Innovation may well turn out to be China's next important advantage

For the last 120 years, customer preferences of Americans have largely dictated the taste and looks of the chocolates and sweets made by Hershey Co of Pennsylvania, the largest producer of quality chocolate in North America. But as Hershey sets up a new innovation center in Asia, there are early indications that Chinese preferences will soon have a say in the final product mixture.

The innovation center in Shanghai is not only expected to help Hershey quickly develop, test and launch new products suited for customers in China and Asia, but also for the rest of the world, say company officials. Yuan Qingbin, head of the center, says it is only a matter of time before Chinese preferences will define the future taste and style of Hershey chocolates and sweets.

"We have the ambition and desire to make some powerful products in China, across Asia and the rest of the world. Chinese preferences in food and drinks, such as tea, are gaining ground in the West. I don't see why Chinese customers cannot decide the taste of global products," says Yuan, who worked for Hershey in the United States for seven years before taking up the Shanghai assignment.

Hershey is just one of several multinational companies that are moving their research and development facilities to China with an eye on the nation's huge domestic market and growing high-end talent pool, apart from the desire to reduce product development costs.

That transition has also prompted several multinational firms to change their R&D focus from "made-for-China" to "made-for-the-world", something that gels well with China's vision of being a global innovation hub, say experts.

Changing trends

"Foreign multinational companies are keen on housing R&D facilities in China to tap the huge market and enjoy benefits such as cost efficiency. This is gradually turning China from a world factory to a global innovation hub," says Dan Steinbock, research director of International Business at the India, China and America Institute, a think tank in the US, who believes that China can complete the transformation in 10 years.

"Innovation is often measured by input indicators, such as R&D and output indicators, such as patents," Steinbock says. "The global patent power is shifting from the West to China, as measured by the number of patent applications received. In terms of R&D expenditure, China is still significantly behind the US, but the gap is shrinking and China is likely to overtake America as the world's greatest innovation investor in about a decade." The indicators are crude, but they do reflect significant trends, he says.

China, which spent $134 billion on R&D in 2011, ranked third in the world while the US retained the top slot, spending $415.19 billion.

However, China had had the most rapid growth in R&D expenditure worldwide with average annual growth of 17.1 percent between 2005 and 2011, according to the Chinese Academy of Science and Technology for Development.

In output, China overtook the US, becoming the country that registered the most patent applications globally in 2011 for the first time. The US regained the top position last year, but the World Intellectual Property Organization based in Geneva said China, which ranked the fourth in the world, still saw strong double-digit growth in filings.

Despite the promising future, the Global Innovation Index 2013 published on July 1 by Connell University, INSEAD (European Institute of Business Administration) and WIPO (World Intellectual Property Organization) shows that China ranks 35th among all the 142 sampled countries in innovation, compared with 34th in 2012 and 33rd in 2011.

However, Bruno Lanvin, the report's co-editor and executive director of INSEAD's European Competitiveness Initiative, does not doubt China's future as a global innovation hub. He says the decline in its ranking is because of the changed methodologies used in the research and China continues to outpace its peers in middle-income economies in innovation.

China is categorized as one of the 18 innovation learners, which are mostly countries ranked from 19th to 36th in Lanvin's index. "There is no doubt that these innovation learners are tomorrow's innovation leaders," he says, adding that innovation has a strong link to per capita GDP.

Lanvin says emerging countries, such as China, are quickly moving up the ladder in GDP. But given the demography and the geography of China, the per capita GDP will grow at a lower rate.

Hu Zhijian, Party chief of China Academy of Science and Technology for Development with the Ministry of Science and Technology, says China will certainly move up the ladder, but more slowly than in previous years.

"This is because the higher you climb, the stronger is the competition you will face," says Hu, whose organization published an annual innovation index in May that ranked China 20th among all the 40 sampled countries. Switzerland, Japan and France took the top three positions.

Hu says that in his index China jumped from the 38th slot in 2000 to 25th in 2005 and to 20th in 2010. "The momentum is becoming slower and slower, because it is getting more and more difficult."

As part of its 12th Five-Year Plan (2011-2015), China has pledged to turn itself into an innovative economy and also set a goal of achieving the 18th rank by 2015 in Hu's index.

Although it looks challenging, many experts say gaining a high score in innovation does not necessarily mean that the country is a global innovation hub.

Steven Veldhoen, partner with Booz & Co, a global management consultancy, which published a report titled Innovation: China's Next Advantage last year, says that although any country can be as innovative as Denmark or Finland (among the top 10 countries in the INSEAD Global Innovation Index 2013), it still does not mean they are global innovation hubs.

The Beijing-based Veldhoen, who specializes in improving corporate innovation and operation capabilities, says that when it comes to one country's innovative capability, people often talk about the R&D spending over GDP.

Although China has increased the number from 0.9 percent in 2000 to almost 2 percent last year, it is still small compared with the 4 percent or 5 percent in developed countries.

"It is not fair to China because it is such a big and diverse country. But if you consider the greater Beijing area a country or Shanghai and Jiangsu province a country, their investment in R&D over GDP are already at 4 percent or 5 percent. Some of the regions in China are already global innovation hubs."

Although it is difficult to quantify one country's status as a global innovation hub, Veldhoen says: "There are very few companies that consider themselves as global innovators who don't have an innovation center in China. That's a very good way to measure whether China is a global innovation hub."