Run of the Red Queen

Perhaps it is time innovative Israelis began to think differently, urges innovation consultant Dan Breznitz

By SHLOMO MAITAL
August 4, 2011 13:57
China and Israel are world leaders in innovation.

China Israel innovate (do not republish). (photo credit: Avi Katz)

 
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IN LEWIS CARROLL’S “THROUGH THE LOOKING GLASS,” the sequel to “Alice in Wonderland,” the Red Queen organizes a race.

“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else – if you run very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Red Queen. “Now, here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

This passage inspired the title of Prof. Dan Breznitz’s new book “Run of the Red Queen,” about China’s phenomenal growth engine and its innovation strategy, based on three years of field work in China by him and his student, co-author Michael Murphree. Focusing on China’s technology companies, Breznitz smashes the myth that countries must invent new things in order to prosper.

China’s technology companies, Breznitz and Murphree found, are world leaders in second-generation process and production innovation.

China’s secret lies in its skill in incremental innovation – making things in new and better ways, rather than inventing better things. Like the Red Queen, Chinese firms run as fast as they can to stay in the same spot – right at the global technology frontier, without actually advancing it.

Chinese firms offer 80 percent of global best quality, at half the cost.

For instance, Apple engineers design the iPhone in America. Within three weeks Chinese engineers know how to make it in China – faster, cheaper, better. The result has been to give China 7 percent annual GDP growth, or more, for 44 years, between 1961 and 2005 – almost unprecedented in history, boosting China’s per capita Gross Domestic Product from an abysmal $105 in 1961 to $1,400 in 2005 and putting China on track to become the world’s largest economy by 2030, deposing America.



Breznitz shows why leading-edge innovation of sophisticated products is neither sufficient nor necessary for sustained economic growth.

Moreover, he claims, China’s success is in spite of central government policy, rather than because of it. He thinks that the Chinese government’s expensive state-directed product-development projects may undermine China’s privately owned companies, which at times act contrary to government policy with great success.

“Chinese companies have been doing wonderfully by being on the cusp of the latest available technologies developed elsewhere and then being able to work on them,” Breznitz says. “It’s a strategy that is basically against the central government’s push for product innovation.

Those “Red Queen” innovation capabilities are probably going to maintain Chinese growth for the next 15 years – unless the Chinese government’s thirst for big state-directed R&D projects ruins its privately owned companies.” The central government’s current push for “Invented in China” instead of “Made in China” may actually harm China’s competitiveness, Breznitz believes.

BREZNITZ IS A CERTIFIED SYSTEMS ANALYST – WHO plan software and hardware for information systems. And he is a bona fide start-up veteran – he co-founded Jerusalem-based Nocturnus Ltd., a software house. After gaining his BA at the Hebrew University in Jerusalem, he completed his PhD in political science at MIT in the US. He has consulted for governments in Finland and Ireland on their innovation policies. He is currently a professor at Georgia Institute of Technology’s Sam Nunn School of International Affairs, in Atlanta.

I attended an informal seminar he gave at the Technion on his new book and then conducted an email interview with him.

The Jerusalem Report: Is China a threat to Israel, or an opportunity? How can we transform the threat elements into opportunities?

Breznitz: “From the point of view of business, China is mostly an opportunity. If you look at what China is excelling at – taking ideas that have been proven profitable elsewhere and running with them, as well as supplying components and system design, production and delivery services – it is easy to see that China’s impressive innovative capabilities are almost perfectly complementary to Israel’s.

“If Israelis are the world’s best in coming up with truly novel ideas and solving problems at the highest end of the technology world, China is best at all the stages of innovation that come after that. For a small export-based economy like Israel, the opening and development of a savvy huge market – soon the largest in the world – is something we should be rejoicing over, not fearing.

“Nonetheless, the rise of China brings with it the need for massive changes, both political and economic and we better figure out how to deal with these changes. We must understand what we excel at, and what Israel’s capabilities are, across all the production stages, and that we must keep and hone in order to continue excelling in novel product innovation.

It is here that I fear that the continued outsourcing of all production to China is not only just a fad with no long-term value, but also herd mentality that might cost us in the future if we let certain critical capabilities disappear from the Israeli economy.”

Like many experts, Breznitz believes nations must actually make things, not just invent them, in order to sustain economic growth.

I have a striking example of the Israel-China complementarity Breznitz describes. Israeli entrepreneur Haim Wilder invented MAZE, a unique water purification technology and filter that works with zero water pressure. Israel’s global food and beverage giant Strauss bought MAZE, and with it formed a joint venture with Haier, giant Chinese home electronics company, called Haier Strauss Water. The venture will soon sell a version of Strauss’s Tami 4, which filters and purifies water without connection to a pressurized water pipe system (non-existent in much of China), in Haier Group’s 8,000 stores and 25,000 sales points throughout China. Akey point is this: The Tami 4 appliance itself will be made in China. But the crucial high-tech MAZE filter is produced in Israel, at Kibbutz Netiv Halamed Hei, thus keeping both high-value-added jobs and sensitive technology at home.”

