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China's technology policy change: how effective has it been?

INTRODUCTION

The Chinese central government held the 4th National Conference on Science and Technology on 9 January 2006. At this important meeting, President Hu Jintao and Premier Wen Jiabao made their speeches and announced the decision to develop China into an innovative country. On the same day, the State Council announced and issued the "National Guideline on Medium and Long-term Program for Science and Technology Development (2006-2020)". According to the Guideline, by 2020, China's entire investment in research and development (R&D) is expected to reach 2.5 per cent of the country's gross domestic product, while science and technology will contribute to about 60 per cent of the country's economic development. (1)

The decision to develop China into a country of innovation is a big policy change. The policy that facilitates technology transfer from multinational enterprises (MNEs) is believed to be the basic strategy adopted by local firms in developing countries to grow their own technological capability. (2) Since China's economic reform in 1978, technology transfer has been the most important policy guiding local Chinese firms' technology sourcing; it has also been very successful in improving local firms' technological capability and facilitating economic development. On the other hand, China also adopted a policy of opening up the domestic market to international competition, thus making technology transfer policy less and less effective.

Gao Xudong (gaoxudong@sem.tsinghua.edu.cn) is Associate Professor at the Department of Innovation, Entrepreneurship and Strategy and Director of the MBA Programme in the School of Economics and Management at Tsinghua University. He obtained his PhD in Management from the MIT Sloan School of Management. His research interests include competitive strategy, technology strategy and management of technological innovation.

For example, the telecommunications equipment industry was among the first industries that adopted foreign technology through technology transfer and opened themselves up to competition with MNEs. Many Chinese local telecommunications equipment manufacturing firms went bankrupt because they could not compete effectively with MNEs in the domestic market. This created a lot of dissenting voices against this policy and many people argued that the government should promote locally developed technologies and provide at least some protection to local industries. (3)

China's entry into the World Trade Organisation in 2001 had made the technology transfer policy even less effective because of the growing reluctance of MNEs to transfer technology. First, MNEs are concerned that local Chinese firms might pose a threat to their dominant position. Second, MNEs prefer to be in control of using their own technology in an open market in China. More and more local firms that relied mainly on technology transfer began to lose competitiveness because of increased competition from MNEs. (4)

With the increasing problems of the technology transfer policy, the Chinese government, particularly the Ministry of Science and Technology (MOST) and the National Development and Reform Commission (NDRC) began to rethink China's technology policy from the late 1990s. In June 2003, the Chinese central government invited and organized more than 2,000 experts into 20 groups to study China's science and technology policy. This led to the conclusion that China needed to adjust its technology policy and promote indigenous innovation. Specifically, the three approaches to promote indigenous innovation included developing new technologies based on technology transfer, through integration of existing technologies, and developing radically new technologies. It is however necessary to develop new homegrown technologies.

More than 10 years have passed since China's accession to the WTO and its attempt to address the problems of the technology transfer policy through promoting indigenous innovation. The question is how effective this policy change has been. According to a commentary dated 4 January 2011 in the China Daily, "the country surprised the world with its engineering and technical feats in 2010, when it completed several monumental projects high in the sky, deep in the seas and in-between . . . China has over the past few years transformed from a country that imported technologies to one that leads in innovation". (5)

This article aims to investigate the effectiveness of China's new policy of promoting indigenous innovation in greater detail. Using a comparative case study methodology, (6) four industries, which have made different achievements in indigenous innovation, were examined to answer the research question. The four industries were the passenger car industry, high-speed train industry, wind energy equipment industry and telecommunications equipment industry.

A key finding of this study is that the four industries, being governed by different mechanisms of indigenous innovation, have made different achievements in indigenous innovation. This article reviews the related literature, analyses the underlying mechanisms leading to the differences in indigenous innovation in the four industries, and discusses the policy and strategy implications of the findings.

THEORETICAL BACKGROUND

Technological capability development can be analysed at different levels, namely the firm, industry and national levels. (7) As this study examines indigenous technological innovation in four different industries, the literature on sectoral systems of innovation is of particular relevance. (8) According to the literature, although different industries are stratified into different sector systems, they share three common building blocks in any sector system of innovation: knowledge and technologies; actors and networks; and institutions. The evolution of different sector systems is affected by differences in these building blocks. (9)

Knowledge may have different degrees of accessibility and cumulativeness, and may come from different sources. Specific features of accessibility, cumulativeness and sources of knowledge determine the technological regime of a specific sectoral system, (10) that is, the opportunity to innovate and the possibility of appropriability. (11) For example, industries with high opportunity conditions to innovate and with a low degree of appropriability would attract more entries and encourage more innovation than industries of low opportunity conditions to innovate and a high degree of appropriability.

The evolution of industries is also affected by actors and networks, given that industries are made up of various firms with different beliefs, expectations and competencies. (12) Besides firms, non-firm organisations such as universities, financial organisations and government agencies are also important actors. Firms and non-firm organisations also form market and non-market relationships and networks, which differ across industries. In fact, some scholars find that the competitive advantage of nations comes from specific industries, which are characterised by different networks. (13)

Institutions, which include norms, common habits, established practices, rules, laws, standards and so on, also affect the evolution of industries. For example, in the long run, national and regional institutions may attract industries that are most compatible with them. In fact, this is the case with high-tech industries in the United States and industries related to public demand in France. (14)

In applying the concept of sectoral innovation system to the analysis of industrial evolution and technological catch-up in developing countries, Lee and Lim developed a model to examine six industries in South Korea (Figure 1). (15) According to this model, the technological catch-up of an industry in a developing country depends on the R&D efforts of firms in the industry, and four main driving factors: technological regimes (which take into consideration the uncertainty of technology trajectory, frequency of innovation and access to external knowledge), market conditions and sources of competitive advantage (the importance of gaining an edge in cost, differentiation, or first-mover advantage), firm's strategies (e.g., the strategic intent of firms in catching up), and government policies.

It is proposed that technological catch-up is easier if the technological regime is characterised by a stable technology trajectory, low frequency of innovation, easy access to external knowledge and low labour costs, thus offering the competitive advantage, strong government support and proactiveness of local firms in investing into catch-up in R&D collaborations between public research organisations and private firms. Technological catch-up helps stimulate market catch-up, which will in turn create more favourable conditions (e.g., availability of knowledge and resources) for it.

For example, compared with the telecommunications industry, the automobile industry has a technological regime characterised by a more predictable innovation path, and less frequent product concept changes. The industry has access to some foreign technologies through collaboration with specialised R&D firms in product design. Market conditions in Korea are also favourable for catch-up because of the cost advantage and the market protection policy of the Korean government. Hyundai has been very successful in catching up by taking advantage of these favourable conditions and investing heavily in R&D.

RESEARCH METHODS AND DATA COLLECTION

As mentioned earlier, this article uses a case study methodology and follows the basic principles of sectoral innovation system, taking a systems perspective to examine various factors and their interactions in this study on the four industries in China.

