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System Dynamics Modeling of High Technology Industry
Development in China
Qingrui XU’, Jingjiang LIU ?, Shouqin SHEN *
1 Research Center for Innovation & Development, Yuquan Campus,
Zhejiang University, Hangzhou 310027, P.R.China
Tel: +86-571-87951886 Fax: +86-571-87951886
1B-mail: sbaxuqr@ dial.zju.edu.cn
°E-mail:loginchance@ sohu.com
’Department of Finance, Yuquan Campus, Zhejiang University, Hangzhou
310027, P.R.China
Tel: +86-571-87951886 Fax: +86-571-87951886
3E-mail: sbaxuqr@ dial.zju.edu.cn
Abstract
High technology industry is a complicated, multiple information feedback and non-linear
system. Its developing process includes the interaction of many factors from the interior and
exterior of the system. The dynamics of high technology industry development (HTID) in the field
is influenced by a series of factors. The motivation that drove the effort to study the dynamics of
HTID is to analyze two issues: (1) How corporate R&D intensity, and the proportion between
corporate internal R&D fee and technology import fee have effect on HTID; (2) How the behavior
patterns of government have influence on HTID. To analyze these issues, a formal model ----
HTID SD model was built. The main conclusions are as follow: (1) At the different stage, Chinese
government should choose appropriate behavior pattern. (2) During the transitional economy, the
main work of Chinese government should create favorable entrepreneurial environment; offer
policy and regulation to minimize institutional obstacles of firms’ innovation.
Keywords: System Dynamics, High Technology, Industry, Policy Analysis
Introduction
In the system dynamics (SD) field, the single most powerful way of
understanding the behavior of a system is the creation of simulation model. The
power lays in the capability of taking into account the interactions of all variables in
the model at the same time. Therefore, practitioners in the SD field must determine
the underlying structure of the system, grasp it and build a model that conveys the
behavior of the real system. In order to construct a model to analyze high technology
industry development (HTID) in the SD field, this paper follows the SD modeling
process (Saeed, 1992).
High technology industry is a complicated, multiple information feedback and
non-linear system. Its developing process includes the interaction of many factors
from the interior and exterior of the system. The dynamics of HTID in the field is
influenced by a series of factors. An investigation according to 20 experts and
professors in America (see Fig.1) indicates that the most correlative factors in tum are:
entrepreneurs; innovation culture; research-oriented university; favorable habitation
and environment of working; venture capital; visionary venture capitalist; mobile
labor; and well-done service agencies, etc.
: J
AF
3 T I ] Factors
c = J A entrepreneurs
bw D B innovation culture
g E C_ research-oriented university
E D favorable habitation &
6 environment of working
H E venture capital
F visionary venture capitalist
0 20 40 60 7
G_ mobile labor
percent 4
well-done service agencies
Oo % of respondents indicating the most correlative factors of HTID
Fig.1 The key successful factors of HTID
Generally speaking, 8 factors in the Fig.1 are also the key successful factors of
China’s HTID. In China, however, these 8 factors are influenced by the behavior
patterns of government that have a strong impact on institutional environment of
HTID. Meanwhile, intensity of corporate R&D makes a great impact on HTID
because of low technological innovation capabilities of Chinese firms. It’s necessary
to think fully of the complicacy, non-linearity and dynamic of this system during the
research on the policies of HTID. The motivation that drove the effort to study the
dynamics of HTID is to analyze two issues: (1) How intension of corporate R&D, and
the proportion between corporate intemal R&D fee and technique import one have
effect on HTID; (2) How the behavior patterns of government have influence on
HTID. To analyze these issues, a formal model- HTID SD model was built.
High Technology Industry Development System Dynamics Model Overview
The objective of HTID is to transform intellectual resource into science and
technology one, and furthermore transform the later into high technology industry that
can cultivate a large number of high technology - centered corporation. HTID system
can be treat as an “input - process - output” system. It includes many elements or
factors as follow: entrepreneurs, venture capital, research - oriented university and
science - technology organizations (technology and person with ability), corporations,
institution and environment such as goverment (government institution), market
(market mechanism), entrepreneurial environment, innovation culture, habitation and
environment of working and so on. These elements or factors interact each other, and
make a more or less impact on the high technology industry performance by
innovation integration and industrialization. To gain the most satisfactory HTID
performance, these elements or factors must be effectively and efficiently combined
and matched by means of technological innovation, organizational innovation,
institution innovation and culture innovation. So the basic logical structure of HTID
SD model is built (see Fig.2). Based on this, the cause and effect diagram of HTID
SD model is constructed (see Fig.3).
