Chapter One
INTRODUCTION
1.1. Research Background
China's economic reforms and subsequent rapid growth have made China the âWorld's Factory Floorâ (Hennock, 2002). The timely insertion into the restructured global economy has brought about an influx of foreign and domestic capital as well as technologies and advanced management skills to China. As part of the remarkable economic growth of the whole country, the dramatic expansion of China's information and communication technology (ICT) industry in recent years appears to be of special importance, not only because the ICT industry has been a driving force for innovation and growth in other industries but also because it involves national security as a core industry of informatization for the whole economy and society (Breidne, 2005). It is pointed out that the ICT industry has been âa Chinese pillar of success and is now the largest industry in China with a growth of nearly 20 percent annually, and there is no end in sightâ (Pecht, 2006, p. xiii). China's First National Economic Census conducted in 2004 singled out the ICT industry as one of the major contributors with growing significance to the Chinese national economy.1 With less than 6 percent of employment and less than 9 percent of the total assets of the whole manufacturing sector, the ICT manufacturing sector generated 12 percent of sales revenue to China's manufacturing industry in 2004 (CSSB, 2005a). The rapid growth of the ICT industry is a recent phenomenon as the ICT manufacturing sector started to dramatically expand only after 1994 and the software sector enlarged only after 2000. Before 1994, the ICT manufacturing sector generated less than 4 percent of output value to the whole of manufacturing industry. This ratio has remained stable at over 8 percent since 1999. Meanwhile, ICT exports have made an even more significant contribution to the whole manufacturing industry. Over one-third of total exports in
China was produced by ICT manufacturing during the period 2003â2008 (CSSB, 2004, 2005b, 2006, 2007, 2008, 2009; MII, 2004, 2005, 2006, 2007, 2008, 2009). ICT exports increased from 142.1 in 2003 to 521.8.5 billion USD in 2008.
China's ICT industry also occupied an important role in the world economy. The industrial output generated by China increased from $14.7 billion to $20.1 billion from 2003 to 2005, accounting for 13.1 and 15.1 percent, respectively, of the world's total (Ning, 2009a, p. 74). China has not only become the world's number one producer of most electronic products such as TVs, recorders, VCD players, telephones, calculators, refrigerators, air conditioners and personal computers, but has also been identified as the number one cellular phone and integrated circuit (IC) market (Pecht, 2006). It is reported that China has been the leading exporter of ICT goods to the world, ahead of Japan and the European Union since 2003, and overtaking the U.S. in 2004 (OECD, 2005).
Given the significant role that China's ICT industry has played in the national economy and the global production chain, it is not surprising that China's ICT industry has attracted much attention from scholars and policy-makers (Breidne, 2005; DeWoskin, 2001; Fan, 2003; Harwit, 2005; Katsuno, 2005; Khalil and Hamid, 2005; Lin and Wang, 2009; Lin et al., 2011; Meng and Li, 2002; Naughton, 1997; Ning, 2009a; Pecht, 2006; Wa n g et al., 2010; Zhang, 2008; Zhou et al., 2010). However, the detailed mechanism of technological innovation and its regional variation remain poorly understood, mainly because of the lack of consistent and comparable data. The rapid growth and the unknown innovative capability of China's ICT industry have raised some interesting and important theoretical and empirical questions about the innovation dynamics of Chinese transitional economies. What is the technological level of China's ICT industry and what position has China taken in the global ICT value chain? What is the spatial pattern in the economic and innovative performance of China's ICT industry? Is there any relationship between spatial agglomeration and economic performance as well as between industrial clusters and innovative performance? While a plethora of literature is available to explain the innovative performance of a region with reference to a relational framework that places much emphasis on inter-firm linkages and network embeddedness as well as learning processes and untraded assets, can the same dynamics derived from Western-based experiences be directly applicable to the ICT firms in a socialist economy under transformation such as China? If not, how can we explain the dynamics of technological innovation of China's ICT firms? These questions are fundamental to our understanding of not only the dynamics of technological innovation of China's ICT industry but also the diverse process of technological innovation in different world regions under globalization.
