China Economic Development Model

7/29/2019 China Economic Development Model

1/38

DAEJEON UNIVERSITY

Korean Economic Successes and

Challenges

Professor: Kim Sun Geun

Topic: Chinas Economic Growth Model

Prepared by:

Siem Pichnorak

Heang Rasmey

Chea Chakrya

Sok Vouchneng

Academic Year: 2012-2013


2/38

ContentsIntroduction ................................................................................................................................................ 3

China Economy: Quantitative Outlook .................................................................................................. 5

1. GDP .................................................................................................................................................. 6

a. Overview of Chinas GDP......................................................................................................... 7

b. Share in GDP............................................................................................................................... 7

2. Inflation ........................................................................................................................................... 8

a. Inflation Rate in General ........................................................................................................... 8

b. Monthly Inflation ....................................................................................................................... 9

3. Export and Import ......................................................................................................................... 9

a. Foreign Trade................................................................................................................................ 11

4. Investment..................................................................................................................................... 12

a. Investment .................................................................................................................................. 12

b. Foreign Investment .................................................................................................................. 13

c. Registered Companies in China............................................................................................. 13

d. Outward Investment by Area ................................................................................................ 14

e. Foreign Indirect Investment ................................................................................................... 15

5. Labor Force and Employment ......................................................................................................... 15

China Economy: Qualitative Outlook................................................................................................... 17

I. Technological Capabilities .......................................................................................................... 17

1. Acquiring Manufacturing Capabilities ................................................................................. 18

2. International Experience with Technological Change ........................................................ 19

3. Lessons from Late-Starting Economies................................................................................. 20

4. Promoting Research and Development ................................................................................ 20

II. Human Resources ........................................................................................................................ 21

1. Labor & Wage Costs ................................................................................................................ 22

2. Human Resource Programs.................................................................................................... 23

III. Government Intervention and Policies ................................................................................. 24

IV. State-owned Enterprises ......................................................................................................... 25

State-owned Enterprises and Technology Transfer ............................................................ 27


3/38

V. Foreign Direct Investment (FDI) ...................................................................................................... 29

FDI and Technology Transfer................................................................................................. 33

Conclusion ................................................................................................................................................... 35

List of Reference ....................................................................................................................................... 37


4/38

Introduction

30 years ago, China was the strong enemy of capitalism, but now China is

deemed as the country which is has open market and attracts a mass number of FDIs.

China economic growth is fast and impressive. However, China economy has been

through many periods. After the establishment in 1949, China ruled the country

following centrally planned economy. Mao Zedong took control of China from 1954 to

1976. From 1966 to 1968, he implemented the cultural reform policy which claimed that

elite people are the ones who destroyed the government and Chinese society.

Schools were closed and millions of young people were mobilized as Red

Guards, who were encouraged to challenge old ways. Books and artwork were

damaged, along with thousands of museums and temples. Individuals in

positions of authority were denounced and attacked, and widespread anarchy

and terror disrupted the urban economy and industry. Officially, the Revolution

was declared over in 1969. However, chaos and political power struggles

continued until Mao's death in 1976. Since then, most of the tenets and reforms of

the Cultural Revolution have been abandoned.1

Although the cultural reform ended in 1968, every citizen of China continued to

live in a very abusive way. They were forced to work under Maos order. Mao did not

care about his citizens and he just told to his citizens to do anything that could help him

to reach his goal which was to expand the economics of China to catch up with the US

economy.

Mao Zedong passed away in 1976; Deng Xiaoping took control over China. He

was a politician and economic reform leader of the communist party of china whochanged Chinese economy from planned economy into market economy to open China

to foreign trade, foreign investment and foreign technology. Foreign companies were

1 (Chegg) http://www.chegg.com/homework-help/definitions/cultural-revolution-47


5/38

permitted to participate in joint ventures with Chinese companies and eventually to be

able to open wholly-owned companies under Chinese regulations in selected areas of

Chinese economy growth rate 8% to 10%. This helped China to double its economy

about every 7 years.

Deng Xiaoping designed and implemented many policies in order to push its

economy to move far forward rapidly in the market economy for over 30 years, and

because of this, he is recognized as the Architect of Chinas Rise.2The famous quote

of Deng Xiaoping is It doesn't matter whether a cat is white or black, as long as it

catches mice. This means that he did not care if the leadership of the country was

socialism or communism, but what he cared the most was whether that leadership style

could move country forward in a speedy way or not. Because of his implementation of

market economy, average citizens started regaining the rights to control their own

destinies. Furthermore, individuals also gained to a certain extent a mission of shared

responsibility for determining the direction of societys development, and this market

economy provided freedom to pursue the goals that individual choices.

In October 2005, China approved the 5 year economic plan aimed at building a

harmonious society through more balanced wealth distribution and improved

education, medical care, and social security. China launched Economic Stimulus Plan to

specifically deal with the global financial crisis of 2008-2009. It focuses on increasing

affordable housing, easing credit restrictions for mortgage and SMEs lower rates such

as those on real estate, sales and commodities. By the end of 2009, it appeared that

Chinese economic was showing a sign of recovers. China is estimated to become the

largest economy in the world by about 2020 in terms of purchasing power parity.

