China’s Internet Giants, Innovation and Entrepreneurship: An interview with Edison Tse

You may listen to this interview from HERE.

Edison Tse is Associate Professor, Management Science and Engineering at Stanford University. He has published over 180 papers and in recent years has researched dynamic entrepreneurial strategy and the transformation of China’s production economy into an innovation economy. His most recent book is Do Good and Prosper: Interplay Between Philanthropy and Business Innovations. Tse is the Director of the Asia Center of Management Science and Engineering, which has the charter of developing executive training programs for executives in Asian enterprises, conducting research on development of the emerging economy in Asia and establishing research affiliations with Asian enterprises, with a special focus on Greater China: China, Hong Kong, and Taiwan. From 2004-2015, he co-directed various Stanford-China programs on regional industry and enterprise transformation that were attended by high level city officials from various cities in China and high level executives from Chinese enterprises. He was a co-founder and a Board member of Advanced Decision System (ADS), a technology company with emphasis on AI and advanced decision tools. Tse received his BS, MS, and Ph.D. in Electrical Engineering from the Massachusetts Institute of Technology.

Q1. Please introduce yourself and tell us about your current interests.

I got my Ph. D. degree in Electrical Engineering from MIT. In my early career, I worked in system control engineering and then I got interested in looking at economic and business dynamics through the lens of system dynamics. I joined the Engineering Economic System Department at Stanford and started my new research in the cross fields of economics, business and system dynamics. Later, the Department merged with Operation Research and Industrial Engineering to form Management Science & Engineering. Since 2003, my research interests have focused on the growth of the Chinese economy, and I followed closely the different phases of its development. My current interest is the development of an economic development model based on innovation theory instead of the traditional economic growth theory. With the current disruption due to geopolitics, I am also interested in exploring how nations and enterprises can manage the significant inflection point of this century – China/US competition – to achieve sustainable growth.

Q2. You’ve done quite a bit of research on China’s internet giants. What got you interested in them and how do you compare their business models and strategies with Western peers? Companies are often a reflection of the strengths and weaknesses of their home markets. What initial conditions helped create these Chinese companies and fostered their growth and development?

My interest in China’s internet businesses is part of my overall interest in China’s rise in economic power. As I pointed out in my book – Do Good and Prosper: Interplay Between Philanthropy and Business Innovations – while most successful Chinese internet companies replicated US internet companies’ business models and adapted them to the unique China environment, their expansion strategies were completely different from their US counterparts. US internet companies tended to expand their business models to different parts of the world, while Chinese internet companies tended to “dig deep” into the Chinese consumers. Technological advancement is often the strength allowing US internet companies to succeed, while empathy with the customer is the strength that enables Chinese internet companies to succeed. Because of the creative imitation culture in China, a great idea will quickly be imitated and thus cannot be sustained. In the long run, however, deep engagement with customers will give the company a competitive advantage and becomes the driver for sustainable growth.

Based on my research on the rise of China’s economy, I would say China’s economic growth is not based on conventional economic growth theory, but rather, based on entrepreneurial innovation theory. The drivers of China’s economic growth have changed since the opening up period. The first period was roughly from 1978 to 2005. Within this period, infrastructure was built to attract foreign investment to build up the domestic supply chain to support the outsourcing strategies of Western firms. Creative imitation as a corporate culture was developed in Chinese enterprises to replicate success in one region to another region. Within this period, the domestic consumer market was also growing rapidly. This laid the foundation for the second phase of growth, which was driven by internet businesses.

Q3. The Chinese government has taken a stronger line around regulating and overseeing the internet economy and its leading companies. This is linked to a growing belief by the government that data is a new factor of production and should not be monopolized by private corporations. How do you view the actions of the Chinese state and how might this impact the long-term development of the internet sector?

The Chinese government has adapted the approach of first encouraging small scale experimentation, and then assessing the impact to society based on the actual outcome of these experimentations. This is a different approach from using analysis based on economic theory, debating the assumptions, and then making assessements on the likely outcomes to derive “optimum policy”. If the overall balance of the outcome is positive then they develop policy to support it; and if the overall balance of the outcome is negative, then the government will take a strong hand to regulate the situation. This certainly creates a lot of unforseen uncertainties to private firms and many will get hurt in the process. The successful entrepreneurs in China factor this into their business development, develop the ability to recover quickly from unexpected difficulties and thrive in the face of change.

