Competitive analysis of the software industry in China

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64 Int. J. Technology Management, Vol. 29, Nos. 1/2, 2005

Competitive analysis of the software industry in China

Deli Yang*, Pervez Ghauri and Mahmut Sonmez Bradford University School of Management Emm Lane, Bradford BD9 4JL, UK Fax: +44–1274–546866 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] *Corresponding author

Abstract: The software industry in the People’s Republic of China has been growing rapidly over the last decades and has played a significant role in the economy. Alongside the industrial development, it appears that a comprehensive competitiveness assessment of this growing industry needs to be conducted. This paper draws on Porter’s ‘diamond’ theory of competitive advantage of nations and the suggested improvements of the framework from relevant scholars to assess the growing competitiveness of China’s software industry. In particular, the focus is on the role of government policies and corporate strategies in shaping the competitiveness of the industry in China in comparison to the top players in the world. Specifically, the paper pays attention to the competitiveness of industry in China as to how and why it has developed the way it has in recent years and what have been the facilitating and impeding factors that has strengthened or weakened the industrial development. In the discussion and conclusions, the overall competitiveness status of China’s software industry is evaluated and the diamond framework is reappraised in light of the industrial analysis and the previous research.

Keywords: the software industry; competitive advantage of nations; the People’s Republic of China; firm strategy; government; national culture.

Reference to this paper should be made as follows: Yang, D., Ghauri, P. and Sonmez, M. (2005) ‘Competitive analysis of the software industry in China’, Int. J. Technology Management, Vol. 29, Nos. 1/2, pp.64–91.

Biographical notes: Deli Yang is Lecturer in International Business (IB) at Bradford University School of Management, UK. She received her PhD from Manchester School of Management, University of Manchester Institute of Science and Technology (UMIST), UK. Her research interests include the impact of culture on intellectual property (IP), the impacts of IP on internationalisation, mergers and acquisitions, international negotiations, and corporate strategies against international piracy. She has published a number of international papers and a book related to the research. She teaches IB and IP in the UK, and related subjects, as a visiting lecturer, in some European countries and China.

Pervez Ghauri earned his PhD from the Department of Business Studies, University of Uppsala in Sweden where he also taught for several years. At present, he is working as Professor of International Business at the Manchester School of Management, UMIST, UK. He has vast experience in teaching graduate and executive programmes and is founding editor of International

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Competitive analysis of the software industry in China 65

Business Review. He has published widely on marketing and international business topics in journals, such as Journal of International Business Studies, Journal of Business Research, Journal of World Business and European Journal of Marketing.

Mahmut Sonmez obtained his PhD in decision modelling from Manchester School of Management, UMIST, UK. Currently, he is Lecturer of Management Science at Loughborough University Business School, UK. His main research interests include strategic solutions on decision-making problems, and violations of IP rights in developing countries, particularly China and Turkey.

1 Introduction

The software industry has become a significant and dynamic force in the People’s Republic of China (China) over the last two decades. Since 1979, software, as a high technology, has been one of the most important economic highways for the country. It, as an industry, has been exerting a significant impact on all businesses and sectors in their operations and management. Between 1996 and 2000, the software industry and information services grew on average at 26%; the growth rate was over 34% in 2001 [1]. In 2001, the total industrial output of software accounted for 32% of the computer industry, which represented 2.6% of the gross domestic products (GDP) in China. By year 2001, software exports reached US $720 million, accounting for 7.5% of the total software output [2,p.49]. In line with such thriving trend, it appears to be necessary to conduct a systematic study of China’s competitiveness in the software industry in the world.

With this in mind, the paper applies a theoretical framework by combining Porter’s ‘diamond’ – competitive advantage of nations [3–4] and the improved framework suggested by a number of scholars [5–8] to assess the Chinese software industry as to how and why it has developed the way it did. In order to achieve this objective, the paper explores the factors endowed in China to nurture the high technology industry. In particular, it attempts to identify how the Chinese government functions and firms are managed in a way that is beneficial and detrimental to the industry, and the extent of competition amongst these firms, particularly between multinationals and local companies. In addition, a comparative study with the world players is also emphasised in the paper to identify China’s major strengths and weaknesses in the process of such rapid development. The paper is presented in the structure as follows:

• Introduction

• Theory and current focus

• Elemental analysis of the software industry in China

• Government policy and firm strategies to strengthen or weaken the industry

• Discussion: China’s software industry in the world

• Conclusion.

66 D. Yang, P. Ghauri and M. Sonmez

2 Theory and current focus

2.1 The ‘Diamond’ framework and evaluations

Michael Porter’s ‘diamond’ theory of four determinants and two external factors (Figure 1) has attracted great attention from academics about its application in practice. At least 30 reviews and over 50 articles have been published to praise or criticise its validity [9]. Arguably, the theory has made an important contribution to competitive studies and added new knowledge to international trade theories linking domestic and international business. The four attributes, plus government policy and chance, work as a reinforcing system complementing one another and, in combination, creating the conditions appropriate for competitive advantage. Success occurs in firms, industries, and nations when the four determinants coexist and the two external factors are favourable to them. Under this theory, countries should encourage production and businesses in the industries where the four determinants are favourable, but restrict production and businesses in those where the four attributes are not favourable. However, whilst the validity of the theory has been and is still subject to independent examination in developing countries, few experiments have been made in Turkey, Mexico, Korea and Singapore [3–4,8,10–11]. It has been mostly tested therefore in developed countries [3,5–7]. Hitherto, there has been no clear consensus of the complex discussion surrounding the theory, which is often a reflection of supporters’ and critics’ own backgrounds [9].

Figure 1 Porter’s ‘Diamond’ theory – competitive advantage of nations

Source: Porter [3–4]


2.2 Current focus based on the suggested improvements to the diamond

Alongside the discussions on the pros and cons, some main suggestions have been made on future improvement of this theory, mainly focusing on three added factors: government role, multinationals and national culture. First, government role has been undermined and should be added as the fifth determinant instead of an external force to emphasise its importance [12–13]. Second, the significant role of multinationals has been inadequately treated in Porter’s framework and should be the third important external factor [5,7,10,14–15]. Due to this, a nation’s competitive strength may be derived from home factors (home diamond or single diamond) [3–4], international factors (double diamond) [8,15–16] and a combination of both home and international factors (multiple diamond) [7,14]. Third, national culture is also a neglected element in the framework despite the facts that religion, language, class stratification and social norms have a significant impact on businesses [17–18]. Therefore, a double diamond, and multiple-linked diamond have been suggested to emphasise the importance of these missing factors [8,10,14,16].

The current study, conducting a systematic analysis based on the Porter’s single diamond framework and the three undermined or neglected factors mentioned above, gives a particular focus on government policy and firm strategies in relation to these factors. The purpose in doing so is to find out if the factors are important, how important they are, and why they are important in shaping the rise of the software industry under the impact of government and firms.

3 Elemental analysis of the software industry in China

3.1 Factor endowment

Human assets are the most important component of the software industry and the intellectual creation of the human mind. There are currently over one million people working in this industry in China, including 250,000 people in software research and development (R&D), which increased by 89% as compared to 1998 [2]. On average, from 1998 to 2000, there were 42,000 Chinese graduates each year from computer and software science studies, excluding the ones from abroad.

In terms of human resources distribution, there is a high availability of medium-level software talents, such as people who understand software technology and R&D (Figure 2). In the short term, China lacks versatile talents with both technological and managerial ability, and system analysis and design skills. There is also a shortage of human resources to provide customer services, commercial planning, programming, etc. at the bottom level. Due to lack of people at this level, many medium level researchers or project managers also have to deal with programming, which could have been more easily done by junior software workers.


