Chapter 3

The Chinese Contextfor Technology Transfer:Strategies and Issues for

Technology Imports

Photo credit: Eric Basques

Yu the Mandarin’s Garden in Shanghai is characteristic of the architectural style of the Ming and QingDynasties. The garden is divided into three parts, each separated by a white brick wall the top of which

forms an undulating gray dragon.

CONTENTS

PageGoals for Technological Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39The Experience with Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Indigenous Capabilities: The Example of the Defense Industry. . . . . . . . . . 42The Decisionmaking System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Perspective of the Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48The Government Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Financial and Trade Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Foreign Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52The Foreign Exchange Constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54The System in Practice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Issues of Assimilation and Diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Technical Manpower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60The Supply System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Internal Diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62The Prospects for Assimilation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

BoxBox PageA. The Structure of the Machine Building Industry . . . . . . . . . . . . . . . . . . . 43

FigureFigure No. Page3. The Acquisition of National Technical Capabilities: A Revised View of

the Elements Involved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Chapter 3

The Chinese Context for TechnologyTransfer: Strategies and Issues

for Technology Imports

In the post-Mao period, the Chinese leader- technology. The challenge for Chinese plannersship has consistently stressed the central role has thus been to develop a workable strategyof science and technology for China’s modern- and consistent plan for scientific and techno-ization. In 1982 Premier Zhao Ziyang said that logical development. After some false startsit would be impossible to reach China’s over- in the late 1970s, a coherent set of objectivesall economic goals by year 2000 without ma- began to take shape in the early 1980s.jor contributions from modern science and

GOALS FOR TECHNOLOGICAL MODERNIZATION

China has four categories of goals for tech-nology. The first is for Chinese industry toreach at least the present Western level of tech-nology by year 2000. This will require a majoreffort at revitalizing established industries, in-cluding a special, well-funded program of‘‘technological transformation’ ~ishu gzu”zao),which is being administered by the State Eco-nomic Commission (SEC).

The second objective is to ensure that mod-ern technologies are diffused to China’s ruralareas. The interest here is not only to continuewith the technological transformation of agri-culture, but also to provide a modern techno-logical foundation for burgeoning rural indus-try. China expects that the coming decades willsee major movements of the labor force outof agriculture and into rural industry and serv-ices. A special project, the Spark program,administered by the State Science and Tech-nology Commission, is designed to providetechnological inputs into this major shift inthe occupational structure.

A third objective is to give priority to thetechnologies needed to develop the country’sinfrastructure and natural resource industries.Thus, a wide variety of technologies pertain-ing to energy, telecommunications, transpor-

tation, and resource exploitation are targetedfor acquisition and development. This part ofthe strategy, by necessity, involves the activ-ities of many Chinese agencies.

Finally, the Chinese have identified a num-ber of technologies that they believe will bethe basis for new high-technology industries—electronics and computers (including advancedsoftware applications such as CAD/CAM), bio-technology, materials, robotics, lasers, andspace and ocean technologies. The Chinese ex-pect these technologies will lead to major in-dustrial advances and have targeted them forspecial attention in the hope of becoming com-petitive.

The achievement of these goals will requirethe modernization of the domestic research anddevelopment (R&D) system. But the Chinesealso realize this cannot be achieved withoutthe transfer of foreign technology to China. Itis important to note, however, that the vari-ous goals entail different approaches for ac-quiring the appropriate technology. Whereasmuch of the technology desired is in the handsof foreign companies, some of it (e.g., trans-portation and telecommunication technologies)is in the hands of foreign governments or pub-lic corporations. In addition, the Western

39

40 ● Technology Transfer to China

university is the locus of much of the knowl-edge needed to launch high-technology or sci-encebased industries. The sending of studentsand older scientists abroad to a Western uni-versity for advanced training, therefore, canbe seen as an important channel for technol-ogy transferal

IThis issue has been explored in Leo A. Orleans, “Chinese Stu-dents and Technology Transfer, ” Journal of Northeast AsianStudies, vol. 4, No. 4, winter 1985; and in Richard P. Suttmeier,“Academic Exchange: Values and Expectations in Science andEngineering, ” unpublished paper presented at the Conferenceon Sine-American Educational and Cultural Exchange, Hono-lulu, HI, The East-West Center, Feb. 18-22, 1985.

—

To gain access to these sources of technol-ogies and use them effectively, the Chinesehave initiated programs of domestic reformand have made extraordinary changes in theirapproaches to foreign relations. This chapterexamines the Chinese experience with technol-ogy transfer more specifically, beginning withan overview of China’s past history of tech-nology transfer.

THE EXPERIENCE WITH TECHNOLOGYChinese experience with technology trans-

fer in the 1980s is shaped not only by the cur-rent technology objectives discussed aboveand the overall economic modernization objec-tives examined in the previous chapter, butalso by historical experience. Since the late19th century, the Chinese have realized the im-portance of modern technology from the Westbut have been unable to reach an intellectu-ally and culturally congenial relationship withit. As characterized by one foreign trade offi-cial, who was trying to dispel these attitudes,Chinese thinking often goes as follows:

After the Opium War, imperialist powerscarved up China. Our political and economiclifelines were controlled by foreigners, ourmarkets were flooded with foreign goods, andour national industry was severely devas-tated. Such a period of national humiliationis still fresh in our memory. Therefore peoplealways associate imports with the protectionof our national industry, and tend to thinkthat the less imported the better.2

Also of concern has been the danger of over-reliance on foreign help. The saliance of thishistoric concern was reinforced at the end ofthe 1950s, when, after the Chinese allowedthemselves to become quite dependent on So-viet technology during the 1950s, the Sino-

‘Wei Yuming, “On Open Door Policy, Trade With Japan, ”Xinhua, Oct. 25, 1985. In FBIS, Oct. 29, 1985, p. A4.

Soviet relationshipcal assistance was

TRANSFER

soured, and Soviet techni-withdrawn.

The scientific and technical infrastructuredeveloped rapidly in the 1950s, but then theChinese were forced to rely largely on their ownefforts for the further industrial developmentof the country until the opening to the Westin the late 1970s. (Some foreign technology,mostly for whole plants and equipment,3 camefrom the capitalist countries after the Sino-Soviet split.) Some of the productivity prob-lems noted in chapter 2 resulted from this ex-treme self-reliance, but another result was thedevelopment of indigenous technical capa-bilities.

From 1950 to 1960, China imported technol-ogy from the Soviet Union and Eastern Eur-ope in support of 156 major industrial projects.These were concentrated in such basic indus-tries as metallurgy, machine building, trucks,coal mining, electric power, and petroleum.Some 400 items of technology were introduced,with an approximate value of $2.66 billion.These transfers were indispensable for thetimely establishment of new industries andcontributed to the rapid economic growth ex-perienced at the time.4

3Huang Fangyi, “Analysis and Suggestions on China’s In-troduction of Foreign Technology and External Trade, ‘“ AsianSurvey (forthcoming).

‘Ibid. Also, Robert F. Dernberger, “Economic Developmentand Modernization in Contemporary China: The Attempt ToLimit Dependence on the Transfer of Modern Industrial Tech-

(continued on next page)

Ch. 3— The Chinese Context for Techrtology Transfer: Strategies and /ssues for Technology /mporfs ● 41

From the withdrawal of Soviet assistance in1960 to the outbreak of the Cultural Revolu-tion in 1966, the Chinese began relying moreon Japan and Western Europe for technology.Some 84 major contracts worth $280 millionwere signed in this period. Industries targetedwere metallurgy, chemicals and chemical fi-bers, and synthetic textiles.

From the early 1970s to 1978, China signedsome 300 contracts for foreign technology,worth $9.9 billion. The emphasis in this periodwas on complete plants in such industries assteel, petrochemicals, and chemical fibers.Many of the contracts from this period wereconcluded in great haste in late 1978 and weresubsequently canceled or postponed.5

It is interesting to note that China’s tech-nology transfer experience with the SovietUnion was intimate in that it involved a wholerange of transfer experiences (including the im-portation of whole plants, the supply of Sovietblueprints, the presence of Soviet technical ad-visors in China, and the training of Chinesein the Soviet Union). China’s subsequent ap-proaches to technology acquisition in the 1960sand 1970s were more at arm’s length, focus-ing on the importation of complete plants andsets of equipment without due attention givento the software, training, and advisory serv-ices that often contribute to successful assimi-lation.

A number of changes in China’s approachto technology transfer have been made since1978. The Chinese came to the conclusion thatthe arms-length, whole-plant mode of trans-fer was too costly and did not yield the know-how they expected. Since then, Chinese pol-—.- —— ——rmlogy From Abroad and to Control Its Corruption of the MaoistSocialist Revolution, Technology and Communist Culture: TheSocio-Cultural Impact of Technology Under Socialism, FredericFleron (cd. ) (New York: Praeger, 1977).

‘l{uang Fangyi, op. cit.

icy has discouraged the acquisition of completeplants and equipment and has stressed theacquisition of know-how: “acquiring the henand not just the egg, “ as the Chinese put it.Thus, modes of technology transfer that offermore intimate interactions with foreign tech-nical personnel have come to be preferred. Awide variety of instruments of transfer, includ-ing licensing, joint ventures, cooperative ven-tures, wholly foreign-owned ventures, compen-sation trade, and the use of consultants andthe procurement of technical services are be-ing used. Much emphasis is being placed onforeign provision of training in contract nego-tiations of SinO-foreign technology transfer. Asa result of this change, a much greater propor-tion of the technology imported since the endof the 1970s has been “unembodied” technol-ogy, or pure know-how.G

In addition, China spends a greater percent-age of its resources on importing technologythan it did in the past. In the sixth Five-YearPlan period, for instance, $9.7 billion, or 15 per-cent of the investment funds provided for inthe plan, went for foreign technology. ’ Twoother changes are notable in this fourth periodof technology imports: Whereas past empha-sis was on technologies supporting the estab-lishment of new enterprises, the emphasis sincethe early 1980s has been on technologies to up-grade or renovate existing enterprises. Finally,the locus of decisionmaking on technologytransfer has changed. As part of the reformistdecentralizations, the central ministries anda single foreign trade corporation are no longerthe principal decisionmakers. Instead, manyother players have become active, includingenterprises, local governments, and a myriadof new trading corporations.

‘Ibid.‘Ibid.

