Innovation in China's furniture industry.

Abstract

Innovation is considered the ultimate drive for business success. In the face of a fast-growing Chinese furniture industry, low-cost advantages have been widely acknowledged by industry observers as the main advantage for Chinese manufacturers in global competition. The industry's

innovation capabilities are, however, less studied. This study explores the industry's recent development and measures its innovativeness via a combination of qualitative and quantitative approaches. Management-level interviews were conducted with 18 Chinese companies known as innovation leaders. Based on this first, qualitative stage of the study, a quantitative, second stage gathered data from 120 respondents at a large, China-based trade show. Correlations among four key variables of interest--innovation, competitiveness, company size, and export intensity--are assessed. Results suggest that Chinese furniture firms are pursuing innovation with three equal focuses on product, process, and business systems. Incremental innovation is more pursued by the Chinese firms than radical innovation. Judging from innovation sources, a responsive-type market orientation has been adopted by the industry. Innovation is significantly correlated with competitiveness and company size, suggesting that large firms are likely to become innovation leaders which may, in turn, improve the overall competitiveness of the industry. The industry is known for its high export intensity; however, export intensity is only found to be correlated with process innovation, suggesting that gaps between the domestic and overseas markets are narrowing in terms of product and business strategies. An innovation-profitability relationship, which has been widely acknowledged in the literature, was not found in this study. Implications are discussed.

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In 2003, China had grown into the world's third largest producer and the second largest exporter of furniture products (CSIL 2003). From 1995 to 2004, China's total furniture production increased by 470 percent (or 17% on annual basis) in value, from $6.8 billion in 1995 to $32 billion in 2004. During the same period, furniture exports grew at an annual average growth rate of 25 percent, and furniture has become the nation's fifth largest export commodity, with roughly one-third of the industry's total production being exported every year (CNFA 2003, 2004, 2005) (Fig. 1).

[FIGURE 1 OMITTED]

To obtain a better perspective on the Chinese furniture industry, major industry statistics of Chinese and U.S. furniture industries are compared in Table 1. There are reportedly 50,000 furniture firms with over 5 million employees in China (CNFA 2005). The U.S. furniture industry, consisting of 21,000 firms and 561,000 employees, is much smaller in size, but it is many times more productive than its Chinese counterpart. In 2004, the U.S. furniture industry's total value of shipments reached over $80 billion (U.S. Census Bureau 2005), 250 percent of the output of the Chinese industry in terms of value.

In terms of firm location, over 80 percent of the Chinese firms are located in China's southeastern and southern provinces (i.e., Guangdong, Fujiang, and Zhejiang) along the coast--the country's most economically developed region and largest exporting base (Fig. 2). The U.S. furniture industry is clustered to a much less extent, where the top five states (i.e., California, Florida, New York, Texas, and North Carolina) host only 37 percent of the industry population. Firm location bears a close relation with export propensity and intensity in China. Firms in coastal areas enjoy several advantages over those located in interior areas, including transportation convenience and higher availability of production factors, such as technology, skilled labor, information, and foreign investments (Zhao and Zou 2002).

Despite a high degree of geographical concentration, the industry is rather fragmented in terms of market share. The industry consists primarily of small-sized companies of less than 100 employees and 90 percent of the industry's total production takes place in medium- to small-sized firms (CNFA et al. 2005). The top 10 Chinese furniture firms account for less than 3 percent of the total market (CNFA et al. 2005). This number compares with 40 percent in the U.S. furniture industry (Anonymous 2004a).

Table 2 summarizes key contributors to the success of the Chinese furniture industry as identified by industry researchers. Most of the "success" factors are attributed to the industry's low-cost production, as well as external incentives, such as government subsidies, foreign direct investments, and the booming domestic and overseas markets.

Little attention, however, has been paid to the industry's internal sources--innovation abilities--which might provide a direct mechanism to the industry's success and become its new advantage in the future. New industry movements by Chinese furniture firms are frequently reported by the media. A case in point is that an increasing number of Chinese furniture manufacturers are developing strategic partnerships with U.S.-based marketing and design firms in a bid to boost exports (Russell 2006). This indicates that Chinese exporters are moving forward to close the gap between manufacturers and local consumers, with better products and a better control of market channels. This is a remarkable evolution from the traditional open-ended market style exporting approach in that these Chinese firms are stepping into higher value-adding areas of export marketing and new product development. They are no longer confined to raw material processing. As commodity and labor costs continue to rise, Chinese manufacturers and exporters must improve productivity and increase product value to remain competitive. Automation, new product design, and sophisticated business strategies (e.g., branding and export marketing) are perceived to be central to the content of innovation pursued by Chinese furniture firms to thrive in the global competition.

This study, therefore, investigates innovation conceptually and in practice in the context of the Chinese furniture industry, based on a combination of qualitative and quantitative research approaches.

