July 20, 2015, by editor
Innovation Policy in China: Building a Thucydides’s Tech Trap?
Written by Regina Abrami.
In 2012, Graham T. Allison, Director of the Harvard Kennedy School’s Belfer Center for Science and International Affairs, warned in a Financial Times opinion piece of potential conflict between the United States and China. A year later, by way of a New York Times article, Allison again issued a clarion call against what he termed “Thucydides’s Trap.” The dilemma seems logical enough: A rising power can inspire fear in an existing dominant power. When not managed well on both sides, Allison claims, war is usually the result.
President Xi Jinping’s 2012 idea of a “new type of great power relationship,” seems to indicate that the hubris of upstart Athens is not to be repeated in China. Xi appealed, after all, for mutual respect, shared benefits, and no confrontation with the United States. Purveyors of the “peaceful rise” idea and those who depict China as a major beneficiary of the current global system, in turn, suggest that any blame for tense Sino-US relations should be directed towards the United States. However, shift the lens a little bit. Look to China’s state-led efforts to create an “innovative economy” by 2020, and you’ll get a very different picture.
China is building a trap that will impede its long term political and economic strategic interests. Put simply, reliance on market-distorting policies is a sure means to do two things: (1) further tensions with the United States and the European Union, and (2) calcify China’s existing knowledge economy.
In the context of WTO regulations, a highly mobile, educated Chinese elite, venture capitalists, and angel investors top-down protectionism is an archaic, ill-equipped means to develop disruptive capabilities. Instead of seeding potentially far-reaching ideas, China’s innovation policies channel energies to state administrators and their dictates, creating a culture of compliance instead of creativity.
Take the case of China’s recently proposed banking regulations. They require an increasing share of only “secure and controllable” technologies in the sector. To obtain this designation, firms need to demonstrate that a given piece of hardware or software can be “self-controlled.” In published rules, such status seems to be contingent on three things: (a) the Chinese government’s ability to maintain and control accessibility (i.e., “backdoors” and source codes); (b) foreign supplier provision of R&D centers in China; and (c) the origin of a product’s intellectual property being China.
Improved cybersecurity is the stated official motive for these regulations, but critics have described these proposed regulations as an intolerable mix of protectionism and forced technology transfer aimed to eliminate foreign firms from China’s lucrative ICT sector. It would not be the first time. The phrase, “de-I.O.E.,” dates to 2008 when Wang Jian, now Alibaba’s Chief Technology Officer and former Assistant Managing Director at Microsoft Research Asia, moved to do away with the company’s existing IT network which depended on the three big players, IBM (I), Oracle (0), and EMC (E). Wang’s long game was a shift to cloud computing to globalize the company’s operations, cut costs, and ultimately create an alternative to the dominant mobile operating systems found in China – namely, Android and iOS (Apple).
Aliyun was Alibaba’s cloud result, with its mobile platform operating system, YunOS released in 2011. The Chinese government has supported Alibaba’s efforts wholeheartedly, making YunOS the only approved mobile operating system on the 2014 central government procurement list. With this climate for business, there can be little wonder that China’s Academy of Sciences thought it prudent to develop products in this area as well, releasing the more patriotically named “China Operating System” (COS) in 2014. YunOS and COS, nonetheless, remain market duds.
Android continues to rule in China, even as the number of foreign ICT products getting kicked off China’s central government procurement list continues to grow. It prevails because of the ecosystem that put it where it is today, and perhaps especially the Open Handset Alliance which brings together 84 firms of varying national origin, to ensure open source standards for their industry, including compatible versions of Android.
Indeed, where Chinese firms have responded to market-driven needs, they have usually excelled, often incrementally innovating along the way. “Pony” Ma (Ma Huateng), Tencent founder, in describing the instant messaging service, We Chat, for example, described its success as the result of “micro-innovations.” Similar incremental innovations occur at all points along China-based supply chains, including cost reductions, process improvements, and quality performance changes, each geared to suit customer preferences and enhance producer margins. As a result, Chinese firms have at times won the “fight for the middle,” ultimately acquiring a dominant market share at home and abroad in many lower and mid-market product segments.
Therefore, the Chinese government’s push to frame homegrown innovation as a zero sum game with the world is a sure-fire way to ensure that the only gates closing down technologically will not be China’s but everyone else’s. Not only will trade disputes with China continue as a result but, as seems the case already, leaders will take their disputes to the front page. Hacking, snooping, and stealing are hardly new in the business of international ICT competition, but when dominant powers openly point fingers, as Obama and others now do, it is time for the Chinese government to consider that it may have picked an unnecessary fight. Chinese firms are feisty enough in their own right. Surely making it easier for the rest of the world to restrain them cannot be China’s end game? State-led technonationalism has no place in today’s world of spatially expansive value chains.
Dr Regina Abrami is a Senior Lecturer in Political Science and a Senior Fellow in the Management Department of Wharton School of Business, and Director of the Global Program, the Lauder Institute of Management and International Studies Image Credit: CC by Sam Churchill/Flickr.
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