Diminishing Returns to High-Tech Standards Wars: China’s Strategies in Mobile Communications Technology
This working paper reviews the competition between various technology standards for mobile communications and the strategies that China has adopted in this competition. It finds that the returns from winning the standards wars have diminished.
Technology standards are often regarded as having a strategic importance in high-tech industries. The Chinese government has been influenced by this theory and has attempted to develop its own high-tech standards. By reviewing the history of mobile communications technology, this paper finds that the expected market size and the switching cost between different technology standards determines the intensity of the standards wars. When the switching cost is high, the potential returns from victory are huge, so the war will be fought hard. But if the switching cost decreases, winning or losing a standards war will have little influence on a firm’s or a nation’s success in high-tech industries. In the case of mobile communications technology, the progress in integrated circuits (IC) technology has reduced the switching cost to a minimum level.
If the switching cost between different technology standards is high, then the competition between standards will have strategic implications for the success of the parties involved in the creation of those standards.
The history of mobile communications technology suggests that in high-tech industries in which the core technology is encapsulated in ICs, the switching cost will decrease along with the technological progress of ICs. This will reduce the importance of standards wars
China belatedly joined the war between various technology standards in mobile communications, but by the time it became involved, the importance of the standards wars in mobile communications was already decreasing. China’s recent policy of favoring indigenous standards will have little positive impact on its domestic industries and little negative impact on foreign industries.