Chapter 15

Technology and Industrial Policy

Background
• As China grows into upper-middle-income status, its capabilities mature
and extend into new areas;
• as the high-growth era ends, China seeks new drivers of growth.
• Chinese policy makers seek an “innovation-driven” economy, in which
technology and productivity advances make an increasing contribution
to growth.
• .
• China’s technology challenge is often implicitly or explicitly framed
within the context of a “middle-income trap.” This holds that
• economies can grow out of low-income status in a straightforward way,
but after an economy reaches middle-income status, growth requires a
different mix of less common skills, including the ability to innovate
and to compete in market segments that demand high quality and
constant innovation
• Since 2005, Chinese government policy (policy-makers, executives, and
the urban public ) has been strongly committed to direct government
support of technology development.
15.1 Framework
• a knowledge-production function, analogous to the aggregate
production function but completely separate:
Technological knowledge = f (R&D, human resources, incentives).
• From the economic perspective, the major importance of technological
knowledge is that it enables capital, labor, and human capital to be
combined in new ways that yield higher overall productivity.
15.2 Technology Effort
• Technology has public goods characteristics: no innovator can capture
the total social gain from innovation.
• Therefore, it is not optimal to let pure market forces determine the level
of inputs into technology development, and there is clearly a role for
government intervention.
• developing countries face enormous difficulties exploiting these
potential advantages. It takes time and skills to identify the technologies
that are available and appropriate.
• developing countries face enormous difficulties exploiting these
potential advantages. It takes time and skills to identify the technologies
that are available and appropriate.
The Trajectory of China’s Technology
Effort
• from the 1950s through 1978, China, despite being a low-income
country, pursued a high technology strategy.
• It mobilized available intellectual resources for defense purposes and
created elite research institutes, particularly in the Chinese Academy of
Sciences (CAS).
• During the reform era, China at first tried to keep government R&D
outlays high while beginning marketization in other areas.
• After 2000, R&D outlays began to increase and diversify.
Growth and Structural Change
15.3 Human Resources
• Human resources can be likened to a pyramid, with elite scientists and
intellectuals at the apex and workers with broad literacy, numeracy, and
mechanical skills at the base.
• Coming out of the planned-economy era, China already had a broad
base of basic manufacturing skills, such as forging, welding, and
machining.
• In addition, there were many programs of vocational training and
accreditation that spread and upgraded these skills.
• At the turn of the century, half of the 56 million state workers in SOEs
and public service undertakings possessed some kind of technical
certification, including 12 million teachers
 15.4 Strategies of Technology
Development
• From Autarchy to Openness, 1978–2003
• Autarchy. Leaders in China set a few key tasks, and planners then
coordinated flexible multidisciplinary and multi-skilled research groups
with plenty of money to pursue those key goals. This approach has been
judged successful in developing nuclear weapons and strategic missiles
in China.
• However, this approach is bad at transferring technology to the civilian
economy. Security obsessions create secrecy barriers around the most
talented scientists and engineers even today. When planners fund
research with the avowed intent of aiding the civilian economy, they are
not efficient at transferring technologies.
From Autarchy to Openness, 1978–2003
• Centralized purchase of foreign technology. To break out of
technological isolation, policy-makers made massive purchases of
industrial machinery from global technology leaders.
• Conditional foreign direct investment (FDI). The next step was to seek
out top multinational corporations (MNCs) as technology partners who
would be rewarded with privileged access to China’s market for their
willingness to share technology.
• Opening up to FDI. After 1992, China accepted a more general
approach in which a number of competitive foreign technology
suppliers would be allowed in the Chinese market. FDI immediately
took off.
Broadening the Domestic Base
• Research and development funding. Even as China became more open
to the outside technologically, it took steps to broaden its domestic
technology base and make government support of technology more
efficient. Although budget allocations to research institutes were cut,
they were partially replaced with a system of competitive grants.
• Encouraging spin-offs. During the 1980s, policy-makers gave research
institutes stronger incentives to diffuse technologies into the civilian
economy. Institutes and universities were allowed to earn money
providing technical services to businesses and were allowed to establish
their own commercial subsidiaries.
• Supporting domestic entrepreneurship. After 1999, private Chinese
firms began to receive across-the-board support to enter high-
technology fields. Instead of favoring only large SOEs, the government
began to support virtually all technologically advanced enterprises,
including small, private start-ups and technology-intensive spin-offs
from schools and research institutes, viewing these firms as “national”
enterprises.
Integrating into Global Production
Networks
• During the 1980s and 1990s, China rapidly integrated into world trade.
Investment from Taiwan, Hong Kong, and Korea allowed firms in
Taiwan and Korea to upgrade rapidly into more technologically
demanding products, while China took over low-tech, labor-intensive
products.
• After the turn of the century, a remarkable transformation occurred.
Firms in Taiwan and Korea began to move the labor-intensive stages of
high-technology products to China as well.
• This rapid restructuring of global production networks seemed to
catapult China into the ranks of high-technology powers. As figure 15.4
shows, China was a minor player in high-tech exports.
15.5 The Turn to Techno-Industrial
Policy After 2006
• From 2006 on, successive waves of techno-industrial policy have
emerged from Chinese policy-makers.
• These policies have steadily grown in size and sophistication. They
represent a substantial shift of direction, compared to the previous two
decades.
