China Innovation Opportunities

by: Tatjana Guznajeva, Technopolis Group

Why should I read this document?

When confronted with the differences between your own market and the market of China you will likely feel that you have to adapt your product/service significantly to make it fit the preferences and expendable income of local people. While many may see this as a challenge this can also proof to be a great opportunity for your company! Adapting to a new market, like China, will allow your company to innovate. Not only will operating in China lead to new insights to be more successful in China, you will most likely also pick up on ideas to be more successful in your home market.

This document provides a short overview of innovation aspects, business opportunities and challenges in China. It will also give advice on best practices for starting and developing an innovative business venture, considering China’s country context. May it help you to explore China and lead you to innovation and success.

Opportunities and tips for innovation and doing business in China

China is the world’s second largest economy in GDP terms, it has a huge consumer market, which absorbs diverse goods, services and innovative ideas.
Digitalization of production and customisation are likely to become the solutions for productivity growth and satisfaction of growing customer needs. China has one of the largest ICT markets, although demand for deployment of ‘smart’ technologies, Internet-enabled innovations is greater than the supply.
China has a large manufacturing capacity. However, the manufacturing sector requires innovation towards next-generation manufacturing.
The demand for environmental, clean and renewable energy technologies is growing in China, as the country tries to transform industries and respond to challenges, such as pollution, shortage of natural resources and desertification.
China is trying to improve its health sector, focusing on medical technologies, however, the competition in the market is not as strong as in other areas. In addition, large aging population opens wide opportunities for insurance, care service, medical and pharmaceutical companies.
The Chinese high-tech sector is moving towards technological and innovative solutions in life science, robotics, smart city, new materials, information technology and 3D printing sectors. Currently, Chinese companies are looking for collaboration in above-mentioned industries.
China has strong trade links throughout the world, it signed 14 free trade agreements and it is a member of the World Trade Organisation. Thus, China is a good place for importing, exporting and supplying to domestic and international markets.
The Chinese labour market is large, the wages and production costs are still relatively low, in contrast to European levels, therefore China is a good location for resource intensive production.
The Chinese market is dependent on foreign imports in several sectors, therefore it could be advantageous to launch a business in most demanded sectors or to start a partnership with foreign suppliers for Chinese companies.
Social media plays an increasingly important role in shaping preferences, therefore it is a useful tool for developing a marketing strategy and examining consumer tastes.
Chinese people are concerned about their financial stability, therefore credits and loans are not popular. When designing a marketing strategy, target consumers with sufficient income to pay for the good or service at once.

On Level 2 you can find information about innovation climate in China, while Level 3 will tell you more about business activities in China.

This page will tell you about innovation ecosystem, major technology sectors, innovation and business practices in China.

Innovation ecosystem

In China, the central government controls scientific and technological development, although local governments and research institutes play a major role in driving innovation in the country. The overall expenditure on science and innovation is the second largest in the world, after the US. Industry and universities participate in many joint projects to satisfy market needs; technology parks and incubators assist in connecting entrepreneurs and academics. SMEs are the major players in China’s innovation ecosystem, as 65% of patents and 80% of most innovative products are produced by them.

China has more than 130 high-tech parks, while Beijing, Shanghai and Guangdong are the centres for industrial R&D and scientific development. Foreign companies play an important role for innovation in China, either through direct investment into Chinese companies, transfer of technologies, ideas, or by establishing foreign R&D centers. China utilises its two advantages in driving innovation – lower costs of production and a large number of researchers, engineers.

In the last two decades, China has been inventing many successful technologies and products, which later have been used throughout the world. However, many innovations in China lack creativity and uniqueness, as they have been replicating European, Japanese or American inventions. Chinese scientists and technology developers have been learning from other countries’ experiences and further advancing foreign ideas. This contributes to a continuous progress of Chinese science and research.

The large domestic consumer market allows to absorb even low quality innovations and test new ideas. Chinese consumers facilitate the process of innovation through immediate feedback on a product for further improvement. Thus, China provides a favourable environment for innovation testing.

Innovation sectors and technology

Scientific and technological development in the country contributed to development of manufacturing, energy, transportation and engineering sectors. China is one of the world’s largest producers of computers and smartphones, however, most manufacturers depend on foreign imports for production.

Since 2011, the central government has been increasingly investing in technological development of manufacturing, agriculture, ICT and the so-called green (energy) sectors, therefore these sectors have a larger potential for innovation.