42 ● Technology Transfer

THE

to China

INDIGENOUS CAPABILITIES:EXAMPLE OF THE DEFENSE INDUSTRY

The context for technology transfer cannotbe understood without recalling the existenceof significant technological capabilities in-digenous to China. These include an extensivenetwork of over 9,000 R&D institutes, includ-ing almost 120 in the Chinese Academy of Sci-ences, a large capital goods industry, and amilitary-industrial complex that has enabledChina to develop nuclear weapons and launchsatellites.

Over the years, Chinese industrial invest-ment has been strongly biased toward heavyindustry, resulting in the establishment of alarge and comprehensive capital goods indus-try supported by a network of R&D institutes.8

At the center of the capital goods sector is thevast machine building industry, the main do-mestic supplier of industrial technology andequipment and the chief alternative to foreigntechnology. Included in the machine buildingindustry (see box A) are China’s industrial as-sets for military production.

As part of the package of economic reforms,the Chinese have initiated a significant policyshift regarding the national defense industry.The latter had for many years been the benefi-ciary of priority investments of material andhuman resources. Commenting solely on theordnance and aeronautics industries (just twoof six main defense industry sectors), for in-stance, two Chinese observers noted:

In the 1950s and 1960s . . . the State as-signed the university graduates and the mostoutstanding scientific and technological work-ers to the departments in charge of the na-tional defense industry, with the result thatthere was a concentration of talented peoplein the industry. At the same time, the Minis-try of the Aeronautics Industry and the Min-istry of the Ordnance Industry jointly owneda scientific and technological work force of

‘A useful analysis of the capital goods industry, includingits technological capabilities, is found in Zhang Renyu, ?’ech-nology Issues in the Capital Goods Sector: The Experience ofthe People Republic of China, United Nations Conference onTrade and Development, UNCTAD/TT/57, 1984.

more than 200,000. In addition, the best facil-ities and equipment went to the national de-fense industry.g

Until the late 1970s, however, this privilegedsector had been largely insulated from the ci-vilian economy and civilian R&D system. Itthus had little impact on the latter in spite oftechnological achievements in the defense sec-tor. China has produced military planes for 30years but is only now starting to produce ci-vilian air lines. It has designed and launchedits own military satellites, but its telecommu-nications satellites are still experimental. Itmastered nuclear weapons technology in the1960s, but the first nuclear power station isstill under construction.

In the post-Mao era, this situation has beenchanging. As the Chinese contemplated themodernization of national defense, they con-cluded that over the long run the nation’s secu-rity could not be achieved without a vigorousand modernized civilian industrial economy.Defense modernization was therefore accordedthe lowest priority position of the four mod-ernizations. Cutbacks in defense procurementresulted in significant underutilization of de-fense factories. The latter therefore have beeninstructed to turn at least some of their pro-ductive assets to the service of the civilianeconomy.

The defense industry has become a vast em-pire of research and production units, but itis difficult to define their economic significance.Until recently, the Chinese rarely provided in-formation on the defense industry, but as partof the ‘‘civilianization’ program, more is com-ing to light. The extensiveness and degrees ofvertical integration of the defense plants isdepicted in a recent account of the “012 En-terprise Group, ” an industrial complex of the

——‘Chen Siyi and Gu Mainan, “China’s National Defense In-

dustry Faces an Historic Turning Point-Sidelights on ZhaoZiyang’s Meeting With National Defense Industry Specialists,Liaowtmg Overseas Edition, No. 6-7, Feb. 10, 1986. In F131S,Mar. 5, 1986, p. K14.

Ch 3— The Chinese Confext for Technology Transfer: Strategies and Issues for Technology Imports 43

Box A.—The Structure of the Machine Building Industry

The machine building industry has been reorganized to reflect its changing military and civil-ian responsibilities. The former Ministry of Machine Building has been combined recently with theMinistry of the Ordnance Industry (which also includes the China Northern Industries Corp. andproduces instruments and meters, precision metal cutting and forging tools, diesel engines, bicy-cles, clocks, washing machines, sewing machines, oil equipment, magnetic heads, tapes, and discs)into the State Commission of the Machine Industry. In addition, there are special ministries of ma-chine building (formerly numbered, but now renamed to reflect their new mixed military and civil-ian roles) listed below. Each of these has set up one or more of its own corporations to link it tothe civilian economy and, particularly, to facilitate its entry into international trade. These minis-tries. their trade corporations (in parentheses), and their civilian product lines are listed below. Therange of sample products gives some idea of the high degree of vertical integration that character-izes these ministries.

1.

2.

3.

4.

5.

Ministry of the Nuclear Industry (China Nuclear Energy Industry Corp.). Products includemeters and instruments, surveying and mining equipment, optical instruments, mechanicalcomponents, nuclear reactors, air filters, valves, and heat exchangers.Ministry of the Aeronautics Industry (China Aero-Technology Import and Export Corp.).Products include transport aircraft, agricultural aircraft, lathes, motorcycles, transducers,switches, optical recorders, washing machines, air-conditioners, and technologies for the autoindustry.Ministry of the Electronics Industry (China Electronics Import and Export Corp.). Productsinclude earth stations, navigation equipment, electronic materials, computers and peripherals,radios, TVs, other consumer electronics, and integrated circuit technologies.Ministry of the Astronautics Industry (Great Wall Industry Corp., China Precision Machin-ery Corp., China Communications Satellite Corp.). Products include expendable launch vehi-cles, communications equipment, weather and earth resources satellites, telemetry, trackingand control equipment, microelectronic devices, and dishwashers.China State Shipbuilding Corp. (China Shipbuilding Trading Corp.). Products include bulkcarriers, container vessels, marine engines, seismographic and meteorological support serv-ices for offshore prospecting, yachts, and pleasure craft.

SOURCE: Adapted from Wendy Frieman, “National Security Risks of Dual-Use Transfers to China,” app. 6, vol. 11 of this report. July 1986.

aviation industry located in Shanxi Province. ’”The complex comprises of over 20 factories andempIoys more than 30,000 people, including4,1000 engineers and technicians. Included alsoare 10,000 major pieces of equipment and one

——. .)(1M &y o–f the defenserela~ facilities established in the 1960s

and early 1970s were located in mountainous regions in the in-terior, for national security reasons. This industrial location pol-icy, sometimes referred to as the “third front construction’ pol-icy, leaves China with a spatial distribution of importantindustries that is not economically rational under the currentpolicies of integrating the defense industry with the civilian econ-omy, The Chinese are taking special action to deal with thesethird-front enterprises; a special office for them has been estab-lished under the State Council, and there is special mention ofthem in the Seventh Five-Year Plan.

of the largest assembly workshops of its kindin Asia. ’l

Such complexes have been assumed by out-siders to be characterized by a high degree ofvertical integration. The full extent of inte-grated industrial capabilities is evident fromthe diversity of industries to which the 012complex now supplies goods and services underthe current policy of aiding the civilian econ-

‘‘Quan Zong, “China’s Large-Scale Aviation Industry BaseDeep in the Mountain s-A Visit to the 012 Enterprise Group. ”Liaowang Overseas Edition, No. 26, June 30, 1986. In F’BIS,July 15, 1986, p. K21, ff.

44 . Technology Transfer to China

Photo credft ” Eric Basques

Assembly of the BJ-212 jeep at the Beijing Automotive Works. This Soviet designed jeep has been produced for decades—annual output is set at 24,000 units. The assembly line has been shut down while these workers are on their lunch break,

which in China is often 2 hours.

omy. Although one of the main products of thecomplex is the Yun-8 transport aircraft, mem-ber factories have produced such diverse prod-ucts as light industrial goods (including copyingmachines), processing machinery, instrumentsand meters, home appliances, and farm ma-chinery. The complex also cooperates with thetextile, plastics, and food processing indus-tries. A cooperative venture with the No. 2 Au-tomobile Factory has been begun to produceminicars.

The degree of vertical integration in the de-fense industry and the privileged quality of thissector in the past may mean that there are“pockets of excellence’ ‘or special competencewhich will, under the new policies, begin tohave more of an impact on the economy.’2 Forinstance, some of China’s more advanced tech-nological competence in computers and elec-tronics may be in the Ministry of Astronau-

12 Denis Simon, “The Challenge of Modernizing IndustrialTechnology in China: Implications for Sino-U.S. Relations, ”Asian Survey, vol. 26, No. 6, April 1986, pp. 420-439.

tics (MOA), not solely in the Ministry ofElectronics Industry, where one might expectit. According to one report:

Great progress has been made in the manu-facture and application of computers used inrockets, satellites . . . All special-purpose com-puters for military use are made by China,Some computers have reached the advancedlevel of the early 1980s. At present this min-istry (MOA) has developed a system thatincorporates research, production, and appli-cation of integrated circuits, whole sets of com-puters, and peripheral equipment and soft-ware. It is now capable of annually producing5,600 microcomputers, and small and medium-sized computers, as well as 5 million integratedcircuits. It has established three bases for pro-ducing integrated circuits, and has put morethan 2,000 computers into operation. ’3

“Beijing, Xinhua, June 13, 1986. In FBIS, June 30, 1986,p. K33. In January 1986, a U.S. delegation attending a sciencepolicy conference in China, which included a member of the OTAstaff, visited a MOA facility in Lishan, Shaanxi province, where3-micron circuits were being produced. The facility was in tran-sition to civilian commercial sales.

— —

Ch. 3—The Chinese Context for Technology Transfer: Strategies and /ssues for Technology Imports 45

MOA computer and electronic products arenow being marketed throughout China and in20 countries abroad. ”

Clearly, such plants as the 012 EnterpriseGroup and the facilities of the MOA, as wellas other parts of China’s military industrialcomplex, have considerable technological po-tential that must be considered in assessingthe prospects for technology transfer to China.The domestic suppliers of technology associ-ated with the defense industry, and the ma-chine building industry more generally, havethe competence to meet many of China’s tech-nological needs, albeit not always as well asforeign technology. Nevertheless, the machinebuilding industry consistently promotes itselfand its capabilities as alternatives to foreignsuppliers of technology, as the account of the012 complex makes clear:

In the past, the Wuhan Iron and Steel Com-plex imported spare parts for the cylinders ofthe hydraulic pressure systems of its rollingmills, The No. 572 factory under the 012 En-terprise Group undertook the task of the re-search and manufacture of the R2 main shaftbalance cylinder. The balance cylinders itproduced have been installed for trial use andproved to have a life of over 3 years, far longerthan the 6-month life of the imported ones. ”

Further evidence that the Chinese see themilitary industries and R&D institutes as im-portant factors in the national technologytransfer strategy is seen in the followingeditorial comment in People Daz”ly:

At present, many enterprises have alreadyattached importance to introducing advancedforeign technology. However, less attentionhas been attached to transferring our owndefense industry technology to civilian en-terprises. Transferring defense industry tech-nology to civilian enterprises is a shortcutto enhancing technological progress, whichshould be accelerated.

