1) The document discusses Chapter 4 of the book "The Competitive Advantage of Emerging Market Multinationals" which explores innovation by Chinese emerging multinational enterprises (EMNEs). 2) It describes different types of innovation used by Chinese EMNEs to gain competitive advantages beyond low costs, including cost innovation, application innovation, business model innovation, and technological innovation. 3) Examples are provided of how Chinese companies like BYD, Lenovo, and Huawei have used these innovative strategies to become leaders in their industries and challenge more established global competitors.

1. EAD-5871: Tecnologia e Economia de Empresas (Economia da Inovação)
Economics of Industrial Innovation
Prof. Dr. Paulo Roberto Feldmann
Class 13: Innovative companies in Emerging Countries
Chapter 4: “Innovation by Chinese EMNEs” (70)
Nei Grando
November, 1 - 2016
UNIVERSIDADE DE SÃO PAULO
FACULDADE DE ECONOMIA, ADMINISTRAÇÃO E CONTABILIDADE
DEPARTAMENTO DE ADMINISTRAÇÃO
PROGRAMA DE PÓS-GRADUAÇÃO EM ADMINISTRAÇÃO

2. The Book, the Authors and The Chapter
The Book: The Competitive Advantage of Emerging Market Multinationals (2013)
by the editors: Peter J. Williamson, Ravi Ramamurti, Afonso Fleury, Maria Tereza
Leme Fleury.
Multinationals from Brazil, Russia, India and China, known as the BRIC countries,
are a new and powerful force in global competition and are challenging the
incumbency of much older global companies from the developed world.
The authors of the book shine new light on the rise of the EMNEs and how they
have built a competitive advantage through innovation, novel configurations of their
international value chains and the acquisition of companies overseas.
Chapter 4: Innovation by
Chinese EMNEs
by Peter J. Williamson and Eden Yin
The chapter explore the role of innovation in helping Chinese emerging multinationals move beyond
the position of unambitious copy-cats or timid subcontractors to Western brands.

3. Introduction
Chinese firms have often been considered as 'low-cost'
and 'me too‘ players, lacking innovative capability to
create competitive advantage beyond their ability to
produce low-cost products with lower quality. But
recently, they begun to emerge as strong global
contestants, in some cases as new leader in particular
product lines and segments. Examples:
• Huaway Technologies (telecom),
• Lenovo (PC - notebooks),
• Wanxiang Group (automotive components),
• Galanz (microwave owens),
• Shangai Zenhua Port Machinery (cranes),
• BYD (batteries, and now electrical cars),
• Haier (consumer electronics), …
Thanks to Innovation, China now leads the world in patent activity, and the government continues to
promote policies that are aimed at transforming ‘Made in China’ into ‘Invented in China’.

4. Redefining Innovation
The lion’s share of the value of new ideas, products,
services and process is captured by those who find
innovative ways to commercialize, standardize and
engineer these inventios for the mass market.
Chinese firms have often taken extend,
nontraditional approaches to Innovation that go far
beyond pure technological progress.
The types of innovation that have contributed to the
ability of successful Chinese multinationals to win
share in the global market include:
1. Cost Innovation – creating adequate quality (and similar or higher value) with low cost.
2. Application Innovation – finding innovative applications for existing technologies or products.
3. Business Model Innovation – changing one component of the BM (or value chain) quickly and at a minimal cost.
4. Shanzai (village fortress) Innovation – hybrid approach that combines product and process approach to produce
more versatile and cheaper alternatives to the mainstream existing products.
5. Technological Innovation – focusing technological break-throughs and increasing sophistications and features.

5. 1 - Cost Innovation
High-Tech at a Low-Cost
Cost Innovation involves creative ways of reengineering
product or process to eliminate things that do not add value.
reduced the cost of the lithium rechargeable
batteries from $40 to $12, replacing the most expensive
materials used with cheaper substitutes, and changing de
production process to avoid the necessity to construct and
maintain expensive ‘dry-rooms’ in the plant.
Capabilities underpinning Cost innovation by Chinese EMEs:
Capabilities required Practical approaches
• Access to low-cost resources
• Cost-oriented innovations mindset
• Flexibility competency
• Simplification
• Parallel processing
• ‘Good enough’ mentality
• Regimented work ethic
• Substitute expensive materials with cheap ones
• Substitute costly manufacturing process with low-cost ones
• Create flexible manufacturing process
• Look for cross-industries economy of scale
• Understand the existing process of production
• Cut out unnecessary sections and focus on the most vital function
• Develop new features based on consumer insights

