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Issue 38, September 2011

This newsletter is a monthly supplement to ChinaAnalysis.Com, a new website that aims to promote knowledge sharing in China-related analysis. This newsletter contains original content and may not be reproduced without exclusive written permission. If you have any questions, comments and suggestions, please email support@chinaanalysis.com.

ChinaCompass - China’s Growth Path: From Infrastructure Investments to Technology Transfer to Indigenous Innovation

By William Lazonick

In 2006 the Chinese government made the promotion of indigenous innovation central to its Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020). This latest stage in China’s growth builds on earlier policies that have promoted infrastructure investments in China and technology transfer to China from abroad. The dynamism of the Chinese economy can be understood in terms of the combination of these three drivers of economic growth.

In terms of investment in infrastructure, there have been vast additions to China’s productive capacity. For example, in 1979 China accounted for 4.6% of world crude steel production compared with 16.6% for the United States and 15.0% for Japan. China surpassed the United States in steel production in 1993 and Japan in 1996. In 2010 China’s crude steel production was 6.6 times its level 15 years earlier, and represented 44.3% of the world total, compared with 7.7% for Japan and 5.7% for the United States.

Alongside capacity expansion, another driver of China’s growth has been technology transfer from the advanced economies. A prime objective of the 1978 economic reforms was to build the nation’s science and technology (S&T) infrastructure. In addition to launching a massive educational effort to increase the supply of scientists and engineers, from 1985 the Chinese government invited multinational corporations (MNCs) to invest in joint ventures (JVs) with Chinese state-owned enterprises (SOEs) under the policy of “trading markets for technology” (TMFT). As the phrase suggests, the lure for MNCs was the potential to gain access to burgeoning product markets in a rapidly growing nation with almost one-fifth of the world’s population.

Quick to grasp the opportunity was the German automaker, Volkswagen (VW), which entered China in a JV with Shanghai Automotive International Company (SAIC) in 1985, followed by another one with First Automotive Works (FAW) in 1987. By 2000 VW produced 52% of the passenger cars in China, most of them for government and taxi fleets. At the time, however, China’s car production represented only 1.5% of world production, and China ranked a distant 13th among all national car industries.

The past decade has changed all that. In 2010 China produced 13.9 million cars, 23.8% of the world total, about 37,000 cars greater than the combined production of Japan (8.3 million) as number two and Germany (5.6 million) as number three. VW produced 1.7 million cars in China in 2010, 2.8 times its production a decade earlier but now representing only 2.9% of total Chinese production. In the Chinese market VW was now second to General Motors. In 2010 GM boosted its worldwide car production to 6.3 million, about a quarter of a million more than in 2008, the year before GM went bankrupt and had to be bailed out by the US government. The 2010 total included 2.2 million cars produced in China, 1.2 million more than in 2008 and 35% of GM’s worldwide production.

At the same time, GM, VW, and other MNCs face lots of indigenous competition in the Chinese car industry. In 2010 no indigenous Chinese companies were represented among the top 15 car producers in the world, although combined the top 15 companies (six Japanese, three German, two each American and French, and one each South Korean and Italian) produced 8.6 million cars in China. Of the next 25 largest car producers in the world, however, 17 were Chinese, with a total output of 5.9 million cars, or 42% of China’s car production. (Note: There is some double-counting between foreign and indigenous producers because of JVs.)

These indigenous Chinese companies are the ones to watch. According to research by Kaidong Feng in his recent Sussex University Ph.D. dissertation on indigenous innovation in China, it is the indigenous Chinese car companies, and in particular nongovernmental enterprises such as Geely, Chery, and Brilliance, that have not been involved in JVs with MNCs, that are the most innovative in the industry, particularly in product innovation. Why? In JVs domestic companies give up strategic control to MNCs. While under TMFT, MNCs are supposed to transfer technology to the Chinese, they tend to keep the latest developments to themselves. When, as has typically been the case in JVs, the Chinese partners are SOEs, the strategic mandate from the government has been to expand production capacity (stressing process innovation) rather than generate higher quality products.