However, extant literature on sectoral innovation systems cannot offer a full explanation of the evolution and indigenous technological innovation of the four industries studied in this article. The Lee and Lim model attests that technological catch-up and indigenous innovation in the automobile industry are not as difficult as in the wind energy equipment industry, the high-speed train industry and the telecommunications industry. However, reality is not consistent with this hypothesis. In fact, technological catch-up and indigenous innovation in China's automobile industry has proven to be very difficult.

This implies that major modifications are needed in order to apply the sectoral innovation system approach in the Chinese context. This study found that market support policies are essential to drive technological catch-up and indigenous innovation, and that joint ventures (JV) are not likely to be an effective vehicle to drive indigenous innovation.

Interviews conducted with people in the four industries constituted the main data source of this study, though secondary data was also used. The author has studied the automobile and telecommunications industries for many years, and has interviewed more than 30 people in the automobile industry, including company vice presidents in charge of R&D, production, human resources, marketing and sales, and senior engineers, as well as more than 40 people in the telecommunications industry, including company chief executive officers, vice presidents in charge of R&D, public relations, and marketing and sales. The author began the research on the wind energy industry and high-speed train industry three years ago, and interviewed more than 30 people in the two industries, including chairs of the board, CEOs and vice presidents in charge of R&D.

Interviews were also conducted with personnel from government agencies such as MOST, NDRC, the Ministry of Industry and Information Technology (MIIT), the former Ministry of Information Industry (MII), and people from industry alliances and associations such as the Time Division Synchronous Code Division Multiple Access (TD-SCDMA) Industry Alliance in the telecommunications equipment industry.

The interviews were semi-structured with a focus on examining factors that affect technological catch-up and indigenous innovation in the related industries. In many cases, interviewers had to take down notes furiously, because the interviewees preferred not to have the interviews tape-recorded, especially when the subject of ineffective indigenous innovation was broached. The interviews typically lasted from one to two hours.

Following the grounded theory development principles, data analysis was conducted simultaneously with data collection. (16) Commentaries were written for each interview and in instances when a theoretical concept seemed to have a new meaning or when a new theoretical concept emerged. Data analysis is an iterative process between raw data, emerging theoretical concepts, related literature and inter-relationships generated from among the theoretical concepts. To ensure the interviews' validity, the author also shared the findings with informants to verify and revise the concepts.

DIFFERENT ACHIEVEMENTS OF INDIGENOUS INNOVATION

This section discusses the fruits of indigenous innovation in the four industries. Measuring innovation performance is difficult, although new technology and new product development, patent data, an increase in market share based on technological innovation, etc., could be indicators of innovation performance. (17)

Table 1 shows the number of patents applied by representative firms in the four industries. It is evident that the telecommunications industry had filed a large number of patent applications before 2008, whereas most of the patent applications filed by the other three industries occurred between 2008 and 2012. Given the fact that the 4th National Conference on Science and Technology was held in 2006, it appears that all four industries have been making progress in indigenous innovation since.

However, as patent data have obvious limitations in measuring innovation performance, indicators such as core technology development, proprietary brand development and market share, complemented by patent data, were used to evaluate indigenous innovation performance. This study focuses on the "Big Three" in the Chinese automobile industry, namely the Shanghai Automotive Industry Corporation (SAIC), the First Automotive Works (FAW), and the Dongfeng Motor Corporation (DFM). As the three largest automobile and passenger car makers, the SAIC, FAW and DFM were selected by the government as the first group of companies to form JVs with MNEs. In October 1984, the SAIC signed an agreement to set up its first JV, Shanghai Volkswagen (SVW), with Volkswagen (VW). (18)

Although the "Big Three" have been facing tremendous pressure to embark on indigenous innovation, (19) they have made very limited progress in this area (Table 2 and Figure 2). For example, core technologies such as engine, transmission and electric injection are still tightly controlled by MNEs. (20) A senior manager at the DFM commented, "We have not developed technology development capabilities. We have nothing except for capability to manufacture MNE-developed cars. Our JV is based on technology licensing. Now our partner is building up their own R&D centre in Shanghai. Does this mean that they are not satisfied with the JV with us? If the answer is yes, what should be our strategy?" (21)

A direct result of the slow development of technology capabilities is that proprietary brand passenger cars account for a small percentage of the total production. In 2010, the DFM made 1.05 million passenger cars with only 21,000 were from its proprietary brand, Dongfeng Aeolus (Table 2).

The situation at the SAIC is similar. Although one of the three strategic goals of forming SVW was to build up technological capabilities and develop proprietary brands, the SAIC has been lagging behind in this aspect, and did not release its first proprietary car brand, Roewe, until 2007, almost 23 years after its first JV was set up in 1984. As a result, out of SAIC's total of 1.53 million passenger cars produced in 2009, 1.52 million were from the SAIC's JVs, and only 0.1 million were from its proprietary brand (Table 2).

Except for Red Flag, the proprietary brand that existed before its JV business, the FAW did not make real efforts to develop its proprietary brand for passenger cars until 2003 when it bought over Tianjin Xiali, a local brand owned by a firm in Tianjin, to form the TJFAW. In 2009, the FAW made 1.15 million passenger cars with only 0.3 million were from its proprietary brands (Table 2). In fact, from Figure 2 it is clear that this M&A contributed significantly to the FAW's car production of proprietary brand.

Compared with the passenger car industry, indigenous innovation in the other three industries has been more effective. In the high-speed train industry, local firms have made impressive progress in technology, product and market. According to a commentary in China Daily, "[i]n September, a China-made fast train reached 416.6 km an hour on the Shanghai-Hangzhou high-speed railway. Two months later, a train on the 1,318-km-long Beijing-Shanghai high-speed railway beat that record by reaching 486.1 km an hour. Sources with CSR Corp Ltd, a major domestic train manufacturer, said in December that an experimental train is being developed that would challenge the 574.8 km an hour speed". (22)

The high-speed train industry develops and upgrades its technological capability by absorbing technology transferred from MNEs, making further adjustments and improvements to the technology, and also showing great commitment to developing new technologies. China Northern Railway Corporation Limited (CNR) is also noted for its exemplary indigenous innovation. In 2004, CNR bought Alstom's 200-kilometre per hour high-speed train technology. After assimilating Alstom's technology and making its own innovation, CNR released its 200-kilometre per hour high-speed train in April 2007. Striving forward, CNR bought Siemens' 300-kilometre per hour highspeed train technology in November 2005, absorbed the foreign technology and released its own 300-kilometre per hour high-speed train in April 2008.

CNR not only assimilates the technologies transferred from MNEs but also adjusts and improves them. For example, CNR has developed the CRH5 platform system offering high-speed trains of 200-250 kilometres per hour speed range, and the CRH3 platform system of 300-350 kilometres per hour to speed range. A third platform, CRH380A, which could offer high speed trains with speed higher than 350 kilometres per hour, has also been developed.

From 2008 to 2012, CNR filed 1,492 patent applications, accounting for 82 per cent of its total patent applications; and China Southern Railway (CSR) filed 5,769 patent applications, accounting for more than 84 per cent of all its patent applications. Considering the fact that both companies built their technological capabilities by technology transfer around 2004-2005, the patent applications data are evidence that the high-speed train manufacturers are making good progress in indigenous innovation after technology transfer.