Introducing foreign technology is certainlya demand of the four modernizations. How-ever, it has many limitations. We need to in-troduce many types of advanced technology,

‘{Ibid.“Ibid., p. K22

but since they are very expensive, we can onlyintroduce what we most need. Moreover, themost advanced technology is usually unableto be introduced into our country. The trans-fer of defense industry technology to civilianenterprises has no such limitations. Therefore,we must energetically encourage this trans-fer. The more and the faster the transfer thebetter. ”

Some of these ministries have made an ag-gressive entry into the civilian market. It islikely that this will continue and that the ma-chine building ministries will have a moreprominent role as exporters of goods, services,and technology during the remainder of thecentury. In the past, machinery and electricalproducts accounted for a small fraction ofChina’s exports, representing only 4.7 percentin 1985. Current thinking, however, predictsa volume of machinery exports by 1990 worthUS$l billion, or a 240 percent increase over1985. ’7

The Chinese are also striving to become ex-porters of technology and high-technologyservices. In April 1986 they convened theirfirst technology export fair in Shenzhen, atwhich the defense industries were well repre-sented.1 8 China’s offers to provide satellitelaunch services to overseas parties and themarketing of the diverse services of the nuclearindustry are two of the more prominent exam-ples of possible future exports of services fromthe military industry. While technology ex-ports from China are unlikely to be exclusivelyfrom the defense sector, many will be. Ironi-cally, given the production and managerialproblems that have inhibited the actual em-

‘eCommentator, “A Shortcut To Enhancing TechnologicalProgress-On the Necessity of More Quickly Transferring MoreDefense Industry Technology to Civilian Enterprises, RenminRibao, Aug. 27, 1985. In FBIS, Sept. 5, 1985, p. K2.

“’i Interview t$’ith He Guangyuan. Vice Minister of the hla-chine Building Industry, ” Beijing Domestic Television Ser\’-ice, June 6, 1986. In FBIS, June 16, 1986, p. K 16.

18Chen Zhiqiang and Yu Fengyuan, “Chinese TechnologyMoves Towards the World, ’ Renmin Ribao O\’erseas Edition,Apr. 22, 1986. In JPRS-CST-86-025, pp. 17 ff. See also, a reporton China’s seeking patent protection services in Hong Kongfor its technology exports in the South China Morning Post(Business .Vewrs supplement). Apr. 1, 1986; and Huang Zhiping,“Chinese Technology Seeks Overseas Markets. Zntertrade, Jan-uary 1986, p. 29.

46 . Technology Trarisfer to China

ployment of new technologies in civilian indus-tries, it may be easier for the Chinese in theshort run to sell technology developed in thedefense industries than to sell products madein China employing that technology.

Products from the defense industry are likelyto become an increasingly important part ofChina’s exports. China is already a major armsexporter (see ch. 7), and recent reports indicatea desire to move to higher technology in itsmilitary exports. In some cases, this will bedone with foreign help. For instance, China andItaly have entered into an agreement to up-grade the electronics and fire control systemfor the A-5M attack aircraft. ’g

China’s new policy toward the relationshipsbetween the defense industries and the civil-ian economy not only has the potential for mak-ing the considerable technical resources of the

“See, Xinhua, Nov. 6, 1986, In FBIS, Ncn’. 7, 1986, pp. K5-K6; and Daniel Sutherland, “China Plans To Expand ArmsSales, ” The J1’ashington Post, NoI’. 12, 1986.

defense sector available to the civilian econ-omy, but also creates the possibility that thedefense sector will become more innovative asit faces market demands, as it gains access totechnology available in the civilian economy,and as it enters into cooperative technologytransfer ventures with foreign firms.

Despite frequent statements from Chinathat the technologies of the defense industriescan often substitute for foreign technology, itis clear that the defense industries also see theircurrent role as improving their technologythrough cooperative international civilianprojects.’” Thus, it is likely that the new pol-icy on the defense industry will not only con-tribute to domestic transfers of technology tothe civilian sector, but also lead to the upgrad-ing of the technology and the management ofthe formerly exclusively military sector of theChinese economy.— —.. .

‘(’For one account of the activities of the a~iation industr~,See Intertrade, December 1985.

THE DECISIONMAKING SYSTEM

Without a clear national consensus on theproper course for technology transfer, differ-ent perspectives and interests have led to afractured decisionmaking system in China. In-deed, organizational complexity is often a dom-inant factor in China’s relations with Westernenterprises and is a major obstacle to China’smodernization.

China’s record of choosing, importing, andassimilating technology has been much influ-enced by the operation of its decisionmakinginstitutions, and particularly by the overlap-ping central and regional jurisdictions thatcharacterize the decisionmaking system. Forinstance, coordination between the central min-istries and between decisionmakers in Beijingand those at the province and enterprise levelshas not always been good. Decisionmakers inBeijing who make purchasing decisions aboutforeign technology have not always had a goodunderstanding of the technical problems in thefield. There is a lack of coordination betweenthe economic commissions at various levels of

government and the science and technologycommissions. 2*

The Chinese in recent years have sought torationalize their decisionmaking for technol-ogy import policy, with mixed success. China’sproblems are in part a function of reconcilingthe many domestic bureaucratic interests inforeign technology into a coherent position,

A related problem is that of reorganizing aforeign trade bureaucracy that was set up origi-nally to conduct trade with other socialist coun-tries. In the original scheme, a centralized Min-istry of Foreign Trade (MFT), which existeduntil 1982, was chiefly responsible for the con-duct of trade and for the centralized allocationof scarce foreign exchange.22 China’s former

2]Song Jiwen, “Digestion and Absorption of ImportedTechnology-A Shortcut to Technological Progress, ” JingjiGuanfi, Sept. 5, 1985. In FBIS, Nov. 4, 1985, p. K24.

‘zSamuel P.S. Ho and Ralph W. Huhnemann, China OpenDoor Poficy (Vancouver: University of British Columbia Press,1984), p. 34.

Ch, 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports 4 7

MFT oversaw eight national foreign trade cor-porations specializing in different commodi-ties. As trade expanded rapidly in the 1970s(from $4.59 billion in 1970 to $20.64 billion in1978), the old system was not able to handlethis increase and became an obstacle to fur-ther growth in trade. Gradually, foreign tradecorporations were set up under other minis-tries, not directly under the MFT.23 Furthercomplicating the situation was the grantingof greater trade autonomy to local govern-ments as part of the decentralization experi-ments. To bring some coherence to this sys-tem, the old MFT was combined with threeother central trade agencies in 1982 to formthe Ministry of Foreign Economic Relationsand Trade (MOFERT).

Yet uncertainties remain about how the sys-tem works largely as a result of a series of cen-tralizations and decentralizations of foreigntrade decisionmaking authority .24 For both ec~nomic reforms generally and for technology im-ports, the Chinese are still searching for theright balance between centralization and de-centralization and between the achievementof centrally determined values for the wholeeconomy and the encouragement of local ini-tiative.

The foreign trade apparatus also shows a ten-sion between the influence of the planning sys-tem and the play of the market. China clearlyplans some of its technology procurements. Forinstance, the SEC had an import plan for the1983-85 period that contained some 3,000items of technology for its national effort torenovate small and medium-sized enterprises.Planning targets for other types of projectswere also established.

In recent years, however, as enterprises havebeen allowed to retain foreign exchange, there

‘] Ibid, p. 35.“Foreign trade reforms begun in 1980 opened the way for more

Chinese companies-those under both central and local control–to participate in foreign trade. Companies wishing to enter intoforeign trade must get the permission of It! OFERT, or a localgovernment, and then must register with and get a license fromthe State Administration of Industr~ and Commerce. Oncelicensed, they ma~’ open foreign exchange accounts. Importlicenses are required for 42 categories of goods. and exportlicenses are needed for ’235 categories.

has been a drift toward a more decentralized,market-driven approach to technology acqui-sitions. This trend and the attendant fear thatthe center will lose all control over technologyimports have led to decentralizing technologytransfer policy and foreign exchange controls,including the 1985 regulations described below.

The Chinese system for decisionmaking ontechnology imports is very complex and, atleast for outsiders, uncertain. In the cases con-sidered for this report, OTA saw considerableconfusion about how decisions are made. Therewas also evidence of decisions being changed,sometimes because of changed circumstances,but also because of the underlying fluidity ofthe decisionmaking system itself.

Decisionmaking procedures vary accordingto the size of the project and the type of con-trol over the project (central or local). Often,but not necessarily, these variations can be ex-plained by the type of industry involved. Theelectronics industry, for instance, has experi-enced considerable decentralization in recentyears, while the energy industry has retainedgreater centralization.25 Decisionmaking alsovaries according to the mode of transfer be-ing used; decisions concerning joint ventures,for instance, will involve different proceduresand regulations from those involving licensing.

A further complication is the relationshipsthat exist between the end user of the tech-nology and the (often multiple) organizationsthat have jurisdiction over the end user. Inaddition, the making of a decision can bethought of as having stages—consultation, ne-gotiation, ratification, implementation, evalua-tion—that often involve different partici-pants. ’6 Finally, the system is complicatedprecisely because in basic ways it is changing.

“Cf., Denis Fred Simon and Detlef Ilehn, “Understandingthe Electronics Industry, ” The China Business Re\’ieu,March/April 1986, pp. 10-15; Oksenberg and I.ieberthal. Bu-reaucratic Politics and Chinese Energ-j Det’elopment, reportprepared for the U.S. Department of Commerce, InternationalTrade Administration, August 1986.

%ee, Roy F. Grow, ‘Transferring Foreign Technologies: Stepsin the Chinese Decision Making Process, unpublished paperpresented at the conference on China ,\rew Technological Rei-oiution, Har\,ard University. Ma}” 9-11, 1986.

48 ● Technology Technolgy.Sfer to china

For instance, until recently, the role of thebanking system was not central. However, witheconomic reform, which has increased the roleof the banks in the running of the economy gen-erally, banks-especially the Bank of China—have also become important in foreign tradeand technology imports.

