INB 311Asian Business Environment: India and ChinaICT11/4/14Dr. Lairson

Andrew Kennedy, "India in the Global ICT Game." 2/25/13indiaictgame.docx

Is India emerging as an ICT power? Not yet. In 1990, the U.S. and Japan accounted for 51 percent of global value added in ICT, according to figures published by the U.S. National Science Foundation last year. By 2010, that figure had fallen to 38 percent. Yet, India wasn’t the reason for this fall; China was. Whereas China’s share increased from 1.7 percent to 12 percent, India’s share barely budged, rising from 0.6 percent to 1.5 percent. Even in computer programming – India’s strong suit – the country’s share remained just 1.7 percent.

In 2011, total MNC spending on R&D units in India – across all industries – was about $7.0-7.5 billion USD, according to the Indian consulting firm Zinnov. Yet, the gap between China and India’s value added in ICT alone was about $300 billion USD in 2010. 

Over the past decade, the wage gap between skilled software programmers in India and those in less expensive American locales has fallen significantly. In the meantime, companies are discovering that outsourcing information technology work can carry unanticipated costs as they lose touch with key parts of their business. To attract ICT investment in the future, India will have to offer more than cheap labor. 

Relate to restructuring – can India rely on markets to provide this kind of change?

China excels in the “hardware” of technological innovation – money, technicians, and equipment – but it still needs much better “software” – legal protections, risk-tolerance, and connections between enterprises and universities. Moreover, China’s Internet controls not only limit information, but also competition from foreign firms.

Still, the question remains: why is India’s ICT industry lagging behind? For some, China’s autocratic system holds the key. After all, China can compel its companies to invest in new technologies as few other governments can. Yet it is far from clear that Beijing’s attempts to move ahead through bureaucratic fiat are effective.

More important, perhaps, is the fact that China’s strong foundation in manufacturing is now overlaid with a vast market for ICT products. China has become the world’s largest market for mobile phones, including smart phones, and for PCs as well. MNCs are no longer coming to China just to export, but more and more to compete for local customers. That means more local R&D to adapt products to local tastes, more retailing, and more after-sales service. 

China’s gigantic market has also created incentives for Chinese firms to upgrade, as Loren Brandt at the University of Toronto and Eric Thun of Oxford University have shown. It is no easy task for Chinese companies to compete in developed economies; their understanding of the market is poor, and technological demands are higher. On their home turf, however, the barriers to entry are lower. Chinese

firms can compete for Chinese consumers, and the ones that succeed also have incentives to upgrade to escape the vicious price competition at the bottom of the market. 

Can India follow in China’s footsteps? To a limited degree, it may be doing so already. Chasing the country’s vast population of mobile phone users, foreign handset maker Nokia has developed an extensive presence – including manufacturing – in India. Meanwhile, according to Business Monitor International, Indian handset makers raised their domestic market share from 1 percent in 2007 to 15 percent in 2010. More generally, however, India is struggling to keep up in the ICT business. In fact, India’s imports of electronics products are surging, as Indian businesses and consumers are hungry for everything from new telecom equipment to tablet PCs. The result is growing concern about depending on imports for potentially sensitive technologies, as well as worries about the growing trade deficit.

In January, the Indian government responded to these concerns by floating new rules that would require tech firms to manufacture their products domestically. This is the wrong approach. India should position itself to add value to the global production networks through which ICT products are made, rather than simply finding ways to decrease imports.

The Economist , "Indian Technology Firms," 3/16/2013 indiatechfirms.docx

India has played the outsourcing game to a big success

Today that outsourcing industry is a capitalist marvel. It has annual sales of $100 billion, mostly from abroad, and these export earnings have been vital in a country with a weak balance of payments. Millions of good jobs in India have been created. Young Indians have seen that globalisation creates winners. India’s reputation in the world has changed, too: Bangalore’s shining IT campuses have become as famous as the Ganges and the Gandhis.

Yet India has been a comparative failure in terms of innovation over the past decade. You might have expected India’s many advantages (the English language, abundant engineers and a thriving diaspora in Silicon Valley) to pay off spectacularly on the internet. But only a few start-ups have made clever technical innovations that have been sold abroad. And at home e-commerce is in its infancy, with sales only 6% of China’s. Thanks to lousy infrastructure, useless regulation and a famously corrupt telecoms sector, the web is available to only 10% of Indians, many of them squinting at screens in cafés.