CNR and CSR not only develop their own technological capabilities but also dominate the domestic high-speed train market through their proprietary brands. This is in sharp contrast to the passenger car industry, whose domestic market is dominated by MNEs' brands. With the capacity to produce its high-speed trains, China has become the world's leader in the construction of high-speed railway networks. By the end of 2010, 7,531 kilometres of high speed railway had been built in China.

In the wind energy equipment industry, Chinese domestic firms have also made impressive progress in indigenous innovation. As in passenger car and high-speed train industries, technology transfer has played a crucial role in the development of the wind power industry. (23) In fact, before 2007, MNEs were the dominant wind energy equipment suppliers in terms of installation capacity. Technology transfer was driven in the form of co-design of products and licensed technology manufacturing-- the key source of technology acquisition--thus spurring Chinese firms to become major suppliers much later. (24)

However, Chinese firms have made impressive technological progress not only in the absorption of transferred technology but also in developing home-grown core technology. The "low voltage ride-through" technology is one such example. Due to the unstable nature of wind power, this technology is of crucial importance for the development of wind energy. Some Chinese firms such as Goldwind and Guodian United Power Technology have successfully developed this core technology. In addition, leading Chinese firms are also developing new and revolutionary wind generation systems. (25)

Unlike the passenger car industry, leading Chinese firms in the wind energy equipment industry were less dependent on JV or MNEs' brands. Chinese firms chose to focus on developing their own brands instead. With technology transfer and technological capability to develop domestic core technology, Chinese firms have overtaken MNEs as the key suppliers of wind energy equipment. The market share by Chinese firms in terms of accumulated installation capacity has soared from 11 per cent in 2003 to 76 per cent in 2009. This changing trend has encouraged the fast expansion of the wind energy industry. In 2003, the installation capacity was only 98 MW Through the years, the annual installation capacity reached 198 MW, 498 MW, 1.334 GW, 3.287 GW, 6.246 GW, and 13.75 GW in 2004, 2005, 2006, 2007, 2008, and 2009 respectively.

To a certain extent, indigenous innovation from Chinese firms in the telecommunications equipment industry, especially in developing international technological standards, can be regarded as highly impressive. In the 1980s, virtually no Chinese firms were able to supply advanced telecommunications equipment, and the domestic telecommunications equipment market was open to MNEs. From the 1980s to the first decade of the 21st century, MNEs dominated the Chinese telecommunications equipment market. The situation has however changed dramatically. Chinese firms have not only developed strong capabilities in individual technologies and products, leading to large-scale digital switch, (26) but have also advanced in terms of international technological standards. (27)

For example, the TD-SCDMA is one of three international standards for 3G wireless communications. This standard is based mainly on technologies developed by Datang Telecom Technology & Industry Group (Datang). It was proposed in 1998 to the International Telecommunications Union (ITU) by the China Wireless Telecommunications Standard Group (CWTS) as a candidate for 3G mobile communications standards, and was accepted as one of the three international standards by the ITU in May 2000 and the 3rd Generation Partnership Project (3GPP) in March 2001. In addition, new generations of technology based on the TD-SCDMA (time-division long-term division (TD-LTE) and TD-LTE Advanced) are attracting more and more firms from around the world. By the end of September 2012, 11 telecommunications service providers in the world had deployed 12 TD-LTE networks, and 24 telecommunications service providers had signed 31 contracts to deploy the TD-LTE technology.

Technological breakthroughs have led to market breakthroughs. In the 2G era, Chinese firms captured a very small percentage of the 2G equipment market (about 5 to 10 per cent), although China has the largest 2G telecommunications network in the world. In the 3G network, especially in the TD-SCDMA, domestic firms have overtaken the MNEs as market leaders. The market share of domestic firms in the TD-SCDMA is more than 85 per cent, with Datang itself capturing a market share of 30 per cent. Contrary to the prediction that TD-SCDMA would not be successful, this technology is performing well. (28)

According to the MIIT data, by the end of January 2011, there were 22.6 million China Mobile TD-SCDMA users, 15.5 million China Unicom WCDMA users and 13.6 million China Telecom CDMA2000 users. TD-SCDMA had about 43.7 per cent of the 3G market in China. Table 3 summarises the four industries' achievements in indigenous innovation.

DIFFERENT TYPES OF INDIGENOUS INNOVATION

This section explores why the four industries have different achievements in indigenous innovation. The author interprets the findings by analogy with the Lee and Lim model, (29) suggesting that government policy is a dominant factor that directly affects not only a firm's indigenous innovation strategy but also the technological regime and market conditions of the industry.

For example, in the high-speed train industry, government policy has an impact on the technological regime, making it easier for local Chinese firms to access foreign technology. Government policy also affected the market conditions through procurement from local Chinese firms. Enhanced technology transfer and market support had provided high incentives for local Chinese firms to develop indigenous innovation. In addition, both market support and indigenous innovation helped stimulate market catch-up, which in turn provided more resources for indigenous innovation.

More specifically, this study found that different government policies in the four industries have led to different types and results of indigenous innovation, namely: (i) JV-based indigenous innovation in the automobile industry due to the preferential policy towards JVs; (ii) dominant customer-led indigenous innovation in the high-speed train industry based on the "trading market for technology" policy; (iii) policy-stimulated indigenous innovation that has the Chinese government's support, for example, in the development of the wind power sector; and (iv) co-evolution-based indigenous innovation that stimulates home-grown innovation. The following section discusses the specific mechanisms of the four different types of indigenous innovation.

Passenger Car Industry

Indigenous innovation in the automobile industry is mainly driven by JVs due to preferential policy towards JVs. (30) This has resulted in lower incentives and fewer resources allocation for Chinese firms to be involved in indigenous innovation, and constraints imposed by MNEs made innovation unfavourable. Specifically, Chinese firms' low incentives for involvement in JV-based indigenous innovation are related to JVs' fixation with short-term high performance.

In typical SOE-MNE JVs in the passenger car industry, the MNEs introduce mature models to be manufactured in China because these models, having been tested in the international market, not only have lower technical and market risks but also higher brand recognition. Therefore, producing mature models developed by MNEs in JVs is an effective strategy to quickly capture market share and improve profit. (31) For example, when the SAIC and VW set up SVW in October 1984, they were the first passenger car JVs in China and basically had no competitors for many years, thus making them JV success stories. This also helped the SAIC substitute the FAW as the leader in the Chinese automobile industry. In fact, in 1999, SAIC's profit was RMB6.2 billion, accounting for 76 per cent of the Chinese automobile industry's entire profit. (32)

In contrast, the development of proprietary car brands faced many challenges that hurt short-term performance. Apart from the fact that domestic firms do not enjoy the strong brand recognition that MNEs do, developing new models involves high technical and market risks, hence SOEs have incentive no to encourage and promote innovation. Mr. Chen Qingtai, the former CEO of the DFM, explained the rationale of following the JV model: "If we insist on developing our proprietary brands but our competitors choose to transfer mature models through JVs, we would definitely be behind them at least 10 years or 20 years. Firms are for-profit organisations and have to make money. This is the reality". (33)

A direct result of local firms' low incentives to be involved in JV-based indigenous innovation is limited allocation of resources to the development of technological capabilities and proprietary car brands. The first indication of poor resources allocation is the tendency to give higher priority to the setting up of new JVs. As indicated in Table 4, all three firms, the SAIC, DFM and FAW, set up their second JV with MNEs before they started developing their proprietary car brand. In fact, these firms were also slower than domestic firms that did not rely on JVs in developing proprietary brands.

