Policies for a complex product system

Futures,Vol. 30, No. 4, pp. 293–304, 1998Pergamon 1998 Elsevier Science Ltd. All rights reserved

Printed in Great Britain0016–3287/98 $19.00+ 0.00

PII: S0016–3287(98)00037-8

POLICIES FOR A COMPLEXPRODUCT SYSTEM

Andrew Davies and Tim Brady

This paper examines how government policy has influenced the pattern of inno-vation and industrial leadership in the cellular mobile communication systems.It focuses on the US government’s role in promoting the early development ofthe cellular concept in the 1970s, Europe’s attempt to take the lead with thepromotion of the GSM standard in the late 1980s, and the rise of two rivalworld-wide standards in the 1990s (Europe’s GSM versus America’s CDMAsystems). The cellular mobile communications system is treated as an exampleof a complex product system (CoPS). CoPS are large-scale, engineering intensiveproducts that are supplied in unit or batch production and tailored to meet therequirements of particular large users. The purpose of this paper is to show bya single case study how patterns of technological innovation in CoPS may beinfluenced by policies of direct and indirect government control to promoteindustrial leadership. 1998 Elsevier Science Ltd. All rights reserved

A race for world-wide technological leadership and market dominance is underway inmobile communications. Established North American manufacturers and new competi-tors from East Asia are challenging Europe’s leading suppliers (Ericsson, Nokia, Siemens,Alcatel and Philips) of mobile communications products. The mobile communicationsindustry supplies two distinct product markets—mobile handsets and the cellular systeminfrastructure—which are characterised by different patterns of innovation, competitivestrategy and government intervention. The competitiveness of European suppliers andimplications for government policy in each market segment tells quite a different story.

First, mobile handsets are becoming standardised commodities produced at low cost

Both authors work in the ESRC Complex Product Innovation Centre (CoPS). Dr Andrew Davies may be contactedat the Science Policy Research Unit, Mantell Building, University of Sussex, Falmer, Brighton BN1 9RF, UK.(Tel.: + 44 1273 686758; fax: + 44 1273 685865; e-mail: [email protected].) Dr Tim Brady may becontacted at the Centre for Research in Innovation Management (CENTRIM), University of Brighton, VillageWay, Falmer, Brighton BN1 9PH, UK. (Tel.: + 44 1273 642461.)

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Policies for a complex product system: A Davies and T Brady

in high-volumes for mass consumer markets. Europe’s lead over Japan and other EastAsian countries in the supply of mobile handsets is diminishing. As the mobile handsetbecomes a high-volume commodity good, it is exposed to intense price competition fromconsumer electronics manufacturers from the Far East, such as NEC, Mobira, Toshibaand Samsung. There is little direct government intervention in this market segment. Sub-scribers usually have a choice between two or more mobile network operators and canselect from a range of handsets supplied by a number of manufacturers.

Second, the cellular mobile communications system infrastructure market consistsof switches, radio base stations and network management subsystems. Unlike handsets,the cellular system is not a commodity item assembled from off-the-shelf standardisedcomponents. A cellular system is a high-cost, engineering-intensive system, sold as itemsof equipment or as entire networks to meet the requirements of mobile phone operators.In the development and installation of cellular systems, European manufacturers have alead over North America and are well ahead of East Asia. Governments are deeplyinvolved in shaping their domestic market structures through various means, such as theregulation, licensing operators, and spectrum allocation policies, and support domesticmanufacturing interests in foreign markets by promoting national technologies as glo-bal standards.

The erosion in the European share of the mobile handset market illustrates the widerproblem of Europe’s declining competitiveness in mass produced consumer goods, suchas electronics, household goods, cameras and cars. For example, Olivetti, Bull, Amstradand other European companies have failed to develop strong international businesses inpersonal computer (PC) markets which remain dominated by US and East Asian compa-nies. The cellular system market, on the other hand, points to a broader category ofindustrial goods where Europe has maintained and possibly increased its competitiveadvantage.