India boasts no big internet firms to compare with Chinese giants such as Alibaba, Baidu and Tencent, nor start-up stars like Facebook’s Mark Zuckerberg. Instead, it has seen a succession of false dawns, from its version of the dotcom bubble in 1998-2002 to more recent hype over deal-of-the-day websites and text-based cricket updates. In 2010-11 lots of start-ups raised cash, but they have struggled since. Venture capitalists grumble that their returns have been poor. The original emerging-market tech pioneer has fallen behind in the internet era.

The good news is that India now has a chance to lead again; the bad news is that this opportunity relies in part on Delhi’s bureaucrats not messing it up.

Optimism springs, first, from a healthy stock of young entrepreneurs

The second change is the mobile internet. India’s fixed-line system may be abysmal, but cheap smartphones and fast wireless networks are rapidly spreading. India is poised to leapfrog the era of the personal computer and go straight to the mobile-internet age. Already a quarter of internet traffic is from

phones, compared with a seventh worldwide. E-commerce sites are getting a surge in activity from phone-users.

But this budding revolution needs clever regulation. Outsourcing boomed in part because it avoided government: the product was exported through global networks. The mobile internet needs capital, payment systems and wireless capacity. In all three areas the government is in the way.

The e-commerce industry appears stymied by the same restrictive rules on foreign investment that have bedevilled bricks-and-mortar retailing. Only a fifth of Indians have credit or debit cards—and using them online is a nightmare, again thanks to regulations (India could learn a lot from Africa’s use of mobile money). And India needs more and better wireless networks; some big players such as Mukesh Ambani, India’s richest man, have been tempted in, but the telecoms regime is a tangle of overcomplicated rules and graft.

India’s New Internet Entrepreneurs

Yet if you walk to the exit of that hotel and reject the option of an expensive limousine, or of hailing a bashed-up street taxi, and instead press “Book now” on your phone screen, another Indian tech scene appears. The application links a network of taxis using satellite positioning, cheap Chinese-made smartphones, souped-up Google maps and credit cards. A 6km (4-mile) drive north in a modern car will deliver you to a snack shop, above which is the firm that runs the system. Olacabs was set up in 2010. Its co-founder, Bhavish Aggarwal, is a 26-year-old engineer who has worked for Microsoft in Seattle. He has raised a slug of venture capital, some of it American, and says business is growing at 30% a month

India needs a million Olacabs: start-ups that use technology to overcome everyday problems. The economic benefits would be huge. And in a country with a stuffy business culture, in which commercial and political dynasties are all too common, a technology revolution would be a colossal breath of fresh air. It would help unleash the energy of a generation of young people. But will it happen?

India has already had one technology revolution. In the 1980s middle-class engineers from a dirt-poor socialist India somehow persuaded Western firms to outsource their back-office functions and bits of their IT operations to the subcontinent. Thus began a three-decade-long boom.

The revolution fed its children well. Thanks to IT, some 3m Indians now work in well-paid formal jobs of the kind that India needs so badly. Perhaps another 10m knock-on jobs have been created for maids, drivers and the like. Technology services have saved India from bankruptcy—exports were 4% of GDP in 2012, keeping the balance of payments in passable shape. As well as local champions such as Infosys, TCS and Wipro, 750 multinational firms have outsourcing and technology hubs in India. Many perform research and development.

Their country has so many advantages: the English language, engineers with global experience, a conspicuously successful diaspora in Silicon Valley. Why, then, has it

failed to produce a new generation of big tech firms? In contrast to America’s constant regeneration, India’s champions have spare tyres and grey hair.

The gulf between Indian hype and reality over the past decade is best shown in numbers. One veteran venture capitalist reckons the investments made in “new-generation” (ie, excluding IT services) technology firms are worth $5 billion-6 billion today. The largest listed firm has a market capitalisation of $700m. By way of comparison, China’s listed internet firms have a combined value of over $100 billion and its e-commerce sales are about 18 times India’s. Other emerging economies, such as Russia, Argentina and South Africa, have produced multi-billion-dollar internet champions. During the past decade India has fallen behind.

