China's Emergent Political Economy – Insights from the IT Industry

in C. McNally, editor, China’s Emergent Political Economy – Capitalism in the Dragon’s Lair Routledge" Routledge, 2008

30 Pages Posted: 7 Mar 2016 Last revised: 16 Mar 2016

See all articles by Dieter Ernst

Dieter Ernst

East-West Center; Centre for International Governance Innovation (CIGI)

Barry J. Naughton

University of California, San Diego - Graduate School of International Relations and Pacific Studies (IRPS), Economics; University of California, San Diego (UCSD) - 21st Century China Center

Date Written: September 15, 2008

Abstract

Since the turn of the 21st century, a distinctive Chinese variety of industrial capitalism has taken shape. In this chapter, we trace the contours of China’s emergent industrial economy, giving special attention to the role of the information technology (IT) industry. Through the reform era in China, the IT industry has often been a forerunner of broader trends in the industrial economy, and this continues to be true today. For most of the socialist period, development was equated with large, heavy industrial plants: steel and machine-building. Even under market transition, the Chinese government at first maintained its faith in guided development and invested resources in large, state-owned firms in the hope of creating “national champions.” But in the past decade, and especially since 1999, planners have moved away from the “big-is-better” model of industrialization, and instead placed their hopes in science and technology-intensive industry and the development of human resources. This emphasis has recently been formalized in the 11th Five Year Plan (2006-2010), with its emphasis on human resources, technology development, and a scientific approach to development (Naughton 2005b). The IT industry has thus stepped into the starring role in a long-running drama, that of China’s transformation into an industrial economy. We use the IT industry as a wedge to gain entry into the industrial economy as a whole, and to provide insights into the broader development of China’s industrial capitalism.

At the same time, we are not just interested in the context of IT industry development: we are interested in the changes in business strategy and the building of technological capabilities that are taking place within the IT industry as well. China’s industry is already so large and so diverse that it is difficult to make meaningful statements that apply to the entire industrial economy. Examining strategy and capabilities -- especially innovative capabilities -- gives us a crucial benchmark to assess how real the changes in the IT industry have been. What alternative strategies are emerging in China to the now discredited “big-is-better” chaebol-type model? Will China become a leading world technology power? Or will limitations in its economic and innovation system and in its position in the world knowledge economy prevent China from moving beyond its current status of a low-cost global export manufacturing platform? In this sense, we assess China’s IT industry as an exemplar of China’s overall industrial transformation. From the perspective of the IT sector, we see a fairly successful transition toward a capitalist market economy for China. In the IT sector, state-owned firms, while present, play a secondary role. In the overall industrial economy state ownership is still significant, but it is now concentrated primarily in natural resource sectors and utilities. By contrast, in those sectors where technical innovation is critical, such as IT hardware and software, China has muddled through to a highly flexible, internationally open, and entrepreneurial solution. In contrast to a pessimistic literature that provides a backward-looking appraisal of the weakness in the Chinese industrial economy (e.g., Nolan, 2002; Steinfeld, 2004; Gilboy, 2004; Rosen; 2003), we argue that the IT industry has played a crucial role both in transforming China’s industrial economy; and in forging a peculiar Chinese model of developing a vibrant high-tech industry. A hybrid mixture of ownership and corporate governance patterns has been combined with aggressive policies to foster alliances with global industry leaders and leading universities. This has enabled Chinese IT firms to accelerate the development of management and innovative capabilities. This approach reflects the current needs of China’s evolving industrial economy and it has worked surprisingly well in generating critical management and innovative capabilities.

The first section describes how China’s contemporary industrial economy emerged from the state-run economy through a process of gradualist transition and incremental marketization. This section also introduces the first of the illustrative companies in the IT industry, the computer firm Legend/Lenovo. The next section describes the emergence of a broader three-tiered industrial system, and indicates where Chinese IT companies fit in. The third section highlights new opportunities and challenges for Chinese IT firms that result from their progressive integration into global production and innovation networks. The fourth section introduces Huawei, China’s largest telecommunications and networking equipment manufacturer, our second illustrative example. We examine Huawei’s strategy and business model, and show how the company is seeking to exploit the new international division of labor to foster its management and innovative capabilities.

Keywords: China, IT industry, China industrial strategy

JEL Classification: O1, O25, O30, O53

Suggested Citation

Ernst, Dieter and Naughton, Barry J., China's Emergent Political Economy – Insights from the IT Industry (September 15, 2008). in C. McNally, editor, China’s Emergent Political Economy – Capitalism in the Dragon’s Lair Routledge" Routledge, 2008. Available at SSRN: https://ssrn.com/abstract=2742927 or http://dx.doi.org/10.2139/ssrn.2742927

Dieter Ernst (Contact Author)

East-West Center ( email )

1601 East-West Road
Honolulu, HI 96848-1601
United States

Centre for International Governance Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

Barry J. Naughton

University of California, San Diego - Graduate School of International Relations and Pacific Studies (IRPS), Economics ( email )

United States

University of California, San Diego (UCSD) - 21st Century China Center ( email )

9500 Gilman Drive #0519
La Jolla, CA 92093-0519
United States

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