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Many western firms have to find an answer to the massive and aggressive Chinese growth. In the past it has been relatively easy: China was a destination for low cost manufacturing and a market for low cost products. Today this is different: China has become very competitive in many technological areas. This is also due to the successful agreement many if not most Chinese joint ventures work with: “You give us your technology and we provide you with access to our huge market.”

‘Technology for market ’ worked in most cases—at least for the Chinese economy. This market deal has been complemented by an extensive buy-in of foreign experts. These western consultants, engineers and scientists have been very expensive compared to local fees but very effective, since they accumulate the technology and the know-how of a few hundred years of experience (Zeng and Williamson 2007).

1.1 China Is the Number One Place for New R&D Labs

The continued growth of the Chinese economy accompanied with the expansion of international investment in China has led to an increase of foreign research and development (R&D) activities in the country. Aside from the rising importance of R&D internationalization , research on foreign R&D in China has been neglected in the past due to its nascent state.

More and more transnational companies have identified China as a preferred place to conduct offshore R&D activities. Ten years ago almost all R&D centers were based in the two most economically important cities of China, Beijing and Shanghai. Today, the two cities are still playing a dominant role but many other Chinese regions are seeing foreign R&D investments, too. The education level in China is constantly rising and the infrastructure is ever improving. These are the two basic reasons why many regions besides Beijing and Shanghai are becoming R&D centers.

The computer and telecommunications industries drive R&D investments in China. But they do not stand by themselves. Other important industrial branches with R&D investment in China include chemical, petrochemicals, biotech, pharmaceutical, automotive, transportation and power generation equipment. These multinational companies typically come from the triad regions. Most of them are from North America, especially from the U.S., followed by the European Union and Japan. A further significant group of R&D investors come from Greater China, and Taiwan.

The strongest driver for foreign R&D has always been the market. If the company’s business requires local product adaptation and intensive customer cooperation, it is likely that local development units will be established (von Zedtwitz and Gassmann 2002). But today we see many firms that go far beyond innovating for China. Their Chinese R&D labs are responsible for many of their breakthrough-innovations in recent years.

1.1.1 Motivations for Establishing R&D Labs in China

Prior to studying western companies’ motivations for establishing R&D in China, we shall briefly outline the general drivers for conducting R&D abroad . Different approaches have been applied to classify motivations for R&D internationalization. One approach broadly distinguishes between demand-oriented and supply-oriented drivers for the internationalization of R&D (see Granstrand et al. 1993; Dunning and Narula 1995; OECD 1998; Doz and Hamel 1998). Demand-oriented motivation factors include the special needs of the local country/market, which require modifications of firm’s products; or host country restrictions, such as local content requirements, tolls, import quotas, and fulfillment of standards. Supply-oriented factors include highly sophisticated foreign scientific infrastructure (e.g., new regional technological competence centers such as Silicon Valley, Prato or Modena), which takes advantage of host country scientific and knowledge inputs and accesses cutting-edge technology. Availability of well-educated local R&D specialists, ideally combined with low R&D personnel costs are further supply-oriented incentives to establish R&D abroad. A third group of motivations, environmental motivation factors, is mentioned by Granstrand et al. (1992).

In a more refined classification scheme, Beckmann and Fischer (1994) identify five categories of R&D internationalization drivers (input-oriented, output-oriented, external, efficiency-oriented and political/social-cultural). This classification has been used to classify drivers of R&D internationalization whereas the input- and output-oriented factors are principally in accordance with the supply- and demand-oriented view. The three other categories such as external, efficiency-oriented, and political/social-cultural factors reveal the multifarious character of motivations for R&D internationalization.

Based on our research interviews and literature analysis, we have relied on this scheme as a preliminary framework to examine the specific motivations for establishing R&D in the Chinese context. We have merged output and efficiency-oriented motivation factors into performance-oriented motivation factors and the external and political/social-cultural into business-ecological motivation factors (see Table 1.1).

Table 1.1 Important motivations for western companies’ R&D establishment in China
Full size table

1.1.1.1 Input-Oriented Motivations

Availability of Qualified Personnel

Amongst the input-oriented motivations for establishing R&D in China, the huge human resource potential is of great importance. In the last 10 years the Chinese education budget has increased by 20 % (9 % since 2009 alone). Western countries were rolling out massive budget cuts in the same period. Currently, there are 1,550 Universities in China, 725,000 professors and 11 million students. Annually 2.5 million students graduated from the countries’ universities including 14,000 Ph.D.s , ranking China third behind the U.S. (approx. 40,000) and Germany (approx. 30,000, Ministry of Education P.R.C. 2003a). Many top universities such as Tsinghua, Beijing, Zhejiang and Fudan train highly qualified students in disciplines such as mathematics and natural sciences.

