Chinese Mrkt

PTC’13 Proceedings

DIFFUSION AND EFFECTS OF CLOUD COMPUTING IN CHINA: ECONOMIC AND INSTITUTIONAL CONSIDERATIONS
Nir Kshetri The University of North Carolina—Greensboro, USA

ABSTRACT China has a stronger ecosystem developed to support the cloud computing industry than most other emerging economies. Cloud players in China are also playing visible roles that have potential to shape the global cloud standards. This paper seeks to understand the economic and institutional factors that affect the diffusion and impact of cloud computing in China. Implications are discussed. KEYWORDS: Cloud computing, China, mobile healthcare, institutions, externalities, supercomputing industry 1. INTRODUCTION China is witnessing a rapid diffusion and development of cloud computing (hereinafter: cloud). According to CCID Consulting, China's cloud market was over US$1.5 billion in 2009, which will reach US$10 billion by 2012 (China's cloud computing market size to top RMB60.7 bln in 2012, 2011). In 2011, China spent US$286 million on cloud computing infrastructure, which is expected to reach US$1 billion by 2016 (Huang, 2012). One estimate suggested that Chinese companies accounted for 10% of the global investment in cloud computing in 2011. Global and local firms in China have launched or are planning to launch various novel, and revolutionary products and services, which have effectively transformed business models and processes. Among a high profile cloud project in China is a collaboration of IBM and China's information services provider Yi Lian Zhong (YLZ). IBM would build a cloud platform for YLZ to connect to networks consisting of citizens, government agencies, social service providers, medical institutions, private and public organizations, and educational institutions. The platform is expected to facilitate the sharing of public resources and information, support service integration, improve government efficiency and ensure effective administration of citizen services. The services would cover 300 million people (cbronline.com, 2011). Chinese companies such as Huawei, Alibaba Group and ZTE have emerged as a strong challenger to global cloud providers such as IBM, Amazon, and HP, especially in the domestic market (Long, 2012). Analysts suggest that by 2015, China may produce cloud-based software service providers of the same caliber as Salesforce.com (Goodburn & Hill, 2010). This phenomenon fits well with the theory of kaleidoscopic comparative advantage, which argues that “the nature of comparative advantage is becoming thin, volatile, and kaleidoscopic and is creating vulnerabilities for industries, firms and workers”( Bhagwati,1998, 20-21). What is not clear is how Chinese technology firms’ shift into a higher gear is occurring. An objective of this paper is to examine the importance of various economic linkages as well as formal and
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informal institutions in the development and utilization of the clouds in China and the emergence of country’s cloud providers as global players. Before proceeding, some clarifying definitions are offered. Cloud computing involves hosting applications on servers and delivering software and services via the Internet. In the cloud computing model, companies can access computing power and resources on the “cloud” and pay for services based on usage. Cloud industry is defined as the set of sellers/providers of cloud related products and services. Cloud providers deliver value to users through offerings such as software as a service (SaaS), platform as a service (PaaS) and infrastructure as a service (IaaS). SaaS is a software distribution model, in which applications are hosted by a vendor and made available to customers over a network. It is the most mature type of cloud computing. In addition to global cloud players, local companies such as Alibaba offer SaaSbased solutions. In PaaS, applications are developed and executed through platforms provided by vendors. Some PaaS vendors include global players such as Salesforce.com (Force.com) and Microsoft (Windows Azure platform) as well as local companies such as Baidu. For instance, as is the case of the Apple Store, Baidu Yi platform allows third-party developers to create and sell apps. IaaS consists of, inter-alia, server, operating system, disk storage and database. Global providers such as IBM, Vmware and HP and local companies such as China’s Huawei (Huawei data center IaaS) offer IaaS. The paper is structured as follows. It proceeds by first outlining our methodology. Then we provide a review of cloud diffusion in China and related entrepreneurial activities. Next, the drivers of the cloud industry in China are analyzed. It is followed by a section on discussion and implications. The final section provides concluding comments. 2. METHODOLOGY We combine a case study approach with a positivistic epistemology. Given the minute amount of existing research on cloud computing in developing countries, much initial research in this area needs to be qualitative, concept- and theory-building in character. Following the tradition of a positivist approach, this paper seeks to identify details associated with cloud diffusion in China. Relationships between variables presented in Figure 1 constitute a major building block of the theory development process. It should, however, be noted that these relationships do not themselves represent theory. We have provided reasoning and justification for each relationship, which is the crucial part of the theory-development process (Webster and Watson, 2002). We have employed three main sources for the reasoning: theoretical explanations for ‘‘whys’’ and ‘‘hows’’ of cloud diffusion; past empirical findings; and practice or experience (Webster and Watson, 2002). Among these, the logical reasoning is the most important component of our explanations. It represents ‘‘the theoretical glue that welds the model together’’ (Whetten, 1989, p. 491). We have also included past empirical research related to diffusion of ICTs. Next, cloud-related experiences of organizations also form an integral part of the reasoning. Yin (1989) suggests that case studies are epistemologically justifiable when research questions focus on reasons behind observed phenomena, when behavioral events are not controlled, and when the emphasis is on contemporary events. Other researchers argue that
