompact cars are now being manufactured in China. Hironori Kanayama, President of Honda Automobile possesses a belief that China could exceed his expectations on quality. “My target was that quality should be better than Japanese-made,” Kanayama says. “I think we have almost achieved the target.”[7]

Risks to this rise in manufacturing excellence for China include the lax enforcement of Japanese manufacturing processes and the human and environmental impact that unchecked manufacturing plants create. During some of the plant tours we noticed that many employees were violating minimum safety guidelines and no correction processes were in place to prevent such actions. Additionally, in some of the facilities chemicals were used without available Material Safety Data Sheets (MSDS) or properly labeled containers. Observing these spot instances, I cannot help to wonder if the employees are even trained to properly handle or dispose of chemicals. Perhaps, that is one of the reasons China faces such huge environmental problems.

By no means can I say that Western influence in China is the driving force behind all of its manufacturing improvements. The Chinese are hungry for growth and self-improvement. They are taking any opportunity presented to them and are running with it. In most of our company visits, the common theme was the Chinese workers’ desire and determination to improve. This was also evident to me while reading an article comparing two factories, one in Shanghai and one in Michigan, making the same products for the same company.[8] While the U.S. facility is still by far more productive than the Chinese facility, both facilities are in a continuous search for improvements. The Chinese workers, working for a tenth of their U.S. counter partners’ wages, are willing to work harder. For example, while in the Michigan plant 10% of the workforce does not make it into work any given day, in China the absenteeism rate is less than 1%.

Although China is not yet at the same level of the USA manufacturing, the signs indicate that it is learning fast and will soon catch up. A great Napoleon quote shown to us at the Eaton Company visit summarizes the potential of China:

“There lies a sleeping giant. Let him sleep. For when he wakes he will move the world.” [9]

- Laura Alvarado

[2] “Nike in China;” Harvard Business School; Ref 9-386-065
[4] “Nike in China;” Harvard Business School; Ref 9-386-065
[5] “Manufacturing in China”, GIE Industry report by Andrews, Fleming, Love & Murray
[6] “China-Factory of the World: Why China’s importance to retailers will continue” China Forum; May 2007, pg 13-15.
[7] “Chinese workers pass Honda’s export test.” Automotive News; 3/12/2007, Vol. 81 Issue 6246.
[8] Alex Taylor III. “A tale of two factories.” Fortune Magazine; 9/14/2006.
[9] Napoleon, 1803. Eaton Corporation, UNC MBA Global Immersion Elective Company visit 05/14/2006.

Saturday, June 9, 2007

China’s Environmental Response to Westernization: The Right Trade Off or a Long Term Deal Breaker?

What got me thinking…
Something I observed during my first day in China haunted me through out the trip and still occupies my thoughts: the air quality.
At our visit at Tiananmen Square, the landmark’s history should have taken center stage but instead I was focused with what appeared to be “visible grayish humidity” which hung over us. In jest, we speculated this was smog and continued on our merry way, but on the second and third day it was less humorous. A few of us developed a slight cough, while others no longer attempted to run outside. For myself, I had developed a cough, sore throat, and was amazed by the grayish mucous I had started to cough up.
If this happened in a matter of days, what was happening to the Chinese locals who lived here? If the air is a problem, what else is polluted? With Westernization’s growing sense of responsibility to Mother Earth, how will China stack up? Will multinational companies let China play or tell her to go home?

What I uncovered…
In probing further, China’s air pollution issue just scratches the surface. In fact problems exist in every possible area where pollutants could occur.

