From Self-Innovation to International Standardization: A Case Study of TD-SCDMA in China 1 Yan Hui * Time Division Synchronous Address (TD-SCDMA) is one of three 3G standards in China, the two others being Wideband Code Division Synchronous Address (WCDMA) from Europe and Code Division Synchronous Address (CDMA2000) from the US. TD-SCDMA is a Chinese-developed standard currently applied only in the Chinese market. From the very beginning, TD-SCDMA has caught tremendous attention. As a government-led standardization, it demands continu- ous technical progress, industry accumulation, and national confi- dence. At the time of its inception, China was not yet the second largest economy in the world; furthermore, as a developing country and technology latecomer, it faced many difficulties and challenges. Thus, it is interesting to note how the Chinese government reached the decision to apply standardization and prepare the relevant con- ditions to fully commercialize TD-SCDMA in China. After five years of TD-SCDMA application, more information has become available to help answer the questions above. Thus, in the current paper, we introduce the evolution of TD-SCDMA, from its very early stage technology to a standard approved by the International Telecom- munication Union (ITU), until its first launch during the 2008 Beijing Olympic Games. The paper provides arguments and evidence to show that TD-SCDMA is a successful case because it has been selected by the ITU as one of the 3G standards for commercial application, even though it is a standard used only domestically in a country, which is considered a technology latecomer with low technological capabilities. Keywords: Innovation, Standardization, China, Telecom industry JEL Classification: O3, O32 *Lecturer, School of Management, Shanghai University, No. 99, ShangDa Road, Shanghai, PRC, (Tel) +86-21-66134148, (Fax) +86-21-66130396, (E-mail) hui.yan@ shu.edu.cn. [Seoul Journal of Economics 2013, Vol. 26, No. 1] 114 SEOUL JOURNAL OF ECONOMICS I. Introduction TD-SCDMA is one of the three 3G standards in China, the two others being WCDMA from Europe and CDMA2000 from the US. TD-SCDMA is a Chinese-developed 3G standard currently applied only in the Chinese market. From the very beginning, TD-SCDMA has caught tremendous attention. As a government-led standardization, it demands continuous technical progress, industry accumulation, and national confidence. At the time of its inception, China was not yet the second largest economy in the world. Furthermore, China faced many difficulties and challenges as a developing country and technology latecomer at that time. Thus, it is interesting to note how the Chinese government reached the decision to apply the standardization as well as prepare the relevant conditions to fully commercialize TD-SCDMA in China. After five years of TD-SCDMA application, more information has become available to help answer the questions above. Thus, in the current paper, we introduce the evolution of TD-SCDMA, from its very early stage technology to a standard ap- proved by the International Telecommunication Union (ITU), until its first launch during the 2008 Beijing Olympic Games. The paper provides arguments and evidence to show that TD-SCDMA is a successful case because it has been selected by ITU as one of the 3G standards for commercial application, even though it is a standard used only domes- tically in a country, which is considered a technology latecomer with low technological capabilities. A brief description of the theories on standardization is presented in Chapter 2, after which the case of Korea’s WiBro as a success story of an international standard developed by a newly emerging economy is discussed. In Chapter 3, we will focus on introducing the TD-SCDMA technology, from its origin, standard application, and industry chain building, to its transformation into a commercial product. In this process, we particularly emphasize the role of the government as the key decision maker and coordinator. Chapter 3 presents an analysis of the industry opportunity offered by the technology life cycle in the telecom industry and the technology accumulation in China. Several companies that de- veloped during the process of the standard setting are then introduced. Finally, we draw conclusions based on the discussions. FROM SELF-INNOVATION TO INTERNATIONAL STANDARDIZATION 115 II. Theories A. Importance of Standards in the Telecommunication Industry a) Network Economy The telecommunications industry is a typical “network economy,” in which consumers of computer and software programs, cellular phones, faxes, and Internet services all have more valuable products. As the use of a product increases, the total social value of that product also increases as it is shared with more consumers. Standardization is one of the cru- cial factors in a network economy. According to Farrell and Saloner (1986) “standardization” is a coordination process resulting in the production of goods that are interchangeable or compatible. Standards in telecom- munications systems play a central role in maintaining service quality; such standards do not involve tradeoffs between service quality and var- iety, but rather integrate advanced telecom networks into a seamless web of interoperable technologies and services (David and Steinmueller 1996). Thus, the highest priority of standard setting is interoperability. However, they also stated that there are varied reasons as to why a con- struction is difficult to achieve. Technical compatibility standards do not flow “naturally” from the best engineering practice, but rather reflect the full range of strategic behaviors. b) Dominant Design A dominant design is often not the technologically superior one; it is typically the result of a complex interplay between technological factors and user demands as well as that among political, social, and economic factors. Different technological designs backed by different sponsors com- pete for the position of dominant design in a process wherein economic, technological, and socio-political factors are intertwined. Technology does not work in isolation, and coordination and compatibility with other prod- ucts or systems are required. Generally, the more complex the product, the more actors are aligned to a technological design and the more com- plicated is the sponsoring role (Tushman and Rosenkopf 1992). What this means is that a complex system must focus on interfaces and ne- gotiations with different users and producers of complementary products, through which it evolves from simple technological artifacts to more com- plex ones. 116 SEOUL JOURNAL OF ECONOMICS c) Network Effects Network effects indicate that the utility derived by a consumer is af- fected by the total number of consumers subscribed to the same net- work. In other words, the demand or utility curve shifts upward with the increase in total users in the network. The adoption of a certain sys- tem is partially dependent on the number of other consumers purchas- ing similar systems. Network effects can be divided into direct and in- direct effects. Direct effects are present when a new customer joins a network, and a new network connection is created for all members in the network. Direct effects depend on compatibility between system elem- ents. For example, the utility of one user of an email system increases along with the increasing number of total users. Meanwhile, indirect network effects arise because of increased demand for complementary products or service, such as specialized training, after-sale support, and compatible software. Indirect network effects represent positive depend- encies that evolve between the spread of a standard and the increasing demand for complementary goods. For example, the spread of an oper- ating system plays an important part in determining the supply of com- patible application software. Katz and Shapiro (1985) find that firms with good reputation or large existing networks tend to ignore compati- bility, whereas those with small networks or weak reputation tend to favor compatibility. This is because large firms have market power to ignore compatibility when introducing new systems. d) Technological Life Cycles in Mobile Communications Numerous experiments are involved during the beginning of a product life cycle, particularly in terms of different designs and technologies, re- sulting in numerous innovations (Utterback 1994). In the early develop- ment stage, accelerated market dynamics and persistent uncertainties are also observed. As the technology evolves, the focus shifts slowly from product performance maximization to cost minimization (with the inte- gration of market dynamics, standardization, incremental products, and process innovations) and to the prominent role of complementary assets. In the mature phase, innovation rate fades as the products become stand- ardized and the market is manipulated by oligopolies. In the decline stage, the market contracts and technology exits. The concept of technological life cycles can be applied to the evolution of mobile communication technologies. The transformation from first gen- eration (1G) Nordic Mobile Telephony (NMT) technology to second gen- eration GSM constitutes a shift in technological life cycles. The coexist- FROM SELF-INNOVATION TO INTERNATIONAL STANDARDIZATION 117 Source: Dalum et al. (2002). FIGURE 1 S-CURVE TECHNOLOGY AND MOBILE TECHNOLOGY LIFE CYCLES ence and shifts of different technological life cycles is not an S-curve, which