Because of network effects, internet businesses are, by their nature, winner take all situations and thus monopolistic. The government has taken a stronger line around regulating and overseeing the internet economy and its leading companies, mainly to regulate their monopolistic power to balance the social benefits. Monopolistic power in itself is not bad. A monopolistic firm would have more resources to invest in new technology and initiate new business development. Most of the State Owned Enterprises (SOE) in China enjoy monopolistic power, but they are also under government control in allocating resources to balance social benefits. But for a private enterprise with monopolistic power, it may allocate resources to further its monopolistic rents and create imbalances in social benefits. For example, a large SOE like China Mobile will invest in building base stations so as to have complete nationwide coverage in China, including unprofitable areas with small populations, to offer full wireless services to all regions. In contrast, in the US, many less populated regions would not have sufficient base station coverage and have poor or even no wireless services. For an internet company, which is a private company, to engage actively in philanthropy and poverty alleviation is an important signal to the government that it is allocating some of its monopolistic power to do good for society and will work collaboratively with the government to achieve its social benefit goals.

Q4. More generally, how do you regulate companies that have such a dominant position in a market, who have effectively created their own networks of trust, payment, logistics, communication, financial services, etc., and are also necessary for the delivery of government services and even philanthropy? What is the right level of regulation, especially in light of the enormous data resources they control and the growth of machine learning and related AI developments?

This is an interesting and important question. I think the main issue is how to control the monopolistic power of a private firm, regardless of where the monopoly firm derives its power. Common approaches to controlling monopoly power are antitrust laws, price capping and other policies that directly reduce the negative impact of monopoly power. Applying these to control the use of data is very complex because the value of data is too abstract and hard to define. What is the value of personal data?

Following on the points in question 3, maybe another way to control monopolistic power is to steer the firm to leverage its monopoly power to do good for society and to work with the government to achieve welfare objectives. Make it clear to the private monopolistic firms that if they leverage their monopoly power to offer public goods and support national goals to a certain level, which can be measured with some metrics, the government will leave them alone. In my book, I discuss the network effects between philanthropy and business innovation, which is quite interesting. So, this may be an interesting approach to deal with the monopolistic power of a firm. Is China using this approach? I think it is worthwhile to explore this further.

Q5. Staying on the AI theme, as someone with a history in system and control engineering and advanced decision tools, what are your thoughts on the future impact of machine learning and AI on engineering and manufacturing? What will the future look like and in your view, is China or the US better prepared for this future?

AI advancement has two fronts. The first front is the breakthrough, like machine learning, deep learning, and generative AI. The second front is the implementation of the technology to derive commercial value. The breakthrough relies on elite AI researchers at the forefront, while implementation relies on an army of top tier engineers and massive data and computation power. AI technology extracts knowledge from data. One can classify different types of data depending on the usefulness of knowledge extracted from the data. For example, data can be regional dependent if the knowledge extracted from different regions are different. How consumers behave in China is different from consumers in the US, as consumer behavior is itself regional dependent. Knowledge extracted from data in the US may not be useful in China. In fact, this also helps explains why most US internet firms failed in China.

The usefulness of knowledge extracted from data may also have a life span, and we can classify data based on its useful life span. The usefulness of knowledge extracted from scientific data has a very long life span, while the usefulness of knowledge extracted from production data depends on the production technology, and thus have a shorter life span. But, when compared to market data, production data has a much longer life span because consumer behavior depends on many factors that may change rapidly as compared to rates of technological change.

AI applications and data collections have positive network effects: more data collected will increase the usefulness of AI applications, which will increase efforts in data collection and thus create network effects. But the usefulness of AI applications depends on the useful life span of the data. So for those AI applications that have short life spans, it may not be cost effective to implement the AI applications. It may have to wait for the next breakthrough for those applications with short life spans to become viable.

The US currently has an edge in AI breakthrough technology as compared to China. On the implementation front, however, it depends on the different application areas. While the US has a competitive edge in advanced AI chips, for most AI implementations, the amount of historical data determines the competitive edge rather than the computation power. Take the semiconductor industry, for example. The US and its allies have more historical data as compared to China and thus the US has an edge in AI implementation in the semiconductor industry. For rare earths, battery production and many traditional forms of manufacturing, China has a competitive edge in AI implementation because it has more data. Production data for manufacturing is regional independent and the knowledge derived from one region can be applied to other regions. For ChatGPT applications, the US has a competitive edge in English speaking regions, and Baidu’s version has an edge in China. Since English speaking is more common in many countries, the US therefore has an overall edge.

Q6. China has become a world leader in many sectors (EVs, batteries, solar/wind, eCommerce, chemicals, manufacturing, etc.). These industries do not sprout from nothing and are not simply the result of government support. What do you see as the key drivers for their emergence, and do you see China’s dominance growing or diminishing over time?