The second indication of poor resources allocation to the development of technological capabilities and proprietary brand is the reluctance to transfer capabilities learned in JVs back to the parent company. In setting up JVs, local firms select the best resources and people to support JVs. However, there is a strong reluctance from local firms to transfer what they learned in JVs back to the parent firms. Staff movement is a case in point. The FAW faces no uphill task in moving senior managers in its JVs to the FAW Car, FAW's subsidiary dedicated to the development of proprietary brand, but encounters difficulty in moving lower-level managers and engineers. An obvious reason is the difference in the income between its JVs and the FAW Car: people working in the JVs enjoy much higher salaries and more benefits. This is not unique to FAW but is common in the auto industry. (34)

The Vela brand from TJFAW, one of FAW's subsidiaries in Tianjin, presents a scenario of how development of proprietary brand passenger cars could also be constrained by MNEs. Vela is a proprietary brand but is based on technology transfer from Toyota. The problem is that Vela was in direct competition with Wechi, a car model developed from a JV between FAW and Toyota, also located in Tianjin. Although Vela received positive market response during its release in 2004, Toyota was able to limit the production of Vela through its control over the supply of core components.

Data on patent applications also seem to suggest the existence of constraints imposed by MNEs. As shown in Table 1, although the SAIC, FAW and DFM are the market leaders and have had an increasing number of patent applications since 2005, in general, they lag far behind Chery and Geely, two local automobile makers that have chosen to rely mainly on internal technology development rather than on JVs with MNEs in indigenous technological innovation.

High-Speed Train Industry

Compared with the passenger car industry, indigenous innovation in the high-speed train industry has followed a different logic, one that can be described as a dominant customer-led process, in which local high-speed train manufacturers (CNR and CSR) have greater incentives to conduct indigenous innovation. Specifically, the Ministry of Railways (MOR), the government agency that manages railway in China and is also the customer of high-speed trains, was not very encouraging in endorsing local high-speed train makers to form JVs with MNEs. Instead, it facilitated high-speed train technology transfer from MNEs to CNR and CSR, thus engendering competition between CNR and CSR. Although CNR and CSR are also SOEs subject to the same performance evaluation system as SOEs in the passenger car industry, they do not have the authority to form JVs to improve their performance, particularly in the short term, and thus the incentives to effectively absorb and develop technologies acquired from MNEs are higher. That the MOR is a demanding customer implies that local firms in the high-speed train industry have strong incentives to improve their technological capabilities.

Local firms have proven their commitment to absorb high-speed train technologies acquired from MNEs. CNR is exemplary in its heavy investment in technology absorption. In China, local firms generally invest more in buying than in absorbing technology. (35) CNR, however, takes a different approach and has invested thrice as much in absorbing the technology as the amount spent on the acquisition of CHR300 technology. CNR has also been very active in strengthening its R&D capabilities. For example, before the acquisition of the CHR300 technology, TRC, CNR's leading subsidiary involved in the transfer of the CHR300 technology, had about 100 people in R&D. Now, TRC has more than 600 R&D scientists and engineers.

Local high-speed train firms' high incentives to develop core technologies stemmed from their experiences. The MOR's decision to consider technology transfer of high-speed train technologies from MNEs came at a time when problems related to technology transfer from MNEs through JVs were highlighted and became a hot topic. A typical case is that the technology transfer strategy in passenger car JVs is widely considered a failure.

In fact, there have been failures of technology transfer through JVs within the high-speed train industry, for example, the JV between ABB and one of CNR's subsidiaries in Shanxi Province. Although the CNR subsidiary had accumulated strong technological capabilities in transformer, the technological edge was quickly lost after the setting up of the JV. A key reason was that the foreign partner dominated the JV, involving only transferred technologies. The subsidiary thus did not have the opportunity to apply and further develop the previously accumulated capabilities in the JV. (36)

Local firms in the high-speed train industry recognised from their negative experiences in JVs that MNEs are willing to transfer only basic fundamental technologies and not core technologies. Core technologies have to be developed internally in the long run. Based on this understanding, local firms have set up R&D centres focusing on different core technological areas. For example, CNR's Dalian Electric Traction R&D Center focuses on the development of core technologies in electric traction. (37)

Wind Energy Equipment Industry

In the wind energy equipment industry, indigenous innovation has been governed by a third logic: government policies created attractive incentives and made resources available for local firms to embark on indigenous innovation. To some extent, the government policies incepted the creation of the wind energy equipment industry. The government policies not only signalled the potential of a large market that would attract local firm entrants, but also facilitated technology transfer and encouraged the development of internal technological capability as a requirement of localisation rate.

First, the Chinese central government set highly ambitious goals for the wind energy industry, which signalled a big market that would attract investment from both giant state-owned power firms and private companies. The first Wind Concession Program started in 2003 by the NDRC had a total installation capacity of 200 MW, which was not considered high, and the central government had boosted the planned installation capacity for 2005, 2010, and 2020 to 760 MW, 5 GW, and 30 GW, respectively. To fulfil the ambitious installation capacity targets, seven 10 GW-level wind power bases were planned in Inner Mongolia (with two bases), Xinjiang, Gansu, Hebei, Jilin and Jiangsu, with Shandong base as the latest addition. By 2007, the installation capacity of the first five projects of the Wind Concession Programs had reached 3.4 GW. By 2009, the accumulated installation capacity reached 25.853 GW, far ahead of the government's planned target.

Second, the requirement of localisation rate had indeed helped local firms. The then Ministry of Electrical Power began to promote the development of the wind energy industry in 1993 in order to change the energy source structure and meet the installation capability target of 100 MW by 2000. The development progress of the wind energy industry was however slow and the goal was not reached until 2005.

