Innovation and Catch-up in Chinese
Telecommunication industry
Xielin LIU
professor
School of Management
Graduate University of Chinese Academy of
Science (CAS)
liuxielin@gucas.ac.cn
outline
 A review of theory of catch-up
 A new framework for understanding catch-
up in China
 Catch-up in telecommunication industry of
China
 conclusion
Theory of catch-up

Gershenkron (1962) argued that targeting rapidly
growing and advanced technologies is the
advantage of catch-up countries.

Using a “window of opportunity” that may arise
in the evolution of a technology system to catchup with appropriate social, industrial and
technology policies, a country may catch-up.
Otherwise, it will continue to lag behind (Perez
and Soete,1988)
Theory of technological regime
 A new approach argues that the technological regime affects the
nature and success of innovative activities of those firms trying to
catch-up (Breschi, Malerba and Orsenigo, 2000 ). Technological
opportunity, appropriabiity of innovations and cumulativeness of
technical advance and the property of knowledge base.
 In the case of Korea, Lee and Lim(2001) argue that regimes, in
which innovation is more predictable and frequent will give
latecomers more opportunity to catch up; such as DRAM and
automobile industries in Korea.
 In the opposite case, latecomers will have less opportunities to catch
up; the PC and consumer electronics industries in Korea also
illustrate this situation.
Case of China
 China has make great economic achievement in the last twenty
years. How to understand the catch-up process in China.
 Different background and approach for catch up: Japan and China

in Japan, limited role of FDI, strong governmental role and social
innovation. More shop-floor processing innovation.
 China: strong role of FDI important, transition economy, more alliance
and outsourcing strategy.
 In the Western literature, Chinese companies are still copy cats
rather than innovators. China is country with huge manufacturing
capability but poor in science and innovation. Kenny: Chinese
companies in NASDAQ, Multinational R&D labs in India and China
 Less papers on catch-up in China.
 Our paper tries to illustrate how one Chinese industry makes a fast
transition from an imitative stage to an innovative stage in the past
20 years.
Why telecommunication industry ?
 The industry entered its fast track since 1980s.
 It is the fastest growing industry in China and in the
world. Even in the dismal period after the bubble of .com
collapsed in USA.
 Telecommunication industry in China keeps its high
growing pace, makes itself the target market of global
telecommunication equipment makers, such as Motorola,
Nokia and Ericsson, etc.
Outline of Chinese ICT industry
2000
2006
Average annual
growth
Fixed phone
users
145 million
371 million
21%,
1/4 of the world
Internet users
33.70 million
131 million
31% ,
1/10 of the
world
Wireless phone
users
85.0 million
449 million
40%
Sales of ICT
industry
607 billion
3800 billion
(2005)
31%,
Number 3 in the
world
Source: 吴邦国在2006年世界电信展开幕式上的讲话, 2006年12月3日.
Catch-up in Telecommunication industry of China
 Mu and Lee(2005) found that the important factors in the
catch-up are the strategy of “trading market for
technology”, the knowledge diffusion from Shanghai Bell
to R&D consortium and Huawei, and the industrial
promotion by government.
 The technological regime of telephone switches is
featured by a more predictable technological trajectory
and a lower cumulativeness.
Question:
But why Chinese automobile and other industries with
very similar of technological regime, industrial promotion
and technological regime, do not show a similar strong
trend to catch-up?
Key factors for successful catch-up in China
 Existing or imported product or technologies are the
starting points for companies in catch-up countries to
make the innovation decision. if there is a large gap
between the imported products with local demands, the
domestic companies will get a strong incentive to
innovate.
 The design of existing foreign product system can be
lead or lock out the late innovator. Totally openness of
the product system design can give latecomers more
opportunity to make innovation based on the existing
product system. Closeness means not easy for
latecomers to learn and enter its future development.
 If the latecomer company can access to new technology
by licensing, alliance or by making themselves, the
opportunity of innovation will be more open. The
availability can be technical problem. The new
technology can come from other industry.
Five key elements for successful catch-up
 Finding mismatch area: innovation in low-end market
 Technological opportunity: new technology from other
industry or existing industry.
 Governmental support: market for technology, stageskipping.