Currently, more than 700,000 students are studying abroad. The majority of students chose to emigrate to other countries after graduating. Hence, China has suffered from an outflow of talents (brain drain) to a great extent. In recent years, Chinese governments, at both national and local levels, have introduced policies to induce highly skilled overseas Chinese to return to China. Increasing numbers of scientists and graduates have returned from abroad thanks to the enduring economic growth and better opportunities in China. A famous example is the company ‘Wuxi Apptec ’, which was solely formed by returnees and has since become a dominant player in the pharmaceutical world. In only 10 years, Wuxi has grown to more than 4,000 employees.

Tapping Informal Networks and Information Sources

In China, business success is heavily dependent on good informal networks and relationships—the frequently cited ‘guanxi’ . The establishment of a local R&D center enables a company to build and maintain informal networks with universities and local scientific communities, which can help western companies to establish strategic partnerships and establish human resources on a long term basis. In addition, China’s industrial development is at an emerging stage and the economy is undergoing a transition from a planned to a market based system. Hence changes in industrial regulations, legislations and policies are all the more dynamic. Their on-spot R&D activities and proximity to the government help western companies to keep pace with changes in the dynamic Chinese environment and allows them to achieve critical competitive advantages.

Using local R&D to gather technology intelligence on local and international competition is yet another input-oriented motivation for western companies to conduct R&D activities in China.

Local Pocket-of-Innovation

Since Chinese policy makers seek to raise the level of China’s industrial production and increase the country’s competitiveness to an international level, special economic and other investment zones have been established and in doing so have become the main engine for growth in the Chinese economy. Notably, the High Technology Development Zones (HTDZ) or ‘science parks ’ have been designed to lure researchers, entrepreneurs, foreign R&D centers and venture capitalists from around the world.

As an example, Beijing’s high-tech Zhongguancun area located northwest of the city is home to a large number of universities and scientific institutions including Tsinghua University, Beijing University and the Chinese Academy of Science. As a result, there are a number of start-up firms, foreign-capital firms and large-scale local firms that are seeking access to high potentials through building strong relationships with the universities. Furthermore, these pockets-of-innovation attract investors with space, advanced infrastructure, and high-tech facilities they require along with financial incentives. As an example, the Chinese State Council and Beijing municipality both offer start-up firms located in Zhongguancun area tax-free operation for 3 years following their establishment, followed by a 50 % discount for the next 3 years, and a 15 % discount from the seventh year onwards, along with other tax incentives. Due to the substantial governmental support and geographical uniqueness, it is not surprising that several interview partners believe a few of these industrial and science parks will become centers of excellence in the future. Since more and more Chinese cities and regions are trying to capture the attention of western companies by various incentives, more western companies have invested outside of Beijing and Shanghai, the two established hubs of foreign R&D activities in China.

1.1.1.2 Performance-Oriented Motivations

Customer and Market-specific Development

One main reason why so many companies establish development bases in China is to locally develop products specifically for the Chinese market. The necessity of adapting products to the foreign market is a widely shared belief of many interviewed R&D managers. Selling products without paying attention to the needs of the local markets is bound to fail. Locating R&D activities in China allows western companies to adapt and tailor their products and services to the local culture and market needs. A typical example is adapting IT user interfaces, telecommunication or car infotainment products to be used via the Chinese language. Moreover, specific local conditions in which products are operating require appropriate modification and redevelopment. For example, in China some automotive components such as air conditioning and combustion engines need to be redeveloped according to local climatic conditions and local gas quality. Within the next 2–3 years over 75 % of growth in electronic manufacturing capacities will take place in China. Risks of such a production shift purely for cost reasons are high; local development and product adaptation in these fast growing markets can support manufacturing operations and increase competitiveness.

Yet, many firms go even further. The electronics company ‘Philips’ for instance sees China as their second home market. There is an additional value to operating in different cultures and countries such as China. A company can develop new products and forge advanced thinking on many product issues. Some managers do believe that products, which satisfy the requirements of the most difficult consumer and market environments are likely to succeed anywhere in the world. The Microsoft Research Center in China pursues problems of computing in Chinese due to the difficulty of inserting Chinese characters onto a western keyboard. Besides the improvement of software’s suggestion and error-checking systems, researchers also focus on data entry methods such as speech and handwriting recognition. The result will make computers more user-friendly in Chinese, but will in the end benefit all computer users.