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case method is ‘‘appropriate and essential where either theory does not yet exist or is unlikely to apply, . . . where theory exists but the environmental context is different . . . or where cause and effect are in doubt or involve time lags’’ (Stuart et al. 2002). This study satisfies these criteria. There are persuasive arguments for thinking that cloud research is in an early stage of theoretical development, especially in the context of the developing world. Case-based research requires a sampling approach focusing on theoretically useful cases (Eisenhardt, 1989; Teagarden & von Glinow 1995). In particular, best practices models provide good candidates for a case research methodology (Eisenhardt, 1989; Teagarden and von Glinow 1995). It is worth noting that as a multiple international award winner, China’s model can be considered as a best practice model for cloud deployment in the developing world. 3. A REVIEW OF CLOUD COMPUTING DIFFUSION AND ASSOCIATED ENTREPRENEURIAL ACTIVITIES According to CCID Consulting, China's cloud market is expected to reach US$10 billion in 2012. China's 12th five-year economic plan (2011-2015) predicted that the Chinese cloud market will be between US$119- US$158 billion) by 2015 (Trader, 2012). Some sample examples are considered to illustrate the cloud’s impact on businesses and consumers in Table 1. The country is also planning the implementation of other cloud-based applications such as a food safety cloud to monitor food growers (cncworld.tv, 2012).Cloud-related offerings of Chinese entrepreneurial firms are presented in Table 2. Figure 1 presents a proposed framework for understanding the diffusion and development of the cloud in China. This section focuses on the bottommost box. Figure1, Tables 1 and 2 around here 3.1. CLOUD RELATED ENTREPRENEURSHIP OF CHINESE IT FIRMS AND THEIR CLOUD OFFERINGS Chinese firms have engaged in substantial entrepreneurial ventures to serve the home and the international markets. For instance, Huwai’s global sales of servers associated with the cloud increased by 130% in 2011 (huawei.com,2012). The company’s goal is to increase cloud businesses originated from outside of China from 25% in 2011 to 60-70% in 2012 (Chua, 2011). Likewise, in September 2012, Lenovo announced a plan to buy a U.S. software company Stoneware in order to strengthen its cloud computing (Chan, 2012). Cloud players in China are also gaining increasing prominence. For instance, China Life and the governmentowned telecommunications company, China Unicom are represented in the Intel-backed cloud standards organization--the Open Data Center Alliance (Thibodeau, 2011). Grand projects and investments involving the cloud: Chinese IT players are involved in grand projects and investments. A highly visible example is the state-of-the-art 6.2 million ft2 Cloud Center in Langfang city constructed by IBM and China’s Range Technology, which will be comparable to the Pentagon and 646,000 ft2 will be devoted for data center (Wilson, 2011). After its completion in 2016, the Center will be the largest of such facilities in Asia (Tontsi,
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2011). Other big projects and investments include China Mobile’s plans to invest US$58 billion by 2013 (Goodburn & Hill, 2010) and Alibaba’s 500-staff subsidiary focusing on the cloud. China's three state-run telecommunications operators, China Telecom, China Unicom and China Mobile, announced plans to invest US$47.4 billion in data centers in Chengdu, the capital of Sichuan province, to create a cloud hub (wantchinatimes.com 2012). China has also established Cloud Centers in Jinan, Shenzhen and Changsha (Trader, 2012). Local-local collaborations and M&A activities: There are a plethora of collaborations, cooperations and partnerships between local players, which have helped stimulate the cloud industry. In China, Tencent shares a cloud security platform with Kingsoft (Tsuruoka, 2012). There are also M&A activities, which are likely to have long-term positive effects on the cloud. For instance, in 2009, Alibaba acquired an 85% stake in the cloud provider HiChina for US$84 million. Local-foreign collaborations and M&A activities: There also collaborations in the cloud industry that involve local and foreign technology firms. In August 2010, the Japanese electronics company, NEC and China’s largest IT outsourcing provider, Neusoft announced a joint venture (JV) to offer cloud-based services for manufacturers with global export business and SMEs (Hille, 2010). Another example is Microsoft and China Standard Software Company’s (CS2C) collaboration, which involves the development of cloud-based solutions primarily targeted to large clients such as retailers, banks and government ministries (Jones, 2011). China is also seeking cloud-related cooperative ventures with manufacturers from Chinese Taipei (Wang, 2011). Likewise, in October 2011, China’s IT leaders held a meeting with those of South Korea and Japan, which explored applications and development trends for cloud computing. Venture capital (VC) and other forms of foreign investments: Cloud related entrepreneurship is also facilitated by the presence of VC firms. In 2011, Intel invested in United Information Technology, a cloud storage products and solutions provider, offering enterprise-class storage products and application software (intel.com, 2012). In the early 2012, Intel Capital invested in Beijing Cloud Union, an online gaming company, and Fashion Republic, an Internet fashion photo-sourcing platform (Roberts, 2012). Cloud Union focuses on the design, development and operation of cloud gaming platforms. With the clouds, it delivers high quality games (intel.com, 2012).