Figure 2 Distribution of the software human resources in China

Source: Adopted by the authors based on [2]

Another related factor is the existence of the gap between supply and demand (Figure 3). The main suppliers of computer science students are national universities and science and research institutions, which account for 70% of the total current market supply. The number of graduates has increased by 114% from 1998 to 2001, according to the Ministry of Education and Ministry of Information Industry. Other suppliers, including polytechnics, private training schools, and self-studies, account for only 25% of the current supply, and talent educated and trained abroad at 5% [2,p.109].

Figure 3 Human resources supply and demand in the software industry in China

0

50000

100000

150000

200000

250000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Num

ber

of P

eopl

e

Demand Supply

Source: Estimated based on [2]


3.2 Corporate structure

The corporate distribution of the software industry is geographically highly concentrated, but very fragmented as an industry. Four types of firms coexist in the software market in China, including state-owned, privately owned, foreign and university spin-offs. Overall, the market is fragmented in which only 15% of the 10,000 firms employ more than 100 people [2]. In terms of geographical location and infrastructure, all the software companies are located in large cities in China, such as Beijing, Shanghai, Tianjin, and Shenyang and other coastal cities (Figure 4). The convenient location of these firms allows them to access easily to the necessary resources and bureaucracy for the development of their products. Another consideration is the high density of population in these cities, such as 16 million people in Shanghai and Beijing respectively. Moreover, many software companies are clustered in particular areas in these cities. For example, in Beijing, computer hardware and software companies are highly concentrated on the Zhong-Guan-Cun Road, called ‘Electronics Street’. The advantage of such a concentration is that consumers can cherry-pick their products swiftly while firms can obtain consumer feedback promptly on why their products are, or are not, bought.

Figure 4 Geographical distribution of the software firms in China

Source: Compiled by the authors based on [2]

In recent years, China has also established over 40 Software Industrial Bases in large cities generating over 30% of the software income for China over the last few years [2,p.93]. One advantage of such a high concentration is the atmosphere that it has created for competitive R&D, innovation and improvements of product and service quality. Firms, due to their close proximity to one another, tend to compare their products, performance and consumers, which in turn motivates firms to improve and advance. The other advantage is that such a concentration guarantees a pool of management, knowledge, capital and human resources to achieve efficiency and effectiveness in time,


cost and human power. Infrastructure is another key factor. Large cities are usually well equipped with advanced facilities in communications, transportation, banking services and information transmission.

Despite the indulgence of government support and encouragement, software firms, particularly small and medium-sized enterprises (SMEs), lack financial support. The majority of software enterprises in China, being small in scale with less than 50 employees, indicate their weak financial foundations and their limited access to finance. For example, banks could provide loans for firms on condition of certain fixed assets or credit guarantees. This is often difficult for software SMEs, as the principal resources are often human assets, and IP, such as copyrighted software. These intangible assets are not recorded in the current accounting standard, as they represent the future cash flows of a firm. Issuing bonds can be a good source for capital, but in China, only large enterprises can issue bonds and shares [19]. Another important channel that could generate capital for the industry is also not to the advantage of SMEs: venture capital. Most venture capital (about 43%) came from abroad [2,19–20]. Private venture capital accounted for only 5% of the total; bank and national organisations, and institutes accounted for 26% [2,19–20].

3.3 Related and supporting industries

Software and hardware are collectively the main part of the computer industry. The computer industry in China only became a fast-track industry in the early 1990s. Before the Open Door Policy, it served merely as the defence and economic infrastructure of China, and only started linking with consumers in the early 1980s [21]. Since 1995, when government removed the important licence and quota control for computer products, much fierce industrial competition has taken place. Nowadays, all the world-class companies are competing in this market, including Compaq, HP, IBM, AST, and Philips. The focal point of the competition is price. For example, Legend stood out as a leading domestic personal computer manufacturer in China with its competitive pricing strategy and adapted products for Chinese consumers and occupied 27% of the PC market [22]. Under the keen competition in China between foreign and Chinese enterprises, and between domestic enterprises, the hardware industry is developing at hyper speed. For example, the sales of computer products exceeded almost 12,000,000, increasing almost 47% in 2002 compared to 2001. At present, China is dominating 36% of the Asia pacific market [23]. The fast development in hardware is due to the increasing demand of PCs from different organisations, families, and educational entities under the information highway policy. Foreign computers are occupying the high performance market niches with high price, good quality and reputed brands, but local firms take advantage of their low price, network channels for material procurements, sales, and services. For example, the top ten computer companies in sales are mostly Chinese enterprises [22].

Software services, as a package of software, include consulting, testing, instruction or training, processing, protection and after-sales services. They represent the potential sales of software. For example, in 2000 and 2001, software services accounted for over 50% of the industrial value [2]. This indicates the importance of improving services for the industry because “software is service” [23]. With the WTO entry, the software services are liberalised, which means more competition, and more diversity of talents and company presence, more inter-corporate cooperation, and more information and technology exchange.


The software exports also play a pivotal role in the development of the industry.

Firstly, they symbolise the openness, and internationalisation of the industry. Exports connect the Chinese software industry with the world with products, services and licensing to the USA, Japan, and Southeast Asia. This connection creates the links and opportunities for information exchange of technology and techniques. Secondly, economically, software exports increase the percentage of GNP although currently it is a very small proportion; exports have been increasing with a growth rate at 57% and 80% in 2000 and 2001 respectively [2,p.123]. In addition, software exports also generate foreign income for the country, balancing the imbalance of payment. Thirdly, software exports also allow Chinese enterprises to explore the international market demands, and standards in order to provide more suitable international products.

3.4 Demand conditions for the software industry

There are no sophisticated demands currently being made of the software industry in China for products. This implies that customers in this industry do not have very high demand of technological sophistication, as most of the software is to facilitate consumers with basic computer software functions [24]. However, 40% of the software was sold to ‘experienced’ computer users, which indicates the high potential for the market. Due to the current unsophisticated demand for most products, enterprises need to induce demand through marketing and publicity strategies.

Along with the unsophisticated technological demand, consumer’s expectations of standards for services are highly refined. As computer investment, including software, is still a luxurious capital commitment, customers think well ahead to discover if related services can be guaranteed for the durability of their products. For example, before a product is bought, customers tend to compare the applicability of products, prices and related services. A good package of after-sales services certainly attracts customers into buying the relevant products, such as testing, trial services, training, warranty, etc.

3.5 External factors

The two external factors: government policy and chance have proved to be very positive for the development of the software industry in China, particularly the government role so evidently crucial that it appears necessary to analyse it independently in the subsequent section. As for ‘chance’ element, three aspects indicate a positive background for the software industry. First, the inventive environment in China since the 1980s has positively influenced the creativity of inventors and product creators. For example, in 1985, there were only 120 local and foreign patent holders within China, but patent holders had increased to 37,154 by the end of 2003 [25]. The overall dynamic activity that investors and creators are engaged in creates consequentially an inventive atmosphere for software engineers and designers. Secondly, the overall international environment also impacts on China’s software development. Technology development has been encouraged in different countries with government policy and reward. Under this environment, knowledge exchange, and science and technology communication flourish amongst countries. In addition, advanced countries in the software industry are very concerned about the protection of advanced software created by their multinationals. In order to protect their businesses in developing countries like China, these foreign


governments either unilaterally (USA) or jointly (USA and EU) pressurise the Chinese government to improve intellectual property (IP) protection. A typical example is the signing of the Memorandum of Understanding between China and the USA, and the Agreed Minutes between China and the EU [26], which pushes forward the improvement of the overall technological environment and motivates Sino-foreign inventors and creators to strive toward more rewarding innovations in China, including software engineering.

