Challenges for Standards and Innovation Policies in the Emerging Global Knowledge Economy Dieter Ernst, East-West Center

1. Challenges for Standards and Innovation Policies in the Emerging Global Knowledge EconomyDieter Ernst,East-West Center, Honolulu

2. 1. Argument • 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. • 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

3. 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

4. 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 © Dieter Ernst

5. Multiple standards Quality Reliability Privacy Safety Seller Buyer Market Interface Interoperability Security Performance Environment © Dieter Ernst

6. Apple iPhone 3G © Dieter Ernst

7. Applications Network Operating system Hardware Applications Network Operating system Hardware Layers of IT standardization 1 2 3 1= standardization starts with CPU, memory, storage & communication gear 2= standardization moves down from applications to hardware 3= enhance interoperability between systems at various layers © Dieter Ernst

8. Complexity of applications requires standardization of hardware, operating system and network Network Layer OS Layer Application Layer Hardware Layer Complexity Time Operating System Network Applications Hardware Source: Lord, 2007 © Dieter Ernst

9. 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 © Dieter Ernst

10. 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 © Dieter Ernst

11. THE NODES OF A GLOBAL PRODUCTION NETWORK Inter-firm Independent subcontractors Distribution channels Independent suppliers FLAG SHIP Cooperative agreements (standards consortia,etc) R&D alliances Joint ventures Subsidiaries & affiliates Intra-firm © Dieter Ernst

12. THE NODES OF A GLOBAL PRODUCTION NETWORK Inter-firm Independent subcontractors Distribution channels Independent suppliers Multiple standards FLAG SHIP Cooperative agreements (standards consortia,etc) R&D alliances Joint ventures Subsidiaries & affiliates Intra-firm © Dieter Ernst

13. 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. © Dieter Ernst

14. Countries differ in standardizationpolicies © Dieter Ernst

15. US and Chinese standardization systems differ © Dieter Ernst

16. 5. Implications for public governance Is 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? © Dieter Ernst

17. Q&A

18. Global innovation networks – a taxonomy • Global companies “offshore” stages of innovation to Asian affiliates • intra-firmnetworks • Global firms “outsource” stages of innovation to specialized Asian suppliers • inter-firm networks • Asian firms construct their own (mostly intra-firm) networks • International public-corporate R&D consortia • Informal social networks (students, knowledge workers) © Dieter Ernst

19. 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 platforms Plano/Texas (Dallas telecom corridor) • total solutions for CDMA; G3 UMTS; CDMA Mobile Intelligent Networks; mobile data service; optical; VoIP Joint R&D labs with • Vodafone, British Telecom, Telecom Italia, France Telecom, Telefonica, Deutsche Telekom © Dieter Ernst

20. Global Chip Design Network - multiple interfaces require multiple standards EMS IP Licensors IDM Fabless ToolSystem CompanyDesign vendorssupport services Chip assembly Foundry ODM Adapted from: Ernst, D., 2005a, Complexity and Internationalisation of Innovation, IJIM, March

21. 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 © Dieter Ernst

22. 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 © Dieter Ernst

23. Standards strategies for latecomers © Dieter Ernst

24. 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

25. 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

26. 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

27. 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 © Dieter Ernst

28. 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 © Dieter Ernst

29. 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