As I mentioned previously, technology advancement has two fronts: one is breakthrough and the other is implementation. Breakthrough requires out of the box thinking, challenging authority, and freedom in thinking. Implementation requires searching for optimal solutions within a box, following authority in implementing the optimal solution, and having harmony in the workforce. Breakthrough gives you first mover advantage in applying the technology, but it is the implementation that determines the final winner in exploiting the technology advancement. Both breakthrough and implementation are risky propositions, but the nature of the risk is very different.

China is not good in breakthrough technology but very good in implementation. Breakthroughs in EVs, batteries, solar/wind were not in China, but China took the lead in implementation. Many upstream technologies that convert raw materials to core upstream components are typically energy intensive, labor intensive and environmentally unfriendly. After the opening up of China, the US and many developed countries outsourced the refinery of raw materials to core upstream components to China. This enabled China to build up core competencies in refining all sorts of raw materials to different up stream core components, and also developed technology to reduce the negative enironmental impact. This has built up high barriers to entry for the US and many developed countries that want to re-enter the market again.

Q7. Entrepreneurs are heavily influenced by the cultures in which they operate. As someone who has worked with entrepreneurs in both China and the US, what are the competitive advantages and disadvantages that you see in both countries, and how do these shape the entrepreneurs in each place?

The breakthrough versus implementation concept I’ve mentioned previously is a useful lens to compare entrepreneurs in both countries. Both breakthrough and implementation are risky propositions, but the nature of the risk is very different. The risk associated with breakthrough technologies is an unquantifiable uncertainty because it is trying to create something new that did not exist previously. The risk associated with implementation is intense competition where many competitors are doing the same thing. Many people only relate innovation with breakthrough technologies, but there is as much innovation in implementation as there is in breakthrough, but the nature of the innovation is different. In my view, US entrepreneurs are more competitive in breakthrough while Chinese entrepreneurs are more competitive in implementation.

Q8. How did China make the shift from a production to an innovation economy, and how is innovation fostered and disseminated? In contrast, where has innovation in China failed to take root or been limited by cultural or political factors? Is China’s experience unique or is it a paradigm other countries might want to emulate?

I would break the rise of China’s economy into three phases covering the shift from a production to an innovation economy. The first phase was from the opening up to around 1998. Within this period, the driving force was infrastructure development by the State Owned Enterprises (SOE) that created an environment that encouraged and supported foreign investment and private enterprises to engage in Original Equipment Manufacturer (OEM) production that supported developed nations’ outsoucing strategies. In the process, China built up supply ecosystems for various industries, and created the domestic demand market.

The second phase was from the rise of internet companies in 1998 to around 2018. Within this period, the driving forces were private internet companies fulfilling the growing demand of the domestic market. There was little technology innovation, and their initial successes were mainly through creatively imitating US internet companies’ models and adapting them to the China market. After their initial success, they took a more innovative approach to expand the internet market in China through deep dives into user engagement and innovation beyond what the US internet companies were doing. Within this period, China did not abandon the production activities that they built up in the first phase, but further expanded to build up pockets of supply ecosystems that strengthened their competiveness in traditional production industries. China also built up its upstream core component supply ecosystem that would support downstream product innovation. In this period, China also built out its high speed train network to further improve its supply chain network and domestic market expansion.

The third phase was government supported initiatives in technology innovation that slowly shifted from the production economy to an innovation economy. The government provided subsidies and funding, and the private enterprises like Huawei, ZTE (partially State-owned), BYD, CATL, Tongwei Solar, DJI and many others took the lead in implementing advanced technologies to make advances in telecom, EV, batteries, green energy, drones, and many other production industries. The success of these companies relied heavily on the rich supply ecosystems and supply chain infrastructure developed in the first and second phases. The growing domestic market also played an important role in their success. During this period, many internet companies like Alibaba, Tencent and Baidu also took the lead in AI applications and cloud computing.

Up to the present time, China’s technology innovation has been mainly in implementation and very little in breakthrough. This may be, in part, because of its culture. Chinese are very entrepreneurial and they are not afraid to take calculated risks. A stress on discipline, harmony and humbleness make them more competitive in managing implementation risks but less competitive in managing breakthrough risk. For Chinese entrepreneurs, if they can buy the breakthrough technology, why would they bother to invest in technology breakthroughs themselves?

Q9. Advancements in many fields are driven by the free and open exchange of information and ideas. Are you worried about growing friction between China and the US and its impact on scientific collaboration and technological innovation? As someone who has straddled East and West, do you see the days of cooperation coming back or is that unlikely?

