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Challenges for Standards and Innovation Policies in the Emerging Global Knowledge Economy

Dieter Ernst,East-West Center, Honolulu

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1. Argument

1. Changes in the international standardization landscape pose new challenges for standards and innovation policy:

The economic importance of standards has dramatically increased.

At the same time, standards development has become more complicated and difficult to manage.

2. Standards development now is a highly contested field of corporate strategy, but increasingly also of public policy:

Standards and innovation policy Standards and competition policy

© Dieter Ernst

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Why does this matter? Claim: Market-led system of standardization is

working well no need for policy adjustments (really?)

Crisis shows - markets work best when there is a strong regulatory framework.

Challenges for standardization are real: established approaches to standards development

are under pressure there are serious gaps in the governance of

standards development. It is time for stakeholders in standardization

(both in the private and public sector) to search for new institutional arrangements and policy responses.

© Dieter Ernst

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2. Explanation – Technological complexity

multiple standards complex standardization process - system

versus component specification demanding performance requirements for

electronic systems modular design system integration on a chip multiple layers of standardization Complexity of applications requires

standardization of hardware, operating system and network

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Multiple standards

Seller Buyer

Quality Reliability

PrivacySafety

Performance Environment

SecurityInteroperability

Market Interface

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Apple iPhone 3G

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Layers of IT standardization

Applications Network Operating

system Hardware

Applications Network Operating

system Hardware

1 2

3

1= standardization starts with CPU, memory, storage & communication gear2= standardization moves down from applications to hardware3= enhance interoperability between systems at various layers

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Complexity of applications requires standardization of hardware, operating system and network

Time

Com

plex

ity

Application LayerHardware Layer

Network Layer

OS Layer

Hardware Operating System Network Applications

Source: Lord, 2007 © Dieter Ernst

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Interoperability standards in the ICT industry Wireless interface standards - ensure non-

interfering use of radio spectrum; Interoperability within a system

ensure that various parts of the computer, radio and network systems function together

ensure compatibility of equipment produced by various vendors;

Portability - permits software to work with heterogeneous systems

Data exchange among different systems

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3. Standards for global corporate networks Reliable and secure communication of

sensitive information within and across networks

Interfaces (middleware) among proprietary information systems

Data formats to enable transmission and interpretation of data

Efficient methods for updating standards to accommodate new technologies

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FLAGSHIP

Independentsuppliers

Independent

subcontractorsDistribution channels

Cooperativeagreements(standards

consortia,etc)

Joint ventures

Subsidiaries& affiliates

R&Dalliances

Inter-firm

Intra-firm

THE NODES OF A GLOBAL PRODUCTION NETWORK

© Dieter Ernst

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FLAGSHIP

Independentsuppliers

Independent

subcontractorsDistribution channels

Cooperativeagreements(standards

consortia,etc)

Joint ventures

Subsidiaries& affiliates

R&Dalliances

Inter-firm

Intra-firm

THE NODES OF A GLOBAL PRODUCTION NETWORK

Multiple standards

© Dieter Ernst

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4. China’s Rise – can US adjust to interdependence? Global Knowledge Economy eroding US

leadership in manufacturing, trade, finance, technology and research.

The US may have less influence than in the past to determine international standards development.

New players: standards are important instruments for industrial and

economic development. move from being standards-takers to standards-

co-shapers and ultimately to standards-setters.

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Countries differ in standardization policies

Innovators (with high IP producers)

• Laws and trade policies protect IP owners• “openness” subordinated to IP protection

Manufacturers (primarily IP users)

•Focus on social good (“development”) and sharing of IP• “openness” subordinated to national development

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US and Chinese standardization systems differ

US China

Distributed, driven by private sector

Centralized, driven by the State (industrial policy; security)

Pragmatic, flexible, bottom-up

Systematic, bureaucratic, top-down

Reactive, responding to specific needs

Anticipatory and strategic

International standards often only guides

Tension between national & international standards

Intense rivalry among SDOs & consortia

Intense intra-agency rivalry

Foreign participation welcome

Limited foreign participation

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5. Implications for public governanceIs it appropriate to conclude that the old-style top down government

intervention won’t do the trick any longer on its own?

new forms of public governance are necessary to cope with the new standardization challenges?