2 (Factor, 2010)


6/38

China Economy: Quantitative Outlook

Qualitative analysis shows economic indicators of the country. Thus, it is

important to be familiar with those data. The below table taken from National Bureau of

Statistics Human Development Report 2007, 2008 and 2009 of United Nations Statistic

Division illustrates the overall economic situation in China.

The data from the above table illustrates that:

- In term of GDP, it increased sharply from $2,712.92 in 2006 to 5, 745.13 in 2010.It was about double amount. Moreover, with only one year period which was

between 2007 and 2008, the amount of GDP grew significantly.


7/38

- In term of GDP real growth, the rate was quite similar in 2006 and 2007,which was around 11%. However, there were slight drops in 2008 and 2009 to

below 10%. Noticeably, the rate jumped to above 10% in 2010.

-In term of GDP per capital, it shows the upward trend. It started from $4,7548 in 2006 to $7,517 in 2010. In short, for the 5 year period, amount doubled.

- In term of inflation rate, it indicates the increasing rate if compared the rate in2006 and 2010.

- In term of unemployment rate, the statistics in China shows that the rate wasalways 4 percent. It illustrates the slight changes between the 5 years.

Four main focused areas that will be discussed in the following sections: GDP,

inflation, export and import, investment, and labor force and unemployment.

1. GDPIn the first part of economic indicator, we will show two key points of GDP such

as overview of Chinas GDP and share in Chinas GDP.

In accordance with World Bank (WB), gross domestic product (GDP) is the value

of all final goods and services produced in a country in one year. GDP can be measured

by adding up all of an economys income-wage, interest, profits, and rents-

expenditure- consumption, investment, government purchases and net export (exports

minus imports).

In this first section of GDP of China, there are two main tables to be shown and

the analysis such as the overview of Chinas GDP and share in GDP.


8/38

a. Overview of Chinas GDP

The chart from National Bureau of Statistics of China shows the overview of

Chinas GDP as the following:

From year 2006 to year 2012, GDP in year 2007 shows the largest growth. From year 2008 to year 2012, the GDP growth has been in moderate change. Also, the GDP growth has been mostly around 8 percent to 10 percent.

Overall, from the chart above, it can be inferred that the GDP growth in china has

dropped from the year 2006 to year 2012. However, China has been still the top growth.

b. Share in GDP


9/38

In accordance with Asian Development Outlook Database, the charts above

shows the components of current GDP by focusing on three main fields such as

agriculture, industry and services in year 2010 for some countries such as Peoples

Republic of China, India, Republic of Korea, Malaysia, Philippines, and Thailand.

In case of Peoples Republic of China, industry is the top contributor to the GDP

in year 2012, while service is the top contributor for most of countries such as India,

Republic of Korea, Malaysia, Philippines. It is noticeable that agriculture is no longer a

big part of GDP for all of the above mentioned countries, and especially China that used

to depend much on it.

2. InflationInflation is defined as the rate at which the general level of prices for goods and

services is rising and subsequently purchasing power is falling, according to the

Investopedia. For the second part which is inflation part, we will show the general of

Chinas inflation rate and the monthly inflation rate in China.

a. Inflation Rate in General


10/38

The table indicates that:

For over the period of time which is about 7 years starting from year 2006 toyear 2012, the inflation rate in China has been up and down.

Noticeably, the biggest change in term of inflation rate happened in 2009.

b. Monthly Inflation

The line graph that was taken from the CEIC Data Company is about the

monthly inflation in China in year 2009, 2010 and 2011. When going deeply to the

monthly inflation of China, it is able to notice that the inflation rate in China usually

starts going up for early the months of the year and it reaches the peak at the year end.

3. Export and ImportFor the third part of this economic indicator which is about export and import, it

consists of overview of Chinas export and import and foreign trade in China.


11/38

a.Export and Import

In accordance with CEIC Data Company, it shows many interesting points:

- Firstly, the export and import in China are in the parallel trend.- Secondly, it should be noticed that during the year 2009, both import and

export growth rate sharply increased. It can be impacted by USAs dollars.

- Last but not least, in year 2010, both of them could reach the summit whichwas about $80 billon for import growth and roughly $40 billion for export.

Export and Import Main ProductsThe significant export products in China include the following:

- Industrial Products- Processed Agricultural Product- Agricultural ProductsThe significant export products in China include the following:

- Agricultural and Industrial Raw Material- Capital Goods- Consumption Goods


12/38

Export and Import Partners and Types- Export Partners and Export by Commodity- Asia (ASEAN) is the top one export partner.-

Heavy Industry represents 80 percent of export.- In term of commodity, electronic products stand a quarter of export products

Import Partners and Import by CommodityFor China, there are many big export partners:

- Japan is the main import partner.- Agricultural and industrial raw material stands 70 percent of import products.

a. Foreign Trade

Source: National Bureau of Statistics of China.


13/38

Foreign trade plays quiet important role to learn more about the export and import.

From the table, it is understandable that:

It demonstrates that foreign trade in China has been growing year by year.For instance, the number of export in China goes up by starting from 2,240.2

in 2006 to 3,082.6 in 2011. For import, it begun from 2,027 in 2006 to 2,814. 4 in

2012.

Also, in term of foreign trade, it shows that export has gone behind theimport.

4. InvestmentInvestment is defined by World Bank (WB) as outlays made by individuals, firms,

or governments to add to their capital. From viewpoints of economy, only creating new

capital is counted as an investment. It is a necessary condition for economic growth.

