Mobile Edition
Print
Get the Mag
Weekly UpdatesSUMMARY
The innovation diffusion process in China has varied impacts on different players in the industrial system, which can in turn either facilitate or impede the effects of innovation diffusion. Bringing not only growth possibilities to the newcomers but also high risks to the established players, the diffusion process might encounter with huge resistance in a highly regulated system, which is also called market failure. Based on intensive case studies in China's communication sector, the paper argues that the structures of the innovation supply system will greatly influence the innovation diffusion process. Policymakers must leverage policy design and intervention to achieve expected strategic objectives. Therefore, proper policy intervention could become the trigger to launch and facilitate diffusion of emerging innovations in such a large developing country as China.
KEY WORDS
innovation; diffusion; telecommunication; policy design; policy intervention
INTRODUCTION
Invention, innovation and diffusion is a sequential trilogy in the whole technological change process (Schumpeter 1947; Stoneman 1995). The concept of 'diffusion' here refers to the spreading of new technologies across potential markets. Until now, most studies on diffusion process have focused on the firm level and provided alternative explanations to the dominant consensus that adoption of new technologies over time typically followed an S-curve, such as the epidemic model or probit model (Bass 1980 ; Oster 1982; Baptista 1999, Geroski 2000). Such diffusion models assumed that the innovation diffusion process was a market process of achieving long-run equilibrium by adjusting short-run equilibrium points, with demand and supply forces affecting the diffusion process from time to time (Griliches 1980; Dixon 1980; Chatterjee & Eliashberg 1990). Furthermore, innovation transfer often occurs within a network in which different actors interact (Caputo et al. 2002; Rogers 1995).
However, existing academic research on diffusion policies remains limited and fragmented. Few have explored how diffusion proceeded within a fast-changing system or the role of policymakers. The policy issue deserves more concern in a regulated context, where the boundary between regulators and players is sometimes blurred. We noticed that some argued that government could barely facilitate the process, and that SOEs (state-owned enterprises) are slow movers compared with private firms (Hannan & McDowell 1984; Rose & Joskow 1990). However, the amount of empirical studies on the impact of policy-makers is quite thin (Stoneman 2002).
Based on detailed case studies of innovation diffusion in the Chinese telecommunication industry, the authors aimed to:
* explore the dynamics of the innovation diffusion process under a transformational context, especially in large developing countries like China; and to
* understand the changing role of policy-makers in such a diffusion process.
An analytical model of policy-oriented diffusion is presented following the case studies.
This article is based on an empirical study of China's telecommunication industry, undoubtedly one of the most dynamic industries in developing countries, with an annual growth rate of 36.7% from 1996 to 2001 (MII 2001). A semistructured interview was conducted with senior managers in leading telecommunication firms as well as officials from the regulation ministries in China. Secondary data was collected from open publications including statistics, industry reports and corporate reports. This research tries to explore, from a policy perspective, how the innovation diffusion process interacts with the systematic transforming process of the industrial system.
CASE STUDIES: INNOVATION DIFFUSION IN THE TELECOM SECTOR
Background
In China, development of the telecommunication industry has been given the highest priority due to official recognition of its significance in the modernization process and for economic growth. Before 1998, Chinese telecommunication firms were closely affiliated to the industry regulators. The primary regulator was then the Ministry of Posts and Telecommunications (MPT); China Telecom (CT) was the monopoly telecom operator before 1993. To some extent, the MPT was responsible for the operational and financial performance of China Telecom and therefore they shared common interests (Xu 2001). As a result, potential competition was impeded.
