Endogenous Innovation in Chinese IC Firms: A Case Study Based on the Technology Strategy Evolution of NSBIC

Transcription

1 Dec Journal of Electronic Science and Technology of China Vol.4 No.4 Endogenous Innovation in Chinese IC Firms: A Case Study Based on the Technology Strategy Evolution of NSBIC WANG Min, YIN Lu School of Management, University of Electronic Science and Technology of China Chengdu China Abstract It is a common sense that enterprise is the principal of endogenous innovation, but why many firms do not innovate actively? What kind of difficulty will enterprises suffer in endogenous innovation? What can the government do for the endogenous innovation? These questions are very crucial to realize endogenous innovation. This paper tries to answer the questions mentioned above from the perspective of evolution. The industrial environment of emerging is emphasized for analyzing the endogenous innovation in Chinese enterprises. The process of endogenous innovation in NanShanBridge Co. Ltd (NSBIC), which is an IC design firm, is analyzed as a case. From the case study, we can answer the questions above in certain extent, give some suggestions to the enterprises as a later-comer, and present some advice to government. Key words endogenous innovation; IC industry; evolution; case study Endogenous innovation strategy has received much interest in China [1]. However, how to implement the strategy is still argued widely. It is a common sense that enterprise will be the principal of endogenous innovation. However, why many firms do not innovate actively? What kind of difficulty will enterprises face in endogenous innovation? What can the government do? These questions are very crucial to achieve the strategic goal of endogenous innovation. This paper tries to answer the questions mentioned above from a prospective of industrial environment. The remainder of the paper proceeds as follows. Section 1 is a briefly review. Section 2 presents a case of endogenous innovation in IC industry. Section 3 is conclusions. Section 4 is recommendations for future research. 1 Review 1.1 Research on Endogenous Innovation Most literatures on endogenous innovation analyzed its importance and feasibility from the macro perspective such as nation s economic safety, industrial structure upgrading etc. Wu and Liu re-defined the concept of indigenous innovation based on a number of theories about the nature of technological innovation [2]. Mei and Luo pointed that it is very limited to promote the innovation capacity of China by introduction and transfer based on the empirical analysis of FDI spillover effect [3]. Shang analyzed the institutional guarantee to endogenous innovation [4]. Lian analyzed the function of venture capital to endogenous innovation [5]. Gao studied the theories of indigenous technological innovation from the capability perspective [1]. Cao pointed that Chinese firms must confront interference of international monopoly group, when they innovate independently [6]. 1.2 Evolution Theories External environment is emphasized when scholars study evolution. Nelson studied the co-evolution of emerging and its environment [7]. James F. Moore pointed that emerging evolution rely on all sorts of resources. The network is constructed by supplier, consumer and other resources supplier is necessary to the evolution [8]. Adner and Levinthal pointed that the rapid development of emerging is benefit from the abundant external environment [9]. Geels thought that co-evolution exists among emerging, market and consumer s preference [10]. Christensen analyzed the demand environment of evolution [11]. 2 A Case Study 2.1 Research Background Why we choose a firm in IC industry to analyze Received

2 408 Journal of Electronic Science and Technology of China Vol.4 the endogenous innovation? There are some reasons as follows. The performance of Information and Communication Technology (ICT) industry has widely effect on all sectors in a country. Many countries dispose ICT as strategic industry, so does China. During the 1990s, China dramatically increased its share in global market in ICT products and now ranks among the top three world exporters (Fig.1, Source: elaborated on UNSD Comtrade Database) [12]. Market share / (%) Time/Year Fig.1 China s market shares of ICT products (1992~2003) Being a leading exporter of final goods in a highly fragmented market does not necessarily imply domestic specialization in the production of those goods. This is in fact the case of China, where the high import content of ICT exports (Fig.2) suggests that the country is at least at aggregate level specialized in the labor-intensive final stages of production rather than in high- stages of ICT production (Fig.2, Source: elaborated on UNSD Comtrade Database) [12]. Trade / (bln$) Exports of ICT products Imports of parts for ICT products Time/Year Fig.2 Trade of ICT products and parts, 1992~2003 (bln $) IC is the upstream of ICT industry, and is of the higher added value in the ICT value chain. Therefore, promoting endogenous innovation in IC is important to ICT industry structure upgrading. Furthermore, Chinese IC firms are short of endogenous IPR technologies. In addition, the gap between Chinese IC industry and developed country s is becoming wider, which may threaten the economy even national security. So studying the endogenous innovation in IC industry is of great significance. 