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Standardization initiatives: A research report released by CCID Consulting in 2010 emphasized the importance of cloud standards emphasizing that this together with cloud security are among the most urgent issues facing China’s cloud computing industry that should be dealt with by the government and other relevant actors (reuters.com, 2010). In this regard, China has participated in various international level initiatives related to the standards. As noted earlier, China Life and China Unicom are represented in the Open Data Center Alliance (Thibodeau, 2011). Likewise, in July 2012, the Distributed Management Task Force (DMTF), and the China Electronics Standardization Institute (CESI) announced that they formed a partnership to drive adoption of DMTF cloud management standards in China (dmtf.org, 2012). According to the agreement, the DMTF will work to make its standards meet requirements outlined by CESI. The CESI, on the other hand, will encourage Chinese companies, universities and non-profit organizations to adopt DMTF standards which include the Cloud Infrastructure Management Interface (CIMI), the Open Virtualization Format (OVF) as well as future DMTF standards for Cloud auditing and software license management. 4.0. A CASE STUDY OF CLOUD COMPUTING IN THE CHINESE HEALTHCARE INDUSTRY Cloud computing has been described in the popular press as the next big thing in healthcare IT, which will make "Health Care 2.0" a reality in emerging markets (Economist, 2008). In this regard, China has been an exemplar case of an economy, which is leveraging on cloud computing to transform the healthcare system. The cloud has enabled doctors and other healthcare professionals to collaborate and share information, and access reports, scans, electronic health records (EHR)/electronic medical records (EMR), prescriptions and medical histories (Kshetri, 2013b). Likewise, insurance claims, prescriptions, and lab reports can be stored on the cloud. 4.1. THE CURRENT STATE OF CLOUD DIFFUSION IN CHINESE HEALTHCARE INDUSTRY China has made substantial progress in Hospital Information System (HIS). According to the Ministry of Health, in 2008, 80% of hospitals had implemented HIS (Zhou, 2011). The progress has been slow on the EMR front, however. Many hospitals still handle patient data on paper. Community clinics and hospitals are plagued by problems such as outdated IT equipment, the lack of collaborative operation, and the lack of IT manpower. Consequently Chinese hospitals and clinics are finding difficult to meet growing needs of patients and do so efficiently. A problem facing China’s healthcare also concerns the “Information Island” (Microsoft.com, 2008). While many large hospitals completed initial IT initiatives in the mid-2000s, they suffer from fragmentation and incompatibility of information systems between departments, and the inability to communicate and share data. One reason for the slow EMR diffusion concerns the lack of a single standard. Despite the above problems some important trends are already apparent: Cloud deployment: Chinese healthcare organizations have focused on the rapid adoption of cloud in an effort to enhance their competitiveness. Shanghai Government deployed China’s
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first "health cloud" in the Zhabei district, which integrated "healthcare cloud", "community health cloud" and "district-wide health cloud" (cloudcomputinglive.com, 2011). Likewise, the City of Dongying plans to add healthcare services to the cloud to centralize patients’ records and make them available (http://www.frost.com/prod/servlet/cio/232651119). The Shanghai Pudong Health cloud hosts medical records of patients in hospitals and community health centers. The information enables patients to visit outpatient or small regional clinics instead of specialized doctors located far away (Chua, 2011). Similarly, any patient visiting a hospital in the city of Jinan receives a card, which is used to register, pay and receive test results via machines in the hospital connected on the cloud (cncworld.tv, 2012). Mobile healthcare (M-health) cloud: The M-health cloud represents the Chinese healthcare IT industry’s sweet spot. While the majority of China’s population has no PC, by the first quarter of 2012, there were 1.02 billion mobile phone users. According to a survey conducted by PricewaterhouseCoopers (PwC), 80% of doctors and consumers in China view that widespread adoption of M-health would be “inevitable”. M-health would improve doctors’ interactions with hospitals and patients. Mobile carriers are capitalizing on this opportunity. China Telecom launched M-health pilot projects in over 200 hospitals. It has also teamed up with Cambridge University in research involving M-health. China Unicom has developed a cloud platform to collect, transmit and retrieve healthcare data. The company has also developed systems for M-health rescue positioning and real-time transfer of vital signs such as heart beat, breathing rate, temperature, and blood pressure (tmcnet.com, 2012). Resources in the cloud to create a healthy society: Some healthcare players have developed systems and created resources to help disease prevention and wellbeing and create a healthy society. Neusoft’s healthcare management platform, Xikang, is an open platform, which connects to healthcare services provided by medical centers and community healthcare facilities and combines with real-time resources available in health Internet of Things, health cloud platforms and other sources. Among the resources available in Xikang include those related to full-lifecycle healthcare services and a chronic disease prevention ecosystem to enhance health and quality of life (http://www.neusoft.com/services/1447/). In 2012, Neusoft also formed JV with Japan's Alps Electric Company to establish Shenyang Xikang Alps Technologies. 