 Licensing and outsourcing strategy: role of FDI and
university
 Innovation strategy: path-following or stage-skipping

Figure 3: A model of catch-up in Chinese industry
Market knowledge:
Gap between the
existing products and
Chinese market needs
Government role: strategy,
R&D programs, R&D
consortia, standard setting,
public procurement
Company’s strategy:
Cost and market
segmentation
Technology opportunity:
The redesign possibility
of the product
The birth of new
technology
The role of university
and GRIs.
Alliance strategy: joint
venture, licensing,
acquisition, collaboration
Catch-up and
Innovation
Path-following Catch-up in the digital phone
switches:
 The boom of fixed phone market from 1978, there
was a boom for fixed phone market and digital
phone switches.
 The market was almost monopolized by imported
or foreign joint venture products.
Table Main indicator of telecommunication industry in China
Indicator
Unit
1995
2000
2001
2002
2003
2004
Investment
Billion
199.5
231.4
264.2
210.6
224.6
217.3
Local fixed
phone switches
million
gate
72.0
178.3
255.7
286.6
350.8
423.5
Long distance
fiber
1000
kilometer
110
290
400
490
590
700
User of fixed
phone
million
40.7
144.8
180.4
214.4
263.3
312.4
Fixed phone
popularity
set/100
people
3.4
11.5
13.9
16.8
21.2
24.9
User of mobile
phone user
Million
3.6
85.3
144.8
206.6
268.7
334.8
Mobile phone
popularity
Set/100
people
0.3
6.8
11.2
16.2
20.9
25.9
资料来源：根据《中国电子工业年鉴（1990～2005）》，中华人民共和国信息产业部网站等所提供的公开信息整理。
Digital phone switches were dominated
by foreign JV’ s products
Company
multina
tionals
Equity share by
Chinese partner
Start year
of
production
S-1240
Shanghai Bell
Alcatel
Belgian
60%
1986
500
EWSD
Beijing International
communication
Siemens
Germany
60%
1992
300
Nangjing Ericsson
Eriksson
Sweden
43%
1993
80
Tienjing NEC
NEC
Japan
60%
1994
70
Qingdao Lucent
Lucent
USA
49%
1995
150
Guangdong Nortel
Nortel
Canada
60%
1995
100
Jiangsu Fujitsu
Fujitsu
Japan
35%
1995
100
Product type
AXE10
NEAX61E/61
5ESS
DMS-100
F-150
Total
Sales volume
(10000
lines)1997
1300
But there was mismatches of the products
with the market
 Most of imported or JV’s products were used in the
large city areas and their design were based on
market needs in their own main market, did not
care much about needs in Chinese market. For
example, fixed phone users often access internet
via fixed line, this made the phone line very busy,
Huawei found that problem and introduced a
solution for that.
 The prices of their products were usually high, the
users in the small cities or rural areas could not
afford.
Availability of knowledge
 Government’s strategy “market for technology ” to
require the foreign JV to transfer some technology
(Mu and Lee, 2005).
 The spillover of FDI: demonstration, labor turnover
and others, e.g.,Shanghai Bell had provided lot of
training and maintenance work for the Chinese
customers, that is one the important opportunity
for Chinese to learn the technology.
 Private company: heavy R&D investment.
The invention of HJD-04 domestic digital phone switches
 Key engineer Mr. Wu had years of experience with





Japan F-150 system, before that, he was a engineer for
computer research.
With government support (Ministry of Post and
Telecommunication), the project team (a R&D consortia
of government research institute and SOEs) of domestic
digital phone switches are familiar with Shanghai Bell
technology.
Computer technology had progressed much than the
time of development of existing foreign technology
engineers thought it was better to apply design structure
to digital phone switches.
The new product integrated the advantage of Fujitsu’s
F-150(centralized control system), Shanghai Bell’s
S1240(distributed control system) and computer design.
The sale of the product firstly by SOE, great Dragon.
This is a typical top-down catch up model in the earlier
stage of the innovation.
Open network system for fixed phone
switches
 The Chinese network system is based on an
open No.7 signal system and it opened a
time for lots of foreign products to enter
Chinese market widely
 It also paved the way for the late entrance of
domestic companies with new technology.
Late innovators—Huawei and ZTE
 But the in digital switches market, coming late means got
more. Huawei and ZTE, both late comers, but these two
companies with an ownership structure of private
companies, aimed the low end market with their own
technology.
