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George Krompacky
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On October 18, 2005, SPRIE presented the next seminar in its 2005-2006 series on "Greater China and the Globalization of R&D" with speaker Dr. Doug Fuller, current SPRIE Fellow. Dr. Fuller, speaking on "From California Dreaming to Silicon Success: The Rise of China's Semiconductor Industry," presented both industry-wide data and case studies of individual firms to explain how the politics of finance in China shape which Chinese chip firms become fast learners able to compete in world markets and which ones remain technological laggards.

Over the last several decades, there has been a strenuous debate about policies for economic development between the Washington Consensus promoted by the major international financial institutions and the revisionist political economists . Followers of the former view advocate free and unfettered markets buttressed by institutions to protect property rights. The revisionists argue that development involves social and political processes not adequately captured by the narrow prescriptive focus of the Washington Consensus.

In confronting globalization, there is also a new split among the revisionists themselves. Whereas the Washington Consensus welcomes globalization as a boon to developing countries through expanding the scope of market forces, the revisionists divide over the prospects for developing countries under globalization. The optimists, such as Ernst and Saxenian, see transnational networks as providing opportunities for developing countries to continue to learn the skills and competencies necessary to further their progress. The pessimists of the revisionist camp, such as Stiglitz and Strange, see globalization eroding the capabilities of the state or state-societal alliances necessary for development.

Using the case of technological upgrading (one aspect of economic development) in China's information technology (IT) industry, I demonstrate that opportunities for development exist under globalization. These paths to development are not simply the result of picking the right international networks to join nor are they due to the continued efficacy of state action. They also do not arise from well-developed market institutions within China. China's development success in spite of low levels of state industrial policymaking capacity and very incomplete market institutions tells us that other developing countries similarly unequipped can develop even in this globalized world.

In China's IT industry, two local institutional variables, firm operational strategies and state-firm relations, have interacted with the technology flows present in global networks to create opportunities for certain types of firms to upgrade. A firm's operational strategy (OS) determines its motivation to upgrade in China as opposed to doing so elsewhere. The relationship of firms to the state determines their sources of finance i.e. whether or not they can access functioning financial institutions.

The relationship of firms to the state determines their sources of finance and these sources of finance in turn impact their ability to upgrade. Sources of finance that provide credit with hard budget constraints give firms incentives to upgrade. Firms have hard budget constraints when they do not receive free help in covering their own financial obligations. With hard budget constraints forcing firms to meet their financial obligations, firms have to remain competitive to survive. For technology firms, a critical part of their competitiveness is their technology so they have every incentive to improve their technologies to keep pace with competitors. Finance that provides credit with soft budget constraints deprives firms of the incentives and even the capabilities to upgrade. Firms have soft budget constraints when they do not have to pay for some or all of their financial obligations themselves. These firms can rationally expect to survive even if not competitive because others are willing to bail them out. A third possibility is no source of finance. Firms without financing will not be able to invest in technological development.

 

There are four types of firms in China: the favored domestic firms, the neglected domestic firms, the hybrid foreign-invested enterprises (FIEs) and the regular FIEs. Financing and motivation have varied across firm categories. Due to different state-firm relations, FIEs rely on foreign finance and domestic firms do not. Hybrid FIEs differ from regular FIEs because the hybrids have a China-based operational strategy. This operational strategy (OS) is a mix of interests and ideational factors that causes these firms to perceive China either as the vital center of their operations (the China-based OS) or as just another location among many (the non-China-based OS). Thus, variation in firm-state relations (finance) and operational strategy (motivation) determine the variation in technological upgrading.

This thesis finds that the two types of FIEs are more likely to contribute to upgrading in China than the two types of domestic firms. Among the FIEs, the hybrid FIEs are more likely to contribute than the regular FIEs though the discrepancy is not as large as it is between the FIEs and domestic firms.

The hybrids are the most successful upgraders because they have both disciplined finance (i.e. credit with relatively hard budget constraints) from foreign financial institutions and the motivation to upgrade in China due to their China-based OS. The unsuccessful domestic upgraders lack finance (neglected domestic firms) or financial discipline (the favored domestic firms) due to their particular relationships to the state. The regular FIEs have the capabilities to upgrade due to their financial discipline and access to transnational technology networks, but undertake less upgrading in China than the hybrids because they lack the China-based operational strategy.

