How Australia can Benefit from China's Innovation Potential China's innovation potential is considerable and it is in Australia's best interests to form deep, lasting relationships as they grow in knowledge and networks

(This article was co-written by Michelle Gallaher, CEO of ShareRoot; and Dr Roksan Libinaki, GM of Avecho Biotechnology.)

We are enjoying beers on a Friday night in a bar called Max's in downtown Shanghai and the direct network effect is in action. Celebrating the last night in China, our group of 30 Monash University Global Executive MBA students, though tired from a week of travel and heavy study, are feeling the heady effects of last-minute pressure and performance anxiety that public speaking tends to bring on. We have just delivered presentations to a panel of our professors, the second of three major project assignments, following an intensive innovation and China Business Residential module at the prestigious China-Europe International Business School (CEIBS).

A member of our group invites a China-based colleague, from the biopharma multinational company they both work for, to join us. He is introduced to the Australian GEMBA group that includes among us: hospital and health insurance executives, health tech and biotech small-cap companies. The GEMBA China study tour is focussed on innovation business models, particularly those in lifesciences.

In less than 10 minutes, considerable value has been added to Australia's lifesciences' sector as we build and reinforce global bridges as the group connects, ideas are shared, and relationship deepens. LinkedIn links are established and WeChat connections are confirmed.

There is purportedly six degrees of separation between each of us – the idea that all people are six or fewer social connections away from each other. In Australia's lifesciences' sector, we often say there's two degrees of separation due to the concentration of workforce in the industry and the fact that Australia, particularly Victoria, has successfully leveraged the direct network effect – a phenomenon whereby increased numbers of people or participants improve the value of a good, service or sector.

The notion of social networks colliding and accelerating innovation and industry engagement is easy to visualise in a country like Australia. But with an exceptionally large population of 1.3 billion, and a lifesciences' industry that is exponentially larger than Australia's, could the same be said about China?

Guanxi is Key to Innovation Industries

Guanxi, the art of building and maintaining connections and relationships, appears to have been a key success factor in China's rapid rise on global innovation indices, most particularly in the lifesciences. Networks link more than just people; they fundamentally link ideas and opportunities, improving knowledge capital and potential for business outcomes. Networks and relationships are critical for building a direct network effect in the global lifesciences sector.

Networking scope as well as networking intensity plays an important role in explaining innovation performance and business growth, according to the European Innovation Scoreboard report published in 2018. China has seen consistent double-digit growth in its biotechnology industry over the past ten years, emerging from being one of the slowest to one of the fastest nations in terms of adopting and developing biotechnologies. The number of Chinese companies (28 in 2019) presenting at the invitation-only exclusive annual JP Morgan Healthcare Conference in San Francisco each year, signifies China's coming of age. Guanxi is very evident in lifesciences – a sector that relies on collaboration and partnership to deliver returns.

New Ideas Flow with New People

The lifesciences' sector is seen in China as a core area of national scientific and economic development. One of China's considerable strengths in biotechnology has been the Thousand Talents Plan, which has been responsible for recruiting and repatriating lifescience talent into and back to China. According to Nature, of the two million scientists and technologists, known as "sea turtles', returning to China over the past six years, it is estimated 250,000 work in the lifesciences' sector.

Michael Porter in the early 1990's and one hundred years before him Alfred Martin described the concept of clustering or co-location as an important element of driving industry growth and innovation. Location strategy is evident in mature lifesciences' innovation market clusters – Melbourne and Shanghai are excellent examples. Successful innovation clusters are usually clustered around universities, providing access to rich resources in infrastructure, capital, natural acquirers, multinationals, and most importantly talent that together drives improved outcomes.

Rapidly developing lifesciences innovation clusters in major cities in China, Brazil and India are increasing their competitiveness through economic incentives and the reform of foundations such as intellectual property protection, harmonisation of regulation and legislation, direct foreign investment policies and the establishment of industry dedicated growth funds often as a result of sovereign wealth funds.

Incubating a New Approach to Innovation

New business models are constantly evolving, aimed at fostering innovation and disruption from within companies and institutions as well as through building supporting ecosystems aligned to geographic clusters. China and Australia have both invested heavily in building a supportive ecosystem that can give rise to many startups and spinouts via local technology accelerators and incubators.

The Monash GEMBA group visited Johnson and Johnson (J&J), the first biopharma multinational to enter China, to hear about the global JLABS concept from Dr Sharon Chan, director of JLABS Shanghai, which was scheduled to open in June. JLABS is a new generation no-strings-attached lifescience incubator and JLABS Shanghai will be the 12th JLABS to launch, which is the closest to Australian lifescience innovators.

The direct network effect, expertly applied by J&J, drives increasing value for the global lifesciences' sector; the more people that engage with the global JLABS concept, the more value is created as a whole. Value exists if there is interaction and deriving value directly related to the number of people using it. As the JLABS infrastructure and network size increases, so does the direct interaction potential and the likelihood of value generation and output, not just for J&J but the global innovation community.

At a local Australian level, the direct network effect is visible in action through the commissioner for Victoria in China, Mr Tim Dillon. Addressing the Monash GEMBA cohort on the last day of the study tour in Shanghai, the commissioner highlighted the fact that China is Victoria's largest trading partner and a key source of inbound investment and tourists. China is Victoria's largest export goods market, particularly in relation to food and fibre and higher education. He confirmed that Australia's lifesciences' sector is quickly becoming more familiar and more adept at doing business in China and that increasing the research collaboration and cooperation intensity and investment will have the potential to drive significant wealth and health benefits for both economies.

