Innovation and imitation: Competition between the US and China on third-party payment technology

Abstract

Third-party payments were first introduced by the US firm PayPal. Soon after, China developed a localized version of PayPal – Alipay, which became the main payment method for online transactions in China. Currently, the number of global transactions conducted with Alipay is three times that of PayPal. In addition to online transactions, Alipay also integrates with mobile payment applications to provide offline services, making physical transactions more convenient for users. The authors, in this paper, aim to address how third-party payments technology seems to be playing out an innovation-imitation-catch up story.,Krugman (1966) proposed a general-equilibrium model of product cycles under perfect competition where high-tech products are innovated by an “advanced” country and imitated by a “developing” country. The competition between US–China online technologies (e.g. third-party payments) seems to be playing out this innovation-imitation-catch up story.,The USA has already put a lot of effort into the operations of credit cards and checks, as well as other infrastructure such as human resources and installation of relevant systems. China lacks the infrastructure for payments made with credit cards and checks, and therefore China’s opportunity cost of moving directly from cash transactions to third-party payments is much less than that of the USA, which is why China holds follower advantage in third-party payment markets.,The third-party payment technologies appear to be a good example of the argument made by Krugman (1966) regarding the US–China competition on advanced technology, which states that an imitator can catch up with an inventor when the former acquires comparative advantages against the latter.