China's Industrial Technology

Market Reform and Organisational Change

Shulin Gu

• Publisher: Routledge
• Year: 2004
• eBook ISBN: 9781134738328
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Offering a comprehensive review of reform policy, followed by an examination of major approaches to institutional restructuring, Shulin Gu explores the way in which China's industrial technology has responded to economic reforms. At the heart of the work is the argument that market reform and organisational change are closely interdependent. Gu outlines the interaction of the two in China and reveals the damage which may result if market reform is not accompanied by new organisational design. Analysis of these issues is drawn from first-hand experience of Chinese technology systems, supported by insights from technological innovation economics and transaction cost economics.

Part 1
A REVIEW OF REFORM POLICY FOR THE S&T SYSTEM IN CHINA From paid transactions for technology to organizational restructuring

1
INTRODUCTION TO REFORM POLICY

The need to address reform policy

Part 1 is intended to open discussions about science and technology policy, as part of market reform exercises, with a particular focus on China. Because of the great complexity and diversity of the R&D system in any modern country, it is limited to policy issues relating to industrial technology R&D. It is not the intention to consider academic (theoretical) R&D, or R&D in fields such as agriculture, health care, environmental protection, calamity prevention, etc., except to the extent that cross-over is unavoidable. When we have to deal with policies whose purpose is more general, the analysis will concentrate on those elements which are closely related to the transformation of R&D institutions for industrial technology.

The terms ‘market reform’ and ‘market-oriented reform’ are employed here as synonyms, and in their most basic sense. They refer to the introduction of the basic rule of the market that transactions are determined in the market place through negotiations between the buyer and seller. This is genuinely crucial to the transition of China’s industrial technology R&D institutions, which were organized and developed in a substantially different regime.

The central concern of the study is that market reforms require the restructuring of industrial technology R&D institutions. This is in contrast to the generally accepted view, which is usually restricted to the pure use of market power. This preoccupation has led to simplistic policy formulations that amount to no more than relying upon the expansion of a ‘free’ market. This has already considerably weakened the effectiveness of policies for the R&D system.

The industrial technology R&D institutions inherited by countries currently undergoing market-oriented reforms are basically characterized by the separation of the industrial R&D and innovation system from its users in production. As several authors have indicated, these systems, in centrally planned economies, were characterized by 1) the centrally planned governance of investments related to industrial technology and 2) extensive externalization (outside firms) of elements relating to industrial technological changes such as research, development, design, standardization, etc. (Hanson and Pavitt 1987:25–30). This pattern of institutional arrangement developed mainly in the 1930s and 1940s, with the inception and consolidation of the first centrally planned economy in the former Soviet Union, and was later adopted by about a dozen centrally planned countries, including China, after the Second World War. A number of countries in Latin America, Asia, and later Africa, began to build up their own industrial R&D capabilities from the 1950s, following rather similar patterns. Their R&D capabilities were established in centralized institutions, and financed and operated by governments. The roles and effectiveness of these centralized industrial research and service institutes have been continuously debated.¹

Numerous attempts are reported to have been made by the Soviet Union and other Eastern European countries from the 1960s to the late 1980s, most of which were focused on intensifying links between the separate organizations and functions necessary for technological change. These efforts can be illustrated by the hard push for the establishment of ‘science-production associations’ in the former Soviet Union. Generally three types of measures were used by the Soviet Bloc countries until the late 1980s, all aiming at improving the efficiency of the centrally planned systems: 1) to merge the originally separate research institutes either with groups of enterprises or with large individual enterprises; 2) to institute full-cycle planning for research work, with each major project having planning targets to cover the development of technology and its application in production, specifying both users and expected effects; and 3) to increase incentives to both researchers and users of industrial technology, by means of favourable pricing, bonuses, etc. This packet of measures has been called by some authors ‘efforts under a planned regime’.²

