In recent years, ‘indigenous innovation’ has become the buzzword in China’s industrial paradigm for promoting the development of Chinese domestic standards and technologies. Outlined in the 2006 National Medium-and Long-Term Program for Science and Technology Development (2006-2020) (MLP), the Chinese State Council has made “indigenous innovation”, a center-piece of its national development strategy and rolled out wide-ranging policy instruments in support of novel indigenous products and technologies.¹ To be sure, China is not the only country to launch policies to support domestic innovating enterprises. Policymakers world over are actively trying to stimulate domestic innovation in their bid to foster economic growth and development.

What however distinguishes the Chinese model is the web of demand and supply-side industrial policies enacted to promote indigenous innovation.² In particular, the use of public procurement as a demand-side innovation policy along with more common innovation instruments like R&D grants and subsidies is the central feature of China’s indigenous innovation strategy that seeks to leverage vast domestic demand and improve market access to cutting-edge local products and technologies. Through improved market access, the MLP not only helps to offer substantive scale advantages to Chinese firms but also to improve their competitiveness in the long-run. The impact of these policies is clearly visible in the increased share of China’s own intellectual property and proprietary product lines.³

Public Procurement and Free-Trade Paradigm

In leveraging public procurement as a tool of industrial policy however, China is frequently accused of violating the principles of free trade and limiting the market access to foreign enterprises in government contracts. ⁴ This has been a cause of much friction between China and its leading trade partners such as the U.S. and EU who called out the Chinese authorities for pursuing protectionism in government procurement.⁵ Using public procurement as a tool of industrial policy is fairly controversial and often runs contrary to the norms of global free trade. The General Procurement Agreement (GPA) under the auspices of the World Trade Organisation (WTO) discourages using public procurement to protect domestic enterprises and calls for maintaining transparency and fairness in the award of government contracts.⁶

Although China joined the WTO in 2001 and agreed to abide by the rules of the free market economy, it has so far remained outside of GPA. Being a non-signatory to the procurement code, GPA gives China sufficient policy space to leverage vast public sector demand in support of its domestic enterprises. Towards this end, China enacted a number of policy instruments such as innovation catalogues, preferential market access schemes for small businesses, technology/equipment commercialisation schemes, etc., and backed them with strong policy capacity for the effective implementation.⁷ The aforesaid schemes have been administered in sectors ranging from information technology to rail equipment, new energy vehicles, medical equipment, biotechnology products, etc.

The uniqueness of China’s approach can be seen in the strategic use of public procurement in conjunctions with R&D grants and subsidies to prop up its own local champions. For example, in the new energy vehicles (NEV) industry, the Chinese State Council mandated that government-funded organisations must purchase NEVs for more than 30 percent of their buses and cars failing which the subsidies received by these organisations for fuel and operating expenses would be cut down significantly.⁸ Similarly, in high-speed train projects, the Chinese authorities extensively leveraged the near-term market access to seek complete technology transfer from foreign vendors and supported technology localisation through R&D grants and subsidies.⁹ Successful assimilation of foreign technologies eventually saw the declining share of European, Japanese and Canadian firms in China’s public procurement while it considerably increased the share of Chinese firms.¹⁰

In sectors like medical equipment devices, bio-pharmaceuticals, etc. the Chinese authorities have been using innovation catalogues that were designed to give preferences to accredited products and technologies. Although China was forced to delink the ‘innovation catalogues’ from government procurement under pressure from foreign investors, it is alleged that the accreditation system induces discriminatory behaviour among public authorities in the award of government contracts.¹¹ China has nevertheless shown little regard to such concerns and has pursued indigenous innovation with all earnestness. The combined use of such policies has significantly enhanced China’s industrial productivity and enabled its transition to an innovation-driven economy.

What Lessons Can India Learn?

The Chinese experience offers several useful lessons for India to leverage the strong domestic demand for boosting industrial production and innovation. Like China, India too can leverage its vast domestic demand to foster domestic industrial production. In India, the use of government procurement as a tool of industrial policy had fallen into disuse after the country embarked upon liberalisation of its economy and chose to minimise state intervention in the economic process. In recent years, this is beginning to change as India has come to realise the importance of public procurement as a demand-side instrument in increasing the share of domestic manufacturing.

For example, India’s National Manufacturing Policy (2011, & 2018) and Science, Technology and Innovation (STI) Policy (2013) envisaged public procurement as a pathway for enhancing innovation and domestic industrial capabilities.¹² This, however, is to be operationalised through dedicated instruments and policy schemes, as is the case in China. The existing policy instruments in India merely focus on boosting industrial production and no specific instrument supporting indigenous innovation akin to China’s innovation accreditation systems has been introduced. Also, the technology demonstration and commercialisation schemes administered by India’s Department of Science and Technology (DST) have not been backed by requisite financial and policy capacity.

This has led to growing calls for widening the ambit of these schemes and to make them more industry-friendly. Since 2015, the Indian government has introduced a number of sector-specific local content requirements (LCRs) as part of ‘Make in India’ wherein the products meeting the stipulated levels of indigenous content would qualify for preferential purchase by the central government entities.¹³ The LCR policy is in addition to the preferential procurement policy for small and medium enterprises (SMEs) which aims to balance the share of small business vis-a-vis the bigger ones in government procurement.¹⁴ Lastly, India has also enacted instruments like offsets and ‘Make’ procedure in the defence sector for promoting indigenous defence R&D and production in the country.

