IT industry drives China’s unique industrial capitalism

HONOLULU — Over the past few years, “a distinctive Chinese variety of industrial capitalism has taken shape,” according to East-West Center Senior Fellow Dieter Ernst and Barry Naughton, professor of Chinese economy at the University of California, San Diego, Graduate School of International Relations and Pacific Studies. This foray into once forbidden economic territory is no more readily evident than in China’s information technology (IT) industry, the two maintain.

Co-authoring a chapter in the forthcoming book China’s Emerging Political Economy - Capitalism in the Dragon’s Lair (edited by East-West Center Fellow Christopher McNally, published by Routledge), Ernst and Naughton are optimistic regarding China’s industrial development, based on their study of the IT industry.

Historically, the State has been pervasive in China’s industry. Ernst and

Naughton say the central government still plays an important role, but it has moved away from top-down command-style policies. Beijing’s influence in information technology is now considerably more constrained. Policies now focus on providing infrastructure, incentives for R&D, and a legal framework (intellectual property rights and standards).

Equally important, according to Ernst and Naughton, state ownership is less dominant. “State-owned firms, while present, play a secondary role in the IT sector, where technical innovation is critical. In fact, China has muddled through to a highly flexible, internationally open, and entrepreneurial solution in sectors such as IT hardware and software.”

The two disagree with the findings of the pessimistic literature that provides what they call a “backward-looking appraisal of weaknesses in China’s industrial economy.” Rather, they 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.

They point out case studies of successful Chinese IT companies such as Lenovo/Legend and Huawei demonstrate that “a hybrid mixture of ownership and corporate governance patterns has been combined with aggressive policies to foster alliances with global leaders in industry and research. This has enabled Chinese IT firms to accelerate the development of management and innovation capabilities.”

Ernst and Naughton note that this shift away from tight Beijing control, as evidenced in the IT industry, can also be witnessed in two other areas, location and industry structure. They say it is leading to a “multi-centric economy with great local diversity,” especially in the Yangtze and Pearl River deltas. “In a related fashion,” they point out, “the rapid emergence of industrial clusters, composed primarily of small firms, is reshaping the distribution of both traditional and hi-tech industries.”

The latter, according to the two authors, “represents the re-emergence of a pattern with deep roots in Chinese history and culture.” They note, “There are many precedents in China for dense networks of competing and cooperating small firms.” The two experts add, “As this pattern deepens, we expect to see increasing differences in the composition of output across different geographical regions.”

They speculate that “this pattern has long-run political implications as well … (it) may influence the political evolution of China.” Ernst and Naughton note that firms at both the central and regional levels “continue to be characterized by close government-business ties, hybrid ownership, and insider dealing.” But add, “It is not far-fetched to expect the region-based interest groups will create the first patterns of open political competition in China.” In fact, the two experts say, “Perhaps this is already happening, as Beijing politicians seek alliances in the northeast and west to offset the growing economic clout of the southeastern provinces.”

Ernst and Naughton say a close examination of the IT industry in China today “reveals patterns of organizational and strategic behavior that are likely to foster robust development … coming at a particular stage in the process of globalization that is enabling new kinds of cross-border cooperation at a deeper level, extending beyond production to design, development, and research.”

Add successful development of capabilities and (the) transfer of technology as part of these international networks of cooperation and competition, and Ernst and Naughton believe, “the IT industry (will) continue to thrive and provide a powerful impetus to the continuing of China’s capitalist transition.”