Theoretical background

Innovation--a cross-functional definition

Innovation has a broad array of definitions. In 1911, when Schumpeter published The Theory of Economic Development, he defined innovation as the motor of economic development (Schumpeter 1934). Five different types of innovation were distinguished in his book:

* new products,

* new methods of production,

* new sources of supply,

* the exploration of new markets, and

* new ways to organize business.

After Schumpeter, numerous innovation studies have been conducted over the century. Dewar and Dutton (1986) define innovation as "an idea, practice, or object that is perceived as new to an individual or another unit of adoption." Porter (1998) advocates that innovation is an important source of competitiveness, by which companies gain advantages through organizing and conducting value-adding activities in a new way. Three classes of innovation are also specified by Porter (1998): product, process, and marketing. In his view, advantages of innovation include creating mobile barriers, gaining new customers, surpassing imitation strategies, and achieving economies of scale (Porter 1998).

This type of cross-functional perspective of innovation has been employed increasingly in recent studies. Boer and During (2001) suggest that innovation is "the creation of a new product-market-technology-organization-combination (PMTO-combination)." Ulrich and Eppinger (2000) advocate that "marketing," "design," and "manufacturing" are the three key functional groups involved in the product development process, and their roles vary with each stage of the process from "planning" to "product ramp-up." In a later study, Krishnan and Ulrich (2001) identify four common perspectives existing within the design and development research community: marketing, operations management, organizations, and engineering design. Hovgaard and Hansen (2004) suggest that product (e.g., new product development), process (e.g., adoption of new or improved processing technologies), and business systems (e.g., management and marketing) are the three types of innovation in the forest products industry.

Product and new product development

In general marketing science, the concept of product has evolved from a "physical object" into what is known as the "total product." The total product includes such things as packaging, delivery, and other services associated with the firm's physical product offerings. Similarly, the concept of a total furniture product can be interpreted as a combination of value-adding processes along the industry chain, from raw material purchasing, furniture design, manufacturing, marketing, distribution, and after-sales services. Each area along the industry chain can add to the total product and provide differentiation opportunities (Levitt 1980).

New product development (NPD) is probably the most researched type of innovation. Benefits of successful NPD include achieving competitive advantages, increasing product value, and gaining more access to the marketplace (Bumgardner et al. 2000). It is the set of activities beginning with the perception of market opportunity and ending in the production, sale, and delivery of a product. NPD is an interdisciplinary activity, with "marketing," "design," and "manufacturing" as its three integral functions (Ulrich and Eppinger 2000), but it can also be defined as "the transformation of a market opportunity and a set of assumptions about product technology into a product available for sale" (Krishnan and Ulrich 2001). From an organizational perspective, NPD is the means by which the organization adapts and diversifies itself to adjust to changing technology and market conditions (Vazquez et al. 2001).

NPD is critical to furniture manufacturers, because the furniture industry is not only a commodity-type manufacturing sector but also a fashion-sensitive business. Shortening product life cycles and emerging new technologies provide market opportunities for furniture manufacturers who are able to develop better products, in a faster manner, and at lower costs.

Market orientation

Market orientation was originally defined as an organizational-level culture: a set of shared values and beliefs about putting the customer first in business planning (Deshpande 1999). Three schools of market orientation perceptions have been proposed by researchers during the recent past: a literature-based view, a field-based view, and an integrated view (Kohli et al. 1990).

From the literature-based perspective, market orientation is about integrating marketing activities with greater emphasis on the customer value than on production cost concerns (McNamara 1972, Kohli et al. 1990). It is about creating superior value for customers and attaining sustainable competitive strategies. The content of market orientation consists of three components: customer orientation, competitor orientation, and interfunctional coordination (Narver and Slater 1990). Deshpande (1999) also proposes three levels of market orientation:

* Culture--the shared set of values and beliefs regarding putting customers first;

* Strategy--creating superior value for a firm's customer; and

* Tactics--the set of cross-functional processes and activities directed at satisfying customers.

From the field-based perspective, three basic components of market orientation are identified, based on managerial interviews: intelligence generation, intelligence dissemination, and responsiveness (Kohli and Jaworski 1990). Three underlying core themes of the concept are: customer focus, coordinated marketing, and profitability (Kotler 2000, Kohli et al. 1990).

Kohli et al. (1990) propose an integrated view on market orientation by combining the two previous perspectives and define "market orientation" as a set of activities or behaviors relating to market intelligence gathering, dissemination cross-functionally within a firm, and the action of responses based on this intelligence. The firm's long-term focus on customers, competitors, and the changing environment are suggested as the three dimensions of market orientation (Deshpande 1999, Kohli and Jaworski 1990, Vazquez et al. 2001).