In the part of the investment, there is covered some main points such as

overview of Chinese investment, foreign investment in China , registered companies,

outward investment by areas and foreign indirect investment in China.

a. Investment


14/38

Meanwhile, it shows that the fixed investment that is managed by the government. Also,

compared to other share, for the manufacturing sector, investment cost 5,871 billion

Yuan in year 2009. Also, real estate is the second largest investment that cost 4,313

billion Yuan. Last but not least, financial intermediation was the third investment withabout 35 billion Yuan.

b. Foreign Investment

In term of foreign investment, energy and power shows the largest investment

portion with $61.8 billion. Followed after energy and power, metal was the secondly

largest investment with $22 billion in the year 2011.

c. Registered Companies in ChinaSource: National Bureau of Statistics


15/38

Along with the data here, it can be illustrated that both number of registered companies

and amount of capital by the registered companies have been increasing hand by hand.

d. Outward Investment by Area

From the data of the National Bureau of Statistic of China, it shows that in term

of outward investment of area, Asia is the top one country for China outward

investment.

Source: National Bureau of Statistic


16/38

e. Foreign Indirect Investment

Source: National Bureau of Statistic of China

From the data above, it is able to see that central east shows the largest amount of

foreign indirect investment. In this case, foreign indirect investment is not so suitable

for Beijing because from the data here the amount of it in Beijing is quite low.

5. Labor Force and EmploymentLabor force is considered by World Bank (WB) as all economically active people

in a country between 15 and 65 which includes all employed persons, the unemployed,

and member of armed service, but excludes students and unpaid caregiver such as

homemakers.

In case of China, labor force participation rate is half of the overall country

population. Also, in term of labor ages, according to National Bureau of Statistic in

China, there are 11 groups of labor ages. However, among them, the age group of 30-34


17/38

stands the highest number, followed by the group of 25-29 and the group of 40-44

respectively.

Furthermore, manufacturing is the sector that most of the people work, whereas

mining industry is the work that has only few people get involved since it is quite risky.

Last but not least, in term of unemployment, those who finish vocational schools

are in the high rank of facing unemployment problems, while graduate students are in

the lowest percentage to encounter the unemployment.

The table below shows the unemployment persons and unemployment rate.

Source: National Bureau of Statistic


18/38

China Economy: Qualitative Outlook

I. Technological CapabilitiesIn less than 20 years, China has developed into industrial technological country

and become the worlds leading manufacturer of mass-produced goods. By 2006, China

had become the fourth-largest economy in the world and the third-largest trading

nation.

China is now aiming higher, preparing to compete with the industrial front-

runners on the basis of industrial production capability in more complex products and

services as well as on the basis of industrial innovation and design in a number of fields.

Furthermore, China is increasing on investment Research & Development (R&D) and

trying to find innovative system that provides the quick result. Moreover, China is

spending on R&D rose from 1.1 percent of GDP in 2000 to 1.3 percent of GDP in 2005. In

term of investment on R&D, the growth of Chinas economy increased by an average

annual rate 9 percent during this period. On a purchasing power parity basis, Chinas

research outlay was among the world highest, far greater than that of Brazil, India, or

Mexico (UNCTAD 2005).3

In Chinas case, speeding of technological development is acquiring urgency

because returns on existing product lines are being squeezed by rising costs and a

massive expansion in industrial capacity, both in China and worldwide.4

While the advantages of assimilating, applying, additionally refining and

contributing to the march of ever-more complex technologies are obvious, several issues

remain to be resolved. Two questions are particularly important for China. Firstly, what

is the feasible pace of technology development and, in particular, the scope for pushing

the technology frontier outward in a few important scientific fields with the potential

3 The art laboratory is described in China Supersizes its Science (2007).

4Schott (2006) finds that even though Chinas exports rank third in the degree of overlap with OECDcountries, the prices it receives have been declining over time relative to OECD prices.


19/38

for significant industrial diffusion? Secondly at Chinas current level of development,

what are mix policy initiatives that will cost-effectively deliver the desired rate of

progress?

1. Acquiring Manufacturing CapabilitiesChina has initiated in industrial strategies since 1950s, which aimed at achieving

a measure of self-sufficiency in a wide range of capital and consumer goods. In the

1970s, China began investing stability in manufacturing capacity for the light customer

items. Although during the 1980s, China lagged behind some of its industrializing

neighbors, several decades of investment helped create a diversified industrial system, a

large pool of engineering and production line skills, and a fund of learning from

building, running, and maintaining manufacturing facilities by drawing mainly on

domestic resources only as Japan and Korea had done earlier.

Since 1980s, when China created Open Door policy, China can integrate its

economy to the global market. At that moment, China also gained technological

knowledge by licensing investment industrial; by attracting foreign direct investment

(FDI) through the knowledge workers and also cheap labors. Through this policy,

China also can transfer technology form those investors and more importantly help the

domestic R&D.

In its effort to strengthen industry, China has been aided by two closely related

trends. First, because of the maturing of certain technologies and the parallel growth of

consumer markets, many manufactures have become standardized commodities.

Second, the very process of commoditization has been supported by the codifying of

the associated technologies, some embedded in equipment, others available from

suppliers.

China has benefited more from these trends than most other countries, because it

was better prepared to assimilate manufacturing technology, for a number of reasons.

