German Business in China Greater Shanghai Innovation Survey 2017

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2 Foreword To have a great idea, have a lot of them, Thomas Edison intoned as early as the late 19 th century. A short stroll around the block in literally any contemporary Chinese city shows that China is overflowing with innovative ideas. Perhaps no other part of China underlines China s penchant for innovation and thinking outside the box as much as the Greater Shanghai region: with a multitude of local and international R&D centers across all key industries, thousands of international and, of course, German manufacturing, automotive, chemical and machinery companies, a flourishing start-up scene, as well as a creative industry out to challenge locations such as Tokyo, Seoul and Silicon Valley. The stage is set for a multitude of ideas that will challenge the current status quo. However, as China s rapid innovation drive does not only provide opportunities, but also creates competition from local players, launching new innovations has become crucial to maintain a competitive advantage. Beyond the buzzwords of Industrie 4.0 and Made in China 2025, which certainly outline an important general strategic direction, we want to shed light on the realities on the ground. For that reason, the German Chamber of Commerce in China Shanghai joined forces with world renowned Tongji University and goetzpartners Management Consultants to assess how German companies in the Greater Shanghai region are currently measuring up when it comes to innovation and to ascertain issue areas that will need improvement to maximize innovative potential across industries. Through our research we have identified some business strategies that appear to be related to above average innovation performance we label these best performers top innovators. While there is of course no blueprint for innovation, we encourage you to pay particular attention to what makes these companies stand out from the crowd. We hope that this survey will help you to plan for the next chapter in your China story. We are very grateful to the over hundred respondents to this survey; without your time commitment, this in-depth study would not have been possible. Simone Pohl Delegate and Chief Representative, Delegation of the German Industry & Commerce Executive Director and Member of the Board, German Chamber of Commerce in China Shanghai Prof. Dr. Zheng HAN goetzpartners Chair of Innovation & Entrepreneurship Sino-German School for Postgraduate Studies (CDHK), Tongji University Tao LIN Partner goetzpartners Management Consultants Goetz von Steynitz Partner goetzpartners Management Consultants 1

3 Survey partners # The German Chamber of Commerce in China (GCC) is the representative body for German companies located in China. The GCC in Shanghai represents German companies in the Greater Shanghai area and in the neighboring provinces such as Zhejiang, Jiangsu, Shandong, Henan, Hubei and Anhui. The GCC Shanghai is one of the largest German chambers in the world with over 1,600 corporate members. The GCC Shanghai offers a wide range of business and social activities, tailor-made services, and networking opportunities. The GCC Shanghai committees to continuously support, facilitate, represent, and inform members and assist them in growing their business in China. The Delegation of German Industry and Commerce in Shanghai represents the Association of German Chambers of Industry and Commerce (DIHK) in the Greater Shanghai region. On behalf of the Federal Republic of Germany, it represents the overall economic interests of Germany and focus on the promotion of bilateral trade and investment between Germany and its region. The goetzpartners Chair of Innovation and Entrepreneurship is one of the endowment chairs at CDHK (Sino German School for Postgraduate Studies), Tongji University. The work of the chair comprises research, education and industry collaboration in the fields of innovation, strategy and entrepreneurship. Tongji University is one of the oldest and most prestigious comprehensive universities in China established in 1907 by the German government together with German physicians. Tongji University is especially renowned for its engineering, business and architecture programs. goetzpartners is one of the leading Germany-based independent advisory firms for all key issues of entrepreneurial activity: strategy, M&A and transformation. The combination of corporate finance and management consulting creates sustainable added value when determining valid courses of action reach decisions and implementing them. goetzpartners has 14 offices worldwide, two of which are in China. Acknowledgments The parties thank Carolin Han, M.Sc. Organizational Psychology, University of London, for her research, analysis, and contribution to this report and Thomas König, Manager Executive Communications and Strategic Projects at the Delegation of German Industry & Commerce Shanghai, for his extensive editorial input and constructive recommendations. The parties would also like to thank HUANG Yunzhu, M.A. Arts and Media, Tongji University, for graphic design. 2

4 Contents About this report 4 Executive summary.. 8 Chapter 1: Innovation performance.. 10 Chapter 2: Attitude towards innovation 17 Chapter 3: Innovation activity 23 Chapter 4: Industrie Chapter 5: Innovation collaboration.. 33 Chapter 6: Innovation skills 37 Chapter 7: Innovation culture. 41 Conclusions.. 47 References. 53 3

5 About this report Background For over 20 years, the German Chamber of Commerce in China has been committed to advancing Sino-German business relations. To provide German companies with leading market intelligence and industry insights the underlying question of our daily operations is: what are the next twenty years going to be like for our member companies here in China? We at the German Chamber of Commerce in China try to see the bigger picture: as part of the larger AHK network, we are in 130 locations in 90 countries with about 47,000 member companies and want to anticipate market developments and, most importantly, present future-oriented and well-informed business strategies. To that end, innovating in and for China is becoming a strategic priority for businesses in China, especially considering initiatives such as Industrie 4.0 and Made in China To provide an in-depth, empirically founded understanding of the innovation behavior of German companies, we are pleased to present you with the Innovation Survey 2017 conducted in cooperation with Tongji University and goetzpartners Management Consultants. This research provides valuable insights for both the academic and business communities. We hope that while we are all embarking on this new, innovation-driven chapter of our China story, the generated input will help German businesses in China to decipher key challenges and opportunities inherent to innovation in this fast-moving economy. Research objectives Specifically, this survey aims to find answers to the following questions: How important is innovation for German manufacturing companies in China? What types of innovation do they focus on? What are key drivers of innovation? What are key challenges of innovation? Who do companies collaborate with to foster innovation? What roles do human capital and organizational culture play for innovation? What differentiates Top Innovators from less innovative companies? Sample The survey among German manufacturing companies in the Yangtze Delta was conducted between February and March The 111 respondents are mainly senior executives (86%) Surveyed companies come from a range of industries, with Machinery / Industrial Equipment and Automotive accounting for 66% >80% of surveyed companies are wholly foreign-owned enterprises 52% of surveyed organizations are small- and medium-sized companies ( 250 employees); 31% have employees; 16% have 1,000 employees Half of surveyed companies had an annual turnover of >RMB 250 million in 2016 >2/3 of companies have been in China for >10 years 4

6 What is your current position? What is the legal status of your entity? 7% 2% 5% 8% 4% 1% 86% 87% Senior executive Middle management Entrepreneur or company holder Others WFOE* Joint venture Holding Others *Wholly Foreign-Owned Enterprise What is your main industry? How many employees do you have? Automotive 41% 12% 4% 18% Machinery / Industrial Equipment Metal / Plastic Products 8% 25% 31% 35% Chemicals 7% < >2999 Please indicate your Chinese entity's annual turnover for 2016 in RMB million. For how many years has your local entity been present in China? 33% 36% 33% 2% 14% 18% 10% 22% 5% 6% 20% <4 years 4-6 years 7-10 years years >15 years 5