2.2 Snapshots and Features of NSBIC NSBIC was established in June It is located in High-tech Industry Park of Chengdu. The firm is mainly engaged in super large-scale integrated circuit (SLSI) design and sale service. Some entrepreneurs are returnees from Silicon Valley who had abundant chip design experience on data communication and the network security, the others are senior engineers came from famous domestic IC corporations. At the beginning of establishment, the local government supported NSBIC by tax and land policies. Some scientific and technological grants are given to promote endogenous innovation in NSBIC. The existing staff in NSBIC surpasses 120, 80% is research and development personnel. It has strong technological development strength. NSBIC can fulfill the design of ultra large-scale integrated circuit from the front end to rear end. 2.3 Technology Strategy Evolution of NSBIC The development experience of NSBIC illustrated how difficult it is for Chinese IC design enterprise to innovate independently. All kinds of handicaps they met at the startup stage have the certain representation on what Chinese IC enterprises must face in endogenous innovation. The development experience of NSBIC has some enlightenment on other enterprises. In this part, we describe and summarize the evolution process of NSBIC s strategy. According to the transformation of strategic focus in NSBIC, the growth process of NSBIC is divided 4 stages The First Stage At the beginning, NSBIC s strategy focused on chip design in data communication domain, which is named fabless. It needs not to manufacture but give the design to an outside foundry to manufacture. Our strategy is dedicated on a certain section of the industrial chain, and makes our product the most competitive in the world, Weimin Li, the CEO of NSBIC, said that. In this stage, firm s strategy focused on the core chip R&D and design in data communication domain.18 months after the establishment, NSBIC launched the first homebred core chip in data communication, which is named HUAXIAWANGXIN (HXWX). This chip broke through the key technological and methodological difficulty, and has the first class performance even in Silicon Valley. NSBIC applied for 10 invention patents, and registered 2 copyrights. NSBIC has completely

3 No.4 WANG Min, et al.: Endogenous Innovation in Chinese IC Firms 409 endogenous IPR of HXWX. However, when NSBIC industrialized the chip, the market in China astonished the entrepreneurs in NSBIC. I had thought the market pressure would be less if we design the chip better than U.S corporations do. But it is a big challenge to us, said the CEO. Chinese system manufacturers had locked in using foreign chips. They are not willing to choose the domestic chip design firms as supplier. The entrepreneurs came from Silicon Valley had been used to effective communication with upstream and downstream corporations. They were over confidant to their technological advantage. They are frustrated in market. During the industrialization of HXWX, entrepreneurs of NSBIC suffered many difficulties, some of which were even not being thought. They began to doubt the strategy. Under the pressure of survival, NSBIC intended to extend its business to downstream of industry chain The Second Stage When they intended to change strategy, entrepreneurs found a tendency that the data communication and the network security are tending to be integrated, and the integration must be realized in chips. Famous corporations such as Nokia, CISCO were developing the rout chip with the function of data communication and information security. So, NSBIC chose information and network security as turning point based on it self s technological advantage. After entering the firewall product field, three super-large scale ASIC chips with endogenous IP were successfully designed. Learning from the experience of HXWX, NSBIC decided to develop firewall product taking advantage of chip, in order to enhance the visibility of technological advantage to consumer and decrease the risk of industrialization. To acquire the complementary assets for product development, NSBIC constructed strategic alliance with Rongxin Tian, which is a famous firm with competence in firewall product. Series UTM product based on the ASIC chips were developed successfully in April This product named Xwall was given the radical technological invention awarded in IT industry in July The other network security chip named Blue phoenix was launched in December It led the competitor 6 to 9 months in function and performance. However, when introduced the product to the market, the similar challenge is confronted by NSBIC. Although the product is developed based the special chip with technical advantage of NSBIC, the Xwall was still in the lower end in industrial chain. The visibility of technological advantage to the end consumer is still weak. Another challenge is that most software firms, which are direct consumer of UTM product, were doubt to