Transcript *** 1

Chinese Economy
Qu Bo
I24022
1
Introduction
 By midcentury, China will emerge as one of the largest economy
in the world.
•
•
•
•
•
Rapidly growing input into production
Vast and better educated manpower resources.
High saving and investment rates
Rapid buildout in physical infrastructure
Well-crafted economic policy
 But not only the size : choice ahead
• World factory: churn out laboriously produced goods
• Otherwise, global center for new products and procedures, innovative
standards, and breakthrough ideas
2
Introduction
 Key and core : pace to adopts, adapts and transforms
world’s S&T.
• Sustained growth : fast growth of inputs ＋ continuous increase in
technology-driven productivity
• Relation: effective adaption of technology will sustain growth by increasing
the productivity.
 Huge potential for being a creative and innovative society:
• Massive pool of talent and ingenuity are still underutilized.
• Achieving a high technology future is the common desire for all levels of
society
(“Science and technology constitute a primary productive force”)
3
Introduction
 Technological capabilities is like a pyramid.
 China is unusual for the composition of 3 layers from the socialist era.
Science and research
capabilities
Complex manufacturing and
assembly-line skills
Basic manufacturing
capabilities
 Strong : scientific and
technological research are near the
world frontier.
 Weak : productivity of massproduction is still very low.
 Strong : basic industrial skills are
widespread
 China’s mission: move its scientific capabilities down to the factory floor,
while upgrade existing factories to a higher level of skill.
4
Introduction
 Triadic relation: approach to analyze the technology in an economic context
 Reflects the volume of resources thrown into
research and development.
Technology
effort
Institutions
and
incentives
Human
resource
base
 Defines the possible capabilities of human
capital and reflects the long-run outcome of
the technology effort.
 Determines what ideas and technologies
actually get applied to the production
process.
 Two aspects: generating and applying knowledge
• Technology effort and growth of human resource : accumulate knowledge
• Institutions and incentives determine how much of the knowledge will be applied
in the production arena.
5
Table of Contents
1. Pushing Critical Technologies: The R&D Effort
• The strategies of China’s Technology Effort
• Strategies of R&D Investment
2. Human Capital Resource Base
3. The Output of the R&D Effort
4. Redefining Government Technology Policy in the 21th Century
• Aligning Incentives in Favor of High-technology Development
5. Deeper Integration into Global Production Networks
•
•
•
Government
Foreign multinationals
Domestic high-technology firms
Interplay
• Whether China will make a
rapid jump to a high technology
economy
6
1. Pushing Critical Technologies: The R&D Effort
 Today’s modern technology are almost from the rich countries.
 Developing countries are quite marginal in the global innovation
process.
• Substantial technology gap =
Disproportion :
enormous
backlog of technology
advantage
for late
developers
• Concentrate on transfer and
adaption without expending on risky
and uncertain research.
• Pick the best and suitable technology
to build competitive advantage with
inexpensive production factors.
7
1. Pushing Critical Technologies: The R&D Effort
(cont’d)
 Actually, enormous difficulties to exploit these potential
advantages.
• Consume time and skill to indentify the available and appropriate
technology.
• Consume effort and resources to get the technology working on the factory
floor.
• Developed countries fence off their IPRs by patents or secrecy or offer some
outdated and backward technology.
 It is almost impossible to catch up with the technology leaders.
• Only Korea, Taiwan, and Singapore stand out as technology success.
• Both the success of Japan and Korea was sharply restricted FDI (<cf “Other
developing countries”).
8
1. Pushing Critical Technologies: The R&D Effort
(cont’d)
 China fits into the general pattern of opening widely to FDI.
•
•
Hope the knowledge and technology spill over to domestic economy.
But different context: economy environment and relationship with MNCs
 Discovery or adaptation of new productive technologies depends
on investment of resources in research.
 Enough and adequate technological effort is required in order to
remain at the technological frontier.
Successful developing countries’ pattern (Korea and Taiwan) on R&D spending
of GDP.
9
Proportional and absolute technological effort
(P: 353 )
 China, with 1.1% of its GDP going to R&D in 2003, fits the general pattern.
• In proportional terms , ahead of India and Mexico, but well short of Taiwan
and Korea.
• Researchers per 1,000 employment is much further back (1.2): the still large
labor force in the traditional and sectors.
10
Proportional and absolute technological effort
(P: 354 )
 Share of economy going to the R&D and ratio of researchers are low.
• Size matters: China has the world fourth-largest R&D effort.
• Korea and Taiwan: important technology powers.
11
1.1 The trajectory of China’s technology effort
 China’s technology effort is paradoxical in socialist period.
•
•
•
Low-income but with high-technology-effort strategy
(1950s-1978: averaged 1.4% of GDP, peaked at 1.7% of GDP)
Available intellectual resources for defense purposes: Two bombs and one missiles
Consistent with command economy and Big Push strategy.