7 概述 背景 中国德商会在华二十多年来, 始终致力于推动中德经贸关系发展 为了向德国企业提供更好的服务, 最新的市场情报和一流的行业洞察不可或缺, 对此我们必须直面一个基本问题 : 未来二十年, 企业日常运营将面临怎样的挑战? 德国工商大会 (AHK) 在全球 90 个国家的 130 个地区拥有约 47,000 个成员企业 中国德商会作为其中的一部分, 努力以高瞻远瞩的视角, 预测市场发展以及提供面向未来, 及时的商业策略 为此, 工业 4.0 和 中国制造 2025 等概念被相继提出, 实施 本土化创新, 定制化创新 正成为在华企业未来发展的战略重点 基于以上背景, 为了深入了解德国企业的创新行为, 德商会携手同济大学和意志高驰咨询公司, 合作进行了 2017 年创新调查 这项报告能为学术和商业界提供宝贵的见解 我们希望, 在谱写 中国创造 新篇章的今天, 这份报告有助于促进中德商业往来, 帮助企业应对在快速发展的经济环境中面临的创新相关的机遇和挑战 研究目标 具体来说, 这项调查解答了以下几项问题 : 对于在华的德国制造型企业, 创新有多重要? 他们关注什么类型的创新? 创新的关键驱动力是什么? 创新面临的主要挑战是什么? 企业与谁合作进行创新? 人力资源和组织文化在企业创新的过程中发挥什么作用? 区分 " 顶尖创新者 " 与缺乏创意的企业的标准是什么? 样本介绍 我们于 2017 年 2 月至 3 月期间, 对位于长三角地区的德国制造企业进行了调查 111 名受访者中大部分是高层管理者 (86%) 受访企业来自各个行业, 其中机械 / 工业设备和汽车行业的企业占 66% 超过 80% 的受访企业是外商独资企业 52% 的受访组织是中小型企业 ( 不超过 250 名员工 );31% 的企业有 名员工 ; 16% 的企业有超过 1000 员工 一半的受访企业在 2016 年的营业额超过 2.5 亿元人民币 超过三分之二的企业在中国的经营时间大于 10 年 6

8 您现在的职位是? 您所在企业的所有制性质是什么? 7% 2% 5% 8% 4% 1% 86% 87% 高层管理中层管理企业家其他 外商独资企业合资企业控股企业其他 您从事的行业是什么? 您有多少员工? 汽车行业 41% 12% 4% 18% 机械 / 工业设备 25% 31% 35% 金属 / 塑料制品 8% 化工 7% < >2999 您的中国公司在 2016 年的营业额为?( 单位 : 百万元人民币 ) 您的企业在中国有几年了? 33% 36% 33% 2% 14% 18% 10% 22% 5% 6% 20% <4 年 4-6 年 7-10 年 年 >15 年 7

9 Executive summary Innovation a top priority for German businesses in China Innovation in all its forms will be a key driver of business activities in China. Innovation ranks among the top three priorities of most German manufacturing companies in China, the reasons mainly being of market-oriented nature: to meet customer needs, to differentiate from competitors, and to attract new customers. For the next three years, over 80% of surveyed companies expect an increase in their innovation output, however, only 41% of companies have a well-defined innovation strategy. Expected shift from product to business model innovation Within the next three years, companies are expected to shift from product to business model innovation. While most companies still limit its R&D activities to Global-to-Local / Local-to-Local innovation, Local-to-Global innovation could be the next strategic priority for companies a quarter of companies already engages in relevant research and these developments is likely to gain momentum in the mid-term. Innovation through collaboration The majority of surveyed companies collaborates with external partners to drive innovation and mentions customers, suppliers and universities as their current top three collaboration partners. Over the next three years, significantly more firms intend to collaborate with start-ups and competitors. Uncertainty surrounding Industrie 4.0 The majority of surveyed companies (52%) regards Industrie 4.0 as important for their industry. Companies expect Industrie 4.0 to impact their future business success and business model but only one third of companies are engaging in Industrie 4.0 in their operations so far; complexity of the topic and uncertainty can be seen as the main reasons. Local M&A to drive innovation: acquiring over merging Almost half of surveyed companies could imagine acquiring a local company to drive innovation. Merging is a less attractive option, potentially due to the legal uncertainty surrounding unwanted technology transfers and overall IP protection concerns. This finding points to a larger problem: as evidenced in the March 2017 Legal Uncertainty Survey by the German Chamber of Commerce, where nearly half of respondents claimed that the complexity, density and number of regulations have had a negative effect on their business activities. Biggest challenges: Human resources and IP concerns Surveyed companies identified human resources (59%) and IP concerns (46%) as the top two largest barriers to their innovative capabilities in China. Human resources are the top barrier to innovation and only a quarter of survey respondents express satisfaction with their employees' innovation capability. Innovation-related skills such as critical thinking, complex problem solving are among the largest issue areas. Protection of intellectual property rights is the second barrier to innovation. Similarly, in the 2016 Business Confidence Survey 1 63% of respondents indicated intellectual property concerns as a key reason for not engaging in R&D in China. 1 German Chamber of Commerce,

10 摘要小结 创新成为在华德企的首要任务 各种形式的创新将成为在华商业的关键推动力 创新跻身于中国大多数德国制造企业首要任务的前三位, 主要由以下三个以市场为导向的因素决定 : 客户需求, 区别于竞争对手, 吸引新客户 超过 80% 的受访企业在未来三年里将会增加他们的创新支出, 然而, 只有 41% 的企业有明确的创新战略 预计从产品创新向商业模式创新转变 在未来 3 年内, 企业将从产品创新转向商业模式创新 虽然大多数企业的研发活动仍局限在 全球到本地 / 本地到本地 创新模式, 但 地方到全球 的创新模式将成为企业的下一个战略重点 四分之一的企业已开始进行相关研究, 预计不久将取得一定进展 合作创新 大多数受访企业会与外部合作伙伴合作推动创新, 并将客户, 供应商和大学作为目前优先考虑的 三大合作伙伴 未来三年里, 更多企业会与初创企业和竞争者合作 工业 4.0 相关的不确定性 有 52% 的受访企业 ( 尤其是金属 / 塑料制品和化工行业 ) 表示工业 4.0 对其行业来说很重要 但实 际中, 仅三分之一的受访企业开始着手与工业 4.0 相关的更新升级 推动创新的本地并购 : 收购合并 接近一半的受访企业计划收购一家本地企业来推动创新 ;; 但由于技术转让和知识产权保护问题的相关法律的不确定性, 并购对于企业来说并不是一个最佳选择 这个发现同时指出了另一个更大的问题 : 德国商会在 2017 年 3 月开展的 法律不确定性 调查中显示, 近一半的企业表示复杂的法规条文对其业务活动产生了负面影响 最大的挑战 : 人力资源 (HR) 和知识产权问题 调查显示在中国, 企业的人力资源 (59%) 和知识产权问题 (46%) 是影响创新的两大障碍 人力资源部门作为最主要的影响因素, 只有四分之一的被调查者对员工的创新能力表示满意 创新相关的技能, 如批判性思维 解决复杂的问题能力都是薄弱点 知识产权保护同样是妨碍企业创新的因素 类似问题在德商会 2016 年商业信心调查 [1] 中有所体现,63% 的受访者表示, 知识产权问题 成为外企研发活动不在中国展开的一大原因 9

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12 Innovation performance Indicators of innovation performance For the purpose of this study and based on extensive literature research, seven indicators were used to measure innovation performance of our survey respondents. These seven indicators all measure innovation output in terms of quantity, quality, or timing. Indicators of innovation performance Innovation scope (1) Types of innovation practiced in the organization Product / process innovation (2) Number of new products/services launched in last 3 years compared to competitors (3) Number of changes in the process in last 3 years compared to competitors Pioneer disposition (4) Pioneer disposition to introduce new products/services in the last three years compared to competitors (5) Pioneer disposition to introduce new processes in the last three years compared to competitors Speed (6) Time to market of an average product/innovation in comparison to German HQ Commercial success (7) Share of revenue generated by new products in last two years compared to competitors Based on our respondents' self-assessed performance in these seven dimensions, we have identified the 15% best-in-class innovators the Top Innovators. Throughout the survey, we have specifically considered what Top Innovators do that differentiates them from less innovative companies. These insights allow us to derive learnings and evidence-based managerial implications. 11