Fortunately things are changing. First, the internet is becoming popular. Penetration is just 3-4% of the population, if judged by the number of moderately fast fixed internet lines and smartphones that use 2.5G and 3G services. About two-thirds of these connections are mobile. If you include people who access the web through cafés, at work, on friends’ computers or through basic phones with small screens, penetration is 10%. Most surfers are young. Many live in provincial towns that the IT revolution has hitherto bypassed.

That 10% is a big figure in absolute terms—122m people—and it will rise as smartphones get cheaper.

The second change for the better is that the start-up scene now has depth, partly as a result of all those mini-booms and busts. The venture-capital industry, with a mix of local and American firms, is now well developed and capable of writing big cheques. And a new generation of entrepreneurs has emerged, most of whom combine technical skills with global experience. Of the 15 technology-firm founders interviewed by The Economist for this article, 12 have worked in America or for multinationals in India.

What kind of companies are these new entrepreneurs creating? Sandeep Singhal of Nexus, a venture-capital firm, describes India’s new tech scene as a mixture of Israel and China. The “Israeli” bit involves selling clever innovations to foreigners. It is still fairly small. InMobi, which sells technology and services for advertising on the mobile internet, is unusual in that it broke into other emerging markets, such as Indonesia and South Africa, before cracking America. “A lot of firms struggle to innovate because the [Indian] market is too small,” says its founder, Naveen Tewari. They need to look farther afield, adds Mr Tewari, a Harvard and McKinsey alumnus who has become something of a hero for budding entrepreneurs.

Only a brave few follow this advice. Cloudbyte, for example, makes storage software for use in data centres. It has just moved one of its co-founders to America. “The market is largely in the US. We want to be a global company with our engineering talent in India,” says the co-founder still in India

The “Chinese” part of the industry is much bigger. The label refers to local firms that sell to locals, as China’s internet giants do. Such firms account for about three-quarters of activity by next-generation Indian tech firms (see table). Some sniff that Indian e-commerce firms are mere copies of Western ones, or that they largely serve the rich. Such gripes miss the mark. The real achievement of India’s digital merchants has been to create reliable supply chains and systems in a country where few things work smoothly.

These firms are exciting but still small. All e-commerce sites in India between them had sales of $10 billion in 2012, about four-fifths from travel products such as plane tickets, according to McKinsey. It forecasts that sales will approach $100 billion in the next five years, roughly the same size as the conventional Indian IT industry is today. Most of that growth is expected to come from a surge in the number of people accessing the web on their phones. In this scenario India will bypass the PC era and leapfrog straight to the mobile internet.

It is at this point that veterans of the telecoms industry chortle. India’s 700m mobile subscribers are stingy. Only 5% pay for mobile broadband and only a fifth of those engage in e-commerce, says one network boss.

Handsets using Google’s Android operating system are available at $100 or less, but their quality is poor. About a fifth of smartphone buyers use them only for voice calls and as a fashion accessory.

Yet the mobile internet is spreading. About a quarter of internet traffic in India is now from mobile phones, reckons Rajan Anandan, the head of Google in India. The global figure is 14%, according to StatCounter. E-commerce sites are seeing a shift towards mobile. Flipkart says phones account for 6-7% of sales, most of it from new users. This should reach 20-25% in a year. Hrush Bhatt of Cleartrip, a travel site, reckons 8% of his sales are now from mobile and this will reach 25-30% in a year. “People underestimate how quickly India will adopt the mobile internet,” he says.

Robosoft Technologies. It is a big developer of mobile apps globally (mainly for the iPhone) and builds sites for third parties as well. Thus far only a small part of Mr Bhat’s business is in India, but he expects that to change. “In 2013 you’ll see some success stories. By 2014 it will be huge.”

The hope is that as mobile e-commerce booms, it will boost software and hardware start-ups. Vani Kola, a venture capitalist, says that “India will never build the next Oracle. We don’t have pure science innovation—we’re not winning Nobel prizes. But India will develop technologies that could take off around the world, from cheap internet-access systems to payments processes.” If that happens, the boom would change India and create a new generation of exporters.

