Globally, innovation is top of mind for CEOs and for many national leaders as well. But innovation has particular significance in China, where it is viewed as the critical lever for moving Chinese companies and indeed the country beyond traditional bases of competition into more sustainable, differentiated growth in China and globally.

Leveraging the 2006 IBM CEO Study, this report provides a view of how Chinese companies are embracing innovation to become more competitive and highlights unique challenges they must overcome. Foreign companies need to understand China's innovation agenda and assess how they can participate in and contribute to China's innovation journey for mutual benefit.

Our interviews with 100 CEOs in China reveal that the innovation priorities are largely the same for Chinese CEOs as they are for their global peers. The differences largely lie in the tactics of why and how Chinese companies innovate, reflecting China's ongoing transformation and rapid economic growth.

Many Chinese companies have focused innovation efforts on increasing revenues as opposed to reducing costs. Innovation is typically centred on one of the following three focus areas: products/services, business models and operations. In the short term, such 'siloed' innovation strategies are helping to improve agility and enable companies to capitalize on growth and expansion, which is a focus for most Chinese companies.

Our global research shows that a broader and more comprehensive approach to innovation will be required for future success. In our discussions with Chinese CEOs, they revealed strategies to transition away from 'siloed' innovation tactics to more comprehensive innovation embracing all three components of innovation. Having completely transformed the world's manufacturing landscape in less than two decades, we expect that Chinese companies will likely be making this leap to broader and more integrated innovation with equal speed.

China's innovation agenda represents much more as a huge opportunity rather than a threat for foreign companies. Leading foreign companies are aligning their business strategy to benefit from China's innovation initiative, making significant R&D investments in China, looking within China for new ideas and exploring new business models to collaborate with their Chinese peers for mutual advantage in China and globally. It is those that embrace and participate fully in China's innovation agenda that will benefit most from it.

This white paper was published in April 2007.