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Lt. Gen. Bruce A. Wright is Commander, U.S. Forces Japan, and Commander, 5th Air Force, Yokota Air Base, Japan. In these two command positions he is the senior U.S. military representative in Japan and commander of U.S. Air Force units in Japan respectively.

The general received his commission upon graduation from the U.S. Air Force Academy in 1973 and served as an instructor pilot early in his career. He has held command at all levels -- fighter squadron, group, wing and major command. Prior to assuming his current position, he was Vice Commander, Air Combat Command, with headquarters at Langley Air Force Base, Va., and Air Component Commander for U.S. Joint Forces Command and U.S. Northern Command. A command pilot, General Wright has more than 3,200 flying hours, principally in fighter aircraft, including 65 F-16 combat missions flown during operations Desert Storm, Provide Comfort and Deny Flight.

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Lieutenant General Bruce A. Wright Commander, U.S. Forces in Japan Speaker
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The US-India corridor for services outsourcing, now over three decades old, has moved from providing software programming to a wide range of lines of work, encompassing business processes, call-centers and analytical work, and going beyond its original focus on the banking industry to cover other financial services, healthcare and personnel management. The talk will address the benefits and risks associated with outsourcing,  the value proposition from a vendors' perspective and trends in the outsourcing services industry. The talk will take an analytical view of the drivers of outsourcing, going beyond the usual arguments based on cost arbitrage to show how firms like TCS have built defensible businesses based on process maturity, domain expertise, scale and scope. 

Surya Kant (known as Sury) is  President, Tata Consultancy Services  North America. Tata Consultancy Services Limited (TCS) is India's largest global IT consulting and services company, employing over 50,000 persons in 34 countries. His 27 year career with TCS includes setting up TCS Japan in 1987. He has also been country manager, TCS UK.  His focus areas include software quality assurance and delivery center management.

Sury received his Masters in Electrical Engineering from IIT Delhi (1978) and his Bachelors of Electrical Engineering from Delhi College of Engineering (1976). He is a member of the Association of Computing Machinery (ACM), USA. He was nominated to the Tata Group Top Strategic Leadership Programme in 2004.

Tea and samosas will be served.

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Surya Kant President, Tata Consultancy Services Limited, North American Operations (TSC) Speaker
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Many people in China and the US assume that the new Taiwanese national identity is a political ploy which originated with Taiwan's government. Based on ethnographic research in both Taiwan and China, Melissa Brown argues that Taiwanese identity -- in both its ethnic and national forms -- are based on social experience. Because the people of Taiwan and China have had such different social experiences since 1895, Taiwanese identity as distinct from Chinese identity is real. The reality of Taiwanese identity poses challenges for resolving the debate over Taiwan's future relations with China, particularly in nationalistic responses due to lack of Chinese experience with Taiwanese society.

Melissa J. Brown is Assistant Professor of Anthropological Sciences and Research Affiliate at Asia-Pacific Research Center at Stanford University. She has been researching changing identities in Taiwan and China since 1991. Her books include Negotiating Ethnicities in China and Taiwan (University of California, Institute for East Asian Studies, 1996) and Is Taiwan Chinese? The Impact of Culture, Power, and Migration on Changing Identities (University of California Press, 2004).

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Melissa J. Brown Speaker Stanford University
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William Breer joined CSIS in October 1996 after a 35-year career in the foreign service. Prior to joining CSIS, he was a senior adviser at the Policy Planning Staff of the Department of State (1993-1996). Breer devoted the major portion of his career to the management of U.S.-Japan relations. He spent 18 years in Japan, serving at the U.S. embassy as political officer, political counselor, and deputy chief of mission with Ambassadors Michael Armacost and Walter Mondale. In Washington, Breer served as country director for Japan, the most senior position dealing exclusively with U.S.-Japan relations, and as director for Northeast Asia in the Bureau of Intelligence and Research. Breer is a graduate of Dartmouth College. He also attended the East Asia Institute at Columbia University and the National War College. He is fluent in Japanese.