In many respects, the US and China should be perfect partners in economic and business development. Working collaboratively, the two countries can extract much more value from technological breakthroughs that would benefit both countries and the whole world. The friction between China and the US will negatively impact all aspects of technology innovation, from its discovery to its implementation and widespread adoption. Restricting the sale of breakthrough technologies to key end user markets with world-class implementation capabilities like China will reduce the overall incentives for these technology breakthroughs, which will ultimately reduce the growth of the world economy. The geopolitical tension is caused by the rise of China that threatens US hegemony. While the US wants to maintain its hegemony to keep a unipolar world, China is trying to create a multipolar world. Unfortunately, this conflict is likely to continue for many years until both sides see a way to compromise their goals.

Q10. During the 2022-2023 school year, nearly 290,000 Chinese students studied in the US, of which grad students accounted for around 126,000. STEM disciplines are among the most popular for these students. By contrast, the number of Americans studying in China was a few hundred. Do you see Chinese students wanting to return to China to pursue careers or would many prefer to stay in the US? What are the push and pull factors in your experience and has that changed as US/China relations have deteriorated? Do you foresee a future where STEM students from the US and other countries might go to China to pursue graduate studies?

I think this highly depends on which country will provide better growth opportunities for these Chinese students. In the 1970s and 80s, most Chinese scientists and engineers who graduated in the US stayed in the US because the country offered the best career growth opportunities. In the mid 80s, TSMC was established in Taiwan and many Chinese in Silicon Valley, especially those that came from Taiwan, found new opportunities and went back to Taiwan; effectively straddling between Taiwan and Silicon Valley. I anticipate the same dynamic to play out in the China situation. The factors for Chinese in the US to return home would be whether the country can provide an environment that will allow scientists and engineers to pursue their vision, and if they can build wealth and be respected by society.

Q11. What are your thoughts on the growing intrusion of geopolitics into the world of technology and innovation? As the two leading global economies, is this just an inevitable aspect of US/China competition, and if so, how do teachers, researchers and practitioners navigate this new reality? Do you personally feel it has become more difficult operating between the US and China?

After World War II, the world became a bipolar place where the US and the Soviet Union operated as the two opposing hegemonies, but were essentially decoupled. In 1989 when the Soviet Union collapsed, the world changed from bipolar to unipolar, and the US became the only hegemon. This allowed the US to pursue liberal hegemony: using its unique power to bend the world towards its preferred ideology of democracy, free markets and human rights. During this period, US enterprises pursued outsoucing strategies to take advantage of the open free markets to produce quality products at a low price that benefited US consumers and enterprises. Many traditional supply ecosystems were moved out of US and most of them were moved to China. So after 1989, while the US was busy fighting wars and many supply ecosystems moved out, China was quietly building up the supply ecosystems for almost every industry. Obama was concerned by the trend and started to pivot to Asia.

Historians like Thucydidies advocate that when an emerging power threatens to replace the existing hegemon, war is very likely to happen. The existing great power will do everything to maintain its hegemony while the emerging power will want to demand a bigger say. In this nuclear age where both sides have enough nuclear stockpiles, both sides will not want a military war. But, an intense form of zero-sum competition among the two to gain a leadership position in technology, economics, finance and scope of influence will be unavoidable. This is an inflection point that everyone is facing in this era. Of course we all will find it difficult operating in this era. This era will only end when both realize and accept that zero-sum competition will only hurt both sides and a win-win paradigm would be a better path to peace and global development.

Q12. Please share any favorite books, blogs, podcasts or other resources that readers could use to improve their understanding of entrepreneurship, China’s internet economy, innovation or other related topics.

I wrote a chapter “Is China Ready for the Next Disruptive Innovation?” in a book Shifting Gears in Innovation Policy: Strategies From Asia, edited by Y.S. Lee, T. Hoshi and G. W. Shin; published by the Stanford Walter H. Shorenstein Asia-Pacific Research Center. This chapter describes in more detail China’s three phases of growth. Each growth phase initiated a disruptive innovation that changed the main drivers for growth in China. A good YouTube podcast on China’s new economy that I enjoyed is “Chinese New Economy and Globalisation – The Sequel” by Dr. Eric Li. Has China Won? : The Chinese Challenge to American Primacy by Kishore Mahbubani is a good book that sheds some light on current geopolitical tensions between the US and China. A book that gives a good discussion on the intense competition of internet companies in China is AI Super-Powers: China, Silicon Valley and the New World Order by Kai-Fu Lee. For understanding innovation and entrepreneurship, reading case studies of iPhone, Windows, WeChat, Dropbox, Alibaba, Tencent, Airbnb, Apple, IBM, Dell, Intel and many other products and companies would be very useful.

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