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Can China be a new tiger?
Continuing our series of articles on China, RON
GROVES looks at the Chinese economy and assesses the claim that it can
repeat the experience of post-war Japan, South Korea and other
South-East Asian states.
IN THE EYES of the Chinese government, the road to
sustainable development and the emergence of the country as one of the
leading capitalist powers lies in China’s ability to harness science and
technology, thus enabling its firms to reach world levels by
commercialising research and development. The viability of this
perspective is increasingly debated, both inside the country and by the
capitalists internationally, as China has emerged as a major economic
force, with a clear distinction emerging between the ‘optimistic’ and
‘pessimistic’ camps. Can China emulate Japan, Korea and the ‘tiger’
economies and create internationally competitive, innovative, high-tech
firms like Sony or Hitachi and thus transform itself into a modern
industrialised country? Or will its nascent industries be crushed by
globalisation now that it has become a member of the World Trade
Organisation (WTO) and should be open to the untrammelled gales of
international competition?
There is no shortage of capitalist entrepreneurs and
bureaucrats in China who have a strong ambition to create a powerful
‘national team’ of firms which will be genuine global competitors.
Creating a dynamic, innovating, high-tech sector is central to this
aspiration, which is driven by a resurgent nationalism and the lure of
exploiting what is potentially the world’s largest consumer market with,
for example, already over 400 million mobile phone users. Within the
high-tech field, information and communication technology (ICT) is seen
as having the greatest potential to transform Chinese society. In the
words of Laurence Lau of Stanford University there will be ‘creation
without destruction’ due to the IT revolution. (This is a reference to
the ideas of the Austrian economist, Joseph Schumpeter, who coined the
phrase ‘the creative gales of destruction’ to describe the continuous
sweeping away of old industries by those based on new technology under
capitalism.) This ideal state of affairs will arise, according to Lau,
since China has the ability to leapfrog the advanced capitalist
countries because there are no vested interests to protect and no
existing businesses to cannibalise.
Leaving aside the rhetoric, there does indeed seem
to have been some significant success stories in China’s economic
development with the growth of an apparently strong, internationally
competitive ICT sector. A survey (August 2004) by the All-China
Federation of Industry and Commerce ranked Lenovo, an IT manufacturer
which recently bought out IBM’s PC business, as the country’s number one
privately managed company by sales revenue. The western business press
noticed the development of strong information and communication
technology firms several years ago, with The Economist commenting in
1998 that "they have succeeded largely by beating foreigners at their
own game".
Indigenous Chinese companies such as Huawei and
Great Dragon have captured more than half of the telecom market in
direct competition with NEC, Motorola and Alcatel. Lenovo (formerly
Legend) has been the PC market leader since 1996, also in competition
with international companies such as IBM and Compaq. Stone, a software
manufacturer, has 80% of the local word processing market and Founder
has become one of the world’s leading developers of colour
high-resolution electronic publishing systems. Lenovo, Stone and Founder
not only imitated western technology but successfully innovated new
products and processes. Their story was a reverse of the common pattern
of technology acquisition by ‘developing’ countries, which often starts
from labour intensive assembly and only much later, if ever, reaches a
point of indigenous design.
The high-tech sector
THE GROWTH OF successful indigenous information and
communication technology firms has been underpinned by the large science
and technology resources that were inherited initially from the command
system and then further developed and marketised by the state. China’s
science and technology structures under the command economy were
modelled closely on those of the Soviet Union in the 1950s. Of course,
consumer/producer relations were entirely different to a market system.
The consumer in the command system was the planning body and its demands
were transmitted by administrative fiat through industrial ministries to
science and technology bodies. Each ministry was responsible for a
particular industrial sector, for example telecoms, and had production
enterprises, research and development institutes and often higher
education bodies under its control.
The system was vertically integrated with very few
if any formal horizontal linkages between production units, on the one
hand, and the research and development institutes responsible for
innovation and higher education bodies with industrial ministry
affiliation. The role of such higher education bodies was to provide a
pool of highly specialised knowledge workers for the production units
and research and development institutes. Other organisations existed
outside the industrial ministries that had science and technology
functions, such as the institutes of the various academies of science
and universities under non-industrial ministries, but they played a
minimal role in industrial innovation. Labour mobility was very limited
and labour markets for knowledge workers did not exist since jobs were
allocated administratively, and were usually for life. The structures
for innovation were extensive, with 800 industry branch research and
development institutes existing before the market orientated changes
began in the mid 1980s.
