Indigenous Innovation and Globalization the Challenge for China’S Standardization Strategy Dieter Ernst

INDIGENOUS INNOVATION AND GLOBALIZATION The Challenge for China’s Standardization Strategy Dieter Ernst A joint publication of the UC Institute on Global Conflict and Cooperation and the East-West Center Figure 1. The AQSIQ Standardization Family Figure 2. The MIIT Standardization Family INDIGENOUS INNOVATION AND GLOBALIZATION The Challenge for China’s Standardization Strategy Dieter Ernst East-West Center, Honolulu June 2011 A joint publication of the UC Institute on Global Conflict and Cooperation and the East-West Center © 2011 Dieter Ernst. All rights reserved. Cover image is courtesy of Min Li, China Daily, and is used by permission. CONTENTS Executive Summary v Foreword and Acknowledgments vi Introduction: Objectives, Arguments, Findings 1 CHAPTER ONE 8 Standards, Innovation, and Economic Development: A Conceptual Framework CHAPTER TWO 19 China’s Strategy: Standards as a Tool for Indigenous Innovation CHAPTER THREE 40 China’s Dilemma: Globalization and Rising Complexity Constrain National Policies CHAPTER FOUR 55 Toward Greater Pragmatism? China’s Recent Policy Initiatives CHAPTER FIVE 68 Institutional Innovations? Recent Developments in China’s ICT Standards Projects Conclusions: Main Findings, Policy Implications, and 101 Future Research Priorities List of Interviews 109 List of Acronyms 112 References 116 iv Ernst About the East-West Center The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through coopera- tive study, research, and dialogue. Established by the US Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options. The Center’s 21-acre Honolulu campus, adjacent to the University of Hawai‘i at Mānoa, is located midway between Asia and the US mainland and features research, residential, and international conference facilities. The Center’s Washington, DC, office focuses on preparing the United States for an era of growing Asia Pacific prominence. About the UC Institute on Global Conflict and Cooperation Since 1983, the University of California Institute on Global Conflict and Co- operation (IGCC) has facilitated innovative research into the causes of international conflict and cooperation. Founded by nuclear physicist Herbert F. York, IGCC’s original emphasis on security and nuclear nonproliferation remains at its core, but its agenda has broadened with time. Today, IGCC researchers study a wide range of topics involving the security, environmental, and economic policies that shape our ability to prevent conflict and promote cooperation. As a research unit serving the entire UC system, IGCC can build project teams from any of the ten UC campuses and the Lawrence Livermore and Los Alamos National Laboratories. IGCC is committed to educating the next generation of international problem-solvers and peace-makers through its research and teaching activities. IGCC builds bridges between the theory and practice of international policy, injecting fresh ideas into the process by establishing the intellectual foundations for effective policy-making. It provides ways for UC faculty and students to interact with government officials at home and abroad through collaborative, multi-campus projects and through an office at the UC Washington Center. Indigenous Innovation and Globalization v Executive Summary The study examines defining characteristics of the evolving Chinese innovation and standards system and explores possible impacts for China as well as the global economy. China considers standardization to be an essential tool for improving its innovative capacity, yet very little is known about this critical building block of China’s innovation system. At the center of the analysis is a fundamental challenge for China’s standardization strategy: How can China reconcile its primary objective of strengthening indigenous innovation with its leading role in international trade and deep integration into global corporate networks of production and innovation? Main Argument 1. Recent policy initiatives on standardization and recent developments in three ICT standards projects (TD-SCDMA, IGRS, and AVS) indicate that both the Chinese government and industry are learning from mistakes and are moving to a more flexible and pragmatic approach. 2. China’s standardization strategy needs to be viewed in the broader context of its development strategy to catch up with the productivity and income levels of the United States, the European Union, and Japan. To achieve this goal, China’s government seeks to move from being a mere standard-taker to become a co-shaper, and in some areas a lead shaper, of international standards. 3. In a “two-track” approach, China is working within the international system with the long-term goal of creating patent-worthy technology essential to global standards. By including Chinese technology into global standards, China seeks to strengthen its bargaining power and to reduce its exposure to high royalty fees. At the same time, however, China seeks to use its increasing geopolitical influence to promote new sets of rules for international standardization, and hence to transform the international standards system itself. 4. Globalization and rising complexity make it necessary for China to combine a government-centered standardization strategy with elements of market-led standardization. China needs to increase the flexibility of policy tools and institutions in order to cope with sometimes disruptive effects of unexpected changes in technology, markets, and business strategies. 5. In its current form, China’s policy on information security standards and certification could create unintended disruptive side effects for the upgrading of China’s standardization system. An extensive scope of regulation and a lack of coordination between Chinese security and trade policies could create potentially serious trade disputes. 6. China’s policies for standardization that were successful during “catching- up” need to be adjusted once the strategic focus shifts to an upgrading- vi Ernst through-innovation strategy. Any attempt to preserve the status quo ante in the context of globalization and increasing complexity is likely to constrict learning and innovation, the two fundamental prerequisites for sustained industrial upgrading. 7. Change, however, should be constrained by the need to build on accu- mulated capabilities. “Big Bang” change, which discards the latter, often involves prohibitively high opportunity costs. It may also destroy social consensus—the most fundamental prerequisite for economic development. Policy Implications 1. The international community should agree that technology-centered competition does not need to be a zero-sum game. However, when this process involves countries at different stages of development, supportive public policies are required to transform technology-centered competition into a positive-sum game. 2. The international community should acknowledge that the challenges faced by latecomers like China are significant; thus, one should not always apply the same criteria to judging the performance of latecomers as one would with the advanced industrial economies. China will need to find its own institutional and legal approaches to develop a standards system that can both foster indigenous innovation and cope with the challenge of globalization and rising complexity. 3. The international community will want to monitor how Chinese policy- makers are searching through trial-and-error for ways to reconcile the primary objective of strengthening the innovative capacity of Chinese firms and industries with the country’s leading role in international trade and its deep integration into global corporate networks of production and innovation. 4. China should seek to reduce trade conflicts that could arise from its current policy on information security standards and certification. An impor- tant trust-building measure would be to improve access to and collection of data that allow for a better assessment of how information security standards and certification can be implemented without disrupting China’s integration into the global economy. 5. One concrete suggestion is to create a U.S.–China Institute of Standards and Innovation to train engineers, executives, and technicians, as well as government officials and academics from both countries. Such an institute could also provide technical consulting services to enable both Chinese and U.S. companies to solve problems that arise from dealing with the dif- fering standards systems in the two countries. Indigenous Innovation and Globalization vii Foreword and Acknowledgements This study is about China’s unique approach to standardization as a tool for its indigenous innovation policy, and it explores the challenges this large emerging economy faces in a world of ubiquitous globalization and rising complexity. While the focus is on the specifics of China’s case, the analysis builds on research on the general dynamics of innovation in the global knowledge economy, and on the diversity of corporate strategies and policies to foster innovation in the United States, Asia, and Europe. As a result, I have benefited from ideas, comments, and suggestions from a diverse group of scholars, journalists, policy- makers, business executives, and analysts in all three of these continents. For introducing me into

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