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A Smart Response to China’s ‘Indigenous Innovation’ Policies
By Dieter Ernst

HONOLULU (May 21, 2010) -- At next week’s U.S.-China Strategic and Economic Dialogue talks in Beijing, one hot topic of discussion will be China’s recent adoption of new policies to implement its “indigenous innovation” strategy.

U.S. Trade Representative Ron Kirk has already made it clear that at the second round of the wide-ranging bilateral talks established by President Obama and Chinese President Hu Jintao last year, he will urge Beijing to “step back” on what he called the “flawed and troubling” new policies, which give government procurement preference to companies that develop and register designs, software and other intellectual property in China. Many foreign companies have decried the indigenous innovation policies as a move away from a more open Chinese economy.

Here is some advice I would give the U.S. delegation on approaching this issue, based on more than 30 years of research on innovation policies in emerging economies.

First, we in the U.S. need to accept that lecturing China on what it should do to comply with the American system of innovation and standardization is counter-productive.

Debates on China’s indigenous innovation policies need to take into account the fact that such policies differ across countries as well as across industrial sectors, reflecting the unique characteristics of a country’s economic institutions, its stage of development, and its culture and history. For China, with its legacy of the planned economy, this means that the state will continue to play an important role as a creator of institutions (including a robust legal framework) as tools for strengthening China’s indigenous innovation.

At the same time, I would argue that we should take a more proactive role in exposing Chinese officials, academics and particularly corporate executives to new innovation policy approaches in the U.S., especially in the management and upgrading of highly complex technology systems, such as the Smart Grid project.

This is an area where we undoubtedly have significant “soft power” – we have ideas to offer on how to combine the efforts of private industry and government in new ways that haven’t been tried before, and there is great interest in China to learn from these debates and policy initiatives in the U.S. Such practical exchanges of knowledge can go a long way toward reducing current tensions and laying the groundwork for longer-term U.S.-China cooperation on innovation policy.

Second, I would say that initial fears about negative impacts of Chinese indigenous innovation policies on foreign companies may need to be reconsidered, in light of the fact that Chinese authorities have toned down some of the policies’ more harsh initial provisions in response to complaints by both Chinese and foreign organizations.

For instance, China’s definition of “indigenous innovation” now appears to be quite pragmatic, and goes well beyond a narrow focus on radical breakthrough innovations.

In recent phone interviews with major U.S. companies in China, our interview sources have emphasized that, due to the increasing complexity of modular design trends, no company – not even a global technology leader like IBM – can claim full ownership of a particular technology. There are always multiple contributors and patent holders.

Hence, even if a product contains only one clearly identifiable locally generated patent, it is likely to be considered an “indigenous innovation product” under the revised Chinese policies.

Earlier reports have focused on the perceived threat of Chinese “techno-nationalism.” But this analysis provides at best a partial picture of the dynamics of change in China’s innovation system. We need to accept that Chinese policymakers are still searching, by trial-and-error, for the best ways to protect China’s own intellectual-property interests while at the same time minimizing possible negative effects on its integration into the global economy.

Our research highlights the importance of understanding the conflicting interests of major Chinese stakeholders, and of related intra-agency rivalries that arguably are an important root cause for an apparent trend towards a more “heavy-handed” government approach to regulation aimed at encouraging domestic industry.

In the case of indigenous innovation policies, three main Chinese stakeholders are seeking to impose somewhat conflicting objectives:

  • Those who support compliance with the international standardization system, such as leading technology exporters like Huawei and Lenovo that already possess a critical mass of registered intellectual property.

  • Those who use standards as a tool to reduce technological dependence, such as parts of the domestic hi-tech industry, research-and-development labs, and universities, often strongly supported by the general public.
  • Those whose main objective is to protect China-based information systems against perceived threats through robust information security and certification regulations.

We need to broaden our analysis in order to understand precisely what policy challenges and opportunities the U.S. is facing as a result of these nuances of China’s new activism on standards and innovation policy.

Finally, we need to take a more multilateral approach toward improving cooperation with China on innovation policies. I strongly feel that it is time to move beyond the current patterns of rivalry between the U.S., the E.U. and Japan in this regard.

At present, all three of the trilateral economic powers are trying to convince China to adopt parts of their policies and regulatory systems aimed against the other trading partners. This obviously provides China with opportunities to use “divide and conquer” tactics.

But more importantly, it confronts China with an uncomfortable choice, since major Chinese players both in government and industry want to cooperate with the U.S. as much as with the E.U. and Japan.

Dieter Ernst is a Senior Fellow in Economics at the East-West Center in Honolulu. He can be reached at ErnstD@EastWestCenter.org .