13 Top Innovators make innovation a top priority (39% vs. 23% of other companies) have a well-defined innovation strategy (72% vs. 34% of other companies) face a dynamic market environment (78% vs. 66% of other companies) market dynamism is a trigger for innovation enjoy higher autonomy from headquarters with regard to product and market decisions demonstrate a higher degree of openness for collaboration and a higher diversity of innovation partners collaborate with suppliers (78% vs. 63% of other companies) and universities (56% vs. 38% of other companies) embrace Industrie 4.0 more actively (33% of Top Innovators vs. 16% of other companies engage systematically in Industrie 4.0) are more satisfied with employees' innovation capability (22% vs. 8% of other companies) invest more in training of innovation capabilities than other organizations (72% vs. 49% of other companies) demonstrate stronger encouragement of innovative behavior among employees than other companies (94% vs. avg. 76%) show a higher propensity to choose high-risk projects than other companies exhibit a higher preference for radical innovation over incremental innovation than other companies Nevertheless, we need to point out that since the identification of Top Innovators is based on selfassessment, the results are subject to bias. Our findings should be understood as correlations between key characteristics rather than proven causalities. In the following the seven dimensions and surveyed companies' performance along these dimensions are described in detail. 12

14 Innovation scope Number of innovation types practiced 14% 14% 19% 21% 16% 17% Number of innovation types practiced (out of product/service, process, business model, marketing/sales, and organizational innovation) An innovative organization does not limit its innovation practices to one or two aspects, but engages more holistically in innovative activities. The more different types of innovation an organization is engaging in, the deeper innovation is rooted in its organizational DNA. 54% of surveyed companies practice three or more types of innovation. Product/service and process innovation Number of new products/services launched in last three years compared to competitors Number of process changes in last three years compared to competitors Industry-leading 6% Industry-leading 5% Stronger than most competitors Stronger than some competitors About same as competitors 15% 25% 25% Stronger than most competitors Stronger than some competitors About same as competitors 17% 23% 28% Lag somewhat behind 15% Lag somewhat behind 17% Lag behind 10% Lag behind 7% Lag far behind 3% Lag far behind 2% Leading innovators demonstrate a higher rate of self-renewal, especially in terms of new product releases. Since frequency of new product/service releases are industry-specific, we asked respondents to assess their performance compared to industry peers. 21% of surveyed companies state that in the past three years they have performed stronger than most competitors in terms of new products/services launches. Leading innovators continuously adapt and reinvent their value creating processes to adapt to a changing environment. Very often it is more difficult for an organization to innovate its way of doing things than to create a new product. We asked respondents to benchmark their process changes in the last three years relative to industry peers. 22% of survey respondents state that they have been stronger than most competitors in this aspect. 13

15 Pioneer disposition Pioneer disposition to introduce new products/services in the last three years compared to competitors Pioneer disposition to introduce new processes in the last three years compared to competitors Industry-leading 7% Industry-leading 5% Stronger than most competitors 13% Stronger than most competitors 12% Stronger than some competitors About same as competitors 22% 23% Stronger than some competitors About same as competitors 23% 29% Lag somewhat behind 18% Lag somewhat behind 20% Lag behind 13% Lag behind 8% Lag far behind 5% Lag far behind 4% A company has two generic choices for their competitive conduct: being the first mover, i.e. the pioneer, or being a follower in the market. Pioneer disposition to introduce new products/services 20% believe that, in the last three years and compared to competitors, they have been a pioneer in introducing new product and services 36% believe they are lagging behind industry peers, i.e. have shown more follower-like conduct in recent years Pioneer disposition to introduce new processes 17% believe that, in the last three years and compared to competitors, they have been a pioneer in introducing new processes 32% believe they are lagging behind industry peers, i.e. have shown more follower-like conduct in recent years 14

16 Speed Time to market of an average product / innovation in comparison to German HQ Much shorter 5% Shorter Somewhat shorter 25% 28% Same time 21% Somewhat longer 11% Longer 7% Much longer 3% Speed is a key benchmarking criterion for innovation capability. We aimed to explore how local Chinese entities perform in terms of time to market of an innovation in comparison with German headquarters. 58% of respondents state they need less time than German headquarters, whereas 21% say they need more time for introducing an innovation in China. Commercial success Share of revenue generated by products/ services launched within the last two years 23% 15% 18% 5% 9% 8% 4% 6% 8% 3% 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% An innovative company s new products demonstrate a shorter time-to-revenue. The average age of the product portfolio also reflects the innovation capability of a firm. Therefore, we aimed to find out how much young products and services, i.e. those launched within the last two years, contribute to total revenue. 61% of surveyed companies indicate that new products contribute 30% or less to total turnover. For 28% of them this share is even 10% or less. 15

17 Sales growth compared to industry avg. in last 3 years German Business in China Greater Shanghai Innovation Survey 2017 Innovation and sales performance Innovation has become a popular topic in academia and practice in recent decades, because in times of rapid technological developments, intensifying global competition, and changing customer demands, innovation is considered to be one of the main drivers of competitiveness and long-term corporate success. In fact, empirical research shows a positive relation between innovation and company performance. In this study, we establish a correlation between innovation performance and sales performance: Sales growth compared to industry average in last 3 years and innovation performance 30% 40% 50% 60% 70% 80% 90% Innovation performance The results confirm that innovation performance is positively related to sales growth, i.e. companies that report higher innovation performance also indicate an above industry average sales growth. 16

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19 Attitude towards innovation Daring ideas are like chessmen moved forward; they may be beaten, but they may start a winning game. Johann Wolfgang von Goethe As markets and economies become more dynamic, we are witnessing an increase in importance of innovation in today's organizations. Studies have repeatedly confirmed that the environment in which an organization operates influences how it acts with regard to innovation 1. Companies in more turbulent markets are more likely to embrace innovation because they are required to adapt products and processes to changing demands. Likewise, companies that face high competitive pressure may feel the need to adopt new technologies to differentiate from competitors or to gain a cost advantage. They are forced to make innovation an integral part of their business strategy in order to remain competitive. Facing an unprecedented pace of change in the market and, at the same time, rising pressure from local competitors, the above is especially true for foreign companies in China. German companies in China voice particular concerns about increasing domestic competition 2. Companies spend huge amounts of resources on innovation, yet many innovation initiatives fail. The problem may not necessarily be a failure to implement, but may be rooted in the lack of an innovation strategy 3. While companies regularly define their overall business strategy, they hardly do so for their innovation intentions, not to speak of aligning innovation efforts with their business strategies. However, having a strategy is crucial in that it helps to focus efforts around objectives and priorities. We want to know: How important is innovation for German manufacturing companies in China? For what reasons do they consider innovation as important? How do they perceive their market environment? What resources do companies dedicate to innovation? Do they have a well-defined innovation strategy? What developments do they expect with respect to their innovation output? 1 Madrid-Guijarro et al., German Chamber of Commerce, Pisano,

20 Importance of innovation Innovation plays a central role for German manufacturing companies in China. 67% of respondents see innovation as one of their top three priorities for the coming three years. Only 8% say that innovation is not a priority at all. Top Innovators tend to ascribe higher importance to innovation. For 39% of them, innovation is the top priority. In a cross-industry comparison, innovation takes the highest priority in the Metal/Plastic industry (top priority for 56% of surveyed companies), followed by Machinery/Industrial Equipment (25%), Chemicals (25%) and Automotive (18%). Looking at innovation as the top second or third priority, the Chemical industry lands on the first rank (88%), followed by Machinery/Industrial Equipment (65%), Automotive (57%), and Metal/Plastic (56%). This indicates that innovation has differentiated leveraging impact on business success among industries in China. Setting innovation as top priority also indicates a heightened competition in the industry where companies are urgently searching new competitive advantages. What is the degree of priority for innovation in your Chinese entity for the next three years? 56% 63% 22% 18% 25% 43% 39% 0% 32% 33% 28% 13% 11% 11% 7% 0% Top priority Among Top 3 priorities Among Top 5 priorities Not a priority Machinery Automotive Metal/Plastic Chemicals 19