Innovation culture and practices

The existence of a large number of state-owned enterprises, as well as, burdensome administrative procedures discourage private companies to innovate. On the one hand, the Chinese mentality is risk averse, culture does not tolerate failure, on the other hand, Chinese people are pragmatic and customer-focused, therefore local entrepreneurs embark on a business venture only if they can foresee success.

The Chinese government has been providing financial assistance in the form of R&D tax credits, investment financing and through public R&D or training programmes to stimulate entrepreneurship. If a foreign-owned company gets a status of a high-tech company it might be entitled for several tax benefits and cover staff training expenses, as it is considered that such companies contribute to China’s domestic technological innovation.

This page highlights major economic sectors and iconic products, shows business trends and explains how easy it is to do business in China. In addition, you will find the list of websites, which provide some hands-on information.

What is the country known for?

Sectors

The biggest sectors in China are: machine building, textiles, mining and ore processing, iron, cement, transportation equipment, petroleum, chemicals, food processing, electronics, telecommunications equipment, satellites, footwear, toys, steel, aluminium, coal.

Iconic products

Computers, broadcasting equipment, telephones, integrated circuits, video displays, electric motors, air pumps, electric heaters, non-knit women’s suit, knit sweaters, light fixtures, vehicle parts, rubber products, trunks and cases, jewellery.

How easy is it to do business in China?

Based on the World Bank ranking:

	China	EU Average	Emergin Markets Average
Overall - ease of doing business	78	30	83

China has many bureaucratic procedures and suffers from overregulation, which prevent a fast market entry and impose restrictions on foreign firms. As a result, the processes of starting a business, paying taxes, getting electricity and obtaining a construction permit are fairly complex in China, even in contract to other emerging markets. In addition, China ranks at the bottom of the list in the protection of minority investors in the country.

The Chinese stock market is underdeveloped, while intellectual property rights suffer from uneven enforcement and procedural barriers, therefore financial stability and viability of companies is at a greater risk than in Europe. The property renting for business could be relatively expensive, in addition, governmental permissions related to some business operations, such as technology transfer, could be very costly.

Due to competitive pressure from state-funded firms, anti-monopoly regulations for foreign companies and large investments into development of local companies, many foreign enterprises find it difficult to grow beyond a particular level. In addition, the government of China has been increasing the number of regulations related to environment, medicine or food sectors. This prevents an easy market entry and incurs significant costs for a business to start producing or selling goods or services in China. However, vast business opportunities which China offers may compensate for additional costs and peculiarities associated with business processes in the country. Moreover, some bureaucratic procedures, such as contract enforcement, insolvency resolution, property registration, are much simpler in China than in other developing countries.

Business trends in China

Since China has the world’s largest e-commerce market, companies are frequently using online platforms for sales and communication with suppliers and consumers in the country and abroad. The business activities with European and American enterprises have significantly grown due to e-commerce. In China, around 95% of industrial firms are searching for suppliers on the Internet. Paradoxically, technological advances and e-commerce have integrated Chinese companies into the global supply chain stronger than domestic companies, therefore within China B2B links are weaker.

The governmental planning of industrial development stimulated concentration of specialised production. E-commerce facilitated and enabled the spread of companies and industries, however, industrial clusters are still present. Thus, if a company is willing to establish a constant interaction with suppliers then it is advisable to choose a production location next to existing industrial clusters (Figure 1).

Figure 1: Industrial clusters in major cities

Province	Industry
Shanghai	Petrochemicals, chemicals, phamaceutical, automobile, electronic apparatus, financial
Beijing	IT, communications, electronics
Guangzhou	Automobiles, electronic appliances, textiles, apparel, toys, pretrochemicals, chemicals
Jiangsu	Chemicals, textiles, communications, petrochemicals, steel, foods, auto parts, biomedicine
Shenzhen	IT, semiconductors, biomedicine, communications, electronics information
Zhenjiang	Light industry, plastics, textiles, apparel, toys, metallurgy, household electrical, furniture, kitchenware
Shandong	Agricultural, oil & foodstuffs, pharmaceutical

Source: B2B International. (2018). Entering Chinese Business-to-Business Markets: The Challenges & Opportunities.