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Q&A

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Global innovation networks – a taxonomyI. Global companies “offshore” stages of

innovation to Asian affiliates intra-firm networks

II. Global firms “outsource” stages of innovation to specialized Asian suppliers

inter-firm networks

III. Asian firms construct their own (mostly intra-firm) networks

IV. International public-corporate R&D consortia

V. Informal social networks (students, knowledge workers)

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New Players: Huawei

Kista/Stockholm, Sweden base station architecture and system design; analog-

mixed signal design (RF); algorithms; 3GPP (standards)Moscow, Russia algorithms; analog-mixed signal design (RF) Bangalore, India embedded SW and platformsPlano/Texas (Dallas telecom corridor) total solutions for CDMA; G3 UMTS; CDMA Mobile

Intelligent Networks; mobile data service; optical; VoIPJoint R&D labs with Vodafone, British Telecom, Telecom Italia, France

Telecom, Telefonica, Deutsche Telekom

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Global Chip Design Network - multiple interfaces require multiple standards

EMS

IP Licensors IDM Fabless

Tool System Company Designvendors support

services Chip assembly Foundry

ODM

Adapted from: Ernst, D., 2005a, Complexity and Internationalisation of Innovation, IJIM, March

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5. Adjustments are necessary in standards & innovation policies

Standardization is an integral part of innovation policy

Flexibility & rapid response to changes in technology, markets & market structure

Combine pragmatic, flexible and bottom-up approach with systematic, strategic and top-down approach

Open standards are essential (not redundant) competition policy needs to be integrated with standards policy

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The Elusive Nature of Open Standards “All vendors pay lip service to open systems, but

agreement ends here. The computer industry needs as many words for “open” as Eskimos need for snow.”

“Market leaders are rarely friendly to open standards when they dominate and eager to see them when they do not.” * *

“Market leaders are friendly to standards in layers above and below them so as to use the competition among others to increase choices, lower costs, and broaden the market.” * *

* Libicki (1995); * * Libicki, RAND study, 2000

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Standards strategies for latecomers

Leader deploy technology and then initiate standards based upon the deployed technology

Participant deploy existing international standard in current and future products

Fast follower

get existing standard as quickly as possible so that products with the standard’s technology can be deployed quickly

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Criteria for Evaluating Standards Policy

Cultural consistency (history matters!) Standards differ across sectors Capability for evaluation & foresight Cost effective solutions require legitimacy

from diverse stakeholders Incentives to promote positive-sum games

through “integrative bargaining” Equivalency with international norms &

procedures (not blind compliance) Robust competition law & enforcement

OTA 1992 © Dieter Ernst

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Pragmatic standards policy –guiding principles Collect a small group of vendors; Write a small, simple specification that covers

the important functions and omits non-essentials;

Leave room for both new technologies and possible backtracking;

Identify real-world test-beds for the standard Get the standard out of the door as soon as

possible

Libicki, 1995 © Dieter Ernst

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Pragmatic standards policy –key questions What problem needs to be solved by

standardization? Who are the key players that must be involved?

What are appropriate approaches to incentives and conflict gaming?

Can the problem be solved domestically? Or must it be solved internationally?

What is the smallest solution? And can it be broken into manageable chunks?

What are the best policy tools (e.g. imprimatur, R&D, targeted purchases, regulation) to promote compliance with the standard that also permit backing off if the standard fails?

Should a domestic solution be exported?Libicki, 1995 © Dieter Ernst

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Coordination – national (US)

Interagency USTR, DoC (standards in trade agreements) FTC, DoJ, FTC (standards and antitrust policies) ANSI – NIST- USPTO – DoD- DoE- DoA- DoH, etc Which USG agency coordinates definition of strategy and

implementation? Broad dialogues among multiple stakeholders

Public-private Role of SMEs Consumers With international SDOs and SSOs

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Coordination – national (China)

Interagency Standardization Administration of China (SAC) China Association for Standardization (CAS) China Communications Standards Association (CCSA) MIIT vs SARFT MOFCOM (standards in trade agreements) ?? (standards and antitrust policies) Which agency coordinates definition of strategy and

implementation? CCP –Central Organization Department (Zhongzubu)?

Broad dialogues among multiple stakeholders Public-private Role of SMEs Consumers With international SDOs and SSOs

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Coordination - international

No ‘institutionalization” that is comparable to IPR (e.g. TRIPS)

Increasing balkanization Diverse models of SSOs intense competition Links between SDOs and SSOs in flux Which agency coordinates definition of governance

and implementation? (analog to IMF; BIS) How to establish broad dialogues among multiple

stakeholders? Public-private; Role of SMEs; consumers IETF; UN-IGF; DCOS; A2K; ..?

© Dieter Ernst