Here are environmental statistics for China:
· China has environmental issues in four key areas: Water, Energy, Soil Erosion and Air Pollution · 5 of the world’s 10 most polluted cities are in China[1]
· China grades water into 5 categories. With 5 being the worst, over half of the major river systems are level 4 or higher and are not for human consumption.
· 116 million people breathe air considered to be very danger[2]
· 400K people prematurely die from air pollution every year (heart and lung related diseases)
· Over 40% of China has a soil erosion issue; 1.6B tons of topsoil wash into the Yellow River every year and the Chinese desert now has its sights set on Beijing…
· China plans to double its coal consumption by 2020 to accommodate city consumption (2.5 times the energy per capita more than rural citizens), and will exceed the Kyoto Agreement's standards by five times[3]

To paint a picture, check out the picture from NASA. From space, China's air pollution can be seen. NASA described the pollution as so bad that Beijing could not be seen anymore...

Why should multi-nationals care?
Anyone who thinks a country’s environmental dilemmas and doing business in that country are mutually exclusive, think again. Typically costs are only thought of when following environmental regulation, but in actuality, the lack of environmental regulation can be even more costly. Consider the above environmental statistics and read on to gauge the economic and commercial implications to China:

· 10% of its annual GDP is the loss estimate to China’s economy from not having an environmental agenda in place[4]
· The cost to fix the environmental damage would wash out the booming commercial growth of 8% a year
· $36B in lost industrial output occurs from a lack of water to run facilities
· $13B is the loss estimate from the damage and health impact of acid rain
· $6B is the loss estimate from the spread of desert regions

There are plenty of dollar signs for the multi-nationals to care. Well fix it then, right? Not so fast. Who regulates all of the resources? The government! To add to the complexity is the need for multinationals to practice “Guanxi” with the government. Sustaining and fostering a relationship with the Chinese government is essential to continued successes in China. How does a multinational successfully build Guanxi AND work towards environmental standards, when the multiple levels of the Chinese government have conflicting views on environmental regulation? To truly appreciate the bureaucracy, recall there are five levels in China’s political system:
1. National
2. Provincial
3. Municipal
4. County
5. Township

There’s a real struggle to connect the dots between economic growth and protecting the environment. The light bulb has gone off (somewhat) at the national level but has yet to at the lower levels. The existing incentive structure for annual performance does not encourage support for the environment. What matters is how much did the government contribute to GDP growth for the respective jurisdiction. When measured in these terms, time spent on environmental regulation falls through the cracks and the local officials have no incentive to discuss it.

Exploitation by the West?
Aside from the obvious bottom line concerns, Western corporations need to care about environmental compliancy to keep their corporate reputations intact. Some companies are struggling with the temptations of maintaining western environmental standards which is hurting the image of multinationals.
Multinationals already receive such scrutiny from the Chinese Media related to environmental standards. When a multinational enters China, the first reason which comes to mind is for the company to enjoy the lax environmental policies which are typically found in its origin country. The ability to use outdated equipment and processes can be environmentally harmful but achieve lower operating costs which makes moving to China very appealing. If this is the case and a multinational company is caught, the ramifications are not only to its reputation in China but globally as well. A few companies recently highlighted as water pollutant offenders in China are Nestle and Pepsi, who have both now been blacklisted in China.

What the China government is doing and what still needs doing…
In China’s 11th 5 Year Plan (which extends from 2006 to 2010) $175 B investment is planned for infrastructure and technology geared to assist local officials to enforce environment cooperation. This is an enormous investment and a clear message from the Chinese government. In conjunction, the government needs to overhaul the incentive structure and legal structure of the local offices. Without changing the performance metrics, no incentives exist for the lower levels to help Mother Earth. The current legal system is also not conducive to enforcing environmental offenders. In 2006, only 500 of the 700K environmental violations had been tried. The fact that there’s an overlap (i.e. conflict of interest) between the judges, government and local business owners makes trying environmental offenders even more impossible. To change the local incentive structure and legal system would require a drastic change on multiple fronts for the Chinese government. It’s possible the Beijing Olympics will highlight some of the air pollutant issues which could drive additional reform, but outside of that, major progress on these two fronts will most likely not occur in the immediate future.
Bottom line; don’t count on the Chinese government to have this figured out before you enter the Chinese market.

