Role of Government in Nurturing Innovation (Part II): China’s Awkward Quest for Bullet Train Technology

We recently talked about the role of government in nurturing innovation. The clear evidence was that China would not be in the wind power industry had it not been for government regulation:

But the fact is that none of this would have been remotely possible if China did not regulate the market to allow its own industry to become strong. May be there is a place for regulation – as long as the protection is for a short time, targeted and with significant competition. We know that rivalry and scarcity are drivers of innovation – so as long as money is not given out freely, it might encourage innovation and give national companies a chance to become strong. Countries could consider outsourcing innovation when necessary, not just buy the whole system from a foreign provider. May be the reason why Indian regulation did not work was because they did not have a large number of companies competing for contracts. In fact, they probably regulated the number of companies…

The article China’s Awkward Quest for Bullet Train Technology in Knowledge@Wharton highlights a few more considerations. Here is the overall background:

It took just seven years for China to build the world’s biggest — and purportedly most advanced — bullet train system. That lightning speed and the political capital invested in the showcase program come with more liabilities than acclaim. The collision on July 23 on a high-speed line near Wenzhou may not have derailed Beijing’s ambitions to dominate cutting-edge passenger rail technology, but it has shed light on the program’s shortcomings.

Some problems should have been expected because development of large systems such as wind mills or high speed rail (HSR) is complex and requires time. There is only so much a country can do to accelerate implementation to catch-up with others.

Transportation experts assert that the accident was a consequence of China’s haste. New lines have opened in quick succession, and corners inevitably cut to meet deadlines — the most visible evidence of which being the low-tech, crumbling rail stations dotted across the country that have yet to be upgraded. “China’s high-speed rail program proceeded at breakneck speed, with a far faster roll-out than any other country has attempted, and this was seen as a matter of pride,” says Richard Di Bona, technical director of LLA Consultancy, a transport consulting company based in Hong Kong.
According to Tsung-Chung (T.C.) Kao, a professor at University of Illinois’s Rail Transportation and Engineering Center at Urbana-Champaign, China is facing up to the fact that it failed to spend enough time testing the high-tech system. “They built the HSR system and networks too quickly and there are many bugs … that have to be fixed now,” adds Kao, a former vice president of Taiwan High Speed Rail Corporation, who was part of an 11-year HSR project on that island.

The rush to speed-up innovation caused problems in Chinese wind power industry as well. I still believe that there is a role for government in nurturing innovation. However, the overall scale/type of problems in the high speed rails is a bit different. Here are some lessons from the article:

Unlike wind mills, there were only a couple of companies developing HSR in China. Unlike wind mills, there was only one major customer (Railway Ministry). The lack of customer and supplier diversity actually prevented true competition / rivarlry and and reduced the drive for innovation. The lack of diversity also drove corruption.
HSR became primarily driven by politics and national pride instead of innovation. This is much harder to do when there is a diversity of customers and suppliers.

So in the contract decisions was based on politics, rather than technology, says Ryoji Nakagawa, a professor of international relations at Ritsumeikan University in Kyoto.
National pride reached its apex this spring when a Railway Ministry spokesperson boasted during the unveiling of the Beijing-Shanghai bullet train that the Chinese rail system had surpassed Japan’s renowned Shinkansen
HSR is much more complex compared to wind power and requires significantly larger investment. It is difficult to maintain government nurturing environment for very long-term. Even at break-neck speed, roll out of HSR probably takes a order of magnitude higher resources and time.

“It took 18 years for Japan to develop a bullet train that could run at 300 km/h after the Tokaido Shinkansen opened in 1964,” says Kamiura. “We spent so much time just improving rail track technology to be able to take the speed from 200 km/h to 300 km/h.” Even today, the maximum speeds for most of Japan’s bullet trains are 240 km/h and 270 km/h. The Sanyo line, connecting Osaka to Hakata in Kyushu, raised its maximum speed to 285 km/h in 1997 and to 300 km/h in 2006.
Chinese HSR companies were very closely tied to foreign partners and the project became technology transfer instead of innovation.

The reality, experts say, is that at best China has integrated the technology of its overseas partners, rather than leapfrogging it. The main so-called CRH2 trains rolled out as China’s own were produced under a joint venture between state-owned CSR Qingdao Sifangand Kawasaki Heavy Industries. According to experts, the CRH380A is based on the same technology as the CRH2 and Japanese bullet trains, and on July 23,it was a CRH2 train that slammed into a train developed in a joint venture between Bombardier of Canada and CSR Sifang Locomotive and Rolling Stock Company, known as a CRH1.