In this paper, the cellular mobile communications system is treated as an exampleof a new category of industrial goods called complex product systems (CoPS), which arecharacterised by different patterns of innovation and competitiveness compared withmass produced goods such as mobile handsets. CoPS are high-value added, engineering-intensive capital goods, systems, networks and constructs produced as ‘one-off’ items orin small batches. Examples of CoPS include flight simulators, airframes, telecommuni-cation networks, railway transportation systems, turnkey nuclear plants, and military sys-tems. This paper focuses on the role governments have played in promoting the competi-tiveness of national cellular system technologies and products. While the paper isconcerned with a single case study, it intends to raise questions about the implicationsfor government involvement in other CoPS markets.

Innovation, government policy and industrial leadership

This section suggests that while the standard model of innovation is helpful in understand-ing competitiveness in mass production industries, a different analytical framework isrequired to explain patterns of competition and government involvement in the supplyof CoPS.

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Contrasting models of innovation

The preoccupation with competitiveness in high-volume consumer goods among govern-ment policy-makers is supported by an influential model of innovation, which applies tomass production goods such as cars, semiconductors and consumer electronics. Inspiredby Vernon’s (1966) classic article on the product life cycle, the Abernathy–Utterbackmodel of innovation shows how products and processes in mass production industriesfollow a life cycle from birth to maturity.1–3 As mass production goods mature, the stan-dardisation of industrial processes makes it possible to shift the location of productionto newly-industrialising nations or less developed countries, whose comparative advan-tage is in their lower wage rates. Mature consumer goods industries experience periodicwaves of radical innovation which render existing technologies obsolete. Establishedfirms that fail to make the switch to the new technologies risk being relegated to a lowerposition in the industry.

This model of innovation is useful in explaining the recent changes in industrialstructure in the mobile handset market, as European manufacturers face increasing com-petition from the East Asian consumer electronics companies. The analogue handset mar-ket has reached maturity and the world’s three leading suppliers—Motorola, Ericsson ofSweden and Nokia of Finland—are producing increasingly standardised digital handsetsin large volumes at lower costs to compete with the recent influx of East Asian suppliers,such as Japan’s NEC, Sony, Panasonic, Mitsubishi and Korea’s Samsung, with strong capa-bilities in consumer electronics. A major shakeout is occurring in the digital handsetmarket as prices fall and profit margins are squeezed, in the same way as occurred inthe PC clone market over a decade ago. As the EC’s 1994 Green Paper on mobile com-munications emphasises:European companies wishing to compete successfully in this market must reach levels of efficiencyin production achieved by Asian manufacturers of high-volume consumer goods. The associateddynamics of manufacturing design and marketing of products with short life-cycles must also bemastered.4

A growing body of literature suggests that Europe may be weak in high-volume consumergoods industries compared with East Asian manufacturers, but strong in the supply ofhigh-value added CoPS, as in cellular mobile communication systems, developed andproduced as single items or in small tailored batches for large business users.5,6 Table 1lists the range of CoPS and mass produced products supplied by a number of strategicEuropean industries.

The product life cycle model is unable to explain the pattern of innovation andindustrial competitiveness in CoPS, which tend to remain in the fluid phase of productinnovation and follow a different cycle of innovation and industrial competition.7 WhileCoPS do mature, a mature phase when standardised goods are produced in long-runsfor mass markets is seldom, if ever, reached. Some of the differences between CoPS andmass production goods have been discussed at length elsewhere and can be briefly sum-marised:8

I In contrast to highly standardised goods, CoPS involve a high degree of customisationin the final product and its key components. Close attention has to be paid to thecriteria of component and interface compatibility with existing and future componenttechnologies and standards.

