The "Indigenous Innovation" Policy Revoked?

As of July 1, 2011, the Chinese Ministry of Finance revoked a set of controversial measures that promoted the purchase of products embodying Chinese domestic intellectual property during government procurement.  News of the revocation can be found at various places such as Forbes, Shanghai Securities News, and the Ministry of Finance (Chinese).

These measures were part of an “indigenous innovation” policy sought to encourage domestic innovation by dangling the carrot of large government purchase orders in front of Chinese businesses.  Since their inception in 2006, they have been criticized for possible discriminatory effects in favor of domestic Chinese firms over foreign firms during the government procurement bidding process.   The issue came up during several high-level US-China trade discussions, and earlier this year China promised to sever government procurement practice from the national origin of intellectual property assets.  The Whitehouse press release summarized thus:


The United States and China committed that 1) government procurement decisions will not be made based on where the goods’ or services’ intellectual property is developed or maintained, 2) that there will be no discrimination against innovative products made by foreign suppliers operating in China, and 3) China will delink its innovation policies from its government procurement preferences

So China made good on its promise, to which businesses applauded.

It is unclear what led to the quick policy change.  Perhaps the government simply wanted to get the best deal on the market and leave social engineering outside the procurement policy.  On an over-night train from Beijing to Shanghai, I met a friendly family of three.  The mother works at Baosteel, the largest steelmaker in China and is owned by the state.  She complained of not being able to use Microsoft Office suite at home because its files are incompatible with the software at work.  As it turned out, her office computer in Baosteel runs a set of domestic office productivity software that “doesn’t work very well.”  I wondered what took place during Baosteel’s IT procurement bid.  And I wondered how many government workers and directors face the same problem as this worker.

Alternatively, perhaps China no longer needs to subsidize local innovators through these explicit measures when the same result could be achieved through national technical standards.  Chinese technical standards are overseen by the Standardization Administration, and often incorporate the intellectual property assets developed by a government lab, a public university, a state owned enterprise, or Chinese private entities.  For example, the China specific CBHD standard (an alternative to the Blu-Ray/HD-DVD standard) is developed by Tsinghua University and a national lab.  TD-SCDMA, the China specific mobile phone standard, incorporates IP assets owned by Datang Telecom—its saga is described in an Economist article.  Government procurement bids can still refer to these national standards that effectively benefit domestic firms.   These days, a popular catch-phrase among Chinese business media goes something like: “Third rate companies sell products; second rate companies sell patents; and first rate companies sell standards.”  (As a search of "三流企业卖产品,二流企业卖专利,一流企业卖标准" in Baidu will reveal).

2011 ITC report discusses the challenges of these China specific standards in some detail.  To be sure, the indigenous innovation procurement policy and national standards policy were aimed to address different concerns.  The former arose out of a desire to feed domestic industries and spur innovation, while the latter was designed for the purpose of ensuring interoperability, protecting consumers, and avoiding foreign royalty payment.  However, as time went on, the IP assets of domestic firms increasingly found their way into national technology standards and the latter can now serve both goals.  The absence of “indigenous innovation” procurement policy may not alter the status quo in actuality.

Time will tell if these standards will affect China's WTO commitments and access to its market.  But charges of trade imbalance, commercial discrimination and protectionism aside, I am impressed by the various benefits China confers on its innovators through a “para-patent” regime.  It is clear that the Chinese government decides to bet on innovation and intellectual property.  During the process of promoting innovation, China will run afoul of some rules and we will call that out when it happens.  But it should still be admired for investing its money into technological aspirations.  At the same time, I hope policymakers on this side of the Pacific continue to study China’s grand innovation experiment and transplant some of the pro-innovation measures here.    

On the way out of the Beijing International Airport, I noticed a security officer riding on a two-wheeled, self-balancing electric vehicle.  Overcame by doubt, I inched closer until the SEGWAY logo came into view.  May the best technology win.