 In 1993, ZTE launched out digital product, ZXJ2000 for
rural market; in 1995, Huawei developed its own digital
product: C&C08. Both ZTE and Huawei aimed at rural
market (small towns and counties) which is neglected by
multinationals.
 Both of them started earlier to develop product of
accessing equipment which can make exchange among
different system of digital switches possible.
The sales of telecommunication manufactures in China in billion yuan
Table The sales of telecommunication manufactures in China in billion yuen
1994
1995
1996
1997
Shanghai Bell
5.12
4.54
4.57
5.00
Beijing International
Switcher
1.57
1.02
1.72
1.99
Eastern
telecommunication of
POST
1.55
2.84
3.90
4.63
Shanghai
Telecommunication of
POST
0.47
0.57
0.61
0.65
Beijing
telecommunication of
POST
Huawei
Sources: Top100 Chinese IT companies.
4.89
1.28
Na
4.19
Huawei’s market share in switches in China(unit:100 lines)
Sales
Market
share(%)
1997
4115
20
1998
7000
24
1999
7500
32
2000
16500
35
Path following in GSM and 3G
 From 1995 on, the market had undergone a sharp change: mobile
telecommunication became the hot products and experienced a fast
growing stage. Motorola, Nokia and Eriksson became the main
players in the new market.
 In GSM system, there is Abic interface between base station
controller (BSC) to base transceiver station (BTS) that is not open.
 If in a regional system of mobile telecommunication is deployed, all
mobile switches, BSC and bases have to be compatible. This makes
locked in become possible.
 As all of the telecommunication infrastructures were built by foreign
companies, it left no space for domestic companies for Huawei and
ZTE. Besides, Motorola, Nokia and Eriksson have long experience
in GSM than Chinese new comers.
How domestic companies do
 To earn the new market, especially the CDMA market.
CDMA is one of the technologies to break the GSM
monopoly in China.
 To get some of GSM marginal market with lot of
incremental innovation for Chinese market. Huawei
constructed mobile intelligent network for China mobile
for users to make prepay phone call possible.
 When text message becomes big market for value
added service, Huawei quickly established their
capability here and get two third of Chinese market for
the equipment.
 To go global to access international low market. Chinese
companies are good at innovation for low-end market.
Stage-skipping in TD-SCDMA
 From 1990s on, government had supported research on
CDMA in GRIs under MPT. MOST began to support
research on CDMA in 1993 and 3G in 1997. But the
research basically followed the path of Ericsson and
Qualcomm, though had made some progress but no
breakthrough. But the research in GRIs provided some
basic knowledge for 3G technology.
 Chinese companies have already accessed necessary
knowledge from Qualcomm via government help. In
2000, in order to get Chinese market share, Qualcomm
licensed its technology to Huawei, ZTE, Datang and
other companies of base station, switches and handset.
This is a action as a result of market for technology, but
also the strategy of multinational to enter China。
Role of overseas Chinese engineering and international
standard
 In 1994, overseas Chinese, one work for Motorola , the other in
University of Texas, Austin developed a new wireless network
technology to bypass Qualcomm’s technology. They set up a
company called CWILL in the USA and at the same time, they set a
Chinese joint venture called Xingwei between CWILL and Research
Academy of Post and Telecommunication of MPT.
 Based their work, in 1995, a new technology was invented by those
mixed research group: a TDD model other than FDD model of
WCDMA and CDMA2000. The new technology system is called TDSCDMA (Time Division - Synchronous Code Division Multiple
Access), with characteristic of synchronization, smart antenna and
software defined radio, Joint detection, banton handover, high-speed
transmission technology for downlink packet data. The main inventor
is the overseas Chinese engineer.
 In 2000, TD-SCDMA, supported by government, became the third
3G standard in the world.
Alliance with Siemens to develop the product
based on the concept
 Datang and Siemens signed the contract. The
development project is consisted with two parts,
base station and end product.
 Siemens almost finished the joint development in
base station, as for a long time the market is not
clear, so Siemens stopped the further
development of end products. It is just because
this complex joint process, there is a wide
distribution of patents in this technology.
Further support by government
 In 2002, the government supported the new technology.
