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Commerce Undersecretary Christopher Padilla, “China’s Quest to be an Innovation Society,” May, 9, 2008

May 8, 2008


MAY 8, 2008

Thank you, Jeremie, for your kind introduction.  I would like to thank the U.S. Chamber of Commerce and the National Bureau of Asian Research for holding this conference on standards and innovation in China.  This is a vitally important issue, and you have done much to draw attention to it.  We in the U.S. government greatly appreciate the work that you are doing.

Two weeks ago, I was in China for a series of meetings on China’s efforts to provide a basic level of health care and medical insurance for the hundreds of millions of its citizens who today lack access to even the most simple care and medicines.  While millions of Chinese have risen out of poverty and joined the world economy as global consumers, millions of others remain in rural poverty, or float between China’s vibrant coast and its struggling interior.  They lack health care, pensions, or a social safety net.  This visit reminded me that as much as some Americans fear the Chinese economic miracle, China faces domestic economic, demographic, and social challenges of such enormous scope and scale that we cannot take for granted that its future will follow a straight line to success.

In almost everything it does, from healthcare reform to currency policy to technology standards, the choices China is making today will affect what kind of economy and society it will have long into the future.  And those choices will impact not only the United States, but the entire global economy.

China’s growth poses a new competitive challenge to the United States.  We have faced such challenges before.  Yet we have remained the world’s largest and most dynamic economy because we hold an important trump card:  our culture of openness, entrepreneurship, and innovation.  At the turn of the 20th Century, America began to set global standards for industrial innovation and new manufacturing techniques.  After World War II, America became the global leader in science and technology.  In the 1990s, we led the information technology revolution.  Today, advances in nanotechnology, biofuels, and aerospace continue to give our economy a crucial competitive edge.

America’s innovative spirit thrives in our open society.  It is our openness – our fundamental belief that we are stronger as a nation when we welcome to our shores the world’s products, ideas, investment, and people – that gives us the ability to respond to new challenges and new competitors.  As Fareed Zakaria recently wrote in Foreign Affairs, America has found a way “to keep itself constantly revitalized by streams of people who are eager to make a new life in a new world.”  Half of all Silicon Valley start-ups today have at least one founder who is either an immigrant or a first-generation American.  Our political system is built on the notion that all Americans have an equal opportunity to rise as far as their individual ability and drive will take them.  Our innovation economy benefits from low taxes, an aversion to the stifling hand of government regulation, and a respect for others’ ideas in the form of strong patents, copyrights, trademarks, and other intellectual property rights.  And our strong education system rewards independent thought and keeps us questioning, wondering, and always searching for ways to make things better.

In almost every way, America has grown stronger from its openness to the world.  In this political season, when the winds of economic isolationism are blowing strongly, it is useful to remember that our openness – to foreign products, foreign capital, foreign ideas, and foreign people – is one of the most important reasons why the United States has been the world’s most innovative and dynamic economy for more than a century.

Today, many wonder if China will be able to replicate America’s success in innovation.  As China continues along the path of economic development, it has many models to choose from, and many models to avoid.  The American model is based on openness and respect for market principles.  But other countries in East Asia have not always allowed the market to determine what technologies are available to consumers, instead preferring a model in which innovation is driven by government planning. These economies have restricted foreign participation and investment, have not been open to trade, and have adopted policies designed to promote so-called “national champions” in key technology sectors. 

Last December, while on a trip to Tokyo, I was reminded again that Japan is one of the only countries in the world where my Blackberry doesn’t function.  That’s because of a unique Japanese cell phone standard, developed years ago as a way to give a leg up to domestic suppliers.  I thought it was ironic to be cut off and isolated from the global communications network, even though I was sitting in the capital of one of the world’s largest economies.    Perhaps it is no coincidence then that Japan has been slow to adapt to the changing global economy and has been more or less at an economic standstill for a decade.

China’s economic success to date has been driven by its decision not to mimic this model.  China’s policy of reform and opening up – of encouraging and welcoming foreign participation in its economy – is responsible for one of the most remarkable economic and social transformations in human history.  Unfortunately, however, we are seeing signs that China may be slowly turning away from the very openness that has served it so well.

Industrial Policy

Innovation cannot prosper if it is centrally directed by government policymakers, or is impeded by artificial boundaries – like restrictions on the Internet – that interfere with the free flow of ideas across borders.  When governments use industrial policies to decide which ideas, products, and companies can compete, the result is technological and economic stagnation.  Industrial policy means that government officials, rather than innovators, imagine a possible future and then direct economic resources to achieve that future.

Resources for innovation are limited, so the question is whether governments or markets are more efficient at distributing those resources.  History shows that if the market is allowed to determine the use of R&D resources, and customers are permitted to buy the products they want, resources and innovative products flow more efficiently.