To lead a mobile-internet revolution, India’s entrepreneurs must overcome three problems. The first is payments systems. Only about a fifth of Indians have debit or credit cards and those who do are scared of using them online. When they try the process is clunky—a quarter of attempts to pay on the Indian Railways site, probably India’s most frequently used, fail. The good news is that regulators are easing the rules for small transactions. Anish Williams quit HSBC to co-found Transerv, a firm that has just launched a pre-paid mobile wallet that can be bought from street vendors and downloaded onto phones. It piggybacks on the credit-card payments system and should make buying online easier. Firms like this could make a big difference.

The second bottleneck is capital. India’s e-commerce industry will need billions of dollars to grow. But local venture-capital firms struggle to write cheques of over $100m. Some fear that foreign investment in e-commerce may fall under the same rules as apply to bricks-and-mortar retailers such as Walmart. These let individual states ban activity.

The third impediment is India’s telecoms sector. Once celebrated, it is indebted, loss-making and fragmented. To blame are a price war, graft and licensing rules that prevent consolidation and roaming. The industry is cutting investment in networks at exactly the wrong time. There are multiple different spectrum and licence charges; big operators pay up to a third of their sales on such levies and on taxes. Telecoms firms are so fed up they refuse to participate in new spectrum auctions.

Manu Joseph, "India's Future Rests with Markets, NYT, March 27, 2013.Aakash.docx

Relate the concept of industrial ecology to the story of the Aakash:

In fact, on Oct. 5, 2011, and in the weeks that followed, the Ministry of Human Resource Development appeared to have reason to be confident and proud, and it received somewhat congratulatory world attention for its tablet, called Aakash. At just over 2,000 rupees, or about $35, it would be the lowest-priced tablet in the world, and it would be distributed to millions of Indian students at an even lower price.

That was the plan.

But, less than 18 months after its introduction, the future of the tablet looks uncertain, even though the government is trying to rescue it. Aakash has been hit by production delays and quality concerns, and its very relevance has been put to question by the sudden rise of competing low-cost tablets from private companies.

Aakash is yet another reminder from India that to achieve good deeds in a developing nation, noble intentions are usually not as efficient as the natural forces of materialism, corporate self-interest and the market.

The actual device sourced 35% of hardware components from South Korea, 25% from China, 16% from the USA, 16% from India and 8% from other countries

What does this tell us about the ability of government to solve problems by acting as an entrepreneur?

Sean McLain, "India, Long the Home of Outsourcing, Now Wants to Make Its Own Chips," NYT , April 15, 2013 indiasemicon.docx

The government of India, home to many of the world’s leading software outsourcing companies, wants to replicate that success by creating a homegrown industry for computer hardware. But unlike software, which requires little infrastructure, building electronics is a far more demanding business. Chip makers need vast quantities of clean water and reliable electricity. Computer and tablet assemblers depend on economies of scale and easy access to cheap parts, which China has spent many years building up.

In October, it quietly began mandating that at least half of all laptops, computers, tablets and dot-matrix printers procured by government agencies come from domestic sources, according to Dr. Ajay Kumar, joint secretary of the Department of Electronics and Information Technology, which devised the policy.

At the same time, it is dangling as much as $2.75 billion in incentives in front of chip makers to entice them to build India’s first semiconductor manufacturing plant, an important step in building a domestic hardware industry.

But like so much of India’s economic policy, it’s doubtful that either initiative will have the impact the government is intending.

“Nobody disputes India’s need to build up manufacturing. Not doing so would be fiscally irresponsible,” said Gaurav Verma, who heads the New York office of the U.S.-India Business Council. But Mr. Verma said that India’s efforts to force international companies to manufacture in the country are futile. “The government needs to not mandate this, but create an ecosystem.”

the “preferential market access” policy, seeks to address a real problem: imports of electronics are growing so fast that by 2020, they are projected to eclipse oil as the developing country’s largest import expense.

India’s import bill for semiconductors alone was $8.2 billion in 2012, according to Gartner, a research firm. And demand is growing at around 20 percent a year, according to the Department of Electronics and Information Technology.

For all electronics, India’s foreign currency bill is projected to grow from around $70 billion in 2012 to $300 billion by 2020, according to a government task force.