Strong, positive relationships among market orientation, innovation, business profitability, and new product success have been acknowledged widely in the literature. For example, Narver and Slater (1990) contend that market orientation is relevant for every market environment and is an important determinant of profitability for both commodity and non-commodity businesses. Vazquez et al. (2001) demonstrate the beneficial effects of market orientation on a company's innovation strategies and competitiveness. Narver et al. (2004) study the effects of responsive market orientation and proactive market orientation on new product success. They advocate that a business relying solely on responsive market orientation by addressing expressed customer's needs is not sufficient to create and sustain new product success. It is also important for a business to maintain a proactive market orientation, which addresses customer's latent needs. Baker and Sinkula (2005) reinstate a strong positive relationship between market orientation and new product success, under an expanded nomological network including profitability, market share, generative learning priority, and radical innovation priority. They also suggest that the influence of a strong market orientation on new product success and profitability may be limited if there is a lack of an efficient marketing function to coordinate resources and capabilities.

Innovation in China and the Chinese furniture industry

Studies concerning the role of innovation and market orientation on business performance were conducted mostly in the context of developed economies, with little known about China as a transitional economy (Deshpande and Farley 2000, Wei and Morgan 2004). Recent research suggests that both innovation and market orientation have positive effects on business performance in China as well. Wei and Morgan (2004) identify a positive direct relationship between market orientation and new product performance and contend that China and western countries share some similarity regarding drivers of new product success. Zhou et al. (2005) found that, in Chinese firms, innovation and market orientation positively impact employee job attitudes, such as job satisfaction and organizational commitment. Robb and Xie (2003) contend that minimizing costs will help Chinese furniture companies adopt advanced technologies.

In conducting this study, no innovation-related research was found in the context of the Chinese furniture industry. Even so, empirical findings suggest that Chinese furniture firms are actively pursuing innovation, which are new to the industry. These efforts are reflected in product design, employee training, industry organization, and marketing strategies. Furniture design-related programs are booming at all levels of Chinese educational institutes today, training at least 5,000 young professionals every year. This number compares to less than 100 about 20 years ago, when furniture design programs were first established in China. Product design is receiving increased attention by industry practitioners. Chinese furniture companies are frequently reported as participating in such activities as funding scholarships, design contests, and contracting with universities to secure future high-quality employees. Meanwhile, a trend toward industry clustering and specialization is in full force. Rapid development in infrastructure and logistic services has largely boosted the development of furniture production in China's interior areas, in contrast to the traditional industry base in the coastal regions. Numerous industry parks have been established with a clear emphasis on specialization. For example, eight towns and regions have been recognized recently by the China National Furniture Association as "distinguished furniture clusters in China," each focusing on a sector of the furniture industry chain, including exporting, trading, furniture raw material and accessories supplying, and specialized furniture production. These industry clusters originated from different backgrounds: some came into being spontaneously from family businesses, some were established by local governments, some are located in rural areas, and some are located in close vicinity to metropolitan areas (Chen 2005). Although most of these clusters are in the initial stage of development and are flaw-ridden compared to those in developed economies, it is hard to underestimate their potential. Very likely, in our view, these clusters, staffed by open-minded young professionals, will become the industry's innovation leaders as the main driver of the industry's growth in the future.

Study stage 1

Methods of stage 1

Due to a lack of innovation literature in the context of the Chinese furniture industry, this research began by conducting long interviews with senior managers of Chinese firms. The purpose was to understand innovation practices as described by industry practitioners, as well as identify key factors that influence innovation.

By definition, a case study is "an empirical inquiry that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident" (Yin 1994). Long interviews are an effective case study tool, in collecting qualitative data and making the data abundant and manageable (McCracken 1988). Selection of the appropriate informants is critical for the success of interviews. We conducted management-level interviews with 18 furniture companies across the country. These companies were identified by industry veterans as innovation leaders in either one or more of the following aspects: products, process, or business systems. Interview questions were structured around the following key concepts: innovation, new product development, market orientation, and competitive advantage. Key questions used in the interviews were:

* How would you define "innovation" and "innovativeness?"

* Overall, do you think your company is innovative? Why?

* Do you think your company is successful? Why?

* What is your product strategy?

* How would you define "new products?"

* How do you differentiate yourself from competitors?

* How do you maintain customers?

* How to become an order winner, based on your company's situation?

* How would you comment on the Chinese furniture market?

* How would you predict the industry's future development?

Following a structured interview protocol, all interviews were tape-recorded and careful verbatim transcription was performed. As the interviews were conducted in Chinese, translation was also performed. This resulted in 52 pages of single-spaced text. To begin, the entire set of interview transcripts were reviewed once thoroughly. With a refreshed memory of the interview content, researchers developed a coding scheme that outlined definitions of key concepts such as innovation, NPD, and competitiveness. The coding scheme provided a framework for the second stage of analysis, when interview transcription was carefully reread, and notes containing these key terms were copied under the appropriate concept in the coding scheme. By comparing and synthesizing the various definitions for each concept, key components were identified for measurement in the next stage.