These included the advantages of a potentially huge domestic market, the early as well


20/38

as successful penetration of foreign markets in light manufactures, both of which

encouraged investment in capacity, and the rapid increase in workers with secondary

and tertiary education. Export-led growth was greatly aided by the flow of FDI, as firms

in Hong Kong (China) and other neighboring economies shifted production facilities totake advantage of Chinas low-wage industrial workforce and establish a foothold in

the Chinese market.5 As a result of the transfer of hard and soft technologies aided by

the growth of human capital, industrial capability has grown by leaps and bounds,

facilitated by the elastic supply of rural workers to Chinas burgeoning industrial cities

in strategic locations along the east coast. The buildup has been supported by rising

investment in urban, transport, and energy infrastructure, which has helped sustain

Chinas cost advantage, making it the workshop of the world for a range of massproduced goods.

2. International Experience with Technological ChangeEmpirical evidence indicates that the returns from R&D investments can be

appropriate. Indeed, private returns can average 28 percent, while social returns can be

as high as 90-100 percent. The elasticity of total factor productivity with respect to R&D

ranges from 0.03 to 0.38, with higher rates in the United States than in Europe or Japan.

Whether and how China can attain these outcomes is an open question, which

can be partially enlightened by examining the experience of a few countries.

Comparator can be divided into three groups: large industrial countries, such as the

United States, Japan, and Germany, that are innovative and leading exporters of

complex manufactures; smaller industrial economies that have attained notable levels of

innovation in key industries, including Finland, Israel, the Republic of Korea, Sweden,

and Taiwan (China); and large industrializing countries, such as Brazil and India, thathave become globally competitive producers of a limited range of manufacturers and

services through the acquisition of specific technological expertise.

5 (Berger and Lester, 1997)


21/38

3. Lessons from Late-Starting EconomiesLate-starting economies offer another perspective on technological capability that

is largely consistent with the conditions described already. Nowadays, Brazil, Finland,

India, Israel, the Republic of Korea, and Taiwan (China) become members oftechnological elite. In the majority of cases, governments took the initiative in creating

tertiary level teaching institution and axial research institutes. For example, KAIST

(Korea Advanced Institute of Science and Technology), created in 1981 in the Republic

of Korea, and ITRI 10 (Industrial Technology Research Institute), created in 1973 in

Taiwan (China), contributed significantly to the strengthening of the technology base.

According to these experiences, China has also developed that kind of model

following by successful factors that those countries have already succeeded.

Furthermore, Governments are committing more resourcespublic as well as private

to R&D, and they are trying to position universities to support these initiatives by

improving the quality of the education they provide, conducting more research, and

developing and commercializing technologies through linkages with businesses.

Behind these initiatives is a growing recognition that a broadening of technological

capability through more and better basic research and more ambitious programs for

developing technologies is vital for growth.

4. Promoting Research and DevelopmentIncreasing spending on R&D up to a certain method is necessary to build

technological capacity. How much spending is needed to reach this threshold, how

quickly it should be achieved, and how far beyond the method spending should be

pushed is uncertain.

Fiscal incentives for R&D are widely used in industrial countries and have been

introduced in China as well. The weight of international empirical evidence suggests

that they are effective in rising corporate spending on research.


22/38

In addition, tax incentives are complemented by direct central and sub-national

government spending on R&D. Grants by various ministries have reached significant

levels and are rising faster than revenues. Furthermore, procurement policies of

government agencies are designed to favor firms that are designated as innovative. Thisis especially helpful for firms in the telecoms, electronics, automotive, and customized

software industries.

Today, nearly 400 of the 500 firms have invested over 2,000 projects on R&D in

China. The worlds famous manufacturers of electronics, computers, telecommunication

equipment, power-generating equipment, and pharmaceuticals have extended their

production networks to China. Moreover, by the end of 2001, there were more than 120

foreign R&D centers in China, making China the second largest foreign R&D

playground in Asia and the sixth largest one in the world.

II. Human ResourcesNowadays, many countries are looking for China, not only purchase low-cost

supplies, components, and services, but also to establish factories there. No doubt, low

cost of goods and labors help China to attract hundreds of billions in investment dollars

from companies of all kinds, from furniture makers to electronic components

manufacturers. China is able to produce products for 30 to 50 percent less than the U.S.

Now, China tries to move forward to industrial prominence in pursuit of higher

manufacturing standards. For the future market strategy, the low labor cost will be the

fourth strategy. The top three strategies are high quality, innovation, and

service/support.

Now, new groundbreaking research from the same research team on the HR

practices of China manufacturers reveals even more provocative findings:


23/38

Many China plants are operating U.S. facilities operational performances, andgetting these results is the adoption of many HR best practices and programs.

China plants with foreign equity structures are more likely to be pursuing HRbest practices and are typically better able to turn practices into improvedperformance than their state-owned or private counterparts.

1. Labor & Wage CostsTotal labor costs in China amount to 25 percent of cost of goods sold, which is above

that of U.S. plants (20 percent), while overhead expenses were higher in the U.S. (27

percent) than China (20 percent). Some of this difference could be due to accounting

fluctuations and how costs are allocated in China compared to the U.S, but it more

likely reflects the labor-intensive production environments prevalent in many China

facilities, especially state-owned plants. In addition, the labor percentage may take into

account housing, meals, transportation, and medical benefits often provided to China

employees.