1.2. The Case of China's ICT Industry
This study documents the dynamics of growth and innovation of China's ICT industry. The significant growth of China's ICT industry in recent years has been the results of the efforts made by the Chinese government and the restructuring of the global ICT industry. Before the 1978 economic reform, there were very few ICT firms in China. Without any autonomy, these firms produced and sold according to the administrative commands and did not undertake any research and development activities. Although this planned economic system had been criticized for its separation of R&D and production from market demands, it produced significant technological breakthroughs through mobilizing the nation-wide resources into several important research projects, which laid a fundamental foundation for the later growth and technological progress of China's ICT industry.
The 1978 economic reform allowed foreign and private capital to participate in the construction of China's ICT industry and, since the 1990s, this industry has embarked upon a path of rapid growth. However, as a latecomer to the ICT industry in the world, China has still been stuck at the low end of the global value chain with the focus on the processing and assembly of electronic products, even though it started to produce much more sophisticated products like electronic computers rather than household video and audio equipment that used to dominate China's ICT industry in the 1980s. At the end of 2007, the sub-sector of electronic computer manufacture had accounted for 33 percent of output value, 26 percent of total profits and 41 percent of exports, much higher than those of other ICT manufacturing sub-sectors, namely telecom equipment, radar and related equipment, broadcasting and television equipment, household audio and video equipment, electronic devices, electronic components and other electronic equipment (MII, 2008).
While the strategy of a âmarket for technologyâ that China adopted at the beginning of the reform and opening-up has indeed attracted a great deal of foreign investment, a problem appeared to be related to the ICT industry's heavy reliance upon foreign capital and technology. China's ICT manufacturing industry has been dominated by foreign-invested firms that had produced 60 percent of output value, 72 percent of exports, 55 percent of total profits and 50 percent of output value of new products at the end of 2004. Although China has been the number one exporter of ICT goods in the world since 2004, the lion's share of ICT exports have been completed by processing imported materials. For example, China had become the leading exporter of TV sets and DVD players, but the most valuable chips in these products are still heavily dependent on imports.
With the core technology controlled by others, China's ICT manufacturers have a weak negotiating power in the world market and survive only on a very thin profit margin. A bitter lesson from the severe dependence on foreign technologies is the patent dispute over the export of DVD players in 2002, when Chinese-made DVD players were impounded at European ports because the manufacturers did not pay the high patent fees. As a result of this dispute, most of the Chinese DVD makers went bankrupt (Suttmeier and Yao, 2004). A Chinese DVD manufacturer complained that âthe more we sell, the more we loseâ because over one-third of the revenues for selling DVD players in the USA went toward royalties to the DVD patent holders (Suttmeier and Yao, 2004, p. 11). The incapability of the indigenous firms to grasp the core technology is not particularly confined to the manufacture of DVD players. This case reflects the awkward situation that Chinese ICT manufacturers found themselves in. Unable to compete with foreign firms in the core technology, most indigenous firms only engaged in low-end production, taking advantage of a cheap labor force and use of land at the expense of product quality.
In recognition of the fact that China's ICT industry is vulnerable without its own IP rights, the Chinese government tried to help its firms get out of the âpatent trapâ set by the industry leaders and to ensure national security through establishing homegrown standards in certain ICT fields. This action and many other efforts made by the Chinese government have exerted a positive influence on the innovation-related strategies of the firms. There are studies to make the case that China has stood on her own feet in certain technology and has managed to develop some of its core technology through indigenous and domestic R&D activities (Lu, 2000; Sun, 2002b; Zhou, 2008). This book also identified that a few regions and firms tend to be much more innovative than others. China's ICT industry has a strong tendency to concentrate in the eastern coastal area, including Beijing, Shanghai, Guangdong, Jiangsu and Fujian. However, the industrial clustering of China's ICT industry did not bring about correspondingly better economic and innovative performance, as the prevailing theoretical models have suggested. As the most clustered area of ICT manufacturing in China, Guangdong Province has alone accounted for over one-third of the employment and produced over of the output value to China. However, its labor productivity and capital profitability are rather poor and its innovative performance, measured by both granted invention patents and output value of new products, is also disappointing. In comparison, Shanghai, with a lower employment location quotient, achieved a much better innovative performance than Shenzhen, a leading city-region in the ICT industry of Guangdong Province.
