Still on the Way
Creating a More Innovative and Firm-Friendly Standardization System in China
Technical standards, though not as popular as “start-up” and “cryptocurrency” in our daily conversations, are crucial to technological innovation. These standards influence the quality of innovative products and give the firms that develop them numerous advantages and incentives in the market. Conventional wisdom holds that the more innovative a firm is, the more likely it is to influence the development of technical standards through standard-setting organizations (SSOs). However, former Ash Center Asia Fellow HU Yefei reveals in a recent study that in the case of China, a company’s political connection is a more predictable indicator in determining its chances of setting industry standards.
Written by: HU Yefei, former Ash Center Asia Fellow ‘16–17
Nowadays, we hear about technological innovations every day, but what do they actually involve and entail? Entrepreneurship, patent and intellectual property are some of the forefront themes that easily come to mind, but a crucial component of technological innovation — technical standard setting — receives far less attention. Technical standards, developed by domestic and international standard setting organizations (SSOs), set rules for industrial manufacturing and innovation nationwide or even worldwide. It is widely believed that industry-leading firms with higher innovation/technological capacity are usually the ones that get to influence the development of domestic technical standards. Once dominating the market, technical standards can significantly increase a manufacturer’s market influence. Therefore, firms often actively vie for opportunities to draft standards in SSOs. Firms with prominent innovative capabilities are generally thought to be more successful in such standard-setting competitions. In my recent study, however, I’ve discovered that in some industries in China, where government interventions in standard-setting are relatively strong, a firm’s political connections, rather than its innovative capabilities or scale, serve as more of an edge in standard-setting competitions. This phenomenon is a result of China’s centralization of standardization authority in the government and governmental SSOs.
In developed countries like the United States, SSOs exist within certain industries with very little governmental interventions. The U.S. market is full of competitive technical standards developed by various SSOs that fall under the jurisdictions of private companies. The U.S. government rarely intervenes in industrial standard-setting procedures and instead allows market mechanisms to pick the “winners” among different technical solutions. Under such circumstances, many scholars have found that firms with stronger innovative capabilities usually wield more influence over the industrial standard-setting process.
Some outstanding firms in China still find it difficult to gain acceptance into national standard drafting groups, regardless of their leading market shares and excellent performances in innovation…
Other countries, however, have starkly different approaches to regulating the development of technical standards. Countries like China and Japan view technical standards as a type of public goods and therefore have established strong governmental agencies to regulate such standards. The Standardization Administration of the People’s Republic of China (SAC) is in charge of overseeing the development of national and industrial standards in China. SAC establishes monopolistic SSOs in each industry and allows these SSOs to set up standard drafting groups, which usually consist of representatives from various firms and research institutes that are responsible for drafting new standards. It is also illegal for Chinese firms to voluntarily form new SSOs without the government’s approval. Once a draft of the technical standard is completed and approved by the SSO and the government, the new standard immediately begins exerting its regulatory authorities on the entire industrial sector. Consequently, in a certain industry, the competition for standard development among companies only happens inside the government-organized SSO. The monopolistic SSO has the power to determine which firm could be formally admitted into the standard drafting group and which ones are left out.
The important question here is how those standard development opportunities are allocated among firms under China’s government-organized SSOs and more specifically, how the SSOs select firms as participants in the technical standards drafting groups. Conventional wisdom presupposes that firms with better innovative capabilities are always more likely to be involved in the standard development process, as such firms’ leading innovative capabilities are almost a guarantee of better technical solutions and standards. Traditional theories in technology and innovation management research, which are mainly developed in the context of western countries, support this presumption.
My study, however, shows that some outstanding firms in China still find it difficult to gain acceptance into national standard drafting groups, regardless of their leading market shares and excellent performances in innovation. Trina Solar, private Chinese photovoltaics (PV) company founded in 1997, is representative of those unlucky firms. This global leader in the photovoltaic module market claims that its laboratory has broken the world records on solar cell efficiency and module power sixteen times since its establishment. While such feats amply demonstrate Trina Solar’s prominent innovative capabilities, the firm was only able to participate in China’s national standard development just once between 1997 and 2015, lagging behind such rivals as Himin Solar and Linuo Ritter International, both of which have participated in far more frequently in the past two decades than their more innovative counterpart.
Similar phenomena could also be observed in other industries in China, thus challenging existing theories on the competition of standards development. What is the crucial determinant of a firm’s chances of participating in the standards drafting groups? How much does innovative capability matter? From a series of interviews, I’ve found that the monopolistic SSOs are more willing to engage firms that are introduced by governments at various levels. Scholars have found that the political connections a firm enjoys can help obtain financing from Chinese banks more easily and acquire more resources distributed by the government’s selective industrial policy. My study indicates that besides financing assistance, firms with political connections also gain advantages in the standard development process by gaining access to standard drafting groups. The governmental SSOs, whose performance is measured by the central government based on the number of new standards, perceive firms with political connections as good partners in the development of technical standards since these firms are more willing to compromise and are even submissive to the authorities. As a result, governmental SSOs can accelerate the process of standardization and improve its performance by rolling out new standards at a faster pace.
Therefore, a hypothesis could be that in China, firms with more political connections are likely to enjoy more opportunities to participate in the development of technical standards compared with those firms with fewer political connections. To test this hypothesis, I’ve collected micro-data of industrial firms in three industries — communications, chemical fertilizer/pesticides, and electric lighting, which represent high-tech, traditional transitional high tech industries respectively. These data were obtained from China’s Industrial Firm Dataset and China’s National Standard Dataset. The estimator is a panel data Negative Binomial regression model. A firm’s political connection is measured by whether it has a formal affiliation with a state council department or the local government. Generally, private firms in China do not have a formal administrative affiliation, but sometimes the government’s selective industrial policy awards a private firm an affiliation label, which reflects the firm’s close relationship with the government.
Results from the regression suggest that in the aforementioned three industries, a firm’s political connection, rather than innovative capability or scale, has a significant influence on its chances of participating in the development of national technical standards. From the perspectives of the industries, standard development opportunities are more likely to be distributed to firms with political connections.
This finding leaves us with a number of questions and implications. For Chinese firms, these results suggest that it is extremely worthwhile for them to establish and maintain sound political connections with the government, especially when the firms are interested in getting involved in the development of technical standards to win an edge in the marketplace. However, it is more important for the Chinese government to make the standard-setting system fairer and friendlier to innovative firms that may not have close government connections. My study shows that China’s highly centralized system distorts the distribution of scarce resources such as the opportunities to participate in the development of technical standards. If firms with leading innovative capabilities cannot sufficiently engage in the standard development process, the qualities of the new technical standards will be fundamentally flawed and such low-quality standards are more likely to lag behind in innovation. In this sense, China’s technical standards system awaits reforms and the government needs to reconsider its own best possible role in the development process of national technical standards.
Yefei Hu received both his master’s and bachelor’s degrees in Public Administration from the School of International Relations and Public Affairs (SIRPA) at Fudan University. He is currently a Ph.D. candidate in Public Policy at the School of Public Policy and Management (SPPM) of Tsinghua University. He was an exchange master student at Rockefeller College of Public Affairs and Policy at SUNY Albany. Yefei’s research focuses are STI policy and collaboration between public and private sector. At the Ash Center, he plans to investigate the effects of government activities in several policy fields, such as standardization, open government data, smart city development, and innovation in China.
