When a nation sets out on the path of development, it must find ways to develop its economy in order to improve the living standards of its citizens, or at very least, to increase its total production of goods and services. Economics teaches us that the key components of economic output are capital, labor, and technology. Capital provides the raw materials, labor uses the materials to create products, and technology provides the configuration of methods for labor’s use of capital. Developing countries generally begin their development by producing resources or by producing labor-intensive goods, whereas a developed country such as the United States has a highly capitalized and highly technologically-advanced economy overall.
All other things being equal, the level of technology clearly determines the level of a country’s output. Therefore, if a country wishes to improve its output, it must raise its level of technology. A country may raise its level of technology either by research and development or through acquisition. Naturally, countries may employ differing strategies for acquisition, either coercive, commercial, or illegitimate. Once a country has acquired a new technology, it must also determine an optimal method to implement and use the technology. As technology implementation often depends strongly on the domestic environment of the country where it was created, implementation of a given technology in another country may raise problems, the alleviation of which costs time and energy. Factors such as poor infrastructure, lack of sufficiently educated human talent, and weak intellectual property rights protection all contribute to slower implementation of imported technology in developing nations.
China, being a large developing nation, gives many examples of how technology has been adapted as well as the problems associated with adapting technologies from abroad. Although the government has ostensibly pursued a modernization program, results have been mixed. Examples abound of technology theft by companies in China. Also, some companies in China may want technology, or China’s society may need technology, but in actuality the need for a technology is not met with either the will, the incentive, or the ability to pay for such a technology. Also, in many cases, China’s government holds up the release of imported technologies for dubious reasons.
China’s original technology acquisition model after the 1979 included attracting international cooperators through using the export-led growth model that had helped the Asian Tiger nations achieve the so called ‘Asian Economic Miracle’. International companies would be able to come to China and enjoy lower taxes, and inexpensive labor. In exchange, international investors would share technology and expertise with their local business partner. This model assumed that a sort of long-term spin-off effect would be achieved through such Sino-foreign partnerships. However, the model has not been totally effective for several reasons as detailed below.
Poor intellectual property protection enforcement and an ineffectual court system in China has greatly slowed the country’s technological growth. For example, if an American company goes to China and invests in a joint venture with a local Chinese firm, the joint venture partner may steal the US firm’s technology and either sell it domestically, or, more likely, utilize it in other locations where the joint venture partner has no facilities, thereby gaining the full amount of any revenue gained from selling the project. Even if the joint venture is honest and credible, there is nothing to stop competitors from copying a product and then attempting to sell it. While legal standards have improved, it is still very difficult to get a fair trial if the court is in a rural area or if the counterparty possesses significant political clout, so investors must beware when moving their operations to China.
In China, where labor is cheap and materials are cheap, engineering and design skills are still fairly hard to come by. However, as IP protection is weak, in many cases, any item that can be easily copied will be copied, from simple items such as American movies, all the way to something complex such as an automobile. A famous example of such copycat behavior occurred in 2005, when China’s Chery Automobile unveiled a compact car, the ‘QQ’, that was virtually identical in design to GM’s Chevrolet ‘Spark’--- with the extra benefit that Chery’s copy version sold for as much as $1,000 less than the Chevrolet. GM attempted to take the company to court, but failed to close the case at a Chinese court despite obvious similarities. In the end, GM dropped the suit after coming under pressure from China’s government. Naturally, the government of China has a vested interest in protecting its domestic market for its own domestic companies, particularly a national champion such as Chery, which is the largest independent Chinese automaker. Lost market share for a domestic company can cause public sentiment to tilt against the government due to a perceived government failure to protect domestic firms. Such a phenomenon of market protection occurs not only in a developing market such as China’s but also in the United States, among other countries.