The elevator and escalator company Schindler established an R&D center in Shanghai in the late nineties because Shanghai is one of the most booming and sophisticated markets in the construction business. Chinese customers are less risk-averse than western customers, which is typical for booming economies. In 2003 Schindler conducted a field study for a new web-based personalized infotainment system in the elevator cabin—an advanced experiment, which would be less likely to be accepted in Europe or the US. Based on that study Schindler has planned to multiply the system requirements for the product launch worldwide.

Cost Advantages

Cost advantages have long been a main motivation for R&D centers in China. Yet, experience shows that the cost advantages are by no means as extensive as they were predicted only 10 years ago. Labor costs (especially for the highly educated) have increased dramatically in recent years. Still, R&D personnel in the U.S. or in Europe is far more expensive, yet the overall cost advantages are not that impressive—when one takes coordination costs into consideration.

Short R&D Cycle Time and Adaptation to Local Production Processes

Localized R&D allows for a shorter R&D cycle time especially for products, which require customer and market-specific accommodations. Furthermore, local R&D activities can assist manufacture operations to improve quality, learn to produce new offerings, reduce costs, or increase capabilities.

1.1.1.2.1 A Different Take on Intellectual Property

When you stroll around China’s enormous metropolitan areas it is challenging not to notice a take on intellectual property that is fundamentally different from the one in the West. You can see street vendors claiming to sell “original” phone accessories or “genuine” Swiss watches. Logos of famous brands are often used to convey the idea of quality and resemble something famous. The picture below shows a convenience store in downtown Shanghai. The store’s elaborate lighting resembles that of the US fast food chain McDonald’s. Even the smaller sign below the logo “24open” is a reminiscence of the burger chain.

This convenience store is not an exception. Stores that resemble famous brands are quite typical in metropolitan China. There are coffee houses that look a lot like Starbucks (they are named Seayahi Coffee, Lucky Coffee or Buckstar Coffee), fast food vendors that are named KLG with a logo that looks like the one from KFC , Nibe stores showing the famous Nike swoosh, among many others.

The city of Beijing even runs an amusement park called the “Beijing Shijingshan Amusement Park” that looks a lot like Walt Disney’s iconic Magic Kingdom.

figure a

1.1.1.3 Business-Ecological Motivations

Governmental Policy

For almost two decades now, one can observe China’s increasing sensitivity towards technology’s contribution to economic growth. ‘Revitalizing the Nation through Science and Education’, a strategy which was officially adopted in 1995 by the Chinese government to speed up scientific and technological progress , and has led to rapid growth of China’s national science and technology activities. In 2006 China’s R&D intensity reached 1.43 % (up from 0.6 % in 1995). R&D spending has increased at a remarkable annual rate of 19 %. Since 2000 China has been ranking second in the world in terms of total number of researchers (only behind the U.S. and ahead of Japan). Today, China has the ability to attract long-term, relatively capital-intensive and high-tech projects from multinational enterprises in OECD countries (OECD 2008). As a result, China has continued to liberalize the approval process for FDI and a number of preferential policies have been put in place in order to encourage foreign business, especially western companies, to set up local R&D investments.

Chinese policy makers believe that an effective way to bridge the gap to the international technology level is to intensify the linkage to the international R&D community. One important means is the establishment of high-tech parks combined with incentives, such as free rent, low tenancy costs, favorable lease terms, and tax relief.

As identified by Ambrecht (2002), there are several multi-faceted reasons behind these kinds of policies. Foreign laboratories will bring capital investment, ancillary spending, and job opportunities. Moreover, they help to attract excellent ethnic Chinese specialists from around the world back to China to conduct advanced research. The proximity to international research facilities will also spur the Chinese high education system through their demand of local high-quality technical personnel and co-operation with Chinese R&D facilities.

Moreover, the business background of these R&D laboratories could help China create market value out from the leading-edge technologies being developed in Chinese universities and research institutions. Furthermore, local R&D activities are considered to be important evidence that the company is interested in developing long-term commitments in China. It helps to build trust and good working relations with the government and to receive official support. But due to the enticement of financial incentives and other business advantages, some foreign firms are even tempted to register their China activities as ‘R&D’, whether their research does or does not entail genuine research and development activities (see Walsh 2003).