International organisations like the WTO and World IP Organisation also endeavour to standardise software protection. The WTO has been working on trade in information technology products for the purpose of reducing or ultimately eliminating tariffs between member states on IT products. According to the Information Technology Agreement [27], member states will have zero custom tariffs for software products by year 2005 from the current 23.3%, and non-technological barriers and export subsidies will be eliminated to allow more transparent market competition. Additionally, under this agreement, China will have to further tighten its IP for software protection, which will certainly make software companies feel more secure to do business in China. Another IP related international organisation: World IP Organisation has also been promoting international legislative framework in information technology to facilitate the development of e-commerce, for example, the protection of databases.

To conclude this section, it can be argued that all the above fundamental factors have bestowed China with both advantages and disadvantages for the development of its software industry (Table 1). Such analysis has also indirectly revealed that the two key players could substantially strengthen these advantages and disadvantages. They are government and firms. In the subsequent section, the paper focuses on these two players to specifically explore how and why they have strengthened and weakened the development elements for the software industry.

Table 1 The factors that advantage or disadvantage the software industry in China

Factors Strengths Weaknesses

Factor endowments

1. Ever increasing number of human resources

2. Low cost labour

3. High availability of medium-level talent

4. Firm concentration in large cities

1. Unbalanced high-medium-low levels of talent distribution

2. Wide gap between high demand and low supply for talent

Corporate structure, strategy and rivalry

1. Complex structure: state-owned, privately owned, foreign and university spin-offs coexist

2. Dynamic rivalry of 10,000 firms

Most firms need financial sourcing

Related and supporting industries

1. Extremely competitive computer industry amongst multinationals and local firms

2. The computer industry is more advanced than the software industry with a market share of 36% in Asia Pacific

1. Software services have much to improve

2. Exports have much potential to develop

Demand High expectations from consumers for services – applicability, prices, and after sale

Limited demand in terms of product sophistication


Table 1 The factors that advantage or disadvantage the software industry in China (continued)

Factors Strengths Weaknesses

Chance 1. Overall inventive atmosphere

2. Active exchange activities for knowledge and information with foreign countries

3. Pressure from developed countries to improve IP environment

4. International organisations accelerate the process for the standardisation of software protection

The overall notoriety of IP piracy

4 Government policy and firm strategies to strengthen or weaken the industry

4.1 Vital role of government

China has always been a policy-driven society and the software industry is a very illustrative case. The industry is a product of the Open Door Policy aimed at encouraging capital investment and technology transfer, as part of the information highway plan, to boost economic development. Within such a national aim, the software industry has become an important supporting tool to increase the level of technology and productivity in all sectors in China, such as finance and information technology. Such policy support is reflected in a series of China’s policy instruments (Table 2). In the rest of the section, the authors explicate the existing situation and government target, government policy instruments to improve the situation, and the existing problems in relation to these instruments.

Table 2 Government policy instruments related to the software industry

Government instruments Main contents Date

1. Policy on encouraging the development of the software industry and integrated circuit industry

Policy on software development related to capital, tax, technology, export, income distribution, human resources, procurement, enterprise certification, IP, and corporate management

2000

2. Action plan (2002–5) to thrive the software industry

Development guidance and targets, development emphasis, and policy measure

2002

Polic

y

3. Conventions of Chinese software enterprises

Guidelines on healthy development, fair market environment and legal rights for software firms and users


Table 2 Government policy instruments related to the software industry (continued)

Government instruments Main contents Date

4. Notice on establishing key software schools in universities

Stipulation on the establishment of software schools, supportive policy, magnitude, evaluation, conditions, and procedures

2001

5. Notice on relevant issues related to software and integrated circuit talent going to work in software bases

Policy on encouraging and attracting software talent to work in these concentrated software bases

2001

Edu

catio

n an

d re

sour

ces

6. Notice on providing convenience of entry and residence for foreign high tech talent and investors

Stipulation on the criteria of high tech talent and investors, specific measure to provide the convenience, relevant documents required, and administrative procedure

2000

7. Provisional standards and administration on the certification of software enterprises

Standards to become a certified enterprise, preferential policy on investment, technology, IP, procurement, etc., procedure and administrative responsibilities

2000

8. Provisional regulations on administration of software industry bases

Stipulations on the conditions of certifying software industry bases, procedure, administration and examination.

2001

9. Provisional regulations on the certification and administration of key software enterprises

Stipulations on the standards for key enterprises, examination, procedure, and annual inspection

2001

Ent

erpr

ise

and

prod

uct

10. Regulations on software product administration

Supervision and administrative registration filing, manufacturing, sales, and government inspection

2000

11. Notice on supporting the development of high-tech enterprises

Policy support for the exports of software products from high tech enterprises

2001

12. Notice on relevant problems of software exports

Clarification of the preferential policy on software exports, policy support and administration for the exports of software enterprises

2000

Exp

orts

13. Regulations on the administration and statistics of software exports

Stipulations on administrative procedure of software exports, and requirement of statistical compilation across relevant organisations

2001

14. Copyright law of the P.R. China

Protection of software ownership, publishing, modification and other rights

2001

15. Implementing regulations on the copyright law

Specified protection of IP rights 2001

16. Regulations on computer software protection

Protection of the creative and ownership rights of software

2001

17. Notice to the government organisations on leading the utilisation of authentic software in China

Protection of software, and healthy development of the industry

2001

Prot

ectio

n

18. Regulations on the copyright registrations of computer software

Emphasised protection of registered software copyright, and the procedure of registration application, examination and approval, and fee

2001

Source: Prepared by the authors based on the Chinese policies


4.1.1 Improving factor conditions – human resources

The Chinese Government has set specific targets to strengthen human resources. The country has the advantages of increasing human resources, high availability of medium-level talents, and the low cost of labour, but it also has an unbalanced structural development between demand and supply. Therefore, targets have been set to increase the number of specialised software engineers to 800,000 by 2005 in comparison to the current 250,000, to optimise the talent structure and to narrow down the gap of demand and supply [28].

Policy regulations have been set in line with these targets. The Ministry of Education, for example, issued a notice to all the higher education institutions to establish software schools to satisfy the urgent demand of human assets in the industry [29]. Such software schools are strongly encouraged to use international textbooks, invite experts at home and abroad to teach, and give preferential support to Sino-foreign institutions. Under this policy encouragement, software studies have proven to be a very popular subject in China. Nearly nine out of ten Chinese universities now provide courses on computer science and software engineering [30]. Aside from this future-oriented policy guidance, government has also provided preferential policy support to existing software talent by encouraging them to work in highly concentrated software bases, and stipulating that different government organisations should provide ‘convenience’ for their transfer, including for their spouses and children [31]. Government is also deeply aware of the importance of knowledge from foreign talents, including foreign software engineers and overseas Chinese. Its main encouraging policy instrument is to provide them and software technology investors with less procedural difficulties for entering and settling down in China [32].

It is evident that the Chinese government is making great effort to enhance the factor conditions, but two facts are undeniable. First, although the education of software talent is a good indicator for the potential of China’s software development, its effect will take time to evolve. Second, it is the concerns about the incentive to attract overseas Chinese to work in China. Although the Chinese government has offered general stimulating rewards to attract overseas Chinese to return and contribute to the country in the form of lump sums, cars, houses, and other promotions, only one third of Chinese who went abroad for higher education since the 1980s have so far returned. These people have foreign work and study experience, are familiar with international markets and software standards, understand both the Chinese and foreign culture, and are usually at least bilingual, and so their potential contribution to the country could be substantial. For example, there are about 2,000 Chinese holding senior posts or heading Silicon Valley firms, accounting for 20% of the high-level software managers there [33].

4.1.2 Strengthening competitiveness and supporting key software enterprises

The target is to provide internationally competitive products and establish many key software enterprises at sales of over 5,000 million RMB Yuan (about US $604 million) [34]. In order to achieve the targets, all the software enterprises must also protect the public interests and jointly create a fair competition environment. Six unfair competition acts are stipulated to prevent any wrongdoings against the healthy competitive environment, including damaging a competitor’s reputation, bribing and sales rebate, threatening, and dumping [35]. Any unfair competitive behaviour must be stopped,


damage compensated, public apology given, and if serious offence occurs, membership, and enterprise certification may be revoked.