21 Driving forces of innovation With regard to the reasons for the importance of innovation, 82% of respondents believe that it is important for company growth. Apart from that, the main importance of innovation are of a market-oriented nature: to meet customer needs, to differentiate from competitors, and to attract new customers. Why do you consider innovation important for your Chinese entity? Important for company growth To meet customer needs To differentiate from competitors To attract new customers 82% 80% 77% 70% To increase margins 55% It's part of our company culture 46% To enhance environmental impact To reduce prices 23% 28% To benefit from government subsidies 11% This reconfirms the main motive behind the presence of German manufacturing companies in China: access to market is the dominant reason for being in China, followed by access to skills and knowledge and access to low cost labor. Most of the surveyed firms find themselves in a turbulent market environment, i.e. an environment characterized by changing customer needs and preferences. 68% of respondents share the impression that customers tend to look for new products all the time. This holds especially true for companies in the Automotive industry, where even 79% indicate to face changing product needs from customers. Especially Top Innovators appear to face a dynamic market environment: 78% of Top Innovators say that customers tend to look for new products all the time. The dynamic market context is a trigger for innovation, forcing companies to adapt and develop their offerings in order to meet changing demands and stay competitive. 20

22 R&D investment R&D spending and manpower dedicated to R&D differ by industry. While the numbers below can only give an indication of organizations' actual investment in R&D, certain tendencies are visible: The Automotive industry dedicates most resources to R&D, both in China and globally. The Metal/Plastic and Machinery/Industrial Engineering industries show a higher gap between R&D spending in China compared to global spending. This suggests that application development is still the focus of R&D within these industries in China. In the Automotive and Chemical industries, the share of employees working in R&D is higher than the global ratio, underlining the perceived future importance of innovation in China. R&D investment / turnover (%) % employees in R&D 4.7% 8.4% 9.0% 8.0% 4.3% 10.3% 4.0% 7.0% 3.3% 6.9% 4.0% 6.0% 2.1% 2.9% 5.0% 3.0% Expectation of innovation output For the next three years, 82% of surveyed companies expect an increase in the launch of new products in China and 85% expect an increase in the share of revenue generated by new products. Over the next three years, does your Chinese entity expect an increase in 21

23 Innovation strategy While innovation appears to play an important role for most German manufacturing companies, only 41% have a well-defined innovation strategy. Without a well-defined strategy, companies may risk misdirecting their efforts and resources, not living up to their full innovation potential. The survey data suggest a relation between having a well-defined innovation strategy and innovation performance: while 72% of Top Innovators indicate to have a well-defined innovation strategy, merely 34% of their less innovative peers do. Key takeaways Attitude towards innovation Innovation ranks among the top three priorities of most German manufacturing companies in China The main reasons for the importance of innovation are of market-oriented nature: to meet customer needs, to differentiate from competitors, and to attract new customers For the next three years, over 80% of surveyed companies expect an increase in new product launches and revenue contribution from new products A well-defined innovation strategy correlates with innovation performance, but only 41% of companies have such; to protect and enhance their market success in China, developing an innovation strategy is indispensable 22

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25 Innovation activity All great deeds and all great thoughts have a ridiculous beginning. Albert Camus While technological innovation has traditionally been a huge driver of competitive advantage and the core of innovation activity among manufacturing firms, there are limitations to a strategy of technological leadership and companies are advised to broaden their scope of innovation activity to remain competitive. Especially the importance of business model innovation has been brought to our attention in recent years. Independent of the type of innovation, foreign companies trajectory of innovation in the Chinese market follows a distinct pattern. In the early stage, globally established products are sold unchanged in the Chinese market and eventually products are adapted to better meet local market needs (Stage 1: Global-to-Local). Many companies have not yet moved beyond this stage. Those who have, however, further localize their offerings by developing improved or even completely new products for the Chinese market (Stage 2: Local-to-Local). Finally, the subsidiary may have accumulated sufficient knowledge and R&D expertise to develop improved or new products for world markets (Stage 3: Local-to-Global). To be able to move along these stages and respond to local market needs, local subsidiaries need a certain degree of flexibility and trust from global headquarters. This awareness and the knowledge that a subsidiary s autonomy is linked to its ability to innovate 1 leads us to look especially into the role of headquarter influence and subsidiary autonomy. We want to know: What types of innovation do German manufacturing companies in China focus on today and in the future? To what extent do they engage in innovation for the local market? What factors do they see as barriers to innovation? What level of autonomy are they granted from headquarters? 1 Ghoshal and Bartlett,

26 Focus of innovation engagement Our research shows that companies engage mostly in product innovation (73%) and only to a minor extent in business model innovation (33%). However, innovation activity among German manufacturing companies in China can be expected to undergo a shift from product to business model innovation in the coming three years. Considering the rising importance of business model innovations in the past decade 1 in both B2C and B2B sectors, this trend is not surprising. In other types of innovation process, organizational, and marketing/sales innovation the expected changes are less significant. Which of the following types of innovation do/will you engage in? 2 Today Within the next 3 years 73% 56% 53% 33% 60% 54% 50% 51% 48% 42% Process innovation Marketing/Sales innovation Organizational innovation Business model innovation Product innovation Trajectory of innovation (R&D) activities in China The majority of surveyed companies limit their R&D activities to Global-to-Local and Localto-Local innovations, i.e. they adapt products to local market needs (79%) or develop improved (69%) or new (58%) products for the Chinese market. We see a steady, yet moderate, decline along these stages. The decline is significantly sharper when it comes to Local-to-Global innovations. Nevertheless, about a quarter of surveyed companies engages in R&D activity that generates improved or new products for world markets. We expect this development to accelerate in the mid-term. Of particular interest is that while 79% of respondents adapt existing products to local market needs, only 20% of them conduct systematic local market research to understand the needs of local customers. For companies engaging in Stage 2 (Local-to-Local) R&D activities, the share of those conducting systematic local market research increases to 54%. 1 Pisano, Typology based on OECD,

27 Please indicate the nature of R&D activity undertaken in your Chinese entity. 79% 69% 58% 28% 23% Product adaptation to customer needs Improved products for the Chinese market New products for the Chinese market Improved products for world markets New products for world markets Revenue contribution of locally developed products Revenue contribution from locally developed products is not yet significant for most surveyed companies: only 18% of surveyed companies generate more than 50% of their turnover with locally developed products. How much do products/services developed locally for the Chinese market contribute to the turnover of your Chinese entity? 73% 18% 9% Local developments contribute 0% to t/o Local developments contribute 50% to t/o Local developments contribute >50% to t/o Looking at the 18% of the Chinese entities which generate more than 50% of their revenue from local-to-local developments, we find that 70% of them invest in systematic local market research compared to only 39% of the rest of the sample. To achieve higher revenue contribution of locally developed products the systematic generation of local market knowledge is key. 26

28 Barriers to innovation In their efforts to drive innovation surveyed companies see themselves confronted with a number of barriers. The largest barrier is the availability of human resources. For 59% of respondents human resources pose a significant barrier to innovation in their organization. Less than 1% of respondents do not see human resources as a barrier to innovation. This finding is in line with the results of the 2016 Business Confidence Survey 1 which identified finding qualified staff as the second most severe business challenge after rising labor costs. The second important concern is the protection of intellectual property (IP). Similarly, in the 2016 Business Confidence Survey 2 63% of respondents indicated intellectual property concerns as a key reason for not engaging in R&D in China. Surprisingly, the influence of headquarters is identified as a significant barrier to innovation, with 37% of respondents indicating it to be a barrier of a very large or large extent, and as much as 34% as a barrier of moderate extent. Only 14% do not perceive headquarter influence as an impediment to innovation. To what extent are the following issues barriers to innovation for you in China? Human resources 19% 40% 30% 11% IP concerns 14% 32% 29% 18% 8% Headquarter influence 13% 24% 34% 14% 14% Lack of market insight 6% 21% 31% 28% 14% Lack of suitable external partners 4% 18% 32% 32% 14% Economic turbulence 4% 17% 32% 28% 19% Financial resources 6% 11% 32% 36% 14% Insufficient government support 3% 10% 32% 35% 29% Very large extent Large extent Moderate extent Small extent Not at all The top innovation barriers are human resources, intellectual property protection, and the influence of headquarters. 1 German Chamber of Commerce, German Chamber of Commerce,