Given the pure power of the Chinese government, they are in a position to play one foreign investor against another in order to accelerate western companies’ investment level and R&D commitment. Prior to China’s accession to the WTO , foreign investors were regularly pressured to transfer technology in return for market access.

Continuing Economic Growth and Unique Market Size

Aside from stagnated world economy, the dynamic growth of Chinese national economy and its overwhelming market size has made China amongst the most strategically important markets for western companies. Especially in IT and telecommunications, multinational giants such as Microsoft , Nokia , Apple , and Siemens have invested hundred of millions of dollars into their R&D activities in China , which is in essence an investment in China’s future market. For example, China is the world’s largest mobile phone market with more than 900 million users by the end of 2009 (census.gov, 2011). The critical mass of the Chinese and the Asian markets is increasingly influencing mobile phone size, style and applications globally. Traditionally China was a market for cost-effective entry-level phones. But in recent years it has also become a main market for margin-rich smart-phones.

Peer Pressure

Western companies’ motivations for establishing local R&D in China are rooted in the awareness of possible mid- and long-term competitive advantages, which have been discussed in the above sections. Seeing that western companies’ competition on the Chinese market has intensified and the number of foreign-invested R&D centers in China has grown in recent years, those who do not have such investments have come under increasing pressure to invest in R&D. Even though most interview partners did not want to admit to peer pressure as a driver, it had been mentioned during informal follow-ups.

1.1.2 Barriers for Managing R&D in China

As discussed in the previous section, China is a very attractive location for transnational companies’ R&D units. On the other hand there are still high barriers before exploiting that potential. Despite the aforementioned advantages and rewards for setting up R&D activities in China, the following barriers could neutralize them to a certain extent.

Difficulty in Management Due to Language and Culture

Given the general lack of experienced indigenous R&D managers in China, the majority of upper R&D management is staffed by foreign expatriates. Unfortunately, most of them do not have adequate or no management experience in the Chinese environment. The Chinese language is an initial barrier in management. Although some of the top Chinese research staff has a good command of English, most of the local engineers only have limited English language capabilities.

An even greater obstacle for western managers is to overcome the cultural gap during the daily interactions concerning issues like communication style, ‘face saving’ etc. A western manager may have done everything correctly according to their understanding of good management style. However, the lack of experience and sensitivity to Chinese mentality and culture will usually incur managerial inefficiency, wrong decisions and inadequate leadership. Western managers coming mostly from low context cultures (e.g., German, U.S.), are used to capturing the meaning of a message with words alone. They believe spelling it out clearly is the only way to avoid ambiguity. On the contrary, the Chinese culture is a very high context culture (Hofstede 1994). A message is delivered with nonverbal signals (e.g., tone of voice, use of silence, facial cues, and body language), unspoken assumptions, and the context or environment surrounding the conversation. People from high context culture assume that the receiver of the message is intelligent enough to understand its true connotation. Lack of awareness and proper handling of interference between high and low context communication styles can eventually lead to misunderstanding, confusion and ineffectiveness.

Diversity of R&D Staff

The R&D teams of western companies in China are diversified and typically composed of three groups of people. Local graduates make up the majority of the R&D staff. Western expatriates and global Chinese comprise the other two groups of the team. Although diversity in R&D teams can increase creativity and innovation, it also provides sources of potential conflict. In addition to general difficulties of managing intercultural teams, one particular challenge lies in the potential conflicts between the local Chinese staff and the global Chinese.

In our context, ‘global Chinese’ is a generic term for three subgroups of Chinese people working for foreign R&D: Mainland Chinese returnees with education and working experiences abroad; Chinese from Greater China (i.e., Taiwan, Macao, and Hong Kong); and overseas-born ethnic Chinese. On the one hand they share the same Chinese origin and culture and have almost no language difficulties with each other. On the other hand due to multi-layered differences between these subgroups, due to such elements as different educational backgrounds, different working styles and perceptions, and in particular the huge gap in pay for the various levels (see also De Boer et al. 1998), one should be wary to generalize these three sub-groups of Chinese people. Western expatriates are often not aware or underestimate these differences.

