Editor's Note

The high technology industry has become a new growth engine for many countries. China, the second largest economy in the world, has also been playing catch up to close the technology gap. However, it still lags behind its neighboring countries, such as South Korea and Taiwan, which achieved economic miracles well before China. Douglas Fuller examines the reasons behind this, asking why China has far fewer tech giants compared to South Korea and Taiwan despite its unprecedented economic success. Fuller concludes that it was China’s ineffective pursuit of industrial policy and excessive state regulation of the market that have impeded the development of the tech industry. 

Quotes from the paper 

Introduction

This report attempts to explain the limited emergence of Chinese technology titans. The first section examines the structural reasons there has not been great success in pro-active (as opposed to passive, tariff-driven infant industry protection) industrial policy in building technology-intensive firms in China. The second section turns to look at how sectoral characteristics shape the opportunities for technological upgrading among Chinese firms given the state’s policies outlined in the first section. The third section addresses the important issue of market regulation and how that has impacted upgrading in various industries. The fourth section examines the critical role that foreign venture capital has played in China’s technology sector, and the implications of the current surge of domestic venture capital. The final section will address continuities and departures with China’s past industrial development in Xi’s industrial policies.

The Sorrows of Industrial Policy

In the case of China, there are four serious constraints to the effective pursuit of industrial policy: (1) the structure of the state apparatus, (2) the bias of credit allocation toward SOEs/state-favored firms and the resulting managerial deficiencies of these firms (3) the information asymmetries due to sheer geographic size and population of China and (4) the balance of exports vis-à-vis procurement. These obstacles are in addition to the incentives for local officials that prioritize investment and land grabs over implementing upgrading of local firms and multinationals within their jurisdictions discussed by Fuller (2016, Chapter 2).

Sectoral Characteristics and Success

There has been variation in technological catch-up across sectors in China’s economy. For more medium-tech technology, machinery-based sectors, China has experienced a fair amount of upgrading among domestic firms (Brandt and Thun 2010, 2016). For many high-technology sectors, China’s record of catch-up among domestic firms has been weak, and hybrid firms located in China but financed from outside of China have driven technologically upgrading. And in most be noted that for even the mature, medium-technology industries, Brandt and Thun (2010, 2016) find little evidence for effective industrial policy beyond the tariff barriers that encourage multinational corporations (MNCs) in these industries to set up factories in China.

There would be no problem with such a hybrid model of high technology development except for two issues.  First, industrial policy has wasted a tremendous amount of resources on the domestic firms in high-technology areas. Second, the hybrid model itself is under threat as will be discussed later in this report.

Regulation of Competition

Brandt and Thun (2016) in revisiting the machine sectors they analyzed over time have concluded that some sectors were much less successful than others even though they shared the benefit of MNC suppliers investing in China. They concluded that the state regulation of market competition to keep out rather than encourage competition was holding back those sectors that achieved less upgrading. The auto industry is a case in point.  The state kept primarily private firms from entering into this market for decades, and consequently, the local state champions, despite benefitting from being the partners of the joint-ventures (JVs) required for MNCs entry, failed to upgrade effectively. In contrast, construction equipment, where there was a veritable free-for-all of foreign, state-owned, private, and other firms in the gray corporate area between state-owned and truly private, witnessed impressive upgrading. To underline Brandt and Thun’s point, the most promising domestic carmaker today is a late arriving (due to state barriers to entry), private firm, Geely.

Domesticating Venture Capital

Author’s Biography

Douglas B. Fuller is a professor at City University of Hong Kong. The focus of his research is innovation, technology policy and international business. He has previously taught at Zhejiang University, King’s College London, Chinese University of Hong Kong and American University in Washington D.C. He has led research projects sponsored by the Alfred P. Sloan Foundation and the Savantas Policy Institute of Hong Kong. Fuller is the author of Paper Tigers, Hidden Dragons: Firms and the Political Economy of China’s Technological Development, and a co-organizer of Network B (Globalization and Socio-economic Development) of the Society for the Advancement of Socio-Economics.