4.2. INSTITUTIONAL FACTORS AFFECTING CLOUD DIFFUSION IN THE CHINESE HEALTHCARE SECTOR The government has identified healthcare as key focus areas for ICT investment. The Health Care Reform Leading Group was established in 2006. Following the Group’s recommendation, in 2009, the government announced national health reform plan and committed to spending US$124 billion during 2009-2011. It announced plans to spend US$27 billion to create a fully electronic predictive health information network (CNN.com, 2009). As a component the reforms, 22 provinces and municipalities in rural regions were selected for a pilot program to trial a system that can better use and manage EMR. By end of 2010, about 100 hospitals in those provinces and municipalities had launched EMR pilot tests (WHO, 2011). Likewise, China’s 12th Five-Year Plan has emphasized on further healthcare reform. The State Council issued the Implementation Plan on Deepening the Reform of Healthcare System
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in 2011-2015, which emphasized IT implementation for enhancing efficiency and service standards (tmcnet.com, 2012).About 2000 middle and small hospitals benefitted from the special funds provided by the government to support construction and upgrade of IT systems. In response to the government‘s call for wider utilization of IT in the healthcare industry, Beijing, Shanghai and developed cities in the East and South coast have made progress in establishing a unified healthcare IT system and started healthcare IT trials. The government’s plan to construct new facilities has focused on less developed regions. 4.3. Foreign companies in the Chinese healthcare cloud industry Major global suppliers of healthcare IT solutions, devices and services are focusing their attention to emerging markets, especially China. Below, we give a brief description of some of the major foreign companies in the Chinese healthcare IT market (Table 3). Table 3 around here IBM: IBM is a major foreign player in the Chinese healthcare IT market. In 2009 IBM opened a Healthcare Industry Solution Lab in Beijing for hospitals and rural medical co-operatives. With the help of IBM, the Guang Dong Hospital of Traditional Chinese Medicine, China's largest medicine hospital, which receives about four million patient visits a year, has implemented a suite of healthcare data-sharing and analytics technologies (http://www03.ibm.com/press/us/en/pressrelease/27394.wss). The system also known as CHAS (Clinical and Health Records Analytics and Sharing) combines the strengths of Traditional Chinese Medicine (TCM) and Modern Western Medicine (MWM) and blends input from the two types of medicines. It is designed to enable the sharing of EMRs that incorporates TCM and MWM data across the hospital network. It is expected to help the hospital standardize its patient records and perform statistical analyses to assess TCM treatments’ effectiveness (Chao, 2012). As noted earlier, Range Technology’s data centers will provide EMR, and other healthcare IT solutions.In particular, Range Technology would also provide Hebei Province with the advanced healthcare IT capabilities. Hebei was among the 22 provinces and municipalities selected for the public hospital reforms pilot. Likewise, the cloud platform in the IBM-YLZ collaboration will connect medical institutions. Cisco: Following the 2008 earthquake of Wenchuan in Sichuan Province, Cisco formed a public-private partnership with the Chinese government and launched a corporate social responsibility program: "Connecting Sichuan". A major goal of the program was to apply ICTs to improve the quality and capacity of healthcare in Sichuan and to bridge the urban-rural healthcare gap. The so called "Wenchuan Model" provides an illustrative example to demonstrate the cloud-led collaboration and integration of hospital resources. Wenchuan People's Hospital (WPH), a secondary-level hospital, evolved as a "center of collaboration" in the region and played a key role in integrating primary-and-tertiary-level healthcare providers. The healthcare collaboration technology and cloud platform allowed doctors at WPH to receive guidance from experts at Sichuan People's Hospital and West China Hospital. Doctors at WPH provide support to the 13 township health centers in Wenchuan (cisco.com, 2012). AT&T: In 2011, AT&T and China Telecom signed a deal that would allow each other to share
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infrastructures in the U.S. and China. The Chinese healthcare industry is likely to benefit from AT&T’s experience in providing access, storage and sharing of cloud-based medical imaging and information management services. Microsoft: Microsoft is working with Chinese hospitals and healthcare IT services providers. In 2009, it formed a partnership with the Affiliated Hospital of the Medical College of Qingdao University (QDUMH). The QDUMH deployed Microsoft Amalga HIS, which is an important component of Microsoft's cloud strategy and integrates EMR, patient and bed management, laboratory and other data management (Microsoft, 2009). In 2010, Microsoft and the China’s iSoftStone signed an agreement to introduce Microsoft HealthVault technology to China (http://www.microsoft.com/en-us/news/press/2010/oct10/1029mshealthvaultpr.aspx). HealthVault is a personal health application platform to store and manage health information in a personal, online account. The project initially focused on the Wuxi city. The Microsoft-iSoftStone relationship envisioned enabling citizens to connect to health systems and services run by government agencies, hospitals, pharmacies and fitness facilities. Dell: Dell offers consulting services to a number of Chinese hospitals. Dell is also working with several province governments on healthcare initiatives involving the cloud (Shah, 2011). The company has partnered with China Telecom to standardize EHR, which involves working with hospitals throughout the country (Chao, 2012). 