Low Individual Initiative and Innovative Mindset

The majority of local R&D staff is recruited from China’s leading universities. During the interviews, most of the managers shared the opinion that Chinese graduates have a solid education and are highly skilled in solving certain well-defined tasks. But there is an awareness of a lack of practical experience and individual initiative, which is to a degree in line with the findings of Walsh (2003, p. 96). It could be argued that this phenomenon is attributable to the Chinese education system, which is characterized by a narrow curriculum design and a neglect on the development of individual initiative.

To a greater extent, an R&D staff member’s individual initiative is decisive for creativity and innovation. As Walsh (2003) stated, developing a more innovative mindset among Chinese staff is a primary concern of foreign R&D managers at this stage. Risk taking behavior and entrepreneurship in the widest sense have to be promoted. As a result, the management and the development of R&D staff in China require much attention.

High Employee Turnover Rates and Lack of Loyalty

Like many other foreign enterprises in China, many R&D departments are plagued by high staff turnover rates, particularly those located in large cities such as Beijing and Shanghai, where sufficient new opportunities are available. In general, there are three main causes of staff turnover. Some of them who leave because they have simply found a better paid job elsewhere, while some go abroad to obtain graduate degrees. Only a few, but worth mentioning, leave to work for or establish high-tech start-up enterprises. This is a common phenomenon not only impacting foreign companies in China, but Chinese domestic high-tech companies and research institutes are suffering from high turnover as well. Foreign companies are often used as a career springboard. Working for a foreign company provides Chinese graduates not only with a higher salary and practice experiences; it also makes them familiar with western management practices and provides them with possibilities of advanced on-the-job training. These kinds of references enable them to get a job with better payment and perspectives. In the worst-case scenario, competitors would hire them.

As stated by several foreign managers and also confirmed by Chinese employees, compensation strongly influences the affiliation and loyalty of Chinese R&D staff. Beside money issues, one should not ignore the level of attachment to western employers. It could be argued that given the fact that China has made a strong effort in building national consciousness; many Chinese employees strongly associate themselves to their own country than to their western employer. As a result some R&D managers have expressed their lack of trust in local people, since they are afraid of lack of loyalty and loosing knowledge to the competitor. This is especially relevant within Sino-foreign joint ventures whereas the parent company of the Chinese partner or simply the partner themselves participates in or owns other domestic enterprises operating on similar business fields. For example, ABB has lost plenty of technological knowledge through their Swiss-Chinese joint ventures. The lack of trust in local people is one reason why Schindler’s competitive intelligence unit in Switzerland consists of two Chinese staff members.

Building long-term staff loyalty is a challenge for human resource managers in China. It is particularly relevant for R&D labs, given that know-how travels with people.

Bureaucracy and Uncertainty in Legal Changes

As mentioned in the above section, the Chinese government provides incentives for foreign R&D activities in China. According to the experiences of some interviewed R&D managers, receiving promised preferential conditions such as tax relief and other incentives can be a stressful and prolonged procedure, due to multiple bureaucratic hurdles and very specific rules. Importing test materials can be difficult (IBM ), transferring people from Beijing to Shanghai requires an official permit (requires long-term preparation) (Siemens , ABB ).

Therefore, a good relationship (‘guanxi’ ) network with the government is crucial to business efficiency and success. This kind of relationship network needs time and occasional financial support. As one western expatriate manager mentioned, relationship investments takes the form of sponsoring of IT equipment for local universities or other contributions to non-profit official organizations such as municipal kindergartens. However, one should not mistake this kind of financial aid for a bribe.

Due to a lack of transparency in Chinese policymaking, China’s industrial, political, legal, technological policies and strategies are difficult to discern. This provides more uncertainty for foreign R&D activities in China. Furthermore, even if the intervention on foreign enterprises’ activities by the Communist Party of China (CPC) has decreased in recent years and the party branch (i.e., the party secretary) within some wholly owned foreign company is not involved in the business at all, some interviewees still mentioned that the a strong governmental influence remains. As one manager said: “There are still numerous possibilities for (the) Chinese government to make everything difficult.”

figure b

1.2 Siemens’ SMART Principle and Reverse Innovation

Siemens is facing the Chinese challenge in nearly all business areas and has developed a corporate strategy to meet this challenge. The answer of Siemens is based on the SMART principle , which has the following cornerstones:

figure c

The SMART principle addresses a very western characteristic: Over-engineering and technology-driven innovation without a clear customer value. Overall, about 30 % of all innovations flop due to over-engineering, also known as ‘the electronic mouse trap’. This describes an innovation that is based on a highly sophisticated technology, loved only by the developing engineers. The customers however, regard it quite differently and often dislike the product’s complexity and its price-point. The importance of delivering customer value cannot be stressed enough.