Results of stage 1

Innovation.--Regarding the concept of innovation, most definitions made by interviewees followed a cross-functional approach and covered a variety of areas, including product, material use, marketing, technology, processing management, corporate culture, and employees. Respondents were generally positive toward contributions of innovation to success and competitiveness. Examples are:

"Innovation can be defined as new product development, it also results from each employee's participation ... Innovation can bring us higher management efficiency, lower costs, higher profits, smoother distribution, less warehousing, faster delivery ... innovation is the most powerful driver to company's sustainable development."

"Innovation should be viewed as a whole system ... besides product design, innovation could be defined from perspectives of marketing, corporate mechanism, business model, production, employee, and positions ... it [innovation] awards companies with new dynamism and core competencies."

"Innovation can be defined in terms of processing technology, production organization, and material use."

In general, innovation was perceived as a combined result from multiple sources. According to the managers interviewed, innovation can be achieved from the following areas: product, design, material use, technology, processing, employee, management, culture, information, customer, competitor, marketing, and distribution. This cross-functional view of innovation by practitioners is consistent with the view in the literature (Ulrich and Eppinger 2000, Hovgaard and Hansen 2004), which justifies a classification of innovation practices into three larger categories: product, process, and business systems (Fig. 3).

[FIGURE 3 OMITTED]

Innovation sources.--Innovation source is defined as where innovation practitioners get new ideas about products, processes, and business systems. They are drivers that gear manufacturers up to pursue innovation actively. To a certain extent, sources of innovation may also reflect a company's market orientation, in terms of responsiveness to customer needs. Based on interviews, a total of 13 factors were identified as common innovation sources and were empirically grouped into two larger categories: manager-driven factors and market-driven factors. Manager-driven factors refer to resources internal to a company including "upper management," "employees," and "R&D department," while market-driven factors refer to information sources external to company including "competitors," "retailers," "end consumers," "business customers," "trade shows," "educational institutes," "equipment suppliers," "raw material suppliers," "IT/software suppliers," and "trade associations."

NPD.--As previously discussed, NPD is considered the core of innovation by past research. Understanding product strategies of Chinese firms is instrumental to gaining insights into their innovation orientations. Characteristic views are:

"Our products are not the best in the market, we see our products as 'selected commodities,' which are better designed but affordable by most of the Chinese consumers."

"We change our products a little bit based on regular product styles (commodities) in the market. For example, we use specially designed hardware accessories to differentiate from competitors. But we just cannot afford to pursue too many such changes (specialties)."

"As an exporter, we are producing commodities of few varieties ... Focusing on production can help us achieve economies of scale ... Services and marketing tactics are rarely needed by exporters, because local sales agencies will take care of all of these issues. But things can be more complicated if we sell domestically."

Commodity-type products with lower costs were most produced by these responding companies, although some companies chose to develop specialty-type products based on modifications of commodity prototypes. An export intensity may influence company product strategies as firms which are highly committed to exporting (export-committed firms) tend to produce fewer product types than firms focusing on both domestic and overseas markets.

Definitions of NPD were made by respondents which reflect diversified product development foci. For example:

"Contents of new product development include applications of new materials, new processing technology, and new equipment."

"Two styles of new product development--one being market-driven, which means products are developed to meet existing demands ... the other being market-leading--products are developed as symbols of new lifestyles and to create demands."

"New products should be developed based on a company's unique resources and personalities. These are hard to be copied by competitors."

Further, a structured procedure for developing new products was mentioned by respondents. NPD is seen as a gradual process, or incremental improvements based on existing products, rather than "radical," "breakthrough" changes or developing "totally new" products. Characteristic comments were:

"Most of our R&D activities are continuous modifications of existing products ... or based on customer orders."

"We develop new products by following these steps: imitations--improvement--modifications--unique designs."

"Only by continuously improving the existing products in the market can we become stronger and more mature, and, after that, we can have enough resources to develop our own designs."

A majority of the interviewed managers are pursuing commodity strategies in their companies with "incremental improvements" or "modifications." Possible reasons could be a lack of market orientation or lack of motivations to make big changes due to limited resources. Thus, company size may be a potential variable affecting the innovation practices of Chinese firms.

Sources for new product ideas are consistent with those previously identified in the literature, including a mix of internal and external factors: consumers, competitors, retailers, trade shows, and company management.

Competitiveness.--Most respondents were confident in their competitiveness, and attributed their strengths to the following resources: cost leadership, technology leadership, new material use, and product quality.

"We use new materials and processing methodology to achieve lower costs and higher quality, as well as a differentiated processing ... Our profits come from (cheap) material use and good finishing skills."

"In earlier times, quality and automation were the key elements in determining competitiveness. But today, quality and automation are required, together with branding, corporate image, marketing, Corporate Identity system, and R&D and unique technology."