Across all types of ownership structures in China, wages were approximately $121

per month, compared to $2,160 per month in the U.S. (see Table)


24/38

Those reasons that make U.S invest more in China rather in its country.

2. Human Resource ProgramsIn the (IW) / Manufacturing Performance Institute (MPI) China Study, as with

the earlier IW/MPI U.S. Census survey, plants were asked about the existence and

effectiveness of six specific human-resource programs recruiting and hiring,

performance management, employee development and training, leader/supervisor

development and training, teaming, and safety and health. Does the plant have a

program in place? If so, what is its effectiveness: not effective, somewhat effective,

or highly effective? The vast majority of China facilities indicate that these HR

initiatives are in place; with adoption rates comparable to or higher than those of U.S.Census facilities (see Table). With the exception of safety and health programs, the

effectiveness of the programs (percentage of plants with a program that is rated highly

effective) was significantly better in China than in the U.S. Adoption rates in China

plants were generally highest among joint-venture and foreign-enterprise plants, with

effectiveness highest among the China Joint Venture/Foreign Enterprises.


25/38

III. Government Intervention and PoliciesLike other neighboring countries in Northeast Asia, China economic growth has

been dictated by government via government intervention and influence. Government

has played a very crucial role in the initial development stage of Japan and South Korea.Likewise, China roots their strategy in the work of Friedrich List, a less well-known

classical economist, who argues that government invention is important to economy

growth. Such strategies include selective protectionism and promoting champion

industries to generate domestic manufacturing activities. There are three major

economic policies which determine Chinas economic model import control, export

subsidies and FDI attraction. Government, under the control of Chinese Communist

Party (CCP), is head of economic growth, for government create policies and intervene

into market when necessary. For example, the government of China always devalues its

currency to achieve export growth. China has a unique development model and

government intervention is also different from other economies. In China, government

influences the market through State-owned Enterprises (SEOs). Those enterprises are

the government investment arms which contribute massively to tax revenue and

national revenue. SOEs also play role as economic policies implementers. As a centrally

planned economy, it is not surprised that Chinese government still maintains the

dominant position in its economy because it is seen as sensitive issue for CCP. It can be

understood that there are three major actors in Chinese economy. Those actors,

SOE/SHE, TVE/SME and FDI/FIE, are essential in activating domestic production,

export growth and technology transfer. It worthwhile to understand that he nature of

SOE and FDI is big with huge capacity, while SMEs are not really brought up into

discussion. However, SMEs and private sector are growing in the recent decades and

they will continue to rise and contribute largely to national economy.


26/38

IV. State-owned EnterprisesSOEs/SHEs (State-owned Enterprises/State Holding Enterprises) are defined as

enterprises owned by state.6 SOEs are either centrally owned or owned by provincial or

local governments. Centrallyowned SOEs include entities managed by the State

owned

Assets Supervision and Administration Commission of the State Council (SASAC);

state-owned financial institutions supervised by the China Banking Regulatory

Commission (CBRC), China Insurance Regulatory Commission (CIRC), and China

Securities Regulatory Commission (CSRC); and entities managed by other central

government ministries such as the Ministry of Commerce, Ministry of Education,

Ministry of Science and Technology, and others ministries. State-holding enterprises

are firms whose majority shares belong to the government.7 TVE refers to the state-

owned small firms located in township or village-ship level and are under the control of

local government. With regard to the bureaucracy, SOEs managers are chosen by the

communist party and are controlled by the ministries, SASAC (State Asset Supervision

Authority Commission) and local governments. These three bodies are controlled by

State Council of the National People Congress. SASAC monitors central SOEs and

subsidiaries and local SASACs control local subsidiaries. Therefore, SOEs, SHEs and

TVEs are the important procurement agents of Chinese communist party.

Since 1978, China has conducted many reforms over SOEs to adjust to the free

market environment and achieve efficiency. The WTO accession in 2002 also saw the

decrease in importance of SOEs amid the rise of private sector in China. Unsurprisingly,

SOEs are still the dominant force in Chinese economy, contributing to the 40% of total

national outputs and employ more than 29% of urban workers.8 In addition, Chinese

SOEs are the giant fortune corporates or the owners of many firms listed in foreignstock markets. Chinas reforms have led its economy to be more market -oriented with

the increase in numbers of private investment and FDI. Though the share of SOEs in

6 (National Bureau of Statistics 2002)7 (Lee, 2009)8 (Andrew Szamosszegi & Kyle, 2011)


27/38

GDP has been dramatically declining, those enterprises are still playing essential roles

in many aspects such policy implementation, national revenue and acquisition of

foreign technology. In 2008, SOEs and SHEs accounted for more than 34% of total

industrial value. Although the number of SOEs decline, the efficiency has beenadvanced, so those enterprises proportionally contribute more to GDP growth.

To achieve efficiency and effective reforms, a number of SEOs have been private.

However, there are some major strategic industries which are very sensitive to privatized, and

those industries are well-protected by the government as the arms of foreign technology and

transfer and diffusion which are strategic for technology development and military sector.

Those industries are biotech, information technology, advanced materials, advanced

manufacturing, advanced energy technology, marine technology, laser technology andaerospace technology. SOEs dominate service sector in China, especially banking and financial

and IT sector.