I CoPS are designed by project organisations and produced as units or in small batches

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TABLE 1. SELECTED EXAMPLES OF COPS AND MASS PRODUCTION PRODUCTS BY SECTOR

Sectors CoPS Mass production

Aerospace Airports, air traffic control Aircraft components (e.g. tyres)systems, baggage handling and consumables (e.g. de-icingsystems, aircraft, ground fluid)support vehicles

Rail and tramway Stations, tunnels and viaducts, Brake blocks, wheels, sleepers,locomotives, carriages and lighting equipmentwagons, electrical signallingequipment

Telecommunications Mobile phone systems, digital Telephone handsets, faxexchanges, broadband machines, pocket pagersnetworks, military centralcommand and control systems

Electronics Semiconductor fabrication plant, Personal computers, electronicbanking automation systems, calculators, printers, consumerbusiness information networks durables

Heavy engineering Offshore drilling rigs, dams, Hand tools and implements, jigssteelworks plant, chemical plant, and dieshydro-electric plant, machinetools, industrial turbines, cranes

rather than in high-volume. The sequence in CoPS production begins by obtaining theorder, modifying the design to suit the requirements of the customers, producing therequired volume of components and integrating them into a tailor-made system. Inmass production, by contrast, product development is undertaken first, then pro-duction, followed by marketing to final customers.9

I Industries supplying CoPS are usually bilateral oligopolies with a few large suppliersfacing a few large customers, or monopsonists, in each country.

I Users—such as mobile phone operators, air traffic controllers, airlines, etc.—are, there-fore, heavily involved in CoPS, since their competitive survival often depends on thetechnical quality and performance of the final product. High quality in CoPS designand production requires continuous feedback of commercial and technical informationconcerning the product’s operational performance from a small number of sophisti-cated and demanding buyers.

Government involvement in CoPS: from direct to indirect control

Until the 1980s, direct government control over the supply of CoPS was exercised throughstate ownership, purchasing decisions, subsidies and protectionist policies. Many CoPSsuppliers were oligopolies consisting of two or three manufacturers supplying equipmentin domestic markets which were closed to foreign competition. Government-owned tele-communications, electricity, public transportation, and other public utility monopolieswere responsible for purchasing a large share of CoPS equipment and systems.

In the 1960s and 1970s, many European governments encouraged the consolidationof strategic industries where CoPS suppliers faced strong foreign competition, throughthe formation of one or two chosen ‘national champions’ from a number of existing firmsin computing, aerospace, defence and telecommunications.10 The justification was thattoo much domestic competition prevented companies from achieving the scale and

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strength needed to challenge foreign competitors. National champions benefited fromdirect government intervention through mercantilist or protectionist policies in their homemarkets, such as public procurement programmes, R&D subsidies and exclusive rightsfor home-based companies, to prepare them for foreign competition.

In the 1980s and 1990s, the pendulum has swung away from direct governmentcontrol towards market competition and new forms of indirect control to promote com-petitiveness.11 Throughout the world governments are privatising, liberalising and dereg-ulating many state-owned monopolies and breaking up established links with domesticequipment manufacturers. Innovation and industrial competitiveness is seen to beenhanced by exposing domestic CoPS suppliers to the disciplines of foreign competition.This has created new and diversified demand for CoPS and permitted more foreign com-panies to enter domestic markets. Companies that have capable home-based competitorsare forced into becoming pioneering global businesses seeking access to expand intoforeign markets. Domestic rivalry is seen to be in the nation’s interest because it promotesinternationally competitive companies that benefit from early mover advantages as theyexpand into foreign markets.

In this competitive environment, governments continue to be involved directly inCoPS through the provision of government subsidies (e.g. the EU’s fifth frameworkprogramme) and as state-owned suppliers or purchasers of equipment. But increasinglytheir involvement is indirect through a number of regulatory measures:

I to establish technical standards (as in air traffic management systems) and regulations(e.g. spectrum allocation policies in radio communications);

I as competition and regulatory authorities to prevent excessive concentration of marketpower (e.g. national policies and EC telecommunications directives) and to promotemarket entry by issuing licences to new entrants;

I standards to guarantee safety (as in transportation and nuclear power plants).

As a result of this involvement, purchasing decisions, standard-making processes, andregulations are often highly politicised to promote the competitiveness of particular CoPStechnologies and industries.

