To go from the factory of the world to a generator of innovation, China continues to invest billions of dollars and churns out tens of thousands of engineering graduates and PhDs.
Having its own version of Silicon Valley is a dream and core pillar of China’s move up the innovation ladder. Yet despite all the money and raw talent it’s throwing at the problem, China is a long way off from achieving its goal. To understand why, it’s helpful to reflect on what makes Silicon Valley what it is today.
Silicon Valley was built by people who understood technology and were willing to take risks and learn from failure. It has been the source of waves of business model disruptions that have transformed entire industries and created new ones. And it has absorbed billions of dollars of investment.
Do any of China’s major hubs of technological innovation meet any of these criteria? Let’s take a look at the three biggest contenders for the title of innovation hub today:
Let’s take a look at Beijing. Beijing’s Zhongguancun has long played the role of China’s “Science & Technology Zone.” It is home to both established technology companies such as Lenovo, and thousands of startups. Several universities in the area, the most notable being the prestigious Tsinghua University, churn out PhDs and computer scientists by the thousands. So there certainly is no shortage of people who understand technology. And the investment tap is flowing quite readily, so there’s no lack of capital.
But a culture of risk taking? Hard to prove. Disruptive business models that are changing industries and creating new ones? Not that I’ve noticed.
Then there’s Shenzhen. They’ve got the technology and the money, but lack a pool of talent that is willing to take risks and has the drive and capability to create business model disruptions. Maybe the legions of young talent leaving the major technology companies will converge to form a new innovation enclave, but I wouldn’t bet money on that happening anytime soon.
So that leaves Shanghai. Certainly Shanghai – future financial capital of China – would have the right ingredients to become China’s innovation hub? There’s no shortage of capital. But there isn’t much by way of technology. A culture of risk-takers? Having lived here for half a dozen years, I have yet to see it. Disruptive business models? Not here.
So despite China’s best efforts, we probably won’t see an innovation hub in the mold of Silicon Valley emerge in the foreseeable future. Not for at least another decade or even longer.
And we’ll almost certainly see some major failures along the way before it even happens. Today’s stock market rout is one example of the kind of shock to the system that could shake things up enough to create the change needed for innovation to take place.
But just because China lacks a geography it can call Silicon Valley, it doesn’t mean it can’t still create its own sources of innovation.
While China is unlikely to see the rise of a geography-based innovation hub in the foreseeable future, there is mounting evidence that China’s version of Silicon Valley will actually look quite different.
In fact, evidence points to a very different model of innovation, one that is driven more by the vast corporate ecosystems within companies like the so-called “Big Three” – Baidu, Alibaba, and Tencent – than it is by any geography-based ecosystem like we see in Silicon Valley.
Why? Because even today within the ‘safety’ of these companies, there’s a tremendous amount of experimentation and idea churn. The platforms these companies operate and the networks they have formed encourage the type of quick testing and learning we would expect to see inside Silicon Valley. Teams are formed that often compete against others internally. Furthermore, the digital platforms that their businesses sit on allow for rapid changes and learning which encourages experimentation among their vast customer bases.
Tencent may have the most formidable of these corporate innovation ecosystems, with more than 200 investments in various ventures around the world and an ever expanding list of new businesses, from WeChat to WeBank. Its 800 million-plus user base could support an almost endless set of new businesses.
And what about China’s state-owned enterprises? With the possible exception of Huawei, most SOEs don’t have the sort of R&D and technology, culture of risk taking, or disruptive business models that are needed for true innovation to emerge.
So while there may be no geography-based innovation “ecosystem” like we see in Silicon Valley, China is likely to give birth to enterprise-based innovation ecosystems of the sort we see in companies like Baidu, Alibaba and Tencent.
Watch this space.
Erik Roth is an entrepreneur, lecturer, serial innovator and lead 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. Connect with Erik on LinkedIn here.