"Processing (technology) leadership, the technology we used is new to our local competitors."

Future development.--In the final stage of interviews, respondents were asked to comment on their company's future development. Results reveal that none of the respondents doubted the industry's potential to grow stronger in the future. Automation and technology were listed at the top of the agenda for innovation. Some respondents perceived market orientation, branding, corporate culture, product design, and good supplier relations (the business systems and product aspects of innovation) to be sources of competitiveness in the future. Meanwhile, value-added production was expected to be pursued increasingly in the industry. Mass customization as a future manufacturing model has been advocated by industry veterans in China; however, it has not been practiced widely by most companies interviewed. Example comments are:

"The Chinese furniture industry and market are simply characterized by supply chain and commodity market. Mass customization is based on highly sophisticated manufacturers and distributors (retailers), which don't exist today. The basic drive for a concept to be adopted by industry is market demands, which are not yet seen today."

"We manufacturers want to adopt automation ... we need to pursue innovation both internally to reduce costs and externally to improve market performance."

Study stage 2

Methods of stage 2

Based on the results from field interviews, research questions were developed to assess innovation foci held by the Chinese furniture firms, as well as to assess potential connections among four key variables of interest: innovation, competitiveness, company size, and export intensity. The research questions were as follows:

* What is the aspect of innovation most pursued by China's furniture industry: product, process or business systems?

* What are important innovation sources for Chinese furniture firms?

* Is innovation correlated with the Chinese furniture industry's competitiveness?

* Is export intensity correlated with either innovativeness or competitiveness of the Chinese furniture industry?

A paper-based questionnaire was designed and pretested during the WoodMac Show in Shanghai in February 2004. Seven fully completed questionnaires were collected from the pretest. Feedback suggested that non-response was likely caused by questionnaire length and lack of question clarity. Thus, we revised the questionnaire and shortened its length from three pages to two. We also revised questions and technical terms to better match Chinese thinking. Final data collection took place at the Shenzhen Furniture International Expo in March 2004, Shenzhen, Guangdong Province. Sponsored by the Shenzhen Furniture Association and held semiannually every spring (March) and autumn (August), products exhibited in the show were mainly upholstered and household panel furniture products, with 65 percent of exhibitors coming from Shenzhen and its neighboring areas. Past statistics indicate that the 4-day event attracts an average of 40,000 visitors, of which 53 percent are furniture traders (retailers and wholesalers), 15 percent material merchants, and 10 percent designers. Furniture manufacturers account for less than 13 percent (SZFA 2004). Three student helpers were hired and trained as interviewers for this survey during the 3-day show. In the show, a booth was set up and bottled water was provided as an incentive to booth visitors. Two hundred and sixty three responses were collected during the show, of which 120 were fully completed questionnaires from manufacturing firms. Incomplete responses could be attributed to unwillingness to answer, lack of relevant knowledge, lack of time on the part of respondents, and interruptions by incoming visitors to the booth.

Based on a 1 to 5 interval scale, where 1 represented "least important" and 5 "most important," 13 innovation sources were evaluated by respondents. Missing data were replaced with series mean. Respondents were asked to compare current and future (over the next 10 years) innovation in terms of three categories: product, process, and business systems. Ratings were made based on the 1 to 5 interval scale, with 1 representing "not innovative at all" and 5 "very innovative." Missing values were replaced by series mean. One-way analysis of variation (ANOVA) was employed to compare the means of the three innovation categories in the "current" and "future" groups, respectively. Borrowing performance measures from previous studies relating to market orientation (Slater and Narver 1994, 2000; Baker and Sinkula 2005), "sales level," "sales growth rate," "profitability," and "new product development" were used as four components of competitiveness. Each of these were self-evaluated by respondents based on the 1 to 5 interval scale. We used a composite of the four items and refer to that composite as "competitiveness," but also use profitability as a stand alone item. Pearson correlations were used to identify relationships among innovation, competitiveness, export intensity, and company size.

Results of stage 2

Respondents were classified into small-, medium-, and large-sized companies based on number of employees (Table 3). The sample was skewed toward large-sized manufacturers with employees over 250. This closely resembles the industry's regional characteristics of the region in which the data were collected, where companies are generally large-sized and highly automated. Manufacturer respondents were also classified into non-exporters, moderate exporters, and heavy exporters based on the proportion of export sales of total revenue. The sample was evenly distributed (Table 3).

Table 4 shows the mean scores for each innovation source. Trade shows, company upper management, competitors, and product designers were perceived by manufacturers as top sources for innovation. Given that this survey was conducted in a trade show, it is not surprising that trade shows were rated as the highest innovation source by respondents. Upper management is the second highest rated source with a statistically significant difference from the rest of the factors (p < 0.05). The fact that market-driven factors, such as competitors and customers, play a less important role than upper management in innovation suggests that the Chinese manufacturers surveyed are pursuing manager-driven innovation more than market-driven innovation. In the literature, manager-driven innovation refers to firms pursuing innovation through incremental improvements or by "closely approximating" leading competitors (Baker and Sinkula 2005). This echoes the findings from the field interviews that innovation practices within the Chinese firms are mostly "incremental" rather than "radical."

