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Janus-face of Chinese Industrial Policy: Nat’l Champions & Fragmented Production

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Abstract:

For most, the Chinese state remains an activist, interventionist, pro-developmental state, both at the national level in Beijing (center) and in China’s innumerable provincial and municipal governments (local). While market reforms have been important especially in the 1980s and 1990s, industrial policy has remained central to the state’s developmental toolbox. As such, it hard not to conclude that China’s muscular state capitalism has been an important factor in its thirty years of rapid growth.

Although China’s partial market reforms coupled with persistent state capitalism offers a convincing narrative, there are many puzzles which muddy the waters. For instance, while individual policies have changed dramatically, the most consistent goal of Chinese industrial policy (for both Beijing and local governments) over the past three decades has been the creation of ‘national champions’ – Chinese firms that can compete with the global giants. For every Apple, Airbus or Amazon, Beijing and local governments dream of nurturing their own. However, for the second largest and fastest growing large economy (scheduled to surpass the US economy around 2020), remarkably few have been created over three decades of active industrial policy. More interestingly, national champions have often arisen in industries considered more high-tech, and thus seemingly harder to overcome the technological gap, such as in telecommunications (Huawei, ZTE), e-commerce (Alibaba), computers (Lenovo) and consumer durables (Haier). Furthermore, at first glance, there appears to be little relationship between the creation of national champions and industrial policy activism. That is, national champions have arisen both in industries intensely targeted by the Chinese state and in industries with little or no intervention.

This paper compares a dozen sub-industries which together account for most of China’s electronics and electrical machinery sector. These industries share common technological and labor skill levels, and are all ones in which China is highly export competitive. Yet, they vary widely in the successful creation of national champions and in the interventions of activist industrial policies. Utilizing large-scale firm-level databases and a large transactional trade database containing hundreds of millions of trade transactions, the paper argues that China’s uneven and anomalous successes are due to the interaction between policy makers’ perceptions of national “development” and the secular changes in global production over the 1990s and 2000s, in which the foundations of commercial success have shifted. Specifically, global production has shifted from a world of vertically-integrated, capital-intensive, manufacturing-centered production to one of “fragmented” production in which firms have broken up and outsourced to other firms in order to intensely specialize on core competencies which may not involve manufacturing. Thus, while Chinese policymakers understandably looked to Japan and Korea – success stories of the post-war decades – for models of industrial policies in nurturing export-oriented national champions to lead the country up through the international division of labor, the underlying factors that made Japan and Korea successful had shifted under the radar of Chinese policy makers. That is, the constitution of the ‘national champion’ itself had changed. As such, Chinese industrial policies worked beautifully in industries that retained vestiges of the former production systems, but yielded no notable national champions in those that had undergone this transformation. At the same time, fragmentation also shifted the very definition of commercial ‘success’ from one of ‘ownership’ (i.e. Chinese-owned firms) to one of ‘capturing value’ in the home country, such as through the formation of supply bases. This second dynamic worked in industries in which Chinese firms could more readily capture value in China, creating surprising successes in the absence of industrial policy. Thus, China’s uneven successes offer important insights into the changing nature of production, while also widening the discussion over the definitions and goals of industrial policy for developing countries, today. The paper also considers the unintended consequences when subjective knowledge, information and bounded rationality among policymakers interacts with evolution changes in the international economy.
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Name: American Political Science Association Annual Meeting
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http://www.apsanet.org


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URL: http://citation.allacademic.com/meta/p1127869_index.html
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MLA Citation:

Dallas, Mark. "Janus-face of Chinese Industrial Policy: Nat’l Champions & Fragmented Production" Paper presented at the annual meeting of the American Political Science Association Annual Meeting, TBA, Philadelphia, PA, <Not Available>. 2017-11-28 <http://citation.allacademic.com/meta/p1127869_index.html>

APA Citation:

Dallas, M. P. "Janus-face of Chinese Industrial Policy: Nat’l Champions & Fragmented Production" Paper presented at the annual meeting of the American Political Science Association Annual Meeting, TBA, Philadelphia, PA <Not Available>. 2017-11-28 from http://citation.allacademic.com/meta/p1127869_index.html

Publication Type: Conference Paper/Unpublished Manuscript
Abstract: For most, the Chinese state remains an activist, interventionist, pro-developmental state, both at the national level in Beijing (center) and in China’s innumerable provincial and municipal governments (local). While market reforms have been important especially in the 1980s and 1990s, industrial policy has remained central to the state’s developmental toolbox. As such, it hard not to conclude that China’s muscular state capitalism has been an important factor in its thirty years of rapid growth.

Although China’s partial market reforms coupled with persistent state capitalism offers a convincing narrative, there are many puzzles which muddy the waters. For instance, while individual policies have changed dramatically, the most consistent goal of Chinese industrial policy (for both Beijing and local governments) over the past three decades has been the creation of ‘national champions’ – Chinese firms that can compete with the global giants. For every Apple, Airbus or Amazon, Beijing and local governments dream of nurturing their own. However, for the second largest and fastest growing large economy (scheduled to surpass the US economy around 2020), remarkably few have been created over three decades of active industrial policy. More interestingly, national champions have often arisen in industries considered more high-tech, and thus seemingly harder to overcome the technological gap, such as in telecommunications (Huawei, ZTE), e-commerce (Alibaba), computers (Lenovo) and consumer durables (Haier). Furthermore, at first glance, there appears to be little relationship between the creation of national champions and industrial policy activism. That is, national champions have arisen both in industries intensely targeted by the Chinese state and in industries with little or no intervention.

This paper compares a dozen sub-industries which together account for most of China’s electronics and electrical machinery sector. These industries share common technological and labor skill levels, and are all ones in which China is highly export competitive. Yet, they vary widely in the successful creation of national champions and in the interventions of activist industrial policies. Utilizing large-scale firm-level databases and a large transactional trade database containing hundreds of millions of trade transactions, the paper argues that China’s uneven and anomalous successes are due to the interaction between policy makers’ perceptions of national “development” and the secular changes in global production over the 1990s and 2000s, in which the foundations of commercial success have shifted. Specifically, global production has shifted from a world of vertically-integrated, capital-intensive, manufacturing-centered production to one of “fragmented” production in which firms have broken up and outsourced to other firms in order to intensely specialize on core competencies which may not involve manufacturing. Thus, while Chinese policymakers understandably looked to Japan and Korea – success stories of the post-war decades – for models of industrial policies in nurturing export-oriented national champions to lead the country up through the international division of labor, the underlying factors that made Japan and Korea successful had shifted under the radar of Chinese policy makers. That is, the constitution of the ‘national champion’ itself had changed. As such, Chinese industrial policies worked beautifully in industries that retained vestiges of the former production systems, but yielded no notable national champions in those that had undergone this transformation. At the same time, fragmentation also shifted the very definition of commercial ‘success’ from one of ‘ownership’ (i.e. Chinese-owned firms) to one of ‘capturing value’ in the home country, such as through the formation of supply bases. This second dynamic worked in industries in which Chinese firms could more readily capture value in China, creating surprising successes in the absence of industrial policy. Thus, China’s uneven successes offer important insights into the changing nature of production, while also widening the discussion over the definitions and goals of industrial policy for developing countries, today. The paper also considers the unintended consequences when subjective knowledge, information and bounded rationality among policymakers interacts with evolution changes in the international economy.


 
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