State Development and Reform Committee, MOST and
MII jointly made a strong support for the industrialization
of TD-SCDMA.
 They supported a TD-SCDMA Alliance so that more
companies can join and share the benefits of new
technology. Just by a GRI-transformed company is not
enough for the hard task. The members of companies in
the alliance included Huawei, ZTE, China Putien, Lenove
and others. Secondly, the government invested 0.7
billion for further testing and other purposes.
 They gave TD-SCDMA a 155m wireless frequency for its
future uses. All these methods emitted a strong signal
that TD-SCDMA technology is now an authorized
technology for future 3G markets.
The paradox of stage-skipping catch-up in TDSCDMA: financial and technical issues
 The technology is still undergoing small scale of testing
for further improving. Datang has already spent about
two billions Yuan for R&D of TD-SCDMA.
 Most of the money came from bank loan. Who will spend
more money to finish the testing and improving before
the final use is still unclear. The operators and
government can not fully decide before all the tests
finished.
 TD-SCDMA is not compatible with that of WCDMA and
CDMA2000. another important issue for its future.
SOE
 How can Datang as an SOE push that further to the
actual uses. This can explain why Datang has difficulty to
find the financer.
 Former experience of digital fixed phone switches is a
good example. Though the SOE Great Dragon is the
main innovator, but the poor management capability
could not guarantee them to spend more money on R&D
for further innovation. They just watched how Huawei,
ZTE and others took over the market.
 Datang may not be the final winner of the TD-SCDMA,
even if the government will issue the certification for that.
 Loose alliance: though there are many local and foreign companies
joining the alliance, this makes future transaction costs very high. It
is not easy to coordinate all players and push the technology
forward.
 Partners of TD-SCDMA.




System equipment: Datang, Siemens, UT Starcom.
Network equipment: Siemens, Huawei, ZTE.
End product chip: TI, Philips, STmicroelectronics;
End product: Samsung, LG, Hauli, Lenovo,etc.
 At the same time, lot of so called alliance partner are watching and
standing by to see the government’s further action. TD-SCDMA is
just one of their technology options.
Market issues
 How big is 3G market will be also a critical for its future.
Some optimistic said that the market value of TD-SCDMA
will be about 400 billion. But some researchers pointed out
that 3G made no money in other countries. Can Chinese
make be an exception?
 Even if the government will issue the 3G certification soon,
it may not Datang win the market. Other domestic and
foreign companies with better marketing and technology
power than Datang are ready to supply their production
system.
 In future’s bidding process, nobody know who will get the
most. In digital switches, Great Dragon is the innovator, but
Huawei and ZTE won the competition.
Public purchase or market purchase?
 Should government or operators decide use of 3G
technology for the market.
 To adapt strategy for indigenous innovation, it seems that
is rational to purchase TD-SCDMA as a main 3G
technology provider.
 But as a member of WTO, China is also cautious as to
favors TD-SCDMA against WCDMA and CDMA2000. So,
MII just announced that in order to match the WTO, it is the
operators (market ),not the Chinese government, has the
power to decide what kind of technology and standards
should be used in Chinese market.
 Purchase good technology or low technology: which one is
good for indigenous innovation in China?
The gap between new
foreign product and local
market needs:
incentive to innovate,
private company via SOE,
Open or close of the
new foreign product
system design:
opportunity to
innovate: technology
opportunity.
Availability of new
technology and learning
capability:
capability to innovate:
FDI, Alliance, open
innovation
A framework for bottom-up catch-up in China
conclusion
 I tried to expand technological regime to look at the catch-
up experience in China with large market size and open
economy.
 The mismatch of existing (foreign) product with Chinese
market needs, the openness of the product design and the
availability of the knowledge (FDI, public research institutes
and company’s own R&D) are the most important
interactive factors for industry in a developing country to
catch-up.
 In China, path-following catch-up has proven to be a more
appropriate strategy than stage-skipping in progressive
industry.
 Stages-skipping approach means more risky and need
better government-industry-academic cooperation for its
final success. It has to play the game with the leading
multinationals.
Limitation and next
 I did a research on Chinese information
processing innovation
 Now, telecommunication industry
 next, automobile industry, biology
industry etc.
 Then I can have a better theory to
understand the catch-up in Chinese
industries.