Dot-matrix printers, outdated in most of the world, are one of the few electronic products that India manufactures. Around 400,000 dot-matrix printers were sold in India in the year ended March 31, an increase of 2 percent from the year before, according to

the Manufacturers’ Association for Information Technology, a computer industry trade group in India.

The big fish the government would like to land is a factory to produce microprocessors for computers.

A computer processor typically accounts for 25 to 35 percent of the total cost of a PC or laptop. India hopes that such a plant, which could cost as much as $5 billion to build, would help spur a bigger high-tech manufacturing industry, said Dr. Kumar.

According to Indian media reports, two consortiums have been in talks with the government to build microprocessor foundries.

The first is led by the Jaypee Group, one of India’s largest construction companies, which built the country’s Formula One track in Uttar Pradesh. It has partnered with I.B.M., which will provide the technology.

The second bid is from the Hindustan Semiconductor Manufacturing Corporation, an American company that, despite its name, does not manufacture any chips. It has partnered with the Geneva-based chip makerSTMicroelectronics.

But Ron Somers, president of the U.S.-India Business Council, said he doubted that India could provide a new chip-making facility with the basic infrastructure it needed to even keep the lights on. There have been several failed attempts to set up chip plants in the past. The most recent was in 2008 by SemIndia, a United

States company run by Indian-American entrepreneurs. It ended acrimoniously when a dispute arose over the terms of the agreement between the company and the state of Andhra Pradesh where the plant was to be housed.

In the case of some electronics, the import duty on a finished product is cheaper than on the component parts, said Mr. Menon. Costs are also higher because of a lack of reliable power and the extra time it takes to move goods on the country’s poor roads.

Spurred by the new “Buy India” requirements, Dell, the largest PC retailer in India, explored the possibility of setting up manufacturing facilities there. Dell assembles computers in India, but does not manufacture any components.

“They flew in their suppliers from China and Taiwan to see if they could set up facilities. They said no,” said an industry official, who requested anonymity since he was not authorized to speak on behalf of the Texas-based company. “The market is too small, and logistically it is a nightmare.”

The discussion of China helps to clarify both the sources of its successes and some of the problems India faces

The articles introduce some ideas and concepts drawn from research on the process of knowledge-intensive production

Important concepts:

InnovationKnowledge-intensive productionIndustrial ClusterGlobal and local knowledge networks

Important relationships:

Why are clusters associated with higher levels of innovation?How do local knowledge networks and global knowledge linkages contribute to innovation?

Chao Zhao, "Global Knowledge Linkages and the Innovativeness of Local Clusters: Evidence from the Guangzhou Software Cluster in China"Chiguangsoft.pdf

Rugman and Verbeke, 2002) from the international business theory field have shown that Multinational Enterprises(MNEs) induce externalities in local clusters and improve innovativeness by providing access to assets, technologies, and management skills to the domestic components of the cluster.

evidence that the global knowledge linkages are regarded in some aspects as more important than local knowledge networks within clusters in raising the innovativeness of local clusters using data from developed economies.

The importance of global knowledge linkages to the innovativeness of clusters has been increasingly highlighted by these researchers. Linkages with these external actors are indispensable in the development of clusters not only as an outlet for production but also as a conduit for advanced knowledge, especially for clusters in the developing countries, which have less local knowledge sources. In fact many clusters in developing countries, such as technology intensive clusters and trade oriented clusters, have more and more international linkages. However, little empirical research has focused on relationships between global knowledge linkages and the innovativeness of local clusters in developing countries.

This paper investigates the relationships among the local knowledge networks, global

knowledge linkages and innovativeness of firms in clusters in a rapidly transitioning economy. This paper tries to provide a better understanding of the importance of the spatial dimension of knowledge interactions. More specifically, we will examine the following research questions by using the qualitative approach and firm survey data from the software cluster in Guangzhou, China. The research questions this study attempts to answer are:

• Do the global knowledge linkages have a significant impact on the innovation of local firms in the software cluster?

• What kinds of global knowledge linkages are the important knowledge sources for local clusters in developing countries?

• How do the interactions of local knowledge networks and global knowledge linkages impact on the innovativeness of local clusters?

