Innovation and Industrial Development in China

A Schumpeterian Perspective on China's Economic Transformation

Kaidong Feng

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9780367111243
• eBook ISBN: 9780429656002
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book focuses on China's economic transformation at firm and institution levels.

It shares insights into the growth of innovative Chinese firms in the automobile and telecom equipment sectors, both of which promoted social dialogue of policy-making and ultimately contributed to a policy paradigm shift in China's 'indigenous innovation'. The book illustrates, through case studies on firms like Geely, the Chery, the BYD, Huawei, the ZTE and the DTT, how these firms behave differently from other local actors and what social conditions had contributed to their success.

The book will help those who are interested to learn more about the rise of innovative Chinese firms to better understand the dynamics of China's industrial progress.

1
From imitation to innovation

A policy transition

The growing power of Chinese industrial innovation has been broadly highlighted globally since 2018 due to the trade conflicts between China and the United States. The heated debate around the trade conflict creates an interesting context for analyzing China’s growth in her industrial capability that occurred over the past two decades. The current Chinese scenario is in sharp contrast with that of 20 years ago. Back in the late 1990s, many international observers, such as Peter Nolan and Xiaoqiang Wang (1999), considered Chinese domestic industry to be highly vulnerable due to low-level competitiveness of large Chinese firms in comparison to their international rivals. In practice, China did meet a huge challenge at that moment, with the unemployment of about 25.5 million SOE (state-owned enterprise) workers, a big shock during the second half of the 1990s (Zhu, 2013; Shi, 2017). However, less than 20 years later, China has become the second largest economy in the world since 2010 and begun to show strong innovation capacity in a series of industries. When Donald Trump declared his trade tariff actions in 2016, he described China as a highly competitive actor in industry and technology, particularly pinpointing the “Made in China 2025” program as an ambitious plan aiming at overtaking the technological advantage of the United States.

In sum, the rapid development of China in the past 20 years creates a pair of images in stark contrast: a vulnerable system of manufacturing economy that is uncompetitive in technology in the late 1990s as opposed to a now world-class economy with frontier technologies. Of course, the assessment of many current critics of China’s rise is quite exaggerated, including Donald Trump’s. But the sharp contrast still brings about a great puzzle in a wide range of domains. In the areas of political science and development economics, scholars develop special concepts such as the “China Model” (Bell, 2015; Breslin, 2011) or “Beijing Consensus” (Halper, 2010) for understanding the Chinese story or Chinese experience. For the discussion in economics and management, it is necessary to shed light on the changes of a major economic actor, namely the firm, to see what has happened to Chinese industrial firms, and what has led to their dramatic uplift of capability. The firm level discussion of this book is based on the transformation of two industrial sectors, namely the car sector and telecom equipment sector in China. The discussion stresses a revival of the engineering-oriented pattern of industrial firms as a central issue for the emergence of Chinese innovative firms. Such a revival urged a policy transition in 2005, which promoted China’s transformation to an innovative nation. To understand the transformation well, we must take an in-depth look at their patterns and the social conditions that have cultivated the changes.

This chapter gives a brief introduction to the entire book. It particularly provides answers to the following questions:

What policy transition has facilitated the economic transformation?

Why did the emergence of Chinese innovative companies trigger the policy transition?

What does the policy transition mean in the long run for China’s developmental strategy?

1.1 The policy transition: forging a concept of “indigenous innovation”

On a spring day in 2004, when Lu Feng, a professor of political economy at Peking University, visited the headquarters of the Ministry of Science and Technology (MOST) of China for a meeting, he found all the officials he knew in the building greeting him and warmly asking to shake his hand. When he arrived at the conference room, the minister and other participants solved his puzzle; the Politburo Standing Committee had made very positive comments on a report authored by his team and delivered it to the relevant ministries for forging a policy agenda.

The report, titled as The Policy Choice to Develop Our State’s Automobile Industry with Indigenous Intellectual Property Rights [in Chinese: 发展我国自 主知识产权汽车工业的 政策 选择], was the major outcome of a research project commissioned by the MOST in the autumn of 2003. Based on intensive field studies, it criticized the prevalent national strategy, namely the “trading market for technology” [in Chinese: 市 场换技术, hereinafter referred to as TMFT] strategy. It argued that the TMFT practices, marked by the surge of Sino-foreign joint-ventures of manufacturing firms (Sino-foreign JVs hereinafter), undermined the capability of China’s industry in developing technologies indigenously. In contrast, the report shed light on a series of automobile makers which were not yet on the horizon of the central government. Based on a very active strategy of technological learning, they survived through tough competition against international giants. Thus, in comparison to the failure of the then prevalent TMFT practice, the experience of indigenous innovators might have indicated a new pattern for China’s industrial development.