Xwall. Although leading the competitor in technical performance, NSBIC faced tremendous later-comer s disadvantage when competed with Cisco such famous firm The Third Stage Learning from the industrialization of HXWX and UTM, NSBIC survived hardly. Decision-makers in NSBIC realized that it was hard to survive and develop for NSBIC if only rely on technological advantage in real market environment. They must make choice, either enter the mainstream industry chain, or enter a new business domain. But no matter which strategy is chosen, an industry ecosystem is necessary to corporation. The ecosystem includes demand of customers, strategic relationship with upstream and downstream partner, innovative culture and institution. Therefore, since 2005, NSBIC focused its strategy on how to enter the mainstream industry chain. Firstly, in order to overcome the difficulties that technological advantage on chip is invisible to end market and is not be confirmed by system manufacturer, NSBIC began to launch entire system. Secondly, the managers are changing their original thoughts that is No.1. NSBIC is trying to acquire other resources of industrialization such as brand cultivating, marketing etc. The offices were set up in some central cities like Beijing, Shanghai, Xi an, Chongqing. Special niche market is chosen to be breakthrough point. Some project NSBIC had finished demonstrates its technological advantage to consumers. All the measures NSBIC taken aim at one goal that is cultivating technological ecosystem for commercialization Outlook of Future Innovation Strategy At the same time of entering the mainstream IC industry chain, NSBIC is also searching for new potential market neglected by large IC firms. Now the decision-makers think the consumable IC chip design is an appropriate field for Chinese IC firms to innovate independently. The reasons are two aspects. Firstly, the diversity of IC demand in China is abundant market resource. Secondly, the industry chain of consumable IC is relatively short, the visibility of technological advantage is higher to end consumer. Therefore, it is

4 410 Journal of Electronic Science and Technology of China Vol.4 easy to accept and acquire competitive advantage. 3 Conclusions 3.1 Technology Strategy Evolution of NSBIC Strategy Main product NSBIC s capacity Chip design HXWX Component First stage Technology strategy evolution Product development based on chip with IP A Xwall Product Second stage Organization learning Entire system manufacture ASIC Xwall Fig.3 Evolution of strategy and capacity 3.2 Case Analysis Based on Theory of Technology Strategy Evolution According the viewpoint of theory on strategy evolution, the design and transformation of strategy can be explained by the evolutionary mechanism. [8]. The case of NSBIC tested that the factors, which have influence on strategy evolution, include technological capacity, organization environment and industry environment. Moreover, the strategic action of strategy transformation relies on organization learning. In the first stage, NSBIC selected communication chip design as strategic focus according its technological experience. It reflects the path-dependency of selection. When commercializing HXWX, the implementation of strategy is restricted by industry environment. Along with the change of internal organization environment, strategy mutated, and NSBIC entered the second stage. Then NSBIC kept its advantage in chip design, but abandon the strategic orientation at fabless. They decided to extend the value chain and develop special product based on the chips they designed independently. Learning from the industrialization and external source in first stage, NSBIC engaged in the integration of data communication and network security. They learned from strategic alliance and acquired complementary capacity for product development. When Xwall was introduced into the market, NSBIC met the similar challenge as in the first Entire system Support and infrastructure Third stage stage. Therefore, the second transformation of strategy happened. Learning from experience, NSBIC found incomplete industry chain was a big obstacle to get competitive advantage. So it began to manufacture system equipment. Keep learning from action, NSBIC realized that internal resources and capability such as market introduction, marketing are scarce. Then it paid more attention to marketing capabilities. The measures training old employees and recruiting new ones were taken to acquire marketing capability. 