(1) The nature and the spatial dimension of knowledge sources in regional innovation system There is now considerable interest in the workings of regional innovation systems, that is, the linkages and interactions between enterprises, universities, specialist research institutes and other actors involved in the production, distribution and application of economically useful knowledge (Freeman, 1995; Lundvall, 1992; Nelson, 1993). They believe that innovations are carried out through a network of various actors underpinned by an institutional framework. This dynamic and complex interaction constitutes what is commonly labeled systems of innovation, i.e. systems understood as interaction networks

In the research on knowledge flows and innovation of firms, a special emphasis is given to innovative clusters, which suggests that knowledge flows from other firms and organisations, such as vertical and horizontal linkages, influence the accumulation and diffusion of knowledge required for firm innovation.

(2) Local knowledge networks and innovation of local firms in a clusterA key implication that could be derived from the cluster literature is that local knowledge transfer and exchange are of vital importance for the innovation of firms in a cluster. Localised flows of know-how and expertise are regarded to be of key significance for the innovation capacity and competitive strength of clusters and regions (Porter, 2000; Malmberg and Maskell, 2002). Most research links the knowledge spillovers with locality, and takes it as tacit knowledge flow pervasive within a spatially- bounded cluster Local knowledge networks provide the platform for collective learning and the social trust relationships which are conducive to innovation in local clusters. As Capello(1999) put it: “the mechanisms for the spatial transfer of knowledge are social because new knowledge is transferred to other agents, whatever the will of the original inventor, thanks to common technological, organisational and institutional routines and behaviours which facilitates the sharing of information and know-how. Local knowledge networks also provide the platform for a mobile local labour pool, which is a very important mechanism for knowledge transfer in technology- based industrial clusters.

(3) Global Knowledge Linkages and innovation of local firms in a cluster

There seems to be a growing consensus among many scholars that it is not only local knowledge circulation that fuels innovations, but knowledge from outside local clusters is also important to the innovation of firms in the local cluster. considered the interface of local and global and found that in the United Kingdom, innovative firms are concentrated in a few locations, but at the same time, innovative regions have more linkages with international actors than less innovative regions. In his interpretation, global knowledge linkages (with customers and clients) are more important for obtaining leading edge knowledge concerning market trends than for obtaining technological information. In other words, Simmie raises the important issue of understanding the drivers of innovation and stresses the significance of global knowledge linkages for local firms in a cluster in advanced economies. To tap into international knowledge sources obtaining access to expertise and skills that are not available within the limited context of the region is considered to be of crucial importance (Camagni, 1991; Bunnel and Coe, 2001). In order to avoid becoming locked-in to the low end of production, knowledge flows from external sources are crucial to developing countries because of limits of resources in the local milieu of developing countries. Global knowledge linkages can be taken as an open gate for regional innovation systems

(4) The type of global knowledge linkages and FDI activities Global knowledge linkages can be generally considered a source of knowledge, in a broad sense, including product, process and distribution expertise, as well as management and marketing skills for developing countries. Knowledge flows can globally transfer through several channels, such as global value chain, multinational enterprise activities, global personnel movement. Multinational enterprise activities have important effects on national competitiveness which are not adequately covered by the facet “firm strategy, structure, and rivalry”

knowledge interactions between international R&D centres in a local cluster and local firms are more and more important for innovativeness. Y un-Chung Chen took Shanghai as a sample of regional innovation system and illustrated how MNEs’ R&D plays an important role

Research methods

we identify market type of knowledge flows as knowledge derived from customers, suppliers, competitors, service firms, new personnel, consultants, and identify scientific type of knowledge flows as knowledge derived from R&D centres, universities, public research institutes, and identify open type of knowledge sources as knowledge derived from fair and exhibitions, professional and industry associations, scientific journals and publications, electronic information. So we can examine the effect of different types of knowledge flows on the innovativeness of local firms in a cluster.

We divide the spatial dimensions of .knowledge sources into four geographic levels, regional, national, local FDI and international. So we can examine the impact of global knowledge linkages versus local knowledge networks on the innovativeness of local

firms in a cluster. In order to answer our research questions, third, we conducted the innovative firm survey and some phone interviews on Guangzhou software cluster. In addition to basic firm information and self-assessed innovativeness of firms, firms were asked in the survey to assess the importance of various knowledge sources of assistance for their upgrading.

