Should firms in developing countries pursue independent R&D or adopt technology to innovate?

By Dai Jianjun and Yang Jianlong, Policy Research and Advice, OECD Development Centre (on secondment from the Development Research Center of the State Council of China)

Research-and-developmentInnovation promotes the global economy’s sustained growth, and innovation in developing countries can be achieved through two main means: independent research and development (R&D) or technology adoption. It is generally believed that developing countries can achieve development at a lower cost and faster by adopting technology. Even though enterprises are subject to certain restrictions in their technology adoption, such as mergers and acquisitions (M&As) that may be rejected due to national security factors, is it still relevant to depend on the adoption of technology for innovation to achieve continuous development?

To help answer this question, two companies in China, Huawei and Lenovo, offer perspectives in analysing different innovation models and their achievements. Both companies are engaged in the information technology industry and were established basically around the same time in the 1980s, experiencing first-hand the process of China’s implementation of the reform and opening-up policy to achieve economic catch-up. Currently, both are Fortune 500 companies, leading in their segmentation and having adopted different innovative approaches. Given the good comparability between the two companies, they offer relevant inspiration and analysis on innovation strategies and performance. How?

Both companies pursued independent R&D and adopted technology to innovate. However, Huawei mainly focuses on independent R&D, while Lenovo mainly acquires technology and market share through M&As. Huawei, on the one hand, was established in 1987. In its early days, it manufactured communication equipment through the adoption of technology. In 1994, it began to turn to independent R&D of high-end products. It also acquired some enterprises during the period, but its main focus remained on independent R&D. Lenovo, on the other hand, was established in 1984. It spent its early days investing in technology R&D, but then adopted a large-scale overseas M&A method to achieve rapid development. Although Lenovo also carried out some independent R&D, the investment intensity of such R&D is much lower than that of Huawei (see Figure 1).

Figure 1: Comparison of R&D investment
R-n-d-intensity

Source:  Huawei 2007~2016 data, Lenovo 2007~2012 data from:Liu Tao, Cao Wenqin. R&D investment is the choice of enterprises to create value——Taking Huawei and Lenovo as examples[J]. Resources Recycling, 2018(刘涛, 曹文琴. 研发投入是企业创造价值的选择——以华为、联想为例[J]. 资源再生, 2018);Huawei 2017 dataLenovo 2013~2017 data fromZhu Xi, Ten pictures to see the comparison of key indicators of Huawei VS Lenovo’s business, the gap is really not a little bit, Prospective Industry Research Institute, 2018-06-01(朱茜,十张图看清华为VS联想的企业关键指标对比 差距真心不是一点点,前瞻产业研究院,2018-06-01)https://www.qianzhan.com/analyst/detail/220/180601-e0730241.html

The comparison between Huawei and Lenovo shows that different innovation models lead to different innovation performances. Huawei currently has more sustainable profitability, while Lenovo has a slight lack of stamina. In its early stages, Lenovo’s development momentum exceeded Huawei. For example, in 1992, Huawei’s revenue was only 100 million yuan, far less than Lenovo’s revenue of 1.767 billion yuan. However, Huawei surpassed Lenovo in sales revenue in 2008, and its size in 2017 was twice that of Lenovo (see Figure 2). Huawei’s profits have maintained rapid and steady growth, far exceeding Lenovo’s, and Lenovo has even suffered losses in some years (see Figure 3).

Figure 2: Comparison of sales revenue

Comparison of sales revenue

Source: Huawei 2007~2016 data, Lenovo 2007~2016 data fromLiu Tao, Cao Wenqin. R&D investment is the choice of enterprises to create value——Taking Huawei and Lenovo as examples[J]. Resources Recycling, 2018(刘涛, 曹文琴. 研发投入是企业创造价值的选择——以华为、联想为例[J]. 资源再生, 2018);Huawei 2017 data, Lenovo 2017 data fromZhu Xi, Ten pictures to see the comparison of key indicators of Huawei VS Lenovo’s business, the gap is really not a little bit, Prospective Industry Research Institute, 2018-06-01(朱茜,十张图看清华为VS联想的企业关键指标对比 差距真心不是一点点,前瞻产业研究院,2018-06-01)https://www.qianzhan.com/analyst/detail/220/180601-e0730241.html

Figure 3: Comparison of net profit

Comparison of net profit

Source: Huawei 2007~2016 data, Lenovo 2007~2016 data fromLiu Tao, Cao Wenqin. R&D investment is the choice of enterprises to create value——Taking Huawei and Lenovo as examples[J]. Resources Recycling, 2018(刘涛, 曹文琴. 研发投入是企业创造价值的选择——以华为、联想为例[J]. 资源再生, 2018);Huawei 2017 data, Lenovo 2017 data fromZhu Xi, Ten pictures to see the comparison of key indicators of Huawei VS Lenovo’s business, the gap is really not a little bit, Prospective Industry Research Institute, 2018-06-01(朱茜,十张图看清华为VS联想的企业关键指标对比 差距真心不是一点点,前瞻产业研究院,2018-06-01)https://www.qianzhan.com/analyst/detail/220/180601-e0730241.html

What conclusions can we draw about innovation and firm development from Huawei and Lenovo? While a much larger sample would yield more abundant conclusions, our focus on just these companies offers two key lessons:

First, enterprises cannot rely on a single way to innovate and promote company growth. The evidence shows that both companies pursued independent R&D as well as adopted technology to innovate. Even Lenovo that is taking the M&A route invested a certain amount of money in R&D. Huawei, which is based on independent R&D, actually bought a series of companies to acquire technology.

Second, the focus of enterprise innovation is different at various stages of development. For enterprises in the early stage of development, the adoption of technology may be more conducive to their rapid growth. However, with technological advancement and accumulation, enterprises should shift from relying on technology adoption to pursuing independent R&D to achieve sustainable and stable development.

Apart from Lenovo, it is difficult to find other companies in China achieving sustained success by relying on technology adoption. More and more successful Chinese companies, in addition to Huawei, rely on independent R&D to achieve core technological breakthroughs.
Indeed, enterprises in China offer some further perspectives on technology transfer, intellectual property protection and enterprise innovation as follows:

Core technology can’t be bought. M&As can only acquire non-core technologies, and core technologies require long-term independent R&D to achieve breakthroughs. China’s ability to achieve technological breakthroughs does not rely, therefore, on compulsory multinational technology transfers.

Moreover, the continuous improvement of the intellectual property protection environment is key to the success of technological innovation in enterprises. Only intellectual property can be protected, and companies are empowered to take the necessary steps to invest in innovation to compete successfully in the market. The success of Huawei’s innovation, for example, is inseparable from the continuous strengthening of China’s intellectual property protection regime, and its R&D investment can fuel market competitiveness.

Thus, for Chinese companies, increasing investments in innovation and in improving market competitiveness are important ways to achieve and sustain enterprise transformation.