What can the multinationals do?
While Chinese governmental reform is not fully within anyone’s circle of influence, there are steps multinationals can take to hedge environmental risk and influence the Chinese government.
Experts indicate there are 2 options for multinationals to follow
First Option - Two Pronged Defensive path

First Prong - Avoid causing harm.

a) Participate in all industry wide standards and associations to prevent negative publicity.

Second Prong- Minimize the environmental “footprint”

a) Not only focus on multinational compliance to environmental standards but also reach out and influence the supply chain partners to strive for global environmental standards

b) E.g. Mattel upgraded its process on how to paint the Barbie Doll’s eyes. The results are eliminating residual hazardous waste and introducing a cleaner environment for the Chinese workers. Just by upgrading from a paint gun!

Second Option- Be Proactive
a) Establish programs centered on developing technologies the national Chinese government requires for the environment. This can be done through community work or actual partnering with local universities or scientists.
b) Some companies opting for a proactive approach to environmental reform are GE and Royal Dutch Shell
c) The proactive approach is truly the win win as there’s an opportunity to build Guanxi by helping the Chinese government meet its outlined environmental standards, with the added bonus of reaping First Mover Advantage benefits.

What lies ahead…
There’s a great opportunity to influence and work with the Chinese Government. Speculation is the Chinese government looks to the west to help take the lead in Environmental Reform. A common theme from the GIE visits with the Ministry of Education, Peking University Hospital, and CCTV; China recognizes that collaboration and understanding Best in Class models increase success. Environmental reform is no different.
A critical key is how the multinational companies take the lead in its environmental relationship with the Chinese government. Regardless of whether the multinationals are more knowledgeable on Mother Earth, there’s the importance of “saving face” and the art of Guanxi will be heavily relied upon when working with the Chinese government.
A possible accelerator to environmental reform is the Beijing Olympics in 2008. The agreement to have the Olympics in Beijing was freedom of the press. Beijing will be open to all news reporters and it’s highly possible the topic of Beijing’s air pollution will be reported. How China responds to these reports could accelerate future environmental reform. In other areas, China has evolved and surpassed the world's expectations. Time will tell if we see a similar response to the environment.

- Alyssa Williams

[1] “Scorched Earth; Will Environmental Risks in China Overwhelm its Opportunities?” Harvard Business Review. June 2007. Elizabeth Economy and Kenneth Lieberthal.
[2] “Shifting Nature.”China from the Inside Series. Part 3.
[3] Pollution From Chinese Coal Casts a Global Shadow. The Energy Challenge. New York Times. June 11, 2006. Keith Bradsher and David Barboz..
[4] China's Pollution Threat. Business Week June 23, 2006.

Tuesday, June 5, 2007

Westernization’s Impact on Human Capital: Uncovering a Weak Link

Westernization has had a tremendous, positive impact on Chinese human capital. Why? Because over time, western capitalist traditions have uncovered China’s weakest link – a lack of innovation and creativity among its people.

As the traditions of western-style capitalism have infiltrated the Chinese culture since it was open to the west in 1979, a clear and present “innovation gap” has emerged. Leaders of western-style corporations doing business in China, Chinese government officials and educators have recognized Chinese adversity to creativity and innovation, the fuel for a thriving western capitalism model. Fortunately, Chinese authorities have admitted the innovation gap and responded vigorously, launching initiatives and working with corporations to help transform the Chinese workforce from a reactive, execution-orientation to one of creativity and innovation. And the positive effects of these initiatives are already being felt. Consider the following.

The Chinese Education Ministry is developing new curriculum to foster “creative learning”, shifting the current memory-based curriculum to one of more innovation and creativity.[1] Cen Jianjun, Deputy Director General affirms that the status quo model – based on the former Soviet Union model – is simply unacceptable because it does not respond to the needs of the market, which demands a more creative workforce.