The development of CoPS over time entails a sequence of related technical changesalong distinct paths, which can be influenced by government action or regulatory inter-vention—particularly at an early stage in the development of a new product—to makesure that future outcomes serve a nation’s interests.12 Electric-power systems, railwaytransportation, telecommunications, airframes and many other CoPS are characterised bya high degree of systemic interdependencies among related components in a productsystem.13 A systemic innovation is a change in the design or functioning of one compo-nent which cannot be introduced without significant readjustments in the design or func-tioning of other components.14 For example, the introduction of many technical inno-vations into the telephone network in the 1980s, such as digital switching, high-speedsignalling systems and fibre optic transmission, required changes in other componentsbefore they could be integrated into the system. The decision to adopt a new componentor interface technology entails a commitment to a standard. Each new systemic inno-vation must be backwards compatible with the current system and future investmentsmust be compatible with the chosen standard.

Therefore, in the development of a new product, governments, regulatory bodies,system suppliers and users have a narrow ‘window of opportunity’ to intervene at an

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early stage to promote a technical standard and influence the future pattern of innovationand demand for a technology.15 Once a standard becomes widely adopted, it is oftendifficult for alternative technologies to gain acceptance because buyers of CoPS haveincurred large sunk costs in technologies with a long operating life cycles. A standardwith a large installed base of users benefits from ‘increasing returns to adoption’, becausea competing standard requires the dismantling of the more widespread infrastructurebefore it can become widely adopted.16

Cellular mobile communications systems

The case of the cellular mobile telephone system industry provides an opportunity toexplore some of the above arguments in relation to one CoPS industry. The developmentof three product generations of cellular systems has provided opportunities for govern-ments to promote particular technical standards and influence demand through variousforms of direct and indirect control. In the rise of first generation cellular systems, manycountries provided direct government support to assist national telecommunicationsequipment suppliers in the development of cellular systems for protected national mar-kets. In the rise of second and third generation systems, governments have favoured moreindirect forms of regulatory intervention to promote national industrial competitiveness,particularly through the promotion of national technologies as global standards. However,the leading industrialised countries have adopted contrasting approaches to technologypolicy. The US prefers to leave the selection of cellular technologies to market forcesoverseen by industry and regulatory bodies. The European Union (EU) and Japanesegovernments, on the other hand, have actively promoted their preferred technologies asglobal standards.

First generation analogue systems

The early development of cellular mobile communications system technology was con-fined to the US. Although the preferred approach in the US has been to leave the selectionof cellular technology to market forces, in practice the early development of cellulartechnology was heavily influenced by government policy through the involvement of USregulatory authorities.

Invented by AT&T’s Bell Laboratories in 1947, cellular telephony encountered a longdelay from its birth to AT&T’s initial proposals for cellular systems in the 1960s, to itsimplementation in the early 1980s. The cellular architecture was introduced to overcomethe limitations of existing mobile phone systems and represented a complete departurefrom the core design concepts of existing mobile phone technology. It was made possibleby the decision to use microprocessor and large software-controlled switching techno-logies in the core design of the mobile phone system. Electromechanical exchanges wereunable to handle the complex tasks involved in managing and switching cellular calls.Cellular systems make better use of a scarce resource—the finite number of frequenciesin a given radio spectrum—by splitting areas of coverage into cells and re-using fre-quencies in nearby cells.

Mobile systems consist of four components whose basic functions and arrangementin the system architecture have not radically altered in successive generations of tech-nology: the core switching system of subscriber databases, computers and mobile switch-

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ing centres (MSC) which route calls; intermediate switching or base station controllers(BSCs); radio base stations (RBSs) which define how the air interface is establishedbetween subscriber terminals and switching components; and the mobile handset (seeFigure 1).

Although first generation (1G) cellular telephone systems use digital techniques forswitching, they are called analogue because they use analogue transmission techniquesbetween the subscriber terminal and the radio base station. Analogue systems use Fre-quency Division Multiple Access (FDMA) technology which defines channels by therange of radio frequencies.

