Confusion still reigns following the execution of the government's procurement policy overseeing the domestic software industry.

As China merges into international markets - more so after its accession into the World Trade Organization (WTO) in 2001 - many remain puzzled about how much support can be expected by the government as the software sector develops. It is still unclear if declaring the developing sector a "domestic" or "national" software industry with the support of government procurement will breach WTO principles.

These and other concerns should be addressed by the government. The Government Procurement Law, effective from January 1, 2003, stipulates government departments should purchase domestic goods, engineering, and services, except on occasions.

For the software industry, it means procurement of domestic software and services.

This offers a legal reason to support domestic software industry through government procurement - a usual practice throughout the world.

Since the Government Procurement Law took effect, there have been few if any challenges from the international community, and this shows the law is in line with the principles of the WTO.

Thus, we can use the concept of "domestic software" without hesitation, because it is legal.

Since a qualification is a clear advantage in government procurement, it becomes a hot topic among software companies. But how should we define the concept?

For example, if a foreign company is registered in China, pays taxes, makes investments, and has an industrial chain, shall we regard its software products as "domestic software?"

Microsoft is one such example - but should its products such as Windows and Office be regarded as "domestic software?"

To answer this, we should first look at what consequences it will bring if we define a "domestic software" with the above criteria. In this principle, Microsoft Windows and Office will become domestic software. As a result, Microsoft Windows and Office sold to other parts of the world will all become Chinese exports.

With the sales of the two software products, the sales of China's software industry and exports will add another 200 billion yuan (US$24 billion) every year, which will make China the world's biggest country in terms of software sales and exports.

Obviously, this is ridiculous and the criterion leading to this situation is not reasonable.

But if this rule is not reasonable, what rules shall we follow?

We can learn from some developed countries which began government procurement long before us.

Let's take the United States for example. The US Congress passed the Buy-American Act in 1933 and required the federal government to buy domestic products, which refer to products made in the United States with 50 per cent of added value.

We can see the United States defines domestic products according to their added value.

If we take an added-value criterion and do not consider the ownership of an enterprise, software products of certain companies, which have added value of over 50 per cent in China, can be regarded as domestic products.

This principle should be applied to all software companies, no matter Chinese or foreign.

Actually, we welcome foreign companies to set up their research and development facilities in China and give more added value to their products. Their products should naturally then, gain the qualification of domestic software.

In this principle, Microsoft Windows and Office are mainly developed in the United States and their retailing prices are about 1,000 yuan (US$120) and 3,000 yuan (US$360) respectively, but only the disc production and packaging are done in China and its added value in China is about 10 yuan (US$1.2), about 1 per cent and 0.3 per cent of their retailing prices.

Obviously, defining domestic software in the principle of added value is what developed countries have been doing for many years, so if we follow suit, there will be no questions as to its legality.

As we all know, the purpose of a government procurement law is to use the tax-payers' money to develop a given domestic industry.

In order to better implement the government procurement law, we need to formulate related regulations and strengthen supervision, including defining the qualifications of domestic software properly. If we do it right, it will be a growth engine to the development of the Chinese software industry and can make China one of the biggest and strongest software powerhouses in the world.

(China Daily 09/20/2004 page5)