The second group of innovation factors consists of competitors, R&D departments, employees, end consumers, retailers, and business customers, which scored significantly higher than the middle point 3 (p < 0.05). The mix of manager- and market-driven factors suggests that the Chinese firms surveyed have adopted a certain degree of market orientation in their operations, though, based on information from the field interviews, this orientation might be reactive rather than proactive.

The role of educational institutes in innovation, which is considered as an essential part of the furniture industry's center of excellence (Schuler and Buelhmann 2003), was, however, perceived as of little value by Chinese industry managers. A possible explanation is a lack of efficient communication between educational institutes and industry practitioners in China.

Regarding comparisons between current and future innovation focus, no statistically significant differences were detected. In the end, aggregate innovation scores (i.e., an average of product, process, and business systems) of the current and future groups were compared, and future innovation was rated significantly higher than current innovation (p < 0.01) (Table 5).

No significant differences were detected among the four aspects of competitiveness. Relationships among the four key variables of interest--innovation, competitiveness, export intensity and company size--were analyzed using Pearsons correlations (Table 6). Strong correlation was found between both current and future aggregate innovation, and an aggregate competitiveness, which is an average of the four competitive measurements (p < 0.01).

For correlations between subcategories of each variable, current product and process innovation are significantly correlated with "sales level," "sales growth," and "new product development" (p < 0.05), but not with "profitability." Current business systems innovation has no significant relation with any of the four aspects of competitiveness. Weak correlations between business systems innovation and competitiveness suggest that Chinese firms are mainly relying on product and process innovation as the means of improving competitiveness. Little attention, however, has been paid to business systems innovation.

Export intensity is negatively correlated with both current and future process innovation (p < 0,05). This means that firms which are highly committed to domestic markets (domestic-committed firms) tend to be more innovative in process than export-committed firms, while no significant difference can be detected in the areas of product or business systems innovation.

Company size is strongly correlated with aggregate innovation and profitability. Successful innovation usually requires significant resource inputs. Results indicate that larger firms tend to be more innovative and profitable than smaller firms.

Profitability bears no significant correlation with innovation. This finding is contradictory to the mainstream belief in the literature, which advocates that innovation is essential to profitability (Baker and Sinkula 2005). The disparity between innovation theory and industry practitioners' perception on innovation reflects that the industry's fragmented nature and a low-cost/low-profit environment have significant impacts on the innovation-profitability relationship, where most firms are small- to medium-sized commodity-style producers with limited investments in innovation. Another implication from the disparity is that innovation may have longer-term profitability benefits but such benefits are not demonstrated immediately. Recalling Robb and Xie (2003), cost-saving is the main motivation for Chinese furniture firms to adopt new technologies. Chinese furniture manufacturers who have set a long-term goal of development are investing in state-of-the-art machinery, not only for image building directed to foreign customers, but also for cost-savings over the long term. They pursue innovation for long-term benefits.

Discussion

Results of this study suggest that Chinese furniture companies are pursuing innovation with three equal focuses on product, process, and business systems. Innovation is significantly correlated with competitiveness and company size, respectively, suggesting that large firms are likely to become innovation leaders which may in turn gain a better competitive position than smaller firms.

The Chinese furniture industry is heavily dependent on exporting and foreign investments. Export intensity, however, is only found to have effects on process innovation, which implies that the gap between domestic and overseas markets is narrowing in terms of the competition environment. Both markets require sophisticated product and business strategies for Chinese firms to enter. During managerial interviews, many manufacturers expressed that the domestic Chinese market is developing quickly and it appears to be more competitive than overseas markets, not only because consumers are demanding more--better designs, better quality, better services--but also in that domestic furniture manufacturers are facing increasing competition from locally sourced foreign brands and overseas imports, as China gradually opens up its market to foreign investors. In exporting, low price is no longer the only competitive edge for many Chinese exporters. As mentioned in the beginning of this paper, more and more Chinese exporters are developing better products and more sophisticated business strategies (e.g., seeking overseas marketing and design firms as partners) in a bid to increase market presence in foreign countries. The fact that the furniture industry has become a global industry has to some extent blurred the distinction between home and foreign markets in terms of competition environment. As we expect both domestic and overseas markets to provide momentum to the industry's future growth, innovation can be pursued equally by both domestic-committed firms and exporting-committed firms to stay competitive. Due to the negative correlation between export intensity and process innovation, we expect domestic-committed firms to become more innovative in processes (e.g., technology and automation) than exporting-committed firms in the future.