If it succeeds the innovation is not only competitive on the home market but on the world market, too. In a benchmark-survey on western R&D in China conducted by the Institute of Technology Management in St. Gallen (2006) we discovered an interesting phenomenon: Most western countries shifted their R&D to China because of the large Chinese market. Hence, the motive was to exploit the Chinese market. But 75 % of all firms exported the Chinese-invented products to the world market later on. What is good for the Chinese market can be good for the world market, too. What works for the Chinese market also works for the world market.

This phenomenon is called ‘reverse innovation’. In fact, it addresses a challenge, which Harvard colleague Clayton Christenson already stressed in the nineties with his seminal work ‘The Innovator’s Dilemma’ : The leading (western) firms are over-engineering while competitors come up with cheaper low end products. Customers consider them not as lousy but as ‘good enough’. Today, these good enough products are developed for local, emerging markets, either from a local subsidiary or from a local competitor based on outdated technologies. Often, these products cater to the general need of a more cost effective alternative to the products available on western markets. To answer this need companies start to export and make the cost effective ‘good enough product’ available on western markets. The process is called ‘reverse innovation’. As such, reverse innovation describes a trend where innovations are developed in emerging countries (China, India, Brazil ¼ ) and are later commercialized on western markets. A famous and often cited example is the Chinese appliances firm ‘Haier’. Haier developed a small washing machine for the everyday use. The machine was later successfully commercialized in both, Europe and the United States. Another example comes from GE . Their Shanghai R&D subsidiary developed a low-cost portable ultrasound machine for the use in rural China. The machine was later a big success in United States’ hospitals. Further evidence for this trend can be found in literature (Immelt et al. 2009; Zeschky et al. 2010).

It is interesting to see why so many innovations developed in emerging countries turn out to be successful in the west, too. Studying the many known cases similarities among them can be found. The products are usually simple in their design and are therefore easy to repair. They are low-cost products but at the same time no low-quality products. Furthermore, they address simple needs in a precise and cost-effective manner. Most products invented in China have one big competitive advantage: they are very cost competitive. In the cement industry, firms like the world market leader Holcim accepts different design criteria of the Chinese suppliers when the price is 35–50 % lower than that of the western competitors. Within only 5 years Chinese suppliers of Holcim gained a market share from zero to 30 % in 2010, mostly by offering a very cost-competitive solution. In most industries western machinery firms counteract this Chinese challenge with higher quality.

The underlying sociological reasons are quite intelligible, too. Only a decade ago western firms, active in emerging markets, aimed at the top of the population pyramid. Emerging markets were basically the few rich people within these markets. The mass was simply neglected. Only when new innovations were targeted at the millions of people (too poor to buy western high quality products but still in need of let us say a washing machine) did the phenomenon of reverse innovation occur.

The need for simple, reliable and affordable products is not limited to emerging markets. In the west this need was further strengthened by recent recessions. Having less money to spend more and more consumers are looking for reliable, yet affordable products. Increasing labor costs also added to the equation, as complex and sophisticated products go along with high maintenance costs. In our western societies, in which people own more things than ever before in history, maintenance costs for every single piece of equipment rapidly add up.

1.2.1 Checklist for Managers of R&D Operations in China

  • How to manage transnational R&D projects in China?

  • How to implement milestones and controlling of the local projects?

  • How to manage the interfaces to the other R&D labs?

  • How to maintain the quality level?

  • How to integrate the local operations into a global platform strategy?

  • How to implement concurrent engineering practices to China?

  • Is the infrastructure, e.g., ICT, good enough?

  • How to get local customer requirements?

  • How to integrate local customers into the innovation process in order to activate the local user knowledge?

  • How to leverage central knowledge into the Chinese operations?

  • How to keep and enforce the corporate standards worldwide?

  • How to design for local manufacturing?

  • How to design for local supply chains?

  • How to design for local suppliers with lower tolerances in production?

  • How to integrate the Chinese operations into the global system?

  • How to promote global technology transfer and organizational learning in the local environment?

  • How to attract and moreover keep talents?

  • How to attract Chinese employees with bi-cultural backgrounds?

  • How to design the incentive system for the engineers and managers?

  • How to cooperate with Chinese partners?

  • How to protect the IP in China?

