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Monday, September 22, 2003

On Exporting Men and Technological Leapfrog

In the mailbox, Joerg has some reflections on my China post yesterday, and on the potential for third world technology leap-frogging.

Your latest post on China reminds me of a quote Schwartz uses in the book. In the Wilhelmine era, German chancellor Count Leo von Caprivi said: "We must export. Either we export goods or we export men. The home market is no longer adequate." China would then seem to be the first country that needs to do both. (Of course, the real point is the misguided ideology expressed in the quote. Communist China may well have moved along a path fairly close to the optimum since Zhou En Lai´s reign, but there certainly are no guarantees it will do so in the future.).............

You obviously rely on Schumpeter for part of your argument. I see several weaknesses in his theses. Long cycles are characterised by substitution of primary energy sources. While developments in the energy sector certainly contribute to the rise or downfall of individual entrepreneurs - Rockefeller is a name that comes to mind -, the process of energy substitution itself is accelerated (or held back) by political decisions. Without highways, there would be a reduced demand for automobiles and oil. A recent German study suggested that China would be the first country to boast a hydrogen economy. Such an outcome would not be due to the creativity of the Chinese - all the technological pieces of the puzzle are in place already. The problem is that the "early adopters" of such technologies are not individuals and small companies but those that finance, regulate, build and operate grids and networks that ensure distribution and supply.

Work on electric cars has been continuing for about one hundred years now. That is how old the discovery of the basic principle they are based on is! (BTW, fax technology was invented at the same time - many decades before it took off commercially).

I can make sense of Schumpeter´s term "overinvestment" - if I twist it a bit. Firstly, we would have to separate stock market investments from real investments by companies listed on the stock market - i.e., separate the undeniable maniacal excess from the uses the more sensible companies put it to. It is just not true that there is a lot of optical
fibre in the ground that will never be used, e.g. Secondly, the war in Iraq was a misguided investment in oil. A back-of-the-envelope calculation shows that levying a tax on gasoline to encourage energy savings and then investing the proceeds into subsidising/tax-exempting the energy infrastructure of the future would have been a much more efficient course for the U.S. to take.

The situation with technological leapfrog is really fascinating. There is a standard problem in conventional economics known as the 'incumbents problem'. Simply put this implies that those that have have an inbuilt interest in strategic defence rather than innovation - read Coca Cola, read Disney, read Microsoft. The incumbent, and in particular in the context of the new economy, increasing returns dynamic defends what it has. Now the interesting point is that this can be extended to states. States have infrastructure, and tend to be conservative in adapting to the new. With technological change in constant acceleration mode this becomes very important. We now have the exciting possibility that some of those perennial third worl technological outsiders could become the early adopters of some of the next generation technology. Joerg's example of alternative fuel sources for transport needs is just one, China and India do not have the same investment in gasoline station networks. wCDMA could be another case. It is clear that what appeared to be a decisive European UMTS lead three years ago could in fact turn out to be a milstone round our necks as both China and India may go for the much cheaper 2.5 generation upgrade. And then watch out, since any first in new technology in the third world would be an enormous confidence booster.

Most of China's state-owned telecom operators are likely to adopt the WCDMA 3G standard, Dow Jones reported. This would be a blow to the companies that are backing alternatives, including Qualcomm, which is developing cdma2000 technology, and state-owned Datang Telecom, which is the main developer of the TD-SCDMA standard. However, Dow Jones reported the final decisions are still some way off, as the Chinese government is yet to issue operators with business licenses for 3G mobile services, and hasn't given any indication when it will. "The ideal timing for the issuance of 3G licenses remains a topic of hot debate within government circles," Norson Telecom Consulting said in its report, but added it's likely each of the four major operators will get a license in the second half of 2004. The plans for two of those operators are fairly clear. China United , is focusing most of its energy on its CDMA2000 network and is likely to follow the established upgrade path to the 3G version, CDMA2000.

China Mobile is expected to adopt WCDMA, which is considered the easiest upgrade for its GSM standard network. The wild cards are China Netcom and China Telecom Group, which don't have conventional mobile phone networks and so don't face upgrade issues. Norson argued that both are likely to choose WCDMA. "China Telecom... has halted TD-SCDMA testing and shifted its focus to WCDMA. China Netcom, in line with strategic partner Singapore Telecom, has also shown a preference for WCDMA," the Norson report said.
Source: 3G News

Alcatel announced that R&D in 3G will constitute a significant portion of the $US 100 million R&D investment in China this year. In addition to R&D, investment in 3G infrastructure and application development in China will be increased by $US 45 million. This substantial commitment will further be used to strengthen its R&D, localization, and the 3G Reality Centre to support China's 3G development.

With the enhanced 3G capability, Alcatel Shanghai Bell, will be able to firmly support operators in China as they prepare for 3G commercial deployments. The company's 3G Reality Centre in Shanghai, which provides a fully-featured and live 3G environment for testing innovative applications and services with local partners, will also be further enhanced to meet the fast growing demand for new mobile applications in China.

The 3G Reality Centre in Shanghai has already conducted laboratory and field trials on 3G infrastructure and new mobile applications in China. The Centre is also the heart of Alcatel's 3G Reality Centre network in Asia Pacific and is connected online to an equivalent Centre in Paris

"We firmly believe that China, an emerging hotbed of mobile applications, will take on a leading role in the field of 3G worldwide," stated Philippe Germond, President and chief operating officer of Alcatel. "Alcatel is fully committed to partnering with Chinese operators to develop successful 3G services, bringing our industry-leading solutions, world-class R&D, global experience and building this into a full long-term applications capability within China."
Source: 3G News

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