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Issue 22, May 2010

This newsletter is a monthly supplement to ChinaAnalysis.Com, a new website that aims to promote knowledge sharing in China-related analysis. This newsletter contains original content and may not be reproduced without exclusive written permission. If you have any questions, comments and suggestions, please email support@chinaanalysis.com.

Tip of the Month - Promoting Innovation at the Expense of Indigenous Firms

On April 9th, the Chinese Ministry of Science and Technology (MoST) website announced a new draft plan for accrediting “indigenous innovation products”, covering a range of high-tech sectors including computers, telecom equipment, automatic office equipment, software, new energy, and energy efficiency devices. These accredited products will enjoy priorities in Chinese government procurements. After being excluded in the initial accreditation plan issued in 2009, foreign companies had been complaining ever since. This time, however, there are two significant changes in favor of multinationals: the accredited products must possess “intellectual property rights” and a “registered trademark” in China rather than the previous accreditation criteria of “indigenous intellectual property” and “indigenous brand”.

The draft plan is complementary to the State Council 2010 Circular No. 9 issued on April 6th, which aimed at encouraging R&D investment of multinationals in China through series of favorable polices including cheap land, tax holidays, and financial liberalization. MoST’s latest accreditation plan is, however, a major setback for many Chinese indigenous companies in the growing government procurement market for high-tech products, estimated to be over one billion dollars per year. Since multinationals are more competent in the market of technology-sophisticated products, the 2009 accreditation plan intended to expand the market share of local firms by giving them privileged access to government procurement contracts. So far, it is not clear whether multinational corporations have directly influenced this year’s draft plan, or whether MoST is pursuing a deliberate strategy that de-emphasizes indigenous innovation for the sake of leveraging access by multinationals to the Chinese market in exchange for technology.

What is clear is that the Chinese state is inclined to abandon government procurement as a policy tool to promote indigenous innovation. That having been said, the Chinese government has spent billions buying underdeveloped products from local firms such as CPU, office software, etc, which still remain commercially uncompetitive and technologically backward. There were even worse scenarios in which large local PC vendors acted as middlemen between the Taiwanese OEMs and the Chinese government, with their huge profits from the procurement market only resulting in diminished productive capabilities. Nevertheless, procurement money can be of great importance for financing innovative firms; prime examples are Huawei and ZTE in the Chinese telecommunication industry. Procurement money provides possibilities for firms to endure the high fixed costs of technological catch-up until they can succeed in generating the high quality products at low unit costs that define innovative success. But such possibilities may be about to disappear.

Top News of Last Month
April 10 China posts first monthly trade deficit in 6 years
April 12 China to unveil new overseas investment policy
April 13 China's new rules on cadre selection, promotion eye public opinions
April 14 6.9-magnitude quake hits China's Qinghai Province
April 19 China steps up efforts to curb property prices
April 22 Chinese Premier urges development of renewable energy
April 26 China starts regular patrols of South China Sea
April 27 China Stocks Drop to 6-Month Low on Economy, Profit Concerns
April 27 China defines commercial secrets after Rio Tinto trial
April 28 China lifts travel ban against people with HIV
New Books
Technology Transfer and China's Industrial Development: Consequences, Policy Reforms, Significant Case Studies

By Zhicun Gao, Clem Tisdell

"After reviewing the relevant literature on international technology transfer, this study outlines and examines recent reforms in China's science and technology policy. The consequences of international technology transfer for the development of China's technological capacity and its economy are analysed. Particular attention is given to China?s electronics industry and to the expansion of China?s television industry. This has resulted in China becoming the world's major producer of television sets. The roles of foreign direct investment and of international product (and investment) cycles in this industrial development are examined. The development of China's television industry is placed in the context of the evolution of this industry worldwide." - from Amazon.com


By Jonathan Story

"'While there are many excellent books on business in China, frequently the emphasis is on what can go wrong and how to avoid problems, few penetrate the issues incisively and offer a masterful fixes. This is a MUST-READ for anyone contemplating doing business in China or already doing business there. Easy to read, well-written and wide in scope, this is a very useful volume for any business library. Having this book is like having ten China business gurus on your board. Tan Yinglan, Author, The Way Of The VC - Top Venture Capitalists On Your Board" - from Amazon.com

India-China: A Comparative Analysis of FDI Policy and Performance

By Ashok Kundra

"This comprehensive reference highlights the key differences between India and China in their policy framework and critically examines the far reaching impact of the Foreign Direct Investment (FDI) policy on trade, technology, and employment. Exploring the reasons for skewed regional distribution of FDI in both the countries, this report considers the nature, type, sources, and direction of inflows to India and China. Drawing conclusions based on concrete empirical evidence and supported by statistics, this study articulates the role of pragmatic policy, strong infrastructure, and a conducive operating environment in driving massive FDI flows into China and advocates a reorientation of policies relating to the development of infrastructure, labor laws, and state-approved investments in order to accelerate the pace of FDI inflows into India." - from Amazon.com

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