29 Barrier to innovation: influence of headquarters Headquarter influence as a barrier to innovation may be rooted in too much control of or, in other words, a lack of autonomy for the China-based subsidiary. When it comes to market and product range decisions, 33% and 42% of surveyed companies respectively have relatively little autonomy. Around 20% of respondents claim to have high autonomy, i.e. freedom to make decisions about the market they serve and the product range they supply without consulting with headquarters. Please indicate the extent to which the Chinese entity can make decisions about the market it serves and the product range it supplies. The market it serves The product range it supplies 45% 28% 33% 37% 22% 21% 5% 9% Decided mainly by HQ Decided mainly by HQ after consulting with the Chinese entity Decided mainly by Chinese entity after consulting with HQ Decided mainly by Chinese entity The survey data show a significant positive correlation between subsidiary autonomy and innovation performance, i.e. the Top Innovators enjoy greater autonomy from headquarters, especially with regard to product decisions, than their less innovative peers. Key takeaways Innovation activity Innovation activity among German manufacturing companies in China can be expected to undergo a shift from product to business model innovation in the coming three years The majority of surveyed companies limits their R&D activities to Stage 1 (Global-to-Local) and Stage 2 (Local-to-Local) innovations A quarter of surveyed companies engages in R&D activity that generates improved or new products for world markets (Stage 3, Local-to-Global); this development may accelerate in the mid-term To achieve higher revenue contribution of Local-to-Local developments the systematic generation of local market knowledge is key The top innovation barriers are human resources, intellectual property protection, and the influence of headquarters A significant positive correlation between subsidiary autonomy and innovation performance can be identified; the China entity should be given more room for experimenting with innovations for the local market 28

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31 Industrie 4.0 Digitization the continuing convergence of the real and the virtual worlds will be the main driver of innovation and change in all sectors of our economy. 1 Industrie 4.0 has become a ubiquitous catchphrase. What began as part of the high-tech strategy of the German government promoting the computerization of manufacturing has been taken up in strategic initiatives of leading industrial companies around the world, particularly in the United States, Japan, China, Scandinavia, and the United Kingdom 2. While the heart of the Industrie 4.0 idea is the application of information technology to production, every organization may have its own definitions and hold individual expectations. Companies may perceive the disruption for value chains, people and business models as more or less fundamental 3. What is clear, however, is that Industrie 4.0 is full of potential for manufacturing companies. It may improve the flexibility, speed, productivity, and quality of production processes and lay the foundation for the adoption of new business models and other innovations 4. Applying Industrie 4.0 not only means digitizing operations, but also redesigning products and services to be embedded with customized software, and closer interaction with customers enabled by these new processes, products, and services 5. The difficulty lies in separating hype from reality, assessing the potential impacts, and developing strategies to take advantage of the opportunities brought by Industrie 4.0. Looking at Chinese and German manufacturing companies, a recent survey 6 showed that while Chinese manufacturers are more optimistic about Industrie 4.0 than their German counterparts, they feel less prepared for it. We want to know: What do German manufacturing companies in China think about Industrie 4.0? How do perceptions of Industrie 4.0 differ among industries? To what extent do companies actively engage in Industrie 4.0 in their operations? 1 Kagermann, Geissbauer et al., Gates and Bremicker, Rüßmann et al., Geissbauer et al., Hou et al.,

32 Importance of Industrie 4.0 How important is Industrie 4.0 for your industry? 19% 17% 17% 18% 14% 9% 5% Not at all important Low importance Slightly important Neutral Moderately important Very important Extremely important The majority of surveyed companies (52%), perceives Industrie 4.0 as important for their industry and 18% even say it is extremely important. The other half either takes a neutral position (19%) or finds it less important (29%). The data indicate that perceptions of Industrie 4.0 are far from consistent. The results show differences with respect to industry. While 33% and 28% of companies from the Metal / Plastic and Machinery / Industrial Equipment industries respectively see Industrie 4.0 as extremely important for their industry, only 11% of companies from the Automotive industry ascribe the same level of importance to it. An underlying reason may be that the Automotive industry has been working on automation and lean manufacturing important elements within the Industrie 4.0 framework since decades already. Impact of Industrie 4.0 Although there is no clear consensus about how important Industrie 4.0 is, the majority of respondents agrees that it will have an impact on their companies success (86%) and their business models (75%). 31

33 Industrie 4.0 activities Looking at how companies act with regard to Industrie 4.0, we find that more than one third of companies (35%) is working on single projects or systematically engage in Industrie % of surveyed companies do not actively embrace Industrie 4.0 in their operations yet. While 46% are still in the observation/analysis phase, 13% haven t even thought about the topic yet. How does your Chinese entity act with respect to Industrie 4.0? 13% 20% We haven't thought about Industry 4.0 at all yet. We are observing/analyzing the issue. 15% We are planning/testing the issue. We are working on single Industry 4.0 projects. 6% 46% We systematically engage in Industry 4.0 in our operations. Although many organizations see Industrie 4.0 as important for their industry, only few actively engage in Industrie 4.0 so far. Top Innovators embrace Industrie 4.0 more actively: while 33% of Top Innovators indicate systematic engagement in Industrie 4.0 in their operations, only 16% of other respondents do so. Key takeaways Industrie 4.0 The majority of surveyed companies (52%) regards Industrie 4.0 as important for their industry Companies expect Industrie 4.0 to affect their future business success and business model, but only one third of companies is engaging in Industrie 4.0 in their operations so far; complexity of the topic and uncertainty can be seen as the main reasons 32

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35 Innovation collaboration If you want to go fast, go alone. If you want to go far, go together. African proverb Innovation collaboration with external parties such as suppliers or competitors has become an increasingly prominent feature of firms innovation activity. Its drivers are manifold: converging consumer preferences, continuous technological change, increasing similarity of technology applications across countries, and the mixing and blending of ideas and technologies between sectors all lead to increasing costs and risks associated with innovation 1 and raise the attractiveness of innovation collaboration. Empirical research shows that innovation collaboration has a positive impact on innovation output 2. Just as diverse teams produce more creative results than teams in which all members are from a similar background, companies benefit from teaming up with external partners to generate new ideas and marketable solutions. In the end, innovation happens through the connection of previously unconnected bodies of knowledge 3, implying that organizations striving for innovation cannot afford to work on their own isolated from their stakeholders and other potential sources of knowledge. We want to know: Which partners do German manufacturing companies in China collaborate with to drive innovation? How do they assess the option of acquiring, investing in, or merging with Chinese companies to drive innovation? 1 Narula, 2003, and Veugelers, 1997; in Jakliča et al., Jakliča et al., von Stamm,