The process of change in the Chinese science and
technology structures began in 1985 with the publication by the Central
Committee of the Communist Party of the resolution on structural reform
of the science and technology management system. These market orientated
‘reforms’ have continued, empirically driven, ever since and have
produced, intentionally or otherwise, some dramatic changes.
Patenting activity by Chinese firms increased in the
1990s, which could be significant since writing patent applications can
give an indication of innovative activity in firms. In the period
1998-2003, patent applications increased ten times. This explosive
growth was unbalanced, however, focussed in three regions only:
Guangdong, Jiangsu, and Tianjin. China is now in fifth place in world
patent filings according to the OECD.
The number of scientists and technologists in China
ranks only after the USA, Japan and Russia, with two million listed,
nearly half of whom were working in research and development. (China
Statistical Yearbook on Science and Technology, 2001). In 2000, China
became the world’s eighth largest contributor to academic journals in
science and technology, with nearly 50,000 papers listed in Science
Citation Index, Engineering Index and Index to Science and Technology
Proceedings. This totalled 3.5% of world output, a 7.5% increase on the
previous year. In basic science output, China was ranked eighth in the
world by Science Citation Index, up from 15th five years previously.
Also, China produces 352,000 graduate engineers a year, compared to
137,000 in the USA.
Gross expenditure on research and development (GERD)
as a percentage of GNP, a widely used performance indicator, was 1.31%
in 2003, a doubling since 1998, and a 17% increase on the previous year.
The Chinese GERD/GDP percentage of 1.31 compares to 2.62 in the USA,
1.88 in the UK and 0.88 in India, indicating that, although there is
still a significant difference with the advanced capitalist countries,
the gap is closing rapidly. In the last decade research and development
spending has more then doubled as a share of GDP and China is now second
to the USA in total research spending, pushing ahead of Japan.
Commercialising R&D
WHEN THE CHINESE government launched its programme
to harness science and technology using market methods in the 1980s, it
sent a delegation to the USA to study western approaches to
commercialising research and development. As part of this fact-finding
mission, officials visited Silicon Valley in California where explosive
high-tech growth was driven by a rapid proliferation of spin-off
companies from existing big firms, universities and research institutes.
In an attempt to emulate the perceived success of
the Silicon Valley model, in 1988 the State Council, a leading body in
the Chinese regime, designated China’s first national high-technology
development zone in Beijing, where there was a very high concentration
of universities and research institutions, and encouraged other cities
to prepare to develop their own zones. Since then, spin-off companies in
the Beijing high-tech zone have become some of the best known in China,
such as the Founder Group of Beijing University, the Tongfang group of
Tsinghua University, and Lenovo, spun off from the Institute of Computer
Technology of the Chinese Academy of Science. There are now 14,000
companies employing nearly 500,000 workers, making it the largest
science park in the world. Information and communication technology is
the dominant industrial sector, but there are also other significant
firms working in bio-tech, advanced materials including optics, and
nanotechnology.
In 1991, 26 zones in other cities were selected and
designated as national high technology zones, leading to the significant
growth in these areas of high-tech spin-off ventures, sometimes called
new technology enterprises, which grew rapidly to 900 by the mid-1990s,
if the companies linked to the Chinese Academy of Science are included.
This rapid growth was given a further boost by the government Torch
programme to establish ‘incubators’ and technology development zones.
There are now 436 incubators and 23,000 ventures linked to them. The
success rate of these high-tech start-ups was reported in the late 1990s
as 10%, comparable to the figure found for similar western ventures.
Science parks now account for the great majority of
output and activity in the high-tech sector in China. Three quarters of
all high-tech firms are based in science parks, which employ more than
four million people. In 2000, industrial products from high-tech parks
accounted for 25% of China’s value added output and total income from
them in 2001 was 13% of GDP.
