Open innovationacross borders: a positive sum game for Australia-China business

Dr Anton KrizFaculty of Business and Law

Newcastle Business School

Visiting scholar – NIIMS

5 November 2010

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2Short bio and background

• Industry, government and consultancy – Japan (JV, exports of live prawns), Malaysia, Korea, HK, also

partnered Taiwanese for 5 years in seafood• Last 10 years in academia - Marketing and IB• Full focus now on Innovation Management (China/Australia)

– Keen to strengthen ties with NIIM– Currently doing consultancy through Newcastle Innovation

• Major project for Tourism Australia on China outbound – Also assisting Federal Government’s Innovative Regions Centre

• Three PhD projects proposed: – Monitoring the Program, Telecommuting to Sydney, Mapping

Gazelles (Chinese PhD)• Starting a training program for innovative brokers/champions

– Will look at replication in future in Zhejiang Province

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3Presentation background

• Recently presented a paper at CICALICs:

– “China’s next big challenge: mastering the art and science of creative technology”

• Head of R&D for Geely

– Purchased a firm in Australia – DSI – second largest Auto Transmission in the world

– Didn’t tell us everything (Geely's Volvo Gain Bloomberg)

• Recent discussion with a successful Shanghainese-Australian businessman

– Bringing Australian technology - small wind turbines to China

– Also Suntech’s success with Australian solar technology

• Informed also from previous papers:

• Journal of Management Decisions on “The Challenge to Rekindle China’s Innovative Spirit”

• Asia Pacific Business Review on “Business Relationships in China: Lessons About Deep Trust”

• “Next Hegemon” published at the ACE Conference

Make it a positive sum game

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Timing is everything

• Title “Open innovation across borders: a positive sum game for Australia-China business” came from:

• The focus at NIIMS on Open Innovation

– I also refer to it as 720 degrees of innovation

– Also like the ecosystem approach of Cambridge

• The Australia-China relationship (obviously critical to me)

– Too much focus on Australia being “the quarry of the world”

– Important long term synergies that will resolve:

» some of China’s innovative issues and equally save Australia from its “small country syndrome”

• I saw Hillary Clinton saying that China-US relations - not zero sum but a positive sum game

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6Why China-Australia (DFAT statistics)

• Australia size of Shanghai in population terms – 13th largest economy based on GDP – China now 2nd – Punch above our weight – Close to Russia – Parity with US$ - 1 Trill to 5

Trill (Aust v China in 1999) • In 2009, Australia exported 19 per cent of goods and services or $48 billion to

China (No1) – Australia is 11th largest exporter to China• In 2009, 15 per cent or $37 billion of Australia’s imports came from China (No1)

– Australia is the 7th largest export market for China• Some other trade specifics:

– Goods (2009-2010)- Iron ore & others $25B, Coal $5B, Clothing $3.7B, Computers $3.5B, Telecom & parts $3.3B,

– Services (2009): Education $4.1B (107,000 in 2007), Personal Travel $.6B (357,000 in 2007)

– Australia's investment in China: $6B - China's investment in Australia: $16B

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7China and Australia – similarities and differences

• Not much in common on the surface• However, cross-culturally we have some positive traits for the

Chinese– Like drinking and socialising (not such a divide between

work and home life)– Have a flexible and “happy-go-lucky” attitude (not easily

fussed)– We are very friendly (on the whole) and can adapt well– Our farmers have often used their “word as their bond”

• On the down side – there is a fear of China in terms of the history (media messages) and its differing political approach– We have struggled to work closely with Chinese (in

partnerships) – There has been many early failures (Fosters)– We are interwoven into US geopolitics and military treatise

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8Trust (Australia and China)

• Taking the Western “outsider looking in” approach• Try to break down some of the myths and misunderstandings in

the process

• My thesis on trust taught me some keys to doing business in China– It’s in the heart (you cannot mimic it for a deal)– You wont cheat Chinese easily (they have a rich history of such games