(3)Characteristics of the Guangzhou software cluster

Guangzhou is a national software industry centre and a national software export and innovation centre. The overall strength of the software industry is leading in China. By the end of 2006, there were 1,284 software enterprises, the technology and trade income was RMB 34.1 billion, of which software income amounted to RMB 22 billion. At present, there are five software firms in Guangzhou with a staff over 1,000, i.e., Netease, Huifeng software, Jiesai Technology, Guangzhou Shukong and Haige Telecom there and 12 enterprises with 500-1,000 employees. In 2006, there were two enterprises with annual sales income over RMB 1 billion in Guangzhou and 33 enterprises with annual sales income between RMB 100 million and RMB 1 billion. There are two companies obtained CMMI-5 certificates, Guangzhou Benbu Computer Software Co., Ltd. and Guangzhou Huawei Mingtian Company. Over 20 enterprises have obtained certificates over CMM-2, 193 enterprises have passed ISO9000 quality system certification, 684 enterprises have passed “Double Soft” certification, and 11 firms are listed as key software base enterprises by the national torch plan.

A. Local training centres as knowledge sources in the clusterIn our empirical results, we can see new personnel from local training centres (including universities) have been the important knowledge sources for many local firms. In last 6 years, there are more than 27,000 people having received software-related training and education in Guangzhou

B. Local public technology service platforms as knowledge sources in the clusterIn improving the innovativeness of software industry, Guangzhou has built Software Product Exhibition and Trade Centre, the Software Project Bidding Centre, China Cyber Software Test Centre, Guangzhou IC Design and Training Centre and the Guangzhou IC Test Centres as a software test platform, a prototype development platform and a software exhibition and trade platform for the software industry. These Local public technology service platforms provide a good technology development condition for software and IC design firms. Based on universities, research institutes and large software firms, the close cooperation among the firms, academic organizations and research institutes is encouraged. Large public software R&D organizations are introduced in the region to enhance technology and product R&D and to improve competitiveness of products. It is suggested from observation that local public technology service platforms may have been the important knowledge sources for many local firms.

C. Local leading innovative firms as knowledge sources in the clusterSome local firms in Guangzhou software cluster are very innovative in terms of technology and market in the fields of telecom, finance and insurance, fiscal and tax, E-commerce, office automation, education and computer and network security.

(2)Global presences and global knowledge linkages A. Knowledge interactions between local foreign R&D facilities and local firms

The famous software outsourcing enterprises such as IBM software innovation centre, Microsoft (China) industrial base, Intel international security data solution centre and so on, have established software R&D, outsourcing programs in Guangzhou. Among them, Microsoft (China) established the South China technology support centre of Microsoft in Guangzhou, as the advanced software training centre and the software outsourcing base for international markets. It is noted that receiving services and knowledge from these foreign R&D facilities may have become the very important knowledge sources for many local firms.

B. Knowledge interactions between FDI affiliates and local firmsThrough the cooperation with multinational firms or introduction of world famous software enterprises in Guangzhou software cluster, many local innovative software firms have explored the international markets and improved the absorptive capabilities of leading technology. In receiving internal outsourcing from international firms, many domestic firms have formed software outsourcing development teams with international firms. In fact, our observation has shown that this is very important way to get knowledge from external environment for some local innovative firms.

C. Knowledge interactions between local foreign training programs and local firmsWith the government subsidies, joint training of software service outsourcing personnel home and abroad has been promoted to provide general and senior professionals, marketing and management professionals. Local foreign training program have been a very important way to improve knowledge sharing in Guangzhou software cluster.

In our research we can find that the key knowledge sources in local knowledge networks for local firms result from local customers, local consultants, local universities, local new personnel and local competitors. The local firms in the Guangzhou software cluster, however, also use global customers and global competitors as knowledge sources. Customers are the most important partners of all knowledge links both from local knowledge networks and global knowledge linkages. Relations to the knowledge infrastructure

Conclusions

we draw the following conclusions and present some policy implications based on the research results:

First, this study provides evidence which suggests that local knowledge networks do matter for the innovation of firms within clusters in developing countries, which is in line with the main hypothesis in the literature that local knowledge networks are the main reason for the increased innovative and economic performance of the firms within clusters (Saxenian, 1994; porter, 2000). However, global knowledge linkages play a crucial role for the innovative performance of the firms in the Guangzhou software cluster. Global knowledge interactions mostly occur between local firms and FDI

affiliates; between firms and global vertical and horizontal linkages. Conversely, local knowledge networks in Guangzhou software cluster are based on geographically close relationships between firms and universities and between local basic firms and local innovative firms.

