China is reinventing itself faster than any country. At a blistering pace, the country is working to expand an already vast manufacturing base, elevate the buying power of its 1.3 billion consumers, and develop high-value goods and services. But China also wants to reduce dependence on foreign investment and demand. Its most recent Five Year Plan emphasizes the creation of a knowledge-led, innovation-oriented economy that is supported by greater domestic consumption.

This new economic model has broad implications that don’t preclude the involvement of international companies— but it may require a shift in strategy or supply chain orientation. Those shifts, examined through a high-tech-industry lens and based on the research and recommendations of Accenture’s Andrew Sleigh and Hans von Lewinski, are the focus of this month’s article.

Retail sales in China surpassed $827 billion in 2005—a nearly 13 percent increase from 2004. China’s consumer-electronics market has soared by an average of 15 percent per year since 2000, reaching $55 billion in 2005. Moreover, the country’s confidence is increasing along with its high-tech sophistication and economic wherewithal. This can be seen in the development of indigenous standards and leading-edge technologies. A notable example of the former is China’s third-generation digital wireless standard, TD-SCDMA. This is a collaboration among Datang Telecom (a Chinese state-owned enterprise) and the Ministry of Information Industry, with support from multinational telecom and mobile-phone companies. And like the U.S. government (which invested in semiconductors for years before seeing solid returns), Beijing is focusing heavily on biotechnology, nanotechnology, and renewable energy. Even now, China holds 12 percent of the world’s nanotechnology patents.

The country’s new confidence is being felt beyond its borders, as Chinese companies venture abroad to access new markets and form multinational partnerships. Lenovo’s purchase of IBM’s personal-computer business exemplifies a growing number of Chinese companies that are expanding their global presence. On the partnership side, Huawei Technologies Company recently signed a five-year deal with Vodafone to provide third-generation handsets to the European market.

In addition to acquiring capabilities and know-how from overseas markets, encouraging innovation within China is one of the government’s top priorities. Developing R&D capabilities is an important part of this agenda. Beijing aims to increase spending in this area from 1.3 percent of GDP in 2005 to 2 percent by 2010.

Also critical to China’s ascent are government policies for building the talents that fuel innovation. China already has the second-largest share of science and engineering researchers in the world, and between 2005 and 2010, the country will graduate some 3 million engineers. This is nearly nine times the number that will graduate in the United States.

Lastly, Beijing’s various efforts to increase enrollment in higher education include encouraging Chinese students abroad to return to work in China. These returnees (known locally as “sea turtles”) are being targeted with attractive incentives, including generous research grants and opportunities to run their own projects. In 1999, the entire graduating class of the Shanghai-based China Europe International Business School MBA program went to work for multinational companies. Today, 25 percent of the school’s graduates are pursuing careers with China-based firms.

Responding to China’s increased power, scope, and autonomy, most international companies will need new or updated strategies. First, they will need to evaluate their operations strategies to optimize the balance between supply-side and demand-side opportunities. Some should even consider relocating production to lower-cost countries, such as Vietnam and the Philippines, or moving away from China’s coastal regions and tier-one cities to areas in the west and north.

International companies also must recognize the emerging symbiotic relationship between production and consumption in China. As Chinese consumers become more sophisticated, so does the production that occurs locally to satisfy this demand. Astute companies will respond by moving more decision-making functions to China and encouraging greater flexibility in their operations. Taking advantage of China’s developing capabilities, companies also can benefit by introducing products that have been influenced, designed, and invented by Chinese companies, to overseas markets.

On a broader scale, multinational corporations need to take stock of their strategies when it comes to Chinese companies. This means looking for opportunities to engage and cooperate with local players. Complementary research is a good example, as are joint marketing, funding, and commercialization. Collaborating in other markets also is advisable, since Chinese businesses may be more accepted and/or experienced in these environments.

Lastly, multinationals should view talent management as an integral part of their China strategy. Local employees need opportunities to grow and develop within the company, travel overseas, and rotate through different parts of the organization. Chinese professionals—like their employers and their country—are fast becoming part of a dynamic global economy.