Perspective of the Enterprise

An enterprise may not always wish to incor-porate new technology into its operations. Inan economy of shortages, as has been the casefor some time in China, producers can sell what-ever they produce, giving them little incentiveto assume the risks and costs of technologicalchange.

If a decision is made to acquire new technol-ogy, several practical decisions must follow.How quickly can the technology be procured?How easily will it be absorbed or assimilated?What level of technology should be chosen?How will it be paid for? Should it be procureddomestically or internationally? The economicand technical reasons for importing technol-ogy include domestic market competition and,increasingly (as a result of government pres-sures to export), international market compe-tition. Foreign technology generally results inbetter products. In addition, it clearly carriesa great deal of prestige. An increasing numberof Chinese firms are establishing ‘technologyintroduction offices” to aid in acquisition de-cisions.

Apart from the central question of what mar-ket exists for the enterprise’s products, the Chi-nese environment has to be considered. Is thetechnology available in China? Has it been tar-geted as a high priority by the Chinese Gov-ernment? Will it be addressed by the nation’sR&D system? How much pressure does the en-terprise feel to increase its exports? What kindof access does it have to foreign exchange? Canthe enterprise get special benefits from thestate by procuring the technology? The enter-prise must also anticipate that these issues willbe assessed by the layers of bureaucracy (lo-cal or national, and sometimes both) that mustapprove the enterprise’s project.27

Furthermore, the international environmentmust be considered. Is the technology availableinternationally, and are there agents (compa-nies, governments) willing and able to trans-fer it? What mode of transfer is most appropri-ate for the technology, and is the adoption ofthat mode feasible? In this international con-text the importance of export controls comesin.

Hidden factors exacerbate delays from theenterprise perspective. Once a decision is madeto import technology, which can be a lengthyprocess, the decision has to be approved byhigher authorities to assure consistency withnational policies, particularly those pertainingto types and levels of technology and to theexpenditure of foreign exchange.28 Thus, wellbefore a contract would actually be signed, andindeed in some cases well before negotiationswith foreign firms begin, the enterprise wouldhave gone through considerable negotiationswithin its own system; anywhere from 6 to 18months would already have passed. If the en-terprise must then wait for a protracted ex-port license decision, it could face delays of 2years or more before the technology arrives.Given the complexities at the enterprise level,it is unlikely that there would be a simple, con-sistent set of benefits for choosing one tech-nology over another.

The willingness of decisionmakers to takerisks is also an important factor. China’s eco-nomic system over the years has structuredincentives in such a way that decisionmakersare often risk averse. Risk aversion has beenfurther encouraged by the history of unpredic-tability in Chinese politics, which has mademanagers unwilling to take individual actionsthat could expose them as targets of a futureradical political campaign. Foreign partnersin joint ventures have reported risk aversionand a lack of initiative among middle managersas factors slowing the absorption of technol-ogy at the enterprise level. The present uncer-tainties are likely to aggravate this timidity.

Perhaps the most crucial factor in decision-making during the last few years is the avail-ability of foreign exchange. Despite severe

“Simon and Rehn, op. cit. ‘nIbid. ‘-

Ch. 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports ● 49

foreign exchange regulations, there are an in-creasing variety of viable strategies for obtain-ing foreign exchange. Some enterprises, for avariety of reasons, will be more privileged intheir access to foreign exchange than others,and the technologies they demand will there-fore tend to have a high priority. Central au-thorities are therefore challenged to ensurethat the country’s foreign technology needsare not determined by the pattern of availabil-ity of foreign exchange; what is best for Chinamay not be what is best for the enterprise withforeign exchange.

The foreign exchange constraint also has amore indirect and often detrimental effect ontechnology transfer behavior. Because of itsshortage, foreign exchange is rationed. Whenprojects are approved, but not necessarily be-fore a foreign vendor is chosen and contractsare signed, enterprises are given quotas for usein going ahead with the project. There are someindications that the technology transfer strat-egies of Chinese enterprises are determinedmore by considerations of how to use the quotathan by how to save foreign exchange andmake the introduction of the technology partof an economically progressive decision.

In one case, an American firm that tookpains to package a sale with a selling price fac-tored in both hard and Chinese currency (inorder to help the Chinese save on foreign ex-change) lost the sale to a Japanese firm thatoffered a somewhat lower total price but in-sisted on hard currency for all of the settle-ment. The foreign exchange cost to China wasthus higher, although the sale price to the en-terprise was lower. Since the enterprise hada quota that had to be used (or lost), it hadno incentive to save on foreign exchange. Inother cases, the Chinese foreign exchangeallocation system seems to have led to the over-valuing of hardware transfers relative to soft-ware, despite policy to the contrary. In ac-counting for the use of foreign exchange toprocure technology, it is easier to point to apiece of equipment than to something as amor-phous as know-how. Foreign exchange limita-tions at the enterprise level also keep enterprisesfrom buying all the support items necessaryfor making the projects work.

—— .

The Government Perspective

Chinese authorities in recent years have triedto bring central policy guidance and coherenceto the business of importing technology, issu-ing a variety of new policy statements and reg-ulations. From the perspective of the centralgovernment, the main principles for choosingforeign technology include the following. Tech-nology to be imported should:

1. be above the level of that which is avail-able in China;

2. be of practical use;3. contribute to China’s eventual self-suffi-

ciency;4. foster economic and social development;

and5. be useful for generating foreign exchange.

Judgments about how to apply criteria suchas these become part of the technology importdecisionmaking process, and periodically vari-ous agencies, particularly the State Science andTechnology Commission (SSTC), are calledupon to interpret these guidelines in specificcases.

As part of an effort to protect both China’sinterests (particularly regarding restrictivebusiness practices by foreign firms) and theproprietary interests of foreign suppliers oftechnology, the Chinese State Council on May24, 1985, promulgated new “Regulations of thePeople’s Republic of China on Administrationof Technology Acquisition Contracts. Theseregulations call for their administration byMOFERT, which subsequently drew up its“Measures for the Examination and Approvalof Contracts for the Import of Technology,which took effect on October 1, 1985.

The regulations set criteria for the kinds oftechnology to be imported, limit the normallife of the technology transfer contract to 10years, offer protection to foreign technologythat falls outside the patent system, andcharge MOFERT with establishing a systemfor reviewing and approving technology trans-fer contracts. As of this writing, it is still tooearly to judge the longer term effectivenessand the consequences of these new procedures.

so ● Technology Transfer to China

Photo credit’ Erfc Basques

This sign is posted on the grounds of the Beijing Jeep Corp.

Some of their ambiguities have been noted,zg

and complaints have been heard that demandsby MOFERT for guarantees that the technol-ogy transfer will be successful place a heavyburden on the foreign supplier and lead tohigher costs.’”

The regulations do seem to strengthen thehands of the central government over enter-prises and localities. It also seems that the reg-ulations were inspired by China’s examinationof the experiences of other developing coun-tries that tried to centralize authority overtechnology transfers to protect national inter-ests from the economic power of multinationalenterprises.

The most important organizations for tech-nology transfer decisionmaking in the centralgovernment are the State Planning Commis-sion (SPC), SEC, MOFERT, and SSTC. In

‘gEllen R. Eliasoph and Jerome Alan Cohen, “China’s NewTechnology Import Regulations, ” The China Business Review,vol. 12, No. 6, November-December 1985, pp. 36-40.

‘°Foreigners also complain about the lack of transparency indecisions about what kinds of preferences the Chinese are pre-pared to grant or withhold in contract language, and call formore standardization on the contract language.

addition, the ministries having cognizance overthe technology in question also play an impor-tant role. For very large projects or projectsof special national importance, decisions wouldbe elevated above the SPC level to an appro-priate level, such as the Leading Group for theInvigoration of the Electronics Industry, orthe Science and Technology Leading Group,or perhaps to the State Council itself.31

The role of the SPC in the Chinese economyis to prepare 1- and 5-year economic plans andto assure that financial, material, and humanresources are made available for the executionof projects included in the plans. This includesannual authorizations to expend foreign ex-change. Since the SPC can give only limitedattention to specific project proposals for im-porting technology, it focuses on strategiccommodities 32 and technology transfer proj-ects with a value of US$5 million or more.There are exceptions to this $5 million figure,however. The central government has dele-

3] For a good overview of Chinese central government deci-sionmaking, and the responsibilities of the key central agen-cies, see, Oksenberg and Lieberthal, op. cit.

321 bid., p. 37.

Ch 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /rnports ● 51.

gated to the Shanghai municipal government, of its Technology Import and Export Depart-for instance, the power to approve projects up ment, it provides policy advice on China’sto the limit of US$10 million and the power needs for a given technology, its ability to ab-to approve joint venture projects up to $30 mil- sorb the technology, and the likely overseaslion (selected other cities have approval powersover joint ventures up to $10 million). 3~

The SEC has traditionally implemented theplans. In recent years, the SEC has also as-

sumed both the leading role in implementingthe economic reform program and the respo-nsibility for introducing modern managementto Chinese enterprises. Its most direct role intechnology transfer decisionmaking, however,is related to its responsibility to see to the tech-nological transformation Jishu gaizao) ofestablished Chinese enterprises.

The SEC has a special office, the TechnicalTransformation Bureau, and a special budgetfor technological transformation, including a

foreign exchange account for importing tech-nology that contributes to jishu gazao. Dur-ing the Sixth Five-Year Plan, the SEC hadresponsibility for 3,000 transformationprojects; another 3,000 are included in the Sev-enth Plan. During the last 2 years of the SixthPlan, some US$5 billion per year was spenton enterprise renovation; the total number oftechnology import projects for the whole planwas 14,000.34 The Chinese expect that this ef-fort will be surpassed during the Seventh Plan.

sources .35 MOFERT also approves the lan-guage of technology transfer contracts to en-sure that it conforms with the country’s regu-lations, and it takes the lead in proposing newregulations or revisions and clarifications ofexisting regulations. It also serves as the co-operating partner with the U.S. Trade and De-velopment Program. In addition, it certifiesChinese end users of sensitive high-technologytransfers in keeping with understandingsreached with the Coordinating Committee forMultilateral Export Controls (COCOM) as part

of the latter’s liberalization of exDort controls.L

The SSTC does not have a direct ongoingrole in decisionmaking for the import of com-mercial technology, but is an important par-ticipant nonetheless. It is centrally involvedin importing technology for the national re-search and technological development projectsit controls and can also play a decisive role inproviding technical assessments of importantpieces of technology to be imported. Further,the SSTC plays a key role in setting nationaltechnology policy. This includes statementsof priority about which technologies Chinashould expect to have by the end of the cen-tury and whether these will be acquired by im-

Thus, technology import projects that fall porting technology or by developing it indig-under the category of technological transfor- enously. These statements of policy serve asmation are approved by the SEC unless they points of reference for the SSTC’S own assess-exceed the $5 million-value limit. Ministries ments of proposed projects and also guide theand enterprises wishing to undertake techno- decisions of other participants in the system.logical transformation projects using importedtechnology submit feasibility studies to the Many enterprises in China are local rather

SEC or to economic commissions of local gov- than under central control. The local govern-

ernments. ment level has counterparts to the central gov-ernment decisionmakers discussed above.

