Catch-up in the IT Service Sector and the Role of the Government in China

Chapter 7 analyzes the market and technological catch-up of indigenous Chinese firms in two information technology service sectors, namely, games and business software (enterprise resource planning (ERP) and security software) and focuses on two aspects. The first aspect is about how latecomer firms have been able to access and learn from foreign knowledge bases and acquire their innovation capabilities. The second aspect is the role of the government and regulation in the catch-up process. Indigenous firms in China have selected different learning and catch-up strategies in different technological regimes. For the online game sector, where imitation is easier and incremental innovation is more important than radical innovation, Chinese firms started with handling the publishing (or distribution) of games developed by foreign incumbents and later secured in-house game development capabilities by imitating the products of global leaders. In the business software sector, where imitation and creative innovation are difficult, Chinese firms acquired third-party technologies through mergers and acquisitions and then differentiated their products by taking advantage of local specificities. In general, intellectual property rights (IPRs) are critical in the business of these two segments. Despite the entry barrier effect of IPR protection by the foreign incumbents, the latecomer firms discussed in this chapter seem to have circumvented the barrier to entry and learning and to acquire their innovation capabilities. However, such learning and acquisition would not have led to commercial success without government regulation against foreign companies, such as business restrictions in online gaming and exclusive procurement of indigenous products in applied software (ERP and security software). Such restrictions against foreign companies were a critical constraining factor against their market share expansion in the Chinese market.