In addition, administrative procedure and conditions are stipulated to encourage the establishment of software industry bases, key enterprises and high technological software enterprises [36–38]. Under this policy instrument, by 2001, 11 software bases were established in 11 main cities [39]. Key enterprises have the privilege of tax reduction and they must have sales revenue over 100 million Yuan (about US $12 million) [34] or export exceeding US $50,000 accounting for 50% of the sales revenues, or exports exceeding 70% of the sales revenues [39]. Government support is also reflected in its large-scale government funded projects to encourage application of software to establish e-government. For example, ‘Gold Projects’ and ‘Olympic Digitalisation’ are to promote organisation need for software in banking, trading, communications, thereby improving government working infrastructure. Another important funding role played by government is to finance R&D conducted by some key software universities, such as the Chinese Academy of Sciences, to promote the development of software technology [40]. In recent years, government-financed projects have included a Development Fund on Electronic Information Industry, a ‘863’ research programme, a R&D Fund on Industrial Technology and a Technological Innovation Fund for technology oriented SMEs [28]. Also, a preferential procurement policy states that domestic enterprises should have priority to participate in key projects and application system, enjoy tax reduction and take national sovereignty and security into consideration [41,Articles 25–7].

By emphatically encouraging and supporting key enterprises and bases, some elite firms may stand out to compete with world-class companies. However, they have two drawbacks. Firstly, they have certainly exacerbated employee mobility. Highly talented software engineers are attracted to work in these key enterprises and software bases concentrated in large cities, especially the coastal cities in China, and this intensifies the unbalanced geographical development. Secondly, the government’s ‘key’ policy has left SMEs to their own devices; in other words, they have to seek for their own financial support and make their own strategic decisions to survive.

4.1.3 Supporting and related sectors: satisfying domestic demand and encouraging exports

Although the computer industry has much stronger market niche in Asia and better development in China, relevant sectors in China still have much room to develop. The current situation for the software industry is that domestic market is dominated by multinationals in most products, and exports only account for 8% of the total software production [2,p.123]. Accordingly, the government target is to strive to achieve 60% of the domestic production and services, and export at the value of US $5,000 million [28].

Specific policy instruments for government to change the current weak export and domestic market situation are to increase incentives for software exporting enterprises. Exporting enterprises have the privilege of enjoying government preferential treatment on tax, bank loan, export insurance, and duty rebate [42–44]. Export-oriented software enterprises can seek financial support from the Ministry of Commerce for foreign market expansion [43].

Under the policy support, exports have increased in recent years from only 4.8% of the total software production in 1999 to 8% in 2001, but some policy problems still exist. First, although government wants enterprises to substantially export abroad, given the


enormous demand at home market and limited competitiveness of its technological capabilities, the software industry will still be domestic market oriented, but the exports of software products are predicted to be an increasing market in the next few years. Second, it appears that government policy has not given much emphasis to services although this issue was mentioned in the action plan [28]. As shown in the previous section, the unbalanced structure of talent distribution has resulted in China lacking a low level supply of people in software services and resulting in staff with medium-level software talents doing the job at a much lower level. There might be a necessity from the perspective of the government to provide policy encouragement in order to improve software services in China.

4.1.4 Improving product standards and stimulating demands

The current situation of demand and supply for software in China is a ‘passive demand’ with two-fold meaning. From the perspectives of organisations, firms and institutions, under the government e-policy, they are encouraged to modernise the infrastructure. From consumers’ perspectives, their demand is also passive, in a sense that they have limited knowledge about software sophistication. In the meantime, all these users have high expectations on the application, price, and services. This raises the importance of quality and cost for product and services. The development target by 2005 for China is to have domestic sales revenues accounting for 60% of the Chinese market.

A special case of government influence in this respect is shown in the encouragement of Linux operating system software, intending to make it the government server in China. The hidden agenda behind the promotion of Linux is to have secure government servers, which is a particular concern of government and national security when the computerised Chinese economy is in the hands of a few dominant foreign multinationals, such as Microsoft. In the meanwhile, government also wants to promote Linux to boost the local technology and brainpower with the development of red flag Linux. Linux was chosen because it is an operating system with low cost, high speed, secure and stable with a wider availability of applications and would speed up the creation of e-government. Although China is still a small market for Linux at present, the promotion of e-government with Linux server creates a market for locally developed software [45]. Most recently, the Canton provincial organisation for information industry signed an agreement with IBM and a local firm to set up the first Linux services centre in China, which was funded by the provincial government. The centre will provide services first for provincial government administration, and gradually expand its services to commerce. As the pioneer province to promote Linux, the government in Canton Province even stipulated a Linux promotion plan aiming at Linux software accounting for 15% of the provincial software production by 2006 [46].

Government has strong impact on the software demand at the organisational, institutional, and corporate levels, but it seems that the individual consumer market has not yet caught much government attention, although the market represents an enormous potential as there were only 29 million personal computer users by year 2000 [40], accounting for only just slightly over 2% of the population. Another area that government could encourage is the promotion of CMM (Capability Maturity Model for Software), which is the internationally recognised assessment standard for software manufacturing quality. By 2002, Motorola China was the only one to pass CMM5 assessment, Huawei


CMM2, plus three CMM3 firms, and 13 CMM2 firms in China, but the enterprises applying for assessments have been increasing. As CMM assessment is the symbol of quality and the key to increase exports, it appears that government needs to publicise the CMM standards, proceduralise the assessment and train local assessors (presently, there are only two in China) [2].

4.1.5 Protecting software and curtailing piracy

China has been dubbed ‘the capital of piracy’ due to the spread of counterfeits in all industries, with software as a typical example [47]. According to the Business Software Alliance, the software piracy rate in China in 2002 was 92% of the software sold, only next to Vietnam. Despite the wide distrust on the methodological accuracy, it is evident that piracy is an undermining factor to the development of the software industry inhibiting job creation, tax revenue, and product development.

Over the last two decades, government has greatly influenced the development of its IP system to create a relatively favourable environment for software development. Apart from the Copyright Law and its Implementing Regulations, a series of regulations are relevant to antipiracy support. Government is committed to enforce antipiracy measures in the industry, such as tackling organised crime in the making, manufacturing and selling of pirated products [41, Article 34]. Specifically, the document stipulated that from 2000 onwards, government organisations should collaborate and organise antipiracy campaigns to counter the spread of piracy. The core of software protection tool is Regulations on Computer Software Protection [48]. The regulations stipulate copyright ownership, licensing, assignment and civil and criminal liabilities for infringing software rights, including piracy. Government has also issued relevant documents [48–50] to encourage government organisations to be the model for the public by using original software and has emphasised the registration system to encourage software owners to register their copyright in order to guarantee special protection.

Apparently, the Chinese government has made great progress in the last decades to improve the relatively new IP system for the protection of piracy, but piracy is an inevitable phenomenon existing globally [47]; the key is to alleviate the extent of pirate spread. As the legal mechanism has been in place, the burden of software protection on government is the improvement of enforcement due to the corporate level of low confidence in government enforcement [26].

The development of the software industry to date has been profoundly influenced by the Chinese government for which the paper has identified the strengths and weaknesses in line with the analytical framework (Table 3). Government is the promoter of software education and supporter of software talent, but attention needs to be paid to attract overseas talents to alleviate the brain drain problem. Government is also the financier of large national projects, key software enterprises, and software bases, but such policy instruments may also exacerbate the high employee mobility to key enterprises, leaving SMEs with difficulties to survive. Government is the stimulator of exports with their preferential policies, but they also need to encourage the improvement of services, including training of relevant people for software services to correct the currently unbalanced structure of human resources distribution. Government is also the main promoter of the utilisation of software in the public sectors, but it also needs to stimulate demand at the family and personal unit level. From a product quality perspective,


encouragement of CMM assessment is the key to future exports. Finally, government is the protector of software copyright, but needs to intensify further the strength of its enforcement.