  • How to increase the awareness and sensibility of local engineers for intellectual property protection?

  • How to get access to the local universities?

  • How to develop ‘guanxi’ for relationships with stakeholders, which can be used later on?

1.2.2 In order to stay successful with R&D and technology intensive operations managers have to:

  1. 1.

    Understand the Chinese culture/at least develop empathy for the differences.

  2. 2.

    Develop human linkages: The right person in the right place at the right time bridges cultural differences.

  3. 3.

    Adapt the management style to the local mentality. What works in Europe and the U.S. does not necessarily work in China, too.

  4. 4.

    Use expatriates in the first 3–5 years for implementing the corporate virus, typically they need to stay longer.

  5. 5.

    Be careful in your choice of local partners; do not expect loyalty.

  6. 6.

    Get access to the local universities; they are the matchmakers and gatekeepers to local partners.

1.2.3 How to Enable Reverse Innovation?

All of these trends put together can explain both, the success of reverse innovation and the intense interest many corporations show towards it. In studying the phenomenon we found that firms have to successfully undertake several steps in order to enable reverse innovation:

Increased Autonomy of the R&D Subsidiary

Many firms still treat their R&D subsidiaries as a sort of extended workbench. Allowing them only to adapt the company’s products to the local market. However, these R&D subsidiaries are not allowed to develop their own products let alone to develop products the western firm does not see a market for. Yet, only when the autonomy of the R&D subsidiary is increased and corporate design rules are put on hold, is there a chance for reverse innovation.

The Swiss elevator and escalator company Schindler first shifted parts of its R&D to Sao Paulo and later to India. The main reasons for the two relocations were the local design-to-cost capabilities. Setting up an R&D lab in Shanghai followed the same rationale: Chinese engineers earn less (which is often compensated by an increase of other costs related to global R&D), but Chinese engineers do not suffer from the ‘over-engineering-gene’—a popular disease among German and Swiss engineers. They design simple, robust, and affordable products. Yet, lower quality products imply the risk of high warranty costs; they can also harm the company’s brand. Empowerments of subsidiaries are fashionable, but opportunities and risks go hand in hand.

Local Reverse Innovation Capabilities

Local teams have to learn product development from scratch. Nowadays, many R&D subsidiaries are limited to enhancing products given to them. This however is a completely different task to developing an entire product. Innovation management tools for all phases of the product development have to be learned by the local teams in order to successfully develop. These phases include everything from ‘idea generation’ to ‘need finding’ to ‘prototyping’ to ‘testing’ and eventually ‘launching’.

Modern Internet based communication and information instruments such as crowdsourcing can speed up the learning process in the local labs drastically. Jam sessions as IBM’s famous ‘Innovation Jam’ offer firm-wide opportunities to participate in the corporate innovation process.

Allowing an East-to-West Flow of Innovation

It is necessary to rethink the idea of innovation flow. Today, most companies do not appreciate the innovation efforts undertaken by their R&D subsidiaries. The flow of innovation is clearly defined as ‘from west to east’. Only if this paradigm can shift and the ideas of the subsidiaries are taken seriously there is a chance for reverse innovation.

To change this direction requires a major shift in thinking: From a colonialistic, ethnocentric view to an open, geocentric perspective. “Designed in China is not our tradition!”, if firms retain such a mindset it is only a matter of time before innovative Chinese competitors take over their markets.

Rethinking Business Models

Established firms often have old, and in many cases, proven business models. Their businesses have worked that way for decades. The management has a tough time proclaiming that the firm will market lower-price products developed in emerging countries in the future. It is a challenge to overcome the resistance of the R&D-departments in the western countries and to include them into the process.

Business models have to be adapted in terms of market segmentation, too. Low cost operating rooms for surgeries serve a need of Chinese hospitals. European hospitals have different standards and form as such a completely different market. However, mobile operating rooms, such as Switzerland’s ‘mobile hospitals’, might open up new opportunities for Chinese manufacturers. Rethinking business models and adapting customer needs becomes a key success factor for Chinese exporters.

Incentives for Local Product Development

Both, western R&D-labs and the R&D-labs in emerging economies must have incentives to develop. It is a successful practice to market both kinds of products. Such a strategy fosters internal competition and thus ensures that new products are being developed.

Often the absence of sanctions and guidelines for using corporate components is enough to foster innovation in local subsidiaries. Once a product has been developed successfully, one challenge remains: How to protect the intellectual property that has been created in China?