Wei Qi)– Guanxi is not xinren (my metaphor of a tree)– Trust and xinren run deep (Li Shang Wang Lai)– Cunning is revered and win-win is difficult (so know your Art of War)– There is a rationale for everything (so anticipate the unexpected)

• Australia – Trust is built around contracts and systems (but still many exceptions)

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9Australia – the good and not so good• Lower R&D spend and innovation capacity – BERD improving • Reasonable education system but it doesn’t match Scandinavia

– In 2004 knowledge investment - Australia 4% Sweden over 6%

– Had improved productivity (down1995-2000 2.5% 2001-2006 1%)

• Via some variations to employment laws, liberalising financial sector

– Consumerism driven our work ethic (like our lifestyle as well)

• Problem being the quarry of the world (like Brazil for Iron Ore)• Failing to grow innovation

– Often a problem of commercialisation

– Australians are good at science and we are good at fixing things

• RESMED, Cochlear, Cervical Cancer Immunization, CSIRO WiFi (comprehensive list)

– But generally best inventions go overseas (California - Ausra Inc) – Orbital Engine, WiFi, Solar, Wind, Scientists (Nobel Laureates 9)

China – the good and not so good

• China offers the biggest market in the world – 1.35 billion (could me more with the current census)

• Napolean warned us that when China wakes the world will shake– However, for 500 years the Middle Kingdom has been fairly dormant

• GDP per capita was higher than Europe for length of time• Very agrarian in nature and did not harness new technology

• Few foreign business succeeded up until 2000– The market was enticing but couldn’t understand it

• Incomes were too low as well (unless Bottom of the Pyramid)– Much has changed in China and Zhejiang is a classic exemplar

• China over 90 times larger in GDP terms than in1978

• So the game rules have changed (China surge in R&D spend)– Number of Australian businesses are still working with old view

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Insead Global Innovation Index Report -Australia ranks 18th China 43rd Variable Australia China

Financial sophistication 6.20 3.98

Availability of VC 3.97 3.22

Company spending on R&D 4.18 4.17

Public R&D Expenditure as % of GDP 1.78 1.33

Culture to innovate 6.58 4.48

Regulatory Quality 1.78 - 0.22

Intellectual property protection 5.79 4.02

Education expenditure (% of GNI) 4.83 1.80

Quality of the educational system 5.21 3.83

Researchers in R&D Per Million 4052.81 852.03

Availability of scientists and engineers 4.68 4.61

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12The focus here is on open innovation across borders (China-Australia) • “Open innovation is the use of purposive inflows and outflows of

knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. [This paradigm] assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology.”

Henry Chesbrough

• Increasingly focused on Institutional Economics– Country or institution like China in particular has similarities with large

organisations (China Inc.)• So treating countries like large organisations

– My work on the next hegemon shows that specific characteristics lead to rapid economic growth and global leadership

• At the centre of hegemonic growth is entrepreneurship through radical innovation

Paradox – China V Australia - view on Open Innovation• Freeconomics has merit – using consumers through open source and

developing interesting innovative Business Models

• Recently published an article on CSR in Westpac’s supply chain – suppliers have to conform to standards

• Australia is largely made up of SMEs

– Only beginning Open Innovation or 720 degrees?

– More protective of their IP

– Ran a program on 360 degrees of innovation (during Australia’s Innovation Festival) – Also presented a version to Price Waterhouse Coopers

– Innovative Regions Centre is promoting networks and collaboration

• So against this backdrop – interesting that NIIMS is taking Open Innovation to Chinese companies

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How can open innovation help China and Australian businesses• Australian businesses generally are reluctant to work with Chinese

businesses (Tourism is a great example – Chinese with Chinese)

– The enormity of such a cross-cultural challenge

• Psychic as well as geographic distance

• Rio Tinto incident and military internet intervention made it worse

– The Chinese quite capable at business - maybe too capable

– Lack of trust and protection of IP

• Generally Australians don’t have the time to invest such emotional and social effort and risks are high

• However, BHP, Rio Tinto, Fortescue and others have no choice – major market – Qantas, Billabong, Quicksilver have also gained