In addition to technological challenges, the high cost of wind energy, which was two times higher (RMB0.8 to RMB1.2 per kilowatt hour) than coal-based electricity, was another factor. The reform of the electricity industry in 1998 required power companies to reduce their power generating cost, and thus there was little incentive to develop this new energy. Due to the higher cost to be shared by local users, local governments also had no incentive to support the development of this new alternative energy. (38)

In order to speed up the development of the wind energy industry, the central government implemented new policies and encouraged cost reductions in 2003. The requirement of localisation rate was one of the new policies implemented. Before 2003, the supply of wind energy equipment was dominated by MNEs, resulting in very high costs, which posed a major obstacle to the rapid development of the wind energy industry. The new policy required that a component localisation rate of 50 per cent (which was later changed to 70 per cent) be reached, thus spurring local firms to be more actively involved in the wind energy industry and resulting in a dip in cost. The market price for wind turbines was RMB6,200 per kilowatt at the beginning of 2008; this dropped to less than RMB5,000 per kilowatt by end-2009 and plummeted further to less than RMB4,000 per kilowatt in 2010. The wind energy industry expanded rapidly with a sharp increase in local firms' accumulated market share from 11 per cent in 2003 to 76 per cent in 2009. (39)

Telecommunications Equipment Industry

Indigenous innovation in China's telecommunications equipment industry is characterised by the Chinese development of international technology standards. This has been governed by co-evolution between firm strategy and government policy, and medium-level incentives and resources for indigenous innovation. Specifically, Datang, the focal company, took numerous actions (including lobbying the government) to promote the TD-SCDMA standard. In response, the government offered Datang and its value chain partners support for the development of the TD-SCDMA standard.

A key challenge in the promotion of the TD-SCDMA standard was the negative impact of latecomer disadvantages (40) as many people did not believe that the TD-SCDMA was as advanced as the other two international technology standards, WCDMA and CDMA2000, or that TD-SCDMA could survive in competition with SCDMA and CDMA2000, though these claims were not scientifically proven in the analysis. (41)

Due to the impact of latecomer disadvantages and unlike the case of high-speed train industry, telecommunications service providers, which are purportedly the main customers, were uninterested in adopting the TD-SCDMA. Also, unlike the case of the wind energy industry, the Chinese government gave no clear signal that TDSCDMA would have a market. Given these challenges, Datang had to take proactive steps to promote TD-SCDMA, which led to a co-evolution process between firm strategy and government policy. Datang had developed three strategies to promote the TD-SCDMA standard.

The first strategy is to establish alignment between TD-SCDMA and national development goals. As discussed earlier, technology transfer has been the most important policy that guides local Chinese firms in technology sourcing since the economic reform in 1978. However, the negative impacts faced in technology transfer led to the Chinese government's decision in 2006 to make indigenous innovation a national strategy and build an innovation-oriented country. Datang made a successful attempt to convince the Chinese government that TD-SCDMA could play an important role in supporting this policy change and national strategy. This is evidenced by NDRC's strong support for the establishment of the TD-SCDMA Industry Alliance in 2002, because it was convinced that TD-SCDMA could help drive the indigenous innovation policy.

The second strategy lies in Datang's initiative and proactivity in offering decision support to the government. As there were intense debates about the advantages and disadvantages of TD-SCDMA, Datang provided effective decision supports such as adequate information and policy alternatives for the government to weigh its options in supporting TD-SCDMA. Datang fulfilled these tasks competently by building an informal social network of non-customer stakeholders such as noted scholars, government officials (including retired officials) and media practitioners.

One such debate was a published report by Professor Hu Angang, a prominent economist from the prestigious Tsinghua University, who argued that China was lagging behind in the development of 3G business and that the government should issue 3G licences as soon as possible. At the invitation of Datang, several very famous telecommunications technology experts got involved in this debate and came to a vastly different conclusion. These experts pointed out that the data used in Professor Hu's report were highly biased, and the calculations made were inaccurate. More importantly, highly specialised technological knowledge is required in making technical judgment about issuing 3G licences. The result was that the central government decided to further delay the issuance of 3G licences in China.

Datang's third strategy was to share its proprietary technology to facilitate the development of the TD-SCDMA value chain. Although getting government support is crucial, it is not easy to gain such a high level of support. Datang believed that maintaining continuous progress in the development of the TD-SCDNA industry value chain is essential. To speed up the development process, Datang decided to share its proprietary technology within the TD-SCDMA Industry Alliance. Member firms, such as ZTE, who are also Datang's direct competitors, were able to access Datang's patented technologies and get technical support by paying very low fees.

The other side of the coin to the co-evolution process between firm strategy and government policy is government support. The Chinese government offered four types of support: (i) support by sending a strong signal (e.g., NDRC's strong support in the setting up of the TD-SCDMA Industry Alliance); (ii) provision of financial support (e.g., RMB700 million was provided to facilitate collaboration among member firms of the TD-SCDMA Industry Alliance); (iii) provision of technical service (e.g., the former MII organised the MTNet test to verify the capability of TD-SCDMA system to be deployed as a standalone network rather than as a complement to WCDMA only, as many experts suggested); (iv) support through administrative order (e.g., the government requested service providers to help systematically test and verify TD-SCDMA from 2005 onwards and finally demanded China Mobile to adopt this technology in January 2009).

Table 5 summarises the key characteristics of the different types of indigenous innovation in the four industries as discussed above.

DISCUSSION AND CONCLUSIONS

This article attempted to examine effective the less of China's policy change from relying mainly on technology transfer to promoting indigenous innovation. The study of four industries suggests different answers. While it is hard to conclude that the passenger car industry enjoys very positive effects from the policy change, the other three industries have enjoyed great benefits from the change. The following conclusions can be drawn from this study.

First, indigenous innovation is possible in China. When China started to open its economy to the world at the end of the 1970s, it chose to rely mainly on technology transfer from MNEs, and expected that technology transfer would be the basis for future indigenous innovation. This policy is consistent with the mainstream literature on latecomer countries' catching up. (42) However, the extant literature also includes an argument that is in sharp contrast with the technology transfer perspective--it is hard for developing countries to catch up by relying on transferring "mature" technologies but it is possible for them to catch up or even leapfrog through the development of indigenous innovation capabilities when new technologies are emerging during periods of "paradigms transitions". (43)

This study provides a new and more balanced perspective: indigenous innovation is possible through both transferring mature technology from MNEs and developing emerging technologies. The high-speed train industry and wind energy equipment industry suggest that it might be possible to realise indigenous innovation based on transferring mature technology, although the passenger car industry suggests that technology transfer will not necessarily lead to indigenous innovation. In the telecommunications equipment industry, the development of international technology standards (TD-SCDMA and TD-LTE Advanced) is an example of indigenous innovation and catching-up in emerging technology.

Second, market pull seems to be more effective than technology push in promoting indigenous innovation. The literature on technological innovation debates the relative effectiveness of market pull versus technology push in technological innovation. (44) This study suggests that market pull is more effective than technology push in promoting indigenous innovation. Compared with the other three industries, the passenger car industry is the least effective in indigenous innovation. As discussed earlier, three factors are responsible for this ineffectiveness: low incentives to do indigenous innovation, low resources allocated to indigenous innovation and constraints imposed by MNEs. The three factors point to a common obstacle for indigenous innovation: there is low market support for local brands. Put differently, the benefits of doing indigenous innovation and developing proprietary brands are uncertain and limited.

