Technological Innovation in China

Professor Xudong Gao

Tsinghua University Research Center for Technological Innovation

Tsinghua University School of Economics and Management

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Agenda

• Moving from buying technology to internal development of technology

• The background

• The future

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Moving from buying technology to internal development of technology

• Make China an innovation oriented country

• Make the firms the driving forces in technological innovation

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The background: Will the Chinese economy be able

to continue to grow?

• Challenges at the macro level

• Challenges at the micro level

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Challenges at the macro level

• Highly depend on export– (Export +import)/GDP: 14 ％－ 20 ％ – 15%--over 80%

• BIG trade surplus

• Low interest rates

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Challenges at the micro level

• 5 types of technology strategiesand competitive strategies

• Buy technology: The consumer electronics industry • JV: The automobile industry • Innovation based on dominant design/International

standard :PC• Technology integration: The VCD/DVD industry• Proprietary technology development: Telecom

equipment; electronic publishing; HPC; oil

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Impressive achievements

• Buy technology: The consumer electronics industry – Brand name– Scale– internationalization

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Impressive achievements

• JV: The automobile industry– Producing a lot of cars

• Innovation based on dominant design/International standard : PC – Lenovo vs. MNEs

• Technology integration: The VCD/DVD industry– Export; Lin’s story

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Globalization and its challenges

• Buy technology: The consumer electronics industry – SAMSUNG SONY

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Who is SAMSUNG?

• Revenue in fiscal year 2000 $119b• Net income $7.3b• Employees: 174,000

• Patents : 4th US granted patents• World’s best selling products in 13 categories

– CDMA handsets– Memory chips– Thin film displays– Ships for drilling oil

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JV: The automobile industry

• Limited Learning

• Zero contribution• MNE rationalization

• Attractiveness • Local competition

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Innovation based on dominant design/International standard : PC

• Legend/Lenovo vs. Dell – Laptop

– Desktop

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Technology integration: The VCD/DVD industry

• Export• Domestic competition

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DVD PRICES: MNES and Domestic Firms

FIRMSonyLGMatsushita 金正夏新新科上广电步步高

LOWEST PRICE

748 561 595 598 488 666 596 598

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The Innovating firms

• Telecom equipment– ZTE: digital switches; soft switch; 3G; NGN

– HUAWEI: digital switches; SDH; 3G; NGN

– DATANG : TD-SCDMA

• Electronic publishing: Founder • HPC: Dawning• Oil: CPNC

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Oil: CPNC

• Overseas oil production: +30m tons – NOT ONLY LOW LABOR COST– TECHNOLOGY ACHIEVEMENTS

• The Geo-East V1.0 integrated seismic data processing and interpretation software

• ABS production technology innovation • Top drive equipment

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Industries

• Domestic market– Chinese medicine – Chinese food– LABOR intensive industries: especially for LOW END

markets (textile, furniture, consumer electronics—ref., dish washer,

– Telecom equipment– Knowledge (not capital) intensive industries: small

high tech firms: so many engineers and scientists • International market

– LABOR intensive industries: for low end markets

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The future

• Many opportunities

• Many challenges

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• WHY SOME LOCAL FIRMS ARE very COMPETITIVE

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The mainstream argument

• MNEs enjoy a lot of advantages: technology, management, finance, brand

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An analytical Framework

• The problems of the above argument

• The concepts of “barriers to appropriability” and opportunities for improvement

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“liabilities of foreignness” and

“barriers to appropriability”

• “barriers to appropriability” : The difficulties MNEs have in using their superior technological resources in a host country’s market.– “liabilities of foreignness” (Hymer, 1976; Buck

ley and Casson, 1976; Zaheer and Mosakowski, 1997; Lou, 2000).

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• Five kinds of “barriers to appropriability”: – regulatory– information– resource– coordination– commitment.

• “liabilities of foreignness” covers the first two • The other three not necessarily related to operating

in a foreign market.

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Regulatory barriers

• Definition: host or home country government regulations that prevent MNEs from using their superior technological resources in host country markets (Hymer, 1976; Dunning, 1992).

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Example

• The development of the Japanese automobile industry (Cusumano, 1985).

• “During the postwar Occupation (1945-1952), American vehicles again filled the Japanese market…the Ministry of International Trade and Industry (MITI) restricted foreign exchange allocations and imposed a value-added tax of 40 percent on imported automobiles----Import continued to decline through the decade, reaching 1 percent of new vehicle sales in 1960, and remained at this level for more than twenty years” (Pp 7).

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Example

• “Public officials had less influence on the automobile industry than on sectors such as iron and steel, shipbuilding, or electronics. But a single policy-protection against imports-turned companies that would surely have been business failures into highly profitable operations. This suggests an obvious but critical relationship: While government policy did not directly enhance the competitiveness of Japanese automakers abroad, a key factor in the success of Nissan, Toyota, and the entire Japanese automobile industry was protection at home and, simultaneously, a taste of international competition through tie-ups and gradual increase in exports” (Preface: XIX to XX).

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Dawning

• US GOVERNMENT

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Information barriers

• Arise from MNEs’ relative unfamiliarity with the unique characteristics of a host country’s business environment.