Table 3 Government policies to strengthen or weaken software development

Framework related topics Policy strengths Policy weaknesses

Factor conditions–human assets

1. Encourage the establishment of software schools to train future talent

2. Encourage talent to work in software bases

3. Provide convenience for talent to work in China

1. Time evolvement is needed for such policy to have effect

2. Limited incentives to attract overseas talent, esp. overseas Chinese talent resulting in no improvement to the brain drain problem

Corporate strategy, structure and rivalry

1. Anti-unfair competition policy support

2. Funding support to large government projects to enhance e-working conditions; government finance on R&D by key universities; and preferential policy on procurement

3. Encourage the establishment of software bases and key firms to provide preferential support allowing a pool of talent for R&D, software production and exports

1. Exacerbate employee mobility to key enterprises and bases

2. Limited support to SMEs, making their survival more difficult

Supporting and related industries

Preferential policy support with tax reduction, bank loan, export insurance, and duty rebate to export firms.

Incentives may be needed to stimulate services support, including increasing the training of people in software services.

Product and demand 1. Product administration

2. Linux promotion to have secure server and stimulate demand for local products

3. Encourage software utilisation in public sectors

1. Lack of policy stimulation to personal computer market

2. Necessary to encourage CMM assessment

Piracy A series of laws and regulations on the protection of software.

Enforcement needs to be intensified to alleviate the piracy spread.


4.2 Firm strategies

The 10,000 software firms can be analysed in this section by two categories – multinationals and domestic firms although local firms can further be divided to identify their advantages and disadvantages into state owned, collectively-owned, privately-owned, and university-based firms. Domestic software firms on the whole have potential advantage over multinationals in four respects: local knowledge and network, certain market niches, pricing and services. Firstly, domestic firms have local knowledge plus their local networks: ‘Guanxi’. Knowing the local language allows them to adapt advanced foreign software for local needs. A home-grown company also has the accumulated network relationship (Guanxi) to allow them to open up their distribution channels and establish their customer network more quickly. Secondly, in relation to the first, firms may use their first advantage to allow them to establish market niches in certain fields. A good example is UFSoft Holding, because, as a management software provider, it is the only domestic company to become one of the top ten packaged software providers and has sustained this position over the years. The corporate strategies for the firm’s success are to emphasise five breakthrough: products, services, R&D, management system and cooperation. The firm currently is aiming to become a world-class management software firm by 2010 with its trademark ‘UFSoft’ [51]. Thirdly, local products have the pricing advantage. For example, typical operating system software has a wide pricing gap amongst Microsoft (around 1,500 Yuan, $1 = 8.3 Yuan, [34]), domestic firm (50–70 Yuan), and a piracy seller (10 Yuan) [52]. Finally, software services account for 50% of the software output, which is a market that firms can explore in terms of quality and sales.

However, in comparison to multinationals, most domestic firms lack R&D strengths to create software and also have little incentive to develop software, for four fundamental reasons. First is the development itself, as R&D needs substantial resources input, such as people, time, effort, and capital. Second is that consumers demand sophisticated services, as mentioned earlier, including integrated software, and services. Third is the brand allegiance. Consumers, despite the overall income limitation, tend to pay attention to brand when they buy something expensive, believing brand represents quality, reliability, and warranty. Finally, the notorious piracy has impact on a firm’s motivation to conduct R&D, which carries no guarantee that, resulting from it, the costs of a new product creation will be recouped in the longer term.

In spite of the overall strengths and weaknesses of the domestic firms, specifically, various types of local firms also have their own advantages and disadvantages to explore. First, it is the Chinese state-owned and collectively-owned enterprises, which account for roughly 50% of the software enterprises in China [53]. Examples of this type of firm are the China Software and Technology Service Corporation, Hope Group, Beijing Founder Group and Shanghai Pudong Software Park. The China National Computer Software and Technology Service Corporation (CS&S) is affiliated to the Ministry of Electronic Industry with a profit of over US $10 million [34] and over 30 local branches, holding companies and joint ventures [54]. The company was established in 1990 with over 3,000 employees, and was one of the key national enterprises [54]. The software firm-government links imply that these types of firms are capitalised with government finance and they have the financial foundations to conduct R&D. The drawbacks are that the brain drain exists from these firms, which undermines their growth. This is due to


relatively low pay and motivation on R&D compared to the other types of software firms, especially foreign subsidiaries.

Second, many software firms in China are privately owned accounting for 20% of the software enterprises [19]. Most of them are of small magnitude, as most of the firms have less than 50 employees. For example, Users’ Friends is a private company specialising in software design in accounting systems. The advantages of this type of firms are the flexibility and simplicity in management, due to the small scale of the operations.

Third, many companies are university-based. This type of firm accelerates knowledge dissemination in this industry between software firms and scientific research institutes in universities. An illustrative example is the Tsinghua Information Technology Company (TITC). It is affiliated to one of the most prestigious universities in China: Tsinghua University, and backed up in R&D by the Centre for Software Technology within the university. As one of the first establishments in the software industry (1980), the main strength of companies like TITC is the direct and quick integration of research and commercialisation and prompt response to new products in the market. In addition to product development, firms like TITC may also obtain support from management scholars in the university to run their business. Nevertheless, like many universities in the world, funding is the key for development. This type of firm however, may not have financial status as strong as the state-owned enterprises and foreign subsidiaries. This drawback, to some extent, may hinder its development if financial sourcing is not properly sought.

Multinationals in the form of foreign direct investment account for 20% of the total number of enterprises [19] and also have their comparative strengths and weaknesses. Examples are Adobe, Apple, Autodesk, Bentley, Borland, Microsoft, Oracle and Macro-Media in the form of Sino-foreign joint ventures (JVs) or wholly foreign-owned enterprises (WFOEs) in China. Currently, foreign firms dominate 90% of the system software market, such as minicomputers, main frames, and operating systems, 70% of the software tools, such as language, development, antivirus, and translation, and 60% of the application software, such as word processing, game, and education software, making the average market share of over 73% [20]. A representative example is Microsoft. Since its subsidiary was established in 1992, it has had different strategic focuses in its development [55]. Before 1995, the firm focused on market sales in China, but between 1995 and 1999, its focus was on R&D development. The R&D Centre, Technology Support Centre and Asia Research Institute were all established during this period. Since 2000, the focal point of Microsoft China has shifted to the development of the whole information technology industry and the protection of IP in China aiming at technology exchange and knowledge dissemination between Microsoft and Chinese enterprises.

Multinationals like Microsoft China are strong in R&D and technology support. This type of firm usually has its own in-house teams engaging in basic and applied scientific research, hence, commercialisation of R&D results has become a very direct process. As a result, like university-based firms, they can provide the latest software products to the market and promptly respond to the market need. The second strength of this type of firm is the attraction of talent. Due to the financial support from foreign headquarters, they can offer very attractive salary package to employees plus good working conditions and motivation for self-development.


The major drawbacks for this type of firm are piracy, competition threats and pricing. Due to the advancement of software development in the world, their products are often subject to imitation and illegal copying. From 2000 onwards, the fact that Microsoft China has been promoting the significance of IP protection has its reasons. Illegal copying can damage the corporate identity of a firm and cause massive loss and damage to corporate development. The damage came from the large extent of pirated software in use in government organisations, of exporting them abroad and consumer buying and copying. Moreover, multinationals face fiercer competition from two directions. One is multinationals themselves. For example, the market share in sales revenue by the top ten packaged software providers was 35% in 1999, but the percentage reduced to 28% in recent years [56]. Multinationals also face competition from some elite domestic enterprises. As mentioned in early discussion, these domestic firms dominate the application software market niches taking advantage of their local knowledge and network. Illustrative examples of domestic competitors are software providers in electronic publishing (Founder), finance (UFSoft) and enterprise resource management (Kingdee). In addition, multinationals are extremely disadvantaged in price competition. The main reason of such a wide pricing gap is the cost of R&D development and in maintaining the brand, which needs to be recouped through expensive sales.