4.4. LOOKING FORWARD Informatization of the healthcare industry has been top on the agenda for Chinese policy makes. This industry has recorded a double-digit growth thanks to massive investments from the government, hospitals, venture capitalists and private equities, which has created demand for the cloud. Healthcare system reform is likely to further boost investments in the cloud. The cloud has the potential to transform the Chinese healthcare industry and improve the quality of care to patients by generating horizontal and vertical collaboration among hospitals and other organizations, providing platforms for to store, share and synchronize patient profiles and enhancing efficiency of hospital management. Wide rural-urban discrepancies that exist with respect to health and health care resources would translate into differential patterns and sophistication of the development of the cloud in the healthcare industry. 5. DRIVERS OF THE CLOUD INDUSTRY AND MARKET IN CHINA Prior research indicates that factors such as consumer preferences, income, availability and costs of input, infrastructures, trade policy and other types of government regulations, technological economies of scope (a function of prior national experience with previous generations of technology), export orientation of the firms, and market size affect the development of an industry (Linder, 1961; Tilton, 1971; Beise, 2001). In order to gain better knowledge about diffusion and impact of the cloud in China as well as a better understanding of factors that are driving the entrepreneurial activities, our proposed model focuses on institutional and economic factors. Table 4 provides reasoning and justification for each
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relationship, which, as noted earlier, is the crucial part of the theory-development process (Webster and Watson, 2002). Table 4 around here 5.1. Institutional legitimacy for the development of the cloud industry and market First, we analyze the roles of formal and informal institutions in the cloud industry. Institutionalists have emphasized the importance of formal and informal institutions in shaping the developmental pattern of an industry (North 1990; Scott 1995, 2001). Institutions are the “rules of the game” (North, 1990, p. 27) and include “formal constraints (rules, laws, constitutions), informal constraints (norms of behavior, conventions, and self-imposed codes of conduct), and their enforcement characteristics” (North, 1996, p. 344).Some specific examples of institutions identified in the prior literature include government regulations, trade policy, the roles of non-governmental organizations such as trade associations and consumer preferences (Kshetri, 2013a; Kshetri et al., 2011; Vernon, 1966). Scott (2001) proposed three institutional pillars: (i) regulative; (ii) normative and (iii) cognitive. These pillars relate to “legally sanctioned”, “morally governed” and “recognizable, taken-for-granted” behaviors respectively (Scott, Ruef, Mendel, & Caronna, 2000, p. 238). 5.1.1. Regulative institutions Regulative institutions consist of “explicit regulative processes: rule setting, monitoring, and sanctioning activities” (Scott, 1995, p. 35). State’s mobilization of resources in cloud: As the case presented in section 4 suggests, China's strong state has been capable of mobilizing massive resources in the development of the cloud industry. Government supports have stimulated cloud adoption in China. The country’s 12th Five-Year Plan (2011-2015) has targeted to spend US$ 308 billion for the telecommunications infrastructures. There are tax and other incentives for investments in the cloud industry (Hille, 2010). To develop into a "smart city", Shanghai is planning to invest in 40 projects including the cloud. Five cities were chosen to develop the cloud as a national policy (Shanghai invests in being 'smarter'’, 2011). In 2011, China also announced an investment of US$154 million to develop a cloud center for high-tech and start-up firms in Chongqing. The cloud computing Special Administrative Region (SAR) would be free from censorship (Russell, 2011). Laws and policy related to security, privacy and control: The cloud-related legal system and enforcement mechanisms are evolving more slowly compared to the technological development (Kshetri 2013a). This means that cloud-related activities are governed by regulations that were mainly enacted and developed for the non-cloud environment and thus do not clearly define the guidelines and requirements for data in the cloud. China lacks strong privacy and data protection laws. To understand the quality of regulative institutions, it may be helpful to compare such institutions with those in the U.S. To ensure the accuracy of financial data as required by the Sarbanes-Oxley (SOX) compliance in the U.S., IT