Venture Research- oriented university
H > > High technology
. ie . industry
capital and science-tech organization Technological, fo
<> erformance
Organizational, is
Fund Technology and 7
7 Institution and A
people with ability culty
ulture
i: innovation
x f t [¢>) industrialization
Entrepreneurs Corporations <
yy : ’
Entrepreneurial environment
Innovation culture
Government [q yi Market ley
Habitation and environment of working
Fig.2 The basic logical structure of HTID SD
tal property right
a Ena i
technology trajectory of industy ——_ HE ecinoloical novation
—_—>,
market capacity’ industy technology select ee
hry poligge a ae ae *Y ‘marketing competence
, technological innovation capital input
Pema high technology industilization
government's R&D input _ op g
high technology industry perf ati od
sh technovogy tndusty Pesformence expedition “high technology indus perfomance
the behavior pattem of gov Ee es an
er, a atration of mechani and environment of —_. education and training system of entrepreneurs
innovation culture
elect ne age —s talent import
knowledge workers’ incentive Palicy
ndusty poli
Aocial security system, ees
a” university role venture capital mechanism
_ between’ 5 and E1
future quafttative ghd quality Tact ine, a ng Venture capital
ccurent quantitative and quality of entrepreneurs(E1)
*
value view of entreprene
growth of entrepreneurs descend of entrepreneurs
fentrepreneurshi
= 9 $$ arent profile,
¢-up enfironment construction
of entrepreneurial ability
\demand gee Bo entrepreneurial opportunty
(
}
fale ofenuepreneusknofledge
~ >
policy aligning risk with reward
supply gene
Fig.3 The cause and effect diagram of HTID SD model
The Behavior of the HTID SD Model
How the Intensity and Structure of Corporate R&D have Effect on HTID
Technological innovation is a bridge to link S&T and economy. It’s the key of
HTID. The two paths to build high technology industry competence are independent
innovation based on internal R&D, and “31”, namely innovation process of
“introduction—imitation—improvement”. To effectively impel HTID, it’s necessary
to balance technological innovation capital between internal R&D and technology
import. Therefore, based on the HTID SD model, how the intensity and structure of
corporate R&D have effect on HTID of City A is observed.
First, it is to analyze how corporate R&D intensity has effect on HTID of City A.
There are 5 schemes by changing technological innovation input capital proportion in
total high technology industry revenues (THTIR): scheme 1 (p=2.5%), scheme 2
(p=3.0%), scheme 3 (p=3.5%), scheme 4 (p=5.0%), scheme 5 (p=6.0%). While
THTIR is independent variable and the other variables hold static, the simulation
result is Fig. 4.
THTIR
(10° yuan) 9 eae ~| —
1049
1999 2001 2003 2005 2007 2009 2011 2013
Time (Year)
scheme 1:
scheme 2;
scheme 3:
scheme 4;
scheme 5:
Fig.4 Technological innovation capital input proportion effecting THTIR
According to Fig.4, THTIR will increase faster with the increase of technological
innovation capital input proportion, as is consistent with the practice of Chinese HTID.
For example, the lower R&D intension in Hangzhou contributes to the lower HTID
speed, while the higher R&D intension in Beijing and Shenzhen leads to the relative
higher HTID speed. Therefore, it is of great significance for Chinese corporations to
improve the R&D intensity.
Second, how the proportion between corporate internal R&D fee and technology
import one has effect on HTID of City A is observed. In 1997, the technology import
capital of City A is about 0.84 billion yuan, accounted for 2.1% of THTIR; the internal
R&D capital is about 1.54 billion yuan, accounted for 3.8% of THTIR. While the total
technological innovation capital input proportion of HTID is 5.9% and the proportion
between corporate intemal R&D fee and technology import one is modified, the
simulation result is Tab.1.
Tab.1 The proportion between corporate internal R&D fee and technology import effecting HTID
Internal R&D | Technol ogy 1/0 THTIR (10° yuan)
(h) import (%) 1997 1998 1999
I 0
5.9 0 ae 343 01 736
5.0 0.9 5.5: 1 391 617 943
4.5 1.4 3.2: 1 715 1038 1624
4.0 Lyf Didssy | 429 826 1347
3.8 rea 1. Sel 406 687 1049
33 2.6 1.3: 1 384 642 901
2.5 3.4 1: 1.4 328 519 865
2.0 3.9 1, 1.8 293 486 697
1.0 4.9 1: 4.9 205 361 509
0 5.9 ae 184 278 367
According to Tab.1, THTIR can reach tiptop when the proportion of
technological innovation input capital between internal R&D and technology import
is 3.2:1. When internal R&D input proportion range from 3.8% to 5.0% and
technology import from 0.9% to 2.1%, THTIR is relative higher. If I/O=5.5:1, THTIR
descend and its growth gets slow. It indicates that completely depending on internal
R&D without timely and effectively absorbing advanced technologies cannot promote
HTID.
How the Behavior Patterns of Government have Influence on HTID
The practice of HTID all over the country shows that only market mechanism is
insufficiently effective to develop high technology industry. Appropriable behavior
patterns of government, which is integration of government's policies and actions for
accelerating HTID, also are important forces of HTID. As a whole, the behavior
patterns of government developing high technology industry can be sorted into highly
concentrating mode (directly goverment controlling mode, named “pattem a” ),
multiply dispersing mode (indirectly government controlling mode, named “pattem
b” ), and concentrative harmonizing mode (combining collective management with
disperse management, or combining government with market, named “pattem c” ). At
the different stage of HTID, the specific content of the behavior patterns of
government is different.