The MOST, led by the minister Xu Guanhua, a former geoscientist, took on the critical task of initiating a national debate about China’s industrial development strategy. It submitted the report to the Politburo Standing Committee without further editing,¹ and the very positive feedback it received had the MOST realize the rarity of such an opportunity to steer a critical transition. Later in 2004, Minister Xu had two chances to have an in-depth discussion in person with Hu Jintao, president of China of the time. All kinds of conferences were arranged to heat up the debates, as there were still voices from other ministries. The rapid expansion of China’s economy in the previous 10 years made many officials and researchers in the Chinese government believe that China could continuously reap the benefits from foreign direct investments (FDI) (e.g. Jiang, 2002). And the then leaders of large SOEs also mostly disagreed with the idea of indigenous innovation since the major economic income from their operations attributed to their partnership with multinationals. They were too rigid to act upon any advocacy for developing complex technologies and products locally.²

In December 2004, President Hu Jintao emphasized the significance of indigenous innovation in the annual Central Economic Working Conference. He addressed the capability of Chinese industry in indigenous innovation as the central issue for advancing the structural adjustment of the economy.³ Soon, in 2005, Chinese policy-makers launched the National Programming 2006 – 2020 for the Development of Science and Technology in the Medium and Long Term [in Chinese “国家科技中 长期规划 2006–2020, hereinafter referred to as MLP 2006–2020] with the term “indigenous innovation” became the formal keyword. Such a plan was officially launched at the National Conference on Science and Technology (2006).⁴

The central role of “indigenous innovation” in the MLP 2006–2020 indicates a significant policy transition, and some critics even regarded it as a “shift of policy paradigm”. First, it constructed a sharp contrast against the previous dominant national strategy for industrial development, namely the TMFT. Second, it was a programmatic document as a medium-and long-term plan and a guiding layout for other shorter-term plans (such as all kind of five-year plans). Finally, the MLP 2006–2020 utilized a national conference on science and technology as its means of nation-wide mobilization. All these have certified the significance of the 2005 policy transition for China’s development,⁵ and the formation of a new paradigm has ceased most previous policy debates and served as a guide for economic planning.

Thereby, a significant policy transition was ignited. The onset of a thorough social mobilization was triggered instantaneously. Right after the MLP 2006–2020 was launched, several National Propaganda Troupes for indigenous innovation were organized. Representatives from innovative firms, well-known scientists, policymakers, relevant scholars such as Prof. Lu Feng were convened. The troupes traveled around the country to promulgate the political resolution about indigenous innovation to audiences, mainly the officials of local governments and leaders of SOEs. One year later, all provincial governments organized their own propaganda troupes to transmit the information further. All these made the transition irreversible.⁶

At the national level, a series of policies were set up as instruments to incentivize domestic innovation or to push the transition further into a new stage. Many of these follow-ups have been discussed by international scholars or critics broadly, including the innovation assessment of SOEs in 2006 (Cai and Tylecote, 2008; Gao, 2019), the policy to encourage Emerging Industries with Strategic Importance in 2008 (e.g. Shubbak, 2019), the Promotion Plan for the Implementation of the National Intellectual Property Strategy in 2008 (Li, 2012), the National Innovation-Driven Development Strategy in 2012, and the Made in China 2025 initiated in 2015. In short, a new ecology of policies and slogans have been created. The concepts of “indigenous innovation” were at the heart of policies and shaped the new policy paradigm.

1.2 Triggers for policy transition: the rise of local innovative firms

As described earlier, it was veritably the report of Professor Lu and the efforts of the MOST officials that created a policy agenda for indigenous innovation. A nationwide campaign operated by the MOST officials, especially those from its Investigation Office, played a critical role. Conferences organized by the MOST and its allies were used to have all kinds of opinions of policy-makers, SOE leaders, scholars and social media exposed to the public.

However, it was not the first time that the arguments against the TMFT policy became a heated topic in public. So why was a policy transition triggered by the 2004–2005 debates rather than earlier ones? Our answer was that the social perception of successful cases of indigenous innovators made the difference. The rise of indigenous innovative firms provided not only a better context for relevant deliberations but also potential solutions for policy thinking.