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William Breer Japan Chair Speaker Center for Strategic and International Studies
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In today's global economy, access to resources around the world has never been easier. The high tech industry has always been in the forefront of globalization in lowering costs, acquiring talent as well as serving markets. For instance, Asian countries have long been known for their vast manufacturing bases for western high tech industry.

In recent years, thanks to Y2K, India has become the leader in software outsourcing. China, given its expanding economy as well as its open market direction, has rapidly become the emerging location for multi-national semiconductor companies to outsource their product development amidst China's own burgeoning integrated circuit (IC) industry. Mr. Lee has first-hand experience in building and managing an IC product development center in Shanghai, China. He will discuss the challenges of operating a R&D organization in an environment of different languages and cultures. He will also share his vision of the future of the IC industry in China.

Mr. Lee is Group Vice President and general manager of Timing Solutions Products at Integrated Device Technology, Inc.(IDT), a public semiconductor company of $650 million annual sales, focusing on valued-added solutions for communication, consumer and computing markets. He has been with IDT for the last 22 years and has served various management roles. In 2001, he architected the acquisition of Newave Semiconductor Corporation in China and established the Shanghai Product Development Center for IDT. Before joining IDT in 1984, Mr. Lee spent 5 years at Intel Corporation as a technologist for the early development of flash memory technology. Mr. Lee earned his B.S. degree in Electrical Engineering from National Taiwan University in 1975 and M.S. degree from Case Western Reserve University in 1979.

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Jimmy Lee Group Vice President & General Manager of Timing Solutions Products Speaker Integrated Device Technology, Inc.
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Susan Chira will speak about rising China, and compare it to her 20-year-old experience as a journalist reporting on risen Japan and rising Korea. Even as Iraq grabs the headlines, the story of Rising China is one of the most gripping, the most resonant of our times. It presents enormous and obvious policy challenges, and considerable journalistic challenges, too. What is familiar in China's rise, and what is unique? How do you cover and present to readers a country that is at once exuberant and fearful, increasingly prosperous and increasingly unequal, newly open and reflexively repressive? The New York Times has had a personal brush with these many faces of China: its researcher, Zhao Yan, is still mired in jail after a year, charged with violating its vaguely-written, draconian law on state secrets.

Susan Chira was named foreign editor for The New York Times in January 2004. Previously, Ms. Chira had been editorial director of book development since September 2002. Before that she was the editor of the Week in Review section at The Times since October 1999, after having served as deputy foreign editor of the newspaper since February 1997. Prior to that, she served in a variety of reporting positions including national education correspondent, correspondent for the newspaper in Tokyo from October 1984 until February 1989, metropolitan reporter in the Albany and Stamford bureaus, and reporter for the Business Day section.

Ms. Chira joined The Times as a trainee on the metropolitan desk in 1981 and was promoted to reporter in July 1982.

She received a B.A. degree in history and East Asian studies from Harvard University in 1980, graduating summa cum laude, Phi Beta Kappa. As an undergraduate, she was a reporter and later president of The Harvard Crimson. She studied Japanese for a year and a half at the Inter-University Center for Japanese Language Studies in Tokyo and at Middlebury College, Vt.

Susan Chira is married to Michael Shapiro, a writer and assistant professor of journalism at the Columbia University Graduate School of Journalism. They have a daughter and a son.

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Susan Chira Foreign Editor, The New York Times Speaker
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For years policymakers in China have advocated creating "Silicon Valleys" in China, but only recently has China's semiconductor industry taken off. Rather than the state leading the way, economic globalization has created the large flow of capital and knowledge to the developing world that has spurred China's technological development in recent years.

However, not all firms in China benefit equally from these inflows of financial and human capital. Presenting both industry-wide data and case studies of individual firms, Dr. Fuller will explain how the politics of finance in China shape which Chinese chip firms become fast learners able to compete in world markets and which ones remain technological laggards.

Douglas Fuller has spent over ten years researching technological development in East Asia. Most recently, he completed a doctorate at MIT in political economy. The topic of his thesis was technological development in China's IT industry. For this and previous research, he has interviewed IT firms in Malaysia, Japan, Korea, Taiwan, the People's Republic of China and the US. He has published articles in Industry and Innovation and other peer-reviewed journals.