However, while the Chinese government sometimes engages in protectionist behavior on behalf of domestic companies, at other times it holds the companies back from moving their services forward. One key example is the manner in which China’s government slowed the domestic rollout of the 3G mobile telephone standard. Currently, China has a large mobile phone market with hundreds of millions of subscribers. Using the 3G phone standard would allow for better spectral efficiency, thereby allowing video calls, broadband wireless data, and wireless voice telephony to be used by mobile phone customers. However, for many years, the Chinese government’s Ministry of Industry and Information Technology delayed issuing 3G phone licenses to China’s wireless service providers, mainly because the government wanted to develop a domestic 3G standard, known as TD-SCDMA. Having such a domestically-controlled standard would confer several key advantages, most importantly allowing Chinese telephone providers to circumvent patent licensing fees for use of technology invented outside of China. On Wednesday, January 7, 2009, the government finally issued licenses for domestic 3G phone services , 8 years after 3G phones were launched in Japan. It is expected that the government pushed the release of the systems at this time because China’s economic growth is slowing, as cellular phone carriers are expected to invest $41 billion in order to implement 3G services.
The issue of control comes up not only in such areas as cellular phone standards, but also in the IT sector, in such areas as web portal services and search engines. The government of the PRC, anxious to have a stranglehold on sources of information, has encouraged local internet companies, including web portals like Sina.com (a copy of yahoo), and search engines like Baidu.com (a copy of Google). Beyond simple searching and portals, China also has its own web messenger (Tencent QQ , a copy of the formerly-popular internet chat program ICQ) the world’s third-largest instant messenger service, and Taobao.com, which famously defeated the USA’s Ebay in a battle for China’s online auction market. The main methods used for this sort of protectionism involve blocks of foreign companies through use of the Great Firewall of China- to this day, Google runs more slowly inside China than Baidu and has occasional service outages, thereby rendering it less competitive. It should also be noted that China’s internet favoritism extends to cover even free information sources such as wikipedia, which has been blocked in China in the past and usage of which trails the China-based Baidu-pedia inside China. This sort of protectionism reflects a type of thinking which has become popular among China’s leadership in recent years, the idea that China’s government should create ‘national champions’ in all industries, running counter to the previous model of collaboration in order to gain expertise. The idea of having ‘national champions’ potentially extends into all areas of the economy, and is a danger both to free trade and to international collaboration on science and technology.
From the opposite perspective concern often raised when discussing transfers of technology from the United States to China is an external issue: the issue of military security and military application of technology. Technologies such as aircraft engines, navigations systems, telecommunications equipment, and sophisticated materials all have possible military uses. Therefore, transfers of such technologies to a nation such as China must be carefully vetted. If not, they can allow nations such as China to build weapons possibly detrimental to the safety of the United States. In the case of the Chinese economy, the state collaborates highly in economic activities, so most companies will have some type of government ties. This interconnectedness makes determining whether or not a given business partner can be considered safe extremely problematic.
A final issue that heavily influences technology transfer to a developing nation such as China is price. With a population of 1.3 billion people and a per capita GDP of only around $2000, China’s government is often ill-equipped to bring in technologies that may benefit society. In particular, the concept of externalities has not been thoroughly disseminated in China, meaning that if the economy grows at a pace of 10% per year, then obviously the country is doing excellently, regardless of the fact that pollution-related lung conditions and birth defects have risen sharply. Such shortsighted thinking also leads Chinese buyers to discount a long-term investment in environmental technology as being wasteful, as it does not maximize profits in the short run. Although the Chinese government is working towards promoting better environmental standards, implementation of perfect environmental controls will not happen overnight.
However, examples do exist for successful transfers of technology: recently, the Chinese government has agreed to receive magnetic levitation train technology from Germany. On 29 January 2009, Germany’s Thyssen Krupp Technologies signed a memorandum of understanding to transfer the core technologies for the magnetic levitation train to China’s Shanghai Magnetic Transportation Development Co. at a meeting of the German and Chinese governments in Berlin. Currently China has a single monorail line in operation in Shanghai, with plans to extend the line further and possibly create a Shanghai-Beijing maglev link in the future.
One final thought: with regard to the learning curve involved for China to move up the production chain. Ideally, initial economic prosperity would lead to higher investment in education, which would then trigger a virtuous circle of development. However, the government has been lax in enacting this virtuous circle, without which, the country is only able to compete on cost. Overall, China needs to focus more on developing its labor resources and technology in the future if it hopes to conquer its problems in development.
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