No significant correlation was found between innovation and profitability, which suggests that the industry's traditional low-cost/low-profit approach still has a profound influence on innovation. Due to limited resources, Chinese firms are mostly pursuing incremental innovation rather than radical innovation. Though upper management sees itself as the main source for innovation, Chinese firms are gaining a responsive market orientation focusing on both competitors and customers.

Last but not least, this study suggests that innovation is no longer a rare case in the Chinese furniture industry, though it is still confined to incremental forms. Looking into the near future, the Chinese furniture industry is likely to stay a low-cost, mass producer. Due to the industry's long and entrenched tradition of low-cost production and limited capital resources, Chinese furniture firms are unlikely to become dramatic innovators in the near term. The innovativeness of the Chinese furniture industry largely rests on its low-profit production philosophies. The "labor-tech intensive" manufacturing approach currently pursued by large-sized companies in Guangdong Province (Lei and McGowin 2002) may well represent the industry's future manufacturing approach. This benefits large companies in maintaining their competitive edge by being innovators, which in turn strengthens the industry's overall competitiveness. In the longer term, we expect that the motivation for lower costs will continue to play an import role in keeping Chinese firms along the innovation route, however, these innovation practices are likely to take place in relatively more dynamic forms pushed by global investors and advanced technology. A recent case in point is that Lacquer Craft, a large China-based, Taiwanese manufacturer purchased an upholstered furniture plant in North Carolina as its first U.S.-based manufacturing facility. Prior to this, the company had become a publicly traded company and had been exporting wood household furniture to the U.S. market under several local brands which it owns (Evans 2006). While China is quickly growing into a manufacturing powerhouse with increasing outsourcing and production migration from overseas, Lacquer Craft is pursuing local production in the United States. This is a rare case in the furniture industry and may be product-specific, but this provides evidence that Chinese furniture firms are gaining confidence in global competition beyond low-cost production. Diversified material use is another example of industry innovation practices. The trend of material use patterns in furniture making in China is shifting toward newer and cheaper substitutes which are manufactured with modern technologies. "High-tech wood," which is a type of artificial veneer made from inexpensive species, has been widely used as appearance materials in higher-end panel furniture manufacturing in China. The material not only has superior decorative attributes, but is also environmental friendly in that its use helps reduce consumption of endangered species in furniture making. Also, many furniture factories are utilizing reclaimed wood, such as Douglas-fir construction members collected from demolished old houses, to make antique-style furniture for export. Overall, these innovation practices suggest that Chinese furniture firms are swift in learning and open-minded to changes, which has provided them opportunities to develop new competitive strengths.

Limitations

The furniture industry in China is highly diversified with wide regional differences. For example, industry infrastructure and facilities located in the coastal regions (in East China) are generally more developed than those in the interior regions. The sample for Stage 2 of this study was from a trade show in Shenzhen, South China, with most attendees coming from local areas. The results likely reflect the Dongguan model, rather than the overall industry.

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Xiaozhi Cao *

Eric N. Hansen *

The authors are, respectively, Graduate Research Assistant, Center for Inter. Trade in Forest Products (CINTRAFOR), Univ. of Washington, Seattle, WA (caoxz@u.washington.edu), and Professor, Dept. Wood Sci. and Engineering, Oregon State Univ., Corvallis, OR (Eric.Hansen2@oregonstate.edu). This paper was received for publication in December 2005. Article No. 10146.

* Forest Products Society Member.

[c] Forest Products Society 2006. Forest Prod. J. 56(11/12):33-42.

Table 1.--Profiling the Chinese and U.S. furniture industries.

                  No. of          2004 total
                 employees         value of     No. of
                  in 2004          shipments    firms

                                 ($ billion)

China (a)        5,000,000          32         50,000
United States      560,584 (b)      80.2 (b)   20,777 (b)

                Firm location            Domestic market structure

China (a)       Concentrated: 80%        Fragmented: top 10 firms
                  located in exporting     take less than 3% of the
                  regions                  total market
United States   Less concentrated: 37%   Consolidated: top 10 firms
                  located in top five      account for 40% of the
                  states (b)               total market (c)

(a) NFA et al. 2005

(b) U.S. Census Bureau 2005

(c) Anonymous 2004a

Table 2.--Chinese furniture industry's key drivers.

Key drivers            Benefits

Low-cost production    Lower labor rates and social welfare;
                       Lower environmental protection costs;
                       Lower manufacturing overheads;
                       Lower production expansion costs land rents);
                       Increasing adoption of automation.

Industry clustering    Efficiency from economics of scale;
(industrial parks)     Information/knowledge share (e.g., technical
                         know-how).

Government subsidies   Low land rents;
                       Export tax rebate;
                       Import subsidies (e.g., machinery);
                       Investments in production expansion (industrial
                         parks).

Foreign direct         Foreign companies and joint ventures account
investment               for over half of total production and 75% of
                         total exports;
                       Established marketing channels and management
                         skills.

