“Building an Innovative Society”

Remarks to the
China-U.S. Innovation Conference
Beijing, China
December 10, 2007

As Prepared

Thank you for that kind introduction, Frank. I would like to thank the Ministry of Science and Technology for co-hosting this conference with the U.S. Departments of Commerce and State. I would also like to express my appreciation to the U.S. Chamber of Commerce and the U.S. Information Technology Office for their assistance.

China has a long history of innovation going back to ancient times. From gunpowder to the magnetic compass to the everyday umbrella, Chinese innovators and entrepreneurs have long contributed to the world economy. Today, in the 21 st Century, China stands poised to make new and important contributions, and to benefit greatly from the innovative technologies that the world has to offer.

Innovation doesn’t just happen; it arises from a combination of important societal factors including a strong education system that rewards independent thought, good protection for intellectual property rights, open competition, and market-based technology standards. Many today wonder what the right mixture of government policies will be for China to foster innovation in its economy.

As China considers its path, it has many models to choose from, and many models to avoid. Indeed, there are several other countries in East Asia that have not always allowed the market to determine what technologies are available to consumers, and that believe innovation should be driven chiefly by government, not entrepreneurs. They have restricted foreign participation and investment in their economies, have not been open to vibrant trading relationships, and have adopted policies designed to promote national champions in key technology sectors.

I would argue that China’s remarkable economic success to date has been driven by its decision not to mimic these economies, with their miniscule amounts of foreign direct investment and their unique, non-interoperable standards on everything from cell phones to automobiles. China’s policy of encouraging and welcoming foreign participation in its economy has been the single most important factor in one of the most remarkable economic and social transformations in human history. To turn away from that path now would be a costly mistake, because economic openness is vital to fostering an environment in which innovation can thrive.

Industrial policy

Innovation cannot prosper if it is centrally directed by government policymakers, or is impeded by artificial boundaries that interfere with the free flow of ideas across borders. When governments use industrial policies to pick and choose which ideas, products, and companies can compete, history shows that the result is technological and economic stagnation. Industrial policy means that government officials, rather than innovators, imagine a possible future and then direct economic resources to achieve that future. There are countless examples of government industrial policies that tried to direct and manage innovation, from France’s Minitel terminals to Malaysia’s auto industry. There are few examples of such policies succeeding.

We all know that resources for innovation are limited, so the question is whether government or the market is most efficient at distributing those resources. It is also a concern when governments try to mandate “self-reliant innovation” that attempts to discriminate against foreign technology, such as business software. If the market is allowed to determine the use of R&D resources, and customers are permitted to buy whatever products they want, resources and innovative products flow more quickly and efficiently. You will hear today from many companies in many industries tell you how they rose from humble beginnings to become world-class innovators because they were left alone by government to create products that met customer demands.

Market-Driven Technology Standards

In the Joint Commission on Commerce and Trade (JCCT), we have talked often with our Chinese colleagues about the importance of government staying strictly neutral in the market’s choice of technology standards. I’ve just come from Japan, which is one of the only countries in the world where I can’t use my cell phone or my Blackberry. Why? Because many years ago the Japanese government encouraged a unique cell phone standard that it hoped would enable Japanese companies to dominate the world market. Instead, the result has been to isolate Japan from globally interconnected cell phone networks.

Government-encouraged standards, proposed with the best of intentions, undermine innovation. Instead, consumers should be able to choose from a number of competing technologies, driving companies to develop products that are faster, cheaper, and more efficient. Several years ago, the JCCT addressed the issue of standards that would have limited the spread of Wi-Fi technology through a government mandated, China-unique standard. Today, many American companies have expressed concern about a possible standard for cell phone batteries that would make it impossible for Chinese consumers to buy the hottest personal cell phones on the market. We will continue to work cooperatively with our Chinese counterparts to discourage such discriminatory technology standards.

Intellectual Property Rights

Engraved on the side of the Commerce Department building in Washington is a quote from President Abraham Lincoln, who said, “The patent system added the fuel of interest to the fire of genius.” What Lincoln meant was simple: protecting the rights of inventors creates a strong economic incentive for further innovation. Without government protection of intellectual property rights, genius is not rewarded – it is robbed.

We have all seen counterfeit products sold on the street and over the Internet. Some have mistakenly argued that counterfeiting is a crime without victims; a harmless way to save a few dollars on a handbag, a pair of sunglasses, or a piece of software. But the world is now beginning to understand the dangerous consequences of counterfeit materials and components making their way into products such as toys, food, pharmaceuticals, autos, and electronics. Counterfeiting doesn’t just erode consumer confidence – it can put consumers in mortal danger.

Innovative societies cannot develop when consumers aren’t willing to take a chance on the latest innovations because they’re worried about their safety. Enforcing intellectual property rights provides entrepreneurs with economic incentives to innovate, and also provides consumers with the confidence to welcome those innovations into their homes and workplaces.

Conclusion

China stands poised to develop into an even more innovative and advanced technological society. Its young people are typical “early adopters” of innovative technologies, and its companies seek out ways to produce more efficiently. China’s government must play a vital role in all this by vigorously enforcing rules to protect intellectual property rights. Beyond setting in place that basic architecture of IPR protection, it is tempting for government officials to want to do more, such as picking and choosing companies for favorable treatment, or mandating certain technology standards.

But we in government need to understand that the best way to encourage innovation is generally to leave it alone. I hope that China’s leaders will see the value in protecting IPR, and in promoting innovation through free markets, as the best way to achieve their vision for a prosperous and innovative Chinese society. Americans do not fear such a future; we would welcome it.

Thank you.