The ‘pessimistic’ view
THE ENTRY OF China into the WTO in 2001, if
rigorously enforced, could have serious implications for its information
and communication technology sector. It was not accidental that this was
the part of the accession negotiations that was most heavily pressed by
the USA, since nearly all the leading world players are based in America
and China is the area where they see huge potential profits. As part of
WTO entry in 2001, tariffs on computer equipment were progressively
reduced to zero by 2005 and restrictions on the rights of foreign firms
to operate freely were all lifted by the same date. It remains to be
seen the effect this will have on indigenous ICT firms, and it is
possible that the USA and EU will not push for strict enforcement,
initially for political reasons linked to preserving China’s role in the
present unstable global economic equilibrium. However, the power of a
company like Microsoft will be difficult to resist if it is allowed to
operate untrammelled and if, as a result, fledgling national champions
are seriously threatened, the political pressure on a leadership that
relies increasingly for legitimacy on nationalistic rhetoric will be
intense.
High-tech development has made a significant
contribution to Chinese trade. High-tech exports increased 15 times in
dollar terms between 1991-2001, and have continued expanding since.
However, most of these exports have been from multi-national
corporations with local operations. For example, in the first nine
months of 2002, they accounted for 82% of the high- and new-tech export
total. Furthermore, many of China’s high-tech products do not possess
independent intellectual property rights, especially in critical
technologies. These products are located at the bottom end of the
high-tech value chain, and firms are negatively impacted by upstream
changes in standards, specifications, etc, beyond their control.
A study of the software industry in 2003 claimed
that it was still in its infancy, characterised by a lack of technical
skills, experience, management know-how, functioning capital markets,
transparency and legal protection. In this sector it was concluded that
the goal of the regime since 1978, to shift from a planned to a market
economy, had only been partly realised. Two non-market factors,
government and guanxi (personal networks, often corrupt, based on
reciprocal exchange of favours or family ties) continue to affect most
aspects of the software industry, with firms dependent on government for
contracts and other connections necessary to conduct business. How long
this status quo will withstand WTO accession, which was meant to sweep
away all distortions such as these to the free market, is a crucial
issue for the sustainability of local IT firms.
The consultancy firm, Deloitte Touche Tohmatsu,
found that there was very little cutting edge innovation in China, with
the possible exception of integrated circuit design and semiconductor
fabrication. According to Nicholas Lardy of the US Institute of
International Economics, only 15% of the value of China’s exported
electronic products are domestic value added, suggesting that the
country remains a mere assembler of high-tech products. Although
gambling software is more advanced than in the west, capable of
supporting hundreds of thousands of players simultaneously, there is an
acute shortage of software engineers available to commercialise this
advantage.
Although the size of the science and technology base
is impressive, the productivity of the sector lags far behind the
advanced capitalist countries, partly due to under-funding, particularly
in basic science. One measure of this is patent output which, although
increasing rapidly, is doing so from a low base. For example in 2000, of
the 12,683 patents granted in China in that year, only 8% went to
Chinese enterprises (China Statistical Yearbook for Science and
Technology, 2001). In output of scientific papers, China still is well
behind the USA, with one eighth of America’s publications in 2000.
Also, the impact factor (a measure of international
ranking) of the journals that published Chinese papers was consistently
lower than for American ones, and the works of Chinese scientists were
less cited by fellow academics than were those of their foreign
colleagues. In 2004, although it was in ninth place internationally in
published scientific papers, China ranked only 124th in the number of
citations per paper, which is a measure of international influence and
recognition. Finally, despite intense efforts by the state to rectify
the situation, China has never won a Nobel prize.
Policy changes have been made affecting the
relationship of firms with universities and research institutes that
could hit the viability of the information and communication technology
sector. The growth of university and research institute spin-offs played
a major role in the development of Chinese indigenous industrial
research and development, particularly in IT. Many of the biggest and
most successful firms such as Lenovo, the world’s third biggest PC
manufacturer, Huawai, Stone, Founder, etc, were created through this
route and their ‘founder’ academic bodies often still retain formal
ownership of them. The close links between universities and their
spin-offs helped the firms to innovate by providing them with privileged
access to knowledge, but there is now evidence that science and
technology structures are characterised by looser university/industry
institutional ties, still exploited by firms for reputational advantage,
but no longer providing privileged access to technical knowledge.