Cellular technology emerged in the US in a heavily regulated industry which soonbecame dominated by two mobile system suppliers: AT&T and Motorola. In 1968 theFederal Communications Commission (FCC) initiated an inquiry to make new channelsavailable for cellular systems. After more than a decade of changing regulatory rules anda dispute between AT&T and Motorola about the ‘right’ cellular design, in 1982 the FCCfinally adopted the technical standards proposed by the Electronics Industry Association.17

The first commercial cellular system operated by Ameritech Mobile Communications Inc.began in Chicago on 13 October 1983. The analogue system called Advanced MobilePhone Service (AMPS) has been in operation in the US since 1983. By the mid-1980s,Motorola and AT&T each had 30% of US cellular system markets.

The long delay in setting standards in the US provided opportunities for Europeanand Japanese manufacturers to develop analogue systems based on alternative standards.In Europe, government efforts to protect state-owned Postal, Telegraph and Telephone(PTT) monopolies and domestic equipment suppliers in the early 1980s produced a frag-mented market structure for analogue cellular systems. Nordic Mobile Telephone (NMT)was originally developed for the Scandinavian markets at the beginning of the 1980s butalso is used in the Austria, France, Germany, the Netherlands and Switzerland. TotalAccess Communications System (TACS), a technology based on AMPS, was first used in

Figure 1.

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the UK in 1985 and subsequently in Italy, Spain and Ireland. In Japan, two differentstandards—NAMTS and J-TACS—are used by the three cellular operators in the market.

Second generation digital systems

Second generation (2G) systems use an all-digital digital connection over the air interfacebetween the subscriber handset and the radio base station to provide narrowband servicesfor voice and low-speed data transmission of around 9.6 Kbps. The most recent 2G sys-tems are micro-cellular networks which use higher and broader frequency bands thatallow progressive reductions in cell size. FDMA is replaced by two different multipleaccess technologies in digital systems:

I Time Division Multiple Access (TDMA) divides a slice of the radio spectrum into timeslots or channels, providing three- to five-fold increases in capacity.

I Code Division Multiple Access (CDMA) technology uses unique digital codes—ratherthan frequencies (FDMA) or channels (TDMA)—to differentiate subscriber calls andoffers even higher increases in capacity than TDMA.

The US government’s decision not to intervene in the selection of a single digital standardfor 2G systems has resulted in the development of two different digital standards. Initially,North American manufacturers preferred to make second generation systems compatiblewith the installed base of analogue systems based on the AMPS standard by developing adigital version called D-AMPS using TDMA technology. A more advanced digital standardemerged in 1993 based on CDMA technology which promised ten-fold increases incapacity compared with analogue systems. CDMA is incompatible with the existing USor European TDMA-based systems.

In the US, standards for mobile systems are now approved by the Cellular Telecom-munications Industry Association (CTIA) without government interference. This body ofmanufacturers and operators reaches decisions on standards by majority vote. Althoughthe CTIA standard-making process is often quick, the diffusion of CDMA has been heldup by legal disputes among Qualcomm and Motorola over ownership of CDMA patents.The FCC has not made a ruling on the multiple access technology to be used in thecurrent auctions of Personal Communications Services (PCS) licences for micro-cellularsystems. As a result of this market-led approach, cellular operators in the US face a choicebetween adopting well-tested TDMA or adopting more advanced CDMA technologies.

The US government’s liberal approach to standard-making delayed the adoption ofa single standard and allowed the EU to gain a vital lead in the promotion of a digitalstandard for 2G systems. The EU’s efforts to develop common standards for pan-Europeancellular systems began as early as 1982 when the European Conference of Posts andTelecommunications Administrations (CEPT) established a working party known asGroupe Speciale Mobile (GSM). The EU pressed ahead with the development of digitalstandards in 1987 when a Memorandum of Understanding (MoU) was signed by 13 EUsignatory countries. The MoU gained the agreement needed to define and implement thepan-European standard renamed Global System of Mobile Communications (GSM) basedon TDMA technology. Europe’s 2G micro-cellular system, called the Personal Communi-cations Networks (PCN) service, uses Digital Cellular System (DCS) technology whichoperates at the 1800-MHz frequency. ETSI decided to base DCS 1800 specifications onthe GSM standard to allow operators and manufacturers to exploit the advantages of

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backwards compatibility when upgrading GSM systems. The first DCS networks cameinto service in 1993 in the UK, France, Germany and Asia/Pacific region.

