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Here we go again?

by Adam Segal
December 10, 2009

The Wall Street Journal is reporting that China has announced new rules for the government procurement of high technology products. According to the rules, posted on a website in October but not publicized, if a high tech product is to be included in the government catalog, it must be certified to include “indigenous innovation.”  The government is a massive customer for high tech products in China so this is no idle threat. The WSJ quotes Bryan Ma of IDC as saying that government procurement is responsible for 14 percent of the forty million PCs sold in China annually, for example.

“Indigenous innovation” is central to China’s technology development strategy (you can find it discussed in detail in the Guidelines on National Medium- and Long-term Program for Science and Technology Development 2006-2020). The push for indigenous innovation reflects a fear that Chinese firm will remain the factory to the world, that everything will be made in China, but nothing invented there. Chinese firms will be stuck in low-margin, high-energy, high-labor-intensity sectors, while foreign firms will reap the benefits of owning the intellectual property rights.  So the goal is to move up the value chain–to create local innovation.

As with previous regulations and administrative decisions-the value-added tax (VAT) on semiconductor manufacturing; WLAN Authentication and Privacy Infrastructure (WAPI), China’s alternative standard to WiFi–the procurement decision is designed to force foreign companies to transfer technology to their Chinese counterparts. We’ll have to see where it goes, however.  Industry groups from North America, Japan, and Europe have sent a letter expressing their displeasure, and if they manage to maintain a unified front, and get a word of support from their governments, there is a chance the Chinese will back down. At least they did in the case of the VAT and WAPI.

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