Second, we have observed that the knowledge flows from the local presence of global components to local firms have been significant in Guangzhou software cluster. FDI activities have brought about advanced technology, management skills and various international knowledge linkages to local firms. At the same time, international firms as customers and competitors are the very important role for global knowledge transfer. FDI R&D activities, local foreign training programs and local foreign personnel movements being knowledge sources for local firms can directly be observed to improve innovativeness of local firms.

Third, global knowledge linkages are to some extent more important to innovativeness of local firms in the market way than the scientific way in Guangzhou software cluster. According to the observation of the foreign presences of the employees in local entities, local foreign personnel movements to innovativeness of local innovative firms are high relevant in Guangzhou software cluster. In addition, international movement of people associated with nationals studying or working abroad for a limited period and applying their new knowledge when they return or the inward movement of foreign nationals into the country is also very important channel for international knowledge transfer.

Yu Zhou, "The Making of an Innovative Region from a Centrally Planned Economy: Zhongguancun Science Park in Beijing"Zhongguancun.pdf

Examines the institutional evolution of the ZGC science and technology park. How can a globally competitive knowledge cluster be created in a developing country?

Can we relate “Institutional evolution” to industrial ecology?

IN developed nations, the institutional pieces to a knowledge-innovation cluster include:

System of flexible production Intense interfirm networks High labor mobility IP rights protection Incentive structures for knowledge sharing and risk taking Adaptive and entrepreneurially connected national and local

government

Beijing is the center of national government and national SOEs but is also the main center for high tech innovative firms.

Institutional economics and market economics: institutions as source of long term growth

Importance of social capital in the operation of markets and clusters

Examples of successful high tech clusters in developing nations:

Hsinchu High Tech Park in TaiwanKaosiung Software Park - Taiwan

Chaebol-based tech centers: Samsung in Korea

Bangalore

Changes in ZGC

Begins as an import substitution strategy with mostly state sponsored research institutes with a command economy mentality

Post reform actions included building up the size and strength of universities and the creation and location of the Chinese Academy of Sciences CAS

1980s saw spinouts from CAS and universities to create profit-oriented firms – LenovoUniversities and research institutes act as venture capitalists with funding and supportstate owned-people run firms operating outside the state budgetautonomy and the right to fail

In 1992 first wave of high tech FDI comes to China and is focused in ZGC. In addition, rapid declines in tariffs on computers and rising incomes led to big increases in computer sales in China, with ZGC firms acting as sales agents for foreign firms.

Large declines in R&D funding and global competition damaged the innovation of ZGC firms, with many eliminated and many others becoming private shareholding firms. Many firms also remained as hybrid forms of state-private ownership.The increasing actual and potential size of the Chinese market for ICT led many TNCs to engage in localization of upper management, product sourcing, R&D, and local firm cooperation.

Chinese firms begin production and distribution themselves, based on knowledge accumulation through TNC relations.

Legend/Lenovo is best success story.

Chinese software firms in ZGC also increase along with the rise of the Internet.

Late 1990s the Chinese state moved to create a technology park in ZGC, with an expansion of R&D funding for research institutes and universities and changed the hukou rules for hiring of non-Beijing residents. Chinese state recognizes the role of ICT and moves to develop national policy support system.

Strengths and Weaknesses

Large number of students in high quality universities, often connected to western universities and experience who recycle back to China. Serves as a knowledge and cultural exchange system with US universities and firms.

High labor mobility

High entrepreneurship

Weak venture capital system and capital sources from traditional Chinese banks

Good collaboration and networks with TNCs; poor networks and collaboration with other Chinese firms – poor IP protection; cultural of IP theft, low trust

Guanxi networks have not adequately formed but may expand dramatically over time.