The mission of MOFERT is to plan and ad-minister foreign trade. Through the activities

~ 11 n spite of the delegation of decisionmaking authority tolocal governments on the basis of the value of projects, the cen-tral authorities remain more involved in decisions than the rulesof delegation would suggest. See, Simon and Rehn, op. cit.

‘“Sun Zonghao, Director, Technical Transformation Bureau,SEC, ‘(China’s Technological Imports and Vistas for Develop-ment, unpublished paper presented at the MIT Seminar onTechnology Transfer, April 1986.

These include planning, economic, and scienceand technology commissions; a bureau of for-eign trade; and enterprise bureaus for differ-ent industries. In some cases, as with the cen-tral government, a corporate organization mayexist between the enterprise and the industrialbureau. The level of decision will depend on

“)oksenberg and I.ieberthal, op. cit., p. 90.

52 ● Technology Transfer to China--

the value of the transaction. In all cases, how-ever, the contract must be approved by the for-eign trade bureau.3G

Financial and Trade Organizations

The Ministry of Finance has attempted tomake technology import policy sensitive to thecosts of technology transfer, with regard notonly to the direct procurement costs, but alsoto the costs of absorption.37 The Ministry ofFinance has also attempted to establish theprinciple that technology imports should leadto expanded exports.

The Bank of China has become the key fi-nancial institution responsible for the distri-bution of foreign exchange and has an institu-tional interest in the financial soundness oftechnology import projects. The bank’s rolehas been enhanced by the increasing relianceon the banking system, instead of the state

budget, for investment. When projects are ap-proved by the SPC or the SEC (or their localcounterparts), a foreign exchange quota (e du)is established with the bank, which the enter-prise can then draw on. The bank, however,reserves the right to conduct its own feasibil-ity y studies before dispensing moneys from thee du if it is dissatisfied with the feasibilitystudies that have already been done. In somecases, the bank also sits in on discussions muchearlier in the project approval process.38

Other important participants in the decision-making system are the foreign trade corpora-tions (FTCS). Some of these, such as the ChinaNational Technical Import Corp., which spe-cializes in technology imports, and the ChinaNational Machinery Import and Export Corp.are under the control of MOFERT. Others areunder the control of the various industrial min-istries. The trading companies are often thebodies that negotiate and actually sign a con-

3’According to Oksenberg and Lieberthal, in the late 1970s,the Ministry of Finance calculated that China should be pre-pared to spend fouryuan of renmin bi on absorption, for everyone US dollar’s worth of technology and equipment imported,Ibid., p. 62.

“Ibid., p. 97.3“CF., Simon and Rehn, op. cit.

tract with a foreign company, and they are attimes tasked by the end users, who help iden-tify possible vendors of technology. In thissense, they act as middlemen. In recent years,however, there has been much more directinteraction between the end user and the for-eign vendor, even in cases where the tradingcompany still actually signs the contract.

Foreign Firms

Foreign firms differ in their motives andstrategies for transferring technology. Somefirms approach technology transfer as the saleof a commodity without presuming any equityparticipation in the Chinese economy. The ap-peal of the transaction may be tied to othercorporate objectives, but basically it is a salesrelationship.

For other firms, China is seen as an exportplatform and source of supply for componentsand finished goods. Such firms can be expectedto transfer technology needed to accomplishthose business objectives. In these cases thefirms can be expected to be earners of foreignexchange for China, although, as the Beijing-Jeep case demonstrates, they may also requiresubstantial amounts of foreign exchange dur-ing the startup period.

Other firms may be more interested in Chinaas a source of raw materials. They too can beexpected to be earners of foreign exchange, andmay, if required by the Chinese, be willing totransfer technology. The foreign oil companiesthat have participated in Chinese offshore oildevelopment fall into this category. In thiscase, a great deal of the technology is in theform of the experience of the personnel of thecompanies, something that cannot be trans-ferred readily except imperfectly via training.A small portion of the technology of the oilcompanies, such as exploration technology, ishighly valued and highly perishable proprie-tary information that companies normallyrefuse to transfer. The Chinese have been con-siderably disappointed over the implementa-tion of the technology transfer provisions inthe offshore oil development case because ofChinese misunderstanding about the nature

Ch. 3— The Chfnese Context for Technology Transfer: Strategies and /ssues for Technology /reports 53

Photo credft Eric Basques

A jet airliner prepares for passenger boarding at the Beijing International Airport, The truck is a model produced untilrecently that was based on Russian technology of the 1950s.

of the technology and a failure of the oil com-panies to understand Chinese expectations.

Other industries have different dynamics.In some areas of high technology where theChinese have a keen interest, the very iden-tity of the foreign firm is tied to its technol-ogy. In these industries—electronics, materi-als, telecommunications, biotechnology-thereis great expense involved in product develop-ment and a rapid rate of product obsolescence.Markets must be expanded to distribute costs.In such highly competitive cases, technologyis not viewed as a commodity to be sold, andthere is great reluctance to transfer technol-ogy unless it will lead to a long-term presencein China with opportunities to design products

for the Chinese market and to repatriate prof-its. It also requires Chinese partners who havethe organizational flexibility to respond to rap-idly changing technologies and business op-portunities.

There are some signs that China is comingto appreciate this diversity of motives andstrategies among foreign firms. The new in-vestment regulations, for instance, recognizethe difference between export-oriented andtechnologically advanced firms that need ac-cess to the domestic market. However, thereis still much in the nature of Chinese policiesand in the Chinese economic and political sys-tems that makes it difficult to accommodatethe diversity of technology transfer issues.

54 ● Technology Transfer to China

The Foreign Exchange Constraint

Since the end of 1985, concern over the avail-ability y of foreign exchange has become an evenmore important element in decisionmakingabout technology imports. The officially pre-ferred way of making a decision to import tech-nology has been to fold it into the normal plan-ning process. If a positive decision is made ona project, then in principle the necessary for-eign exchange to implement it will be provided.However, it is precisely because foreign ex-change costs are a factor in judging the desira-bility and feasibility of the project that deci-sionmaking through the planning system hasin recent years been biased toward projectsthat promise to earn foreign exchange quickly.Thus, until recently, petroleum and coal proj-ects promising to produce exportable com-modities have enjoyed a privilege denied toelectric power.

This bias of the planning system is one rea-son why enterprises, corporations, ministries,and local governments might find it in theirinterest to have decisions made outside of theplanning system. There are also two other rea-sons. First, receiving formal plan approval canbe time consuming if decisions on new projectsare desired at a time out of phase with the plan-ning cycle. In addition, present economic re-forms are creating an environment in whichenterprises often (though not always) wish topractice as much of their new autonomy as pos-sible. To a considerable extent, they can do thisif they have access to foreign exchange. Thequestion of access to foreign exchange there-fore becomes quite important for understand-ing decisionmaking.

As noted above, the SPC has the major rolein allocating the right to expend foreign ex-change to ministries, enterprises, and local gov-ernments. For the enterprise that wishes toimport technology, therefore, one source of for-eign exchange is that which is provided in theplan. For projects that have been included inthe plan, provision is made, in principle, forthe foreign exchange necessary to carry it out.This solution may not be optimal for more com-plex joint venture projects, where foreign ex-change needs may be very fluid.

Enterprises can also earn foreign exchangethemselves. The tight restrictions on foreignexchange imposed by the state in the last 2years can be thought of as an incentive for en-terprises to become more active foreign ex-change earners , though they are al lowed tokeep only a fraction of their earnings and mayneed permission to spend even that. The en-terprise can also approach the local govern-ment or the supervising ministries for out-of-plan foreign exchange, although the accountsheld by these entities may not be large. Bei-jing, for instance, had only $100 million at itsdisposal.

In addition, the enterprise can attempt to

buy foreign exchange from other units usinglocal currency (renminbi) at a rate set by theChinese Government. Or foreign exchange canbe borrowed from the Bank of China if the bankapproves of the project. In such cases, repay-ment is usually made in foreign currency. Otheragencies, such as the China International Trustand Investment Corp. (CITIC), which havefloated loans from foreign banks, are also pre-pared to lend foreign exchange.

It is clear that changes are occurring in theallocation of foreign exchange, just as in theeconomy as a whole. This does not necessarilymean that there is less overall central controlover the total amount of foreign exchange ex-pended. Within that total, new mechanisms forallocation are appearing, which may lead tomore efficient use of the foreign exchange avail-able. These new mechanisms complicate thetask of trying to understand how the decision-making system actually operates, however.

The System in Practice

The decisionmaking system is supposed to

operate as follows: Proposals for the importof technology originate in an enterprise underone of the central ministries or units of localgovernment. The enterprise, however, is work-ing under control figures that have alreadybeen supplied by the SPC (or local authorities)as a guide to enterprise planning. In develop-ing the proposal, the enterprise typically mustdemonstrate the feasibility of the project

—

Ch 3— The Chinese Context for Technology Transfer: Strategies and /ssues for Technology Irnports . 55— -.

through a feasibility study. The project mustthen be submitted to the ministry or local en-terprise bureau (or in some cases, a corpora-tion under a ministry of which the enterpriseis a part) for approval. The approving author-ity at this level may also conduct its own in-dependent feasibility study. For local enter-prises, the project must then be approved bythe local planning committee. If the project(whether from a locally or centrally controlledenterprise) exceeds $5 million, sg it must be sub-mitted to the SPC for approval, and the SPCmay also do its own studies as to the desira-bility and feasibility of the project.

For projects pertaining to the technologicaltransformation of industry, the proposal wouldgo to the SEC. For projects below the $5 mil-lion level that do not pertain directly to tech-nological transformation, the approval decisionwould be made at the level of the ministry, anational corporation, or a local government.