12
1.1 The trajectory of China’s technology effort (cont’d)
(P: 355)
13
1.2 Strategies of R&D Investment
 China: high degree of consensus around the need to invest in new
technology.
 Try to improve China’s technological standing by various means.
1. Do it yourself
•
•
•
In socialist period, classic “mission-push” mode of R&D.
Worked well when broad on agreement on priorities, but was bad at transferring
technology to civilian economy (military technology).
Scientists and engineers have no incentives to commercialize their discoveries ,
factory managers have few incentives to implement.
2. Buy it
•
•
•
From China’s opening (1978), massive purchases of industrial machinery with
embodied technology of world leaders.
It was very expensive and ineffective in diffusing new technologies into economy.
Change today: “soft technology licensing and away from the expensive purchase of
“hard” assets that embody technology.
14
1.2 Strategies of R&D Investment (cont’d)
3. Bargain for it
•
•
•
During 1980s, government negotiated with MNCs to trade market access for
technology.
MNCs: not willing to give away most advanced technology.
China: highly restrictive and comprehensive deal.
Protracted negotiations, delays in implementation, disputes over compliance.
Change : let numerous investors compete in the marketplace.
4. Seed it (培植)
•
•
•
From 1980s, a system of competitive grants for funding research.
For basic science and research, institutes prepare applications for funding
purposes: “86-3Progarm,97-3 Program”.
For technology diffusion, provide fund for technology adoption or technological
upgrading: “Torch Program, Spark Program”.
More strategic and effective in spreading its funds among research and technology
diffusion measures.
15
1.2 Strategies of R&D Investment (cont’d)
5. Encourage spin-offs
•
•
•
•
During 1980s, institutes and universities were allowed to contract with enterprises to
provide technical services, or establish own commercial subsidiaries.(Hightechnology industry)
“Hazy” area of Chinese industrial organization: owned by state entity but considered
as “civilian” (minban, 國有皮，民辦骨)
No direct bureaucratic supervisor, more operational freedom.
This strategy raises the curtain for liberalization : extra latitude and more
comprehensive stage afterwards.
6. Open up to FDI
•
•
•
•
After 1992, transformation in attitude and more general approach towards foreignowned firms. (<cf “Bargain for it”)
Government-sponsored technology development program not led to catching up
with global best practices.
Provide market access and protect IPRs for transferring production to China.
MNCs: not only for domestic market access but also knit China into GNPs of hightechnology items.
“Invite investments from overseas”→
16
1.2 Strategies of R&D Investment (cont’d)
7 . Support domestic entrepreneurship
•
•
•
After 1999, across-the-board support for domestic entrepreneurs to enter hightechnology fields.
Private firms from rivals with SOEs to “national” enterprises → nonstate firms also
represent China in global market.
Tax breaks, access to low-interest credit lines, preference in procurement decisions
and other regulatory preference or relief.
 Two things have been shown from these seven approaches:
1.
2.
Ongoing search for institutions and policies that can effectively support
China’s ongoing drive to become a technology power.
The technology effort is extremely diverse and flexible, which enhances
its impact.
17
2. Human Capital Resource Base
“Study abroad”
 China has an impressive total of technical personnel.
•
•
1.16 million individuals engaged in R&D (2004),growth at 5% annually
920,000 scientists or engineers(2005), 6.5%
college degrees: 858.000 (1999) →3.07 million (2005)
Human capital is growing at an accelerating rate.
 Be careful with number: average standards are very low.
•
•
•
Personnel with technical credentials are at a very low level.
It still suggests opportunities for technological upgrading in workplace.
Factor endowments: manpower is cheap but the human capital inputs into
training manpower are scare and expensive.
 Training overseas contributed large amount to the growth of human
resource base.
•
•
1/4 return to China: foster new high-tech start-ups and upgrade educational
institutions.
Not return: connect domestic scientists and engineers to international networks of
research and innovation.
18
2. Human Capital Resource Base (cont’d)
(P: 355)
 At PPP rates: larger than Korea and approaches Japan→ much low cost of skilled
manpower
 At exchange rates: less than Korea and a small fraction of Japan → high-quality
inputs needed in R&D should be imported at world prices
The Chinese R&D effort is large, but it is less effective due to overall lower
level of development.
19
3. The Output of the R&D Effort
 Government research accounted for 2/3 of total R&D expenditure
through 1980s.
• The concentration limited the economic effectiveness of R&D, while also
making it difficult to assess that impact.
• Market economies: 2/3 of researchers and R&D money from business
sector.
 Recent years, share of R&D by Chinese enterprises has increased
dramatically(62% in 2003), same as other market economies.
 Actually, the share may be less than the data indicate:
1. Many research institutes were converted into enterprises
2. Some enterprises may manipulate the government’s tax incentive and
support by classifying and reporting more R&D activities.
20
3. The Output of the R&D Effort (cont’d)
 Chinese enterprise-level R&D expenditures: significant effect on
firm-level productivity and ability to absorb technology
• Firm R&D outlay and foreign technology transfer are complements →
productivity’s growth
• Induce to adapt existing technologies to shift toward more laborintensive(abundant factors) and capital-and energy-saving (scarce factors)
technologies.