• Chinese see a remote island with a lot of strange creatures

– PM Kevin Rudd was an exception – Chinese linguistic skills

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One common potential bond – innovation via commercialisation

1. Australia has many creative and inventive people

2. Australia has not been able to commercialise many inventions due to market size

3. For the banks - numbers did not stack up against risk (not VC culture)

1. China’s institutions are not set up for creative and inventive people

2. China has the second biggest market in the world(eventually the biggest)

3. Chinese investors are cashed up and look at benefit as well as risk

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Equals some positive opportunities – but can we go beyond FDI/WFOE to Alliances and Open Innovation?

Open Innovation – Works through leveraging off others

• “…innovation means inventions implemented and taken to market”John Seely Brown

(2005)

• Australians will find it difficult to use the Open Innovation model in China– Breaching IP is rated as major issue although prosecutions are possible as

P&G identified (Kriz 2009)

• However China is well known for counterfeiting – Recent Penfold’s (Benfolds) incident with wine labels

– Homework and having good legal support is critical

• If companies wont share ideas then it will be hard to innovate up and down the supply chain– One way is for Australian firms to employ more Chinese staff both here and

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17Changing the attitude to a positive sum game

• The Australian manufacturer have become uncompetitive – particularly high volume and low unit items

– Most textile operators shifted to China – Bonds - designers are world class

– Manufacturers are often developing innovative technology and processes

• Example - software to support mine safety and productivity - LVA

• Our high tech area in biotech and aspect like green technology solid as well (one of leaders in patents - Smart Grid Smart City Project in Newcastle)

• Time to use our strengths and China’s strengths to complement

– Australia advantages include innovation via creativity, development, design, processes, marketing

• Sectors - resources & energy, building, agribusiness, engineering, manufacturing, services, consumer goods

– Chinas advantages include human capital, scale and cost efficiencies

– Law of comparative advantage – we both win (Australia and China grow)

Biggest challenge – breaking down the cultural barriers• “You can lead a horse to water but you can’t make him drink”

– Fault on both sides

• Originally went the EJV route – pseudo arrangement with many failures

• Then shifted to WFOE (Vanhonacker 1997)

– This does not necessarily encourage Open Innovation

– Value Chain often becomes Chinese or Western (Tourism)

• Reverse FDI – Geely and others are acquiring (interesting implications)

– CITIC, Sinosteel, Chinalco, CNMC, all have share investments

• Is it time for a new hybrid (SMEs)

– Strategic alliances but with Chinese characteristics

• A guanxishu with a mixture of Chinese and Australians

• More use of the Chinese students educated in Australia

• Australians are using this model well – Case Studies needed to demonstrate effectiveness

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Personal efforts to change the status quo• Trying to educate Australians about Chinese culture

– One of the reasons I am visiting Zhejiang

– I am talking to Government and business as well

• My thesis on trust was inspired by a great experience with my Taiwanese partners

– Taiwan is not China (but it is another Province as I am told)

• What I have learnt:

– If you get a trusted relationship with the Chinese it runs deep

• Currently working on Tourism innovation in the supply chain

– I can see some benefits for the agribusiness sector re airfreight

– Next step probably education

• My project on the Central Coast with the Innovative Regions Centre

– Will try to match the Zhejiang businesses with like minds in the Hunter and Central Coast area

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Summary

• As Hillary Clinton suggested: need to start looking at China as a positive sum game

• Culture plays a huge role in such a divide – we need to start looking at breaking down this divide

– PhD student working on Cultural Intelligence

– Looking at starting workshops in Australian Tourism service sector to counter – the 1 million Chinese syndrome

– Tourism Australia introduced the Premium Aussie and Aussie Specialist Program – certainly helped bridge the divide in that sector

• Open Innovation has potential benefits to both Australia and China

– Law of Comparative Advantage

• Academics have an important role and I am keen to work with the Faculty and people like Zheng Gang, Xiaobo Wu and Faculty members to make this happen…

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Discussion, further comments and questions