The complex structure of firms in the software industry undoubtedly creates dynamic rivalry and a competitive environment within China. Firstly, world-class giants can push forward the development of this industry with their high technology. For example, since 2000, Microsoft has been pursuing an aim and promise of simultaneous progress and development within the software industry in China and increased its intensity of investment and cooperation. With this promise, Microsoft has been cooperating with the government, banks, and enterprises for IT support and development with their reliable products. The Asia Microsoft Research Institute has been nurturing new talent, enhancing cooperation and exchange with universities, and assisting the development in the western part of China to narrow gaps in economic development [55]. Microsoft’s large-scale operations in China, in the long run, may develop linkages with domestic firms, and spill over the development of the whole industry. For example, Microsoft (19% of the share) established three-partner relations with Beijing Centergate Technologies (51%), and Stone Group (30%) under the name Zhong-Guan-Cun Software Co. to enhance software applications and provide solutions for government and industries at home and abroad [57]. It has established a certified Technical Education Centre to train high-level human resources in the industry.

Secondly, with the sophisticated working environment, welfare, and motivation for self-development, firms like Microsoft tend to attract overseas talent and the best graduates in China to work for them, thus competing with local firms and making them the market leaders in the Chinese software market. This makes the brain drain to high tech firms an irresolvable problem in the short run, but in the longer term, such efforts will generate highly competent employees for China. These employees may, for example, establish their own small businesses after gaining some experience in a larger company. The high mobility of employees accelerates knowledge transfer from one firm to another, and motivates firms to improve their management and corporate identity in the competitive market.

From the analysis above, we identify that both domestic and multinationals have their strengths and weaknesses (Table 4). Multinationals dominate and account for 65% of the Chinese market in the total sales of the packaged software [2]. They are successful due to


their strengths in their commercialisation of new creations, their ability to respond to market, their long established brand reputation, their sensitivity to competition, and their appeal to talented human resources. However, their products tend to be the targets for imitation and copying, undermining their sales and product reputation due to high price and novelty. Along with product piracy and high price, in recent years, multinationals have also faced much keener competition than before from both new market entrants and some elite domestic companies.

Table 4 Comparisons of the four types of the software firms in China

Firms Strengths Weaknesses

Domestic firms 1. Language advantage and knowledge on the local systems, and market niches in accounting, finance, education and management software

2. Local networks

3. Cheaper price

4. Potential to develop in services

Low incentive to develop R&D because of:

1. piracy 2. finance 3. customer demand for

integrated supply: software, services, and integration

4. the brand preferences of consumers

1. State-owned or collectively owned firms

Affiliated with government organisations privileged with policy and finance

Brain drain and employee mobility

2. Privately owned SMEs

1. Flexible and simple in management due to small scale

2. Motivation for survival and dynamic in development

Seriously lack of financial support

3. University-based firms

1. Direct and quick integration between research and commercialisation

2. Prompt response to new products in the market

3. Input of management scholars from universities

Proper financial sourcing for development needs to be sought

Large foreign subsidiaries

1. Strong R&D and technological support guaranteeing direct commercialisation

2. Market leader of new products and prompt response to new products in the market

3. High salary package, quality working conditions, and motivations for employee development

4. Brands

1. Products subject to imitation and copying

2. Increasing competition from new entrants and some local firms

3. Pricey software

In comparison to multinationals, the majority of the Chinese software firms are in disadvantageous position of competition, but a number of star companies are rising to becoming a domestic elite in the industry. Chinese software firms are mostly small in scale: spreading in services, application software, but limited in resources support.


However, they tend to be easier to manage and are more flexible than most large firms. More importantly, under the competitive environment, they tend to be motivated to improve themselves in products and services. Therefore, some elite firms stand out from such competition. Their success is due to a key position in a particular market niche. They have the local knowledge and networks that help them occupy dominant positions in the application software market, such as accounting and finance, education, and resources management, with much lower price. However, most domestic firms are inert in research apart from university spin-off firms, which are more sensitive to new products and have human resources to conduct R&D. Their contribution to software R&D would probably strengthen some domestic firms and gradually penetrate some of multinationals’ market niches at high-end market.

5 Discussion: China’s software industry in the world

On the whole, China is an insignificant player in the world. The software industry only accounted for 0.83% of the GDP and 32% of the computer market in China in 2001 in comparison respectively to 6% and 55% on average globally [2]. Such a gap indicates that China still lags behind other countries in this industry. However, there is an enormous potential for China.

5.1 Highly attractive nation for development, but a battlefield for firms

Cheap resources and a huge potential market decide that China will always be an attractive proposition. The costs of human resources are even lower than India [33]. Apart from cheap resources, the attraction is in its undercultivated consumer marketplace. However, competitors from all over the world will have to face competition from international players, but also from some rising domestic firms. Therefore, the future of China in the industry will be more competitive and more fragmented.

5.2 Abnormal resource structure and market formation

Compared to major software countries such as the USA, Japan, Ireland and India, China lacks versatile talent with both technological and managerial ability and system analysis and design skills. However, the striking difference is that China is also short of human resources to provide customer services, commercial planning, programming, etc at the bottom level. There is a much more solid foundation elsewhere in the normal pyramid structure of human resources than in the Chinese structure. Consequently, this could hinder the effective quality improvement and efficient allocation of labour, time and cost.

In addition, the high demand for human assets does not match the current supply. The number of people working in this industry is 40,000, of which 25,000 work in the technical field, but the shortage of supply is 200,000. In comparison to India, such a problem also becomes obvious where there are 200,000 people specialising in the software technological field [2]. Therefore, enhancement of software education and increasing the supply of human resources has become a crucial issue. Such short supply has caught the attention of government and firms to strengthen the human resources in China. The major problem is that China heavily relies on universities as a source of


supply and pays limited attention to other supply channels, such as training institutions, vocational training, polytechnic schools, and talent from overseas. Such unbalanced supply forms a stark contrast with the talent supply in India where non-university supply accounts for the highest percentage at around 45% [2]. Such comparison indicates that non-university institutions need to be motivated to play a much bigger role. For this, some firms have taken action to intensify the software workforce. For example, China and India have agreed to cooperate in the training of bottom level software workers while Microsoft is training high-level human resources in the industry.

5.3 Domestic market domination and export orientation

In terms of world industrial output, there is not a wide gap between China and the rest of the world apart from the USA (Table 5). The USA is far more in the lead than all the other major players. The success of the industry in India has resulted from high-level projects, experience, the rich human assets plus education and training, which delivers 1,100,000 graduates [33] and provides basic education for software studies. However, it also has disadvantages, including lack of experienced project managers, the brain drain to the USA, and project migration to China, due to low living cost. Such comparison indicates that China, like the rest of the world, cannot compete with software giants like the USA and Japan in the near future due to their dominant positions in R&D and product advantages, but China can certainly learn from them.