• These characteristics include customers’ tastes, business customs, supporting industries, the culture, and the legal system (Hymer, 1976; Buckley and Casson, 1976; Dunning, 1992; Zaheer and Mosakowski, 1997).

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Example

• TCL MOBILE PHONE

• Trucks

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Resource barriers

• Arise from resource constraints, especially financial resource constraints, that face MNEs when they try to employ their superior technological resources in a host country.

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Indicators

• Many MNEs face strong competition, mainly from other MNEs (Mowery and Nelson, 1999; Lester, 1998; Womack, 1991), and have low profit margins and have to operate on tight budgets.

• The 512 key local enterprises in China had much higher average profit margins in 2001 than the Fortune 500.

• The profit/sales ration: 6% vs. 2.8%

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Coordination barriers

• Arise from the complexity of coordinating activities within MNEs (Chandler, 1962; Freeland, 1996; Doz, 1986; Bartlett and Ghoshal, 1989; Carroll, 1993; Dunning, 1992; Studer-Noguez, 2002).

• Example: Auto firm

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Commitment barriers

• Come from MNEs’ LOW commitment to a host country market. – Home country market is of strategic importance (Stude

r-Noguez, 2002; Bartlett and Ghoshal, 1989): key sources of revenue and profits; superior technological resources

• Studies: Amsden, 2001; Amsden and Chu, 2003; Zhang, 2000; Gao, 2003. – Amsden (2001) : foreign direct investment plays a trivi

al role in the early stages of many latecomer countries’ industrialization and development.

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Opportunities for improvement

• Definition: – Development of emerging technologies– Development of mature technologies– Technology transfer

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Development of emerging technologies

• Four kinds of opportunities– Learning– Cultural– Incentive– organizational

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Learning opportunities

• Entry barriers are low when a new technology is emerging (Perez and Soete, 1988; Utterback, 1994; Tushman and Rosenkopf, 1992).

• Local firms might be able to develop equivalent or even better technologies than those developed by MNEs (Wang, 1999; Gao, 2003; Perez and Soete, 1988; Lee and Lim, 1998; Hobday, 1990).

• Examples

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Cultural opportunities

• Corporate culture advantages that local firms might have over MNEs in perceiving and developing emerging technologies.

• A leading organization tends to develop the NIH (not invented here) syndrome, believing that it has a monopoly on knowledge in its field (Katz and Allen, 1982; Cohen and Levinthal, 1990; Hamel, Doz, and Prahalad, 1989).

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Example

• GE in the late 1970s– Major Appliance Business Group (MABG) did not beli

eve that Matsushita and other Japanese firms could develop better refrigerator compressors, even when GE’s Canadian subsidiary was about to buy Matsushita’s products (Magazine and Patinkin, 1989).

• Local firms are followers and are thus less established, they should be less subject to an NIH syndrome.

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Incentive opportunities

• Come from the greater incentives that local firms might have, compared to MNEs, to develop and use emerging technologies.

• Incumbent firms are reluctant to develop and use emerging technologies because these technologies might cannibalize their existing businesses (Foster, 1986; Henderson, 1993).

• Local firms, as followers, should be less worried about the cannibalization effects and should have greater incentives

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Organizational opportunities

• Arise from the greater structural flexibility of local firms.

• Incumbent firms’ existing organizational structures and procedures have developed to support existing strategies and operations.

• Difficult for incumbent firms to change these structures and procedures and allocate necessary resources to support the development and utilization of emerging technologies (Christenson and Rosenbloom, 1995; Clark, 1985; Henderson and Clark, 1990; Tushman and Rosenkopf, 1992 , Burgelman, 2002, Christensen and Bower, 1996).

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Development of mature technologies

• Two kinds of opportunities – Reinvention opportunities– Adaptation opportunities

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Reinvention opportunities

• Possibilities for local firms to reinvent mature product and process technologies.

• Diminishing returns for MNEs (Perez and Soete, 1988).

• For local firms is of critical importance

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Conditions conducive to the reinvention of mature technologies

• Much information about mature technologies is widely available.

• Application of new tools, such as computer integrated manufacturing systems (CAX, CIMS).

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• Leading domestic telecom equipment firms in China (Shen, 1999; Gao, 2003).

• CIMS in China– Beijing No.1 Machine Tool Plant actually won t

he SME 1995 Industry Leadership Award (Wu, 2001).

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Adaptation opportunities

• Possibilities for local firms to improve their technological capabilities by adapting mature technologies to the local environment.

• Both product technology and process technology are developed to solve particular problems in particular technical, business, social, and political contexts (Tushman and Rosenkopf, 1992; Utterback, 1994).

• Technology has implicit and tacit aspects, rather than being fully specified (Pavitt, 1985).

• Technology must be adapted and modified to fit new contexts or environments.

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Technology transfer

• Pavitt (1985): sources and patterns of technological progress vary among sectors.

• In supplier-dominated sectors and scale-intensive or production-intensive sectors, machinery suppliers play crucial roles in technological progress

• Many Japanese firms in the petrochemical and steel industries (Hikino, Harada, Tokuhisa, and Yoshida, 1998; Dertouzos, Lester, Solow, the MIT Commission on Industrial Performance, 1989).

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Key challenges

• Not money, not capabilities

• Urgency and confidence

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•Thank you!