Help US Companies Compete Against China on Technology Standards
The Chinese government has made leadership in international technology standards setting a key priority and it is working to give their firms an unfair leg up. While the U.S. government needs to defend the current voluntary, industry-led standards process in the face of this unfair competition, they also need to play a more active helping role. To do that Congress should modify the research and experimentation tax credit to allow international standard setting costs to qualify as expenditures for purpose of the credit. This will help U.S. firms better afford standards setting activities, helping them win over China.
Standards are universal technical specifications agreed to usually by commercial actors, and sometimes involving governments and non-governmental organizations. The standard-setting process is a voluntary one, typically conducted on an international basis and led by industry. The spirit and intent of standard-setting is based on technological merit; the best technology is chosen as standard.
When standards are global, they underpin interoperability around the world and facilitate trade. Think, for example, of how one can seamlessly use a new smart phone almost anywhere in the world. A concerted effort toward standardization eliminated the need to swap SIM cards to connect to another country’s cellular network. At the same time, charging that phone abroad is likely to require an adapter to fit one of the 15 wall socket designs in use internationally because electric plug standards were developed before global standards were the norm.
Standards are also important to individual companies. Being the developer and owner of technology that becomes a standard helps to grow and protect a company’s market share. And licensing revenue provided by other companies to use that technology is an important source of cash that is often used to recoup R&D investments.
But what makes standards and the standard-setting process even more important now is the geopolitical context. Technology is the main enabler of economic, political, and military power. Technological leadership, including in standard-setting, is of outsized importance for a country’s ability to gain and retain influence. The leadership in Beijing recognizes this and is attempting to shape standard-setting in its favor to gain global competitiveness for its firms. Chinese industrial policy melds the interests of the state with that of industry, and Beijing’s strategy for standards means that technological merit is less important than having a Chinese firm set the standard and reap the rewards.
To accomplish this, Beijing is putting growing sums toward standard-setting activities to ensure active participation of Chinese companies in standard-setting activities and tainting the integrity of international standard-setting with bloc voting — where Chinese firms are ordered by government officials in advance to back a specific company’s technology.
Having such practices take root and become widespread carries major risks for the governments and private sectors of the techno-democracies. Most immediately, it puts non-Chinese firms, and their workers, at a competitive disadvantage. Longer term, it erodes these companies’ innovative capacity by eating away at revenue streams needed to fund R&D. There is also a challenge to democratic governance. Beijing doesn’t just export technologies; its concept of techno-authoritarianism is inextricably linked with commercial activity. Chinese firms are an extension of the Chinese Communist Party and Beijing uses technology sales abroad to set norms for technology use, such as for mass surveillance and censorship. Abusing global standard-setting processes thus enables creeping authoritarianism worldwide.
Even highly profitable large U.S. firms, not to mention less profitable small and medium sized firms can have a hard time competing with Chinese-backed firms on standards setting processes. As such, there is a strong case for the federal government to support standards participation by firms. Even in the absence of the China challenge, government support of private sector standards efforts can address a key market failure. The fact that standards are a public good that the entire ecosystem benefits from, firms that participate only receive some of the benefits and therefore underinvest relative to what is societally optimal. As one study concluded: “there is a strong case for government activity to keep the stock of standards up to date and in good order, and this case rests on both the market failure and system failure rationales.”
Ensuring that the open, voluntary and industry-driven standards process prevails over China’s “standards mercantilism” will require action along a number of fronts, including providing financial support for companies to participate in the international standards process. This is because it is costly for companies, especially small- and medium-sized companies, to participate in international standards setting process. One estimate is that it costs a company $300,000 per year for an engineer to work on international standards.
There are two main ways this could be done: grants and tax incentives. The challenge with grants is that process is likely to be time consuming and cumbersome. A better way would be for Congress modify the research and experimentation tax credit to allow legitimate international standard setting costs to count as qualified expenditures under the credit. Given the fact that the United States R&D tax credit ranks just 32nd out of 34 comparable OECD and BRIC nations in tax incentive generosity, such a change would start to close the innovation policy gap between the United States and major competitors, while helping to ensure that U.S. companies don’t lose to China in the standards wars.
Robert Atkinson is President of the Information Technology and Innovation Foundation.
Martijn Rasser is Senior Fellow and Director, Technology and National Security Program, at the Center for a New American Security.
