The East-West Wire is a news, commentary, and analysis service provided by the East-West Center in Honolulu. Any part or all of the Wire content may be used by media with attribution to the East-West Center or the person quoted. To receive the East-West Center Wire, please contact John Lewis at (808) 944-7204 or EastWestWire@EastWestCenter.org.
HONOLULU (July 28) - China's information technology (IT) industry may be a relative newcomer on the world scene but it is doing something right, and in a big way. China is now the largest exporter of IT goods, surpassing the United States ... up from a world ranking of tenth in the year 2000.
That jump, according to East-West Center senior fellow Dieter Ernst, is not a fluke. It signals rapid progress in China's innovative capabilities. Ernst says in a recently completed study, that China may be a latecomer to the IT world but its "opportunities to build innovative capabilities in the IT industry differ from those faced earlier by Japan and East Asian newly industrializing economies."
He notes "China has a unique combination of competitive advantages that comprise a booming market for electronics products and services, and the world's largest pool of low-cost and easily re-trainable knowledge workers." But, it doesn't stop there. China has witnessed the "emergence of sophisticated lead users and test-bed markets ... (especially in wireless telecommunications) ... and concerted policy efforts at both the regional and national levels to strengthen its innovation system."
Ernst points out that timing also could be an important factor. As a "late-latecomer to the global economy ... China has the additional advantage that its policy-makers can learn from past achievements and mistakes" of those nations that preceded it in the market.
Most important however is that "the international environment within which China seeks to develop is dramatically different from that of previous East Asian success stories ... China's technological development over the past twenty years has been inseparable from the expansion of global knowledge networks. These networks have emerged as globalization has been extended beyond markets for goods and finance into markets for technology and knowledge workers."
The study documents that "China is far more integrated into global knowledge networks than were Japan and Korea at a similar stage of their development." And Chinese firms are learning fast how to work those networks.
"Formal corporate networks link Chinese firms to global customers, investors, technology suppliers and strategic partners through foreign direct investment as well as through venture capital, private equity investment and contract-based alliances," Ernst points out. Informal global social networks also give China a leg up. They enable Chinese firms to link "to more developed overseas innovation systems, primarily the U.S., through the international circulation of students and knowledge workers."
The study shows that "a high integration into global knowledge networks can expose Chinese IT firms to 'best-practice' management approaches, intellectual tools and sources of knowledge on leading-edge technology."
The inherent knowledge of its large home market has also helped China's IT industry both in developing domestic market share and in eventual entry into the global marketplace.
But, for the time being, there are limits to China's IT successes. Ernst notes that "the successful companies have not attempted to jump right into 'technology leadership' strategies, to compete head-on with global technology leaders through 'radical' innovations. Instead, they appear to have focused on 'incremental' and 'architectural' innovations that allow them to pursue 'technology diversification' strategies."
To understand why, Ernst argues it is necessary to open the black box of "innovation". "Incremental" innovations improve on cost, time-to-market and performance, by introducing relatively minor changes to an existing product or process. These innovations do not require substantial inputs from science, but they do require considerable skill, experience and ingenuity.
"Architectural" innovations seek to break new ground in product development, by changing the way components work together. Ernst notes that, "to implement that new architecture, Chinese firms do not need to develop the necessary components", they can buy them from specialized suppliers. Finally, "technology diversification" recombines (mostly known) technologies to create new products and services. Ernst shows that this strategy focuses on applied research and technology sourcing through global knowledge networks.
Ernst says China's accomplishments in the IT field contradict both those who cling to the "backward-looking appraisal of the weakness in China's innovative capabilities," and those who play to the fears "sometimes for political purposes, that Chinese firms could successfully create 'radical' innovations that would challenge U.S. technology leadership." An important finding of the study is that Chinese IT firms seem to make most progress in areas that escape the attention of both pessimists and proponents of China's threat to US technology leadership.
Ernst points to Lenovo, a large and successful Chinese IT firm, as an example. He shows how Lenovo "has leveraged linkages with global industry leaders to develop capabilities needed to establish domestic market leadership". The study explores what changed once the company decided to "go global", by acquiring IBM's PC division. "To implement this new business model poses major challenges, but also provides new opportunities for learning and capability development," Ernst notes.
Of course Lenovo, together with a handful of other successful Chinese IT companies (such as Huawei, Haier, ZTE) are still an exception in an industry that remains primarily "a low-cost export- oriented global factory". But these companies provide a powerful role model for what it takes to upgrade China's IT industry through innovation.
The study shows that success requires a variety of factors, including user-friendly products and services that are less over-engineered and less expensive than those of their global competitors. It also requires offering unique performance features that address peculiar needs of China's markets that are neglected by global industry leaders.
Ernst adds the successful business plan also takes advantage of "superior domestic distribution networks and information management, advanced industrial design capabilities, strong brand names, reliance on China's competitive cost structure, and access to well-educated and trainable knowledge workers."
But how sustainable is this new growth model? Can China's IT industry as a whole continue to exploit the unique advantages it has?
That, according to Ernst, will require "conscious efforts on the part of Chinese firms. They must develop strategies that allow them to translate familiarity with peculiar features of China as a market and production site into an appropriate set of innovative capabilities."
To accelerate that development, he says, China will have to formulate "policies to facilitate and promote the development of firm-level innovative capabilities... To enable Chinese IT firms to cope with the complex challenges and opportunities ... new policies are required that are very different from earlier top-down 'command economy'-type industrial policies that were typical for the 'East Asian development model'."
And that, according to Ernst, means "fundamental adjustments in institutions and behavior." Something he points out that is "time-consuming in any country, and even more so in China because of the uncertainty and instability created by its recent transition to capitalism."
###
Dieter Ernst is a senior fellow in the Economics Study Area of the East-West Center Research Program. He is a former senior advisor to the OECD, Paris and former research director, Berkeley Roundtable on the International Economy (BRIE) at the University of California at Berkeley. Dr. Ernst has co-chaired an advisory committee of the U.S. Social Science Research Council to develop a new program on Innovation, Business Institutions, and Governance in Asia. He has also served as scientific advisor to several institutions, among them the Organization for Economic Cooperation and Development, the World Bank, the Asian Development Bank, the U.N. Conference on Trade and Development, and the U.N. Industrial Development Organization. Ernst can be reached at the East-West Center at (808) 944-7321 or via email at ErnstD@EastWestCenter.org
For daily news on the Pacific Islands, see www.pireport.org. For links to all East-West Center media programs, fellowships and services, see www.eastwestcenter.org/journalists