In fact, market dominance by MNEs has not only constrained indigenous innovation at the FAW, DFM, and SAIC--China's top three passenger car makers that relied mainly on JVs to transfer technology and capture market share--but also made it hard for local firms that had not formed JVs with MNEs to make progress in indigenous innovation. Figure 4 shows that local passenger car brands account for a small percentage (around 25 per cent) of the total production, although the Chinese passenger car market has been expanding rapidly. In 2009 and 2010, the number reached about 30 per cent for a special reason: the central government offered strong support to small passenger cars for environmental reasons and local passenger car brands are concentrated at the low-end market. In fact, in 2011, the number dropped to 29.1 per cent. In addition, the market share of 30 per cent is far behind the government's planned target of 50 per cent by 2010.

The situation is different in the high-speed train industry and wind energy equipment industry. In the high-speed train industry, MOR, the dominant customer, created the market for local firms (CNR and CSR) by sourcing products from local firms. Of course, the market is not guaranteed. In order to capture the market, CNR and CSR must compete with each other and take indigenous innovation into serious consideration. In the wind energy equipment industry, government policy clearly signalled a huge market, which again is not guaranteed for any company. Instead, local firms have to improve their technological capabilities through indigenous innovation to capture the market.

The situation in the telecommunications equipment industry is more complicated. Indigenous innovation in this industry in the form of developing international technology standards can be regarded as most impressive among the four industries being studied. However, the government did not give a clear signal that there would be a market for TD-SCDMA. Instead, the government offered various kinds of support that could be categorised as technology push: support through signalling, provision of financial support and technical service.

Technology push was helpful but also made the process of promoting TD-SCDMA a long and arduous process. TD-SCDMA was proposed to the ITU in 1998.

After 10 years, it was still facing huge market uncertainties. For example, in December 2008, the TD-SCDMA Industry Alliance and the Tsinghua University Research Center for Technological Innovation (RCTI) invited key handset producers and key IC manufacturers along the TD-SCDMA value chain to have a workshop. The majority of these firms felt that they would have to cut their investment in TD-SCDMA, because they did not feel that the Chinese government was really supporting TD-SCDMA. This was one month before China Mobile's official adoption of the TD-SCDMA standard in January 2009.

The real change came in January 2009. The policy changed from technology push to market pull, because China Mobile was asked to adopt TD-SCDMA technology standard. Although China Mobile was unhappy about this policy, it had to actively promote this technology in order to keep its leading position in China's mobile business. As highlighted, the result is that TD-SCDMA is able to maintain a leading role in China's 3G market. Put differently, had the Chinese government played a more active role in the co-evolution process of indigenous innovation in the telecommunications equipment industry and implemented market pull policy earlier, the promotion of TD-SCDMA would have been much more successful.

Third, internal capability development is the basis of indigenous innovation. Outsourcing technology is an important part of a firm's technology strategy, (45) especially when open innovation is becoming more important. (46) This study confirmed the importance of outsourcing technology. For example, technology transfer from MNEs played a crucial role in both the high-speed train industry and the wind energy equipment industry. However, this study also found that internal capability development is the basis of indigenous innovation.

For example, the Chinese railway equipment industry has a tradition of relying on internally developed technology, and has accumulated good technological capabilities. In fact, the DJJ2 high-speed train, which was based on proprietary technology, reached a speed of 321.5 kilometres per hour in an experiment conducted in November 2002. High-speed trains that were developed from transferred technology did not surpass this speed until April 2008. (47) This accumulation of internal capabilities is an important factor facilitating the absorption and improvement of high-speed train technologies transferred from MNEs. (48)

The importance of internal capability development has clear government policy and firm strategy implications. For example, it is important to recognise the potential negative impact of technology transfer through JVs with MNEs, and avoid institutionalising JVs as the dominant form of technology transfer when the policy goal is to help local firms develop technological innovation capabilities. Technology transfer could take many different forms such as technology licensing, service agreement, production sharing agreement, reverse engineering and JVs. (49)

The importance of internal capability development also raises the question of how open a developing economy should be. If competitive advantages do come from unique resources and capabilities, which are the results of long-term accumulation, (50) making a developing economy highly open to MNEs' competition can hardly be a good policy. (51) Cusumano makes the following points, "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".

For local firms, one implication of the importance of internal capability development is that they have to actively manage the challenge of balancing short-term and long-term benefits when they have to follow the JV-based model in technology transfer. As analysed in this study, it is easy for local firms to become too addicted to the short-term benefits of JVs, develop high dependence on MNEs, (52) and lose control over their own initiatives. As a result, local firms face difficulties in allocating resources to absorb transferred technologies and in developing new technologies and proprietary brands. Their future would be jeopardised. The right choice is not to forget the strategic goal of using JVs as a vehicle to learn and actively allocate resources to facilitate knowledge and technology transfer in JVs back to their parent company in order to improve their technological capabilities. Alternatively, local firms could make an effort to not rely on JVs to transfer technology but to choose other forms of technology transfer such as buying technology.

Fourth, the study has important implications for the international community and MNEs. The policy of promoting indigenous innovation, especially the development of international technology standards led by Chinese firms, has created a lot of concern in the international community. (53) This study seems to suggest that the rise of China's innovation capability is inevitable and these concerns are understandable. One implication of China's rise in innovation capability is that developed countries and MNEs need to take effective action to maintain their technology leadership. With Chinese domestic firms acquiring the capability to develop core technologies, the value of MNEs as the sources of technology transfer would drop. As a result, in order to maintain themselves as a continuous source of technology transfer to Chinese firms and benefit from this process in return, MNEs have to uphold their leadership in new technology development.

The second implication is that developed countries and MNEs may have to adjust their relationships with China and Chinese domestic firms. For example, MNEs should treat Chinese firms as equal partners in technology, or be willing to work with Chinese firms that assume the role as technology leaders. A specific example is related to TD-SCDMA. In the development and adoption of this international technology standard, most MNEs took a wait-and-see attitude, resulting in many lost opportunities to play an important role in China's 3G market, especially in the TD-SCDMA market.

ACKNOWLEDGEMENTS

The author would like to thank the anonymous reviewers for their constructive comments and suggestions, and for the support from the National Science Foundation of China (71272020, 71110107027).

(1) The State Council, "National Guidelines on Medium and Long-term Program for Science and Technology Development (2006-2020)", at <http://scitech.people.com.cn/GB/1056/4091541.html> [10 Feb. 2006].

(2) Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization (Oxford: Oxford University Press, 1989), pp. 3-5.

(3) Zhang Qingzhong, Pu tian: zhong guo zhi zao (PTIC: Made by China) (Beijing: China Yanshi Press, 2000), pp. 17-23.

(4) Chen Jin and Liu Xielin, eds., Zizhu chuangxin yu guojia qiangsheng (Indigenous Innovation and the Development of a Powerful and Prosperous Country) (Beijing: The Science Press, 2008).

(5) "Country Wows World with Engineering", China Daily, 4 Jan. 2011, at <http://english.people.com. cn/90001/90776/90883/7249100.html> [4 Jan. 2011].

(6) Barney G. Glaser, Theoretical Sensitivity (Mill Valley: The Sociology Press, 1978).

(7) William Abernathy and James Utterback, "Patterns of Industrial Innovation", in Readings in the Management of Innovation, eds. Michael Tushman and William Moore (New York: Harper Business, 1988), pp. 25-36.

