Why the Entry Regulation of the China Mobile Phone Manufacturing Industry Collapsed: The Impact of Technological Innovation on Institutional Transformation

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Coase Conference: Markets, Firms and Property Rights: A Celebration of the Research of Ronald Coase, University of Chicago Law School. Zhimin Liao, Coase Institute Fellow and currently an L.L.M. candidate at Harvard Law School (2009-2010), Xiofang Chen, Coase Institute Fellow and Ph.D. candidate at Renmin University of China (2008-2011).

This case study aims to explore an interesting puzzle: why the license regulation in China’s mobile phone production industry, which generated large rents for an once powerful interest group, was suddenly eliminated. In 1998, a strict entry licensing regime was imposed on China’s mobile phone manufacturing industry. The stated objective of the regulation was to protect domestic corporations from foreign competitors and to prevent waste from duplicate investments. This regulation brought huge rents to these protected state-owned enterprises (SOEs) and to the Ministry of Information Industry (MII), which both regulated and controlled them. Some SOEs with MII licenses did not even produce mobile phones, but they earned billions of RMB each year by leasing licenses to mobile phone manufacturers. Surprisingly, in 2005 the licensing regulation was relaxed, and many new mobile phone manufacturing licenses were granted to newcomers. Two years later, the licensing regulation was formally eliminated. Why was the regulation eliminated? The stated reason was that China’s domestic mobile phone producers had become strong enough not to need protection any more. But our research suggests that the licensing regime was eliminated because technological innovation had increased the enforcement cost of the licenses to the point where the monopoly became of little value to the SOEs and the regulator.

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