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12015 Social Innovation Research Conference(May 21, 2015)
Li TANG1, Michael MURPHREE2, Dan BREZNITZ3
1. Shanghai University of Finance and Economics2. University of South Carolina3. University of Toronto
Structured Uncertainty and Tacit Alliance: A Case Study on China’s Innovation Patterns in Mobile Phone Handset Industry
2
RESEARCH BACKGROUND
A pilot study of a five-year project of US NSF
The project: construct innovation theories for emerging economies
This research: - understand innovation behavior of Chinese firms - limit inquiry to institutional and structural perspective - focus on non-state handset firms
CENTRAL PLANNING
National strategy of indigenous innovation • Rooted desire of self-sufficiency• Failure of trading market for advanced
technologies• Perception of national security and
economic threat
MLP: Innovative society by 2020• R&D investment > 2.5% of the GDP• S&T contributing to >=60% of total EG• Dependence on foreign technologies <30%
(41% in 2008)
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Source: Pictures were adapted from those at www.nipic.com/bc20
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Source: Pictures were adapted from google image @ www.nipic.com/bc20
Resources: mega projects , tax break, R&D subsidies, public procurement et al..
PUZZLE
Expectation• Novel product innovation by state selected
firms (LMEs)
Reality• A profusion of private firms pursuing
incremental innovation practice
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A SYSTEM ARRAY AGAINST CHINA NON-STATE FIRMS
Fierce competition against domestic brands and international brands
Constraints associated with small size Innovation certainty
Negligible support from the State Uncertain environment
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RESEARCH QUESTIONS
What kind of innovation is feasible in Chinese mobile handset industry ? And
What shapes the innovation activities of the successful firms ?
Specifically, What are the main characteristics of
innovation behavior among Chinese private firms?
How do they survive and thrive under the climate of structured uncertainty? 8
RESEARCH SETTING -CHINA’S HANDSET INDUSTRY
• Important• The largest production center for handsets [1][2]
− 1.13b cell phones; 70.6% global share in 2011− 62.8 b USD worth export in 2011
• The fastest growing markets for mobile phones [2]− 1.1 b subscribers by Sept. 2012− penetration rate of 81 subscribers/100 habitants
• A strategic industry selected by the state
• Phenomenal• Swarms of non-state firms pursue incremental
innovation [3]
[1] Foster & Reinsch 2010; [2] MIIT Bulletin 2011; [3] Baroza 2009
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Surging of studies on China mobile handset industry [1][2]
But research has remained lopsided.
Mainly descriptive Technology push and market pull [3][4[5][6]
[1] Gao 2011; [2] Guo & Guo 2011; [3] Kao & Lee, 2010;
[4] Sun et al. 2010; [5] Zhu et al. 2009; [6] An et al., 200610
LITERATURE GAP: EMPIRICAL STUDIES
LITERATURE GAP: THEORIES Much takes institutions and incentives in western
economies as givens
- rule of law - effective IPR - financing infrastructure, - credible stable commitment of government
Some emphasize the role of state in national innovation development [1][2]
Fail to consider the increasing fragmentation of global production & the rise of EE
[1] Amsden 1989; [2] Gerschenkron 196211
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RESEARCH METHOD An inductive case study [1][2]
Based on field work and interviews Convenient sample and snowball
method fierce competition quasi-grey zone
Data Secondary data: documentary data Primary data
in-depth interviews direct observations
[1] Eisenhardt 1989; [2] Eisenhardt & Graebner 2007
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KEY NOTIONS & PROPOSITIONS
Fragmentation of global production
Spatial dispersion of component production and integration across national borders
Modularization production in IT sector [1][2] - firms can focus their resources on core
capabilities Eg. MediaTek chipset (one-stop turn-key
solution)[3] - low technology threshold for firm entry
[1]Lynn & Salzman, 2007; [2] Helg & Tajoli, 2004;[3] Hu etc., 2011
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PROPOSITIONS 1
With the fragmentation of global production, Chinese mobile phone firms access the global value chain by confining their business model and innovations to a specific stage of production.
Mobile handset manufacturers are granted opportunities to develop unique and strong competitive capacities
Have to innovate around the core in their own ways
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KEY NOTIONS & PROPOSITIONS (CONT’)
Structured Uncertainty Definition: An institutional condition that
cements multiplicity of action without legitimizing a specific course or form of behavior as the proper one.
Chinese firms face:Innovation uncertaintiesStructured uncertainty
Eg. Different or conflicting of views state elites on goals
(3G) Locality deviation (under the flag of autonomy) Industrial regulations (production license & testing)
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PROPOSITION 2Constrained by structured uncertainty,
China’s non-state firms opt to seek competitive position by excelling in incremental innovation.
Multi-layer space-time-varying ambiguity [1][2]
=>unable and unwilling to bear the risks of radical innovation
Þ rational behavior: incremental innovation
Þ [1]Christensen 1996; [2]Guo and Meng, 2011
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PROPOSITION 3The tacit alliance between firms and local
officials buffers structured uncertainty, while encouraging incremental innovation.
Firms’ willingness [1][2]business partners (with suppliers and buyers )government allies (for resources and support)
eg. obtaining permits, avoiding fines, getting R&D subsidies, mitigating risks
Local bureaucrats’ inclination [3] increased fiscal incentivesexpanded local autonomyunitary personnel evaluation and promotion
systems
[1] Boisot & Child, 1996; [2] Oerlemansa etc., 2013;[3] Zhao & Zhang, 1999
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TABLE 1: SUMMARY OF INTERVIEWS
Type Headquarter Location
21 Handset firms 16 in Shenzhen; 3 in Shanghai; 1 in Huizhou; 1 in Beijing
5 Innovation scholars 1 in Beijing; 2 in Shenzhen: 2 in Shanghai
4 Government officials 1in Beijing, 3 in Shenzhen
3 Mobile Phone Markets in Shenzhen
Mingtong, Gaokede, & Longsheng
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FINDINGS
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Proposition 1 is supported (fragmentation of global production)
- Every component of making a handset can be purchased within 5km radius of Huaqiang Bei.
- “Traditional Chinese medicine” (quote)
Proposition 2 is supported (excelling in incremental innovation)
-fast dump incrementally innovative product s to market
(capital paucity; technology forecasting uncertainty)
-tailor incremental innovation to customer needs (long tail market) -heavily reliant on access to MediaTek’s GSM
chipset, and to a lesser degree on code division multiple access (CDMA) chipsets from Qualcomm and Spreadtrum
FINDINGS (CONT.)
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Proposition 3 is supported (certainty of local protection)
Explicit support from local government- Various resources and tax breaks on R&D
activities Tacit alliance
- Cooperative attitude of firms introduced by officials
- Be instrumental for firms’ international market
expansion at the cost of declining tax revenues• Aggregation of mobile handset firms contributes
hugely to local development ( ~200,000 employment;
~40 billion RMB in annual sales in 2009)
FINDINGS (CONT.) - Sympathy toward private handset firms
(even Shanzhai ji) “As long as shanzhai phones are not simply
copying the existing brands but have merged in some innovative elements, they are a good thing…. shanzhai is the great equalizer.”
“China must go through the imitation-innovation-practice for the whole industrialization process before it begins developing its own brands and technologies.”
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DISCUSSION
Limitations• Convenience sample
Findings & Implications• China’ incremental innovation trajectory is
shaped by increasing fragmentation of global production and structured uncertainty.
• China’s regional governments tilt the playing field to favor local private firms.
• Indigenous innovation is not a panacea• Double – edged sword
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