Innovation & The Law of Relative Competition

It is widely believed that by the year 2020 China will surpass the US in spending on research and development (R&D), enabling it to become the new leader in global innovation. One author recently posited that this important change in leadership has already occurred if you define R&D more narrowly as scientific R&D.

Following WWII huge companies like Xerox, AT&T, and DOW, less fearful of activist shareholders or concerned about the quarterly value of their stock, built huge research centers devoted to basic scientific research solely on the belief that scientific advancement would ultimately benefit society and the company in ways yet undefinable.

At the same time, the US government, through institutions like NASA and the National Institute of Health (NIH) were pouring billions into basic scientific research in the belief that scientific discovery was a worthy social goal of and by itself.

Today, largely under pressure from Wall Street, the corporate research centers have greatly downsized or disappeared altogether. And under pressure from taxpayers and other groups with their own interest in the federal tax pie, institutions like NASA and the NIH have seen their budgets slashed year after year. They are now mere shadows of their former selves.

In the meantime, China is racing to move up the value chain in order to both reclaim its environment and move more of its citizens out of poverty and into the middle class. And it has clearly stated that technology, and the science behind it, are critical to that transformation.   Needless to say, moreover, that the large state-owned enterprises (SOE’s) that control much of the economy are not beholden to shareholders and, with the support of the treasure troves of wealth the government has acquired during decades of double digit economic growth, are in a comfortable position to make investments in basic scientific research whose ultimate economic promise is unknown, but the place from which all great technological breakthroughs have historically sprung.

US corporate R&D spending, I believe, has stayed relatively constant as a percentage of sales over the year. The nature of the spending, I equally believe, has changed dramatically, however. Instead of investing in scientific research in the belief that science itself is worthy of investment and will ultimately pay for itself, corporate America today is subjecting its R&D spending to rigorous financial analysis, investing only in known technologies that will lead to new revenue streams with relative certainty rather than new technologies themselves.

US investors today want earnings and revenue growth. And managements want higher price/earnings ratios (P/E), where the real wealth of Wall Street is contained. The difference between a P/E of eight and fifteen can mean the difference between being well off and acquiring obscene wealth to a CEO who sits on a huge pile of stock options and performance bonuses driven by the price of the company’s stock. (All in the false belief, in my opinion, that if you only align the financial interests of management with the financial interests of shareholders they will make the best decisions. Be careful what you wish for, my mother always said.)

And there is one thing above all else that drives a company’s P/E – it’s narrative. The narrative is the elevator speech that turns the company’s basic product line and business into emotion – a story so full of hope and promise it seems both given and without boundaries.

Scientific research, as it were, makes for a poor narrative. Most of it is too dry and complicated for investors to understand. And with no current understanding of how it will drive sales, it is expense rather than investment to the average shareholder.

Most corporate R&D, therefore, is devoted to developing new revenue streams in existing markets or opening up new opportunities in adjacent markets where the company has some experience and a reasonable chance of success.

And what about government spending in scientific research? During my youth in the 1960’s I had two uncles who were both engineers with NASA. Both were ultimately laid off and the American public shows little interest in exploring space when terrorists at home threaten our daily peace and the real income of the average American has changed little in the last decade. (I agree with them, if it matters.)

In the meantime, China is racing into space. The government has clearly identified space and the technology needed to explore it as a critical part of its future industrial policy. (The US, by contrast, has no industrial policy other than to leave things to the kings of Wall Street to sort out through their ‘invisible hands’ of commercialism.)

The US continues to maintain the best university system in the world, but other countries, China included, seem to be the ones to see the value inherent there. And while I’m sure it happens, I read more about universities building new stadiums and athletic training facilities, and hiring multi-million dollar coaches, than building state-of–the art research centers or giving students a reason to go into science rather than investment banking or marketing.

In the meantime, China has increased the number of students who graduate from university by seven-fold over the last decade, many with degrees in engineering and science. Not a single seat is taken at any Chinese university by someone who simply wants to go on to the NBA or NFL.

Many Westerners will argue that the Chinese can copy, but they can’t innovate. In the past I myself have talked about the lack of curiosity, the backbone of innovation, I have been frustrated by here. In the last year or so, however, I have changed my tune on that. Entrepreneurialism is everywhere and the government is strongly supporting the transformation with both bureaucratic reform and funding. Unlike their predecessors, who wanted to graduate to earn a coveted job with a prestigious SOE, the graduates of today want to start their own business, to become the next Steve Jobs or Bill Gates. And if they bring the same determination to that task that they have to all others I have no doubt that many will succeed.

In the end, however, I believe it will all come down to the Law of Competitive Relativity. There is an old joke that goes like this: Two male hikers find they are being chased by an angry bear. One kneels down to pray. The other kneels down to tighten the laces of his boots. The first says, “What are you doing? You can’t possibly outrun a bear.” To which the second replies, “I don’t have to outrun the bear. I merely need to outrun you.”

Competition of all types is a relative affair. How good you are matters. But what matters most is how good you are relative to your competitors.

In that respect the prognosticators may well be right. China may well be the world’s leader in innovation in very short order. The ball, to use a worn out cliché, is in the court of the West. The Chinese have made a strong serve.

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Some early praise for the author’s latest book, “Understanding China – There is reason for the difference”

“An insightful, compelling introduction to the intricacies of Chinese business and life.” – Kirkus Review

To see the full review from this prestigious literary company, please click on this direct link:

https://www.kirkusreviews.com/book-reviews/gary-moreau/understanding-china-fYhXZndj/

“Understanding China is a “must-read” for anyone interested in culture, working with Asian businesses, visiting China or simply if you enjoy a well-written book! I worked in China in the 90’s and while I eventually understood the differences, I never understood “why” until now. Moreau does a great job explaining the “why”. Well done!!”

(Not a relative!)

“Having done business and gone on personal journeys through the Asia Pacific region, I wish I’d read a book like this first. The premise is that being happy and effective in China requires more than just learning how things operate and working within the established system. This will bring frustration and leave you ineffective because you, the Westerner, will still be looking at these cultural differences as irrational. Mr. Moreau contends that only by understanding why things are the way they are in China and in the West can a Westerner actually influence outcome in China.

The author proceeds to explain the differences with very engaging writing that made me say, “Of, of course! It all makes sense now.”

(Also not a relative!)

Enjoy.

Copyright © 2015 Gary Moreauschools, etc 146

Note: The views expressed in this post are strictly those of the writer acting in a personal capacity.

You may contact the author at glassmakerinchina@gmail.com