In newspapers, the challenge to the TMFT practice started in the late 1990s. Until then there was no evidence that indigenous capabilities of industrial technologies were better off with the assistance of multinationals, even though China had made use of FDI as a method to facilitate local technological learning for about fifteen years. The car industry was a hot spot, and journalists, like Cheng Yuan,⁷ started to publish a series of articles in 1998 to criticize the poor performance of Sino-foreign JVs in developing technologies and products locally. In 2000, two former CEOs of the China Automobile Industry Corporation (CAIC) also realized the problem. They both were key persons in facilitating the TMFT policy in the automobile industry. However, when Chinese negotiation with the World Trade Organization (WTO) involved the terms about policies for the automobile industry, the two of them wrote to the Premier Zhu Rongji, respectively, and stressed the decadence of domestic car brands as a critical issue (Jia, 2010: 49–52).

However, without any alternative prospective solutions for indigenous innovation, the critics could only demand multinational partners in Sino-foreign JVs to put more efforts in fostering Chinese local technological force, or the policy-makers to support the indigenous brands. All these certainly received no positive response as the Chinese SOEs in TMFT practices had been depending increasingly on their foreign partners for technologies. Therefore, even those active advocates among policy-makers often ran into a paradox: on the one hand, they were not satisfied with the decline of local capability in technological development; On the other hand, they suggested more technologies should be imported to promote technological advancement. At the China Industrial High-tech Forum in 2001, Xu Guanhua, the Minister of Science and Technology, emphasized that “original innovation” rather than reliance on technological import was the foundation for China’s sustainable development (Xu, 2001a: 122–126). In the same year, he contradicted himself at a National FDI Affairs Conference by admitting that encouraging technological importation associated with FDI was still a critical part of China’s innovation policies (Xu, 2001b: 108–109). Among top policy-makers, Xu was distinguished for his endorsement of local S&T (S&T) development. He had also clearly acknowledged the growth of indigenous technological capability as pivotal to the enhancement of Chinese bargaining power in negotiations with foreign partners for technological importation by pointing out certain cases. However, none of his cases related to TMFT practices, but all to the public S&T sector. Xu knew well about the short comings of TMFT practices, areas in which the multinationals would not be willing to bring about potential local competitors with considerable technological capability. Nonetheless, lack of perception of an effective strategy for sustainable capability construction in industries, he had no choice but had to emphasize the contribution of FDI to China’s industrial technology with the expectation that the multinationals would set up more R&D (research and development) centers in China (Xu, 2001b: 108–109). Like most policy-makers in favor of domestic S&T advance, Xu made contradictory statements at different occasions, which reflected his vulnerability at that time.

The rise of indigenous innovators altered the situation. Around 2002, local innovative firms were becoming active in the mainstream domestic market. In the telecom equipment industry, two leading Chinese telecom equipment producers, namely Huawei and the ZTE, became formal members of 3GPP,⁸ which introduced them as formal players in the ongoing negotiation of the global industrial community for the third generation mobile telecom technology. These two firms had earned their positions within the global telecom community by their competitive products of large-scale switchers and equipment for the 2G mobile telecom system.⁹ However, as the 2G equipment market in China domestically was still dominated by multinationals and the JVs they co-founded with Chinese SOEs, the capability of Huawei and ZTE had not been properly assessed by the Chinese society. In the car sector, the Chery and the Geely began to launch their cars on a mass scale. However, as they focused on the low-end market and were accused by multinationals for IPR violations,¹⁰ they were still perceived by Chinese society as copycats of foreign technologies.

Therefore, it is not difficult to understand why Lu’s report delivered a critical impetus to initiating a momentous policy agenda. The report addressed the social perception gap at that time. It presented a detailed investigation into the pattern of Sino-foreign JV production, thereby indicating why the TMFT practices did not lead to indigenous innovation; and it also revealed how the effective activities for indigenous innovation were organized by three emerging car producers, namely Chery, Geely, and Hafei. The spread of this report updated the perception of Chinese society about the development pattern of TMFT practices and indigenous innovation. It also sped up the transition of wider social attitudes.

Compared with the TMFT practice...

Table of contents

• Cover
• Half Title
• Series Page
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• Preface
• Acknowledgements
• List of Abbreviations
• 1 From imitation to innovation: a policy transition
• 2 Requesting an innovative firm theory for catching-up study
• 3 Schumpeterian competition: the rise of Chinese local innovative firms
• 4 Retrospect: “trading market for technology” policy and its impact on Chinese state-owned enterprises
• 5 Re-emergence of engineers: organizational system of local innovative firms
• 6 Various sources of organizing: social conditions for the transformation
• 7 Conclusion: change of organizational pattern and rise of China’s indigenous innovation
• Index