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How will China innovate?

chinamapDoubting whether China can really innovate, a la Silicon Valley? China sure can copy a U.S. technology and implement it in its own market. We've seen that in search engine Baidu (very similar to Google), semiconductor company SMIC, and job search company 51Job. So they're just copying our stuff, right? Surely, they'll never lead!

Not so fast. We talked the other day with Ronald Chwang, over at Acer Technology Ventures.

He's one of four partners in the Silicon Valley office (Santa Clara) of the venture firm, a spin-off from the Taiwanese computer company Acer. The firm was on the early side of the latest wave of VC firms scrambling to invest in China, making its first investment there in 2000.

True, Chwang is here in Silicon Valley, he says, because it still leads technology innovation broadly. Hands-down winner. Developments in intellectual property, new business models, or just divining things that are "very hard to do" -- it's largely happening here in the San Francisco Bay Area. So the trick so far has been to apply the innovations here to the market back in China, tweaking products so they fit in with local usage habits, cultural preferences and so on.

But then Chwang says things have been shifting lately. In some areas where China's market size so exceeds the U.S., they're poised to sneak ahead with several technology innovations. Take the mobile phone usage, where China clearly exceeds the U.S. Chinese companies, he says, are developing new ring tone, music/picture/video messaging capabilities not yet seen here. "Just because of sheer population," he says. Short Messaging Service (SMS) is taking off faster in China because of the country's censorship of official newspapers and online news sites. "SMS is China's underground news media," he notes. He predicts new innovations sprouting from that usage. Another area is in DVD media. China already has a higher DVD standard, offering higher quality and more storage capability than the going US standard. And with broadband usage taking off in China, companies are moving aggressively to offer video-on-demand -- something slow to catch on here. So just as Japan forged a lead in consumer electronics, China has potential to lead in several of these new mobile/DVD/broadband areas, Chwang concludes.

This should be interesting to watch. Chwang's firm, meanwhile, is putting its money where its mouth is. His firm recently raised a new venture capital fund dedicated solely for China.


I think that Chwang right be right about this, as are folks like KP's Vinod Khosla, who says similar sings about India. There is a school of thought -- mistaken, i believe -- that claims America can afford to do things like send jobs overseas, because American innovation/entrepreneurism will create new jobs here at home. It is perhaps best known as the "our folks are smarter than your folks" labor theory.

In reality, however, a primary reason for Silicon Valley's ascendance has been its ready access to venture capital. Indian and, to a lesser extent, Chinese engineers and entrepreneurs have come to America because here is where the money is. If, on the other hand, they could get similar funding at home, they would be far less likely to uproot themselves and their families. It is a trend we already are beginning to see, with groups like Acer helping to fill that foreign funding void.

The paraidgm may be shifting, and we could be on the side that it is shifting away from...

Dan Primack on November 11, 2004 8:37 AM
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I too agree that innovation is not exclusive to the US or Silicon Valley. However, I think the one area other regions will have difficulty duplicating the conditions for innovation will be in cultural diversity and acceptance. All regions can duplicate the capital, educational and "smart people" ingredients. China and other regions in Asia (excl. Japan) have also shown they can build the "risk taking" umbrella as well. However, having worked in and been in many other innovations regions around the world, I would challenge the speed at which these regions can foster this remaining ingredient of diversity. It is this additional ingredient that fundamentally separates the Bay Area from most regions of the world and one that I believe it still has a commanding lead in.

john ciacchella on November 15, 2004 1:14 PM
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Our experience with a Chinese technology companies in Bangalore is been amazing.

The guys are really very focused, hardworking and trying to build the best products in minimum time. In a short term this would look like cloning the Best products from US, however they are using this learning to build the innovative products at lesser cost, enabling the technology to reach the masses. I believe the chinese companies using Indian software talents would thrive.


mhj on November 18, 2004 8:29 PM
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