Firstly, how at the preliminary stage of HTID the different government behavior
patterns have effect on HTID is observed. While THTIR is independent variable and
the other variables hold static, the simulation result is Fig. 5.
3302
THTIR = 2302
(10° yuan) =
—
1302 aa
pe}
302
1995 1997 1999 2001 2003 2005 2007 2009
Time (Year)
pattern a:
pattern b:
pattern c:
Fig.5 The different government behavior patterns at the same stage (preliminary stage) effecting HTID
Fig.5 indicates that the different government behavior patterns at the same stage
(preliminary stage) have distinct effect on HTID.THTIR can grow rapidly by pattern a
in the short term, but it will falls speedily when it arrives at the top. THTIR grows
slowly by pattern b. Although THTIR grows by pattern c more slowly than it by
pattern a, but THTIR can grow rapidly by pattern c in the long term. According to
situation of Chinese HTID, the pattern c is the best choice.
Second, how at the different stage of HTID pattern c has effect on HTID of City
B is analyzed. Patten c can be further subdivided into two sub-patterns, namely
pattern cl (give priority to governmental adjustability) and pattern c2 (give priority to
marketing adjustability). The process of HTID is divided into four stages, namely
preliminary stage, prophase of growth stage, metaphase and anaphase of growth,
mature stage. So 16 portfolio strategies can be gotten (see Tab. 2). The process of
HTID of City B can be divided into the above 4 stages (see Fig.6). While THTIR is
independent variable, and the other variables hold static, and 16 portfolio strategies
are simulated respectively, the simulation result is Tab.2.
1990 2010 2020 2040
embryo stage preliminary stage prophase of -—_-metaphase and mature stage
growth anaphase of
stage growth
Fig.6 The process of HTID of City B
Tab.2 shows that the fourth portfolio strategy (D4) is the most feasible. So at the
preliminary stage and prophase of growth stage, it should give priority to
concentrating management of government that can impel the industrialization process.
At the metaphase and anaphase of growth stage and at the mature stage, it should give
priority to market adjustability and the government behavior pattem should
harmonizing management- oriented.
Tab.2 Portfolio strategies of pattern c and their simulation result at the different stage of HTID
Portfolio Preliminary stage Growth stage Mature stage
strategies Prophase | Metaphase and anaphase
D1 Cl Cl Cl Cl
D2 Cl Cl Cl C2
D3 Cl Cl 7} C1
D4 Cl Cl C2 C2
D5 Cl C2 Cl C1
D6 Cl C2 Cl C2
D7 Cl C2 C2 Cl
D8 Cl C2 C2 C2
Dg C2 Cl Cl Cl
D10 C2 Cl Cl C2
Dit C2 Cl C2 Cl
D12 C2 Cl C2 C2
D13 C2 C2 Cl Cl
Di4 C2 C2 Cl C2
DIS C2 C2 C2 Cl
D16 C2 C2 C2 C2
Conclusion
The main conclusions are as follow: (1) In the whole process of HTID, the R&D
fund should be increased step by step. Based on technology trajectory of HTID and
market competition, the proportion between intemal R&D fee and technology import
fee should be made reasonable changes. There are two strategies for cultivating and
enhancing high technology firms’ technological innovation capability. As is shown by
Fig.7, one is technology import/improvement; the other is endogenetic innovation. (2)
At the different stage, government should choose appropriate behavior pattern. At the
start-up phase and the prophase of growth stage, it should give priority to centralized
management. It can impel the industrialization process by increasing governmental
organization and intervention. At the metaphase and anaphase of growth stage and at
the mature stage, it should give priority to market adjustability and governmental
behavior should give priority to harmonizing management. (3) During the transitional
economy, the main work of government in China should create favorable
entrepreneurial environment; offer policy and regulation to minimize institutional
obstacles of firms’ innovation. Currently, it is necessary for government in China to
integrate innovation resource for the purpose of impelling the great industrialization
project and the important construction of industrial base.
Strategy 1
High-tech firm md Technology import/improvement L—p © Technology diffusing
@ Industrialization
Marketing 4
Strategy 2
> > p) © Technology diffusin
| High-tech firm R&D Endogenetic innovation uN 4
@ Industrialization
Marketing j
Fig.7 Two Strategies
References
Lihong Guo, et al., 1999, High Technology Industry: Development Laws and Venture Capital,
Beijing.
Qifan Wang, 1990, System Dynamics, Higher Education Press, Beijing.
Qingrui Xu, 2000, Research, Development and Technological Innovation Management, Higher
Education Press, Beijing.
Saeed. K. 1992, Slicing a Complex Problem for System Dynamics Modeling, System Dynamics
Review 8(3): 251-261.
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