 The pace of patenting in China has grown strongly and steadily.
• In 2003, more than 300,000.
• New inventions (1/3):
Half from foreigners
Half from Chinese citizen
MNC’s strategies to protect IPRs in China
Realize worthwhile to start protecting
IPRs
21
3. The Output of the R&D Effort (cont’d)
 MNCs affiliates in China: begin to spend significant amounts on
R&D
•
US company in China: 9.2% of value added on R&D> average rate 3.3% in all
overseas locations
 The most apparent China differences in the distribution of R&D
effort are outside the business sector.
Distribution of R&D effort
China
Most other countries
Business sector
62%
67%
Government sector
26%
10%
University sector
10.5%
20%
 Characteristic of China’s R&D effort: relatively strong government sector,
relatively weak university sector, and still immature business R&D sector
22
4. Redefining Government Technology
Policy in the 21th Century
“National Top Science and Technology Award”
 From new century, China’s technological development has
accelerated.
•
Government policy increase the R&D inputs＋Corporate sector has the ability to
invest in R&D.
 “ Industrial policy” in market transition period.
•
•
Target priority sectors, picked up winners among firms(typically SOEs), and try to
compensate for distortions in the emerging market environment.
Technology policy is a major part of that.
 Since 1999, technology policies have resulted in the alignment of
incentives of government and corporate actors.
1. By redefining “National industry（國營企業）”, planners removed ideological
obstacles to creative organizational approaches.
2. By relaxing condition approvals on foreign investment projects, planners enabled
much more repaid technology transfer.
 Aligning incentives are in favor of high-technology development.
23
4. Redefining Government Technology Policy in the 21th
Century
 Technology development is the unifying thread that links many
aspects of economic policies.
Human
resources
development
policy
Trade
promotion
policy
 Key to upgrading exports
is the promotion of hightech exports.
Technology
development
policy
Corporate
government
 Human capital base to
promote technology industry.
 High-tech enterprises are
at the cutting edge.
Subsidies and
financial
support
packages
 Technology policy itself
includes support packages.
24
4.1 Aligning incentives in favor of high-Technology
developments
1. Tax breaks
• Amendments to the tax code to make expenditure on R&D costless for enterprise.
2. Subsidized credit
• A domestic fund to support small and medium high-technology enterprises.
3. Procumbent preference
• Domestic high-tech firms have preference in government procurement
4. Corporate governance provisions
• Altered corporate government procedures to accommodate venture-capital-assisted
start-up businesses.
5. Manipulation of Technical Standards
• Use Chinese technical standards to create competitive advantage for domestic firms.
1. Increase the resources into knowledge-intensive industry and accelerate the
development of high-technology industry
2. Policy interventions draw resources away from other sectors that need resources
(agriculture).
25
5. Deeper Integration into Global Production Networks
 During 1980s, China rapid integrated into GPNs by taking over lowtech, labor-intensive production stages.
 Pessimistic literature for China:
• Spillovers into indigenous technological capabilities were minimal.
• Low participation due to the weaknesses of Chinese corporations.
 From 1990s, rapid changes in the configuration of GPNs is good
situation.
•
•
•
Select some “ high-tech” stages of production: integrated circuit (IC,집적
회로,集積回路) )
Rapidly shrank the technological gap.
A flagship : Semiconductor Manufacturing International Corporation (SMIC,中芯國
際)
 Economic fundamentals had to be in place before the policies could
bear fruit.
26
5. Deeper Integration into Global Production Networks
(cont’d)
 IC industry illustrates general changes in the organization of GPNs.
 Firms begin to pursue focused strategies that rely heavily on
outsourcing across the value chain.
27
5. Deeper Integration into Global Production Networks
(cont’d)
 Modularization allows China to specialize in labor-intensive activities that
also involve medium levels of engineering skill.
28
5. Deeper Integration into Global Production Networks
(cont’d)
 Chinese domestic firms are utilizing GPNs in their own way.
•
•
•
Seek access global technology at the cheapest cost and combine it with their own
capabilities.
Design capabilities improved and also expanded technological capacity.
Fine division of the value chain create the points of contact so that advanced
technology can spill over to Chinese firms.
 The re-creation of GNPs requires new cooperation around
intellectual property.
•
•
Production involves various cross-licensing agreements
Hard bargaining for the relative value of IPRs.
•
Don’t want to invent around existing IP or to license IP at the market rates
 China faces two challenging jobs:
1. Strengthen protection of IPRs so that become a full partner in cooperation
2. Develop enough bargaining power: have something to offer MNCs in exchange for
their IPRs.
29
Technology: path to a stronger China↓
Conclusion
 The pace of technological change in China is likely to
accelerate.
 Locate in China’s advantage → human resource capacity and the
institutional framework allow China to seize this opportunity.
30
31