The policy issues addressed here became sharper when the former centrally planned economies began to take drastic steps toward market reforms. Since around 1990, economic plans have been radically abandoned in these countries, and the funds granted from government budgets to both enterprises and R&D institutes have been dramatically reduced. R&D institutes are forced to sell themselves on the market. ‘Inability in selling themselves’ (on the part of specialized and former government-financed R&D institutions) was then widely seen as the most pressing difficulty, and this became the focus of attention in science and technology policy communities in these countries and worldwide.³

Assuming that there is a problem of ‘inability in selling R&D’, the next question which is commonly asked is, ‘Are the limited market functions sufficient to support market reform for the R&D system?’⁴ Authors who have posed this question begin with the reality that R&D institutes have proved to be bad sellers, which they argue is due to low demand from users and the inadequacy of legal protection for intellectual property. They conclude that government appropriations are urgently needed to prevent the existing R&D organizations being dispersed and lost.

It must be admitted that the market institutions are definitely poor, and that the users of industrial R&D are weak, at a time when the reform efforts are just starting to transform them. In practice, the question raised by the debate is: Should the reform process go back to the old system? Can the transformation of the science and technology (S&T) system, which has proved to have limited abilities in selling itself and dealing with the market, proceed on the basis of a market orientation? An OECD report has put the question in slightly different terms, and suggests an answer: ‘The problem…was whether measures were designed to keep capacity or the present structures. The latter…were judged…to be unsuitable for S&T development. Government should fine-tune approaches designed to preserve capacity and to change present institutional arrangements’ (OECD 1992:168).

Apart from the practical question of the ability of the S&T institutions to work through the market, there are theoretical questions about the suitability of the marketplace for mediating between the suppliers and users of technology and knowledge. Many presently preferred policies emphasize the soundness of market intermediation, assuming perfection in the technology market itself. There are reasons to question this assumption.

In industrially-developed market economies, industrial firms are the institutional basis for industrial technology (Freeman 1982, especially section 5; Kline and Rosenberg 1986). A large part of industrial R&D and designing is internalized within firm organizations. The uncertainty of technological innovation, and the tacitness of technological knowledge, have favoured internal organizational mechanisms rather than pure market mechanisms. It is argued that the commercial success of industrial technology depends on continually seeking to match uncertain technological opportunities to changing market possibilities, and the match can be realized more easily within firms, with better information feedback between the various activities. This internalization has developed spontaneously in market economies, underlining the imperfections of the pure market mechanism in dealing with technology transactions. Williamson has discussed these imperfections extensively in the context of ‘market and hierarchy’ (Williamson 1985, especially Chapter 2).

Market reform requires institutional restructuring, because the old institutions were developed to fit within the old economic regime. If the necessity of institutional restructuring was ignored (i.e., if R&D institutions were expected to produce the same products as in the past, within the same structures, but to sell them in a technology market), policy making would be unlikely to respond to the widespread evolutionary movement already underway towards the integration of production and research functions within organizations. For instance, in Hungary, during the last two decades ‘all types of research institutes adjusted themselves to the opportunities offered by business and restructured their activities accordingly… The R&D institutes themselves started manufacturing new equipment instruments.’ ‘In the 1970s production had become a common activity of R&D institutions…the market regulators [i.e., rules] made them interested in “in-house” production.’ ‘Thus, frequently, the mass production goods of the research institutes were also sold…’ (Balazs 1993).⁵ In East Germany, approximately 100 ‘research companies’ had been established from elements of former combines by November 1990 (Bentley 1992:156). Such realities have often been seen, in the light of neoclassic theory, as evidence of extraordinary chaos.

This study, therefore, addresses industrial technology R&D reform policy, with the focus on the what in a conventional view would be regarded as ‘extraordinary’ institutional restructuring.