Table 5 Industrial output of software by country of origin

2001 USA Japan Ireland India Korea China Rest

Percentage of industrial output 42 10.6 1.7 1.7 1.6 1.5 41

Source: Based on [2,p.50]

The exports comparison shows that China is still a domestic market oriented country (Table 6). Both India and Ireland have a much higher export value than in China, for example, the current Indian exports of software and IT services were estimated at US $12.5 billion and it is the best in the world in terms of exports in scale, quality and cost [24,58]. Apart from government support, human resources, etc, these two countries have two obvious advantages over China, plus some intrinsic conditions that decide that China will still be a local market-oriented software supplier. Firstly, both Ireland and India have the advantage of using the international language: English. Ireland is a native English speaking country and English is an official language in India where education in English is greatly emphasised by government. In contrast, much of the advanced software from foreign countries must be adapted from English to Chinese to suit the market need. The top software countries – USA, Ireland, and India have benefited, as English is either their official language, or dual official language, as India was formally a British colony. Japan, China, and Korea do not have this advantage, and although English is widely promoted, it is not widely spoken yet as an international language. Secondly, the number of firms with CMM quality in Ireland and India is much higher. India heads the number of enterprises obtaining CMM5 qualifications, accounting for 81% of the total CMM firms in the world [2]. In contrast, there is only one CMM5 firm in China: Motorola, China.


Table 6 Software exports from China, India and Ireland in value (100 million)

Country 1999 2000 2001

China 2.5 4 7.2

India 39 62 78

Ireland 70 85 107

Source: [2]

Apart from these two advantages for India and Ireland, the intrinsic conditions in China have also decided that China is a domestic market-oriented software nation. This is because the huge demand of the domestic market has not been satisfied and cultivated thoroughly. Presently, the main demands come from public sectors to create an e-working environment. Such demands are purely local and the products are Chinese-oriented, and cannot be adapted to the international market. In addition, the individual consumer market has not yet been stimulated fully, due to majority of the population still perceiving the computer as a luxurious product, which results in the low demand for software. Moreover, multinationals enter into China for the main purpose of exploiting local markets.

5.4 Product dominance and service orientation

The software market in China is still a product-dominated market with software services that need to improve in both quality and quantity. The current structure of the software output is that software products account for 41%, exports 8%, and services 51%. Such distribution indicates the important role of services when people choose their products. Amongst all the software products, application software accounts for 60% of the total product output, which needs good service support [2]. In comparison, India has much better support in software services, as 90% of its software human resources are ‘blue collars’ providing strong foundational support to software development [24].

5.5 China: a rising star in the global software industry

The software industry in China is by no means a lead competitor in the world market, but a rising star. The undercultivated market will continue to be the main customer of the industry: the immaturity of the market where the unsatisfied collective demand needs to be fulfilled, and the underexplored consumer market needs to be stimulated. The competition within the local market amongst various top players in the world creates a favourable environment to push forward the rising of world-class companies from China in the future.

Under the IT policy of informatisation in China, almost all the sectors are either compelled or induced to modernise their information system to suit the increasing demanding market. In the service sectors, such as banking, insurance, finance and accounting, software is needed to increase management efficiency and market effectiveness, such as on line transactions, and e-logistics. The financial sector accounts for almost 30% of China’s IT spending, telecommunication 20% and transport sector 10% [20]. In government organisations, software is needed to develop office automation. In the manufacturing industry, CAD/CAM are needed in engineering and production to


increase productivity. For example, there are estimated to be over 11 million firms in China, but only 50% of the SMEs possess computer facilities [23]. They represent the e-commerce potential and also the demand for software. This implies that the market demand for enterprise software and service software will hugely increase. In the education sector, software is needed to enhance learning, teaching and research. For example, there are over 200 educational software manufacturers, but only less than 5% of the primary and middle schools are installed with intranet [53]. There are 152 million students in China, which represents a huge potential for educational software. In the publishing sector, software is also needed to develop digital processing of words, graphs, photographs, etc. Another unexplored potential in China is that computers have not widely penetrated into family units in China, but this represents a potential market for personal computers, software and related services.

In addition, all these sectors and personal units need security software to guarantee the safety of their software and documents. For example, the government has put a great emphasis on information security. It completed a pilot project in 2001 to push forward the development and applications of security software for data protection in different sectors, such as detection of viruses and hackers [23]. Based on the prediction by the Ministry of Information Industry, over the next few years, software market will maintain a 26% increase annually [2]. Additionally, the annual growth rate of 20% for personal computers will facilitate the growth of the software market. Other related events, such as the 2008 World Olympics in Beijing, and the flux of foreign enterprises after the WTO entry is also likely to boost the demand and stimulate competition in this industry.

6 Conclusion

The analysis here allows us to reassess the ‘Diamond’ framework on the basis of the software industry in China with a particular focus on the government role and corporate strategies. The case study confirms previous studies [8,10–11] that Porter’s framework of competitive advantage of nations is applicable in developing countries. Our study identifies the factors that facilitate or impede the development of the software industry.

The industrial analysis also supports the disparities of this theoretical framework reflected particularly in three respects. Firstly, the framework focuses on the static, instead of dynamic situation of industrial analysis, which undermines the potential of industrial competitiveness. This is particularly the case for China’s software industry where if only static factors, such as historical development and current status, were emphasised, government would not pay much attention to eliminate barriers for industrial development, and firms would not invest in this industry. Secondly, the framework lacks comparative analysis, as the ‘Single Diamond’ analysis only reflects the deriving features of the domestic industry, which has limited reflection of the competitiveness in the world, thereby making the analysis of international competitiveness inconclusive. Thirdly, the undermining of a number of factors in industrial development is clearly exposed in this study, which will be more specifically discussed as follows, including culture elements, multinationals and government.


One important factor is cultural consideration, which was not emphasised in the ‘Diamond’. The impact of national culture on the software industry is reflected in language differences and education. Much of the advanced software from foreign countries must be adapted from English to Chinese to suit the market need. Another social cultural factor: education also impacts on this industry in China. Educational policy decides if there are enough availability of skilled workers, national competitiveness and product promotion. These two influential factors may gain companies in Hong Kong and overseas Chinese companies advantage because they know technology, are also bilingual; and for companies in Hong Kong, they also have the advantage of considerable commercial experience. This is probably one of the reasons why Chinese government is in urgent need to attract overseas Chinese to return to their motherland in order to strengthen the human resources.

Multinationals are undermined in the ‘Diamond’ in this case, as the high-end and packaged software market are dominated by foreign subsidiaries. Their full functions in the market cannot be fully assessed using the framework, apart from analysing the state of corporate rivalry. Their intentions on doing business in China cannot be clearly identified and therefore, it is difficult to judge if these companies only aim to explore the factor endowments or the market share. In addition, the role that multinationals have played in encouraging rivalry is that they intensify the competitive environment, but their involvement makes the national analysis of this industry blurry. This raises the question: whether they should be considered the strengths of the Chinese software industry, or those of other countries. Probably, this divide can never be made clear due to the limitation of this framework. Additionally, this case study further strengthens the arguments from previous research about the ill treatment of multinationals and also strongly suggests that previous research have sufficient grounds to make suggestions of double and multi diamonds to increase the significance of foreign direct investment.

Moreover, the role of the government in the software industry is far more significant than Porter has suggested. This has been shown in three aspects aside from favourable policy itself. First, the Chinese government has played a very directive role in promoting the development of this high technological industry. Porter [3–4] believes that governments in developing countries play a more directive role than those in developed countries. This is clearly shown in the forms of low interest bank loans, government subsidies, and preferential treatments on exports as discussed in the paper. Second, the government has also been involved directly and indirectly in the industry. This is because many large software enterprises are state-owned firms affiliated with central or local government organisations. Third, government’s significant role is reflected in its emphasis and initiatives on accelerating the industrial development. The case in point is the establishment of over 40 software bases in major cities in China. Given the directive, involving, and promoting role that the Chinese government is having, it is in line with previous arguments that government should be the fifth determinant. However, government role is not a static element in this study. With the WTO entry, its role in protecting or involving corporate activities is restricted under the WTO standards to allow fair and transparent competition. Therefore, in the near future, government role in this industry will still be significant, but only from the perspective of policy encouragement.


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14 Dunning, J. (1992) ‘The competitive advantage of countries and the activities of transnational corporations’, Transnational Corporations, Vol. 1, No. 1, pp.135–168.

