Smells a Lot Like Import Substitution
Import substitution industrialization (also called ISI) is a trade and economic policy based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. (Wiki)
During the past six months or so, one of the big themes in foreign investment circles has been the extent to which China has rolled up the red carpet for foreign companies. Some of this talk is in reaction to recent government enforcement policies that have made it more difficult for foreign companies to do business here. Additionally, China’s industrial policy has led to significant concentrations in certain market sectors, dominate by “chosen” State-owned Enterprises (SOEs).
In my own law practice, I have seen a disturbing trend with respect to technology transfer. In the past year, I have seen one tech license deal go bad because of a very questionable patent invalidation decision — the result allowed the local company to use the tech royalty-free. The other matter was a transfer of Chinese tech offshore, a purchase by a foreign entity; a couple of years ago, this deal would have gone through within days but now is bogged down in red tape.
For a long time, two of the chief motivating factors behind China domestic innovation programs are: self sufficiency and avoidance of paying royalties to foreign enterprises. As a developing country, China’s econ policy here makes some sense if it leads to domestic innovation and a continuous rise up the value chain of tech products.
However, if this attitude leads to specific policies designed to dislodge foreign suppliers in favor of domestic firms after tech know how has been shared, that’s not so cool. So what should we make of this sort of report:
China spends billions of dollars importing high-end scientific instruments every year, and its global competitiveness in manufacturing this technology is dwindling, a survey has found.
Conducted by Peking University and the National Center for Nanoscience and Technology and the National Science Library, the survey found that in some sectors scientists rely 100 percent on imported high-end instruments.
Importing these high-end instruments, including DNA sequencers and particle colliders, cost several billion US dollars in 2009, an increase of 30 percent on the previous year, the report found, without specifying an exact figure. (China Daily)
On its face, this is a simple report about how China is spending a lot of money, perhaps inefficiently. Maybe I’m reading between the lines too much here, but in addition to being more efficient, the obvious solution to this problem is import substitution.
“However, if this attitude leads to specific policies designed to dislodge foreign suppliers in favor of domestic firms after tech know how has been shared, that’s not so cool.”
What exactly did you think the endgame was, if not this? Are we all that naive?
The are dozens of examples of this type of practice across every industry. Import substitution has become a national strategic gloal as has the displacement by local ‘national champions’ of successful foreign enterprises already in China. Government procurement, pressure on licensing fees paid to overseas IP holders, national car policy, the daily defamation of foreign goods and services in the national press… it is all a highly disturbing trend. The strategy appears to be to allow national champions to take over domestic markets then use profits from those domestic sales to fund global expansion.
No, I don’t think we’re naive. But there is a difference between what the government might like to see in an industry and what it is actively, and blatantly, willing to do to get that result. Recently the effort has become a lot more noticeable.
By the way, as industrial policy becomes more and more aggressive, the government also runs the risk of crossing the line into WTO-inconsistent action.