(8) Franco Malerba, Sectoral Systems of Innovation: Concepts, Issues and Analysis of Six Major Sectors in Europe (Cambridge: Cambridge University Press, 2004).

(9) Franco Malerba and Richard Nelson, "Learning and Catching Up in Different Sectoral Systems: Evidence from Six Industries", Industrial and Corporate Change 20, no. 6 (2011): 1645 -75.

(10) Giovanni Dosi, "Sources, Procedures and Microeconomic Effects of Innovation", Journal of Economic Literature 26 (1988): 120-71.

(11) David Teece, "Profiting from Technological Innovation", Research Policy 15 (1986): 285-305.

(12) Richard Nelson and Sydney Winter, An Evolutionary Theory of Economic Change (Cambridge: Harvard University Press, 1982).

(13) Michael Porter, "The Competitive Advantage of Nations", Harvard Business Review 68, no. 2 (1990): 73-91.

(14) Richard Nelson, ed., National Systems of Innovation: A Comparative Analysis (New York: Oxford University Press, 1993).

(15) Keun Lee and Chaisung Lim, "Technological Regimes, Catching-up and Leapfrogging: Findings from Korea Industries", Research Policy 30, no. 3 (2001): 459-83.

(16) Glaser, Theoretical Sensitivity.

(17) Vittorio Chiesa, R&D Strategy and Organization (London: Imperial College Press, 2001), pp. 113-44.

(18) Martin Posth, Shanghai 1000 Tian (1000 Tage in Shanghai), Chinese edition, trans. Xiang Wei (Beijing: China CITIC Press, 2008), pp. 7-8.

(19) Lu Feng and Feng Kaidong, Fazhan woguo zizhu zhizhichanquan qiche gongye de zhengcexuanze (Policy Choices in Developing China's Automobile Industry with Proprietary Technology) (Beijing: Beijing University Press, 2005).

(20) Ni Wei, Indigenous Innovation in the Chinese Automotive Industry, Master's Dissertation, Tsinghua University, 2011.

(21) Interview with a senior manager at the DFM, 18 Apr. 2010.

(22) "Country Wows World with Engineering", China Daily, 4 Jan. 2011.

(23) Joanna Lewis, "Technology Acquisition and Innovation in the Developing World: Wind Turbine Development in China and India", Studies in Comparative International Development 42 (2007): 208-32.

(24) Wang Zhongying, Ren Dongming and Gao Hu, The Renewable Energy Industrial Development Report 2010 (Beijing: The Chemical Industry Press, 2011).

(25) Interviews with senior managers of Guodian United Power, 12 Dec. 2010.

(26) Fan Peilei, "Catching Up through Developing Innovation Capability: Evidence from China's Telecom-equipment Industry", Technovation 26 (2006): 359-68.

(27) Gao Xudong and Li Jizhen, eds., Zhongguo jishu pinglun (China Technology Review) (Beijing: The Intellectual Property Right Press, 2010).

(28) Dieter Ernst, "Indigenous Innovation and Globalization: The Challenge for China's Standardization Strategy", Policy Studies, (June 2011): 1-123.

(29) Lee and Lim, "Technological Regimes, Catching-up and Leapfrogging: Findings from Korea Industries".

(30) Lu and Feng, Policy Choices in Developing China's Automobile Industry with Proprietary Technology.

(31) Interviews with senior managers of procurement from Zhengzhou Nissan, 7 June 2010.

(32) Lu Ji'an, Ronghe yu chuangxin (Fusion and Innovation) (Shanghai: Shanghai University of Finance Press, 2001), p. 5.

(33) Market Information Consulting Center of China Automotive News, Reference Materials of China's Automotive Innovation (III), 2004, p. 161.

(34) Interviews with senior human resource managers from the FAW, 24 July 2011.

(35) Gao Liang, Zhongguo zhuang bei zhizaoye de zizhu chuangxin he chanye shengji (Indigenous Innovation and Industrial Upgrading in China's Equipment Industries) (Beijing: The Intellectual Property Right Press).

(36) Interview with vice chief engineer of CNR, 29 July 2010.

(37) Ibid.

(38) Wang Zhongying, Ren Dongming and Gao Hu, The Renewable Energy Industrial Development Report 2010 (Beijing: The Chemical Industry Press, 2008).

(39) Ibid.

(40) Gregory Carpenter and Kent Nakamoto, "Consumer Preference Formation and Pioneering Advantage", Journal of Marketing Research 26 (1989): 285-98.

(41) Yang Hua and Lu Yu, "TD shinian" ("10-year History of TD"), in Zhongguo jishu pinglun (China Technology Review), eds. Gao Xudong and Li Jizhen (Beijing: The Intellectual Property Right Press, 2010), pp. 1-28.

(42) Amsden, Asia's Next Giant: South Korea and Late Industrialization.

(43) Carlota Perez and Luc Soete, "Catching Up in Technology and Windows of Opportunity", in Technical Change and Economic Theory, ed. Giovanni Dosi (London and New York: Pinter Publishers, 1988), pp. 458-79.

(44) David Mowery and Nathan Rosenberg, Technology and the Pursuit of Economic Growth (New York: Cambridge University Press, 1989).

(45) Dorothy Leonard-Barton, Wellsprings of Knowledge: Building and Sustaining the Sources of Innovation (Boston: Harvard Business School Press, 1998).

(46) Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology (Boston: Harvard Business School Press, 2003).

(47) Interviews with president and vice chief engineer of CNR, 29 July 2010.

(48) Wesley M. Cohen and Daniel Levinthal, "Absorptive Capacity: A New Perspective on Learning and Innovation", Administrative Science Quarterly 35, no. 1 (1990): 128-52.

(49) Nathan Rosenberg and Claudio Frischtak, ed., International Technology Transfer: Concepts, Measures, and Comparisons (New York: Praeger, 1985).

(50) Jay Barney, "Firm Resources and Sustained Competitive Advantage", Journal of Management 17, no. 1 (1991): 99-120.

(51) Michael Cusumano, Preface to The Japanese Automobile Industry: Technology and Management at Nissan and Toyota (Cambridge: Harvard University Press), pp. xix-xx.

(52) Aimin Yan and Barbara Gray, "Bargaining Power, Management Control, and Performance in United States-China Joint Ventures: A Comparative Case Study", Academy of Management Journal 37 (1994): 1478-517.

(53) Ernst, "Indigenous Innovation and Globalization: The Challenge for China's Standardization Strategy".