The Report: You make the widely overlooked point that a country does not need to be a world-class product innovator to build a dynamic economy. But you do need innovation of other kinds. Israel is focused on breakthrough product innovation; Chinese-style incremental innovation seems just too boring for Israeli entrepreneurs. What can we learn from China, in this area?

Breznitz: “First, we can learn from China one important lesson and that is how to diffuse the fruits of our economic success wider. It is apparent that in Israel we have a severe case of a dual economy. Much of the non-high-tech business sector has not gained in productivity at all and enjoys limited, if any, positive spillovers from the high-tech sector. One important lesson from China is that innovation is not limited only to the very high-end novel technology-inventing sector.

“In Israel, innovation should be seeded throughout the economy in all sectors, enhancing productivity and invigorating industries that might not seem fashionable, but are huge and quietly growing worldwide. It should be alarming to all of us that at the end of the day, almost the entire Israeli high-tech miracle is in ICT (information and computer technology).

It is time that the Israeli genius found ways to widen our portfolio.”

“In Israel, apart from the Office of the Chief Scientist (which does an amazing job supporting some of the traditional industries, with very little resources and almost no political support), we live under the dangerous illusion that innovation equals invention, and that through NASDAQ initial public offerings of stock (IPOs) all the economic illnesses of our society can be solved. If we are the nation of innovation, the “start-up” nation, we had better employ it widely throughout all sectors of our economy and in all stages of production.”

“Run of the Red Queen” has a vivid example of Breznitz’s argument.

China’s coastal Guangdong province, opposite Hong Kong, is widely regarded as the center of China’s backward sweatshops; its major city Shenzhen has thousands of them. But a closer look at this region, known as the Pearl River Delta (PRD), reveals a different reality. Guangdong Province provides 19 percent of China’s total patents, and three-eighths of China’s high-tech exports.

“Three of China’s leading information technology innovators are in the PRD: Huawei, ZTE and Tencent,” Breznitz and Murphree write.

“Huawei and ZTE are the only Chinese telecommunications equipment companies feared by multinational executives for their in-house R&D capabilities. The PRD is the only region where one can discern growing industrial clusters whose operations resemble those of celebrated northern Italian industrial districts in form, function and capabilities.

By following “run of the Red Queen” logic the region has become at least as successfully innovative as Beijing and Shanghai. It has done so by building from the bottom up – from production to industrial engineering, design, development and research. As one PRD engineer said: ‘So long as there is improvement or new features, it counts [as innovation]; we do not need to come up with a wholly new product.’”

The Report: What must Israel do in order to reinvent its high-tech ecosystem and run faster, just to stay where it is?

Breznitz: “The very first lesson from China is: Invest in education and human capital! This is even truer in the case of Israel. Our continued economic success for the foreseeable future is based solely on our ability to excel at the very cutting edge of science and technology.

“It is therefore, shocking that we have been neglecting our education system for so many decades. If a Chinese official were hired to consult Israel on building sustainable prosperity, he would have been stunned to realize how little care we take to ensure that our competitive advantage in human capital is maintained. This is especially the case, because ICT seems to have reached maturity. Let us not forget that much of the investment in ICT, and many of the inventions and products sold by Israeli companies, came about as derivatives of the defense establishment needs and investments.

“It is not at all clear that the next large rapid innovation-based industry will be so intimately tied to the defense sector. The defense establishment cannot by itself foist another such transformation on the Israeli economy. In addition, even in Silicon Valley there are many who voice doubt that the financial system that excelled in the ICT industry – Venture Capital (VC) based on quick exits – is one that can support the next technological revolution. In Israel, even more than in the US, we rely on honing this VC financial engine to fuel our continued ICT-based growth.

“It might be the case that, similar to what was done in the past, we need a public policy aimed at building a new financial organization that can support different rapid-innovation-based niches, where time lags are longer and investment demands are significantly higher, if we want to see our great ICT success diffused to other sectors. In sum, we need to revamp our education and research system, train and infuse Israel’s economy with the needed skills and human capital for the future and to think of the proper financial institutions that would allow the transformation of those human resources into economic growth.”

In “Through the Looking Glass,” the White Knight saves Alice from his opponent, the Red Knight. He repeatedly falls off his horse and lands on his head, telling Alice of his weird inventions, such as anklets to guard his horse against shark bites.

Can Israel become more like China’s Red Queen and less like the White Knight? Israel, the start-up nation, prides itself on thinking differently.

Perhaps it is time innovative Israelis began to think differently, as Breznitz urges, about how they think differently. •

The writer is senior research fellow, S. Neaman Institute, Technion.

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