Why the Entry Regulation of Mobile Phone Manufacturing in China Collapsed : The Impact of Technological Innovation

This paper analyzes why an entry regulation that generated large rents was abruptly abolished. We argue that the rents supporting the regulation dissipated because a new technology encouraged illegal entry by raising the cost of enforcement. In 1998 China introduced a licensing system for the manufacturing of mobile phones. This created large monopoly rents for those who received the licenses. Later, in 2003, an integrated chip was invented that significantly lowered the costs of manufacturing mobile phones. Immediately thereafter, thousands of unlicensed manufacturers started producing mobile phones. The manufacturers who had been earlier licensed suffered large losses from this competition, and many went bankrupt. The new chip technology raised the cost of enforcement by making entry extremely cheap. The regulator turned to local governments and telephone network operators for assistance in suppressing the illegal phones, but both groups did not cooperate because they benefited from the flourishing illegal phone industry