TABLE 1

NUMBER OF PATENTS APPLIED BY KEY FIRMS IN THE FOUR INDUSTRIES

                       2008    2009    2010    2011

FAW                       0     436     687     655
DFM                     278     392     477    1,026
SAIC                    169     178     157     291
Chery                  1,142   1,122   1,216   1,095
Geely                   306     892    1,757   2,249
CNR                     259     320     335     338
CSR                     590     660    1,255   1,751
Goldwind                  9      10      15      20
Sinovel                  20      30      44     153
Guodian United Power      2       2      49     160
Mingyang Wind Power      11       9      22      40
Huawei                 5,598   4,547   3,375   3,707
ZTE                    4,928   6,632   6,018   5,045
Datang                  369     563     340     354

                       2012    2008-2012   Total

FAW                     458       2,236    3,507
DFM                    1,143      3,316    4,309
SAIC                    274       1,069    1,495
Chery                  1,072      5,647    7,574
Geely                  2,348      7,552    8,169
CNR                     240       1,492    1,821
CSR                    1,513      5,769    6,833
Goldwind                  5          59       80
Sinovel                 126         373      373
Guodian United Power    255         468      475
Mingyang Wind Power     105         187      198
Huawei                 2,560     19,787    41,224
ZTE                    1,777     24,400    36,738
Datang                  322       1,948    2,826

Source: State Intellectual Property Office of the People's
Republic of China.

TABLE 2

PASSENGER CAR PRODUCTION: SELECTED COMPANIES (IN 10,000)

Firms   Brands             2000   2001   2002   2003   2004

SAIC    Proprietary
        Total production   25.2   28.9   39.1   61.3   61.1

FAW     Proprietary        1.5    1.8    3.0    14.1   14.5
        Total production   12.5   15.2   22.2   51.7   55.1

DFM     Proprietary
        Total production   5.4    7.2    13.2   21.9   21.5

CHERY   Proprietary        0.2    3.0    5.0    10.1   8.0

JEELY   Proprietary        1.5    2.1    4.7    8.1    9.8

BYD     Proprietary               0.5    1.7    2.0    1.7

Firms   Brands             2005   2006   2007    2008    2009

SAIC    Proprietary                      1.7     3.9     10.4
        Total production   56.5   75.9   95.1    96.7    153.4

FAW     Proprietary        20.1   21.2   21.4    22.0    30.4
        Total production   62.4   81.4   114.7   121.6   147.7

DFM     Proprietary                                      2.1
        Total production   41.2   54.8   65.3    68.2    105.3

CHERY   Proprietary        18.0   27.6   32.7    28.1    43.1

JEELY   Proprietary        14.8   20.7   21.7    22.1    33.0

BYD     Proprietary        1.1    6.0    10.0    19.3    42.8

Source: Compiled by the author based on data from the
China Association of Automobile Manufacturers (CAAM).

TABLE 3

COMPARISON OF ACHIEVEMENTS IN INDIGENOUS INNOVATION ACROSS THE
FOUR INDUSTRIES

Industry                     Results of indigenous innovation

Passenger car        Technological capability development: (1) Very
                     slow progress in core technology development; (2)
                     Key components controlled by MNEs.

                     Proprietary brand development: (1) Started very
                     late in developing proprietary brands; (2)
                     Proprietary car brands account for very small
                     percentage (less than 10 per cent excluding M&A
                     data).

High-speed train     Technological capability development: (1)
                     Absorbing advanced technology transferred from
                     MNEs and adjusting and improving these
                     technologies; (2) Steady progress in core
                     technology and key component development.

                     Proprietary brand development: Chinese firms'
                     proprietary brands (for example, CRH5, CRH3, and
                     CRH380A) dominate domestic market.

Wind energy          Technological capability development: (1) Not
equipment            only absorbing transferred technology but also
                     developing core technologies such as "low voltage
                     ride- through"; (2) Progress in developing new
                     and revolutionary wind turbines.

                     Proprietary brand development: (1) Leading
                     Chinese firms chose to focus on developing
                     proprietary brands; (2) Domestic firms' market
                     share increased from 11 per cent in 2003 to 76
                     per cent in 2009.

Telecommunications   Technological capability development: (1)
equipment            TD-SCDMA selected as one of three international
                     standards for 3G wireless communications; (2)
                     TD-LTE Advanced selected as one of two
                     international standards for 4G wireless
                     communications.

                     Proprietary brand development: (1) Leading
                     Chinese telecommunications equipment makers such
                     as Huawei, ZTE, and Datang have become well-known
                     in the industry; (2) Chinese firms have overtaken
                     MNEs as market leaders in the 3G telecom
                     equipment market with more than 80 per cent
                     market share.

Source: Compiled by the author based on interviews and
secondary sources.

TABLE 4

SLOW PROGRESS OF INDIGENOUS INNOVATION IN THE PASSENGER CAR INDUSTRY

Indication of Slow Progress                  Brief Descriptions

Set up second JV as a priority   (1)   SAIC: formed second JV in
to developing proprietary car          1997, and only began to
brands                                 develop proprietary brand in
                                       2007;

                                 (2)   FAW: formed second JV in
                                       2000, and only began to
                                       develop proprietary brand in
                                       2003;

                                 (3)   DFM: formed second JV in 2002,
                                       and only began to develop
                                       proprietary brand in 2009.

Reluctant to transfer            (1)   Best resources and talent
capabilities learned in JVs            selected to support the
back to parent firms                   formation of

                                 (2)   JVs; Appointment and movement
                                       of high-level managers back to
                                       parent firms but not lower-
                                       level managers.

Source: Compiled by the author based on interviews and
secondary sources.

TABLE 5

DIFFERENT TYPES OF INDIGENOUS INNOVATION

Types of indigenous innovation            Key characteristics

JV-based indigenous innovation/   (1) JVs with MNEs enjoy high
Passenger car industry: Low       performance because of mature
incentives and low resources      technology, tested products, and
                                  high brand recognition;

                                  (2) The SOE evaluation system
                                  emphasises short-term performance;

                                  (3)  Developing proprietary brands
                                  involves various major challenges
                                  such as technology, market, brand
                                  recognition risks and obstacles set
                                  up by MNEs.

Dominant customer-led             (1) The Ministry of Railways (MOR)
indigenous innovation/High-       did not endorse local high-speed
speed train: High incentives      train makers to form JVs in order
and high resources                to improve performance; (2) MOR is
                                  a tough customer that demands
                                  technological progress;

                                  (3) There are two equally strong
                                  competitors in the high-speed train
                                  industry;

                                  (4) There were failed experiences
                                  in technology transfer through JVs
                                  with MNEs in this industry.

Policy-stimulated indigenous      (1)  Government policy signalled a
innovation/Wind energy            huge potential market in wind
equipment: High incentives        energy equipment; (2)  Government
and high resources                policy requirement of localisation
                                  rate helped local firms to transfer
                                  technology and encouraged them to
                                  develop their own technology;

                                  (3)  Government policy requirement
                                  of localisation rate also provided
                                  opportunity windows for local firms
                                  to develop their capabilities.

Co-evolution based indigenous     (1)  Latecomer disadvantage created
innovation/Telecommunications     huge challenges for locally
equipment: Medium incentives      developed international standard to
and Medium resources              be adopted; (2)  Datang took
                                  advantage of policy changes to
                                  promote TD-SCDMA, and the
                                  government had the intention to
                                  promote indigenous innovation;

                                  (3)  Co-evolution between company
                                  strategy and government policy was
                                  a long and arduous process.

Source: Compiled by the author based on interviews and
secondary sources.
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