The scale and scope of these policies is, however, no match for China’s highly ambitious drive to use public procurement for promoting industrial production and innovation. The Indian policies leave much scope to exploit the potential for using procurement in sectors where the domestic demand is large enough to create competitive manufacturing capabilities. For instance, in the solar sector, the Ministry of New and Renewable Energy can demand full domestic value addition as opposed to the limited value addition for granting market access thereby improving both local manufacturing and innovation.

Similarly, depending on the specific advantages of Indian firms in value chains, the LCRs can be used to improve the competitiveness of Indian firms specialising in specific components and sub-systems. In the ICT industry, one of the key lacunas has been the state failure to invest in chip-manufacturing capability. The government can help to create such capability in collaboration with countries like U.S. South Korea or Taiwan. Creating the local electronic hardware industry is critical for the overall success of India’s ICT industry. Likewise, in aviation and ship-building, the government can use local demand to propel domestic design, development, and manufacturing of aircraft and ships.

Pursued in this way, the sustained value addition can not only improve the share of manufacturing but also boost the competitiveness of the Indian industry in the long run. In the extant innovation policy mix, public procurement has been recognised as a powerful tool to stimulate industrial production and innovation.¹⁵ By making public procurement a central theme of ‘Make in India’ campaign, the Modi government has attempted to strike a right balance between demand and supply-side industrial policies. For the success of ‘Make in India’ initiative, however, it is incumbent that government identifies all possible opportunities, enact appropriate instruments for leveraging government procurement and back them with requisite policy capacity.

Endnotes:

1. People’s Republic of China. “China’s National Medium- and Long-term Plan for Science and Technology Development (2006–2020),” February 9, 2006: https://www.itu.int/en/ITU-D/Cybersecurity/Documents/National_Strategies_Repository/China_2006.pdf.
2. Ibid.
3. Mourdoukoutas, P. (2019), “China Is Closing the Innovation Gap with America”, Forbes, Jan 22, 2019, URL: https://www.forbes.com/sites/panosmourdoukoutas/2019/01/22/china-is-closing-the-innovation-gap-with-america-bad-news-for-us-china-trade-war/#1af1f58c6f37.
4. Chao, Loretta. “China’s Curbs on Tech Purchases Draw Ire,” Wall Street Journal, December 11, 2009, URL: https://www.wsj.com/articles/SB126047365539485893.
5. Browne, A. & Dean, J. (2010), “Business Sours on China”, Wall Street Journal, March 17, 2010, URL: https://www.wsj.com/articles/SB10001424052748704688604575125650352968686; “More foreign firms feel unwelcome in China”, Associated Press, March 23, 2010, URL: http://www.sify.com/finance/more-foreign-firms-feel-unwelcome-in-china-news-international-kdxkkrdbcbjsi.html.
6. Mattoo, Aaditya, (1996), “The government procurement agreement: Implications of economic theory”, WTO Staff Working Papers TISD-96-03, World Trade Organization (WTO), Economic Research and Statistics Division.
7. People’s Republic of China. “Evaluation Measures on Indigenous Innovation Products for Government Procurement,” February 25, 2008, URL: http://most.gov.cn/ztzl/gjzctx/ptzczfcg/200802/t20080225_59306.htm; See, also, Baden, B. (2011), “Domestic Innovation and Government Procurement Policies”, China Business Review, October 1, 2011, URL: https://www.chinabusinessreview.com/domestic-innovation-and-government-procurement-policies/.
8. “China Requires 30% of State Cars Use Alternative Energy”, Bloomberg News, July 14, 2014, URL: https://www.bloomberg.com/news/articles/2014-07-13/china-targets-30-new-government-vehicles-use-alternative-energy.
9. European Union Chamber of Commerce in China. (2017). China Manufacturing 2025: Putting Industrial Policy Ahead of Market Forces, Beijing, URL: http://docs.dpaq.de/12007-european_chamber_cm2025-en.pdf.
10. Goh, B. (2016), “Foreign Rail Firms Shunted as ‘Made in China’ Mantra gathers Pace”, Reuters, August 02, 2016, URL: https://uk.reuters.com/article/us-china-railways/foreign-rail-firms-shunted-as-made-in-china-mantra-gathers-pace-idUKKCN10D2ME.
11. Lubman, S. (2011), Changes to China’s ‘Indigenous Innovation’ Policy: Don’t Get Too Excited, Wall Street Journal, July 22, 2011, URL: https://blogs.wsj.com/chinarealtime/2011/07/22/changes-to-chinas-indigenous-innovation-policy-dont-get-too-excited/.
12. DIPP (2011), National Manufacturing Policy, Department of Industrial Production and Policy, Ministry of Commerce & Industry, Government of India, URL: https://dipp.gov.in/sites/default/files/po-ann4.pdf; DST (2013), Science, Technology & Innovation Policy, Department of Science &Technology (DST), Government of India, URL: http://www.dst.gov.in/sites/default/files/STI%20Policy%202013-English.pdf.
13. Government of India (2017), Public Procurement (Preference to Make in India), Order 2017, Dept. of Industrial Policy & Promotion, June 15, 2017, URL: https://dipp.gov.in/sites/default/files/Revised-PPP-MII-Order-2017_28052018.pdf.
14. Public Procurement Policy for Micro & Small Enterprises (MSEs) Order, 2012, Ministry of Micro, Small and Medium Enterprises, March 23, 2012, URL: http://dcmsme.gov.in/notification.pdf.
15. NESTA (2007), “Driving innovation through public procurement”, NPRU Policy Briefing, February 2007, URL: https://media.nesta.org.uk/documents/public_procurement.pdf.

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