Finally, the national pride also led to pressure to file for patent protection (to demonstrate that China was innovating). It is important for R&D managers to remember that Trade Secrets are probably as important as – in not more than – patents in a true IP-based innovation protection strategy.

Seeking such patents is a double-edged sword. Commercial considerations are only part of the reason why China wants such patents. “Again, this is a political statement,” says Kao. “They want to show off their success to the top leaders and bosses,” who want evidence that the government’s huge investment in the bullet train program is paying off.
But the process would force China to reveal details of its technology — even possibly that it made limited changes to the technology transferred by its foreign partners, Nakagawa contends.

Minority rules: Scientists discover tipping point for the spread of ideas

Some good insights for R&D managers trying to drive change in their organizations in the article Minority rules: Scientists discover tipping point for the spread of ideas:

Scientists at Rensselaer Polytechnic Institute have found that when just 10 percent of the population holds an unshakable belief, their belief will always be adopted by the majority of the society.

We can use this to form concrete communications strategies. We should plan on getting at least 10% of the stakeholders committed to a change. The 10% number can be used as a metric to guide success of change related training or buy-in…

When the number of committed opinion holders is below 10 percent, there is no visible progress in the spread of ideas. It would literally take the amount of time comparable to the age of the universe for this size group to reach the majority,” said SCNARC Director Boleslaw Szymanski, the Claire and Roland Schmitt Distinguished Professor at Rensselaer. “Once that number grows above 10 percent, the idea spreads like flame.

5 Myths of Innovation

Prof. Birkinshaw has a must read article for all innovation managers in the MIT Sloan Management Review: The 5 Myths of Innovation. Here are my learnings from it:

Innovation is NOT about the Eureka moment. Innovation is 5% inspiration and 95% perspiration. Companies are good at generating ideas, but it is in the detailed development and getting the innovation ready for market is where most failures are identified (the valley of death). The research shows that many companies are good at generating ideas (or at least ideas that sound good), but the performance drops through successive steps of development.

Most innovation efforts fail not because of a lack of bright ideas, but because of a lack of careful and thoughtful follow-up. Smart companies know where the weakest links in their entire innovation value chain are, and they invest time in correcting those weaknesses rather than further reinforcing their strengths.

The eureka moment is the driving force behind ideation workshops. I have myself conducted several and have been amazed at the lack of results. Many ideas sound good on the surface but digging into them is expensive. Also, it is very hard to find budget to explore ideas beyond the ideation workshop.
Innovation does not come from social interaction: There has been many suggestions of using social networks (here and here) and online forums to gather innovation ideas and nurture innovation (Tata’s learn to innovate). However, the success of tehse forums is not guaranteed. As we have seen in the past, active engagement from the managers/executives is key to success of any online forum. Here are some more thoughts:

So what should you do to avoid these problems? The most important point is to understand the types of interaction that occur in online forums, so that you use them in the right way. If you are looking for creative, never-heard-before ideas, and if you want people to take responsibility for building on one another’s ideas, then a face-to-face workshop is your best bet. But if you are looking for a specific answer to a question, or if you want to generate a wide variety of views about some existing ideas, then an online forum can be highly efficient. (See “Questions That Work — and Don’t — in Online Innovation Forums” for examples.)
Open Innovation is not critical: Borderless or open innovation where companies access innovation from the outside has been much revered as the next big wave (See hotbeds of innovation, quirky innovation, etc). However, nurturing innovation from the outside is an order of magnitude more complex than internal ideas. R&D teams are often weary of outsiders. Organizations often have a problem with not-invented-here. Finally, outsiders often speak a different language from internal teams, which makes it difficult to internalize their innovation. Add to it complexity of IP licensing and costs of evaluating thousands of ideas that you might receive from the outside, and it becomes unmanageable. The key is to access innovation from the outside when the problem can be very narrowly and precisely defined and there is not much overlap between external/internal teams.

External innovation forums have access to a broad range of expertise that makes them effective for solving narrow technological problems; internal innovation forums have less breadth but more understanding of context. Smart companies use their external and internal experts for very different types of problems.
Financial Incentives are not the best way to drive to innovation: As we have discussed many times (the problem with financial incentives, impact of incentive bonus plans, etc), financial / monetary incentive are probably not the best approach to driving innovation. Prof. Birkinshaw has the following to say:

Rewarding people for their innovation efforts misses the point. The process of innovating — of taking the initiative to come up with new solutions — is its own reward. Smart companies emphasize the social and personal drivers of discretionary effort, rather than the material drivers.
Top-down innovation is as important as bottom up: There is a misconception that all innovations start from disruptive technologies and key R&D. However, even when the ideas come from R&D, they need to be actively funded and managed to succeed. Also, it takes a lot of discipline and cultural change to get disruptive innovation to market.

