Indigenous Innovation and Globalization: The Challenge for China's Standardization Strategy

Abstract

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 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 accumulated 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 policymakers 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 important 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 differing standards systems in the two countries.

Keywords: Indigenous Innovation, China, Standardization, Globalization

JEL Classification: 031, 032, 034, 038, 053