In this way, the EU promoted a standardised 2G system which avoids repeating themistake of fragmenting its cellular markets along national lines and takes advantage ofthe failure of the US government to establish a standard for digital systems. The growthof GSM as a pan-European standard has been facilitated by liberalisation. GSM marketshave been opened up to competition in EU member states through the licensing of twoor more GSM operators. No longer exclusively tied to domestic equipment manufacturers,new cellular operators in each member state have purchased GSM equipment from twoor more international manufacturers.

The body of operators and manufacturers responsible for mobile standards is theEuropean Telecommunications Institute (ETSI). Unlike the US standards body, ETSI stan-dards have the backing of government in the form of the European Commission. Conse-quently, once ETSI reached a decision on the GSM standard, its rate of adoption increasedrapidly since GSM technology is made available to any operator who applies for it. Butintellectual property rights for GSM are controlled mainly by European manufacturers.

EU member states are required by law to license GSM and DCS-1800 operators.European governments are ensuring that when cellular operators migrate from analogueto digital systems they adopt GSM or DCS-1800 by refusing to open up spectrum whereother access technologies might be feasible. Cellular operators in Europe are, therefore,constrained in their choice of access technologies by the spectrum policies of nationalregulatory authorities. Moreover, to support national manufacturing interests, many Euro-pean countries provide financing for cellular operators intending to purchase GSM equip-ment. In short, European 2G markets are largely closed to CDMA even if it might be amore cost-effective solution.

In East Asia, governments are more open to the co-existence of TDMA and CDMAsystems. For example, Hong Kong’s spectrum policy allows CDMA and TDMA cellularoperators to use two different frequencies. In Japan, the government chose to developtheir own digital system—now called PDC—based on a version of TDMA technologyrather than adopt D-AMPS or GSM standards. However, PDC never moved beyond anational standard.

In the race to establish global standards for 2G systems, the leading cellular systemsuppliers and their governments have been involved in an intense lobbying war in theUS, Europe and Japanese markets, arguing the merits of their competing CDMA andTDMA-based GSM standards. After a slow start, the diffusion of CDMA was strengthenedin early 1997 when Japan followed Korea in adopting the CDMA standard in preferenceto GSM or Japan’s own digital standard. Motorola has 60 contracts for CDMA systemsin 17 countries. Currently, however, GSM is the dominant world-wide standard for digitaltechnology with nearly 100 countries now offering licences to operate GSM networks.

In the US, around half of the American cellular operators to receive PCS licences in1996 had adopted CDMA technology while the others had chosen GSM or a variationof GSM. For example, several US operators, such as Pacific Bell, have purchasedEricsson’s PCS 1900 product, based on the GSM platform. The 2G CDMA standardencountered several problems which retarded its progress towards a global standard. First,in comparison to commercially proven GSM systems, CDMA technology took muchlonger to move beyond laboratory tests to an operating environment. Second, CDMA isnot backwards compatible with the installed base of analogue AMPS systems in the US

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and requires operators to construct a completely new infrastructure. GSM systems, bycontrast, allow US cellular operators to establish a working system cheaper and morequickly using mature technology produced in large volumes.

European manufacturers of GSM systems, on the other hand, have benefited enor-mously from the EU and ETSI’s efforts to take advantage of a temporary window of opport-unity—the failure of the US and Japan to establish a common 2G standard and movebeyond their national markets—to promote the adoption of the GSM standard as a globalstandard. EU member states are using spectrum policy as a form of public procurementpolicy to lock out CDMA from their home markets and to provide a large internal marketto launch GSM as a global standard.