36 Collaboration partners 82% of survey respondents collaborate with external partners to drive innovation. Today, the top three innovation collaboration partners are customers (73%), suppliers (66%), and universities (41%). Within the next three years, however, we can expect to see a shift: companies are reducing their collaboration with customers and suppliers, with 50% and 42% of companies planning to collaborate with them respectively. Instead, more companies intend to collaborate with start-ups (today: 8%, next three years: 28%) and competitors (today: 7%, next three years: 21%) to drive innovation. We further identify a trend towards collaboration with non-value chain partners such as external consultants and public research institutes. Which of the following external partners do you collaborate with in innovation? Today Within the next 3 years Clients/customers 50% 73% Suppliers Universities 42% 41% 42% 66% External consultants 20% 33% Public research institutes External start-ups Competitors 8% 7% 20% 27% 28% 21% Top Innovators exhibit a different pattern in innovation collaboration than their less innovative peers. As the survey results show, 78% of Top Innovators collaborate with suppliers (vs. 63% of other respondents) and 56% of Top Innovators collaborate with universities (vs. 38% of other respondents). With regard to the diversity of innovation partners the results show that while 18% of surveyed companies do not engage in innovation collaboration, 45% collaborate with one to two types of partners, 39% collaborate with three to four types of partners, and 9% collaborate with more than four types of partners. To a certain extent, we detect the pattern of the more diversity, the more innovation. Looking at the diversity of collaboration partners and innovation performance, we find that innovation performance increases with partner diversity, but only up to four types of innovation partners. Beyond that there is no visible impact on innovation performance. As discussed in Chapter 4, companies attribute high importance to Industrie 4.0 and, at the same time, face uncertainties in developing IT-based solutions and business models. Therefore pursuing a more open approach of collaboration (open innovation) along (vertical) and across (horizontal and lateral) value chains can lead to future competitiveness for the firm. 35

37 Driving innovation by tapping into local know-how As German companies are increasingly recognizing the innovative potential of Chinese companies 1, we further looked into the intention of leveraging local knowledge to drive innovation, i.e. attitudes towards acquiring, investing in, or merging with Chinese companies. In general, openness for driving local innovation by M&A is surprisingly high. 45% of respondents indicate the option of acquiring a Chinese company to drive innovation as somewhat to very attractive. Investing in and merging with a Chinese company are considered as less attractive options though. Are the following options attractive to drive innovation in your Chinese entity? As indicated in the 2016 Business Confidence Survey 2, Chinese companies are perceived as becoming increasingly competitive. We expect that more and more German companies will consider acquiring a local company to strengthen their innovation portfolio, particularly in the midmarket or good enough market segment. An acquisition can be a shortcut for German companies to access the fast-growing mid-market segment and buy into value innovation and new business models of value creation. Key takeaways Innovation collaboration The majority of surveyed companies (82%) collaborates with external partners to drive innovation Top three innovation collaboration partners are customers, suppliers, and universities, but over the next three years, companies are reducing their collaboration with the former two More companies intend to collaborate with start-ups and competitors Top Innovators demonstrate a higher degree of openness for collaboration and exhibit a higher diversity among innovation partners Almost half of surveyed companies could imagine acquiring a local company to drive innovation; merging is a less attractive option 1 German Chamber of Commerce, German Chamber of Commerce,

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39 Innovation skills "Genius: one percent inspiration and 99 percent perspiration." Thomas Edison Chapter 2 of this report revealed that our survey participants see human resources as the top barrier for innovation in their organizations. This result is alarming, but not exceptional; lack of skills is the single most important innovation obstacle in a wide range of industries and countries 1. What is alarming about this finding is the recognition that human resources are the enabling factor in innovation 2 and therefore essential. Studies have repeatedly confirmed the importance of human capital in innovation, as, first, human creativity will continue to be key in creating innovation, and second, without sufficient skills, firms benefit less from an innovative idea, because they do not have the complementary capabilities or absorptive capacity to turn it into commercially successful offerings for their customers. It appears that in many organizations, human resources are just not fit for meeting innovation objectives. This impression is reflected in the World Economic Forum s 3 Future of Jobs report which shows that workforce strategies are rarely aligned with their innovation strategy. Investing in reskilling current employees is deemed a suitable strategy by many, and, in fact, there is evidence that investments in skills can help organizations to innovate more successfully 4. Particularly within the China context, human resources are a key challenge for companies 5. Innovation-related challenges are adding to the complexity of managing human resource in this dynamic environment. We want to know: How satisfied are German manufacturing companies in China with the innovation capability of their employees? Do they engage in targeted human resource management practices to foster innovation capability? Which innovation skills in particular need improvement? 1 Mohnen and Röller, Leiponen, World Economic Forum, Leiponen, German Chamber of Commerce,

40 In this sur vey, German Business in China Greater Shanghai Innovation Survey 2017 It is important to highlight that almost two thirds of surveyed German companies see access to skills and knowledge as an important reason for their presence in China, the second most important motive after access to market (94%). The motive that used to be of particular relevance in the past access to low cost labor is fading from the spotlight. The skills and knowledge sought after by German companies can be very diverse and covering areas such as local market knowledge, local sourcing skills, product development, innovation related skills, and others. In this survey, most respondents see human resources as the top barrier to innovation. When asking about satisfaction with innovation capability in particular, the evidence hardens: 44% of respondents are dissatisfied with their employees innovation capability, 32% take a neutral position. Only 25% of survey respondents express satisfaction with their employees innovation capability. When it comes to those who are very satisfied, the share drops to 1%. How satisfied are you with the innovation capability of your employees? 26% 32% 5% 13% 15% 9% 1% Very dissatisfied Dissatisfied Somewhat dissatisfied Neither satisfied nor dissatisfied Somewhat satisfied Satisfied Very satisfied Top Innovators report higher satisfaction with innovation capabilities (22% are satisfied or very satisfied than their less innovative peers (8% are satisfied ). This indicates that Top Innovators may have effective approaches in place for developing innovation capabilities of their employees or pay more attention to innovation skills in recruitment. Companies appear to recognize the importance of investing in innovation capability: more than half of surveyed organizations strengthen innovation capability through training and development. The survey results also confirm that those companies that invest in strengthening innovation capability through training and development show above average satisfaction with employees innovation capability. In addition, Top Innovators invest more in the training of innovation capabilities than other organizations (72% vs. 49%). Thus we can conclude that efforts to develop innovation capabilities pay off. 39

41 But where should training and development efforts focus on? To answer this question, we asked for satisfaction with eight critical innovation-related skills. How satisfied are you with the following innovation-related skills of your employees? Critical thinking 5% 16% 21% 29% 26% Creativity 4% 27% 22% 27% 21% Complex problem solving 7% 23% 19% 29% 22% Judgment and decision-making 9% 29% 23% 23% 16% Cognitive flexibility 11% 30% 23% 23% 14% Communication 23% 28% 22% 19% 8% IT literacy 22% 35% 23% 11% 9% Collaboration 32% 35% 13% 15% 5% Very satisfied Neutral Very dissatisfied Somewhat satisfied Somewhat dissatisfied Satisfaction levels are especially low for critical thinking (21%), creativity (31%), and complex problem-solving (30%). These three critical skills also head the list of top skills needed by 2020, as analyzed by the World Economic Forum 1. Reasons for skill shortages in these areas are manifold, but the nature of the education system and the social-cultural context are certainly two of the most important root causes. In contrast, communication, IT literacy, and collaboration (team work) are seen as less problematic. Key takeaways Innovation skills For about two thirds of surveyed companies access to skills and knowledge is a motive for their presence in China Only a quarter of survey respondents expresses satisfaction with their employees innovation capability; Top Innovators report higher satisfaction than other organizations More than half of surveyed organizations strengthen innovation capability through training and development; Top Innovators invest more in training of innovation capabilities than other organizations The data indicate that innovation training is related to heightened satisfaction with innovation capability 1 World Economic Forum,

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43 Innovation culture "The biggest threat to innovation is an organizational culture which doesn t accept failure." 1 Organizational culture, the integrated set of perceptions, memories, values, attitudes, and definitions 2 or simply how things are done around here 3, is an often less addressed factor in innovation, presumably because of its intangible nature. While an innovation-conducive culture is crucial for ideas to be generated and implemented, it cannot be made. Rather, culture evolves as a result of changes in leadership, employee turnover, and environmental and societal developments. As research shows, a culture characterized by proactivity and risk taking, the two key dimensions of entrepreneurial orientation 4, positively influences the number of innovations generated and the extent to which firms favor innovation generation over adoption 5. Other characteristics of an innovation-conducive culture are acceptance of failure and openness to ideas from outside. Any performance is a product of ability, motivation, and opportunity, implying that even the most skilled employees will not perform at their best without the right culture in place and a supportive environment that gives them the opportunity and psychological safety to perform at their full potential. We want to know: To what extent do German companies in China encourage innovative behavior among their employees? Are they prepared to take risks? How proactive are they in their market activity? 1 Gartner, Cameron & Quinn, Drennan, Brettel et al., Pérez-Luño et al.,