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controls need to be designed to ensure that data are accurate and are protected from unauthorized changes. Likewise, the Human Services Health Insurance Portability and Accountability Act (HIPAA) requires healthcare providers to have technical, physical and administrative security measures in place to protect the privacy, integrity, and availability of patients' data. Those not complying with HIPAA standards may face up to $250,000 in fines and up to 10 years in prison. Such regulations are conspicuously absent in China. China’s strong state cuts both sides. China’s state strategies toward ICTs have been to balance economic modernization and political control (Kalathil, 2003, Kshetri 2012a). While China’s supports to the development of the cloud industry are encouraging, it is also using the technology to pursue political goals. According to a Foreign Policy survey, 38% of the world's top Internet experts viewed the governments as the biggest threat to the open Internet (Foreign Policy, 2011). The cloud is described as the ultimate spying machine (Kshetri, 2010, 2011a). An obvious danger in an authoritarian regime concerns the possibility that the government may intensify further controls on citizens (Zittrain, 2009, Kshetri, 2011b). China has allegedly employed cyber-control measures involving the cloud. In 2010, U.S.- and Canada-based researchers published a report that tracked a sophisticated cyber-espionage network (Information Warfare Monitor/Shadowserver Foundation, 2010). Social-networking and cloud computing platforms, including those of Google, Baidu, Yahoo, Twitter, Blogspot, and blog.com were combined with traditional command and control servers. The report noted, “Clouds provide criminals and espionage networks with convenient cover, tiered defenses, redundancy, cheap hosting, and conveniently distributed command and control architectures”. The government’s cyber-control measures have led to an inability of businesses and consumers to realize the cloud’s potential. For instance, China’s filtering system makes it difficult or impossible to access cloud services provided by foreign vendors such as Google docs, and Dropbox and causes significant connectivity speed and capacity reduction (Getting to grips with cloud in China, 2011). Cyber-control measures have also discouraged foreign investments. Google’s 2009 report indicated that it had discovered an attack on its infrastructures that originated in China. In 2008, Google’s CEO said that his company would work with Chinese universities, starting with Tsinghua University, on cloud-related academic programs. The country’s unfavorable environment from the security standpoint, however, led to Google’s withdrawal from China. 5.1.2. NORMATIVE INSTITUTIONS Normative institutions introduce “a prescriptive, evaluative, and obligatory dimension” (Scott, 1995, p. 37). The basis of compliance in the case of normative institutions derives from professional and social obligations. Special interest groups and non-government organizations’ roles: Special interest groups and non-government entities are organized loosely and there is little room for these groups to influence national policymaking in China (Su and Yang, 2000; Li et al., 2004). We illustrate the China-India differences from the standpoint of security and privacy issues, which are tightly
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linked to the diffusion of the cloud (Kshetri, 2013a). Various ongoing efforts and activities initiated by National Association of Software and Services Companies (NASSCOM) and Data Security Council of India (DSCI) have played a key role in the cloud’s development in India (Kshetri, 2012b). Trade associations, which are an important component of normative institutions, have been notably absent in promoting the cloud industry in China. 5.1.3. COGNITIVE INSTITUTIONS Cognitive institutions are ‘‘the shared conceptions that constitute the nature of social reality and the frames through which meaning is made’’ (Scott, 2001, p. 57). These are built on the mental maps (Huff, 1990). Price sensitivity: Unlike in mature economies, SMEs in China tend to be price sensitive and are interested only in simple online presence. A survey conducted among Chinese SMEs suggested that many believed that they were paying too much for telecoms services and 24% of the respondents were concerned about high prices (Castelli, 2008). Chinese organizations primarily emphasize on process improvement, efficiency and savings, rather than on finding innovative ways to make use of the cloud’s enormous computing power, speed and flexibility (Alter et al., 2010). Chinese organizations’ cloud adoption involves a simple and low cost strategy. Propensity to outsource: Put simply, the cloud is about outsourcing IT functions. Adopting cloud model results in losing control over these functions. However, for China’s state-owned enterprises (SOEs), the ability to control is important (Ko, 2011). In this regard, a barrier facing the Chinese cloud industry is that large SOEs are reluctant to outsource IT needs and move to the cloud (Hille, 2010). 5.2. EXISTING AND POTENTIAL LINKAGES IN THE ECONOMY Prior researchers have suggested that the developmental pattern of an industry is tightly linked to the forward linkages (demand), backward linkages (supply) and horizontal or inter-sectoral linkages (Markusen & Venables, 1999). This section thus examines upstream and downstream linkage effects as well as horizontal linkages. 5.2.1. DEMAND (FORWARD LINKAGE) Cloud adoption propensity of organizations and industries: As noted in section 4, huge market for e-healthcare created the demand for the cloud. B2B e-commerce, supply chain management and others have been an importance driving force behind the activities of foreign multinationals as well as local firms (Table 1). Online gaming industry, which generated US$6.8 billion in 2011 is an example of an industry, which has generated strong forward linkages in China. Gaming companies are facing intense pressure to transform their processes and business models. The deployment of a cloud platform helped China’s second biggest gaming company, Shanda enhance the automatic management of game operation business and reduce data center costs by 80% (Intel Corporation, 2011).