This shift was partly due to policy changes in the
past six or seven years. Although close academic/industry links were
important at a certain stage in creating high-tech industries in China,
the regime saw a danger by the late 1990s that basic research was being
seriously undermined by commercially focussed academic/industry
relations. Consequently, major policy changes were instituted to weaken
and eventually break the links between spin-off firms and their parent
academic bodies. The ramifications for information and communication
technology sector firms of this change could be serious, because the
‘free’ technical knowledge acquired as a result of the close links
between spin-off firms and universities and research institutes helped
give these companies a competitive edge that will no longer be
available.
Without hidden or not so hidden state support the
great majority of Chinese information technology firms will not be able
to compete with their counterparts in the advanced capitalist countries,
since there is little evidence that many of these firms have developed a
capability to innovate cutting edge products. They could survive if they
retain privileged access to state dominated markets, but their ability
to do this will be tested by the increasing pressure the USA will apply
on China to abide by the spirit of WTO entry.
Is the glass half-full or half-empty?
ASSESSING THE sustainability and prospects of the
high-tech sector in China is a complex question, partly because reliable
information is still sparse, although expanding, and partly because the
Chinese economy represents a continuously moving target, where what data
and analysis there is rapidly becomes out of date due to China’s current
explosive and contradictory development. However, studying the data
available does reveal some discernable trends. Firstly, the science and
technology base underpinning the information technology sector is large
but unproductive in international terms, although the gap has been
closing rapidly in the past seven years as a result of a huge increase
in government directed investment.
Secondly, several internationally competitive
information and communication technology firms have emerged, such as
Lenovo, ZTE and TCL, that are aggressively expanding in the home market
and to a limited extent now overseas. They have achieved their position
partly by obtaining resources from the state, directly and indirectly.
Although there is little cutting-edge innovation in China, apart from
that mentioned earlier which is mainly in niche areas, this did not
appear to be a barrier to economic development for the so-called ‘tiger’
economies, which did not innovate new products until late in the process
of industrialisation. There is a debate about whether it is necessary
for ‘developing’ countries to innovate new products rather than imitate
existing ones, because Japan and the Tigers appeared to be successful
without innovating for a long time.
However, in developing their economies, Japan and
the Tigers were helped by having a protected home market and by using
dubious practices such as industrial espionage and committing patent
violations to gain a foothold and competitive edge. This was tolerated
by western governments, mainly the USA, due to the imperatives of the
cold war. Eventually, as globalisation progressed and the Berlin wall
fell, the big corporations in these countries had to compete more on the
world market and to do this they needed to innovate. As a very late
comer to the capitalist party, the favours extended to Japan and the
Tigers in the cold war will not be extended to China, and to survive it
will also have to build innovative globally competitive firms.
The biggest potential threat to Chinese information
and communication technology firms like Lenovo, and to a far greater
extent to those in the second rank below them, comes from WTO accession,
because if the full provisions of entry are applied, all will struggle
to survive without government sponsorship against the Western ICT
giants. This is especially true for the software industry that relies
heavily on the state for contracts and other connections.
The vulnerability of Chinese firms is highlighted by
the 2006 Research Scorecard compiled by the British government, which is
a list of 1,250 leading international companies ranked by their spending
on research and development. There are only seven Chinese entries, three
from the oil and gas sector (PetroChina, China Petrol, CNOOC), and four
from the information and communication technology sector (Lenovo, ZTE,
TCL, SMIC). In a ranking of ICT firms there are two Chinese companies in
the top 100: ZTE is 61st and Lenovo 75th. Lenovo only achieves this
place because it recently took over part of IBM and inherited a big
research budget. Before this its spending on research and development
was insignificant. (In the statistics, Lenovo and TCL are listed as
being from Hong Kong but, in fact, their ultimate owners are in mainland
China.) All the Chinese firms listed are hardware producers – PCs,
mobile handsets, etc. There are no software companies in the rankings at
all.
Another factor, apart from a lack of world-class
competitive firms, that will hamper the high-tech sector in China when a
fight for survival develops with the western multinationals, is the
difficulty local companies have in raising money for research and
development projects. There are virtually no functioning capital markets
in China, where money can be borrowed on the basis of an objective
calculation of the risks involved. The stock markets are like casinos
and the banks operate as if they were government departments that lend
mainly to big public-sector corporations or to those who have close
connections with them such as property speculators. Consequently, most
small and medium sized indigenous firms have to fund research from
retained profits or borrow money from wealthy individuals they have
connections with, which means most cannot afford the huge costs of
developing new products.
