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Upgrading China’s Standards system – the challenge of rising complexity

posted by Dieter Ernst on Thursday, June 24th, 2010 at 9:04 am

China has substantially improved its capacity to develop and implement a broad set of interoperability standards, security protocols, and product specifications as an enabling platform for the development of indigenous innovation. However, as rising complexity in technology, business organization, market structure and laws and regulations is reshaping the international standardization landscape, China’s government-centered standardization strategy is under pressure. While rising complexity creates new opportunities for learning and institutional innovations, it also increases the cost of standards development and its risks, especially for Chinese companies that seek to move beyond the status of fast-followers to become co-shapers of international standards.

An important drawback of China’s top-down approach to standards and innovation policy are elaborate lists of products and technologies that are constructed to assess compliance with China’s standardization and certification requirements. It is very time-consuming and cumbersome to construct and to manage reasonably systematic lists of products and technologies. As a result, such lists risk being quickly outdated and bypassed.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.

For China, the development dimension remains critical, with the result that the state will continue to play an important role as a promoter and coordinator of an integrated standards and innovation policy. However, it is necessary 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. In a world of rising complexity, it is always preferable to have built-in redundancy and freedom to choose among alternative options rather than seeking to impose from the top the “One Best Way” of doing things.

First, rising complexity drastically reduces the time available for standards development and implementation, which makes it practically impossible to get solutions right the first time. There may have to be many policy iterations, based on trial-and-error and an extended dialogue with all stakeholders in standardization to find out what works and what doesn’t.

Second, rising complexity makes it very difficult to predict possible outcomes of any particular policy measure, especially unexpected negative side-effects, of which there is an almost endless variety. Hence, one small change in one policy variable that describes for instance a particular procedure for achieving compliance with a particular regulation can have far-reaching and often quite unexpected disruptive effects on many other policy variables and outcomes.

And, third, it is next to impossible to predict the full consequence of interactions among China’s increasingly diverse population of standardization stakeholders. Thus, the results of a particular standards policy depend much more on negotiations, gaming and compromises than on the logical clarity and technical elegance of that policy.

Of critical importance are incremental reforms of China’s standards system. It is time to give Chinese standards associations the right to make their own standards and to let the market develop voluntary standards, especially in strategic areas like inter-operability standards. Additional reform tasks include the harmonization of standards and conformity assessment; attempts to rationalize the outsourcing of research and support services by ministries to specialized research institutes; efforts to strengthen cooperation between standardization system and SIPO; and, and integrating standards and innovation policy with China’s still relatively new and untested Anti-Monopoly Law.

Finally, a sustainable upgrading of China’s standards system critically depends on
effective policies to strengthen the position of China’s SMEs which lack adequate standardization capabilities. For these companies, standards are a burden that generates very high costs. In short, a fundamental prerequisite for upgrading China’s standards system is to reduce the huge gap in standardization capabilities that separates SMEs from the handful of dominant Chinese global players.

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Dieter ERNST says:

Niklas:
Adjusting and upgrading existing standards and innovation systems is never easy – not in the US (think about the fractious battles on the Hill on even the humble idea of strengthening the position of NIST that Andy Updgrove has so well described).
And given China’s tumultuous history, the incredible speed of its emergence as a global factory, and the resultant huge gaps in institutional implementation capabilities, it will of course be a hard and very conflict-ridden struggle to implement some of the solutions that I have indicated.
But one thing is certain – China’s position, or rather the position of some of its leading companies in international SDOs and consortia, is rapidly improving. Of course, entering the closed circles of these organizations is a major challenge for Chinese firms, as Chinese engineers are only now beginning to become members of the informal social peer group networks of international standards experts. One way to overcome this barrier is to recruit foreign engineers who are well-respected in the international standards community.
This is precisely what Huawei is trying to do, but this strategy comes at a substantial cost, not only in terms of the high salaries paid to the foreign experts, but also in terms of adjusting Huawei’s management practices. Today, Huawei is a member of more than 120 international standards organizations, and the company occupies 148 leadership positions in the most important of these organizations,like the ITU, IETF, 3GPP, the WiMAX Forum, OMA, IEEE, ATIS, ETSI. In addition, Huawei is a Board member in OMA, IEEE, ATIS, IETF, and WiMAX Forum.
Dieter ERNST says:

Peter,
1. You are spot on with regard to implementation. One of the weaknesses of the Chinese standards system is too great a focus on technical issues of standards development (‘hard’ capabilities. Standards implementation is the somewhat neglected Cinderella. Key questions like “Are customers willing to pay for this technology?” are rarely asked right at the beginning.
2. Yes, there is a significant tension in the concept of “top-down” reform of a “top-down” system. But think about Hardenberg and his team of reformers in 19th century Prussia. Contradictions there are – but it can be done. And maybe in china, this is the only way to move things forward, as WANG Ping and his co-authors argue in their important study on China’s standardization strategy.
“Standardization Strategy of China – Achievements and Challenges”, by WANG Ping, WANG Yiyi, John Hill, East-West Center Working Paper – Economics Series #107, http://www.eastwestcenter.org/fileadmin/stored/pdfs/econwp107.pdf
Dieter ERNST says:

Baisheng:
1. I agree that we in the West (US, EU) need to find effective ways of establishing dialogues with China and other emerging economies. For instance, I keep suggesting to the relevant US agencies that we should expose more actively Chinese government officials, academics and corporate executives to new approaches to innovation policy in the US, especially in the management and upgrading of highly complex technology systems, such as the Smart Grid Interoperability project. This is an area where we undoubtedly have significant “soft power” – we have ideas to “sell” on how to combine the efforts of private industry and the government in new ways that haven’t been tried before. There is a great interest in China to learn from these debates and policy initiatives in the US. Specifically, I’d suggest to broaden such exchange programs beyond government officials, and to invite more Chinese company executives (especially junior engineering staff and managers). Such practical steps can go a long way to reduce current tensions and to lay the groundwork for longer-term US-China cooperation on innovation policy.

2. You ask: “When we are talking about standards issues with China, are we talking about the market access implications or innovation implications?” As you know from our discussions, research that is conducted under my watch seeks to understand how standardization can foster socially responsible innovation.

3. You mention WAPI. There are indeed much more interesting examples. Our research focuses on institutional innovations introduced by AVS, CESI and IGRS to cope with the rising complexity requirements. However, it is not s bad idea to take a fresh look at achievements and opportunity costs of the TD-SCDMA project, and ask whether the WAPI alliance has learnt from earlier mistakes and whether it has shifted to a more pragmatic approach. (Ernst, D., forthcoming, “Institutional Innovations? Recent Developments in China’s ICT standards projects”, East-West Center)
Dieter ERNST says:

Stacy:
You nicely capture the trade-offs of the still largely government-centered Chinese standards system.
1. The potentially disruptive effects are reasonably well covered in the Western innovation and standards policy literature. The problem with that literature is that it fails to accept that China differs in its economic institutions, stage of development, and development model and hence needs to develop its own hybrid approach to standardization. Supporting evidence can be found in the writings of Alexander Gerschenkron (on latecomer industrialization), Richard Nelson’s and Dave Mowery’s studies on the evolution of the US innovation system since the 18th century, Peter Drahos analysis of the Global Knowledge Economy, the EPO’s scenarios, developed by Konstantinos Karachalios and others. Specifically on China, see the analysis of LIU Xielin, XUE Lan, GAO Xudong, AN Baisheng, and specifically for China’s standardization strategy, the report by CNIS’ WANG Ping and co-authors:
, “Standardization Strategy of China – Achievements and Challenges”, by WANG Ping, WANG Yiyi, John Hill, East-West Center Working Paper – Economics Series #107, http://www.eastwestcenter.org/fileadmin/stored/pdfs/econwp107.pdf
2. Less well understood are the advantages of China’s relatively unified standardization strategy. You are right when you highlight: “paced, measured reform.” There are other substantial advantages – fast mobilization of financial and human resources; focused learning; avoidance of excessive risks; and Chinese-style diversity. The latter aspect is largely ignored by existing research: In China, it falls on local governments to act as pace-setters for a more decentralized approach, establishing local standards as a constituent building block of the Chinese standards system. This is in line with the role regional governments have played in innovation policy. Pioneered by the Shenzhen government in 2007, the governments of Shanghai, Beijing, Jiangsu, Zhejiang, Shandong, Henan and Shaanxi have all issued their own local standardization strategies.
3. My own concern really is to initiate a research agenda that seeks to apply findings of complexity theory (which right now is at the center of the best work in innovation and organizational theory, see W.B. Arthur, The Nature of Technology; and Cristiano Antonelli) in a more operational manner to the formulation of standards and innovation policies (in China, as well as in the US, and the EU). Such a comparative study of diverse standards systems and their responses to rising complexity could help to reduce current tensions and misunderstandings between standards communities in the “West” and in China. Some may call this agenda naïve. For me, it is one of the few ways we have to improve the governance of the global knowledge economy.