The real driving forces which placed China's telecommunications industry on the liberalization track in 1998 came not from inside the industry but from the political vision of Chinese central government and the pressures of access to the World Trade Organization (WTO). More importantly, to boost the national economy in the face of global competition, the government was eager to vitalize the telecom sector and decided to introduce intensive competition among state-owned enterprises, instead of leaving it to the private sector. Therefore market mechanisms emerged in China. In April 1998, the Ministry of Information Industry (MII), a relatively neutral department, was formally established. It encouraged oncoming domestic competitors to improve the efficiency of the sector. In early 1999, the former China Telecom was split into four independent companies, respectively responsible for fixed-line services, mobile phone, paging and satellite communications service. The paging sector soon merged with China Unicom. In August 1999, China Netcom Corporation (CNC) was founded, with it's building broadband backbone networks. Beside the existing six nationwide telecom firms, (China Telecom, China Mobile, China Unicom, China Netcom, Jitong and China Sat (China Satellite Telecom)), China Railway Telecom was set up by the railway sector in 2000. A much more competitive market came into being.
By 1999, the industrial reform had achieved some improvements--three new entrants (China Unicom, China Netcom and Jitong) had entered the data communication market with their constructing backbones. China Telecom, however, whose subscribers increased very fast and exceeded 100 million in 1999, still retained the biggest market share in the country. Different from China Telecom, the keen interest of its competitors was on new profitable market niches such as long distance voice service. In the PSTN (Public Switching Telephone Network market), the traditional circuit-switched fixed network, China Telecom monopolized for over 50 years, setting high entry barriers to potential entrants. The revenue from its long distance PSTN service was RMB 63.5 billion ($ 7.7 billion) in 1999 (MII 1999). This sector business is China Telecom's mainstay, which it defends with every effort.
Till now, the barriers to fixed telecommunication market entry remained as high as they were several years ago. While MII is under pressure to introduce market mechanisms and lower prices in the sector, new entrants are excluded by the high building costs of a new circuit-switched network. Therefore, in 1999, it was difficult for policy makers to find an ideal solution. Even if they did, the capacity to implement the policy would be very much restricted. In countries where Public Telecom Operators (PTOs) are regulated by independent authorities, like Canada, Britain, and the U.S., there is generally less precedent for regulatory agencies to be directly involved in technology and implementation of new technological matters of an operational nature (Milne 1997). The diffusion of innovation in a dynamic system like the telecommunication industry may lead to greatly unequal distribution of benefits among industrial players. Case studies revealed that innovation diffusion, with regard to regulatory vision, has played a strategic role in the transforming process of the whole industrial system.
Characteristics of emerging innovation
IP (Internet Protocol) telephony is the term used to describe the technology of carrying voice or fax over IP-based networks such as the Internet. Although there were some early applications of Internet telephony in 1996 and 1997, it was not until 1998 that services based on this new technology became significant (Wright 2001; Rinde 1999). The voice service over IP technology enables businesses and consumers to make phone calls at much lower costs than the traditional PSTN technology. Two key factors contributed to the cost-effective implementation of IP telephony recently. Firstly the price of IP equipments like network routers came down quickly. The second key factor was a reduction in bandwidth cost on international circuits in recent years (Rinde 1999). The voice quality of IP telephony has been improved with special QoS (Quality of Service) means and generic increasing bandwidth. With the quality upgrade, the users of IP telephony could make a call without caring what kind of hardware or software is at either end or in the middle.
In China, the potential fixed operator can establish network gateways between its IP backbone and the local telephone networks of the incumbent to provide long distance voice service. Through the use of gateways, IP telephony users can connect directly with any other telephone in the world and finish calling through the IP-based network.
Opportunities: Policy design and intervention
Under pressure from the public to break up the monopoly, neither the regulator nor the newcomers in China had any feasible solution. At that time, emerging IP telephony technology was presented to the whole industrial system, providing an opportunity to break through bottlenecked reforms.
With the rapid penetration of the Internet in China, the supply of IP Telephony service became available in 1999. Among existing firms, the attitudes of China Telecom towards innovation were opposite to its competitors'. China Telecom was strongly against innovation for fear of threat to its former business based on traditional circuit switching. On the other hand, the backbones bandwidth union of China Unicom, China Netcom and Jitong reached 500 million bits/second in July 2000 (CINIC 2000) and the new competitors were eager to benefit from the innovation by making use of redundant backbone capacities to support IP Telephony services.
FEED