Students and educators from Tsinghua University, one of the top universities in all of China, agree that instilling creativity in the minds of Chinese is one of the biggest challenges of the Chinese education system. Long an advocate for the study of western culture, Tsinghua University is pushing individual thought over collective thought aggressively to help overcome the innovation gap.

Realizing the difficulty of fostering creativity and innovation in a culture unwilling to legally protect invention, Chinese authorities have recognized the importance of intellectual property rights and are helping to advance ways to protect IP. For example, the cluster model for manufacturers in China – fostered by the Chinese government – is encouraging clustered firms to collaborate on the management and protection of proprietary thinking. Some signs even suggest a growth in patent applications and management, despite evidence of a continued “imitation” approach to manufacturing for much of China.[2]

For Nortel, huge pay-offs have already been detected. In the beginning, China was a low cost manufacturing source. “Now, what you are seeing is a movement from China as an outsourcing center to an R&D center thanks to China’s investment in higher education. North America, in 25 years, might be in a follower position on a lot of technologies,” says Kalli Lefevre, Vice President, R&D Asia Pacific & Greater China for Nortel. For Nortel, it is simply a matter of teaching Chinese employees how to unleash creativity. Many of the new product innovations sold in the rest of the world stem from R&D work based in Nortel’s Beijing campus. Nortel was the first to locate in the Beijing Zhongguancun Electronic Zone, an area created by the Beijing Municipal Government to encourage high-tech companies to locate in the region.[3]

Corning has found a way to culturally address the need for innovation. At Corning, employees are recognized for creative thinking through a reward and recognition program. Corning bi-annually bestows the “Break the Box” award to employees who “encourage job process improvements, apply breakthrough thinking on the job, and deploy new processes to the job.”[4] A hall of fame of past “Break the Box” award winners is prominently displayed on the company wall. At the top of the sign is the saying, “Only those who see the invisible can do the impossible.” Like Nortel, Corning finds that Chinese employees only need the training and encouragement to innovate. Once they find those two elements, innovation tends to flourish.

Perhaps one of the reasons western firms in China are beginning to see the innovation gap close so quickly is because innovation is not new to China. More than 1,000 years ago, Chinese inventions had far-reaching impacts on global society. Gunpowder, the compass and navigation had dramatic affects on the development and globalization of the world. In the areas of fine arts and craftsmanship, the discovery of porcelain, book-printing and silk-making still have prominence in today’s modern society.[5]

But Chinese authorities know that the heavy hand of government over time created a culture adverse to out-of-line behavior, a component of innovative thinking. And they have readily and publicly admitted to this reality. In an edition of China Daily, the government owned and controlled national newspaper, an editorial cartoon depicted the national economy as a high performance Formula One racecar ready to “speed off” only to be saddled with a wooden wheel labeled “technology”.[6]

But China is making innovation a top priority from the highest levels of government. In a speech by Chinese President Hu Jintao to national scientists and engineers, Hu declares that they must make China "a nation of innovators."[7]

But for China to truly emerge as a “nation of innovators” China must make significant advances still. Consider the following.

China is spending only 1.1% of its GDP on R&D, compared to the developed nations of Japan and the United states who post 3.2% and 2.6% respectively. This suggests that China is still reliant on the old imitation-driven manufacturing model still, not keeping up with the national priority of creating a “nation of innovators.”[8]

The relationship of public and private R&D activity remains constrained, atypical of an innovative society where financial collaboration to foster R&D is high. In China, R&D funding remains politically controlled and directed.[9]

Chinese recipients of the coveted Nobel Prize – the hallmark for innovation globally – had to leave their homeland to pursue their innovations.[10]

The Chinese are conformists by nature, a tremendous obstacle to innovation. In the words of an ancient Chinese proverb, “The bird that flies out of its flock is the first one targeted by hunters.”[11] This type of instruction can be found in the school system still.

