Indigenous Innovation Policies and the New Global Protectionism

While "innovation" is a critical component of any nation's continuing economic success, it can also be used as a "cover" for potentially trade restrictive domestic policies against foreign-invested enterprises ("FEIs"). In a June 16, 2012 Op-Ed ("Protectionism is Back") in The Wall Street Journal, Thomas J. Donahue, president and CEO of the U.S. Chamber of Commerce, and Dean C. Garfield, president and CEO of the Information Technology Industry Council, draw such a distinction with the concept of "indigenous innovation", i.e., national policies that are designed to protect domestic high-technology manufacturing industries and their research and development (R&D) capabilities by discriminating against FEIs. Donahue and Garfield note that these indigenous innovation policies include: forced technology transfer; local sourcing ("procurement") requirements; requirements to disclose sensitive designs as a condition of market access; domestic-standards mandates that ignore international standards; and restrictions on the free flow of data and information.

Prime examples of "indigenous innovation policies" are found in The Peoples Republic of China (hereafter "Chinese government"), which has become the global leader in instituting domestic preference policies in government procurement to ensure the development of Chinese-owned technology and intellectual property. After a December 2010 U.S.-China Joint Commission on Commerce and Trade meeting, the Chinese government agreed to delink its indigenous innovation policies from government procurement preferences, with the Ministry of Finance announcing the revocation of three national laws linking procurement with indigenous innovation effective July 1, 2011. However, these indigenous innovation procurement policies reportedly continue at the provincial and municipal levels of Chinese government, as fragmentation of the Chinese government procurement market allows for local governments to develop their own written and unwritten procedures and procurement catalogues. In February 2012, the US-China Business Council recommended the equal treatment in government procurement for all, regardless of ownership, and continues to encourage China's pledge to delink its innovation and local government procurement policies.

What is troubling is how some other countries are now embracing the Chinese government model of "innovation policy". For example, Argentina, Brazil, India, Indonesia, Nigeria, and Russia are instituting their own protectionist indigenous innovation policies designed to boost their domestic manufacturing and services and R&D capabilities in high-technology industries. In Argentina, the national government has established an import-licensing requirement that discriminates against foreign technology products. Brazil has recently mandated the local sourcing of telecommunication equipment that will be used to build next generation communication equipment to support an expanded spectrum. India is mandating extensive local sourcing requirements for electronic product procurement and testing and certification standards by its national laboratories of all imported telecommunication network hardware and software products.

On March 30, 2012, 14 American industry associations, including the Business Roundtable, National Association of Manufacturers, and the U.S. Chamber of Commerce, sent a "Multi-Association Letter on Indigenous Innovation Policies" to Secretary of State Hillary Clinton, Secretary of Commerce John Bryson, and U.S. Trade Representative Ron Kirk, to raise the issue of the adverse effects of indigenous innovation policies on the U.S information and telecommunications sector as an agenda item at the June G8/G20 summit in Los Cabos, Mexico. The G20 Leaders Declaration, released on June 19, 2012, expressed that "[w]e are deeply concerned about the rising instances of protectionism around the world" and there were the usual platitudes to "pledge to roll back any new protectionist measures that may have arisen", but no specific mention of "indigenous innovation policies" appears in the declaration.

Donahue and Garfield, representing the U.S. industry perspective, advocate four policy approaches worth considering countering the new global protectionism trend. First, MNEs must be prepared to speak out against mercantilist policies and use the power of their investments to encourage domestic policies that follow global trade rules. Second, the U.S. government must intensify bilateral dialogues with key trading partners, focusing on market access and safeguarding against the burgeoning domestic practices of forced localization and indigenous innovation policies. Third, like-minded governments must be prepared to engage in a sustained strategy that places an increased emphasis on enforcement at the WTO and in other multilateral forums to contest practices that are clear violations of international agreements and forums. Fourth, the U.S. must get serious about reforming its own problematic tax, immigration and education policies and practices.

More may be yet to come in China as the national government unveiled its 12th Five-Year Plan, which is built around a core initiative to develop seven Strategic Emerging Industries, or "national champions", through 2015, including next generation information and telecommunication technology. This new plan is viewed by many as a Chinese government commitment to be "self-reliant", i.e., developing stealthier indigenous innovation policies, at the expense of FEIs. This Chinese government economic development model is one that FIEs do not want to be replicated in other emerging market countries; but that prospect may be slipping away. For example, in an October 15, 2012 article in China Business Weekly, Suwatcha Songwanich, chief executive officer of Bangkok Bank, wrote that "... it definitely time for Thailand to develop its own indigenous innovation policy." What is the lesson that is being learned in other emerging economies? "Success" breeds imitation.