Top-down or bottom up Catch-up: which one will win out ...
Catching-up in China’s
Graduate School, China Academy of Science (CAS)
IDPM, The University of Manchester
A review of theory of catching-up
A analysis of catching-up in
telecommunication industry of China
Theory of catching-up
Gershenkron (1962) argued that targeting rapidly
growing and advanced technologies is the advantage
of catch-up countries.
According to Perez and Soete (1988), a “window of
opportunity” may arise in the evolution of a
technology system. With appropriate social, industrial
and technology policies, a country may catch-up.
Otherwise, it will continue to lag behind.
Theory of technological regime
Technological regime affects the nature and
success of innovative activities of those firms trying
to catch-up (Breschi, Malerba and Orsenigo, 2000 ).
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 automobile industries in Korea. In
the opposite case, latecomers will have less
opportunities to catch up.
telecommunication industry ?
China has make great economic achievement in the last twenty
years. But how to understand the catching-up process in China?
Very few papers are available on the catching-up of China.
China’s telecommunications 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, making itself the target market of global
telecommunication equipment makers.
Outline of Chinese ICT industry
2000 2006 Average annual
(million (million RMB) growth
Fixed phone users 145 371 21%
1/4 of the world
Internet users 33.7 131 31%
1/10 of the world
Mobile phone users 85 449 40%
Sales of ICT 607,000 3,800,000 31%
industry (2005) #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.
Indicators of China’s telecommunication industry
Indicator Unit 1995 2000 2001 2002 2003 2004
Investment 199.5 231.4 264.2 210.6 224.6 217.3
Local fixed phone million
72.0 178.3 255.7 286.6 350.8 423.5
Trunk fiber 1000 km 110 290 400 490 590 700
Fixed phone user million 40.7 144.8 180.4 214.4 263.3 312.4
Fixed phone set/100
3.4 11.5 13.9 16.8 21.2 24.9
Mobile phone user Million 3.6 85.3 144.8 206.6 268.7 334.8
Mobile phone Set/100
0.3 6.8 11.2 16.2 20.9 25.9
China’s Telecommunication industry
Mu and Lee (2005) found that the important factors in the
catching-up are the strategy of “trading market for
technology”, the knowledge diffusion from Shanghai Bell
to R&D consortia 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.
But why Chinese automobile and other industries with
very similar technological regime, and industrial
promotion and technological regime do not show a such a
strong trend to catch-up?
Key factors for
successful catching-up in China
Existing, imported technologies are the starting points for
companies in catching-up countries to make the innovation
decision. If there is a large gap between the imported products
and local demands, the domestic companies will get a strong
incentive to innovate.
The design of existing foreign product system is the basis for
future innovation. Openness of the product system design can
give latecomers more opportunity to make innovation based on
the existing product system. Closeness means it is not easy for
latecomers to learn and enter its future development.
Five key elements
for successful catching-up
Finding mismatch area: innovation in low-end market
Technological opportunity: new technology from other
industry or existing industry.
Governmental support: market for technology, stage-skipping.
Licensing and outsourcing strategy: role of FDI and university
Innovation strategy: path-following or stage-skipping
in the digital phone switches
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.
But there was mismatches of the
products with the market
Most of imported or joint ventures’ 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 joint ventures to transfer some technology (Mu
and Lee, 2005).
The spillover of FDI: demonstration, labor turnover and
others, e.g. Shanghai Bell provided lot of training and
maintenance work for the Chinese customers, which was
one important opportunity for Chinese to learn the
Private company: heavy R&D investment.
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 switch ZXJ2000 for rural
market; in 1995, Huawei developed 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.
Huawei’s market share in
switches in China
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 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.
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?
CDMA is one of the technologies to break the GSM
monopoly in China.
To get marginal GSM market with lot of incremental
innovation for Chinese market. Huawei constructed mobile
intelligent network for China Mobile allowing users to make
prepay phone calls.
When text message became a big market for value added
service, Huawei quickly established their capability here
and got two third of Chinese market.
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, MPT supported research on CDMA. MOST
began to support research on CDMA in 1993 and 3G in 1997.
The research basically followed the path of Ericsson and
Qualcomm, though had made some progress but no
breakthrough, but it provided Chinese with useful knowledge
on 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
In 1994, overseas Chinese, one work for Motorola , the other in
University of Texas developed a new wireless network system to
bypass Qualcomm’s technology. They set up a joint venture with
Research Academy of Post and Telecommunication of MPT.
Based on their work, in 1995 a new technology system called TD-
SCDMA (Time Division - Synchronous Code Division Multiple
Access) was developed.
In 2000, TD-SCDMA, supported by Chinese government, was
accepted by ITU as the third international 3G standard.
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
Further support by government
In 2002, State Development and Reform Committee, MOST
and MII jointly made a strong support for the industrialization of
The government formed a TD-SCDMA Alliance. The members
included Huawei, ZTE, China Putien, Lenove etc.
The government offered 0.7 billion RMB for further system test.
The government allocated TD-SCDMA a 155MHz spectrum for
its future uses.
All these methods sent out a strong signal that TD-SCDMA
technology is now an authorized technology for China’s 3G
market in the future.
The paradox of stage-skipping catching-up
in the case of TD-SCDMA
TD-SCDMA is not compatible with WCDMA and CDMA2000.
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.
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 issue: How big is 3G market will be critical for its future.
Some estimated 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?
With technological regime method we have looked at the
catching-up experience in China with a large market and
The mismatch of existing (foreign) products 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
In China, path-following catching-up has proven to be a
more appropriate strategy than stage-skipping in
Stage-skipping approach means more risky and needs
better government-industry-academic cooperation. It has to
play the game with the leading multinationals.