3.3 Case Analysis Based on Emerging Technology Management NSBIC plays a dual role in chip design of data communication. It is a later-comer in world, but it is the first one in China. Therefore, some theory related emerging management can be used to explain NSBIC s behavior Acquiring Complementary Assets by Strategic Alliance After deciding to enter UTM business, NSBIC realized only technological advantage in chip design was not enough to development UTM product. The experience on firewall is very important and scarce to NSBIC. So it decided to acquire complementary assets by strategic alliance, and get two-win outcome Grasping Niche Market Without brand advantage and lacking marketing capability, NSBIC grasped the niche market in the introduction of UTM, and broke through the monopolization of famous firms. Firstly, it chose the niche market such as weapon industry sector, police sector in which the need for network security is very high and foreign competitors face big obstacle to enter. Secondly, NSBIC chose the niche market, in which the performance of its product is better. In these markets, NSBIC supplies system equipment and builds up demonstrating program to increase visibility of technological advantage. In the environment of intensive competition with foreign corporations, the market exploitation strategy in NSBIC is of great significance to other China firms. 3.4 Case Analysis Based on Theory of Technology Ecosystem According to the theory of ecosystem,three roles can be played by within an ecosystem: component, product and application, support and infrastructure. In the case of

5 No.4 WANG Min, et al.: Endogenous Innovation in Chinese IC Firms 411 NSBIC, the chips are component and the Xwall based the chips is product. But from a more wide perspective Xwall is support and infrastructure for network. From the ecosystem perspective, technologies of component, product, support and infrastructure are co-evolved. This conclusion is also tested in NSBIC. ASIC of NSBIC is component of Xwall, which is support and infrastructure to software supplier and network. Co-evolution must be existed among them if the ecosystem of NSBIC is complete. But the fact is that software supplier was reluctant to build relation with NSBIC. This is vital to NSBIC s failure of commercialization. Social and governmental forces, economic forces, and technological forces are three major external environmental forces. In NSBIC case, the governmental force is the most strong. Especially the High-Tech industry policies support the endogenous innovation actively. But the policies from market side seem to be scarce. In aspect, the macro atmosphere of endogenous innovation and Sci-Tech polices are very propitious to endogenous innovation. From the case, we conclude that economic force especially market force is the less for endogenous innovation. The conclusions have some meaning for both government and enterprises. 4 Further Research During the research of NSBIC, we collected many materials on Chinese IC design corporations. An interesting phenomenon attracts our attention. IC deign firms served for consumable product such as Vimicro Corp, Actions Semiconductor Co., ltd seem to have better economic performance than firms served for system equipment. This seems to imply that the latter s endogenous innovation is more difficult. In future, we will do further research on this question and try to find the key for Chinese IC firms to innovate independently. References [1] Research Center for Technological Innovation of Tsinghua University. Management of Innovation and Entrepreneurship[M]. Beijing: Tsinghua Press, 2006: (in Chinese) [2] Research Center for Technological Innovation of Tsinghua University. Management of Innovation and Entrepreneurship[M]. Beijing: Tsinghua Press, 2006: (in Chinese) [3] MEI Y H, LUO H. Endogenous innovation is neccessary path for Chinese science and to develope[j]. Science and Technology Industry in China, 2005, 188(1): (in Chinese) [4] SHANG Y. Implementing endogenous innovation from the two aspects of science and [J]. Science and Technology Industry in China, 2005, 191(3): (in Chinese) [5] LIU Y H. Implementing endogenous innovation through boosting venture capital[j]. Watching the Global Science and Technology, 2005, 235(7): 4-5. (in Chinese) [6] CAO J. A review of independent innovation from WAPI[J]. China Soft Science, 2005, 175(7): (in Chinese) [7] NELSON R R, WINTER S G. An Evolutionary Theory of Economic Change[M]. Cambridge, Mass.: Harvard University Press, [8] BURGLMAN R A, MAIDIQUE M A, WHEELWRIGHT S C. Strategic Management of Technology and Innovation[M]. Beijing: China Machine Press, [9] ADNER R, LEVINTHAL D. Demand heterogeneity and evolution: implications for product and process innovation[j]. Management Science, 2001, 47(5): [10] GEELS F W. Technologies transitions as evolutionary reconfiguration processes: a multi-level perspective and a case-study[j]. Research Policy, 2002, 31( 8-9): [11] CHRISTENSEN C M. The Innovator's Dilemma[M]. Boston: Harvard Business School Press, [12] AMIGHINI A. China in the international fragmentation of production: evidence from the ICT industry[j]. The European Journal of Coparative Economics, 2005, 2(2): Brief Introduction to Authora(s) WANG Min ( 王敏 ) was born in Gansu Province, China, in She received the B.Sc. degree in economics from the Northwest Normal University, Lanzhou, in 1999 and the M.Sc. degree in System theory from the Chongqing Normal University, Chongqing, in She is currently pursuing the Ph.D. degree with the School of Management, University of Electronic Science and Technology of China. Her research interests include Innovation management, Technology management. YIN Lu ( 银路 ) was born in Sichuan Province, China, in1957. He is currently a professor and Ph.D. supervisor with School of Management, University of Electronic Science and Technology of China.