Two innovation models to learn from

Updated: 2013-11-12 07:27

By Stephan Richter and Nathan Richter (China Daily)

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The three nations that, one way or another, lead the global economy at the moment are the United States, Germany and China. For the US, it is innovation driven by a can-do spirit and an appetite for risk, with established corporations and startups introducing some of the world's most important and game-changing technologies. In Germany, a commitment to product quality and engineering excellence has been key to the success of both its multinationals and small- and medium-sized enterprises.

China's economic strength has been built on its cost competitiveness and the adoption of foreign-developed technologies and innovations since its opening-up, and its global impact has been due mainly to its massive scale. The global financial crisis, however, has ushered in a new phase in China's economic development, as it can no longer rely predominantly on foreign consumption as an engine for growth. It has to develop domestic consumer markets and orient its production towards them. Furthermore, rising wage costs make it highly unlikely that China will be able to continue to grow by being the factory for many of the world's simpler products.

To move forward and move up the value chain, China needs to begin developing a management system and, more importantly a culture, for technological and product innovation.

To catch up in innovation, China needs to learn from Germany and the US, which offer the two main - and quite contrasting - models for future success.

The US business community benefits from the long tradition of newcomers taking risks on entirely new product categories and technologies and leapfrogging companies that have lost their competitive edge. One need only look at Apple for a basic idea of how this plays out. Another trait of US firms is that decisions are usually made in a top-down fashion, requiring only one or at most a few people's approval, which allows for rapid adaptation and changes in direction.

The advantages of the US approach to managing innovation are quicker market penetration of new products, broad brand recognition in new markets, and attention to customer feedback, which can be used to improve future generations of products. The weakness, one could argue, is that product quality may suffer, leaving the door open for other companies (possibly from other nations) to step in.

German corporations have historically been big innovators in terms of technology and product quality. However, because of a cultural resistance to risk and a widespread preference for stability, larger German corporations of late have not been able to capitalize on new ideas to the same degree as US companies. Management in German firms is also more horizontally organized. If a decision is to be made, it must be approved in a time-consuming process by multiple individuals or groups. Even after it's been decided at the top, the process may be slowed by levels below. However, these traits are less pronounced with Germany's more nimble SMEs.

The advantages of the German approach to managing innovation are high product quality and well-thought-out services that accompany those products. The downside is that new products can be late to market, and truly disruptive innovations are few. Even when German companies come up with disruptive ideas, they can miss discovering their immense market potential, such as the German-invented MP3 player. Disruption and rapid scaling-up seem to fit better with the US psyche. It is important to keep in mind, though, that as far as market and sales potential are concerned, the German approach - while more restrained - can be lucrative and self-sustaining.

What does this mean with regard to China's future path? The argument is often made that the freer people are in a society or an economy, the more innovation is likely to result. Innovation is bound to happen when people are taught from a young age to challenge the norm. However, the democracy-innovation nexus should not be overstated. Historically speaking, German companies displayed an innovative spirit long before the country was a democracy. That suggests that democracy is not necessarily a requirement for innovation.

That part of the historical record sounds like potential good news for today's China. But it is crucial to recall what Germany did have as assets at the time - a strong engineering tradition, a strong adherence to the rule of law, as well as a quickly rising focus on intellectual property rights. On that basis, risk taking and innovation were properly rewarded. China does not yet have the engineering and legal traditions Germany has, and it also lacks other key ingredients in the innovation formula.

How about Chinese firms finding inspiration in the US model? The trait that Chinese firms share with US ones is the ability and inclination to bring a new products to market quickly, although generally at a low level of product sophistication. Where Chinese firms still have a lot of catching up to do in making adjustments based on customer feedback as well. Bringing a new product to market rapidly and improving its quality based on feedback from customers is the true value of the US' approach. There can be no doubt that Chinese companies will also adopt this approach before long. The size of the Chinese market and the increasing sophistication and quality demands of Chinese consumers will likely ensure that.

The big question for Chinese companies is whether they can find their own equivalent of the risk-taking spirit in the US that results in radical product innovation, or develop something more like the German model of technological excellence to give products a global advantage.

All that can be reliably said at this stage is that China's new leaders recognize the challenge. They have begun to encourage innovation and are revamping the educational structures and priorities. Some of China's leading universities have launched programs dedicated to honing the innovation potential of the country's future managers.

It's also likely that both the German and US approaches to management are going to be practiced in China. The country's State-owned enterprises, whether partly privatized yet or not, are "German" in their character. They have to obtain a lot of buy-in, including from political stakeholders, and thus are likely to follow a more slow-moving, horizontal management approach. In contrast, privately owned firms in China are bound to follow the more nimble top-down US model.

The ultimate outcome of China's innovation journey of course remains highly uncertain. One thing is for sure, though - it will be fascinating to watch.

Stephan Richter is publisher and editor-in-chief of The Globalist, and president of The Globalist Research Center. Nathan Richter is a Master of Management student at Peking University's HSBC Business School in Shenzhen, China. The Globalist

(China Daily 11/12/2013 page9)