6. 2 - Application Innovation
Application Innovation refers to innovation that is new in terms
of its application, but not its technology. In other words, it
involves creating a new application for an existing product or
technology. The Chinese easily use Lateral Thinking.
was well stablished in the business of sealants used
in shipping container rapidly win share in the global market sealants
used in construction industry, by deploying a high cost product
manufactured using silicone as a alternative to the acrylic-acid-based
products offered by others suppliers to seal external doors. The acrylic
option doesn't works well if it rains within the first 24 hours after applied.
Capabilities underpinning Application innovation by Chinese EMEs:
Capabilities required Practical approaches
• Customer benefit-centered mindset
• Lateral thinking
• Cross-functional collaborative
capability
• Identify group of industries that are similar in terms of the customer
benefits sought, e.g. who else also needs it?
• Identify a group of industries that may use similar technologies, e.g.
where can this be used?
• Choose the sizable industry that requires the minimal level of product
adaptation

7. 3 - Business Model Innovation
Some of the word’s most competitively successful innovations have
stemmed from novel ideas that did not involve changes in the
underlying technologies, products or services et al.
The idea of business model Innovation is to change customer
value proposition or profit formula or key resources or key
process quickly at a minimal cost, sometimes, reconfiguring
the value chain to achieve extremely flexibility and agility.
Capabilities underpinning Business Model innovation by Chinese EMEs:
Capabilities required Practical approaches
• Proactive attitude towards change
• Insights on consumer value proposition
• Insights on existing limitations or value
proposition
• Creative thinking
• Extreme level of integration
• Understand the existing consumer value proposition
• Augment or enhance the service component of this value proposition
• Develop essential infrastructure or resources to deliver this enhanced
service-based value proposition
The largest Chinese social networking and instant messaging
service builds up its core business with the simples idea of
allowing subscribers to route short messages from their
computer to mobile phones. Grew 500 million active
accounts x $ 1.50 month.

8. 4 - Shanzhai Innovation
Shanzhai, literally "mountain village“, originally used to describe a
bandit stronghold outside government control, refers to imitation and
trademark infringing brands and goods, particularly electronics in China.
They are businesses based on fake or pirated products.
But, many businesses with humble Shanzhai origins are now
becoming formidable market disrupters and, in many cases,
market leaders.
The innovative nature of Chinese culture and the huge potential in the
Chinese market create vast opportunities for Shanzhai companies.
The best of them are fast, flexible, innovative, and willing to take risks.
The Shanzhai phenomenon is not about low-cost fake products
anymore; it is about how one type of Chinese company achieves
success without following conventional wisdom and develops
competitive advantage through innovation.
SHANZHAI
China's Brand
Copycat
iPhone clone
‘Dream G2’
from
SciPhone
As unacceptable as this practice may
be, over successive cycles it has
allowed some firms involved to develop
some capabilities like:
• improved their tech skills;
• learned to change product features;
• bring the counterfeited products to
the market extremely fast.

9. 5 - Technological Innovation
Perhaps, not surprisingly, there are also some firms in
China that follow a more orthodox approach to
innovation, based on trying to achieve significant
technology advances.
Because the growth of value-for-money, price-competitive
market in China, severe gaps in the infrastructure for
protection of intellectual property and lack of experience in
basic R&D, these firms are certainly a small minority.
Huawei Technologies and
Wanhua Polyurethane are
prime examples of successful
implementation of this strategy.
Despite of adopting the more traditional route to
technological innovation, however, these firms tend to
focus on tech break-troughs that will result in different
customer value propositions that their established global
competitors.

10. Conclusion
There is a need to rethink how the birth of new breeds of innovation from the
emerging markets is impacting the theory and practice of mainstream innovation
and internationalization.
The leading Chinese firms who aspire to become global players have innovated in
a variety of ways that potentially contribute to their competitive advantage in
ways that go far beyond pore factor cost advantage in China.
Their innovation initiatives cover a wide spectrum from cost innovation, through
application and business model innovation, to more traditional technologies
advances.

11. Another way to think about Business Models