Gordon Orr
May 10, 2006

"Independent innovation" is one of the Chinese leadership's new strategic mantras. It is shorthand for China's efforts to hoist itself further up the technology ladder and ensure it profits more from its surging industrialisation.

Its emergence is based on a belief that China's economic growth will be constrained if Chinese companies do not innovate more - on core technology, on products and on process efficiency. In the background are two further concerns: first that Chinese enterprises could be deprived of access to needed technologies, and second that money paid for overseas patent rights could be better deployed elsewhere. Key objectives are to increase the share of gross domestic product growth attributed to scientific innovation to 60 per cent and to have research and development investment reach 2.5 per cent of GDP by 2020.

There are strong arguments for saying this initiative is based on an already outdated view of China's development. For example, in the motor industry, initially dominated by foreign producers, Chinese manufacturers have now gained close to a 30 per cent share. They are making acquisitions abroad to access technology and are starting to export. Companies such as Huawei, the telecoms equipment giant, have proved enough technological independence to win significant orders internationally. Meanwhile, thousands of Chinese are working for research centres set up in China by multinational companies, acquiring skills that will percolate through to a wider industrial community.

The government's plans are already well advanced. It is poised to put more funding into technological research and offer tax breaks. Beijing will use its power as a purchaser and standard-setter to favour home-grown solutions.

Multinationals' first instinct might be to view this as a challenge. But instead they should seek to shape the reality on the ground - for example by helping to formulate the definition of what kind of research obtains the tax breaks. They should also work with China's standard-setting institutions to have a say in how standards evolve. Chinese enterprises could often become allies in this, if they feel China-specific standards could hurt their global business. To help build further commonality of interest, multinationals should expand their network of partners.

One should not overreact to the initiative's high profile. It is largely an extension of existing policies and in several industries lags behind the reality of growing Chinese capabilities. R&D spending as a percentage of GDP has more than doubled in 10 years. However, experienced business leaders in China know such initiatives do shape behaviour, and that there can be real advantages to aligning early with such programmes. Smart multinationals will do this now.

The writer is a director in McKinsey and Company's Shanghai Office.

This article was originally published in the Financial Times.