A 10-Point Plan to Grow Your Economy Through Innovation Mercantilism (Part 2)

By Robert D. Atkinson

To the commerce minister of a developing nation:

Yesterday I reviewed the first five steps for how you too can grow your nation’s economy using innovation mercantilism. Here’s the rest of what you need to do…

6) Pile on the subsidies.

It can be a challenge to compete fairly, but having a government-backed war chest can help. So rather than fund early-stage scientific research at universities, instead fund industry directly. That way you can get a leg up on foreign firms that are constrained by having to fund most R&D out of profits. Again, the Japanese were the pathbreakers. After the Japanese government pressured U.S. technology leaders to license semiconductor technology to Japanese firms, the government organized well-funded pre-competitive industrial R&D consortia, including those developing DRAM (dynamic random access memory) chips. And it paid off. Within a little more than a decade, the Japanese share of the DRAM market went from 5 percent (the United States had the rest), to 92 percent. But be sure not to let foreign firms operating in your nation qualify for these programs. Again, follow the Japanese model: When they formed the joint Japan Electronic Computing Company consortia, they kept IBM out. Don’t follow the U.S. and European model that lets foreign firms participate in their national tech programs as long as they are invested in the economy.

If you are not sure where your agency can get all the cash for this kind of investment, just set up a meeting with your counterpart at the state-owned bank or state-owned enterprise and tell him that the prime minister wants him to start making below-market loans or equity investments in your national champions. Again, this is what Japan did in the 1970s when the state-owned national telecom firm, NTT, along with the government agency MITI, bought a large share of an emerging U.S. mainframe computer company set up by former IBMer Gene Amdahl. They then transferred the technology to Japan. Or do what China is doing: Put the arm on a bunch of state-owned enterprises (SOE), like the tobacco SOE, to invest billions in a so-called private investment fund to channel state money to Chinese semiconductor firms. That way you get a two-for-one: lots of money invested that doesn’t come out of your budget while at the same time avoiding any hassles from Geneva and the World Trade Organization (WTO) because this is private, not public money, right?

But be careful, for if you are not, all those subsidies can go down a rat hole, as Europe has found. In their endless quest to take down American information technology companies, France invested €400 million to create its own search engine called “Quaero,” the “Google killer.” The only thing that died was Quaero after French Internet users stuck with Google and Bing. Likewise, the French, British, and German governments wasted in excess of a billion dollars trying in vain to create a viable competitor to IBM in mainframes.

7) Don’t forget government cash to buy foreign IP.

You should know that buying intellectual property (IP), while it might be expensive in the short run, often more than pays for itself in the long run. To be sure, it’s better to force or steal IP, but sometimes one actually has to write a check. So be ready to use your considerable foreign exchange earnings from running large trade surpluses as a cash trove to buy out cash-hungry foreign technology firms. They will often sell you the crown jewels for a few million bucks. Again, the Japanese led the way. In 1970, Gene Amdahl, who had once been the chief designer of IBM’s mainframe computers, decided it was time to start his own business. The only problem was there was a recession on and he had difficulty raising the $40 million from domestic investors. Desperate, he turned to a leading Japanese computer maker, Fujitsu, who for a mere 24 percent stake in Amdahl’s new company got complete technical information for how to make advanced mainframe computers. Three years later, Fujitsu was selling mainframes in the United States and became a viable challenger to IBM. A decade before, because of an antitrust settlement with the U.S. government that forced RCA to license its TV technology to U.S. competitors for free, CEO David Sarnoff had licensed so much valuable TV technology to the Japanese (who were willing to pay) that he was given a hero’s welcome when he visited Japan, including the “Order of the Rising Sun” from the emperor. And more recently, China has shown the way with a substantial portion of foreign exchange funds being used to acquire foreign competitors in technology industries, including the semiconductor industry. Since June 2014, Chinese entities have made 17 acquisitions across different levels of the semiconductor industry value chain, with the most notable target being China’s government-backed Tsinghua Unigroup’s $23 billion bid for Micron Technologies in July 2015.

8) Remember, the enemy of my enemy is my friend.

When you’re attacking the technology leader, don’t forget that other nations may want to ally with you, if for no other reason than because their noses got bent out of joint at losing innovation-based competitive advantage from another nation. So if you play your cards right, you can get other nations to align with you in a joint effort. Don’t worry, since they lost to the leader the first time, they are hardly likely to beat you. So after you have used them to gain global market share, you can dominate the rest of the world, including the technology leader. Japan figured this out in the 1970s. After Europe tried and failed to create a viable competitor to IBM in the mainframe business, they turned in frustration to Japan in the 1970s and 1980s, hoping, in vain as it turned out, that this partnership would give them a leg up. In fact, all it did was allow Japan to take a bigger share of the European market.

9) Play the leading companies off against each other.