To some outside observers, the pursuit of innovation by the government is limited to products, not ideas. Just this week, the government announced that bloggers in China would now have to register their real names and identification card numbers to maintain the ability to post to blogs. Bloggers universally condemned the decision as a direct attack on freedom of expression, yet another critical component of a society that fosters creativity and innovation.[12]

Despite some evidence of IP protection, most foreign observers would agree that the lack of a true rule of law remains a critical problem. This places an incredible burden on innovation because without IP protection, the just reward for creativity is impossible.[13]

GE, a global company known for innovation, has found China still innovation adverse. GE understands that Chinese have lived in a culture that thrives on living by the rules. As a result, GE has had to invest in developing innovative leaders by requiring select new hires to undertake their Management Leadership Program so that the soft skills of leadership, innovation and creativity can be learned. To further the challenge, GE competes regularly with the government on talent recruitment. Top graduates from Chinese universities tend to be lured away to the security of government positions.

So what is the prognosis? Will the adoption of innovation take hold culturally? And should an innovative and creative class flourish in China, can is be sustained?

Innovation is beginning to take hold in China. As suggested above, evidence supports that in pockets throughout the economy, innovation is beginning to flourish. Why? When you combine the will of a centralized government with the will of foreign capital investment, change will occur.
Jeff Gallinat, Vice President of Global Manufacturing at Lenovo believes that while the creativity and innovation gap may still exist, the gap is closing. He suggests that a lack of innovation is a generational dilemma and as Chinese are exposed to new ways of thinking over time, Chinese human capital will adapt. Clearly the need for more stringent legal protection around intellectual property is needed. After all, without IP protection, no one is rewarded for innovation. But the government and business leaders know this and they are working to crack down on IP infringement. This is good news for a firm know for innovation and when translated from its root word “Lengend” means “innovation.”

Firms are finding that the Chinese employee base is young, well-educated, passionate and eager to learn more. This is a good sign for those firms interested in training employees to be more creative. Young employees don’t know what can’t be done and with proper training and the encouragement and tools necessary to do so, the passionate, young workforce, will innovate.
Magnus Gyllo, Vice President of Asia for Atlas Copco agrees. And as part of developing their human capital, Atlas Copco has created a training academy, partnering with local universities to train employees on issues related to company culture and innovation. This is a critical component for Atlas Copco, a foreign firm which believes that the best way to do business is China is to train Chinese to manage Chinese employees.

Fortunately for China, corporations understand the innovation weakness and how to overcome it. They are devising strategies and models to sustain growth through continued innovation.[14] To ensure that their strategies can flourish, however, China will need to further reform and open their markets by allowing capital to flow freely, protect intellectual capital, and ensure true transparency. The US enjoys an “entrepreneurial culture, relaxed labor markets, and free capital flows”, allowing it to be “the most innovative economy in the world.”[15] China will have to follow if they hope to sustain this march to become a “nation of innovators.”

- Harris Vaughan

[1] “Ministry of Education”, Doing Business in China GIE Report, Kira Brown.
[2] “China’s Innovation System and the Move Toward Harmonious Growth and Endogenous Innovation,” Shulin Gu and Bengt Ake-Lundvall,

[3] “Nortel Overview”, Doing Business in China GIE Report, Alyssa Williams.
[4] Corning “Break the Box Award” Hall of Fame, Corning Campus, Shanghai, China.
[5] “In China, Dreams of Bright Ideas,” Edward Cody, Washington Post, June 17, 2006.
[6] Cody, June 17, 2006.
[7] “Innovation in China,” Bruce Nussbaum, BusinessWeek, June 17, 2006.
[8] Nussbaum, June 17, 2006.
[9] Cody, June 17, 2006.
[10] Cody, June 17, 2006.
[11] Cody, June 17. 2006.
[12] “Chinese Rules Would Keep Blog Registry,” Associated Press, May 23, 2007.
[13] “Technology Innovation in China,” Marco Di Capua, National Academy of Engineering, 1998.
[14] “Obstacles to Innovation in China and India,” CEO of Infosys, BusinessWeek, September 25, 2006.
[15] Cody, June 17, 2006.