China is showing a flair for world leadership in innovation

China is no longer just the factory of the world. It is rapidly becoming the innovation leader of the world. Three years of research on the ground in China with my colleague George Yip have convinced us that Chinese private companies have developed the capability to challenge multinationals on their home turf. They have been in the forefront of a remarkable innovation evolution over three phases - first, from copying to "fit for purpose"; second, from followers to world standard; and third, from seeking new resources to seeking new knowledge. They have developed better management philosophies and techniques to go with a strong competitive advantage as Chinese brands expand globally.

How did they do this? Although some people typecast Chinese firms as overly dependent on government, this was not the case among the firms we studied. Beijing has invested consistently over many years in national innovation and has created a modern scientific and technological infrastructure of parks, universities and research institutes, combined with a growing number of scientists and engineers. This has been valuable for start-ups. But companies are contributing more at the research and development end of the innovation process, and the combined spending on it is now 42 per cent of the US - about right for the size of China's gross domestic product.

More important have been the unique characteristics of the Chinese market - its size, rapid growth, diversity, and in the first phase, its early need for low-cost products (fit for purpose). Chinese entrepreneurs learned innovation by doing it incrementally. In the second phase, China's demanding, richer and discriminating consumers and large-scale government projects have driven firms to develop rapidly. China's market has been a "Petri dish" of competitive innovation. The Darwinian struggle has produced myriad companies that are brilliant at designing and producing what customers need and are driven to do better by demanding leaders, but mainly by the market.

In the third phase of their growth, and urged by the government's "go global" policy, more Chinese companies are entering foreign markets. While the earlier rationale was to secure minerals and energy, today the drive is to enter the markets of the developed world to become insiders. With earnings from their success in the domestic market and borrowing from state banks, firms will have the resources to acquire what they lack in brands, market access and technologies to complement what they have developed. So we are seeing acquisitions of European and US firms and technology centres in foreign hi-tech hubs. Their focus on knowledge creation should soon enable them to challenge the world with disruptive innovation.

Despite these impressive achievements, China has recognised that it needs to shift towards more sophisticated, less labour-intensive sectors, which will create and retain more value. This was the motivation for the release by the State Council of "Made in China 2025", a plan to transform China into a leading manufacturing power by 2049. The plan emphasises quality of output rather than volume and aims to raise the value of 70 per cent of domestic output by 2025. Clearly, there appears to be a recognition that innovation must be coupled with an improvement in the wider environment.

Chinese innovation does not follow the Western pattern. Companies have very different approaches to the relationship between not only innovation and the market, but also to change and to the purpose of product and process innovation. They have learned how to innovate more cheaply than their global competitors and to build innovation processes in collaboration with their customers, and to do it faster than their Western counterparts. Both growing Chinese companies and multinationals can benefit from learning the lessons of this innovation model.

Dr Bruce McKern is a visiting professor of international business at the China Europe International Business School, Shanghai. This is an excerpt from a recent speech at the Savantas Policy Institute, based on his book with George Yip: China's Next Strategic Advantage: Innovation