Re: China as a high tech source

[Martin Hart-Landsberg <marty@xxxxxxxxxx>]

Quoting michael perelman <michael@xxxxxxxxxxxxxxxxx>:

> Martin Hart-Lansberg told me that China is not moving very fast "up the
> value chain."  Might this be changing?
>
>

What follows is a small except from a forthcoming piece in Historical
Materialism by Paul Burkett and me, on China and the Dynamics of Transnational
Accumulation. I am sharing a small part of the argument that deals with the
technological upgrading of Chinese firms:

The Chinese government has employed a variety of policies to attract
export-oriented foreign investment, hoping that foreign capital would generate
substantial technology transfers and export earnings.  However, as Edward
Steinfeld describes:

'What has moved to China en masse . . . are the manufacturing-intensive segments
of particular value chains.  More precisely, it is the codified, commodified,
non-integral manufacturing activities that move. . . . Chinese firms, though
integrated into global supply chains, remain focused on non-differentiable
production activities.  Despite high-levels of foreign ownership, only 15
percent of the manufacturing firms surveyed by the World Bank in 2001 reported
engaging in any design efforts for foreign customers, a sign that the
respondents are essentially ?rule takers? in open, modularized production
processes. Only 7 percent reported providing customers R&D or other specialized
services.  The figures are noteworthy given that the sample specifically
targeted higher-tech sectors, the very ones in which we should expect high
degrees of innovation, networking and development of firm-specific proprietary
knowledge.'

Government leaders have also worked to create a few world-class Chinese
companies in an attempt to ensure an independent, national base for China?s
future industrial development.  The companies targeted to become national
champions include Huawei (which produces telecommunications equipment), Haier
(white goods/consumer appliances), Lenovo (personal computers), TCL
(televisions), and Baosteel (steel).  However, despite the fact that many of
these proposed champions have grown quite large, few have succeeded in becoming
internationally competitive.

Huawei, for example, operates in 70 countries, with 24,000 employees including
over 3,000 foreign nationals.  Over 40 percent of its 2004 revenue was earned
outside the country.  But according to the Economist, much of its sales are in
emerging markets where there is little competition and most of its success is
tied to its connections with the Chinese military.  Perhaps most telling, its
profits have been quite limited: $300 million on $5 billion in revenue.
Lenovo, China?s leading PC maker, is also struggling for survival.  Its
?profits from PCs are rising by just 1% per year and its market share is being
squeezed as Dell makes inroads in expensive computers and private-label firms
undercut prices on basic machines.  Some put its early success down to good
government connections -- it is majority-owned by the Chinese Academy of
Sciences.?

China?s leading firms have also done little to advance national interests in
terms of research and development.  Most importantly, they continue to rely on
imported foreign equipment to stay competitive.  According to George Gilboy,
?Over the last decade . . . Chinese industrial firms have spent less than 10
percent of the total cost of imported equipment on indigenizing technology.
Indigenization spending at state firms in the sectors in which China is most
often cited as a rising power (telecom equipment, electronics, and industrial
machinery) is also low (at 8 percent, 6 percent, and 2 percent of the cost of
imported equipment, respectively).  By comparison, such spending by industrial
firms in OECD countries averaged approximately 33 percent.  And South Korean
and Japanese firms, during their respective periods of rapid industrialization
?spent between two and three times the purchase price of foreign equipment on
absorbing and indigenizing the technology embodied in the hardware.?  China?s
leading firms have also done little to support the development of national
technology supply networks.  In fact, ?China's best firms are among the least
connected to domestic suppliers: for every $100 that state-owned electronics
and telecom firms spend on technology imports, they spend only $1.20 on similar
domestic goods.?

Unfortunately for Chinese planners, the reasons for such failures are largely
found in the very nature of the country?s economic reform strategy --
specifically its direct and heavy reliance on transnational corporations.  In
this regard, the Chinese experience with export-led growth has been different
from that of Japan, South Korea, and Taiwan; those countries ?relied almost
exclusively on domestic firms to manufacture and to export commodities; China
has largely relied on FIEs [foreign invested enterprises] to produce exports,
and virtually no domestic Chinese companies control significant export
networks.?   Because ?the central government has allowed foreign companies into
China at a much earlier stage of its development . . . these [firms] now control
the bulk of the country's industrial exports, have increasingly strong positions
in its domestic markets and retain ownership of almost all technology.?   The
declining effectiveness of China?s strategy is well illustrated by the strong
and growing foreign dominance in China?s high-tech sector:

'While exports of industrial machinery grew twentyfold in real terms over the
last decade (to $83 billion last year), the share of those exports produced by
FFEs [foreign funded enterprises] grew from 35 percent to 79 percent.  Exports
of computer equipment shot from $716 million in 1993 to $41 billion in 2003,
with the FFEs' share rising from 74 percent to 92 percent.  Likewise, China's
electronics and telecom exports have grown sevenfold since 1993 (to $89 billion
last year), with the FFEs' share of those exports growing from 45 percent to 74
percent over the same period. . . . This pattern repeats itself in almost every
advanced industrial sector in China. . . . FFEs increased their total share of
high-tech exports from 74 percent to 85 percent between 1998 and 2002.  But
perhaps more significant, in the same period, they increased their share of
total domestic high-tech sales from 32 percent to 45 percent, while the share
of that market held by China?s most competitive industrial firms, SOEs, fell
from 47 percent to 42 percent.'

In sum, Chinese state policy has indeed transformed the country into a fast
growing export platform, with some significant domestic production capacity.
But autonomous development potential is being eroded as the state loses its
planning and directing capability, and resources are taken over and
restructured in and by foreign networks largely for the purpose of satisfying
external market demands.