Figure1: Value added of industrial SOE and SHE as a share of total industrial value


28/38

Figure 3 indicates the domination of SOEs and SHEs in Chinese economy. In conclusion, it is

understandable that state sector remains important in Chinese national policies.

State-owned Enterprises and Technology TransferTechnology development and advancement is the top priority of China. Many experts

on China affairs agreed that China is once again implementingguojin mintui policy (the state

advances as the private sector retreats) to fuel the strategic future industries.9 In the aspect of

technology transfer, SOEs are the default vehicle for foreign technology acquisition. Before the

accession of WTO in 2002, the investment regulation in China required all FIEs invested in

Chinese market establish partnership with local firms through Joint Venture. In order to benefit

from Chinese market, those foreign have to choose the SOEs as their partner because it helped

strengthen the relations with government, and it was a must to have SOEs as partners in order

to get the investment proposal granted. Furthermore, SOEs are the enterprises that have

connection with government and mass economies of scale required in major projects. The share

9 (Andrew Szamosszegi & KyleCole, 2011)

Figure2: SOE and SHE shares of domestically funded fixed investment in urban

areas by sector, 2009


29/38

of states assets has been growing at the expense of private sector in the many strategic

industries such as: steel, chemicals, coal, petroleum, mining, electricity generation, civil aviation,

highways, water, finance, brokerage, insurance, real estate, posts, etc.10 Through Joint Venture

and partnership, technology is being transferred, but IP is also problematic between foreign

firms and host enterprises. Foreign companies limit the level of technology transfer by holding

key technology.

SOEs and other actors play an important role in creating indigenous innovations

through coinnovation and reinnovation of foreign technologies. There are two mega

projects which are the examples of foreign technology transfer in China. For example, COMAC

(China Commercial Aircraft Corporations) agreements with General Electric (GE) and the other

foreign aviation companies such as Rockwell Collins, Honeywell, Hamilton Sundstrand, Parker

Aerospace, Eaton Corporation and Kidde Aerospace to build commercial aircraft and the

agreements between China South Locomotive & Rolling Stock Corporation and its subsidiaries

with Kawasaki Heavy Industries, Siemens, and Bombardier to build highspeed rail in China.11

Foreign companies, through Joint Venture and mega project involvement, are lining up to

integrate their technology and transfer that strategic technology to Chinese SOE partners. The

State Council has shown its desire in creating and activating indigenous technological

development via The National Medium and LongTerm Plan for the Development of Science

and Technology (20062020) (MLP), issued on February 9, 2006.12James McGregor explains

Chinese industrial ecosystem in his study in China Innovation Efforts that those policies include:

a domestic patent regime that can be used to retaliate against foreign companies insideChina if they file IPR violation lawsuits against Chinese companies outside of China;

compulsory certification and standards requirements that slow or block the entry offoreign products into the China market;

requirements for the disclosure of technology secrets and other proprietary informationthat serve to exclude foreign products from major Chinese markets; and

uneven and lax enforcement of IPR protection.1310 (Is China Renationalizing? 2010)11 (Andrew Szamosszegi & KyleCole, 2011)12 (The Government of China, n.d.)13 (McGregorJames, 2010)


30/38

V. Foreign Direct Investment (FDI)China economic policy had been changed to export-oriented in the 1990s. In the same

period, China chose a number of coastal cites as the pilot sites to establish Special Economic

Zones, which provide many incentives and preferential conditions for foreign investors. China

has since then absorbed the largest portion of foreign investment and capital outflow in the

world. China accounts for 80% of FDI inflow in Asia, and 50% in the world. It is deemed that

foreign companies have been relocating to China to achieve cost efficiency as the result of cheap

labor, but thing has changed. It is worth noting that FDI/FIE from developed countries are the

primary source of fund in large-scale capital- and technology-intensive projects in China. The

presence of giant companies such as IBM, GM, Motorola, Sony or Samsung has revealed the

greater possibility of foreign investment in China. For the source of FDI, Hong Kong takes the

first rank followed by Taiwan (including unofficial investment) and U.S. and other Northeast

Asia countries such as Japan and South Korea. Other EU countries also invest in the large

proportion in China.

Unlike Japan and Korea, China has been utilizing FDI and foreign capital as the force to

boost up export growth. In China, FDI/FIE take up three major forms, Joint Venture,

Cooperative Enterprise and Solely Foreign Owned Enterprise. Before 2001, Joint Venture is the

dominant form for FDI because those firms have to partner up with local firms to conduct

business. Only the most advanced technology company can form the company under Solely

Foreign Owned Enterprise. However, in the effort to comply with WTO regulations China had

relaxed the restrictions. Now, Solely Foreign Owned Enterprise of FDI has replaced Joint

Venture as the popular form of foreign investment.

In order to understand the process of technology transfer from FDI to Chinese

enterprises and the linkage between, we shall first understand the Chinas policies on FDI.