After substantive approval by one of thebodies mentioned above, a contract definingan agreement with a foreign partner must besubmitted for MOFERT (or local foreign tradebureau) review, which involves a comparisonof the terms of the contract with criteria ex-pressed in policy regulations.

It is difficult to say with confidence that thedecisionmaking actually works the way it isdesigned to. Furthermore, the system is chang-ing as reforms in the economy progress andas new approaches and new participants a p -pear. 13anks have clearly emerged as more im-portant parties, and relatively new organiza-tions, such as CITIC, also influence the waythe system operates. In addition, the decision-making system is embedded in an environmentof bureaucrat ic s truggles and shif t ing al l i -ances, making the decision process, as well asthe outcome of a decision, difficult to predict.

Despite much serious effort to establish pol-icies and institutions for importing technology,the current Chinese system has become the ob-ject of criticism from outside and inside China.. —

‘qklxcept in those jurisdictions, such as Shanghai, which ha~’ebeen delegated authority to make decisions on higher \aluedprojects.

The criticism from outside, discussed in chap-ters 2 and 4, focuses on the impediments todoing business in China. The criticism of thecurrent system from within China focuses moreon whether the current system for technologytransfer serves Chinese interests. Apart fromthose criticisms inspired by desires to protectdomestic industries and R&D facilities fromforeign competi t ion, the more disinterestedcommentaries on the current situation focuson three main issues: the problems of duplica-tion of imports, the negative consequences ofdecentralization, and the problem of assimila-t i on . 4 0

The problem of duplicative technology im-ports has been part icular ly evident in con-sumer -o r i en t ed l i gh t i ndus t ry . Repo r t ed ly ,over 100 color television assembly lines wereimported since the late 1970s. If all were putinto operation, they would more than saturatethe market. To make matters worse, many ofthe components could not be made in Chinaand had to be imported, resulting in a wasteof foreign exchange. Similar problems were en-countered with other consumer appl iances ,such as refrigerators and washing machines.Strong local interest in the production of floppydisks for computers has led to the prolifera-tion of small plants to produce them, thus los-ing economies of scale.41

A related example is the field of optical tele-communica t i on t echno log i e s . I n t h i s c a se ,three different Chinese organizat ions havebeen negotiating with three different foreigncompanies, from the United States, Japan, andEurope. Instead of coordinating their efforts,they are all going separate ways, with the pos-sible result of duplication and excess capac-ity. Since this area of technology has been iden-tified as a national priority, two units of thecentral government have been charged with

‘“This discussion is drawn from a three part article b~’ CaoJiarui entitled, “The Present Condition of, and Problems inChina’s Technological Imports, ” published in the o~’erseas edi-tion of the journal, Ziaowang. Part 1 appeared in No. 18, May5, 1986, and was translated in FBIS, hlay 16, 1986, p. K5 ff.Part 2 appeared in No. 19, Ma3 12.1986, translated in FBIS,hla~’ 22, 1986, p. K1O ff. Part 3 appeared in No. 20, hlay 19,1986, translated in FBIS, Nlay 30, 1986, p. K13 ff,

4’Cao Jiarui, Part 1, op. cit.

56 Technology Transfer to China

overseeing the importing of this technology.However, because these central authorities arelinked to the organizations involved with thenegotiat ions, they are unlikely to be disin-terested arbi ters and eoordinators .4 2

The current critiques of the decisionmakingsys t em fo r t e chno logy impor t s r e f l e c t t heunderlying problems of Chinese institutionalweaknesses and jurisdictional confusion seenelsewhere in this report. A recently reportedcase involving continuous casting technologyused in steel plants illustrates this point. Inthis case, china imported the technology fromWest Germany in 1980 under a cooperat iveproduction arrangement. The technology wasass imi l a t ed to t he ex ten t t ha t t he Ch inesereproduced and employed the technology suc-cessfully in other steel mills. As is often theChinese custom, the achievement was publi-cized as a case of how foreign technology canhelp China and how successful assimilation canbe accomplished. On the basis of this success,the State Council issued a directive in 1981 tothe effect that in the future, if steel plants needthis type of cont inuous cast ing machinery,they should first try to acquire it in China. 4 3

In 1985, by which time the decentralizingof decisionmaking on technology imports hadbeen implemented, a Chinese steel plant wasin need of a continuous casting machine of thetype that had by then been successfully pro-duced in China using the original German tech-nology. Instead of looking for a Chinese sup-plier, however, the plant decided to import themachinery, in violation of at least the spiritof the State Council directive. The justifica-tion for going to the foreign supplier was thatthe foreign equipment had cer tain technicalcharacteristics allegedly not available in China.

To proceed with the purchase, the plant hadto secure the approval of the provincial author-ities only. The first step was to conduct its ownfeasibility study. This was then followed byan approach to the provincial branch of thebank, which conducted its own assessment andreport. Finally, the provincial economic com-

mittee gave the plant approval to proceedagain, seemingly in violation of central policy .44

Information is not available on the techni-cal differences on whether the plant, the branchbank, or the provincial economic committeewere unaware of the State Council directiveor simply chose to ignore and circumvent it.Nor is it known whether the plant and provin-cial authori t ies genuinely bel ieved that thef o r e i g n t e c h n o l o g y w a s m o s t a p p r o p r i a t e ,whether they were at t racted to the foreigntechnology s imply because they assumed i twas best because it was foreign, whether therewas some form of corrupt ion involved, orwhether the authorities were simply incompe-tent to evaluate the proposed transfer in lightof China’s own capabilities. Any or all of theseexplanations are possible, given a variety ofreports from China in recent years. What isclearer, however, is that from the central gov-ernment perspective, this is the kind of experi-ence that leads to duplicative imports that un-necessarily drain foreign exchange reserves.

Would the decision have been more in keep-ing with the national interest if there had beengreater centralization? The answer to this ques-tion is not certain. The answer would almostcertainly be positive if the center had a limitednumber of such cases to decide and could de-vote the necessary resources to informationgathering and analysis. However, the numberand variety of technology import cases clearlyare far greater than the central authorities canhandle. Central planner incompetence and ig-norance of local particularities is precisely theweakness of centrally planned economies, andthe main justification for decentralization.While the central authorities can and do rec-tify grievous mistakes, as they have now donein the TV, refrigerator, and washing machinecases, routine and efficient central directionof technology imports is seemingly beyond thecapacity of the system.

China has had difficulty finding an institu-tional formula that would allows effective cen-tral policymaking, the observance of these pol-

4’Ibid.4’Ibid. 441bid.

Ch, 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology imports ● 57— -— —

icies in their implementation, and the flexibilityof decentralized decisionmaking. The problemis the one alluded to in the previous chapter,that of the legacy of past decentralizations thatempowered local (especially provincial) gov-ernments.

The Chinese sometimes refer to the struc-ture of economic authority in China as a check-erboard, meaning that vertical authority ema-nating from the central government throughministries and commissions is crosscut by thehorizontal interests of local or regional author-ities. This system is sometimes also referredto as tiao tiao kuai kua”, literally “branchesand lumps, ‘‘ in which the central ministries andcommissions are the “branches” and the

“lumps” are formed when these are crosscutby regional authorities. As one commentatorput it. “The crucial point of our existing sys-tem is the division of departments (read min-istries) and regions, which develops into a se-ries of complicated contradictions betweendifferent departments (ministries), between de-partment and region, and between different re-gions.’’”

This system of institutions has the effect ofconstraining the decisionmaking effectivenessof all parties and explains why even in periodsof greater centralization, central authority isnot necessarily determinative even on high-priority matters.

Not surprisingly, Chinese perceptions of in-stitutional deficiencies differ. From the per-spective of the production enterprise, decen-tralization has not gone far enough, since theenterprise’s own autonomy is constrained. Ifthe enterprise is under the jurisdiction of a lo-cal government, it is constrained by the inter-ests and prerogatives of the latter, as well asby national policy. If the enterprise is underthe jurisdiction of a central ministry, it is con-strained by the interests and practices of theministry and by overall national policy. How-ever, it is also subject to the discretion of thelocal authorities, who typically would have asay in the management of the enterprise’s per-sonnel matters and in the supply of such goods

as water and electricity. From the view of cen-tral planners and high-level economic and tech-nology policy makers, on the other hand, theimpression is one of fragmentation, with au-thority dispersed among ministries and re-gions.4G

The current economic reforms and efforts atpolitical institutionalization would seem topromise some improvement in decisionmaking.However, the record to date is mixed. For in-stance, management of Chinese industry hasin many cases been removed from governmentministries and vested in new corporate enti-ties, which in principle are to run as profit-making organizations. However, these havenot always been able to escape the heavy handsof party cadres, who want to maintain old waysof doing things even as the forms of organiza-tion change. Efforts are being made through-out the government and the economy to pro-mote younger, more technically qualified, andmore entrepreneurial individuals into mana-gerial positions. On the other hand, the eco-nomic system still does not generate the eco-nomic information on which managers can basesound technology transfer decisions, nor theincentives for managers to assume the risksof innovation.

The now-standard insistence on feasibilitystudies for technology import decisions is in-tended to inject additional technical judgmentsinto decisions and to force the attention of moreinterested parties on assimilation problems.The mechanisms for horizontal technical com-munication, noted in the next section, also aidin Chinese decisionmaking. Although this wasnot true in the late 1970s, decisions about im-porting technology are often informed by someof the best technical judgments in China. Thisis largely a result of the growth of consultingand advisory services.

However, the best technical judgments donot necessarily result in the the most appropri-ate technology decisions, and it seems that thefull integration of technical, economic, and po-litical criteria remains something of an ideal.There are some reports, for instance, that fea-

451 bid. 4’Cao Jiarui, Part 3, op. cit.

58 ● Technology Transfer to China

sibility studies are not always taken seriouslyand are used for manipulative purposes. Theprevalence of this practice, not unheard of inother countries, is not known.

A summary assessment of China’s decision-making system for technology imports is dif-ficult. The system is composed of elements ofcentralization and decentralization, of marketprinciples and planner influences. An optimis-tic interpretation is that it can be thought ofas a transition to a more market-driven, de-centralized system. This interpretation isclearly consistent with the intent of current

policy, and much Chinese reform experiencedsince 1979 provides evidence for it.

The pessimistic interpretation is that thesystem is stymied, stuck between the impera-tives of centralization and decentralization, ofmarket and plan. In this view, the inertia ofthe established institutional setting is so great,and its power so entrenched, that reform pol-icies cannot be fully implemented. Instead, re-form impulses from the center will be distortedat various points in the system, producing un-desirable and unanticipated consequences ofthe types noted above.