Despite slowing economic growth in China in the last few years, most European companies report that they experienced higher sales in 2016. In sectors of information and communication technology, machinery, automotive, retail and environment the highest growth of revenue has been witnessed, due to escalating domestic demand. The China Manufacturing 2025 plan, announced in 2013, has caused a considerable frustration among foreign companies in China, as the plan intends to increase self-sufficiency of the economy in strategic industrial sectors through extensive public support to local firms.

The Chinese market of luxury goods is soon to become the largest in the world, while the spending on education, food, electronics and travel is accelerating in the country. In the future, the demand in accessories, jewellery, electronic household items and personal devices is likely to continue growing.

More hands-on info

The EU-China Business Association (in 2017: http://www.eucba.org/en/)
China EU International Association (in 2017: http://www.chinaeu.eu/chinaeu/)
The European Union Chamber of Commerce in China (in 2017: http://www.europeanchamber.com.cn/en/home)
EU Gateway Business Avenues (in 2017: https://www.eu-gateway.eu)
Business Laws and Regulations in China (in 2017: http://www.china.org.cn/business/laws_regulations/node_1214470.htm)
China IPR SME Helpdesk (in 2017: http://www.china-iprhelpdesk.eu)
EU SME Centre in China (in 2017: http://www.ealink.eu/business-support/partners/eu-sms-centre)
The EU Asia Business Link (in 2017: http://www.ealink.eu)
The State Council of the People’s Republic of China (in 2017: http://english.gov.cn)
The Central People’s Government of The People’s Republic of China (in 2017: http://english.gov.cn)
Euractiv (in 2017: https://www.euractiv.com/sections/eu-china-trade/)

Bibliography

Level 1:

Export.gov. (2017). China – Technology and ICT. Retrieved from: https://www.export.gov/article?id=China-Technology-and-ICT
Kan, H. (2009). Environment and Health in China: Challenges and Opportunities. Retrieved from: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2799473/
Nelson, C. (2012). Senior Care in China: Challenges and Opportunities. Retrieved from: https://www.chinabusinessreview.com/senior-care-in-china-challenges-and-...
Xinhua. (2017). China seeks more sectors to cooperate with Israeli hi-tech startups. Retrieved from: http://www.chinadaily.com.cn/business/2017-11/20/content_34773304.htm
HKTDC Research. (2017). Trade regulations of China. Retrieved from: http://hong-kong-economy-research.hktdc.com/business-news/article/Small-...
Nelson, C. (2011). Understanding Chinese Consumers. Retrieved from: https://www.chinabusinessreview.com/understanding-chinese-consumers/

Level 2:

OECD. (2018). China. Retrieved from: https://www.oecd.org/sti/outlook/e-outlook/sticountryprofiles/china.htm
World Economic Forum. (2016). China’s Innovation Ecosystem. Retrieved from: http://www3.weforum.org/docs/WEF_GAC_On_China_Innovation_WhitePaper_2016...
The Innovation Policy Platform. (2018). China. Retrieved from: https://www.innovationpolicyplatform.org/content/china
China Briefing. (2015). Opportunities for FIEs in China’s High-Techn Sector. Retrieved from: http://www.china-briefing.com/news/2015/11/13/opportunities-for-fies-in-...

Level 3:

CIA World Factbook. (2018). China. Retrieved from: https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
OEC. (2018). China. Retrieved from: https://atlas.media.mit.edu/en/profile/country/chn/
COMMCreative. (2011). Challenges and opportunities of Doing Business in China. Retrieved from: https://www.commcreative.com/feed/challenges-and-opportunities-of-doing-...
King, R. (2018). The China Market: Opportunities and Risks. Retrieved form: http://businesslife.com/articles.php?id=1106
Marketing to China. (2016). B2B (Business to Business) & Lead Generation in China. Retrieved from: https://www.marketingtochina.com/b2b-business-business-lead-generation-c...
Yip, G. (2014). China’s Many Types of Innovation. Retrieved from: https://www.forbes.com/sites/ceibs/2014/09/19/chinas-many-types-of-innov...
B2B International. (2018). Entering Chinese Business-to-Business Markets: The Challenges & Opportunities. Retrieved from: https://www.b2binternational.com/publications/china-market-entry/
Yingqun, C. and Nan, Z. (2017). European companies in China report sales growth. Retrieved from: http://europe.chinadaily.com.cn/epaper/2017-06/02/content_29587183.htm
Barton, D. (2013). Mapping China’s middle class. Retrieved from: https://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-m...