Policies on FDI have been adopted and changed through time. The government use both carrot

and stick to enhance export volume. The main policy on FDI is Export Performance. Export

Performance was used as the measurement to access the capacity of export and to determine the

level of incentives to be provided in particular cases. Export Performance regulation had been

relaxed upon the accession of China in WTO. In addition, China has a wide range of law and

regulations and policies over FDI. Those laws include Law of the Peoples Republic of China


31/38

upon Foreign Wholly Owned Enterprises; Law of the Peoples Republic of China upon Sino-

Foreign Joint Ventures, Law of the Peoples Republic of China upon Sino-Foreign Cooperative

Enterprises, and the Guiding Directory on Industries Open to Foreign Investment.14 Through

various regulations, China encourages favorable conditions for FDIs; therefore, FDIs receive

more favorable treatments than the local firms. FDIs have been accessed and categorized into

many types and receive distinctive treatments upon different industries and regions. China is

steering its policies to utilize and benefit from FDI advanced technology. Guoqiang Long in his

paper China Policies on FDI outlines the purposes of China in attracting FDIs:

transforming traditional agriculture, developing modern agriculture, and promotingthe industrialization of agriculture;

producing transportation infrastructure, energy sources, and raw materials, and otherbasic industries;

tapping into cutting-edge, technology-oriented industries such as electronicinformation, bioengineering, new materials, and aviation and aerospace, as well as

establishing local R&D centers;

encouraging foreign businesses to utilize advanced and applicable techniques totransform traditional industries such as machinery, textiles, and consumption goods

manufacturing industries as well as to upgrade their equipment and facilities;

using raw and renewable resources comprehensively, initiating environmentalprotection projects, and modernizing public utilities;

encourage export-oriented FDI project; building up the industries in western regions.

Boosting export growth and transferring technology are the two important

objectives which China desires to obtain from FDIs. Chinese export performance policies on FDI

are very complex, but it can be understood that those policies are designed under the following

purposes:

strengthening the countrys industrial base and increasing the domestic valueadded,

promoting linkages,14 (LongGuoqiang, 2003)


32/38

generating and increasing the level of exports, balancing trade, promoting regional development

transferring technology.15

Export performance regulation includes three policies such as compulsory, neutral and

voluntary. Compulsory policies required that FDI shall be able to keep a balance of exchanges,

or make sure the proportion of their domestically made products in the total number of

products reaches a certain benchmark or a certain percentage of their products must be

exported.16 But compulsory policies are against WTO regimes, and were relaxed. Neutral

policies facilitate the fair conditions for export to compete internationally. For example, the

tariff and VAT exemption for re-export processing imports so that Chinese products can

compete in foreign markets. Voluntary policies encourage exports by incentives, for example,

an enterprise with 70 percent of export products is entitled to a 50 percent cut in corporate

income tax. 17 In addition, China focuses on processing trade with imported materials (PTI) and

processing trade with materials supplied by clients (PTS). Through tax system reform, import

and export tax has been reduced, favorable for export and importation of capital goods from

foreign countries. In the same vein, spare parts and raw materials importation tax is exempted if

the final products are exported.

Transnational investment inflow into China can be categorized into two: domestic

market seeking and efficiency pursuing or exportorientation. China has the competitive

advantage in term of cheap labor compared to more developed countries. In the same light,

because of import substitution between 1949 and1979, China has a great deal of industrial base

and skilled workers, making its growth the miracle. China also has the large market potential to

growth. Therefore, foreign companies are lining up to invest in China. However, the cheap

labor competitive advantage has been seized due the increase in wage. So China is working to

improve its domestic market and capital and technology intensive industries. Figure3 points out

the reasons why FDIs choose China as their investment destination.

15 (LongGuoqiang, 2003)16 (Law on Foreign-invested Enterprise, PRC)17 (LongGuoqiang, 2003)


33/38

Figure3:FactorsaffectingthedecisionofFDIsdo

ingexportprocessinginCh

ina


34/38

FDI and Technology TransferAs mentioned, China top priorities in attracting FDI are export growth and technology

acquisition. China has a great potential for FDIs to invest, and that is one reason that China can

achieve its objective. China also has concrete policies to benefit from this and make technology

transfer happen to help transform its traditional industries through advanced and applicable

technology. There are three main categories of technology transfer 1. Filling the technological

gap 2. Introducing advanced technology 3. Improving existing technology. But how can China

push those foreign firms to transfer technology? First of all, it happens because of domino

effect. This effect creates cluster industry which is favorable for general economic climate.

Once FDIs in same industry are competing in the same region, it push forward the development

of supporting industries and the technology is diffused; SEZs in Chinas Pearl River Delta and

Yangtze River Delta regions can be the practical example. FDI helps introducing new advanced

technology to Chinese local partners. Figure 4 illustrates the level of technology used by foreign

companies according to different forms of FDI.

Figure4: Difference of technology used by types of FDI (percent)


35/38

More than that, China encourages those foreign companies with advanced technology to

establish R&D centers in China instead of activating indigenous R&D. Foreign firms create R&D

centers in China because they expect to meet domestic demands, to benefit Chinas wealth of

scientific research and technological talent and to improve relations with government. There is a

wide range of incentives in which foreign get once establishing the R&D center. The policies to

encourage R&D include:

any imported equipment and supporting technology confined to the FIEslaboratory and used for pilot experiments (and not production)are exempt from

tariff and other import taxes;

income from the transfer of technology that has been developed solely by an FIEis exempt from sales tax;

an FIE with technological development expenses at least 10 percent over itsprevious year is entitled to a 50 percent discount of its total technological

development expenses in the current years corporate income tax; and

FIEs with R&D centers in China are allowed to import and sell a small quantityof high-tech products on a trial basis in the local market, if they are goods

produced as a result of the R&D by their parent companies.18

More importantly, the local government also provides facilitation through reducing

land use fee and employee recruitment. R&D centers usually cooperate with local

research institutes which strongly supported by government to achieve join technology

breakthrough. Through these local R&D institutions, technology can be transferred and

diffused to local firms

Another mean of technology transfer is the creating spillover effect. Crowding

out effect is the undesirable outcome when a country decided to invite FDIs. However,in the case of China, it is the spill over rather crowding out because China has a giant

market so that FDI cannot dominate. Plus, China has a well-established industrial base

to allow local firms to serve as the suppliers for giant FDIs rather dying out.