Bottom-up innovation efforts benefit from high levels of employee engagement; top-down innovation efforts benefit from direct alignment with the company’s goals. Smart companies use both approaches, and are adept at helping bottom-up innovation projects get the sponsorship they need to survive.

Role of Government Regulation in Driving Innovation: Wind Power in China

The widely held belief is that regulation and government protection does not actually drive innovation. Clayton Christensen in China’s Growth Will Force an Innovation Competition with the West points out that India’s regulations for 30 years actually produced no benefits for the society. Here is another viewpoint and a lot of interesting data from Knowledge@Wharton (Wind Power in China: Lots of Turbines, Little Bluster?):

China has more than 80 wind turbine manufacturers, four of which are among the top 10 globally by market share. By the end of last year, it had 45 gigawatts (GW) of installed wind power, up 73% from 26 GW in 2009, compared with 40 GW in the U.S., according to the Brussels-based Global Wind Energy Council. And China’s government intends to raise total wind power capacity even further, to 100 GW by 2015 and 200 GW by 2020. Louis Schwartz, a U.S. lawyer and specialist in Chinese energy, says China’s officials have spoken off the record of targets that are even higher, reaching 150 GW by 2015 and 250 GW by 2020.“

The fact is that the foreigners have been pretty much shutout of the Chinese markets (Vesta has a meager 4.6% market share in China).

Before China’s wind energy market really took off around five years ago, there were roughly 10 foreign and local wind turbine manufacturers in China, according to Jens Tommerup, president of the China arm of Denmark’s Vestas, Danish firm with US$9.8 billion (RMB 63.4 billion) of annual revenue, which commands a world market share of nearly 15%.”At that point, non-Chinese manufacturers had the majority of the market,” he says. But last year, while the number of non-Chinese manufacturers remained largely the same, the number of Chinese manufacturers increased to more than 70. The foreign share of China’s wind business plummeted to 10.5% from 75% in 2005. Amid the state of flux, top foreign turbine makers are by no means suffering, even if their overall market share has declined.

The Chinese, on the other hand, have no foreign presence – probably because they are not mature and cannot compete technologically

Yet China’s turbine makers have a meager presence in world markets and nearly all their growth has been at home. In 2010, only one Chinese company among the country’s top four, Goldwind, exported wind turbines — 4.5 megawatts (MW) to Cuba, which accounted for 0.12% of Goldwind’s total new installations of 3,739.5 MW last year.

Dependence on domestic and often immature technology has caused problems:

The issue hit home after a massive disruption in February at the Jiuquan wind farm in Gansu province in northwest China. Regulators at SERC said it was the most severe accident for wind power grids in recent years. Reporters at the financial newspaper China Business News learned that most of Jiuquan farm’s wind power units did not have what’s known in the industry as “low voltage ride-through capability.” Such technology gives a power grid time to adjust itself in the event of temporary faults and maintain uninterrupted grid connection.

However, the fact is that now that the Chinese firms have had time to mature, they are going to start competing in the global market place.

Goldwind is targeting markets in the U.S., Europe, Australia and Africa and expects its overseas business to account for between 20% and 30% of sales within five years.

May be that is too ambitious:

That’s a tall order. It currently only has 9.5% of the global market share. Along with China’s Sinovel at 11.1% and Dongfang at 6.7%, other leaders included GE Wind of the U.S. at 9.6%; Enercon of Germany at 7.2%; and Suzlon of India at 6.9%, according to a report titled, “International Wind Energy Development Market 2010,” by Denmark-based BTM Consult.

But the fact is that none of this would have been remotely possible if China did not regulate the market to allow its own industry to become strong. May be there is a place for regulation – as long as the protection is for a short time, targeted and with significant competition. We know that rivalry and scarcity are drivers of innovation – so as long as money is not given out freely, it might encourage innovation and give national companies a chance to become strong. Countries could consider outsourcing innovation when necessary, not just buy the whole system from a foreign provider. May be the reason why Indian regulation did not work was because they did not have a large number of companies competing for contracts. In fact, they probably regulated the number of companies…

INSEAD Global Innovation Index

INSEAD just announced its 2011 Global Innovation Index (Or an interview here). Here are top 10:

Switzerland
Sweden
Singapore
Hong Kong (SAR)
Finland
Denmark
United States
Canada
Netherlands
United Kingdom

Here is how this index is computed:

The Global Innovation Index is computed as an average of the scores across inputs pillars (describing the enabling environment for innovation) and output pillars (measuring actual achievements in innovation). Five pillars constitute the Innovation Input Sub-Index: ‘Institutions,’ ‘Human capital and research,’ ‘Infrastructure’, ‘Market sophistication’ and ‘Business sophistication’. The Innovation Output Sub-Index is composed of two pillars: ‘Scientific outputs’ and ‘Creative outputs’. The Innovation Efficiency Index, calculated as the ratio of the two Sub-Indices, examines how economies leverage their enabling environments to stimulate innovation results.