Part of SPRIE's Greater China and the Globalization of R&D seminar series.

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Doug Fuller SPRIE Postdoctoral Fellow Speaker
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There are currently an estimated 840,000 people in China who are infected with HIV. The largest two groups that have been affected are injection drug users and former plasma donors. Recent demographic and economic changes in China could and may be fueling an increase in sexual transmission in China. Dr. Nancy Shulman will give a brief overview of HIV in China and the governmental response. Future collaborative efforts with Stanford will also be discussed.

Co-sponsored with the Center for East Asian Studies

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Nancy Shulman Instructor of Medicine, Division of Infectious Diseases, School of Medicine, Stanford University Speaker
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George Krompacky
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Dr. Liu first offered his view on the current state of the software industry's development and in particular software outsourcing to China. Software prices and margins continue to drop. Coupled with this reality is Liu's view that "only 10-15% of software development is truly innovative and therefore suitable to be developed in Silicon Valley". As software development platforms and communication technologies, especially the Internet, become ubiquitous and affordable, distributed software development is becoming the rule.

China's challenges and advantages in software outsourcing

Compared to India, the leader in software outsourcing, China has its own distinct challenges. Chinese software companies have almost no U.S. customers for a number of reasons: language barriers, different working styles, customers' concern for software piracy, and the lack of experienced programmers and technical managers in China. Yet, China also has its advantages. Not only does it have a rapidly expanding domestic software market, but it also has a large pool of fresh engineering talent. "The key, therefore," asserted Dr. Liu, "lies in someone creating the right environment to train and build a local team to be able to develop and deliver world-class software products."

Augmentum's software development goals

This is what Augmentum has set out to accomplish. "...[W]e want to build a world-class, distributed development team for software product development... like the ODM model in the PC world..." declared Dr. Liu. Based on this vision, Augmentum's strategy hinges on its insistence to develop software for top US customers, such as Motorola, Business Objects, and PalmSource--and to rely primarily on local Chinese engineers. Explained Liu: "We want to make sure that the center of most of the people of that team is going to be in China, even though the locomotive, the teachers, is in the U.S., because that's where the leadership is in the software product development world."

Drawing on decades of experience developing top software teams at IBM and other companies, Dr. Liu detailed his company's efforts to attract the brightest local engineers and train them to be even better. He explained, "Culture and team is the true differentiation of Augmentum.... The real...challenge is to build the right culture with the right core team." The company insists on having no expatriates in their China operations but promoting close interaction between experienced mentors in the U.S. and the young teams in China, sometimes using some creative approaches for recruitment and training. For example, Augmentum puts all of its new hires under "a stress test" after hiring and proactively maintains an "upfront churn of at least 30%" in the first three-month period." Their end goal: "a world-class software development team that can bridge the East and the West but still has a cost structure comparable to local companies."

Liu's focus for the future

Despite experienced leadership, ties to leading U.S. companies, and strong young software teams, Augmentum faces real challenges. Liu acknowledged skeptics who question the ability to build a world-class team through working on the "crumbs of companies" of "projects they don't want to work on themselves." Nevertheless, he is confident in the trajectory of Augmentum's future growth, as the company is expecting to double its employees every year for the coming few years. In addition, Dr. Liu's vision includes a landscape beyond Augmentum. "I have a very simple focus. I want to train a lot of world-class software developers in China to serve the world. Many of them will not be working for Augmentum. It is fine...I want to bring my experience to there to make it happen. And the best vehicle to do that at this moment and time, the wave [that] I want to jump on is outsourcing, because it is growing the fastest."

Biography of Leonard Liu

Leonard Liu has spent 30 years in the systems industry, with a track record of developing innovative computing technologies into successful businesses. Most recently, he served as president of ASE Group, a leading provider of IC test and packaging services, having held roles as Chairman and CEO of Walker Interactive Systems, COO of Cadence Design Systems, and President of Acer Group. He was an early champion of outsourcing to India and China at Cadence and Walker. Dr. Liu began his career at IBM where he was responsible for the creation and implementation of SQL and the management of CICS, SNA and AIX, eventually overseeing the worldwide Database and Language lines-of-business. He received his undergraduate degree from Taiwan University and his Ph.D. from Princeton University.

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