This study reveals that the innovation dynamics of China's ICT firms is not embedded in industrial clusters or in inter-firm linkages, connections and relationships, but instead lies in the process whereby the innovation-related strategies of the firms are coordinated with the strategic selectivity of the state, so-called âstate-firm strategic coordinationâ. Therefore, the different degrees of state-firm strategic coordination entailed a different extent of innovative performance of firms within a city-region and in different regions. Under an innovation-supportive regional environment that is characterized by an active strategic selectivity by both the central and local governments toward innovation-related activities, Shanghai's firms are more innovation oriented. Shanghai achieved a higher degree of state-firm strategic coordination and hence a better regional innovative performance. In sharp contrast, under an innovation-averse regional environment that indicates no interest by both the central and local governments in innovation-related activities, firms in Shenzhen suffered from a much lower degree of state-firm strategic coordination and hence a worse regional innovative performance. Why is there a mismatch between existing theories and the Chinese reality? How do the prevailing theoretical frameworks explain the dynamics of technological innovation?
1.3. Theory and Reality
In recent decades, the importance of technological innovation to sustained regional economic growth in the context of intensified global competition has received considerable scholarly attention. Ever since Schumpeter (1934) brought up technological innovation as one of the basic factors for economic development, the dynamism of innovation has never ceased to intrigue economists, geographers, planners and development specialists (Dodgson and Rothwell, 1994; Fagerberg et al., 2005; Fagerberg and Verspagen, 2009). Since the 1990s, a great deal of theoretical and empirical work has been carried out to investigate industrial clusters and the geography of innovation (Audretsch and Feldman, 1996; Bottazzi and Peri, 2003; Breschi and Lissoni, 2001a, 2001b; Cooke, 2001; Döring and Schnellenbach, 2006; Howells, 2002; Kesidou and Romijn, 2008; Porter, 1990, 2000a). Among many other things, it is widely recognized that co-location of related firms could facilitate cooperation and competition, produce mutual trust and an innovative milieu, stimulate collective learning and bring about localized knowledge spillover, all of which will contribute to the growth of a regional knowledge-based economy (Fan and Scott, 2003; Florida, 1995; Porter, 1990, 2000a). A brief review of the existing literature can identify at least three prevalent explanatory frameworks that build their interpretations upon such analytical concepts as localized production networks, innovative milieu and knowledge spillover, etc. (Audretsch and Feldman, 1996; Camagni, 1991c; Florida, 1995; Porter, 1990, 2000a). Each of these interpretations tends to approach the same issue from different standpoints and is characterized by different emphasis.
The model of a localized production network stresses the importance of the production linkages based on the division of labor and vertical disintegration in an industrial cluster. A localized production network is believed to have the effect of increasing external economies of scale and scope, producing collective efficiency and reducing transaction costs (Grabher, 1993a; Marshall, 1920; Schmitz, 1995). Geographical proximity is considered to be important because it allows firms in the same region to share collective resources, facilitates the interaction between suppliers and customers, cultivates a relationship of mutual trust and stimulates competition (Bröcker et al., 2003; Fan and Scott, 2003; Gertler, 1995; Gordon and McCann, 2000; Saxenian, 1994).