Government-encouraged standards, proposed with the best of intentions, undermine innovation.  Instead, consumers should be able to choose from a number of competing technologies, driving companies to develop products that are faster, more affordable, and more efficient.

In this globally competitive environment, U.S. industry is affected by technology standards more than ever.  Standards create a common language through which innovators can collaborate.  They provide a platform for creating new products and services, expanding existing markets and creating new ones, and enabling innovation across industries.  While standards development groups and their processes may differ, standards that truly enable innovation have two things in common: they are market-driven and are widely used.

Yet despite the existence of suitable, widely accepted international standards, China has been developing unique technical standards of its own, mandated through government regulations.  China’s unique requirements in its standards and conformity assessment processes, coupled with a lack of openness, transparency and due process, hinder U.S. industry’s ability to compete effectively in the Chinese market.

These requirements certainly provide Chinese domestic companies an unfair advantage, but they also carry great risks for China.  In the 1980s, Japan thought its market was large enough to justify unique technology standards that would eventually move the world in its direction, to the benefit of its companies.  It was wrong.  Now China runs the same risk of turning itself into a lonely island of technological isolation, cut off from the world by government-mandated, China-unique standards that are out of line with where the market-driven global economy is heading.

Several years ago, the Joint Commission on Commerce and Trade addressed the issue of standards that would have limited the spread of Wi-Fi technology through a government mandated, China-unique standard.  Today, many American companies have expressed concern about security standards for information technology products that would make it too costly for them to enter the Chinese market.  We see this happening in other areas as well, including telecommunications, electronics, digital media, and software.  For example, it appears that the PRC favors a China-specific 3G standard over internationally recognized standards.  While China’s approach may appear to provide a competitive advantage in the short term, it in fact inhibits collaboration, limits product development, reduces consumer choice, and hinders China’s competitiveness and growth.

Intellectual Property Rights

Recognizing that the focus of our discussion here today is standards and innovation, I would be remiss if I didn’t briefly mention intellectual property rights.

The world is now beginning to understand the dangerous consequences of counterfeit materials making their way into products such as toys, food, pharmaceuticals, autos, and electronics.  Counterfeiting doesn’t just erode consumer confidence—it can put consumers in danger.  Counterfeit software can crash a computer’s hard drive, but counterfeit drugs can kill.

Consistent, transparent and equitably enforced rules regulating intellectual property increase the incentive to innovate.  Without clear rules and strong enforcement, no country can fully develop the economy it wants, nor build the strong, recognizable and respected brands that are hallmarks of developed economies.

Innovative societies cannot develop when consumers aren’t willing to take a chance on the latest innovations because they’re worried about their safety.  Enforcing intellectual property rights provides entrepreneurs with economic incentives to innovate, and also provides consumers with the confidence to welcome those innovations into their homes and workplaces.

While some progress has been made recently, such as new rules requiring legal operating software to be pre-loaded on computers and a commitment to join the World Intellectual Property Organization, China clearly needs to do more, which is one reason we filed a case at the World Trade Organization on IPR enforcement.  China also knows it needs to close loopholes in domestic regulations such as those that allowed producers of counterfeit ingredients for the blood thinner Heparin to avoid regulation by China’s State Food and Drug Administration.  

Technological Openness or Technological Isolation?

China certainly has the potential to develop into a more innovative and advanced technological society.  Its young people are typical “early adopters” of innovative technologies, and its companies seek out ways to produce more efficiently.  China’s government can play a vital role by vigorously enforcing rules to protect intellectual property rights.  Beyond setting in place the basic architecture of IPR protection, it is tempting for government officials to want to do more, such as picking and choosing companies for favorable treatment, or mandating unique technical standards.  That is why we should emphasize to China’s leaders that a government-managed approach to innovation cannot produce the type of results found in the United States.  

Our message must be clear:  first, that a technology-neutral position on standards by China’s government would give all competitors an equal opportunity in the marketplace, allowing China to be part of the innovative global economy rather than isolated from it.  Secondly, that an industry-led, market-driven standardization system leads to increased innovation, competition, and economic growth.  Thirdly, that full protection of intellectual property spurs innovation by allowing innovators and standards developers to fully reap the fruits of their labor.  And finally, that the participation of innovative foreign companies in China’s economy is good for China, because strong competition builds strong products and strong brands.

For over thirty years, the United States has welcomed China’s integration into the global economy and has worked actively to encourage China’s market reforms. In the United States, we have fostered innovation through openness, recognizing that our ability to welcome and work with the world fuels the flame of American innovation.  We know that China wants to become a more innovative society, but we also know that innovation cannot be mandated, centrally directed, or imposed from above.  And we know that innovation cannot thrive in an economy that is isolated from foreign ideas or foreign investment.

So we must work together to encourage China to remain open to global technology standards, to further open itself to foreign ideas, and to continue to encourage foreign investment.  A more open China will be a more innovative China.  And that is a goal I know we all share.   Thank you.