Clayton Christensen: ‘China’s Growth Will Force an Innovation Competition with the West’

Disruptive innovation is best described as a process "by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market’, eventually displacing established competitors," according to the website of Harvard Business School professor Clayton Christensen. An experienced entrepreneur, Christensen has launched three successful companies and is the author of five bestselling books, including The Innovators Dilemma and most recently The Innovator’s Prescription, which examines healthcare systems. He is the founder of the consulting firm Innosight and the investment firm Rosa Park Advisors, which both build on disruptive innovation frameworks.

Considered the world’s foremost authority on the process of disruptive innovation, Christensen discusses with Arabic Knowledge@Wharton his reaction to the Arab Spring, how India and China are developing their economies, and where the next wave of disruptive innovation will come from. Corruption remains a concern for India and China, Christensen notes, but adds the greater economic stress impacting China is its rapid growth. To keep pace, he says, China will soon need to compete with the West in the innovation of products.

An edited transcript of the conversation follows.

Arabic Knowledge@Wharton: Last year, you spoke at a CEO forum in the United Arab Emirates, focusing on disruptive innovation and growth opportunities in those regional markets. Considering the Arab Spring, what has developed?

Clayton Christensen: I recently had two conversations, one with an executive from Singapore and the other with a Marxist economist from China. Both agreed that to create a society that is peaceful and prosperous, [with benefits even reaching] lower income people, then there are two conditions that must be met. You have to identify the rules that everybody has to follow in order for the system to work; you need to view other people’s life and freedom the same as your own. Then you must have a mechanism to hold people accountable if they don’t follow the rules.

My friend in Singapore said, "One option for achieving that kind of society is to do what Singapore did." He puts his arms around this synthetic nation that was comprised of four different ethnic groups, and they hated each other. He said, these are the rules and there are clear rules. And the mechanism for holding people accountable is a strong fist, and if you are caught, you are held accountable with justice or punishment.

My friend from China said, now you Americans, you have chosen the other option, which is democracy. He pointed out democracy only works if there is a religion underneath it that has the power to articulate these same rules. Moral people voluntarily obey the rules. It actually doesn’t matter whether there are police or courts that will catch you, because you believe God will hold you accountable. And the religion, that has to have a pervasive influence over people’s choices so that they voluntarily obey even unenforceable rules.

But between the two conditions, if you have democracies where people actually don’t believe that God will hold them accountable, or believe the government will catch them, then there is this middle ground that’s just filled with corruption, and those are the nations where poverty and violence persists.

So I think it’s not clear if the [Arab Spring] will make the possibility of disruption any more probable than it was in the past. What needs to happen is either democracy emerges, or a sense that people will be held accountable either by a deity or an honest dictator like [former Singapore Prime Minister] Lee Kuan Yew, who just makes rules and everybody’s got to follow them. That’s a long way of saying, ‘I’m not sure that I could predict if they would put such a foundation in place.’ But there are tremendous opportunities to grow disruptively.

Arabic Knowledge@Wharton: What are some of those opportunities? One thing you have asked before is why hasn’t the Middle East used Africa to disrupt?

Christensen: There is the automobile market in Africa, historically comprised of used cars imported from the U.S. and from Europe. Now, it’s the Chinese; three different car companies in China have just blown out all of the European cars from Africa, bringing in small, low cost cars that are new and reliable. Another successful company in Africa was the wireless firm Celtel that developed a functionality to exchange money from cell phone to cell phone rather than having to build physical bank branches in rebel or rural areas. Again, considering the Middle East, there is Islamic finance, which places businesses under different rules. You have large numbers of people who aren’t bound by these rules, and you could figure out how to do the same thing wirelessly. But it just isn’t there. The people who are in the financing business, they want to bring services for the wealthy, not for the rest of the population.

Arabic Knowledge@Wharton: You’ve also talked about India’s corruption struggles and how they are slowly becoming cleaner as they deregulate. In terms of India versus China, what are your thoughts on how each country is coping with corruption and how that’s impacting their growth and innovation?

