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Insights

A one-year-long survey covering more than 600 medium, small and micro-sized startups across China have highlighted the importance of innovation as firms try to cope with an ever changing market environment.

The survey was conducted by a Guanghua team headed by professors Wang Tiemin, Zhang Yichi and Huang Tao in collaboration with Hewlett-Packard and CYZone, a start-up information platform. Two thirds of the firms surveyed are micro-sized, with one to nine employees. Nearly half of all respondents are businesses less than three years old.

According to a report penned by the team based on the survey, the latest industrial revolution is washing out more low-skill jobs and leading to a redistribution of wealth across the world, and firms have to innovate their way of doing business in accordance with changing market demand and values. Those failing to adapt or even just not fast enough to do so will risk rendering themselves irrelevant.

It notes that a small number of these firms will become unicorns or even superstars in the market while the majority will spend a long time finding their own paths and identities. Some others will fail due to incompetence or bad luck. Whatever the outcome, their innovation capability will largely determine their fate.

Incorporating questionnaire, data samples and interviews of senior executives, the project finds that most of China’s smaller businesses value innovation and some are particularly energetic in this regard. Innovation progress is positively correlated to a firm’s scale, especially in the fintech field.

Also, these innovation-driven startups have acute strategic plans that focus on all aspects of their businesses, from client, product to solutions, and their innovation strategies become more specific as businesses grow, a phenomenon particularly notable in healthcare, biopharmaceuticals, fintech and digital technology.

Meanwhile, they are very competent in discerning and seizing business opportunities but show a lack of balance in risk management and resource utilization in innovative projects. Their innovation management capacity do not necessarily grow as their firms age,indicating that a firm might need some kind of outside intervention to push forward its innovation management idea.

The report reveals that the larger a business gets the more emphasis a firm put on efficiency in the use of resources and implementation, highlighting a smaller firm’s difficult balance between innovation and business results. A more friendly exterior environment should help them find and maintain such balance.

It also notes that a startup’s innovation progress is, in general, positively correlated to its strategic innovation efforts and management levels, consolidating the opinion that innovation capacity is a must for smaller businesses’healthy development.

While multiple channels can contribute to a firm’s innovation and creativity, the survey finds that, in most cases, it comes from core employees who have accumulated rich experiences in vertically-related industries where they have worked before. Creativity plays a key role in a firm’s efforts to push forward innovation and seize opportunities.

These startups’innovation strategies usually focus on core technologies and business modes. More than half of the firms surveyed focus on innovating business modes, while those in emerging fields such as high-tech hardware, digital technology, corporate services focus more on core technology innovation.

Core technology includes patents, algorithm, software copyright, technology secrets and unique formula that are difficult to obtain or copy,and firms that value innovation in core technology usually make more efforts to maintain technology edge, apply key technologies to more areas and convert them to market values.

Meanwhile, innovation in business modes are easier to replicate and may lead to fierce market competition, but success in such innovations also requires outstanding execution capacities.

The report reveals that the need for incessant innovation so as to maintain an edge is also a huge pressure for many of these smaller businesses, while market uncertainty, peer pressure and the need to constantly coordinate multiple resources to keep up with growth are also among the risks and challenges they have to face.

Innovation also cushions firms in hard times and even provides new opportunities for them, the report says, citing the covid-19 outbreak when nearly half of the firms already adept at online businesses said they were either less affected or even saw a boom as most businesses were halted by lockdowns.

According to the report, firms based in the Beijing-Tianjin-Hebei agglomeration as well as Shanghai, Jiangsu and other coastal regions exhibit, on average, sound innovation management capacity, while those in west China are in need of improvement.

While the survey was only a rough scan, its results shed light on China’s innovation drive and offer firms’a mirror to review their own innovation efforts.

“The ongoing revolution is offering endless possibilities and opportunities to firms, especially emerging businesses that have no historical burdens,” the report says, adding that medium, small and micro-sized startups relishing innovation will be the key force rising up to new market challenges “for a long time in the future.”

(Team members participating in this project include Prof. Zhang Yichi, Prof. Huang Tao, Prof. Gao Yan, Prof. Wang Tiemin, Ma Xin,Liao Lin, Wang Lin, Tan Tianyu, Fu Zijian)

© 2019 Guanghua School of Management Peking University