The approach of the study—empirical observation of the historical evolution of reform policy in China

No systematic framework has yet been developed for analysing reform policies. Recently the OECD has organized studies on science, technology and innovation policies in some formerly centrally planned economies, addressing transitional issues. These studies seem to be at an early stage, of seeking to describe and define problems through empirical examination.⁶

An analogous approach is taken in this study which, from an empirical survey of the formulation and implementation of policies, and responses to policies, is intended to provide ingredients for the conceptualization of the subject. China is a promising subject country because the reform has been going on there for fifteen years with little interruption, and may be supposed to illustrate the ‘natural’ evolutionary process in the medium term. Our study differs from the OECD projects in two respects: it is elaborated in a longer historical context, with greater attention to the causes and consequences of important policy making since the market-oriented reform began, and is more narrowly focused on R&D institutions for industrial technology, a segment of the national science and technology (S&T) system which was more urgently faced with the need for restructuring.

The historical examination of reform policy asks these questions: 1) what demands to reform the R&D institutions arose out of the changing economic environment and international relationships, and how were these demands perceived by policy makers? 2) how were the related policies formulated and what measures were devised for the implementation of the policies? and 3) how did the R&D institutions respond to the policies, and how were the reform policies amended in response? These questions imply an examination of the most important events in the development of reform policies for the R&D system, in relation to the most important changes in economic reforms, at the expense of overlooking many other facets which may also have been influential, but to a lesser extent.

It will be evident that an historical perspective brings considerable benefits. It reveals an evolutionary sequence that highlights several steps, moving successively forward to adjust the S&T system in accordance with the economic reforms. In China, market-oriented reform was begun in the late 1970s, starting with the agricultural sector. This was followed by reforms for industrial sectors, launched in the first half of the 1980s. Following on from this process, market-oriented reform for the S&T system has been in place since 1985, when the Decision on S&T Management System Reform was promulgated. Many observers have stopped there, but a close examination will show that institutional restructuring has been developing ever since, in parallel with the expansion of market dynamics.

The restructuring of R&D institutions thus far has produced a few recognizable forms: 1) merging R&D institutions into existing enterprises; 2) spinning-off new technology enterprises from R&D institutions; and 3) transforming whole individual R&D institutes into manufacturing or engineering corporations with intensive in-house R&D and design. Policies for facilitating these kinds of restructuring were created in a clear time sequence, from merging R&D into enterprises in 1987, to spinning-off in 1988, to the transformation of individual R&D institutes since the 1990s. The different mechanisms underpinning these transformations will be explored, along with the review of policy initiatives, in order to illustrate what kind of ‘fine-tuning’ reform policies were developed, in interaction with particular kinds of restructuring, at each stage of the process.

This part of the book is organized in seven chapters. The remainder of this chapter will sketch changes in the economic environment since the end of the 1970s, and outline the institutional heritage of the system for industrial R&D in China, so as to provide a broad background for the following chapters. Chapter 2 introduces the main policy initiatives from the end of the 1970s to 1985, as a basis for comparison with those taken after 1985. This period saw an overall rehabilitation and enhancement of the planning apparatus and of state-run R&D institutions, to meet ambitious economic targets. During this period, market-oriented economic reform started in the agricultural sector and followed in the industrial sector. Chapter 3 analyses policy measures stipulated by the Decision on S&T System Reform in 1985. This launched the systematic introduction of technology market mechanisms into the operation of R&D institutes. Chapter 3 also outlines some responses by R&D institutes to the technology market. The following chapters deal with policies for various kinds of restructuring of industrial technology R&D institutes. Chapter 4 addresses restructuring by merging R&D institutes into existing enterprises; Chapter 5 is on the process of spinning-off enterprises; and Chapter 6 deals with the transformation of entire individual R&D institutes. Finally, the concluding chapter summarizes findings a...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Tables
• Figures
• Case Texts
• About the Author
• Foreword
• Series Editor’s Preface
• Author’s Preface
• Acknowledgements
• Part 1: A Review of Reform Policy for the S&T System in China from Paid Pransactions for Technology to Organizational Restructuring
• Part 2: Spin-Off Enterprises Channelling the Components of R&D Institutions into Innovative Businesses
• Part 3: The Machinery Technology R&D Institutes Transforming the Established Industrial Technology Institutions
• Notes
• Bibliography