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Prior researchers have suggested that in most developing economies, governments agencies are often the biggest single users of hardware and software (Moussa & Schware, 1992; Nidumolu et al., 1996). China’s SOEs especially the ones owned by the central government have increased their cloud investments (Shuhe, 2012). SMEs’ access to technology: Cloud services give SMEs access to technologies they are not able to afford from other sources (Ernst & Young, 2010). Even at the current maturity level, the cloud is an attractive option for most SMEs. According to Parallels study released in 2011, China’s SMEs are likely to go directly to the cloud instead of taking the intermediate step of installing in-house IT solutions. 28% of SMEs had plans to purchase IaaS services by 2014 and 24% had plans to adopt the cloud. The study estimated that cloud service market size for the Chinese SMEs would reach US$640 million in 2011. China considers the cloud as an opportunity to provide cost-effective Internet services to SMEs as a component of an ambitious virtualization program. 5.2. 2. INPUT (BACKWARD LINKAGE) The development of industries which supply various ingredients needed for the cloud offer strong backward linkages. In China, R&D activities in the cloud and development of the supercomputing industry have provided backward linkages. Development of supercomputing industry and economies of agglomeration: The idea in economies of agglomeration is that large number of firms in related industries benefit from positive externalities by clustering together. Factors such as the presence of multiple suppliers, knowledge spillovers, availability of intermediate inputs, and labor specialization lead to low costs of production. For instance, by locating close to other firms, they benefit from positive spillovers from investment and economic activities that are already in place. Several mechanisms associated with economies of agglomeration include technology spillovers, advantages of thick markets for specialized skills, and the backward and forward linkages (Marshall 1920). Users and suppliers of intermediate inputs tend to cluster close to each other because the large market provides greater demand for goods and supply of inputs (Krugman 1991). Supercomputer industry provides economies of agglomeration for the cloud industry. In the June 2011list of the world’s top 500 supercomputers, two Chinese computers were represented in the top 10: Tianhe-1A China (No. 2) and Nebulae (No. 4) (Geller, 2011). China’s approach to the development of the cloud industry has been to build cloud centers next to regional supercomputing sites. For instance, Chengdu Cloud Computing Center, which was China's first major commercially-operated Cloud Center launched in December 2009, was built by Chengdu Supercomputer Center and powered by the Dawning 5000 supercomputer. Likewise, the Shenzhen Cloud Computing Center, which completed testing in January 2012, is home to Nebulae supercomputer. In the same vein, Changsha Cloud Computing Center opened in July 2011 is home to the Tianhe-1 supercomputer built by the Chinese National University of Defense Technology (NUDT) (Trader, 2012). R&D activities: Foreign as well as local firms are involved in cloud-related R&D activities in China. ZTE’s 10,000 m2 global cloud center in Nanjing has about 3,000 R&D staff, which is
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expected to increase to 5,000 in 2012. As noted in section 4, China Telecom and Cambridge University have teamed up to conduct research involving M-health cloud. IBM’s Shanghai R&D facility has the cloud as a primary area. As noted in section 4, IBM is also working on a research project, which involves statistical analyses to assess TCM treatments’ effectiveness. Overall, 490 of world’s top 500 companies have established over 1,160 R&D centers in China. 5.2.3. STRUCTURES OF RELATED INDUSTRIES (HORIZONTAL LINKAGE) An intersectoral linkage is said to exist between two economic sectors if events in one provide a stimulus to another. For instance, a higher ICT penetration rate and bandwidth availability may lead to higher demands of cloud related products and services. Conversely, ICT users are more likely to enjoy higher benefits from the cloud. ICT penetration: Availability of web-connected computer, cellphone, or other devices is a prerequisite to benefit from the cloud. The role of the cloud is to change the delivery, pricing and consumption of the IT functionality (Ried et al., 2010). The cloud can help leverage existing ICT investments, systems and infrastructures. High and rapidly growing cellular penetration provides strong horizontal linkages due to the popularity of mobile clouds. While the majority of China’s population has no PC, by the first quarter of 2012, there were 1.02 billion mobile phone users (China's mobile phone, 2012). Bandwidth availability: The basic idea in the cloud model is that computation and storage concentrate on the clouds and high performance machines are linked by high-bandwidth connections to manage resources (Hayes, 2008). High Bandwidth is thus required for a better and effective utilization of existing resources on the clouds. In 2011, China added 30 million fixed broadband subscriptions, which was about half of the total subscriptions added worldwide. The country’s fixed broadband penetration reached 12% in 2011 (ITU, 2012). At the same time, as in most developing countries (Parikh, 2010), low bandwidth is the most glaring shortcoming in rural areas, which may hamper the cloud’s growth. 6. DISCUSSION AND IMPLICATIONS As the case study of the healthcare industry and other sectors indicate, the overriding reality is that only a small segment of the economy is currently benefitting from the cloud. It is in the infant stage of development and cloud-based innovations and business models are yet far from inclusive of SMEs. However, as economic (e.g., connectivity and affordability) and institutional factors improve, the cloud may certainly gain momentum and holds a promise to bridge the digital divide. On the upside, emerging economies are less likely to face barriers related to privacy and security regulations. Cloud business models are still evolving. Since potential users in the developing world tend to be price sensitive, cloud providers’ success in developing economies hinges on business models focusing on affordability and considering the unique needs of small-scale consumers. Cloud related innovations and business models that leverage existing infrastructure and technologies in novel ways undoubtedly have potential benefits. Especially, given the fact that cellphone penetration rate is higher than that for the PC in the developing world, mobile-based cloud presents an enormous potential. There are two interrelated reasons why this is likely to
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happen. First, less sophisticated cellphones are cloud ready due to recent developments. A cellphone capable of running a browser can access mobile clouds. Low-cost phone users can thus tap into applications that are currently accessible only through smartphones. Second, consumers in the developing world are using increasingly sophisticated devices. Chinese firms’ low cost and experiences in serving the home market may allow them to develop value-creating strategies and realize significant share in the cloud market, especially in the developing world. At the same time, while Chinese IT companies have undertaken successful entrepreneurial activities on the home front, they may face barriers in foreign countries. Cloud providers from China might experience a negative country-of-origin effect. As noted above, institutional environment in China cannot guarantee data security and privacy. These concerns further increase if one takes into consideration the possibility of government control of China-based cloud providers. As the case presented in section 4 suggests, the transformation of the healthcare IT markets has generated opportunities for foreign as well as local companies in areas such as hardware, network, software and services. While the investments in the past focused on hardware, a shift is occurring toward software and digital services with the increasing maturity of the industry .The nature of demand in low tier cities and rural areas is however likely to be different from that in advanced region. 7. CONCLUDING REMARKS Economies of scales have undoubtedly played a major role in attracting global and local players in the Chinese cloud industry. The breadth and depth of cloud offerings thus would continue to expand. Smaller developing economies lack some of the favorable conditions enjoyed by China and are less attractive markets for cloud suppliers, and thus face more problems in the development of the cloud industry. Chinese policymakers have recognized the opportunity to tap this technology to slip into a higher gear. Due to China’s strong state and weak civil society, the private sector’s roles have been relatively less significant. China has also shown a willingness to form an astonishing alliance with its traditional rival, Chinese Taipei, and relax cyber- control measures. While government purchases of products and services are expected to drive cloud diffusion, they would favor products that incorporate high levels of domestically developed technology. Other developing economies are likely to benefit from the lesson and experience of the China’s cloud industry. Especially relevant and important in this regard is Chinese companies’ expertise and experience in healthcare IT. For instance, Huawei built China's first Healthcare Cloud deployed in Zhabei District .Chinese companies such as Huawei and Alibaba can easily adapt the business models used in their domestic markets. Their capability to deliver value for money in the domestic market is likely to be an important source of their competitive advantage to operate in other developing economies.