In the last two decades, the study of economic geography has experienced a shift of emphasis from an economic and reductionist explanation to a more contextual and discursive approach, sensitive to social, cultural and institutional environments in the understanding of industrial location and regional development (Amin, 1999; Barnes, 1999; Martin, 2000; Yeung, 2005a; Yeung and Lin, 2003). Regional unevenness in technological innovation has to be understood in relation to the variation in social, cultural and institutional conditions. The key to technological innovation, it is argued, lies in some âinnovative milieuâ, such as the presence of a well-developed enterprise culture, supportive regulatory and promotional agencies, research-orientated universities, and locally committed financial structures, and the resulting process of mutual learning in such an innovative milieu (Martin, 2000, p. 82).
In recognition of the importance of collective learning, scholars started to pay much attention to localized knowledge spillover in the process of technological innovation (Cooke, 2001; Döring and Schnellenbach, 2006; Howells, 2002; Paci and Usai, 1999; Porter, 1990, 2000a). In the framework of knowledge spillover, knowledge is seen as a localized asset which is difficult to access for firms outside the region (Simmie, 2004, p. 1098). Because of the localized nature of technological knowledge, geographical proximity is believed to be instrumental in speeding up knowledge spillover and stimulating various forms of learning-by-doing, learning-by-using and learning-by-interacting (Malmberg, 1996; Maskell and Malmberg, 1999; Porter, 1990, 2000a). In this view, localized knowledge spillover could cut down the cost of knowledge search and scientific discovery and hence, to a large extent, reduce the risk resulting from the uncertainty of innovation (Audretsch and Feldman, 2003). The localized knowledge spillover resulting from the clustering of firms is therefore identified as a major driving force for technological innovation and regional growth (Kesidou and Romijn, 2008).
While the theories of industrial cluster have shed significant light on the dynamics of technological innovation, a close scrutiny and critical evaluation leads to a number of conceptual issues that require further clarification and interrogation. First, these theoretical frameworks stressed the importance of interactions or inter-relationships among the firms within a region, while paying little attention to the nature, attributes and characteristics of the firms themselves as active agents and actors in the process of technological innovation. Recent studies have shown that the nature and attributes of firms (e.g. size, ownership, market orientation, etc.) have implications for technological innovation no less significant than the regional environment that surrounds the firms (Beugelsdijk, 2007; Jefferson et al., 2006; Lin et al., 2011). It has also been observed that the success or failure of the technological innovation of a firm is, to a great extent, dependent upon the firm's capability to find a coupling between its production and a niche in the market where the firm has its competitive advantages (Brown and Fai, 2006). Meanwhile, these frameworks neglect to explore the internal resources held by the firms for technological innovation and hence fail to understand their diverse innovation-related strategies and behavior. Most of China's ICT firms are relatively small, without adequate capability to mobilize the necessary capital for innovation-related investment and without a highly-qualified workforce to potentially lead important research projects. These observations lead to questions like âwhat are the constraints to innovation confronting ICT firms in China? What are the options for ICT firms to overcome these barriers and conduct innovative activities? Why are some firms more innovation-oriented than others even though both of them share the same location?â These questions require further investigation.
Second, the frameworks have tended to assume that all firms in a cluster are tempted by the benefits of innovation and would therefore like to engage in research and development activities without taking into account other influential factors that may depress the innovation-related activities. Explanations as to why some firms are more innovative than others have been made in terms of the different capability of the firms to gain access to knowledge, without paying adequate attention to the motivations of firms and the opportunity costs that may be involved if a firm decides to engage in innovation. The reality has clearly been more complicated that what has been perceived in these theories. Firms are not necessarily motivated to engage in innovation-related activities because of the risks anticipated and the opportunity costs involved. It has been noticed that many firms would not be willing to commit themselves to innovation-related activities because of the risk-averse nature of private capital (Arrow, 1962; Lu, 2000, p. 15). In addition to financial constraints, there are many strategic considerations which may mean that firms are reluctant to enter the...