Overseas markets       Exports take one-third of the total production;
(exports)              Developed countries are major buyers;
                       Higher-end exports are increasing.

Domestic market        Booming housing market;
                       Increasing income levels and a growing middle
                         class;
                       Demographic changes in favor of higher
                         value-added production.

Key drivers            Example literature

Low-cost production    Bryson et al. 2003
                       Anonymous 2004b
                       Houston 2003a
                       EIA 2003
                       Lei and Mcgowin 2002

Industry clustering    Desrochers 2001
(industrial parks)     CNFA et al. 2005

Government subsidies   AFPA 2004
                       CNFA et al. 2005

Foreign direct         CNFA et al. 2005
investment             Zhang 2002
                       CNFA 2003

Overseas markets       CNFA 2005
(exports)

Domestic market        Economist 2005
                       CSIL 2003
                       Xu 2003

Table 3.--Manufacturer respondents' demographics.

                           Company                   No. of
                       characteristics     Sample   companies

                                            (%)
Size (# employees)   Small (1 to 100)       15.8       19
                     Middle (101 to 250)    36.7       44
                     Large (above 250)      47.5       57
Export intensity     None (0%)              20.8       25
  (% total sales)    Medium (1% to 50%)     49.2       59
                     Heavy (above 50%)      20.8       25
                     Missing value          9.2        11

Table 4.--Key innovation sources as rated by Chinese
manufacturing respondents. (a)

                           Mean     Standard deviation

Trade shows              4.11 (b)          0.91
Upper management         4.10 (b)          0.89
Competitors              3.75 (c)          1.06
Product designers        3.74 (c)          0.98
Employees                3.59 (c)          1.04
End consumers            3.58 (c)          1.05
Retailers                3.45 (c)          1.06
Business customers       3.34 (c)          1.18
Machinery suppliers      3.23              1.14
Trade associations       3.20              0.96
Raw material suppliers   2.93              1.15
IT suppliers             2.89              1.05
Educational institutes   2.67 (c)          1.10

(a) Sample size n = 120.

(b) The difference is significant compared with the middle point
3, p < 0.01 (two-tailed).

(c) The difference is significant compared with the middle point
3, p < 0.05 (two-tailed).

Table 5.--Innovation focus today and in the future as rated by
manufacturing respondents.

                                                Standard
                    Minimum   Maximum   Mean    deviation

Innovation today
  Aggregate           2.0       5.0     3.834    0.6215
  Product             2.0       5.0     3.878    0.7686
  Process             2.0       5.0     3.860    0.7765
  Business systems    2.0       5.0     3.763    0.7481
Innovation future
  Aggregate           2.7       5.0     4.366    0.5410
  Product             3.0       5.0     4.464    0.6208
  Process             2.0       5.0     4.391    0.6993
  Business systems    2.0       5.0     4.343    0.7243

Table 6.--Correlations among key study variables. (a)

                        Aggregate       Sales      Sales
                     competitiveness    level      growth

Company size            0.29 (b)       0.35 (b)   0.23 (c)
Export intensity        0.06           0.03       0.01
Innovation today
  Aggregate             0.28 (b)       0.24 (b)   0.21 (c)
  Product               0.31 (b)       0.28 (b)   0.18 (c)
  Process               0.24 (b)       0.21 (c)   0.22 (c)
  Business systems      0.13           0.10       0.12
Innovation future
  Aggregate             0.29 (b)       0.23 (c)   0.28 (b)
  Product               0.23 (c)       0.15       0.20 (c)
  Process               0.22 (c)       0.19 (c)   0.23 (c)
  Business systems      0.24 (b)       0.21 (c)   0.23 (c)

                                                Company     Export
                     Profitability     NPD        size     intensity

Company size           0.33 (b)      0.06         --
Export intensity       0.11          0.01       0.04           --
Innovation today
  Aggregate            0.06          0.31 (b)   0.26 (b)    -0.02
  Product              0.12          0.34 (b)   0.19 (c)     0.08
  Process              0.00          0.26 (b)   0.18        -0.23 (c)
  Business systems     0.02          0.15       0.21 (c)     0.00
Innovation future
  Aggregate            0.12          0.23 (c)   0.23 (c)    -0.18
  Product              0.16          0.17       0.12        -0.11
  Process              0.06          0.17       0.17        -0.22 (c)
  Business systems     0.08          0.20 (c)   0.23 (c)    -0.11

(a) Sample size n = 120; values are Pearson correlation

(b) Correlation is significant at the 0.01 level (2-tailed).

(c) Correlation is significant at the 0.0> level (2-tailed).

Figure 2.--Regional distribution of Chinese furniture firms
(CNFA et al. 2005).

Southeast,   47%
North,       12%
Northeast,    5%
Southwest,    1%
Northwest,    1%
South,       34%

Note: Table made from pie chart.