44 Encouragement of innovative behavior German Business in China Greater Shanghai Innovation Survey 2017 Encouragement of innovative behavior The three statements below show the extent to which companies encourage innovative action through management behavior. Around 75% of surveyed companies agree that managers encourage employees to think outside of the box and that original ideas are highly valued. An even higher share of respondents (86%) says that managers encourage employees to attempt to solve a problem by themselves. In sum, these are indicators for a culture that accepts failures and is open to fresh ideas. Do you agree with the following statement about your organizational culture? The encouragement of innovative behavior correlates with innovation performance the more employees are encouraged to solve problems, think outside of the box, and generate original ideas, the higher an organization s innovation performance. Encouragement of innovative behavior 1 and innovation performance 2 30% 40% 50% 60% 70% 80% 90% Innovation performance Top Innovators demonstrate stronger internal encouragement of innovative behavior (94% of Top Innovators agree with the three statements above). 1 Measured by Managers encourage employees to solve the problem, Managers encourage employees to think outside of the box, and Original ideas are highly valued in this organizations ; based on Li and Lee, Methodology in Chapter 1: Innovation Performance 43

45 Risk tolerance 58% of surveyed organizations top management appear to strive for technological leadership and innovations rather than relying on proven and tested products and services. This may indicate that organizations are willing to take the risks that come with such an approach. In general, the top management of the Chinese entity favors However, only one third of respondents indicates to favor high-risk projects with chances of high return over low-risk projects with certain rates of return. 40% of respondents are undecided in this question, indicating a rather cautious attitude. In general, the top management of the Chinese entity favors For an overall cautious attitude among surveyed companies also speaks that only 26% describe changes in products and services in their Chinese entity as mostly radical. 45% say that changes are mostly of incremental nature. Changes in products or services in our Chinese entity are mostly 44

46 Risk tolerance German Business in China Greater Shanghai Innovation Survey 2017 Risk tolerance correlates with innovation performance the higher the emphasis on technological leadership and innovations, the preference of high-risk projects, and radical innovation, the higher an organization s innovation performance. Risk tolerance 1 and innovation performance 2 30% 40% 50% 60% 70% 80% 90% Innovation performance Top Innovators indicate a significantly stronger emphasis on technological leadership and innovations and a somewhat higher propensity to choose highrisk projects and radical over incremental innovations than other respondents. Proactiveness More than half of surveyed companies see themselves as initiators or pioneers. Their Chinese entity typically initiates actions which competitors respond to (52%), and is very often the first business to introduce new products or services (59%). In dealing with its competitors, the Chinese entity 1 Measured by emphasis on technological leadership and innovations vs. proven and tested products and services, preference of high-risk projects vs. low-risk projects, and radical vs. incremental innovation 2 Methodology in Chapter 1: Innovation Performance 45

47 In dealing with its competitors, the Chinese entity Key takeaways Innovation culture About three quarters of companies appear to encourage innovation through management behavior the encouragement of innovative behavior correlates positively with innovation performance Companies show a rather cautious than risk-loving attitude risk tolerance correlates positively with innovation performance More than half of surveyed companies see themselves as initiators or pioneers 46

48 Conclusions As the transformation of the Chinese economy is accelerating, innovation has become one of the most important means for creating and maintaining a competitive advantage. With this study, we aimed to establish an up-to-date understanding of how German companies engage in this strategic area in their daily business operations in China. The findings of this research show that German companies are taking innovation seriously. However, they face a variety of challenges. The following six recommendations can be helpful for developing an innovative organization in China. The data show: innovative German companies in China have a clear innovation strategy foster continuous learning and development encourage fresh ideas and accept failures collaborate to innovate think locally 1. Innovation needs a well-defined strategy As this research shows, a large share (59%) of respondents does not have a well-defined innovation strategy. Without a clear strategy, i.e. a set of guiding principles for achieving specific objectives in the future, most innovation-related initiatives will be ineffective and a waste of resources. Companies need to ask themselves: What is our innovation strategy? How does our innovation strategy support our business strategy? How can we align the local innovation strategy with the global innovation strategy? Anticipating the future performance based on past market developments is no longer relevant, especially within the China context. Competition has become so intense that initiative-taking in the local organization is more important than ever. 2. Innovation capabilities require continuous development The majority (59%) of surveyed companies considers human resources as the number one barrier for innovation in China. This reconfirms the most frequently mentioned challenge organizations are facing in China. Giving employees opportunities to innovate might be a relatively simple step to take. Continuous commitment to learning and development along a well-defined innovation management process is more challenging and lengthy to implement. Employees need tools and adequate training to generate and evaluate ideas, systematically develop marketable value propositions, understand how to test innovation hypotheses by developing minimal viable products (MVPs), and implement required process changes. In other words, they need to develop a comprehensive set of discovery, execution and change management skills. However, only half (53%) of surveyed organizations strengthen innovation capability through training and development. 3. Culture matters Innovation needs an eco-system to flourish. Company culture drives people to pursue a common goal. This research has shown that the higher the preference for high-risk projects and radical innovation, the higher also an organization's innovation performance. Beyond risk tolerance, many aspects can reflect and contribute to an innovation organization culture, i.e. dedicated resources and top management attention for innovation topics, a stimulating physical working 47

49 environment, and clearly defined organization values and processes for innovation. Particularities of the Chinese culture such as adherence to hierarchies, high-power distance, and high in-group collectivism (as opposed to individualism) are less favorable for innovative behavior. Therefore, companies need to pay attention to strengthening an innovation-conducive company culture. Innovative companies now use different metrics beyond commercial success to evaluate new initiatives (such as their long-term sustainability value) as they cannot compete at the same level the business has been involved in for decades. 4. Innovation through collaboration To speed up the development process and tap into new knowledge domains, companies will have to diversify their portfolio of innovation cooperation partners. For traditional industry companies it is recommended to explore collaboration opportunities beyond the existing value chain and to open their innovation process. In times of big data analytics, artificial intelligence and cloud technology, start-ups, external subject matter specialists and even competitors can become attractive partners to drive innovation. Innovation is about the continuous generation of new knowledge and insights and bringing diversity into the dominant thinking pattern of the organization. Choosing the right partners and learning from them through collaboration will become critical capabilities of innovative companies. The survey data show that Top Innovators invest in innovation collaboration. 5. Headquarters, don't keep the leash too short! It has become obvious that the role of the Chinese subsidiary in innovation is ambiguous for many German companies. On the one hand, there is no doubt about the high importance of innovation for and from China in the future. However, many HQs find it challenging to balance advantages and disadvantages in the short- and mid-term and align innovation initiatives between HQ and their Chinese subsidiaries. The data show that those companies who grant more freedom and systematic support to local innovation activities will outperform those who see more risk than opportunity. 6. Looking beyond the data: German companies in China need an innovation ecosystem The findings of this survey highlight one aspect that is necessary to successfully innovate in and for China : To truly flourish, innovative companies in China such as our Top Innovators - need to be placed in a wide-ranging innovation eco-system that supports innovation in all its forms. An innovation eco-system necessitates structural and institutional support through reliable cross-border internet services and quick data transfers as well as through companies, research organizations, universities, start-ups, investment funds or government grants, and an innovation culture that fosters respect for intellectual property and promotes cooperation and skills critical for innovative thinking. The German Chamber of Commerce in China Shanghai believes that in order to enhance the innovation landscape in China, healthy collaboration, transparent communication and fair competition are key. To that end, general concerns about legal uncertainty, technology transfers, cross-border internet speed and access as well as IP protection need to be further addressed. The March 2017 German Chamber flash survey on legal uncertainty among German companies on the Chinese market 48

