By Stanley Lubman, The Wall Street Journal, China Real Time Report
China has announced a significant retreat from a policy initiated in a 2006 report on “indigenous innovation” that established “guidelines” intended to reduce dependence on foreign technology. Subsequent government actions at first seemed to threaten to exclude foreign companies from selling intellectual property developed outside of China to government agencies, to the alarm of foreign governments and technology companies.
But while government policy on procurement has receded from the original position and “indigenous innovation” has been “delinked” from government procurement requirements, implementation of this shift is problematic because acceptance and commitment by sub-central (provincial and municipal) governments are needed to make it meaningful.
Given the evolution of policy in China, that implementation deserves to be watched closely. Indigenous innovation was first clearly linked to government procurement in 2009. The policy was to be carried out via a national catalogue of industrial products that were targeted as most desirable to develop in order to raise the nation’s technological level. It required that to qualify as “indigenous innovation,” a product had to be produced by an enterprise that owned the intellectual property in China, had a trademark owned by a Chinese company, was registered in China and embodied a high degree of innovation.
Foreign sellers objected vigorously, in part out of fears that foreign-invested enterprises (FIEs) would be excluded.
In January 2010, the Ministry of Science and Technology issued a notice that modified the policy. It provided that to be eligible for accreditation, applicants must be manufacturing enterprises that are legal persons in China (including registered foreign-invested enterprises) and their products must comply with national laws, regulations and ”technology” policies. In addition, applicants must own the IP rights, and have the exclusive right to use the trademark for the product in China. The notice also stated that the product must be “advanced” according to criteria expressed only very generally, and must be “reliable” in quality.
The policy was modified in April 2010 replacing the demand that applicants own IP rights with a requirement that they merely have a license to use the IP. Then, in January 2011, President Hu Jintao, during a visit to Washington, promised to “delink” indigenous innovation from government procurement.
Mr. Hu appeared to have made good on his pledge last month when the Ministry of Finance announced that it would revoke three laws linking procurement with “indigenous innovation.” In a recent report on China’s innovation policy for the East-West Center (pdf), economist Dieter Ernst wrote that the modifications to the policy were undertaken “possibly in response” to foreign complaints and reflected “greater pragmatism in the implementation of China’s innovation policies.”
Although this is a welcome reversal, it does not by its terms extend to sub-central agencies. Whether provincial and municipal governments will fall into line by allowing foreign competition rather than favoring local companies remains to be seen. The European Union Chamber of Commerce in China recently issued a report on European business experience in competing for public contracts in China (pdf) stating that “ although [the delinking of indigenous innovation from national procurement] was a “major positive development, the international business community remains concerned that discriminatory policies might continue to be enforced locally in spite of national commitments to the contrary.”
While it appears that a national catalogue will not be issued after all, a considerable number of provincial and municipal level governments have already released their own indigenous innovation product catalogues. A survey by the US-China Business Council found 61 such sub-central catalogs had been issued by November of last year. The council identified an additional 13 this past February. Although it says it hasn’t reviewed all of the catalogues, the council found that the local lists it had studied “appeared to discriminate against foreign invested enterprises products by including only a handful of FIE products.” The Shanghai catalogue, for example, listed only two indigenous innovation products from FIEs out of a total of 523. Of 42 products listed in the Beijing catalogue, only one came from an FIE. On Nanjing’s list, there were none.
Similarly, the EU Chamber report refers to a “fragmentation of the Chinese government procurement market” because “sub-central authorities develop their own procedures, procurement catalogues and unwritten procedures.” Another discouraging note on “fragmentation” comes from Ken Wasch, president of the Software and Information Industry association, who noted in testimony before the U.S. China Economic and Security Review Commission in May (pdf) that the Ministry of Science and Technology and the Ministry of Finance claim that “they lack jurisdiction over local catalogues.”
In April, The Wall Street Journal reported complaints from U.S. companies that local governments had not seemed to have adjusted their policies to conform to national policy. Foreign impatience can be expected to grow if, as seems likely, the “delinking” of sub-central government procurement from indigenous innovation is slow.
As this column has reported in a variety of contexts and as any foreign business with experience in China must know, local government failures to implement national policy are common. It is useful to recall that although China is theoretically a unitary state, in practice national laws and policies are often poorly and tardily implemented. Doing away with provincial catalogues will not prevent provincial governments from keeping the procurement process opaque and from using the lack of transparency to favor local firms.
Indigenous innovation is not the only issue that confronts foreign companies as they deal with China’s drive to develop advanced technology domestically rather than importing it. Related emphases are seen in the setting of technical standards “favoring domestic industries at the expense of internationally accepted foreign standards and technologies,” as the U.S. International Trade Commission has shown in a recent report (pdf).
As China pursues the upgrading of its economy, there will be more debate over policies on technology development. The very tentativeness with which indigenous innovation has been pursued may be a hopeful sign that continued dialogue may bring about adjustments of measures that are deemed protectionist.