Christensen: I don’t have my finger on the pulse of corruption in China, but I think most people on the ground would say that as China was emerging from communism it was a very regulated society and therefore it was very corrupt.

But as they have deregulated the economy, there just aren’t as many opportunities for people to be corrupt. China has become a more efficiently lubricated capitalist economy.

In India, there is a huge difference. India’s prosperity is sectioned by geography, such as in Bangalore, where the information technology industry is prominent. Because they have a conduit out of India, competing in the world by the Internet, it’s not regulated in corrupt ways and it is very prosperous. But the physical economies of India, where products have to get to ports to get out of the country, it’s not nearly as robust. It’s improving but they still need to keep pushing ahead.

Arabic Knowledge@Wharton: To what extent would you say that China is a disruptor? To what extent can China be controlled?

Christensen: What will happen is the next waves of disruption will come from countries such as Vietnam and other Southeast Asian countries that are not thoroughly corrupt. But because China is growing so fast, they are now starting to feel the impact of their policy on population control. Wage rates are going up at a very fast rate… I don’t know who else can join them, but this will force China to not just knock off designs from the West. They’ll have to compete on innovation as well, because other countries can take the low end.

Arabic Knowledge@Wharton: For countries in the developing world, especially where entrepreneurs can’t compete with cheap Chinese imports, is shutting borders a solution?

Christensen: Well, shutting borders will help a few wealthy people preserve their wealth. But there’s no evidence that I know that shows shutting down borders helps your economy grow. Look at what happened with India during the first three decades after their independence, where they essentially wanted to keep imports out so that they could develop their internal industries. None of those industries became engines for economic growth. They were all inefficient and served India very poorly. It wasn’t until things opened up that the local economies prospered. History is pretty strong on that question.

Arabic Knowledge@Wharton: Saudi Arabia is trying to build up its local workforce by giving incentives to big multinationals to train their local employees. Is that an effective strategy?

Christensen: There are companies trying to build business within Saudi Arabia, and what they find is that if they try to bring on locals and teach them how to become senior executives, they just don’t show up to work. They are not predictable as to when they’ll come in and how much of their hearts are into that opportunity. I don’t know why this is so. It’s really hard to predict, but there is the requirement that you have to employ a certain number of domestic citizens.

Arabic Knowledge@Wharton: Your newest book is on heath care. Do you think there is a global opportunity to profit from its innovations? 

Christensen: It’s possible, but again, it will happen only with disruption. If Saudi Arabia uses its wealth to replicate the American healthcare system on the Arabian Peninsula, it won’t create growth. It will only create local or regional services for the wealthy. But if there are companies focused on disruption, utilizing technologies that enable nurses to do things that in the United States require expensive doctors, it will make good health care available to the hundreds of millions of people who don’t have access to it. So there are tremendous growth opportunities there, but it’s not by replicating the American system. It’s by disrupting.

Arabic Knowledge@Wharton: At the World Innovation Forum [in New York City this past June], you made a couple of statements, such as how solar innovation will happen in the developing world. Could you elaborate more on why?

Christensen: Go back to [the wireless payment provider in Africa that I spoke about.] They had the insight that the vast majority of the population was without a mechanism for secure payments. It was all done with currency, and each of those transactions had the risk of corruption… The companies that will succeed now are those with people who just live with the people and understand what life is like and what they are trying to accomplish, and figure out a way to help them live more effectively.

Arabic Knowledge@Wharton: From your personal experience, being someone who adheres to his values [In the 1970s, Christensen was a missionary for the Church of Jesus Christ of Latter-day Saints in the Republic of Korea, and is currently a leader in his church] what advice would you have to offer people that may feel a bit conflicted about following that path?

Christensen: Do not be deceived by impostors. I remember a number of years ago, a group of Chechen terrorists took over a school and in the process over 300 people, including students, were killed. A British journalist somehow got her way into that group of terrorists and interviewed the leader. This guy claimed in the 1960′s to have worked for Che Guevara in Bolivia. The journalist asked him what was his cause, what was it that brought him to take this school hostage with hundreds of children? It turned out he knew nothing about Islam. He was just carrying a banner so that he could accomplish his own purposes.

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