Constraints can be a powerful force to drive innovation.
India, in particular, is known for its remarkable ability for “constraint-driven innovation”. Many know this phenomenon by the term, “jugaad”.
“Jugaad” is a Hindi word for “hack” or “workaround”, but is increasingly used to describe the creative problem-solving that people use to develop innovative solutions to everyday challenges.
Like India, innovators in China also face numerous challenges. But unlike India, the hurdles are very different. India faces severe deficits in infrastructure, skills and resources. By contrast, China’s constraints are found in its abundances. Ironically, China’s abundance of money and talent often stand in the way of innovation.
But how can this be? Given its larger economy and bigger consumer base, shouldn’t we expect China to excel at innovation, or at least find an equally vibrant surge of novel solutions like what we observe in India?
To suggest a solution, we must first understand the abundances that create the problem.
China’s money problem is unique. It suffers from too much money versus the typical scarcity found in most countries. The amount of capital coming into China increased substantially this year: total China venture capital investment in the first 9 months of this year reached US$36.2 billion, compared to $19.9 billion in 2014.
With all this money pouring in, you would expect an increase in the number of successful startups. And yet, IPO registrations (despite the well publicized market fluctuations) for new startups – a proxy for exits – are down this year.
The plentiful sources of funding for innovations of all kinds highlight what many in the venture world already know: not all money is the same. In fact, a lot of the money sloshing around in China these days is what many might call, “dumb money”. “Dumb money” chases quick wins, investing fads, and propositions without real value or differentiation.
“Smart money”, by contrast, are funds invested by people with expert knowledge, relevant experience, or connections that lead to early sales. The vast pools of wealth in China, instead create an ocean of “top three-percenters” increasingly looking to play the venture game versus experienced business builders smartly deploying seed funds to accelerate the birth of the next Chinese success story.
As a result, fledgling businesses must contend with over-funding, pressure from inexperienced board members, and a lottery-like dynamic that encourages size over economic fundamentals. I think we saw how this movie plays out in the late nineties across the rest of the world.
The problems are numerous here. There’s not enough of it. What talent there is, companies can’t attract. And what they can attract is often not the right type.
China graduates more new engineers, researchers, and scientists every year. Yet sheer numbers of graduates are not translating into talent that can turn ideas into scalable businesses.
There are growing pockets of talent in China in more science-driven areas like pharmaceuticals, genomics, and digital technologies. The opportunity for Chinese companies is in strengthening their ability to identify these talent pools and tap into them.
Yet, while the number of skilled talent continues to rise, sufficient quantities of the right talent organized in the right way are still elusive.
Chinese companies have an abundance of structures and processes, but suffer from the inability to translate these into an increased stream of value creating innovation. The average size of a company has grown in China, but increased scale and breadth is not translating into more value creation in most cases.
Siloed, hierarchical organizations stifle innovative thinking. They prevent the cross-pollination of insights and ideas which lead to innovative solutions. The typical Chinese company is a well-structured organization where reporting lines reflect a management hierarchy that is designed to reinforce leadership direction and execution focus instead of stimulating bottom-up creativity and breakthrough thinking.
Furthermore, it is not unusual to find companies whereby the leadership makes decisions to reinforce the status quo and solidify management power bases. One well-known Chinese giant has a widely known practice of taking high-performing managers and re-assigning them to the worst-performing businesses to lead a turnaround.
While on the surface, this practice can be justified as moving the best talent to where it is needed most, in practice successful innovators struggle to replicate their success in the face of significant capability and other business challenges.
So what can China do to transform these constraints into advantages? Will an increasingly competitive marketplace develop over time, and allow for these forces to once again stimulate innovation, and not hinder it?
What do you think? Please share your thoughts in the comments.
Erik Roth is an entrepreneur, lecturer, serial innovator and leader of McKinsey & Company’s Global Innovation & Growth Practice. He recently co-authored a report on innovation in China with the McKinsey Global Institute, which you can download for free here. And please connect with him here on LinkedIn.