INNOVATION PATHWAYS in the CHINESE ECONOMY Copyright © 2017 by Yin Li
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INNOVATION PATHWAYS IN THE CHINESE ECONOMY A Dissertation Presented to The Academic Faculty by Yin Li In Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the School of Public Policy Georgia Institute of Technology December 2017 Copyright © 2017 by Yin Li INNOVATION PATHWAYS IN THE CHINESE ECONOMY Approved by: Dr. Philip Shapira, Advisor Dr. John McIntyre School of Public Policy Scheller College of Business Georgia Institute of Technology Georgia Institute of Technology Dr. Jan Youtie Dr. William Lazonick School of Public Policy Department of Economics Georgia Institute of Technology University of Massachusetts Lowell Dr. Juan Rogers School of Public Policy Georgia Institute of Technology Date Approved: October 13, 2017 ACKNOWLEDGEMENTS I am grateful to the many people who have helped me along the way in accomplishing this research. Especially, I wish to express my gratitude to Prof. Philip Shapira, Prof. William Lazonick, Prof. Juan Rogers, Prof. John McIntyre, and Dr. Jan Youtie, for their time and input in serving on my dissertation committee. I wish to thank my advisor, Prof. Philip Shapira, for giving me the opportunity to do this work, and for his advice, support, and encouragement throughout my PhD study. I am indebted to Prof. William Lazonick, who inspired me to pursue an academic career and guided me ever since. I am grateful to Dr. Jan Youtie, for her support and advice during my PhD work in the STIP Group at Georgia Tech. I would like to take this opportunity to acknowledge the invaluable support, suggestions, and help I received in carrying out this research, especially for my fieldwork in China, from Dr. Dan Breznitz, Dr. Michael Murphree, Dr. Yu Zhou, Dr. Kaidong Feng, Dr. Feng Lu, Dr. Xielin Liu, Fang Yu, and Rui Zhao. I am thankful to my colleagues and fellow graduate students in Atlanta for their friendship, especially to: Sanjay Arora, Sergey Koleshnikov, Seokbeom Kwon, You-Na Lee, Wenman Liu, Li Tang, Jian Wang, Sabrina Woltmann, and Seokkyun Woo. Last, but not least, I wish to thank my parents, Liancheng Li and Huiqin Zhu, for their love, understanding, and education. I thank all my professors, friends, and colleagues who helped me in one way or another and who made my stay in Atlanta a pleasant one. iii TABLE OF CONTENTS ACKNOWLEDGEMENTS iii LIST OF TABLES vi LIST OF FIGURES vii LIST OF SYMBOLS AND ABBREVIATIONS viii SUMMARY x CHAPTER 1. Introduction 1 1.1 Background 1 1.2 Motivations 5 1.3 Task of This Thesis 13 CHAPTER 2. Theoretical Framework And Research Design 15 2.1 Chapter Introduction 15 2.2 Theories of Innovation: A Literature Review 17 2.2.1 Product Cycle and Stage Models 17 2.2.2 System Models 19 2.2.3 Learning Models 21 2.3 Theories of Innovation in China: Current Debates 29 2.4 Research Framework 39 2.5 Methods 48 2.5.1 Research Method 48 2.5.2 Case Selection 50 2.5.3 Data Collection 53 CHAPTER 3. Innovation In the Chinese Context 57 3.1 Chapter Introduction 57 3.2 The Roles of State, Market, and Globalization in Chinese Development 58 3.2.1 Roles of the State 58 3.2.2 Globalized Production 65 3.2.3 Expanding Domestic Markets 69 3.3 Chapter Conclusion 79 CHAPTER 4. The Semiconductor Industry 80 4.1 Chapter Introduction 80 4.2 The Evolution of Semiconductor Industry in China 84 4.2.1 The Origin of the Industry 84 4.2.2 Technology Transfers and Project 908 90 4.2.3 Joint Ventures and Project 909 96 4.2.4 Global Enterprise and SMIC 104 4.2.5 Rise of Domestic Market and Sustainable Innovation 113 4.2.6 New Policy and Industry Outlook 120 iv 4.3 The Semiconductor Industry as A Testing Case for Existing Theories 123 4.4 Innovation Pathways and Technological Learning 130 4.5 Chapter Conclusion 139 CHAPTER 5. The Telecom Equipment Industry 142 5.1 Chapter Introduction 142 5.2 Industry and Policy Background 145 5.2.1 China’s Telecommunication Industry and Market 145 5.2.2 Roles of the government and changing policies 149 5.3 Technological Innovations and the Growth of Huawei 156 5.3.1 Early Days of Huawei and Innovations for Rural China 156 5.3.2 Innovation in Wireless Network and Rise in Global Competition 163 5.4 Huawei’s “Three-Pronged Investments” 169 5.4.1 Investment in User Knowledge 171 5.4.2 Investment in Technological Accumulation 176 5.4.3 Investment in A Capable Workforce 180 5.5 Innovative Firm and Innovation Pathways 185 CHAPTER 6. Lessons From China’s Innovation Pathways 193 6.1 Review of Findings 193 6.2 Innovation Pathways: From Sectoral Process to National Pattern 196 6.3 Contribution and Limitation of This Study 204 APPENDIX. List of Interviewees 217 REFERENCES 219 v LIST OF TABLES Table 1 Theories of Chinese Innovations 34 Table 2 International Comparison of R&D Funding (%) by Types of R&D 63 Activities Table 3 Ratio of Expenditure on Assimilation to Importation of Technology by 72 Ownership Types of Firms (2013- 2015) Table 4 Invention patent application activities by ownership types of firms 75 (2013 - 2015) Table 5 China’s Five Key Semiconductor Enterprises (1988 – 1995) 89 Table 6 Top 10 Pure-Play Foundry Companies in 2016 112 Table 7 Top 10 Fabless Semiconductor Companies in 2015 119 Table 8 Three phases of the Chinese semiconductor industry 133 Table 9 Huawei’s revenue, employment and R&D (2006 – 2015) 144 vi LIST OF FIGURES Figure 1 Growth of income and R&D intensity in China, 1995 - 2014 3 Figure 2 Research Framework 46 Figure 3 Funding to China’s Major S&T Programs (2001-2015) 61 Figure 4 Total value of industrial output by ownership types of firms (2006 – 73 2015) Figure 5 R&D expenditure by ownership types of firms (2006 – 2015) 74 Figure 6 Numbers of Semiconductor Design Firms in China (1990 - 2010) 107 vii LIST OF SYMBOLS AND ABBREVIATIONS 3GPP 3rd Generation Partnership Project CAS Chinese Academy of Sciences CCP Chinese Communist Party DRAM Dynamic Random-Access Memory ESOP Employee Stock Ownership Plan FDI Foreign Direct Investment GDP Gross Domestic Product GPN Global Production Network GVC Global Value Chain IC Integrated Circuit ICT Information & Communication Technology IDM Integrated Device Manufacturer IPO Initial Public Offering IPR Intellectual Property Rights JV Joint Venture LSI Large Scale Integration LTE Long Term Evolution MEI Ministry of Electronics Industry MNC Multinational Corporation NIE Newly Industrialized Economy NIS National Innovation Systems OBM Original Brand Manufacturing ODM Original Device Manufacturing OECD The Organisation for Economic Co-operation and Development OEM Original Equipment Manufacturing PAT packaging, assembly, and testing PBX private branch exchange PDSS Public Digital Switching Systems PLA People’s Liberation Army R&D Research & Development RAM random access memory RAN Radio Access Network S&T Science & Technology SASAC State-owned Assets Supervision and Administration Commission of the State Council SDR Software Defined Radio SMIC Semiconductor Manufacturing International Corporation SOE State-owned Enterprise viii TD-SCDMA Time Division-Synchronous Code Division Multiple Access TMFT Trade Market for Technology TSMC Taiwan Semiconductor Manufacturing Corporation USPTO United States Patent and Trademark Office WAPI WLAN Authentication and Privacy Infrastructure WCDMA Wideband Code Division Multiple Access WFOE Wholly Foreign Owned Enterprise WIPO World Intellectual Property Organization ix SUMMARY This study investigates emerging innovation pathways in the Chinese economy. An innovation pathway is defined as the historical and evolutionary process through which business firms establish and accumulate capabilities in technology development and market access that enables them to compete with international technology and market leaders. The study proposes a framework for understanding the development of innovation capabilities through the interactions of institutional forces of state, market, and globalization. The main proposition is that innovation pathways in China emerge when the government policy synchronizes with domestic market development and global industry evolution in providing opportunities, resources, and a broad set of complementary capabilities necessary for technology development. Conversely, where public policy is out of step or asynchronous with global industry and domestic market institutions, this delays or inhibits the emergence of innovation pathways. Searching for synchronization requires the co-evolution of government policy and business strategy. The framework and theory is used to explore case studies of leading Chinese firms in two critical information technology industries: the telecom equipment industry and the semiconductor industry. In the semiconductor industry, leading Chinese firms struggled to close technological gaps with international leaders. This was because state-led development was out of step with global industry evolution while business-led development was decoupled from domestic markets. In comparison, in the telecom equipment industry, innovative indigenous companies emerged from a synchronization of public research, government investment in infrastructure, multi-layer domestic markets, and accessible global suppliers in the 1990s. The exceptional case of Huawei Technologies Co., the Chinese telecom equipment maker that has become an international x innovation leader, shows how innovative Chinese firms capitalize on and complement government policies by strengthening internal R&D and aggressive internationalization. This study contributes to economic theories on how firms from emerging economies can learn to innovate. Traditional views emphasize transferring technologies from advanced economies, following a learning sequence of reverse product cycles, and more recently, specializing in manufacturing in the global value chains. This study offers an alternative view that in today’s advanced industrial and globalized world, emerging economy firms can succeed in innovation by exceling in new technology development and market access capabilities, provided that government policy synchronizes with domestic market and global industry conditions to offer a broad range of complementary capabilities.