Nevertheless, although Chinese firms are in a weak
position to withstand competition, since it joined the WTO over five
years ago the impact on the indigenous information and communication
technology sector has not been dramatic. One possible reason is that it
is hard for the WTO to eliminate guanxi, which gives local firms a
non-market advantage, because it is so deep-rooted and hidden in Chinese
society. Another reason, and probably the main one, appears to be that
the advanced capitalist countries choose not to enforce the WTO rules
because precipitating a conflict with China could both destabilise the
world economy and threaten the big investments many multinationals have
made in the county, in anticipation of a hoped for growth of a new mass
consumer market.
Breach of intellectual property rights, a prime
target for the WTO, is commonplace and most software in use is still
pirated, but the Western capitalists take little effective
counter-action. For example, it is possible to download music from
hundreds of pirate websites via China’s leading internet search engine
Baidu.com. However, a Beijing court ruled last November that Baidu’s
links to the pirate websites were legal and dismissed an action brought
by the International Federation of the Phonographic Industry (IFPI), a
body representing western music companies. Baidu has now proposed a
compromise method for downloading music, in partnership with EMI. EMI
agreed to this, despite describing the method in question as illegal,
and has pulled out of the planned appeal by the IFPI. In another
context, China heavily restricts foreign involvement in domestic
financial markets in contravention of an undertaking to the WTO to allow
foreign stakes of up to one third in brokerages by last year. The
government has announced it will not take action for another year, with
little protest from the west.
The current stand-off in implementing the provisions
of WTO entry mean that the local high-tech industry will survive for the
moment, but China has no prospect in the short or even medium term of
building trans-national corporations to compete with the likes of
Microsoft, Intel or Sony. It is possible theoretically that other
sectors apart from information technology could emerge as global
challengers, such as nanotechnology where the government has been
spending heavily on basic research. This seems to be getting some
results and could put China in a potentially strong position. However,
the nanotech industry is in its very early stages of development
internationally and it is far too soon to draw any conclusions about it
forming the basis for a new ‘techno-economic system’ underpinning a
fresh period of capitalist growth. At the very least it will take a
considerable time before its potential is apparent, and time is
something that China probably does not have.
It has been suggested that the best chance of
creating viable competitive firms in the long term is to harness the
talents of those Chinese working for foreign companies in China and to
attract back the millions of émigrés mainly working in the USA. There
are some problems with this suggestion. Firstly, the extent to which
foreign firms actually carry out research and development in China is
not clear. Many set up operations for public relations reasons. A recent
study found that only 30 were doing innovative research. Secondly,
persuading émigrés to return in large numbers from the USA will not be
easy because of their high salaries and the repulsive nature of the
Stalinist regime in Beijing. Nevertheless, it is true that the skills
and technique now learnt by these people could help transform China
rapidly into a modern industrialised (and environmentally sustainable)
society, but harnessing such talent cannot be done without overcoming
the deep structural problems built into world capitalism, which China is
now at the heart of. At some point, which cannot now be long delayed,
China will be a victim of these contradictions it helped to create as
the mechanisms supporting the unsustainable growth of the world economy
begin to break down.
When this happens China will be at a crossroads.
With the world economy moving into reverse, and a consequent downward
pressure on profits, the western imperialist powers and Japan will no
longer tolerate any free-riding by China in terms of breaking WTO rules,
and local firms will face being wiped out very rapidly by foreign
multinationals. This is the rule of all crises of capitalism: the weak
go to the wall and the strong survive. This will dash the ambitions of
China’s rulers of competing as an equal partner in the global economy
which, for a regime that relies increasingly on nationalism for
legitimacy, will provoke a deep crisis. The alternative on a capitalist
basis though will be equally unattractive to the Stalinist leadership. A
move to economic nationalism to protect home markets and firms, using
import and capital controls, will be counter-productive because it will
hit China’s huge export sector which employs tens of millions of workers
and has been the basis of its massive economic growth. China is
integrated to such a great extent into the world market that going down
the road to a siege economy would cause mayhem in society with tens, if
not hundreds of millions thrown out of work in a country already prone
to huge unrest caused by the conditions created by the move to
capitalism. The leaders of the regime will probably soon be recalling
the old Chinese saying, ‘we are cursed to live in interesting times’.
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