Domestic rivalry at home, the rapid growth of Scandinavian mobile phone marketsin the early 1980s, and their involvement in many geographical markets, are some thereasons why Ericsson and Nokia were quick to take advantage of liberalisation of cellularmarkets in the late 1980s and 1990s. Unlike other European equipment manufacturers,however, Ericsson and Nokia never enjoyed the status of national champions and benefitsof protected home markets during the 1970s and 1980s.

But the emergence of Ericsson and Nokia as the world’s leading suppliers of GSMequipment was made possible by the GSM standard which provided a number of com-petitive advantages in global markets: experience in system design and technologicallearning; economies of scale in the supply of increasingly standardised GSM components;and growing demand for GSM systems which allow operators some opportunities to ‘mixand match’ subsystems from different suppliers.18 Ericsson is now the world’s leadingsupplier of the mobile phone systems. In 1996 Ericsson had contracts for total GSMsystems or major system components in 34 countries, amounting to around 50% of theworld GSM market.

Third generation systems

However, the market for digital cellular systems is no longer a GSM monopoly sinceCDMA provides an alternative multiple access technology to TDMA in third generation(3G) systems. 3G systems are designed to supply a mass market for mobile services withcircuit-switched voice transmission and high-speed packet-switched data traffic for broad-band multimedia services, such as videoconferencing and access to the Internet. US,Japanese and European suppliers and operators are currently developing CDMA air inter-faces which are compatible with switching systems in the core GSM network. In Europe,for example, Vodafone and Qualcomm are involved in a field trial to test a combinedCDMA and GSM system.

In the rise of 3G systems, the battle over standards has switched from the US andEU to Japan. The Japanese have taken the lead in developing wideband radio accesstechnology for 3G systems. NTT DoCoMo, Japan’s leading cellular operator, has awardeda large contract to a manufacturing consortium led by Ericsson and Nokia with Japanesemanufacturers including Fujitsu, Matsushita and NEC to develop an experimental wideb-and 3G system called W-CDMA to handle up to 2Mbps.19 Ericsson is responsible for thedevelopment of the core infrastructural system and Nokia is responsible for the subscriberterminal component in the system. The aim is to test the experimental W-CDMA systemin 1998, establish it as the standard in Japan by 1999, and have the first commercialapplication in 2001. The advantage of W-CDMA is that it is backwards compatible with

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the large installed base of GSM systems—estimated to reach 300 million GSM subscribersby 2001—which allows existing GSM users the possibility of a smooth migration to thenew systems.

The W-CDMA system provides an opportunity for Ericsson and Nokia to establish astandard which represents a complete break with the narrowband CDMA IS-95 specifi-cation for 2G systems and provides an opportunity to establish the same standard inJapan and Europe. A consortium of North American manufacturers, including LucentTechnologies, Motorola, Nortel and Qualcomm, is developing a different wideband stan-dard for 3G systems based on the earlier CDMA IS-95 specification.

Conclusions

This paper described two different forms of government involvement in cellular systems.In the rise of 1G systems, governments exercised direct controls, through governmentownership, purchasing and protectionist policies, to support national champions in cellu-lar equipment markets. During the rise of 2G systems, the balance shifted towards indirectregulatory control through spectrum allocation policies, the coordination of R&D andselection of technical standards.

The use of regulation to support national technologies and industrial competitivenessshould not, however, obscure major differences in government technology policiesamong the leading industrialised countries. Whereas the US government prefers to leavethe selection of technologies to the market, the EU follows a mercantilist strategy ofpromoting GSM in foreign markets while using regulatory measures to limit competition,technological choice and new entry at home. EU member states have effectively pro-moted the global adoption of GSM from inside a sheltered home market. Japan’s strategyhas been closer to the EU, but more recently relies on international collaboration in thedevelopment of 3G standards.

