Catch-Up by Indigenous Firms in the Software Industry and the Role of the Government in China: A Sectoral System of Innovation (SSI) Perspective

Abstract

This paper analyzes the market and technological catching-up of latecomer firms in two IT service sectors from a sectoral systems of innovation (SSI) perspective. It finds that indigenous software firms in China have selected different learning and catch-up strategies in the different technological regimes. For the online game sector where imitation is easier and incremental innovation is more important than radical innovation, these Chinese firms started with handling the publishing (or distribution) of games developed by foreign incumbents, and later on secured in-house game development capabilities by imitating the products of global leaders. In the applied software sector where both imitation and creative innovation are difficult, Chinese firms attained third-party technologies through M&As, and then differentiated their products by taking advantage of local specificities. However, such learning and acquisition would not have led to commercial success without government regulation against foreign companies, such as business restrictions in online games and exclusive procurement for indigenous products in applied software. Thus, this study underscores the importance of government and regulations in playing the role of “artificially opening” another window of opportunity for latecomers.