Indigenous Innovation and Globalization – the Challenge for China’s Standardization Strategy

A downloadable version of this article and discussion can be found here:

Dieter Ernst

China’s 11th Five-Year Plan for Standardization defines standardization as an enabling platform for indigenous innovation. That commitment to use standards as a tool for economic development has virtually no parallel. It reflects a major transition in China’s development model from export-oriented industrialization to an upgrading-through-innovation strategy. It is this development aspect that distinguishes China’s standardization strategy from standardization strategies in the US, the EU and Japan.

A new report [1] documents the rapid pace of change in China’s standards system and explores possible impacts for China as well as the global economy. At the center of the analysis is a fundamental challenge for China’s standardization strategy: How to reconcile the primary objective of strengthening indigenous innovation with the country’s leading role in international trade and its deep integration into global corporate networks of production and innovation?

An in-depth analysis of recent policy initiatives (on indigenous innovation products; government procurement regulations; and the role of patents in standardization) shows that responses by Chinese authorities to complaints (by both Chinese and foreign organizations) have softened some of the initially harsh requirements. And recent developments in three ICT standards projects (TD-SCDMA, IGRS, AVS) indicate that both the Chinese government and industry are learning from mistakes and are moving to a more flexible and pragmatic approach.

While the implementation of China’s TD-SCDMA project remains decisively top-down, the contents of policy is moving away from regulating the market to promotional policies. With the transition to next-generation mobile telecom standards, there is greater openness to foreign participation. In addition, R&D and patent data add to a picture of an overall positive impact of this project on China’s innovation capacity. The report documents that China’s IGRS and AVS standards projects are developing sophisticated standardization procedures and IP policies that are demonstrably fair and transparent. While both projects had to go through an arduous learning process, they have succeeded in developing institutional innovations that have allowed them to overcome their latecomer disadvantage. Policy makers and corporate executives in the US, as well as in the EU and Japan, would be well advised to study these Chinese institutional innovations and to learn from them.

However, the report also highlights two important drawbacks of China’s standards and innovation policy. First, elaborate lists of products and technologies that are constructed to assess compliance with China’s standardization and certification requirements may have significant negative impacts in the rapidly moving ICT industry. These lists risk being quickly outdated and bypassed. Even more important for China’s objective to foster indigenous innovation is that such control lists focus on existing technologies, rather than on the future innovations that they are designed to promote.

Second, in its current form, China’s policy on Information Security Standards and Certification (especially the National Information Assurance Policy Framework Multi-Level Protection scheme [MLPS])

could create unintended disruptive side effects for the upgrading of China’s standardization system. There are widespread concerns in the international community that an extensive scope of regulation and a lack of coordination between Chinese security policies and trade policies could create potentially serious trade disputes.

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 US, the EU and Japan. To achieve this goal, China’s government seeks to move from being a mere standard-taker to a co-shaper, and in some areas a lead shaper of international standards. In a ‘two-track’ approach, China is working, on the one hand, 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.

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. China’s policies for standardization that were successful during catching-up, need to be adjusted once the strategic focus shifts to an “upgrading-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.

Change should, however, 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, i.e. the most fundamental prerequisite for economic development.

To conclude, the international community should acknowledge that the challenges faced by latecomers like China are very significant and one should not always apply the same criteria in judging 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 standard system that can both foster indigenous innovation and cope with the challenge of globalization and rising complexity.

[1] Ernst, Dieter, 2010, Indigenous Innovation and Globalization–the Challenge for China’s Standardization Strategy, Draft scheduled for publication by the East-West Center and National Bureau of Asian Research (2011).