ISSUES OF ASSIMILATION AND DIFFUSION

Acquiring technology is only half of China’sproblem. Once transferred, the technologymust be assimilated and diffused effective-ly if China’s modernization goals are to beachieved.

The question of assimilation is linked to theunderlying issue of technological dependencyon the foreign suppliers of technology. Sincethe end of the 1950s, China has been particu-larly sensitive to this issue of dependency andhas striven to avoid it. Ironically, however, thepolicies and institutions established in the pastto foster self-reliance are now obstacles to thefull assimilation of technology under the newassumptions of the open-door policy. The riskof dependency thus increases as the problemsof assimilation remain unsolved.47

In discussing the assimilation of technology,it is useful to distinguish between production(using the imported technology), manufactur-ing (replicating the import), and design (the ca-pability to redesign the technology) .48 Overall,China’s ability to assimilate production tech-nology has been greater than its ability to ab-sorb manufacturing or design technologies.

4’Zhang Shihong, “A Noteworthy Issue: Digestion, Absorp-tion and Renewal in Technology Importation as Viewed FromShanghai, ” Renrnin Ribao, May 3, 1985. In JPRS-CST-85-027.Aug. 22, 1985. p. 62.

‘8K.C. Yeh, “China”s Assimilation of Foreign Technology,1950-1985, ‘paper presented at the conference on China NewTechnological Revolution, Harvard University, May 9-11, 1986.

However, it is also useful to recall the variousperiods of Chinese technology imports, sinceassimilation experience has varied somewhatfrom period to period.

The Chinese seemingly did better at assim-ilating all three types of technology during the1950s than in the subsequent two periods. So-viet provision of blueprints, technical advisors,and training programs undoubtedly contrib-uted to this success. On the other hand, thetechnology transfer experiences of the 1960sand 1970s were not notably successful in termsof thorough assimilation. ’g

China’s past history of importing technol-ogy suggests that many factors influence ef-fective assirnilation.’” Choosing the right tech-nology at the outset is clearly important. Manyof the cases of unsuccessful assimilation weredue to procurement decisions made by techni-cally unqualified people, which resulted in theimport of technology having the wrong prop-erties for the intended task. Also, the Chineseunderestimated the value of expertise relativeto hardware, and neglected the support itemsnecessary to make assimilation successful.

A second concern has been that managershave not been willing to make the effort to fullyabsorb the technology. That is, they have been.

‘gIbid.50 This discussion is drawn from Ibid.

Ch 3— The Chinese Context for Technology

more interested in expanding output by ex-ploiting the production technology withoutattending to the acquisition of the underly-ing manufacturing and design know-how. Im-ported technology has been seen as a shortcutto technical progress. Yet, effective assimila-tion requires focused attention to the problemsof absorption. In addition, it requires commu-nication and cooperation among a variety oforganizations, such as enterprises, researchunits, government agencies, and universities.China’s segmented society has often frustratedthe meeting of this requirement.

Another problem has been the lack of ade-quate managerial know-how to employ thetechnology fully. This was less of a problemin the 1950s since the Chinese imported So-viet management along with the technologyand had the services of Soviet advisors. In sub-sequent periods, however, Chinese managerialbackwardness became a hindrance.

China’s past experience also points to theimportance of having domestic R&D resourcescommitted to the tasks of assimilation. As theChinese currently see it (which is in keepingwith international analyses as well), much ofthe Japanese success in assimilation was dueto the attention given to adaptive engineer-ing and R&D in support of absorption, withexpenditures on the latter running five to seventimes those of the purchase of the technology.”

Although China’s R&D resources are not in-substantial, they have often been poorly de-ployed and misused; China’s best talent, forinstance, is typically employed in centralizedresearch units not physically proximate to theenterprise importing the technology. Further-more, Chinese R&D personnel have been com-partmentalized, keeping researchers and engi-neers from the academies, the universities, andthe production ministries from working to-gether on assimilation tasks.

China has many of the same problems of as-similation that other developing countries re-ceiving transferred technology experience. Yet,China also has both distinctive advantages and

51 Ibid.

Transfer: Strategies and Issues for Technology Imports ● 5 9—

disadvantages in dealing with technology fromthe international economy. During the last 2years, the Chinese have come to realize the im-portance of paying special attention to theproblems of assimilation. Current discussionsof assimilation, however, indicate that theproblems that troubled the assimilation proc-ess in the past have by no means been over-come. An examination of current assimilationproblems points to the following problems.

Technical Manpower

A first constraint facing many developingcountries is a shortage of qualified technicaland managerial manpower and a lack of scien-tific tradition. In absolute terms, China hasa large pool (approximately 2.4 million) of sci-entists and engineers.52 Even though the qual-ity of training received by those in the poolvaries a great deal, and the distribution of tal-ent by region and economic sector is unbal-anced, China does have a cadre of technicalspecialists to facilitate technology transfers.

China is also rapidly expanding its techni-cal manpower ranks through its own new edu-cational policies and by taking full advantageof educational and training opportunitiesoffered abroad by institutions of higher edu-cation, companies, and foreign governments.Thus, while manpower inadequacies do appearin the context of technology transfers, foreignfirms seem to agree that the Chinese are mov-ing up the learning curve effectively.

Manpower limitations affecting the assimi-lation of foreign technology are exacerbatedby two characteristics of the Chinese techni-cal community. The first is the misuse and mal-distribution noted above. Too much of China’stechnical manpower is concentrated in central-ized research institutes, which have historicallynot been well connected to production enter-prises. Meanwhile, at the level of the enterprise,there is often a severe shortage of engineers.

“See, I.eo A. Orleans, The Training and Utilization of Scien-tific and Engineering Manpower in the People’s Republic ofChina, U.S. House of Representatives, Committee on Scienceand Technology, October 1983: and Orleans, “Graduates of Chi-nese Universities: Adjusting the Total, The China Quarterly(forthcoming).

60 ● Technology Transfer to China

Limitations on the mobility of technical per-sonnel also hinder both the assimilation anddiffusion of technology. The tendency of en-terprises and research institutes to regard tech-nical personnel as the propert y of the unit hasbeen a major obstacle to labor mobility. A va-riety of new approaches to stimulate the move-ment of technical personnel have been intro-duced since the early 1980s. Although thesehave had some positive results, the problemremains serious.53

Second, problems with the educational sys-tem affect the seriousness of the manpowerconstraint. Two deficiencies in particular standout. First, the typical Chinese graduate is usu-ally stronger in theory than in hands-on ex-perience relevant to the tasks of technologyabsorption. Second, the educational system,especially in engineering, has focused too muchattention on training narrow specialists whoare often ill-equipped to deal with problems re-quiring interdisciplinary approaches. In addi-tion, the failure of the educational system toproduce economists who are familiar with theeconomics of the industries in which the trans-fers are occurring is a hindrance to effectivedecisionmaking. 54

Management

China’s lack of personnel with modern man-agement capabilities may be of greater imme-diate importance for assimilation than theshortage of scientists and engineers. Althoughoften capable and experienced in working un-der conditions of static technology and the dic-tates of a planned economy, China’s managersnow face a very different environment.

Effective technology assimilation requiresa systemic understanding of how the technol-ogy will fit into the social system to which itis being transferred and a willingness to take

—“See, Leo A. Orleans, “Reforms and Innovations in the Utili-

zation of China’s Scientific and Engineering Manpower, ’ pa-per presented at the conference on China New TechnologicalRevolution, Harvard University, May 9-11, 1986.

54Geoffrey Oldham and Alyson Warhurst, “Technology Trans-fer to the Chinese Offshore Oil Industry, ” unpublished report,University of Sussex, Science Policy Research Unit, no date,p. 43.

risks and to adopt a timeframe that sees thevalue of the technology over the longer run.It also requires an understanding of the for-ward and backward linkages needed for the ef-fective deployment of the technology. As notedabove, these are not traits that were instilledin Chinese managers by the old system, whichput immediate production targets foremost inthe manager’s mind and made risk avoidancea rational individual strategy.

The Chinese government is well aware of thelimitations of the present enterprise managers.Modernization in management has been en-couraged by policy changes such as decentral-ization of authority, institution of managerialaccountability, provision of incentives andflexibility in organizational design. The mosteffective improvements have resulted from di-rect contact with modern managerial tech-niques—through joint ventures and otherforms of technology transfer and in trainingcenters, such as the Dalian Institute sponsoredby the U.S. Department of Commerce. Thenumber of managers that can benefit directlyfrom such contact is minute compared to thetotal need in China, but the effect appears tobe multiplied by the dissemination of informa-tion from the centers and by learning from theexample of the now more effective managers.Since managerial inadequacy is one of the mostsevere constraints, special attention is war-rented if technology transfer and China’s mod-ernization are to be supported.55

Research and Development

In contrast to many developing countries,China has a comprehensive industrial struc-ture and an extensive R&D network. Yet Chi-nese R&D has had many problems and, likethe economy as a whole, is now the target forextensive reforms.5G

Most sectors of the industrial economy haveresearch, design, and educational institutes.

Sbwillim A. Fischer, “The Transfer of Western ManagerialKnowledge to China, ” app. 5 in vol. I I of this report, May 1986.

“See, Richard P. Suttmeier, “New Directions in Chinese Sci-ence and Technology, ” in: The Asia Society, China Briefing:1985 (Boulder, CO: Westview Press) 1986.

Ch, 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports 61

Many of these had experience with technologytransfers from the Soviet Union in the 1950s,and all of them have had experience with tech-nological self-reliance since 1960. This R&Dsystem was terribly disrupted during the Cul-tural Revolution, and its capabilities were re-duced. Nevertheless, it is important to recallthe evolution of this system since 1949, itsmany achievements, and the renewed supportit enjoys in the post-Mao period. It is a sig-nificant resource that could aid China in as-similating foreign technology and avoidingtechnological dependency. China’s technicalcommunity needs to be brought up to worldlevels, but it does not have to be created anew.

Ironically, the existence of an established in-dustrial structure and R&D system at timesworks against technology transfer. Because domestic industry and the R&D establishmenthave interests in domestic supply, China isfaced with make-or-buy questions that wouldnot trouble other developing countries. In addi-tion, China’s domestic industry has had trou-ble converting the results of its research intoserially produced new products. These prob-lems, and the more general relative technologi-cal backwardness of the domestic industry,provide opportunities for the foreign suppliersof technology. It is likely, however, that effec-tive international technology transfers will alsostimulate the domestic industry to improve itscapacity for indigenous innovation.