In contrast the nongovernmental enterprises can tap into the state-funded S&T infrastructure for knowledge and people and the national banking system for finance capital while maintaining their strategic autonomy from the government in the allocation of resources and returns. These indigenous companies, some of which succeed and many of which fail, seek to set themselves apart from the competition through innovation.

The process of indigenous innovation in China took root long before the Chinese government made it a formal policy focus in 2006. In his book, China’s Leap into the Information Age, published in 2000, Qiwen Lu documented and analyzed indigenous innovation in the rise of China’s first successful computer electronics companies during the 1980s and 1990s, including Legend (now Lenovo) and Founder. In his doctoral thesis, Dr. Feng has found similar results on indigenous innovation for the communications equipment industry, in which Huawei Technologies and ZTE are the most prominent examples. So too in a study of the electric power industry that Feng has done collaboration with Qunhong Shen of Tsinghua University, and in a just completed study on the development of the Chinese semiconductor industry by UMass student Yin Li. Going forward, state-of-the-art work on the subject of indigenous innovation will be the focus of a workshop on “Chinese ways of innovation” in Los Angeles in October.

China will continue to expand its productive capacity and transfer technology from abroad. Without these investments, indigenous innovation could not take place. At the same time, however, indigenous innovation will become increasingly important to China’s growth as an economic superpower.

Top News of Last Month
Aug 01 China's manufacturing sector contracts first time in a year
Aug 09 China inflation rises to 37-month high in July
Aug 09 China's first aircraft carrier starts sea trial
Aug 10 China's July exports hit record high
Aug 22 China builds 150 business start-up incubators for returning Chinese talents
Aug 22 China overtakes U.S. as largest market for PCs
Aug 24 China on track for modern military by 2020: U.S.
Aug 27 China formalises rules for inward merger checks
Aug 27 China plans to attract more overseas Chinese scholars in next 5 years
Aug 30 Fitch says China yuan debt downgrade likely
New Books
Charting China’s Future: Domestic and International Challenges

Edited by David Shambaugh

“Charting China’s Future provides informed analysis on the complexities of today’s China, and where these complexities may lead, from some of the world’s leading Asia experts. The contributors have provided clear, intelligible, and forward-looking analyses, free of social science jargon and extensive footnotes. Probing into many of the key domestic and external issues facing China today from political, economic and social perspectives the book proffers a forward-looking analysis that will appeal to anyone with a professional, academic or personal interest in the big issues facing today’s China and its interaction with the world.” – from Routledge, August 2011


Edited by Elaine Jeffreys

“Since the Chinese Communist Party (CCP) embarked on a program of 'reform and openness' in the late 1970s, Chinese society has undergone a series of dramatic transformations in almost all realms of social, cultural, economic and political life and the People's Republic of China (PRC) has emerged as a global power. China's post-1978 transition from 'socialist plan' to 'market socialism' has also been accompanied by significant shifts in how the practice and objects of government are understood and acted upon. China's Governmentalities outlines the nature of these shifts, and contributes to emerging studies of governmentality in non-western and non-liberal settings, by showing how neoliberal discourses on governance, development, education, the environment, community, religion, and sexual health, have been raised in other contexts.” – from Routledge, August 2011
Competition Policy And Regulation: Recent Developments in China, the US and Europe

By Michael Faure and Xinzhu Zhang

“This unique book considers competition policy and regulation in light of the recent introduction of the anti-monopoly law in China. It addresses the relevance of competition policy for China from a broad theoretical and practical perspective, bringing together lawyers and economists from China, Europe and the US to provide an integrated law and economics approach.” – from Edward Elgar Publishing, August 2011
Upcoming Events
Sep 08 - Sep 11 China International Fair for Investment & Trade
Sep 19 - Sep 20 Effective Project Management of Global Megaprojects
Oct 06 - Oct 07 Workshop on “Chinese Ways of Innovation”
Oct 14 - Oct 15 International Conference on Social Sciences and Society
Oct 15 - Nov 04 The 110th China Import & Export Fair

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