Last week, The Economist ran an article titled “Something New: getting serious about innovation” about the Chinese government’s new found determination to push China’s economy up the technology value chain – shedding its manufacturing stripes and dawning a white laboratory coat.

The article is timely in that the government recently published its “National Medium-Term and Long-Term Programme for Scientific and Technological Development (2006 – 2020)” which outlines steps to spend more capital on science and technology and promote business reforms – the ultimate goal is to dramatically reduce China’s dependency on imported technology by as much as 30% by 2020.

The Economist reports that currently, on average, “China’s 20,000 large and medium-sized enterprises undertake fewer than five new development projects and generate only two and a half new products each year.” This is shockingly low when compared to Japan where the average products live cycle can be as short as 90 days.

The government’s plan also calls for an increase in R&D spending from 1.3% of GDP to 2.5% of GDP by 2020 – this would place China on par with America and Europe. In other words, China wants to crank out more engineers and scientists whilst fading “softer” skills, such as finance jockeys and marketing studs.

Admittedly, the plan’s time horizon is, well, a bit longish – who really knows what is going to happen in China over the next decade?! And frankly, this stuff ain’t all the interesting (numbers, figures, forecasts…dull) – so why am I spending time mulling this over, you ask?

What is interesting is the underlying debate this plan has generated between China’s officials – in one corner we have the nationalists who favor domestic homegrown “go-it-alone” technology innovation (i.e. mega-technology projects), in the other corner we have the internationalists who favor incremental innovation (i.e. small technology projects) of existing platforms and technology.

I think a prime example of this polarization is evident in yet-to-be-resolved-though-likely-to-happen-next-year battle over China’s 3G wireless technology standard – lovingly known at TDS-CDMA. ‘Nough said!

I bring this up on the back of a recently published (July 2006) paper a friend from Columbia University’s business school emailed me over the weekend. The paper is written by Columbia Professor Amar Bhide titled “Venturesome Consumption, Innovation and Globalization”. Professor Bhide argues that policy makers and business managers, in general, are not only totally and completely clueless as to how innovation works but also its impact on economic growth.

In describing this misperception, Bhide points to the wayward individuals as prescribing to “techno-fetishism and techno-nationalism” as described by Ostry and Nelson in 1995. Bhide writes,

“The mindset incorporates two related tendencies. One is the focus on the upstream development of new products and technologies while glossing over their downstream consumption and use. The other is the belief that national prosperity requires upstream international leadership in upstream activities – “our” scientists, engineers, entrepreneurs, and firms have to better than everyone else’s – they must write more papers, file more patents and successfully launch more products.”

Furthermore, Bhide argues that,

“…the willingness and ability of individuals to acquire and use new products and technologies is as important as – and in small countries more important than – the development of such products and technologies. An innovation originating in one country does not impoverish other countries. Rather it tends to improve standards of living in all countries that have the downstream capacity to acquire and implement the innovation.”

Okay, this might be a lot to digest – to break it down in bite size chunks – Bhide believes that innovation, true innovation, doesn’t originate upstream in federally/state funded laboratories but rather downstream in the market place and in the hands of the consumers (i.e. demand for innovative products). And thus, the most vital part of innovation (demand side of the curve) is the willingness of consumers to purchase and play around with new products and services.

On the supply side of the curve, the most important catalyst for innovation is a manager’s ability to successfully adapt the organization to embrace innovation. In other words, the company’s got to figure out how to get consumers to dig deep into their pockets and purchase crap they already own (in one form or another) in an often highly competitive and oversaturated market.

My old boss (British) use to say “…you’ve got to love Americans! You can gift wrap dog crap and they’ll buy it…” I used to grunt and scratch my head (being American and all) and try can scrape together a counter argument but, to be honest, I never could, he was right. But this is the very reason why America is so good at innovation – we’ve got consumers willing to buy crap and companies willing to sell crap (but some of this stuff is really cool crap).

As a side note, the amount of capital US companies spend on developing technology is lower than the amount of capital extended on technology integration/adoption – when this cash ratio is plotted against other OECD countries (Japan, Germany, etc) America is below average.

Back to China’s “National Medium-Term and Long-Term Programme for Scientific and Technological Development (2006 – 2020)” initiative – the question begs, is this the right strategy for China? Should the country be developing mega projects whilst encouraging a go-it-alone mindset?

I’d argue that China’s infrastructure and education system is better positioned to focus on mega-projects employees heaps and heaps of engineers and scientists, however I believe a prolong attempt down this path will not yield the sort of innovation and success China’s leadership and consumers expect. I firmly believe China must find a balance between upstream innovation and downstream innovation, with emphasis on cultivating an environment that promotes incremental innovation.

China needs to develop Venturesome consumption with Chinese characteristics.