Monday, July 31 2006 12:00 Hrs (IST) - World Time -

Honolulu: China's information technology (IT) industry may be a relative newcomer on the world scene but it is doing something right, and in a big way. China is now the largest exporter of IT goods, surpassing the United States up from a world ranking of 10th in 2000.

"zThat jump, according to East-West Center senior fellow Dieter Ernst, is not a fluke. It signals rapid progress in China's innovative capabilities. Ernst says in a study that China may be a latecomer to the IT world but its opportunities to build innovative capabilities in the IT industry differ from those faced earlier by Japan and East Asian newly industrializing economies," he said.

He notes, "China has a unique combination of competitive advantages that comprise a booming market for electronics products and services, and the world's largest pool of low-cost and easily re-trainable knowledge workers."

"But, it doesn't stop there. China has witnessed the emergence of sophisticated lead users and test-bed markets ... (especially in wireless telecommunications) and concerted policy efforts at both the regional and national levels to strengthen its innovation system," he said.

Ernst points out that timing also could be an important factor. As a "late-latecomer to the global economy. China has the additional advantage that its policy-makers can learn from past achievements and mistakes" of those nations that preceded it in the market.

Most important however is that the international environment within which China seeks to develop is dramatically different from that of previous East Asian success stories ... China's technological development over the past twenty years has been inseparable from the expansion of global knowledge networks. These networks have emerged as globalisation has been extended beyond markets for goods and finance into markets for technology and knowledge workers.

The study documents that "China is far more integrated into global knowledge networks than were Japan and Korea at a similar stage of their development."

And Chinese firms are learning fast how to work those networks.

The inherent knowledge of its large home market has also helped China's IT industry both in developing domestic market share and in eventual entry into the global marketplace.

But, for the time being, there are limits to China's IT successes. Ernst notes that the successful companies have not attempted to jump right into 'technology leadership' strategies, to compete head-on with global technology leaders through 'radical' innovations. Instead, they appear to have focused on 'incremental' and 'architectural' innovations that allow them to pursue 'technology diversification' strategies.

Ernst points to Lenovo, a large and successful Chinese IT firm, as an example. He shows how Lenovo has leveraged linkages with global industry leaders to develop capabilities needed to establish domestic market leadership.

The study explores what changed once the company decided to 'go global', by acquiring IBM's PC division.

"To implement this new business model poses major challenges, but also provides new opportunities for learning and capability development," Ernst notes.

Of course Lenovo, together with a handful of other successful Chinese IT companies (such as Huawei, Haier, ZTE) are still an exception in an industry that remains primarily a low-cost export- oriented global factory.

But these companies provide a powerful role model for what it takes to upgrade China's IT industry through innovation.