Open innovation across borders: a positive sum game for Australia-China business

1. Open innovationacross borders: a positive sum game for Australia-China business Dr Anton Kriz Faculty of Business and Law Newcastle Business School Visiting scholar – NIIMS 5 November 2010

2. Short bio and background • Industry, government and consultancy • Japan (JV, exports of live prawns), Malaysia, Korea, HK, also partnered Taiwanese for 5 years in seafood • Last 10 years in academia - Marketing and IB • Full focus now on Innovation Management (China/Australia) • Keen to strengthen ties with NIIM • Currently doing consultancy through Newcastle Innovation • Major project for Tourism Australia on China outbound • Also assisting Federal Government’s Innovative Regions Centre • Three PhD projects proposed: • Monitoring the Program, Telecommuting to Sydney, Mapping Gazelles (Chinese PhD) • Starting a training program for innovative brokers/champions • Will look at replication in future in Zhejiang Province NIIMS

3. Presentation background • Recently presented a paper at CICALICs: • “China’s next big challenge: mastering the art and science of creative technology” • Head of R&D for Geely • Purchased a firm in Australia – DSI – second largest Auto Transmission in the world • Didn’t tell us everything (Geely's Volvo Gain Bloomberg) • Recent discussion with a successful Shanghainese-Australian businessman • Bringing Australian technology - small wind turbines to China • Also Suntech’s success with Australian solar technology • Informed also from previous papers: • Journal of Management Decisions on “The Challenge to Rekindle China’s Innovative Spirit” • Asia Pacific Business Review on “Business Relationships in China: Lessons About Deep Trust” • “Next Hegemon” published at the ACE Conference NIIMS

4. Make it a positive sum game NIIMS Presentation

5. Timing is everything • Title “Open innovation across borders: a positive sum game for Australia-China business” came from: • The focus at NIIMS on Open Innovation • I also refer to it as 720 degrees of innovation • Also like the ecosystem approach of Cambridge • The Australia-China relationship (obviously critical to me) • Too much focus on Australia being “the quarry of the world” • Important long term synergies that will resolve: • some of China’s innovative issues and equally save Australia from its “small country syndrome” • I saw Hillary Clinton saying that China-US relations - not zero sum but a positive sum game NIIMS Presentation

6. Why China-Australia (DFAT statistics) • Australia size of Shanghai in population terms • 13th largest economy based on GDP – China now 2nd • Punch above our weight – Close to Russia – Parity with US$ - 1 Trill to 5 Trill (Aust v China in 1999) • In 2009, Australia exported 19 per cent of goods and services or $48 billion to China (No1) – Australia is 11th largest exporter to China • In 2009, 15 per cent or $37 billion of Australia’s imports came from China (No1) – Australia is the 7th largest export market for China • Some other trade specifics: • Goods (2009-2010)- Iron ore & others $25B, Coal $5B, Clothing $3.7B, Computers $3.5B, Telecom & parts $3.3B, • Services (2009): Education $4.1B (107,000 in 2007), Personal Travel $.6B (357,000 in 2007) • Australia's investment in China: $6B - China's investment in Australia: $16B NIIMS

7. China and Australia – similarities and differences • Not much in common on the surface • However, cross-culturally we have some positive traits for the Chinese • Like drinking and socialising (not such a divide between work and home life) • Have a flexible and “happy-go-lucky” attitude (not easily fussed) • We are very friendly (on the whole) and can adapt well • Our farmers have often used their “word as their bond” • On the down side – there is a fear of China in terms of the history (media messages) and its differing political approach • We have struggled to work closely with Chinese (in partnerships) • There has been many early failures (Fosters) • We are interwoven into US geopolitics and military treatise NIIMS

