Innovation via new ventures as a conversion strategy for the Chinese defense industry

The Chinese economic system is undergoing a transformation from a centrally planned to a market economic system. The process is difficult for at least two reasons: civilian producers lack innovative capability; R&D intensive defense firms need to shift some of their production to civilian markets. The latter requires management innovations that are difficult to master under present-day conditions. Based on the system characteristics of the Chinese defense industry we discuss its problems in managing technological innovation. We conclude that to facilitate the conversion process to civilian markets Chinese defense firms should be encouraged to split off those activities that are aimed at civilian markets.