Like the manpower problem, the R&D sys-tem has historically been compartmentalized,and R&D has been concentrated in centralizedinstitutes rather than at the level of the enter-prise that needs the technology. The currentreforms in China’s science and technology man-agement system are intended to change thissituation, but it is likely that the strengthen-ing of R&D at the enterprise level will taketime.

A second problem is that R&D supportiveof technological assimilation has not receivedpriority attention and adequate funding. Thelinking of R&D plans to technology importplans is a recent development. The new policyemphasis being given to assimilation is in-

tended to bring attention to the need to forgethis link, but a lasting solution to the problemis not likely to be found in central policy direc-tives. More likely, the solution will depend onthe course of the reforms of the economic andthe science and technology systems, with theiremphases on enterprise autonomy and thestrengthening of enterprise R&D.

The Supply System

China’s ability to absorb and assimilate tech-nology is influenced by problems in the domes-tic economy. Many characteristics of the econ-omy that inhibit domestic innovation in Chinaalso affect the assimilation of foreign technol-ogy. The inability of the economy to supplyhigh-quality inputs reliably-up to the tech-nical standards required by the foreign tech-nology-to enterprises engaged in the impor-tation and assimilation of technology is oneof the more serious of these problems.

One example is the well-publicized case ofthe Wuhan steel mill, which imported ad-vanced German technology but found that themachinery in which it was embedded could onlybe used for a fraction of the designed time. Theelectronic control technology of the importedmill presumed the supply of a reliable source

Photo credll Eric Basques

This ginger root salesman is completing a sale in theChangchun agricultural “free market. ” Produce Inexcess of government quotas can be sold for what the

market will bear.

62 Technology Transfer to China

of electric power, which the city of Wuhan didnot have. In other cases—the Shanghai Fox-boro and Beijing-Jeep joint ventures, for in-stance-the supply problem is also seen in thesupply of raw materials, semi-processed ma-terials, and finished intermediate goods.

The uncertain availability of these inputsslows the full assimilation of the technology,prolongs reliance on foreign suppliers, and thusincreases the demands for foreign exchange.Scarce supplies have been a particular irritantto joint ventures. In some cases, the best hopeis to go to enterprises from the military indus-tries that are now instructed to serve the ci-vilian economy. These enterprises are oftenable to meet the quality standards required,but they may not have the incentive to linkup with the joint ventures. Undercurrent eco-nomic conditions and policies, they often findit more profitable and less demanding to pro-duce for the Chinese domestic market.

The response of Chinese enterprises to theuncertainties of the supply system has beento pursue vertical integration, creating a tech-nological system different from those in capi-talist countries, in which components for tech-nologies are often sourced from many differentsupplier companies. This systemic differenceinfluences Chinese choices of technology andassimilation. The Chinese often expect moretechnology transfer than the Western firm cansupply, since some of the component technol-ogies are the property of other firms. The fullassimilation of the technology supplied toChina may therefore be blocked because thesupporting, component technologies are nei-ther available to nor being supplied to China.

Internal Diffusion

The question of how effectively foreign tech-nology is diffused within China remains uncer-tain. This issue is particularly pertinent for thetransfer of dual-use technologies to civilian en-tities. U.S. national security implications ariseif these technologies diffuse to the military.Foreign firms have also been concerned thatwithout effective patent protection, technol-ogy licensed to one enterprise may be illicitly

transferred to another. China’s new patent lawand other recent policies designed to encouragetechnology transfer, should help alleviate someof these concerns. A separate question, how-ever, is the capability of the Chinese systemfor internal technological diffusion.

Chinese organizations are excessively bu-reaucratic and compartmentalized. Contraryto the principle of communalism embedded inofficial ideology, Chinese enterprises and re-search institutes often act as if they have pro-prietary claims on technology and, more im-portantly, on the technical manpower theyemploy. The clarification of property rightspertaining to knowledge is an important ele-ment in current reforms of the science and tech-nology system. Yet the Chinese continue to la-ment what they refer to as departmentalism,and the lack of effective horizontal, interor-ganizational communication. Instead, commu-nications follow the strong vertical orienta-tions along which Chinese organizations weredesigned.

For example, world-class bicycle-manufac-turing machinery is produced by the Shang-hai Bicycle Co. (SBC), one of China’s leadingbicycle makers, for its own production. Thecompany has no interest in, nor incentives for,the production and marketing of its manufac-turing equipment. The Shanghai Light Indus-try Bureau had to establish a specialized fac-tory for the production of bicycle-makingmachinery. While the new plant is able to usethe designs and manuals of the SBC’S equip-ment, the personnel from SBC who possess theknow-how have not been deeply involved in thediffusion.”

The Chinese have attempted to overcome theproblems of technological departmentalism bycreating mechanisms for crosscutting techno-logical communications. The first of these arethe professional societies organized aroundacademic disciplines and industrial technol-ogies. The professional societies draw individ-uals from different vertical systems (different

“The World Bank, China: Long-Term Issues and Options: TheMm”n Report (Washington, DC: 1985), p. 172.

Ch. 3— The Chinese Context for Technology Transfer: Strategies and /ssues for Technology /reports 63

ministries, academies, and universities) intoa common forum. A second mechanism is a net-work of scientific and technical informationservices which was developed with the coop-eration of the U.S. National Technical Infor-mation Service. In addition to these two mech-anisms, a large number of technical consultingorganizations have been formed in recentyears, and other organizations, including pro-duction enterprises, universities, and researchinstitutes, have been active in establishing con-sultancies, as well. Recent policy has also sanc-tioned consulting by individuals.

Most importantly, however, the economic re-form program is designed to alter the strongvertical, bureaucratic orientations of the econ-omy by creating the conditions for horizontalmarket exchanges. This is true in the area oftechnology as well. With the initiation of tech-nology markets for the buying and selling oftechnology, the regime has, in effect, recog-nized the de facto proprietary claims to knowl-edge that had been made by enterprises andresearch institutes as they resisted the shar-ing of technology without appropriate compen-sation. Thus the leadership now encourages theview that technology be considered a com-modity to be bought and sold in a marketrather than a free public good to be allocatedby the state.

The Chinese are also trying to allow greatermobility of technical personnel. To create theseconditions, the Chinese have had to modify es-tablished practices of administratively assign-ing technical personnel to jobs and have at-tempted to establish, on a trial basis, a limitedlabor market for scientists and engineers.

It is difficult to assess how effective this re-form has been, but there are a number of indi-cations that its impact has been dulled by theunwillingness of work units to allow their per-sonnel to leave. Since most social services, in-cluding housing, are only available through thework unit, individuals may be reluctant to seekopportunities to move.5g

“’’Cf., orleans. “Reforms and Inno\rations ., . ‘“

The climate for the diffusion of technologyhas improved markedly in recent years eventhough the inherited structure of the Chineseeconomic and research systems still inhibitsit. Current Chinese thinking calls for the at-traction of foreign technology to the more de-veloped coastal cities and the subsequent dif-fusion to the interior and throughout theeconomy. This strategy is becoming increas-ingly likely to be successful. The problemsassociated with the power of individual workunits to make proprietary claims on technol-ogy and technical personnel, however, are for-midable.

The Prospects for Assimilation

The financial, manpower, decisionmaking,and economic problems noted above make itlikely that assimilation will not go as smoothlyas the Chinese and their foreign commercialpartners might like. It is important to remem-ber, however, that China also has capacitiesthat make it likely that some of these limita-tions could be overcome in the relatively nearfuture. These include an expanding pool oftrained personnel; an established, extensiveR&D system; and new policies to encourageforeign investment and technology transfer,as well as those for economic, administrative,and educational reform. China’s leaders, fur-thermore, have incentives to maintain an envi-ronment favorable to technology transfer andabsorption.

As these policies have been refined, the im-portance of the assimilation issue has comeinto focus. China clearly seeks technologytransfer agreements that will facilitate assimi-lation and include as much of the manufactur-ing and design know-how, as well as the pro-duction technology. Western firms however,have diverse motivations in their dealings withChina and in their uses of technology transferin corporate strategies. The behavior of thesupplier of the technology, considered in thefollowing chapters, can also influence China’sassimilation ability, thus adding another vari-able to any analysis of likely assimilation ex-periences.

64 ● Technology Transfer to China

CONCLUSION

China has ambitious expectations about therole technology will play in its modernizationand has set a course both to acquire technol-ogy abroad and to increase its domestic capa-bilities for producing technology. There ismuch to be said for the course chosen; thereare also significant problems of decisionmak-ing, of assimilation, and with basic economicinstitutions; problems that must be solved ifthe full economic value of technology transferis to be realized. Reforms under way shouldcontribute to the solution of these problems,but the solutions will take time. Cases of Chinachoosing inappropriate technologies and hav-ing difficulty with their assimilation are likelyto be seen in the future, but they are likely tobecome fewer.

China’s larger quest for modern technical ca-pabilities involves much more than interac-tions with the foreign suppliers of technology.It is also shaped by the operational objectivesof technology policy, by the nature of the do-mestic economic and R&D systems, by thequality of management, and by the policy envi-ronment. The complexity of this context fortechnology transfer can be seen in figure 3.

As depicted in figure 3, the underlying chal-lenge the Chinese face in creating technical ca-pability is to realize change on a number offronts simultaneously. An enhanced capabil-ity for technological innovation entails changesin both the R&D system and the economy.Economic reform and changes in the policy en-vironment are necessary for improving the cli-mate for foreign investment. Effective absorp-tion of foreign technology requires not only apolicy environment conducive to the operationof foreign businesses, but also further economicreform and changes in the domestic R&Dsystem.

While the Chinese realize the significance ofthe systemic nature of the technology trans-fer phenomenon, and while their moderniza-tion policies are intended to bring the elementsof the system into greater harmony, the verycomplexity of the system makes it likely thatthere will continue to be problems with tech-nology transfer. The wider significance of theseproblems is explored in chapter 6.

Ch. 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports 6 5.

Figure 3.— The Acquisition of National Technical Capabilities: A Revised View of the Elements Involved

k f

Management

1. Modernization of existing enterprises

Issues of innovation

The economy

Issues of assimilationmake-or-buy issues

I The internationalenvironment I

Issues of business climateand the assimilation /

of technology

SOURCE Office of Technology Assessment, 1987