"Innovation requires continuous hiring," said Associate Professor Taiyuan Wang during a class on Managing Innovation in China at CEIBS. "Businesses get lazy and will hire ten new people in one year and then no one new for the next two years," he said. This, he explained, is bad for innovation. Like a river, ideas need freedom to flow and gather momentum. New ideas need to be continuously introduced and cultivated. He confirmed the value of diversity and inclusion in ensuring confirmation bias did not cloud rigorous testing of ideas and that voices within organisations could be heard. He also outlined the importance of good leadership, autonomy and motivation, to enable organisations to innovate and thrive. Fostering autonomy enhancement by supporting employees to have their own ideas, with time to create and explore their entrepreneurial ideas for the company, was another way successful companies are able to innovate.

Hiring behaviours directly affect the innovation potential in an organisation. Associate Professor Wang attributes "newcomers" as crucial in "bringing in new knowledge and ideas, on the one hand, and by collaborating and exchanging with incumbents, on the other". Hiring rate, change, and dispersion directly affect both the "flow of new ideas into the organisation and the level of collaboration between newcomers and incumbents". Wang raised the concept of investing in highly collaborative workplaces and behaviours to mitigate the need for high-throughput hiring. Human resource strategy and its impact on innovation quality output was a very new concept and one in which neither of us have considered in as much depth.

People and Platforms versus Product

What was clear in our learning journey – over the course of a week – was the repeated emphasis on developing business models and market approaches that were people-centric. Platforms were of greater value than product, more investment-worthy offering attractive economies of scope and scale. The value of platforms was most evident in the comparison between Baidu, Alibaba and Tencent with Metcalfe's Law working in-line to explain their rapid growth.

Pre-internet – when we just had the telephone – we communicated and shared information with one other person, but when the internet came along and there were millions (or hundreds of millions in the case of these Chinese juggernauts), connected, or "networked", via their platforms delivered value exponentially larger than what many innovators could have imagined.

Metcalfe's Law describes the substantial growth of these businesses via their (internet-enabled) platforms, a "network effect" that can not only provide additional value but also a competitive advantage. For example, in Australia we are familiar with Ebay – not necessarily the best auction website – but they certainly have the most users. So, therefore, it is difficult to replicate or dominate. The power of EBay's network drove out other large competitors for quite some time. The size of EBay's footprint continues to work as an effective barrier to entry, ensuring the auction sites dominance in the market, which continues to grow as more users access the platform.

China's Alibaba, Tencent, and Baidu may have started out as e-commerce, gaming or social platforms, but given their enormous network driven by the sheer size of the population in China, it is more efficient for them now to leverage their internal networks and economies of scope.

Economies of Scale and Economies of Scope

A visit to MicroPort, a large publicly-listed Chinese medtech developer and manufacturer across ten major medical disciplines, exporting millions of products across the globe each year, highlighted the concept of economies of scope and economies of scale – theories that had been introduced into our learning at CEIBS. According to the MicroPort website, every eight seconds someone in the world is being treated with a MicroPort product. The theory of an economy of scope states the average total cost of a company's production decreases when there is an increasing complementary range of goods produced, ideally sharing the same resource inputs. Whereas, economies of scale is the cost advantage a company has with the increased output of a good or service.

Winning the Global Digital and Data Race

Over 15 months, the Monash GEMBA focussed on investigating in three major global innovation sectors: advanced manufacturing, lifesciences and digital transformation. Depth in each sector is explored alongside global business strategy and practice; advanced manufacturing at INSEAD in France, lifesciences at CEIBS and digital transformation in Stern Business School in the United States.

It is apparent that Monash Business School had strategically selected the three innovation sectors because of the increasing convergence that is occurring, particularly evident upon visiting Pfizer and being introduced to Dr Jessie Chan, head of Pfizer's China development team. There is no separating advanced manufacturing, lifesciences and the digital and data race. Dr Chan articulated the value of digital and data in improving the patient and physician experience with lifescience technologies as well as the new frontier of experience complementary to technology solutions.

In an effort to personalise healthcare and achieve better outcomes within a "quality use of medicines mindset", prevention, education, compliance and patient activation or engagement are clearly a growing emphasis for biopharma with digital platforms and real world data a key tool growing in significance and sophistication.

Hofstede's Version of China is Evolving - Stereotypes No Longer Apply

Though Professor Geet Hofstede may have positioned China in 1975 as a nationality that recognised and respected a big power distance, typically making it hard to hear voice from much lower down the organisational ladder, this appears to be far less so in modern China.

China has moved at lightning speed to position and equip its rapidly developing knowledge economy to embrace and master a new world order that thrives on "merit first", accessing education from trusted global leaders such as Monash University, whilst committing infrastructure and capital resources on a scale that few economies can compete with.

China's stereotypical, hierarchical structure is evaporating, with the clear and apparent national entrepreneurial approach that a good idea can come from anywhere and anyone. The take home message from the study tour at CEIBS and visiting leading lifescience companies in China was that If we approach developing our professional networks with a global growth mindset, cultivate a longer term view and work on developing our social and cultural intelligence, we will continue to not only expand our professional networks but potentially learn life lessons that can enrich and sustain us.

It's apparent that China's innovation potential is considerable and it is in Australia's best interests to form deep, lasting relationships with our international student population as they grow in knowledge and networks.

Australia is in an advantageous position; a time difference of only two hours makes doing business with China easy. The majority of Australian school children are studying Chinese or at least an Asian language opening their minds to the Asian century upon us, trade agreements effectively position Australia as an innovation gateway to China and our ability to grow talent within our universities and industry is central to building and sustaining lasting bilateral relationships.

Chinese proverb: "Teachers open the door. You enter by yourself."