8. Trust (Australia and China) • Taking the Western “outsider looking in” approach • Try to break down some of the myths and misunderstandings in the process • My thesis on trust taught me some keys to doing business in China • It’s in the heart (you cannot mimic it for a deal) • You wont cheat Chinese easily (they have a rich history of such games Wei Qi) • Guanxi is not xinren (my metaphor of a tree) • Trust and xinren run deep (Li Shang Wang Lai) • Cunning is revered and win-win is difficult (so know your Art of War) • There is a rationale for everything (so anticipate the unexpected) • Australia • Trust is built around contracts and systems (but still many exceptions) NIIMS

9. Australia – the good and not so good • Lower R&D spend and innovation capacity – BERD improving • Reasonable education system but it doesn’t match Scandinavia • In 2004 knowledge investment - Australia 4% Sweden over 6% • Had improved productivity (down1995-2000 2.5% 2001-2006 1%) • Via some variations to employment laws, liberalising financial sector • Consumerism driven our work ethic (like our lifestyle as well) • Problem being the quarry of the world (like Brazil for Iron Ore) • Failing to grow innovation • Often a problem of commercialisation • Australians are good at science and we are good at fixing things • RESMED, Cochlear, Cervical Cancer Immunization, CSIRO WiFi (comprehensive list) • But generally best inventions go overseas (California - Ausra Inc) – Orbital Engine, WiFi, Solar, Wind, Scientists (Nobel Laureates 9) NIIMS

10. China – the good and not so good • China offers the biggest market in the world • 1.35 billion (could me more with the current census) • Napolean warned us that when China wakes the world will shake • However, for 500 years the Middle Kingdom has been fairly dormant • GDP per capita was higher than Europe for length of time • Very agrarian in nature and did not harness new technology • Few foreign business succeeded up until 2000 • The market was enticing but couldn’t understand it • Incomes were too low as well (unless Bottom of the Pyramid) • Much has changed in China and Zhejiang is a classic exemplar • China over 90 times larger in GDP terms than in1978 • So the game rules have changed (China surge in R&D spend) • Number of Australian businesses are still working with old view NIIMS Presentation

11. Insead Global Innovation Index Report -Australia ranks 18th China 43rd NIIMS Presentation

12. The focus here is on open innovation across borders (China-Australia) • “Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. [This paradigm] assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology.” Henry Chesbrough • Increasingly focused on Institutional Economics • Country or institution like China in particular has similarities with large organisations (China Inc.) • So treating countries like large organisations • My work on the next hegemon shows that specific characteristics lead to rapid economic growth and global leadership • At the centre of hegemonic growth is entrepreneurship through radical innovation NIIMS

13. Paradox – China V Australia - view on Open Innovation • Freeconomics has merit – using consumers through open source and developing interesting innovative Business Models • Recently published an article on CSR in Westpac’s supply chain – suppliers have to conform to standards • Australia is largely made up of SMEs • Only beginning Open Innovation or 720 degrees? • More protective of their IP • Ran a program on 360 degrees of innovation (during Australia’s Innovation Festival) – Also presented a version to Price Waterhouse Coopers • Innovative Regions Centre is promoting networks and collaboration • So against this backdrop – interesting that NIIMS is taking Open Innovation to Chinese companies • Interesting experience – Zhejiang Hengyi Group NIIMS Presentation

14. How can open innovation help China and Australian businesses • Australian businesses generally are reluctant to work with Chinese businesses (Tourism is a great example – Chinese with Chinese) • The enormity of such a cross-cultural challenge • Psychic as well as geographic distance • Rio Tinto incident and military internet intervention made it worse • The Chinese quite capable at business - maybe too capable • Lack of trust and protection of IP • Generally Australians don’t have the time to invest such emotional and social effort and risks are high • However, BHP, Rio Tinto, Fortescue and others have no choice – major market – Qantas, Billabong, Quicksilver have also gained • Chinese see a remote island with a lot of strange creatures • PM Kevin Rudd was an exception – Chinese linguistic skills NIIMS Presentation