50 complements the findings of this survey: We appreciate the Chinese government s continuous efforts to adapt IP laws and setting up national court systems to handle IP infringement cases. However, efforts need to be further increased to create a better environment that offers wideranging IP protection and overarching legal certainty to encourage experimentation and innovative thinking. Let s innovate together The German Chamber of Commerce in China Shanghai encourages Chinese authorities to: (1) Proactively address concerns surrounding IP protection and data security alongside overarching legal uncertainty for international and German companies looking to innovate in China (one of the top concerns for surveyed German companies). (2) Promote a wide-ranging innovation ecosystem that offers institutional and cultural support to fostering a transparent and accessible innovation culture in China. This includes timely and clearly defined information on implementation of new rules and regulations pertaining to innovation. (3) Systematically enhance educational efforts in schools, dual vocational training and universities for enhancing creativity and innovation skills and capabilities. Joint efforts with companies can ensure relevance as well as effectiveness of the training in the practice. To conclude, finding and binding qualified local personnel in China remains the top challenge among surveyed companies for innovative business strategies. Human resources are the top barrier to innovation and only a quarter of survey respondents express satisfaction with their employees innovation capability. Innovation-related skills such as critical thinking and complex problem solving are among the largest issue areas, whereas respondents are overall satisfied with their employees IT literacy. While this is a long-term goal, Chinese authorities and companies should further explore options for expanding innovation-related skills among the Chinese labor force, either through specialized trainings or increased cooperation in fields such as dual vocational training. 49

51 结语 随着中国经济加速转型升级, 创新已经成为创造和保持竞争优势的一个重要战略 通过此次研究, 我们进一步了解了在华德国企业在日常商业运作中, 与创新这一战略相关的实际情况 研究结果显示, 德国企业非常重视创新 而同时, 德国企业也正面临着各种各样的挑战 以下六项建议可能对于企业在中国发展创新有所帮助 数据表明 : 在中国具有创新力的德国企业是... 有清晰的创新策略... 积极促进可持续的学习和发展... 鼓励新想法并接受失败... 敢于创新合作... 建立本土化思维 1. 创新需要一个明确的战略 正如研究所示, 大部分的受访者 (59%) 没有明确的创新战略 由于缺乏清晰的战略, 即一系列为了实现未来具体目标的指导性原则, 大部分与创新相关的计划是无效和浪费资源的 企业需要知道 : 我们的创新战略是什么? 我们的创新战略如何支持我们的商业战略? 我们如何使本地创新战略与全球创新战略保持一致? 基于过去的市场发展情况预测未来已不再有意义, 特别是在当今中国 竞争变得越来越激烈, 以至于在当地组织中的主动创新具有空前的重要性 2. 创新能力需要可持续的发展 大多数受访企业 (59%) 认为人力资源是在中国创新的首要障碍 这再次证实了在中国的组织所面临的最常见的挑战在于人力资源 为员工提供创新机会可以说是相对简单的措施, 而按照明确的创新管理流程持续地学习和发展则更为具有挑战性, 也需要更长的时间去实现 员工需要工具和足够的培训来产生和评估自己的想法, 系统地开发有市场价值的主张, 了解如何通过开发最小化可行性产品 (MVPs) 来测试创新假设, 并做出所需的流程变更 换言之, 他们需要开发出一套全面的结合发现 执行和变革的管理技能 但是, 只有一半的受访组织 (53%) 通过培训和研发来加强创新能力 3. 文化因素 创新需要相应的环境才能蓬勃发展 企业文化推动人们去追求一个共同的目标 我们的研究表明, 越偏向于高风险的和激进的创新, 它的创新绩效就越高 除了风险承受能力外, 许多方面都可以反映和促进创新组织文化, 比如, 专项资源的设立和高层管理人员对于创新议题的关注, 具有激发性的工作环境, 以及明确的创新组织价值观和流程 中国文化的某些特点不利于创新行为, 比如层级制度 权利分级以及集体主义 ( 与个人主义相对 ) 因此, 企业要特别注意加强创新型企业文化 现在, 除了商业成功之外, 创新企业使用不同的衡量标准来评估新措施 ( 例如其长期可持续发展价值 ), 因为他们无法再沿用数十年积累下来的传统经验 50

52 4. 合作创新 为了加快发展进程, 开拓新的知识领域, 企业必须和不同的业务伙伴展开合作 对于传统工业企业而言, 最好的方式是探索除了现有价值链之外的合作机会, 开拓创新 在这样一个大数据分析 人工智能以及云端创业公司的时代, 外部专题专家甚至是竞争对手都可以成为合作推动创新的有力伙伴 创新在于不断创造新的知识和见解, 并使多样性成为一个组织的主导思维模式 选择合适的合作伙伴, 并通过合作向他们学习, 将成为一个创新公司的关键能力 调查数据显示, 顶尖创业者会对创新合作进行投资 5. 总部需将权力下放 显然, 中国子公司在创新中的作用对于许多德国企业来说是不明确的 一方面在中国开展创新毫无疑问非常重要 然而, 许多总部机构认为在中短期平衡创新的优缺点, 并使总部与中国子公司的创新措施保持一致非常具有挑战性 数据显示, 比起那些看到更多风险而非机会的企业, 那些给本土创新活动提供更多自由和系统支持的企业表现更出色 6. 数据体现了 : 在华德国企业需要一个创新的生态系统 本次调查的结果突出了在中国成功创新的一个必要因素 为了能够真正蓬勃发展, 在中国的创新型企业需要一个较大范围, 支持各种形式创新的创新生态系统 创新的生态系统一方面需要结构和制度支撑, 这一支撑可通过可靠的跨境互联网服务 快速的数据传输以及公司 研究机构 大学 创业公司 投资基金或政府补助来提供 ; 另一方面, 创新生态系统还需要一种创新文化, 这一文化可以促进对于知识产权 合作和能力的重视, 这些对于培养创新思维来说至关重要 中国德商会上海分会认为, 为了促进中国的创新形势, 推动良性合作, 透明的沟通和公平竞争非常重要 为此, 对于法律不确定性, 技术转让, 网络速度和知识产权保护方面的普遍关注应当被重视并解决 2017 年 3 月德国商会对于德国企业在中国市场的法律不确定性的调查, 也为此次研究进行了补充 : 我们非常赞赏中国政府在不断调整知识产权法律, 并通过建立知识产权法院去处理相关知识产权侵权案件所做的努力 然而, 中国仍需努力创造一个可以提供多方面知识产权保护以及法律确定性的更好的环境, 来鼓励试验以及创新性思维 总而言之, 在中国找到并成功雇佣合适的具有创新能力的本地人员仍然被受访企业视为创新的首要挑战 51

53 让我们共同创新 : 中国德商会上海分会希望中国政府能够 : (1) 积极解决企业普遍关注的问题, 包括知识 产权保护 数据安全以及在中国创新的外资包括 德国企业关注的法律不确定性的相关问题 ( 受访 德国公司的首要关切问题之一 ) (2) 推进多方面 大范围创新生态系统的建 立, 为中国建立透明易行的创新文化提供制度和 文化支持 这包括及时出台新的创新相关法律法 规以及对实施情况提供明确的信息 人力资源是创新的主要障碍 只有四分之一的受访者对其员工的创新能力表示满意 创新相关的能力是最大的问题领域之一, 例如批判性思维以及复杂问题的解决能力 但总体来说, 受访者满意其员工的 IT 技术素养 这是一个长期目标, 中国政府和企业应该通过专业培训或加强双重职业培训等领域的合作, 为提高中国劳动力创新能力提供更多的可能性 (3) 系统加强学校 双重职业培训和大学对于 提高创造和创新能力的教育工作 ; 与企业共同努 力, 确保在实践中培训的相关性和有效性 52

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