May be US does indeed need to invest more in innovation, but US already has the largest R&D budget in the world. May be we need to think of something new?

Dr. Naushad Forbes, Chairman of the CII Innovation Council 2011-12 and Director of Forbes Marshall commented: ‘Today the whole world is talking about innovation in all forms starting from industry to government to society. After the recent economic slowdown the focus has shifted clearly towards the developing regions not only in terms of a booming potential market but also a hot spot for frugal innovations. Measuring this shift is important to know how we are doing, the GII is a starting point to do that and unquestionably in the right direction.’

Here is the NSF Innovation Survey if you want more…

China’s Growth Will Force an Innovation Competition with the West

One key point for R&D managers in Knowledge@Wharton article Clayton Christensen: ‘China’s Growth Will Force an Innovation Competition with the West’:

But because China is growing so fast, they are now starting to feel the impact of their policy on population control. Wage rates are going up at a very fast rate… I don’t know who else can join them, but this will force China to not just knock off designs from the West. They’ll have to compete on innovation as well, because other countries can take the low end.”

I think this can be a very important driver of long-term R&D strategy. We have discussed how necessity is the mother of innovation. When companies compete in low cost markets, they have generate new innovations – which in turn improves their competitive position in the high value market (what is normally called frugal engineering or reverse innovation). However, this article points out the next frontier – challenge from the BRIC countries in high cost market. Are we ready for that?

2011 Global R&D Funding Forecast

Here is link to the 2011 Global R&D Funding Forecast: from the R&D Magazine: “

Global Spending Following cuts in total R&D spending by most advanced economies during the global recession in 2008 to 2009, R&D spending growth resumed, albeit at reduced levels, in 2010 and is again forecast for 2011. Rapid growth in R&D spending in emerging Asian nations only slowed slightly during the recession and is forecast to continue growth that is several times that of the advanced economies.

US has a third of the global R&D spending, even though others are growing much faster. Here are some takeaways:

In addition to outsourcing R&D, many organizations are building new R&D facilities in offshore locations.
R&D Collaboration is increasing between developed and developing nations, with all parties gaining from it.
R&D gap between developed and developing countries are narrowing as measured by patent filings. Even though developed nations continue to file for new patents, developing nations are fast accelerating their rate of patenting.
And some good news – academic innovation and R&D is accelerating. May be because many strong students went back to academia when they could not find jobs in the great recession…

A lot of interesting data.

5 Reasons Why Government Should Spend More on Innovation

MIT Sloan Management Review has 5 Reasons Why Government Should Spend More on Innovation: “

US is not in the top five countries in research spending
US was ranked 40/40 in the ITIF ranking on improvement in innovation capacity
Innovation generally requires technology development (not just business models)
Government fuels innovation at universities and education
All other governments seem to be pushing innovation. Only in US it is controversial.

Interesting commentary. Not quite sure what to do about it. Just increasing funding may not be a comprehensive solution. When I was in grad school, most students there were immigrants. As cultures get wealthy, do the loose the fire and desire to work hard?…

Is Your Company Choosing the Best Innovation Ideas?

Article first published as Is Your Company Choosing the Best Innovation Ideas? on Technorati.

There is an interesting article in the MIT Sloan Management Review about innovation pipelines and how to manage them (Is Your Company Choosing the Best Innovation Ideas?

A new innovation: LED light bulb that can also be used as a flashlight (From Tech-on)

As we have discussed in the past, even though every manger wants to have their organization become more innovative, getting those ideas is tough. From innovation bazaars to the quirky way, a lot of different ways exist to access innovation. However, once we get those ideas, what should we do with them? The article has an example of a large multinational company that solicited ideas from their employees and got twentyfive thousand!

I analyzed proposals for innovative ideas solicited from more than 50,000 employees at a large multinational corporation operating several hundred sites in more than 60 countries (see “About the Research”). It is difficult to know how many employees eventually submitted ideas, how many proposals they sent in and how many different managers were involved in evaluating all of the submissions, in part because of the large number of operating locations and also the number of different IT platforms in use.4 I began with 25,000 idea proposals, which could be traced to approximately 6,000 different employees worldwide.