If an opportunity to establish a standard is not taken at an early stage in the commer-cialisation of a new product, it may be difficult for a technology coming later in theproduct life cycle to achieve widespread adoption and compete with the cumulativeadvantages of a mature and path dependent technology. For example, despite the superi-ority of CDMA technology, GSM has continued to be the preferred choice for 2G cellularoperators mainly because of the large installed base of GSM users and lower GSM instal-lation costs. Therefore, CDMA’s emergence as a global standard may be delayed untilthe emergence of 3G systems.

As the GSM example illustrates, EU member states, manufacturers, operators, regu-lators and standard-making bodies had to co-ordinate their efforts to develop a globalstandard which meets a number of criteria:

I adoption of common standards in the early phase of a new product generation tocreate a large installed base;

I early adoption allows manufacturers to benefit from technological learning andscale economies;

I a widespread standard offers reduced costs, improved performance and services forcellular operators;

I standards which are sufficiently flexible to allow for backwards compatibility with pre-vious and future generations of technology (as in GSM).

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While GSM is a success story for the EU, the future battleground for the acceptance ofglobal mobile standards is being decided by the enormous size of Japanese and Asianmarkets. The large installed base of GSM users encouraged NTT DoCoMo to involveEricsson and Nokia in the development of an integrated W-CDMA and GSM system asthe major standard for Europe and Asia. In this way, European manufacturers are reapingthe benefits of an earlier decision to promote GSM as world standard. The task for the EUis to repeat this success in other CoPS areas, such as air traffic management, broadbandcommunications and other sophisticated high value-added goods.

Notes and references

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3. Utterback, J. M., Mastering the Dynamics of Innovation: How Companies Can Seize Opportunities in theFace of Technological Change. Harvard Business School Press, MA, 1994.

4. CEC, (Commission of the European Communities), Towards the Personal Communications Environment:Green Paper on a common approach in the field of mobile and personal communications, Com (94) 145final, Brussels, 1994.

5. Miller, R., Hobday, M., Lerroux-Demers, T. and Olleros, X., Innovation in complex systems industries:the case of flight simulation. Industrial Corporate and Change, 1995, 4(2).

6. Hobday, M., Innovation in East Asia: The Challenge to Japan. Edward Elgar Ltd, 1995.7. Davies, A., The life cycle of a complex product system. International Journal of Innovation Management,

1997, 1(3).8. Hobday, M., Product complexity, innovation and industrial organisation. Research Policy, 1998, 26,

689–710.9. Woodward, J., Management and Technology. Her Majesty’s Stationary Office, London, 1958.

10. Vernon, R. (ed.), Big Business and the State: Changing Relations in Western Europe. Macmillan, NewYork, 1974.

11. Porter, M. E., The Competitive Advantage of Nations. Free Press, New York, 1990.12. David, P., Clio and the economics of querty. American Economic Review, Proceedings, 1985, 75,

332–337.13. Davies, A., Innovation in large technical systems: the case of telecommunications. Industrial and Corporate

Change, 1996, 5(4), 1143–1180.14. Teece, D. J., Technological change and the nature of the firm. In Technical Change and Economic Theory,

ed. G. Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete, pp. 256–281. Pinter, London, 1988.15. David, P., Some new standards for the economics of standardisation in the information age. In Economic

Policy and Technological Performance, ed. P. Dasgupta and P. Stoneman. Cambridge University Press,Cambridge, 1987.

16. Arthur, W. B., Competing technologies: an overview. In Technical Change and Economic Theory, ed. G.Dosi, C. Freeman, R. Nelson, G. Silverberg and L. Soete, pp. 590–607. Pinter Publishers, London, 1988.

17. Davis, J. H., Cellular mobile telephone services. In Managing Innovation: Cases from the Services Indus-tries, ed. B. R. Guile and J. B. Quinn, pp. 144–164. National Academy Press, Washington, DC, 1988.

18. Azoulay, P., The GSM standard: an impetus for the globalisation of mobile communications. Communi-cations and Strategies, 1996, 21, 95–134.

19. Public Network Europe, In brief: mobile matters, July/August 1997.

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Policies for a complex product system