15. One common potential bond – innovation via commercialisation • Australia has many creative and inventive people • Australia has not been able to commercialise many inventions due to market size • For the banks - numbers did not stack up against risk (not VC culture) • China’s institutions are not set up for creative and inventive people • China has the second biggest market in the world(eventually the biggest) • Chinese investors are cashed up and look at benefit as well as risk Equals some positive opportunities – but can we go beyond FDI/WFOE to Alliances and Open Innovation? NIIMS

16. Open Innovation – Works through leveraging off others • “…innovation means inventions implemented and taken to market” John Seely Brown (2005) • Australians will find it difficult to use the Open Innovation model in China • Breaching IP is rated as major issue although prosecutions are possible as P&G identified (Kriz 2009) • However China is well known for counterfeiting • Recent Penfold’s (Benfolds) incident with wine labels • Homework and having good legal support is critical • If companies wont share ideas then it will be hard to innovate up and down the supply chain • One way is for Australian firms to employ more Chinese staff both here and in Australia CICALICS - 2010

17. Changing the attitude to a positive sum game • The Australian manufacturer have become uncompetitive – particularly high volume and low unit items • Most textile operators shifted to China – Bonds - designers are world class • Manufacturers are often developing innovative technology and processes • Example - software to support mine safety and productivity - LVA • Our high tech area in biotech and aspect like green technology solid as well (one of leaders in patents - Smart Grid Smart City Project in Newcastle) • Time to use our strengths and China’s strengths to complement • Australia advantages include innovation via creativity, development, design, processes, marketing • Sectors - resources & energy, building, agribusiness, engineering, manufacturing, services, consumer goods • Chinas advantages include human capital, scale and cost efficiencies • Law of comparative advantage – we both win (Australia and China grow) NIIMS

18. Biggest challenge – breaking down the cultural barriers • “You can lead a horse to water but you can’t make him drink” • Fault on both sides • Originally went the EJV route – pseudo arrangement with many failures • Then shifted to WFOE (Vanhonacker 1997) • This does not necessarily encourage Open Innovation • Value Chain often becomes Chinese or Western (Tourism) • Reverse FDI – Geely and others are acquiring (interesting implications) • CITIC, Sinosteel, Chinalco, CNMC, all have share investments • Is it time for a new hybrid (SMEs) • Strategic alliances but with Chinese characteristics • A guanxishu with a mixture of Chinese and Australians • More use of the Chinese students educated in Australia • Australians are using this model well – Case Studies needed to demonstrate effectiveness NIIMS Presentation

19. Personal efforts to change the status quo • Trying to educate Australians about Chinese culture • One of the reasons I am visiting Zhejiang • I am talking to Government and business as well • My thesis on trust was inspired by a great experience with my Taiwanese partners • Taiwan is not China (but it is another Province as I am told) • What I have learnt: • If you get a trusted relationship with the Chinese it runs deep • Currently working on Tourism innovation in the supply chain • I can see some benefits for the agribusiness sector re airfreight • Next step probably education • My project on the Central Coast with the Innovative Regions Centre • Will try to match the Zhejiang businesses with like minds in the Hunter and Central Coast area NIIMS Presentation

20. Summary • As Hillary Clinton suggested: need to start looking at China as a positive sum game • Culture plays a huge role in such a divide – we need to start looking at breaking down this divide • PhD student working on Cultural Intelligence • Looking at starting workshops in Australian Tourism service sector to counter – the 1 million Chinese syndrome • Tourism Australia introduced the Premium Aussie and Aussie Specialist Program – certainly helped bridge the divide in that sector • Open Innovation has potential benefits to both Australia and China • Law of Comparative Advantage • Academics have an important role and I am keen to work with the Faculty and people like Zheng Gang, Xiaobo Wu and Faculty members to make this happen… NIIMS

21. Discussion, further comments and questions CRICOS Provider 00109J | www.newcastle.edu.au