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Figure 1: A proposed framework for understanding the diffusion and development of the cloud in China

Institutional and technological environment facing the in Chinese cloud industry and market

Institutional environment

Economic environment

Regulative institutions

Normative institutions

Cognitive institutions

Demand and forward linkage

Input and backward linkage

Cloud-related industries and horizontal linkage

Laws and policy related to security, privacy and control

Special interest groups/non-govt. orgs’ roles

Price sensitivity

R&D activities Cloud adoption propensity of orgs. and industries

ICT penetration

State’s mobilization of resources in cloud

Propensity to outsource

SMEs’ access to technology

Development of supercomputing industry (agglomeration)

Bandwidth availability

Institutional legitimacy for the development of the cloud industry and market

Existing and potential linkages in the economy for the development of the cloud industry and market

• Diffusion and impact of the cloud • Cloud-related entrepreneurship

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Table 1: Cloud computing applications and their impacts in China: A sample of examples Cloud application Enhancing efficiency with ecommerce/ebusiness Example IBM’s Project Yun Explanation 2008: a pilot project was started to provide access to cloudbased business services: Project Yun (Chinese for "cloud”). It dynamically allocates storage, server and network resources. Wang Fu Jing Department Store, one of China's largest retailers with more than 10 million customers, has benefitted from Project Yun (Yujuico & Gelb, 2011). It uses the cloud to share information with retail stores and implement B2B e-commerce with suppliers. Supports software developers across hundreds of companies (Cleverley, 2009). The tenants, mostly SMEs, have access to IT infrastructures and enterprise-ready environments. Expected to enhance mobile Internet and 3G experiences.

Reduction in capital expenditure Development of new or improved products/services Extending market reach E-health (also see Table 3) E-education

IBM Cloud Center Wuxi China Mobile

China Mobile Guang Dong Hospital Supercomputer power/access to educational resources.

Expected to diversify demand. Implementation of a suite of healthcare data-sharing and analytics. Analyze data on disease spread pattern and climate changes Chinese universities are also among educational institutions worldwide participating in the IBM Cloud Academy, which allows access to a range of educational resources.

Table 2: Patterns and drivers of cloud-related entrepreneurship of local firms in China: A sample of examples Example Explanation Offering for • IBM and the • Launched PangooSky platform for SMEs (Peng, 2009). SMEs Wuxi National Software Park • Alibaba Group • 2009: announced US$146 million investment in software development, marketing and establishing cloud centers for customers, especially SMEs (Xing, 2009). • Shanda • GrandCloud Offerings for • Huawei • IaaS solution for operators, governments, and enterprises with large data center IT infrastructure. enterprises or • ZTE. • Initial customers are telecom operators, government agencies specialized and the military business needs Offerings for • Huawai • Cloud as a critical component to serve foreign markets. foreign • Has 45 out of the world’s 50 biggest telecommunications markets operators as customers (China Daily, 2011). • As of the mid-2012: collaborated with 85 customers in 33 countries on the cloud’s commercial use. • Cloud bases in Southeast Asia, the Middle East, Southern Europe and Eastern Europe (Chua, 2011). Offerings for • Tencent • 2010: Launched cloud-based QQ mobile browser. Users would individual be able to store pictures and files. It also provides a seamless consumers interface between mobile devices and PCs.

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• Ubitus and China Mobile • Huawei

• 2010: launched mobile gaming based on BigCloud. • Cloud+ platform

Table 3: Major global cloud players in the Chinese healthcare IT market: A sample of examples Foreign multinational IBM Chinese partner(s)/collaborator(s) • The Guang Dong Hospital of Traditional Chinese Medicine (GDHTCM) • Range Technology • YLZ • Peking University • China Telecom • Medical College of Qingdao University (QDUMH) • iSoftStone • China Telecom Examples of achievements • Development of the CHAS (Clinical and Health Records Analytics and Sharing) system with GDHTCM. • Range has plans to provide Hebei Province with the advanced healthcare IT capabilities. • A collaboration of IBM and YLZ involves building a cloud platform to connect 300 million people with a number of networks including medical institutions. • The "Connecting Sichuan" program helped develop Wenchuan People's Hospital (WPH) as a "center of collaboration". • AT&T’s experience in Medical Imaging and Information Management would be helpful. • Helped develop HIS for QDUMH. • Agreement with iSoftStone to introduce Microsoft HealthVault • Offers consulting services to hospitals. • Partnered with China Telecom to standardize EHR.

Cisco

AT&T Microsoft

Dell

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Table 4: Drivers of the cloud industry and market in China Factors Explanation Institutional factors State’s mobilization of • The state’s investment has been a major resources in cloud driver of the cloud industry Data security and privacy laws • Lack of strong privacy and data protection laws • Using the cloud to pursue cyber-control measures: Inability of businesses and consumers to realize the cloud’s potential • Discouraged foreign investments. Special interest groups and o Loosely organized non-government entities o Trade associations notably absent Price sensitivity of SMEs • SMEs prefer low cost model Large SOEs’ reluctance to • Since the cloud model involves outsourcing, outsource it may act as a barrier. Economic factors Cloud adoption propensity of • Huge market size is a driving force organizations and industries • Some industries with high propensity to adopt the cloud: online gaming • Governments agencies adoption of cloud: especially domestic SMEs’ access to technology • SMEs’ access to technologies they cannot otherwise afford R&D activities • Domestic and foreign firms’ engagement in R&D activities related to the cloud Supercomputing industry and • Cloud centers are built next to regional economies of agglomeration supercomputing sites ICT penetration • High cellular penetration and increasing proportion of cloud ready mobile phones. Bandwidth availability • 2012: fixed (wired)‐broadband penetration 12%

Regulative

Normative Cognitive

Forward linkage

Backward linkage

Horizontal linkage

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