George Gilboy explains why China's "...high-return high-tech industries are dominated by foreign companies. And Chinese firms will not displace them any time soon..."
There is a conflict between its political system, and the ability of its firms to exploit technology ("The Myth Behind China's Miracle" (Foreign Affairs, July/August, 2004):
Developing technology is a difficult and uncertain process. Neither large capital investments nor a significant stock of existing science and engineering capability can guarantee success. To create commercially viable products and services, firms must monitor and access new forms of knowledge, understand evolving market trends, and respond rapidly to changing customer demand. Firms that can develop strong links to research institutions, financiers, partners, suppliers, and customers have an advantage in acquiring, modifying, and then commercializing new technology. Such horizontal networks are essential conduits for knowledge, capital, products, and talent.
Yet China's unreformed political system suppresses such independent social organization and horizontal networking and instead reinforces vertical relationships. China remains a fragmented federal system, its fractious regions unified by a single political party. The CCP controls all aspects of organized life, including industry associations, leaving few avenues for firms to work together for legitimate common interests. This structure drives business leaders to focus on building relationships through CCP officials and the bureaucracy. Although market reforms have brought more rules to the Chinese economy, without institutional checks and balances or direct supervision, CCP officials still exercise wide discretion in defining and implementing those rules, especially at the local level. They can, and often do, manipulate economic policies to pursue particular local goals. Some engage in this "particularism" because they are corrupt, others because they directly own or operate firms. Most, however, do it because the political elite encourages them to: understanding that local economic growth promotes social and political order, the CCP tolerates, and even rewards, officials who use any means to produce local investment and employment. But this often results in fragmented national industries and wasteful overlapping investment.
Chinese business leaders at both public and private firms recognize that an economy dominated by particularism is a risky business environment. Markets are fragmented; rules constantly shift under manipulation by government officials; and political obstacles prevent firms from associating, sharing risk, and taking collective action. To cope with these uncertainties, Chinese business has developed a distinctive industrial strategic culture over the past two decades -- a set of values or guidelines about what strategies "work" in this environment. First, in response to the "particular" application of policy, Chinese firms routinely focus on obtaining "exceptional" treatment from key officials: special access to markets or resources, exemptions from rules and regulations, or protection against predation by other officials. Second, to maximize these exceptional benefits, as well as to avoid entanglements with other firms and their patrons, many Chinese companies shun collaboration within their industry, especially if such collaboration crosses regional or bureaucratic boundaries. Third, they generally favor short-term gains over long-term investments. Finally, Chinese firms tend to engage in excessive diversification in order to mitigate the potential damage of fratricidal price competition created by excess production capacity and overlapping investments.
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