Beginning in the late 1990s, the Chinese government began to understand the negative effects of relying on external technology transfer, the country's key technology sourcing policy since the 1980s: local firms were becoming so dependent on external technology that they were not developing effective internal technology capabilities to sustain their competitiveness. In response to this realization, government agencies such as the Ministry of Science and Technology and the National Development and Reform Commission began to work to promote indigenous innovation. The culmination of these efforts came in June 2003, when the Chinese central government invited more than 2,000 experts to participate in a two-year study of the country's science and technology policy. Based on that work, the results of which were released in 2005, the Chinese central government decided in 2006 to make promoting indigenous innovation a national strategy (PRC State Council 2006).
Although mobile technology was an early target for government efforts to nurture indigenous development efforts (Lou 2008), firms did not react quickly to those efforts. One of the three international standards for mobile communications, TD-SCDMA (time division-synchronous code division, multiple access), was based mainly on technologies developed by Chinese firm Datang Telecom Technology & Industry Group (Datang); TD-SCDMA was proposed as a candidate standard in 1998 and adopted by the International Telecommunications Union (ITU) in May 2000. Thus, TD-SCDMA was an indigenous innovation with international applications. The government provided various kinds of support to reduce both technology and market uncertainties, intended to increase firms' confidence in adopting TD-SCDMA. However, multinational firms, displayed a lack of sensitivity to the Chinese government's intention to promote indigenous innovation and took a "wait and see" attitude toward TD-SCDMA. As a result, these firms lost their dominant market position in China. The story of multinationals' response to government efforts to support TD-SCDMA offers important lessons for MNEs attempting to build a presence in China.
Government Support of TD-SCDMA
The Chinese government used four strategies to support indigenous development of TD-SCDMA technology:
* Leveraging the size of China's market to support TD-SCDMA,
* Supporting development of TD-SCDMA through frequency spectrum assignments,
* Providing financial and technical support for development of TD-SCDMA technology, and
* Supporting TD-SCDMA by deploying government power.
The sheer size of the Chinese telecommunications market gave the government leverage to influence multinationals' choice of technologies. The Chinese telecom equipment market is the largest in the world; once the market opened to multinationals, those firms rapidly came to dominate the market, nearly shutting out local firms. Clearly, this was not a market they wanted to lose. At one point, when some multinational firms tried to block the acceptance of TD-SCDMA as an international standard, the Minister of the Information Industry invited top managers of these firms in China to come to the Ministry, where he delivered a clear message: the Chinese government wanted to see TD-SCDMA treated the same as other candidates in the mobile communications standards selection process. The implication was that multinationals that did not support TD-SCDMA would be shut out of China. The support of multinational firms played a critical role in the eventual acceptance of TD-SCDMA as an international standard.
The government further supported the development and adoption of TD-SCDMA by allocating favorable frequencies to the technology. The frequency spectrum allocation for 3G mobile telecommunications, announced in 2002 by the Ministry of the Information Industry, assigned 155MHz to TD-SCDMA and 180MHz total to WCDMA and CDMA2000, the other two international 3G standards, combined--just 90 MHz for each of the two alternate standards. …