15 Rugman, A.M. (1991) ‘Business in the rough’, Business Quarterly, Vol. 55, No. 3, pp.61–64.

16 Rugman, A.M. and D’Cruz, R. (1993) ‘The “Double Diamond” model of international competitiveness: the Canadian experience’, Management International Review, Vol. 2, No. 33, Special Issue, pp.17–39.

17 Van den Bosch, F. and Van Prooijen, A.A. (1992) ‘The competitive advantage of European nations: the impact of national culture – a missing element in Porter’s analysis?’, European Management Journal, Vol. 10, No. 2, pp.173–177.

18 Pressman, S. (1991) ‘The competitive advantage of nations’, in M.E. Porter (Ed.) Journal of Management, Vol. 17, No. 1, pp.213–227.

19 Hong Kong Trade Development Council (2000) Opportunities in Ten Major Industries, November, Special Issue, Accessed April 9, 2003, www.tdctrade.com

20 Hong Kong Trade Development Council (2001) Liberalisation of Software Industry, Iss. No. 3, Accessed April 7, 2003, www.tdctrade.com

21 Li, W. (2000) ‘The computer industry’, in J. Reuvid and Y. Li (Eds.) Doing Business with China, London: Kogan Page, pp.452–456.

22 Gao, S. (2003) ‘The analysis of computer production and sales in China in 2002’, Ministry of Information Industry, China at www.mii.gov.cn/mii/hyzw/tongji/2003–03–0703.htm, Accessed in April 2003.

http://www.tdctrade.com/


http://www.mii.gov.cn/mii/hyzw/tongji/2003-03-0703.htm


23 Kharbanda, V.P. and Suman, Y. (2002) ‘Chinese initiative in the software industry – quest to leap’, Current Science, Vol. 83, No. 12, pp.1450–1455.

24 Chen, W.Y.C. (1995) ‘Overview of Chinese software industry’, Asian Technology Information Program, Accessed in February 2003, www.atip.org

25 The figures were obtained from two sources: The 1985 figure was from page 141, Yang, D. (2003) ‘The development of intellectual property in China’, World Patent Information, Vol. 25, No. 2, pp.131–142; and the 2003 figure was obtained from State Intellectual Property Office at http://www.sipo.gov.cn/sipo/tjxx/gnwszzlsqzknb/2003/t20040115_24580.htm Accessed in May 2004.

26 Yang, D. (2003) Intellectual Property and Doing Business in China, London: Pergamon.

27 World Trade Organisation (1996) Overview of the Information Technology Agreement and its Implementation, Accessed in April 2003, http://www.wto.org/english/tratop_e/inftec_e/inftec_e.htm

28 State Council (2002) Action Plan (2002–5) to Thrive the Software Industry, State Council, People’s Republic of China, No. 47.

29 Ministry of Education (2001) Notice of the Pilot Scheme on Establishing Software Schools in Universities, People’s Republic of China: The Ministry of Education, No. 13.

30 The figure was calculated by the authors based on the CSIA statistics 2002 [2].

31 Ministry of Personnel (2001) Notice on Relevant Issues Related to Talent in Software and Integrated Circuit Going to Work in Software Bases, People’s Republic of China: The Ministry of Personnel, No. 60.

32 Ministry of Public Security (2000) Notice on Providing Convenience of Entry and Residence for Foreign High Tech Talent and Investors, People’s Republic of China: The Ministry of Public Security, No. 1302.

33 World Class Software Development Services (2003) Chinese Software Market Overview, Accessed on April 8, www.worldclass.com

34 This is based on the mid-market rate at www.xe.com on May 11, 2004.

35 China Software Industry Association (2000) Basic Convention of the Chinese Software Enterprises, People’s Republic of China: China Software Industry Association.

36 Planning Committee (2001) Provisional Regulations on the Administration of Software Industry Bases, People’s Republic of China: The Planning Committee, No. 2836.

37 Planning Committee (2001) Provisional Regulations on the Certification and Administration of Key Software Enterprises, People’s Republic of China: The Planning Committee, No. 1351.

38 China Customs and Ministry of Commerce (2001) Notice on Supporting the Development of High-Tech Enterprises, People’s Republic of China: China Customs and The Ministry of Commerce, No. 279.

39 The 11 bases are in Beijing, Shanghai, Guangzhou, Nanjing, Hangzhou, Xi’an, Chengdu, Dalian, Jinang, Changsha, and Zhuhai.

40 Tschang, T. (2003) China's Software Industry and its Implications for India, OECD.

41 State Council (2000) ‘Policy on encouraging the development of the software industry and integrated circuits industry’, State Council Document No. 18, Beijing: State Council.

42 China Customs (2001) Notice on Supporting the Development of High Technological Enterprises, People’s Republic of China: China Customs, No. 279.

43 Ministry of Commerce, The Ministry of Information Industry, State Bureau of Tax, China Customs, State Bureau of Foreign Exchange Administration, and State Bureau of Statistics (2000) Notice on Relevant Issues of Software Exports, People’s Republic of China, No. 680.

44 Ministry of Commerce (2001) Regulations on the Administration and Statistics of Software Exports, People’s Republic of China: Ministry of Commerce, No. 601.

http://www.sipo.gov.cn/sipo/tjxx/gnwszzlsqzknb/2003/t20040115_24580.htm

http://www.worldclass.com/


45 Einhorn, B. (2004) ‘For China, Linux has lots to like’, Business Week, March 30.

46 China Software Industry Association (2004) Canton Province Sets up the First Linux Technological Support Centre in China, Accessed in May, http://www.csia.org.cn/htm/focus/head/0851–20@2004–04–30.html

47 Yang, D., Sonmez, M. and Bosworth, D. (2004) ‘Strategic response for multinationals to intellectual property abuses’, Long Range Planning – International Journal of Strategic Management, Vol. 37, No. 5.

48 State Council (2001) Regulations on the Protection of Computer Software, People’s Republic of China: State Council, No. 339.

49 State Copyright Administration (2001) Notice to the Government Organisation on Leading the Utilisation of Authentic Software in China, People’s Republic of China: State Copyright Administration, No. 1.

50 State Copyright Administration (2001) Regulations on the Copyright Registrations of Computer Software, People’s Republic of China: State Copyright Administration.

51 UFSoft (2004) The UFSoft Company, http://www.ufsoft.com.cn/about/index.asp, Accessed in May.

52 Prices were average, calculated from the observations at Zhong-Guan-Cun Electronic Street, Beijing.

53 Hong Kong Trade Development Council (2002) Learning Software, Top of the Class in China, May 2, www.tdctrade.com, Accessed in April 2003.

54 CS&S (2004) China National Computer Software and Technology Services Corporation, accessed in May, http://www.css.com.cn/articalshowo.php?id=795

55 Microsoft (2003) Microsoft China at http://www.microsoft.com/china/info/introduction.asp Accessed in April.

56 Saxenian, A.L. (2003) ‘Government and Guanxi: the Chinese software industry in transition’, a paper presented at a conference entitled Global Software from Emerging Markets: An Engine for Growth?, Long Business School, May 12.

57 Khoo, E. (2002) Microsoft teams up for China software push at http://zdnet.com.com/2100–1104–817115.html?legacy=zdnn, Accessed in February 2003.

58 PTI (2003) ‘China-India software association launched’, The Economic Times, at http://economictimes.indiatimes.com/articleshow/327914.cms?, Accessed in May 2004.

http://www.csia.org.cn/htm/focus/head/[email protected]

http://www.ufsoft.com.cn/about/index.asp


http://www.css.com.cn/articalshowo.php?id=795

http://www.microsoft.com/china/info/introduction.asp

http://zdnet.com.com/2100-1104-817115.html?legacy=zdnn

http://economictimes.indiatimes.com/articleshow/327914.cms?

Competitive analysis of the software industry in China

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