Feng Fei& Wang Xiaoming

Currently, a new investment wave sweeps across various parts of the country. But overall, these places still do not have a profound understanding of the laws governing the development of strategic emerging industries. Their actions and their results are short of expectations. Some of them have even paid heavy prices. For this reason, China should deepen its understanding of the laws governing the development of strategic emerging industries and focus its energy on the innovation of technologies, commercial models, and systems and mechanisms.

I. Understand Laws Governing Initial Development of Strategic Emerging Industries

In general, the lifecycle of an industry comprises three stages: takeoff, growth and maturity¹. And the development of a strategic emerging industry has to experience four stages: knowledge, technology, product, and industry. While strategic emerging industries are mainly driven by innovations, the lifecycle of technologies determines the lifecycle of industries. As a result, the development of strategic emerging industries observes laws that are distinctively different from those governing the development of traditional industries, and the takeoff stage also has features different from those in the growth and maturity stages.

In the takeoff stage, a strategic emerging industry has four distinctive features. One, technological innovation is highly active. On the one hand, the leading technology path is still unclear and faces diverse options. For example, a new-energy vehicle can be an electric one, a fuel cell one or a plug-in hybrid one. A solar cell can be a crystalline silicon one, a thin film one, or a photovoltaic/thermal one. In short, the leading technology remains uncertain. On the other hand, subversive innovation appears one after another, each causing "innovative damage" to the former and turning the original production capacity into nonperforming assets within a short time. Failure to control core technologies and emphasis on investment expansion and project attraction often amplify technological risks.

Two, real demand is limited despite huge market potential. There are several reasons. First, some sectors require supply to create demand. In other words, only when effective supply is provided can demand be formed (e.g., the Internet of Things). Second, when an emerging product replaces a traditional one, it will encounter market barriers such as the near-perfect properties and sound service facilities of the traditional product (e.g., when electric vehicles replace gas fuel vehicles). Third, the cost of an emerging product in early marketization is rather high and less competitive under the existing market rules (e.g., new energies).

Three, the change of industrial organization and structure is dramatic. In the takeoff stage of an emerging industry, innovative enterprises are small and highly active and large amounts of fundamental innovations come from emerging enterprises. In the United States, the information revolution beginning in the 1990s can serve as the most convincing evidence. Microsoft, Cisco and Yahoo took only a few years to become world IT giants from the scratch. On the other, industrial chain still has no clear division of labor, and enterprises must solve all problems appearing in the whole process of product production. Therefore, vertical integration is the leading corporate organization in this stage, which can hardly form economy of scale and cannot blindly pursue scale. Besides, investments tend to come in swarms due to the enormous temptation of new market opportunities.

Four, systems and mechanism need to be innovated. The appearance of an emerging industry represents a challenge to both the vested interest groups and the existing systems. In the early 1990s, for example, the new-energy vehicles in the United States were blocked by the three auto giants and the IT revolution also posed a challenge to the regulatory system of the telecom industry.

In short, whether a strategic emerging industry can grow depends on two factors: the development of technologies and the conversion of research results, and the growth of innovative emerging enterprises.

II. Focus on Technological Innovations

The features of innovation driving and the technological uncertainty in the takeoff stage determine that the development of a strategic emerging industry should never overemphasize scale and speed and bet all stakes on an unclear technology. Vying for investments and projects is extremely risky. Instead, emphasis should be placed on seeking technological breakthroughs and core technologies. At present, all other leading economies are emphasizing the development of technologies when they develop emerging industries, and are calling them "emerging technologies" or "emerging industries and technologies". We suggest the 12th five-year plan should replace the term "strategic emerging industries" with the term "strategic emerging industries and technologies" so as to emphasize the importance of technologies.

In this respect, two new policy approaches may be introduced:

One, open industrial innovation alliances should be established. Internationally, major industrial technology innovations mostly come from innovation alliances. This is because major innovations involve multiple disciplines. In China, alliances can play unique roles in integrating economy with science and technology and in boosting corporate innovation capacity. The formation of innovation alliances requires government guidance and the involvement of enterprises and research institutions. Alliances must form mechanisms for interest and risk sharing and refrain from being alliances in the nominal sense. Alliances must also be open, instead of being closed such as those established by competent government departments according to administrative jurisdictions or administrative divisions. They must be open to private enterprises and even to foreign-invested enterprises or research institutions.

Two, demand-end innovations should be encouraged. In the takeoff stage of a strategic emerging industry, the government may have charted the leading technological path, instead of adopting a neutral technological policy, for some sectors. But technological risks still exist. This requires that demand-end innovations should be encouraged. In the supply end, a specific technology may have not yet been included in the scope of government support. But once this technology is developed, the government can support it with technology purchase, application demonstration and other policy tools. Besides, the government can also help solve market entry difficulties by adopting demand-end measures such as demonstration, popularization and purchase subsidy.

III. Emphasize Innovation of Commercial Models

For a technology to become a product and an industry, both technology and commercial model must be innovated. Without a good commercial model, an advanced technology cannot become a major industry. And the opposite is often true. For example, contract energy management has developed into a brisk energy-saving service industry simply because this commercial model can bring benefits to both users and energy-saving service companies.

Currently, commercial model innovation is badly needed for many strategic emerging industries. For example, the Internet of Things industry in its early development stage requires demonstration and application in the public sector. But more importantly, it requires the innovation of commercial models so that the industry can form a virtuous circle. Besides, the recharging model of electric vehicles also requires the innovation of commercial models. The innovation of commercial models relies mainly on market and requires corporate creativeness. The government should unequivocally encourage the innovation of commercial models, create a liberal atmosphere and environment, and remove market access barriers, industrial barriers and industrial monopoly barriers.

IV. Emphasize Innovation of Systems and Mechanisms

The development of strategic emerging industries faces many system and mechanism barriers. Some of these barriers are fatal, due to the amplifying effect of the existing system and policy defects and the challenges from new technologies. So the relations between government and market must be correctly handled. In particular, the government cannot take everything onto itself and should pursue progress step by step. The development of strategic emerging industries should be combined with system reform and system innovation. The systems and mechanisms required for the development of strategic emerging industries should be taken as an experimental field for a deeper reform of the administrative system.

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¹The A-U product lifecycle theory was put forward in the 1970s by William J. Abernathy of Harvard University and Professor James M. Utterback of Massachusetts Institute of Technology.