Lenin once famously stated: “The capitalists will sell us the rope with which we will hang them.” Today, many leading companies in market-oriented economies will cut deals with you in order to hurt their domestic competitors. You can take advantage of that vulnerability buy playing them off against each other. They think they are getting the advantage because they are hurting their domestic competitors, but when everyone is hurting everyone else, the only winners are the companies in your country. Just look to China, which is pressuring a variety of U.S. technology firms to turn over technology that is not central to their competitive advantage, although it is to their U.S. competitor. If only one U.S. firm did this, then only one U.S. firm would be hurt. But when many U.S. firms do it, it turns into a circular firing squad, with the Chinese competitors the winners.

10) When in doubt, steal.

If you have tried all the above machinations and your PM is still on your back, you have one more card to play: theft. In other words, just go out and steal foreign IP. Get yourself some good industrial spies. Japan figured this out early when seven employees of Hitachi, a leading mainframe computer maker, attempted to steal IBM’s software. Bribery works too. The Chinese did this in order to get key IP from Boston-based American Superconductor (AMSC), which provides software, design, and hardware solutions for wind manufacturers and energy providers. American Superconductor’s top customer, the Chinese-based wind turbine manufacturer Sinovel Wind Group, payed an AMSC employee to steal proprietary power-converter and control-systems software, which it then used illegally in its wind turbines to meet electricity grid standards. The only problem with this tactic is that you might get caught, as Hitachi and Sinovel did.

If you do get caught, make sure the case is tried in your own domestic courts so you can insure that the violators just get a slap on the wrist. Like what happened to Guangzhou Wuyang Steel Structure Corporation, which was found to have systemically used pirated copies of U.S. software from three companies and got fined just 1.3 million yuan ($198,000), much less than the actual value of the software it pirated.

However, one pretty foolproof way to not get caught is through cyber theft. Support hackers in your country, perhaps even in your military, to hack into the corporate computers of all the leading tech companies that compete with your national champions. Then turn over the treasure trove of IP to them. Just like China reportedly did to Nortel Networks, the once giant Canadian maker of telecommunications equipment that had its computer systems penetrated as long ago as 2000, with technical papers, research and development reports, business plans, and employee emails being sent directly to addresses in Shanghai and Beijing. And don’t forget: If the leading tech countries accuse you of theft, just deny.

China is the leader when it comes to IP theft. According to the IP Commission Report on the Theft of U.S. Intellectual Property, China accounted for nearly 80 percent of all IP thefts from U.S.-headquartered organizations in 2013, amounting to an estimated $300 billion in lost business annually.

Should you have any moral misgiving about stealing other people’s IP, just add to your reading pile any of a number of United Nations Conference on Trade and Development reports about how intellectual property laws are a plot by the “North” to keep the “South” in poverty. Also, don’t forget to enlist liberal apologists in developed nations whose allegiances are with developing nations like yours rather than with their home country or with the goal of maximizing global innovation. Why don’t you send a note to U.S. economist Joe Stiglitz, for example; he might write an op-ed criticizing U.S. tech companies for not sharing their technology for free to help the world’s poor. But whatever you do, don’t let Stiglitz know you are doing this to enable your firms to dominate global markets and put U.S. workers out of work. Tell him it’s only to give your impoverished consumers low prices.

Finally, a note on process. Much of what you want to do to implement an innovation mercantilist agenda is problematic with respect to the WTO. Not that you have to worry too much; the WTO has become largely toothless with regard to these kinds of non-tariff innovation mercantilist practices. But, better to be safe than sorry. So, first order of business is “don’t be transparent.” That can only lead to depositions in Geneva. You can learn from China here. For example, in October 2011, the USTR identified some 200 unreported subsidy measures that China has maintained since 2004 without public notice through the WTO. And as U.S. Trade Representative (USTR) notes, China “still does not appear to notify all new or revised standards, technical regulations, and conformity assessment procedures as required by WTO rules.” As USTR explains, China’s WTO notifications have “rarely included measures from other agencies that appear to require notification, such as the Ministry of Health, the Ministry of Industry and Information Technology, or the Ministry of Environmental Protection … China’s TBT [technical barriers to trade] measures continue to enter into force without having first been notified to the TBT Committee, and without foreign companies having had the opportunity to comment on them or even having been given a transition period during which they could make necessary adjustments.”

And above all don’t put things down on paper. For example, while foreign firms and governments complain that the Chinese government requires tech transfer as a quid pro quo for investment in China, the Chinese government can simply retort “show us the law or rule that says this.” And the foreign governments usually can’t because this is all done informally. Likewise, when the Chinese government was pressured on indigenous innovation product catalogues (a scheme to force foreign tech firms to turn over IP in exchange for the right to sell to the government and SOEs), the central government instructed the provinces to stop talking about the policy and not put anything down on paper. Well played, China. For there are no pesky written rules that can come back to bite you in Geneva, only a well understood, informally communicated quid pro quo.

Now that you’ve got these steps down, tomorrow I will explain how you can get away with all of this and why no one will notice your innovation mercantilist ways!

Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation, a think tank focusing on the intersection of technological innovation and public policy.