• All these major policy initiatives involve government interventions that
target specific industries for promotion, reversing the previous trend to
reduce targeted interventions. In addition, all of the policies are
nationalistic, in the sense that they strongly emphasize the creation of
independent technological capabilities within China as well as the
creation of “national champion” firms.
 The Medium-Long Range Plan for Science and
Technology (2006)
• The Medium-Long Range Plan for Science and Technology (MLP) was
the outcome of a multiyear planning process. It envisaged many steps to
improve the overall environment for innovation in China, and
specifically to improve domestic innovative capabilities.
• The MLP introduced the term “indigenous innovation” (zizhu
chuangxin) to describe one of its objectives: to develop the separate and
independent innovation capacity of Chinese actors, particularly firms
but including universities and research institutes.
Strategic Emerging Industries (2010)
• A new set of industrial policies emerged out of the 2008–2009
economic crisis, and were formalized in a central government plan in
2010: the strategic emerging industries (SEIs).
• SEIs comprised 20 industrial sectors grouped into 7 large groups.
Made in China 2025 (2015)
• A new wave of industrial policies was rolled out in 2015. Most
prominently, these included “Made in China 2025” and “Internet Plus.”
• they are primarily directed toward the use of information technology in
other production sectors, including traditional industries.
• Made in China 2025 has the objective of upgrading China’s
manufacturing industry in order that China continue to be the world’s
dominant manufacturer, despite the impact of rising labor, land, and
environmental costs. In a sense, Made in China 2025 is an initiative
designed to avoid the middle-income trap, and make sure that industry
continues to be a prominent part of China’s development going forward.
15.6 A Multistranded Program of High-Technology
Development
• The ambitious objectives of China’s industrial policies are to be
achieved through a full spectrum of policy instruments. Policy-makers
deploy qualitatively different instruments that overlap and affect many
of the same enterprises simultaneously.
• These policies attempt to align incentives of government and corporate
actors in support of the development of knowledge-intensive industry.
Financial Support
• Tax Breaks. A whole range of amendments to the tax code have been
enacted to make expenditure on R&D virtually costless for the
enterprise.
• Subsidized Credit. Varieties of low-cost credit include a domestic fund
to support small and medium high-technology enterprises.
• Procurement Preference. Domestic high-tech firms are entitled to a
general preference in government procurement.
• “High-Technology Enterprise” Status. Enterprises that qualify for
“high-technology” status enjoy a lower corporate income-tax rate (15%
instead of 30% national tax).
Investment Funds
• Around the turn of the century, a small but lively venture-capital
industry was established in China. It had the peculiarity that most of the
funds came directly or indirectly from government agencies, but with a
significant role for a few foreign venture capitalists. Domestic private
funds gradually became substantial as well. Provisions to allow listing
of new high-tech companies on existing stock exchanges were made in
the early 2000s, and new listing venues were established。
Demand-Side Policies
• The SEI program included the systematic use of government resources
to support demand for emerging industries. These programs had their
roots in the government procurement programs developed as part of the
“indigenous innovation” program of the MLP. Today, the government is
the primary (or sole) customer for some SEIs, such as satellites. For
others, such as commercial aircraft, state-owned enterprises serve as
lead customers, putting in orders for as-yet-untested aircraft.
Regulatory Environment
• Technical Standards
• Protecting Intellectual Property
• Control of the Internet
• Light Touch Regulation of Emerging Segments
Asymmetric Use of Institutions to Promote Domestic Enterprises
• At the same time, virtually as soon as these institutions were created,
they began to be used as instruments to protect and privilege domestic
enterprises. This was apparent first with technical standards, which were
intentionally set up to leverage the advantage of the large Chinese
domestic market and give domestic firms a head start in responding to
domestic market demand.
15.7 Outcomes
• From an economic standpoint, we are most interested in whether
innovation contributes to the total factor productivity of the economy (in
aggregate or in specific sectors).
• From a technology standpoint, we are interested in the outputs that
indicate new knowledge creation, even if this has not yet contributed to
the economy’s increased productivity. We cannot measure knowledge
directly, but two important proxies for new knowledge creation are
patents and scholarly articles.
Patents
• Patents serve as a useful intermediate indicator of knowledge
production. The number of invention patent applications provides
striking evidence that China now takes intellectual property seriously. In
the United States, the number of patents has doubled since 2000 to
almost 600,000. In China, applications skyrocketed to 1.3 million in
2016 (figure 15.5).
Scholarly Articles
• Chinese authors accounted for 12.2% of global scientific papers in 2011,
up from 0.2% in 1980; since 2007, China has produced the second-
largest number of scholarly articles annually, after the United States.
Citation counts are a fundamental way to evaluate the influence of
scholarly articles (or patent quality). We expect citations to lag the
number of articles for China, both because China is a developing
country—so the overall quality of scientific production should be lower
than in advanced countries—and because the growth of publishing has
been very rapid so awareness may lag.
15.9 Conclusion
• The pace of technological change in China is impressive and is likely to
accelerate.
• Whatever the ultimate impact of China’s technology and industrial
policies, it is important to recognize the many advantages China has in
innovation.
• First, China is an enormous lead market. New inventions have their
greatest economic impact when they are successfully tailored to the
needs of a mass market.
• Second, China has an enormous manufacturing base. A great deal of
innovation is cost-reducing innovation that occurs through learning
while doing, especially in manufacturing.
• Finally, China has an entrepreneurial and risk-taking population.