Here is the trouble – how to sort through these ideas?

Sifting through ideas to find the best one may seem like it would be a mundane task compared with the creative side of the process; perhaps that is why there is little or no data on what organizations spend on the idea selection part of large innovation campaigns.

More importantly, it is expensive to do these evaluations! The company in question invested almost six many years into evaluating innovative ideas over just two years. That is equivalent to having three employees dedicated full-time just to evaluate innovative ideas:

More than 200 lower-level managers and about 80 midlevel managers were involved in evaluating roughly 20,000 of these ideas over the course of about two years before the selection process was terminated. Since each idea required anywhere between 10 and 20 minutes of total evaluation time (including reading and reporting on the proposal, conferring with colleagues and so on), and since some ideas had to be evaluated repeatedly, this group of ideas required total manager assessment time of between 5,500 and 11,000 hours (or 715 to 1,430 workdays); that does not include any time needed for implementation.

Clearly, these evaluations have to be distributed and manged carefully. The article goes into suggest six biases that need to be taken into account to ensure the process bubbles up the truly innovative ideas.

Geographical and organizational bias: Ideas suggested in the country, division and site are preferred by respective managers. If an idea comes from a particular site, the evaluators from that site are 10-50% more likely to give it a positive grade. Some countries and cultures tend to be more innovation friendly than others.
Length of the proposal: In this particular company, 250 words was the sweet spot for the proposal. Both shorter and longer proposals had a lower likelihood of being selected.
Tone of the proposal: A proposal that talks positively about the impact on the company business is more likely to be selected (regardless of the actual benefits)
Size of the organization: Larger organizations are more likely to select innovation ideas (there is other research that supports this)
Hierarchy: Less hierarchical organizations are more likely to select ideas for innovation. We have seen related evidence from other angles as well.

The table below lays out some of the authors recommendations. Here are mine:

Develop a standard form for all innovative idea submission across the entire company. This form can be structured to remove some of the biases pointed out above.
Ensure the form is short enough (250 words or less) so each form gets equal attention.
Ensure the form asks specific questions about business benefits. Not only will this remove biases related to the tone of the proposal, but it will also force the innovator to think about the practical aspects of its innovation
Set up a standard set of evaluation questions (checklists) for all evaluators. This should eliminate geographical and cultural biases.
Ensure evaluation checklists is short so that many different perspectives can be obtained.
Distribute evaluation beyond managers to technology experts. In addition to getting more valuable evaluations and reducing management work load, this will help build employee networks and foster collaboration.

Does Strategic Planning Impede Innovation?

Executives are increasingly focusing on innovation in response to the great recession. Executives also depend on strategic planning to navigate through tumultuous times. In fact, there has been very influential research showing that planning can actually help organizations learn and improve. So what is the impact of strategic planning on innovation? The article Does Strategic Planning Enhance or Impede Innovation and Firm Performance? from the Journal of Product Innovation Management has some timely insights:

Does strategic planning enhance or impede innovation and firm performance? The current literature provides contradictory views. This study extends the resource-advantage theory to examine the conditions in which strategic planning increases or decreases the number of new product development projects and firm performance. The authors test the theoretical model by collecting data from 227 firms.

The paper has empirical evidence suggesting that both strategic planning and innovation are good for organization. We should keep in mind, however, that the paper appears to use new product development (NPD) as innovation. That is probably not the accepted definition of innovation, but we can use it as an approximate stand-in…
The other interesting information is that the firms with organizational redundancy (larger firms), gain more from strategic planning than smaller one. However, strategic planning actually reduces NPD (or innovation). The evidence seems to support that improvisational organizations (as opposed to planned) are more innovative. Also, lack of strategic planning seems to encourage more outside-the-box thinking. May be Wall Street is right in thinking that larger firms can not be innovative… However, the article also shows that larger firms with large R&D budgets are able to overcome the impact of planning and still succeed.
So what are the lessons for R&D managers:

Make strategic planning flexible so that innovation and improvisations is allowed.
Develop resource allocation processes that clearly communicate to employees that innovation is important.
Encourage employees to access innovation from the outside (in form of technology or user experience).

Here is the overall message:

Finally, managers must understand that managing strategic planning and generating NPD project ideas are beneficial to the ultimate outcome of firm performance despite the adverse relationship between strategic planning and the number of NPD projects.

Article first published as Does Strategic Planning Impede Innovation? on Technorati