For a detailed analysis, see my paper The Challenge of Rising Complexity for Innovation Policy –China’s Standardization Strategy in the ICT Industry, presented at the University of California Institute on Global Conflict and Cooperation Conference on Chinese Approaches to National Innovation, University of California, San Diego
La Jolla, California, June 28 – 29, 2010
Stacy Baird says:

With regard to incremental reform of China’s standards system: One aspect of Capitalism with Chinese characteristics is the ability of the government to step in to any discussion and say “it is in China’s interest to do it this way,” and so it is done in what ever manner the government chooses. But another aspect is paced, measured reform. As the marketplace matures, the assumption is that the reins of command and control will be relinquished to those in the market. My expectation is that this is the case with regard to standard setting – while the government exercises tight control of standards that are important to economic development or national security, the government is also developing the mechanisms for better market standard development. I am sure others who have written today are better situated to illuminate.
Baisheng An says:

WAPI is one of the most visible standards in Chinese standardization activities. But is it representative or is it the only representation of Chinese standardization? To answer this question, more should be known about Chinese standardization activities, especially those under the reform. As for TD-SCDMA, what about the GSM and Japanese 2G mobile standards? Are they doing the same thing? If any difference, it should be channelled to Chinese policy makes and industries. So far, the argument that Japanese 2G mobile standard story (a failure if you will) has not be convincing to Chinese. One of the reason is that China believes its bigger domestic market might make it a story different from Japanese one.

Dieter’s efforts are valuable in the sense that he looks quite deep into Chinese stories.

The following is my comment is not based on Dieter’s article. It is simply my comments with regard to Chinese standards policy. I post it here because I do not know technically how and where to post it.

With regard to ICT standards themselves and IPRs included in them, there are at least two sets of issues: market access in global trade context and technology and innovation policies mainly at domestic level. The issues of market access are closely related to industrial policies and so called trade protectionism. The second one might more of a domestic issue with more objectivity in itself, which is focused more upon academic explorations.

Do we know well enough about the second issue in academic terms?
When we are talking about standards issues with China, are we talking about the market access implications or innovation implications? Even western world is still arguing on issues of innovation and standards, and competition issues related to them as well, when it comes to China, the issue many times turned into a market access issue.

Therefore, a question arises: what are we talking about and do we know the answer well while we are giving lectures to China? Besides, do we know well enough about China with regard to its current status, the changing dynamics and the underlying reasons for those changes?

China is eager to learn. However, China might find it is both risky and unreliable to accept western advocacies both because they are not necessarily academically sound and/or because the discussions are only market access oriented, even oftentimes they are having an innovation flag. Of course, one reason for that feeling is that China does not have due research capacity to discern reliable suggestions from unreliable ones and it is China itself to take the responsibility.

My suggestion is:

To have more academic researches on related issues such as the relationship between innovation and standards, network effects of ICT standards and its implications upon competition policies. Or, to make the researches wider, state role in standardization where comparative advantage in a dynamic context and development strategies derided from Washington Consensus are closely relevant.

To have proactive dialogues with China, including both official dialogues and business ones so as to enhance mutual understanding and disseminate updated researches and discussions. This should be merited especially in contract to the current approach of taking this discussion as a market access issue and labeling Chinese policies as protectionist without much deep thought.
Peter Gray says:

Dieter, interesting article! Regarding the reforms you mention, how crucial is the implementation? As in, is there a risk of contradiction from a “top down” reform of such a “top down” standards system?
Niklas Lindblom says:

Dieter, you make some good points and you make the way forward sound so easy! In your opinion, how long will it take to implement the changes you suggest, and what are the biggest obstacles to overcome? One of the main issues is the relaxation of the “one best way” approach, and allow for diverse innovation leading to a dynamic competition. But the strong strategic focus on developing and implementing a domestically strong standard ready for export doesn’t really allow this. And- like you say- focusing on one specific technology seriously impedes agility, which is counterproductive to creating the “best” internationally prevailing standard. If, hypothetically, the system of keeping lists is dropped today, do you believe that China’s position on the international standardization stage would strengthen, and how fast? //Niklas

Upgrading China’s Standards system – the challenge of rising complexity

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Dieter Ernst

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