18 (China Ministry of Commerce, 2003 p.107)


36/38

Furthermore, China uses swap market for technology, which requires foreign firms to

import advanced technology in order to enter into domestic market. With regard to

technology diffusion, FDI provides technical assistance by assisting domestic

enterprises to reach new technology requirements, joining hand to advance technology,training staff for domestic companies. In particular, the Lenovo Group worked with

Oracle to develop ERP software to meet the demands of small and medium-sized

companies; the Langchao Group cooperated with LG to develop company-used

Composite Solution.19 Last but not least, FDI provide the production base for domestic

enterprises to develop and succeed in new products.

Through various cases, we can understand that Chinese giant companies both

state-owned and private are responsible for technology transfer and diffusion.

Therefore, it is arguable that the linkage between FDIs and domestic enterprises has

been strongly tied via government policies, especially joint venture and partnership. In

particular extent, SMEs/TVEs are also playing essential rules as the agents of

technology transfer and development through the linkage with FDIs. SMEs are the

effective suppliers to giant SOEs and FDIs in the production chain.

Conclusion

China has been through a number of reforms since the establishment in 1949, but

the economic miracle started after the reform in 1978 under leadership of Deng

Xiaoping who decided to open up China for market economy. China economy growth

is the successful story which can be a lesson learned for developing country. China is

growing bigger and faster, and will take US position in 2016 according to OECD report.

Various economic indicators show the great success of China, but it is just the successful

part of the story which represents China from the quantitative outlook. China has great

market, well-established technology and industrial base as well as effective human

resource which allow China to maintain growth for the long term future. The roles of

19 (LongGuoqiang, 2003)


37/38

SOEs are very important in the case of China. State sector serves as the default vehicle

for national revenue generation and technology acquisition. WTO accession saw the

great move forward with a great deal of reforms, allowing China to benefit from open

trading relation and to attract more FDI to achieve its end objectives which are to boostexport growth and technology transfer. Before WTO membership,

China had implemented successfully the export performance policies which include

compulsory, neutral and voluntary export policies. As a result, it boosts further exports.

More impressively, China has implemented many policies to achieve foreign

technology acquisition. Those strategies include creating cluster industries through

establishment of SEZs, encouraging foreign firms to create R&D centers and utilizing

policies to generate spillover effects. Despite successes, China also has manyweaknesses which shall not be overlooked. The last part of this report will outline the

weaknesses of China economy with suggested strategies to sustain growth.

Weakness of China Economy Suggested Strategies

Export-driven Economy Poor financial sector Aging population Poor service sector Increase in wage Political problems Undervalued currency and inflexible exchange rate Low quality products Over protected markets Innovation weakness

Encourage domestic consumption andservice sector

Financial sector reforms Fight corruption and further political

reforms

Skill and capital intensive industrydevelopment

Monetary policy reform Open up for more competition as the

mean to improve quality

Expand development activities to theWestern region.


38/38

List of Reference

Andrew Szamosszegi , & Kyle, C. (2011).An Analysis of State

owned Enterprises and State Capitalism in China . Washington: Capital Trade, Incorporated.

Chegg. (n.d.). Chegg. Retrieved from Cultural Revolution: http://www.chegg.com/homework-

help/definitions/cultural-revolution-47

Chow, G. C. (2004). Economic Reform and Growth in China.JEL.

Factor, M. (2010, December 30). NY Daily News. Retrieved November 27, 2012, from Deng

Xiaoping: http://articles.nydailynews.com/2010-12-30/news/27085881_1_deng-

xiaoping-china-petroleum-socialism-with-chinese-characteristics

KEIDEL, A. (2008). Chinas Economic RiseFact and Fiction. Carnegie Endowment for

International Peace.

Lee, J. (2009). State Owned Enterprises in China: Reviewing the Evidence. OECD.

Long, G. (2003). China's Policies on FDI: Review and Evaluation.

McGregor, J. (2010). China's Drive for 'Indigenous Innovation': A Web of Industrial Policies. APCO.

Rawski, T. G. (2011). THE RISE OF CHINAS ECONOMY. Foreign Policy Research Institute

Footnotes, 16.

Richard S. Wellins, J. R. (2005). Super Human Reseources IN China: Practices, Performance and

Opportunities Among China's Manufacturers. Washington: Development Dimesions

International.

World Bank. (2012). China 2030. Washington: World Bank.

Yusuf, S., & Nabeshima , K. (2007). Strengthening China's Technological. The World Bank

Research Group.

Date post:	14-Apr-2018
Category:	Documents
Upload:	norak-greeny
View:	218 times
Download:	0 times

China Economic Development Model

Documents