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The evolution of high-technology in China after 1978:

Towards technological entrepreneurship


M.J. Greeven

ERIM REPORT SERIES RESEARCH IN MANAGEMENT


ERIM Report Series reference number

ERS-2004-092-ORG

Publication

October 2004

Number of pages

34
mgreeven@fbk.eur.nl

Email address corresponding author


Address

Erasmus Research Institute of Management (ERIM)


Rotterdam School of Management / Rotterdam School of Economics
Erasmus Universiteit Rotterdam
P.O.Box 1738
3000 DR Rotterdam, The Netherlands
Phone:
+31 10 408 1182
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ERASMUS RESEARCH INSTITUTE OF MANAGEMENT


REPORT SERIES
RESEARCH IN MANAGEMENT
BIBLIOGRAPHIC DATA AND CLASSIFICATIONS
Abstract

Library of Congress
Classification

The purpose of this paper is to describe the development of Chinas science and technology,
their related institutions and use in the business world since the reforms started in 1978. Special
attention will be given to the re-integration of high-technology into the private sector and the
accompanying new type of organization: the New Technology Enterprises (NTEs) or
technological entrepreneurs in the Development Zones. In an historical analysis we identify
several phases of institutional reforms and international technology transfer. The present state of
Science & Technology is analysed in terms of information infrastructure, educational system and
innovative capability. The analysis shows the still underdeveloped parts of a science and
technology supporting environment. The analysis discusses the basic features of the hightechnology industry and identifies the information and communication technology (ICT) sector as
the most important sector of the industry. This sector is growing fast none the least due to the
attention the reform policy has paid to its development since 1978. Specifically the role of NTEs
who are pre-dominantly ICT oriented in Development Zones is interesting and important. We
argue that the NTEs play a large role in the development of private high-technology. We propose
a system for technological entrepreneurship and identify computer hardware and software as
key sectors for NTEs and high-technology development.
Mission: HF 5001-6182
Programme: HB 615-715

(LCC)
LCC Webpage
Journal of Economic
Literature

Paper:

HD 72 Economic development

Mission: M
Programme : M 13, O 32

(JEL)

Paper:

JEL Webpage

L 2 Firm Objectives, organization and


behavior
L52: Industrial policy; sectoral planning
methods
M13: Entrepreneurship
O32: Management of technological
innovation and R&D
O53: Economic country studies, Asia
P31: Socialist enterprises and their
transitions

Gemeenschappelijke Onderwerpsontsluiting (GOO)


Classification GOO

Mission: 85.00
Programme: 83.82, 83.62, 85.00,
Paper:

Keywords GOO

83.30 Economische structuur, ontwikkeling

Mission: Bedrijfskunde / Bedrijfseconomie


Programme: Ondernemerschap, Innovatie
Paper: China, technologische ontwikkeling, ICT, netwerken,
ondernemerschap

Free keywords

Technological and institutional change, networks, evolution, high-technology, entrepreneurship,


China

TheevolutionofhightechnologyinChina
after1978:Towardstechnological
entrepreneurship

M.J.Greeven
FacultyofBusinessAdministration
ErasmusUnversiteitRotterdam

October,11,2004

TobepresentedatEURAM,May47,2005,Mnich

Abstract

ThepurposeofthispaperistodescribethedevelopmentofChinasscienceand
technology,theirrelatedinstitutionsanduseinthebusinessworldsincethereforms
startedin1978.Specialattentionwillbegiventothereintegrationofhightechnology
intotheprivatesectorandtheaccompanyingnewtypeoforganization:theNew
TechnologyEnterprises(NTEs)ortechnologicalentrepreneursintheDevelopment
Zones.Inanhistoricalanalysisweidentifyseveralphasesofinstitutionalreformsand
internationaltechnologytransfer.ThepresentstateofScience&Technologyisanalysed
intermsofinformationinfrastructure,educationalsystemandinnovativecapability.
Theanalysisshowsthestillunderdevelopedpartsofascienceandtechnology
supportingenvironment.Theanalysisdiscussesthebasicfeaturesofthehigh
technologyindustryandidentifiestheinformationandcommunicationtechnology(ICT)
sectorasthemostimportantsectoroftheindustry.Thissectorisgrowingfastnonethe
leastduetotheattentionthereformpolicyhaspaidtoitsdevelopmentsince1978.
SpecificallytheroleofNTEswhoarepredominantlyICTorientedinDevelopment
Zonesisinterestingandimportant.WearguethattheNTEsplayalargeroleinthe
developmentofprivatehightechnology.Weproposeasystemfortechnological
entrepreneurshipandidentifycomputerhardwareandsoftwareaskeysectorsforNTEs
andhightechnologydevelopment.

Keywords:technologicalandinstitutionalchange,networks,evolution,high
technology,entrepreneurship,China.

JEL: M10:businessadministration,general

M13:entrepreneurship
O53:economiccountrystudies,Asia
O32:managementoftechnologicalinnovationandR&D
P31:socialistenterprisesandtheirtransitions
L2:firmobjectives,organization,andbehavior
D85:informationanduncertainty,networkformation
L63:microelectronics;computers;communicationsequipment
L52:industrialpolicy;sectoralplanningmethods

1.Introduction:headingfortechnologicalentrepreneurship

Chinastartedimplementingpoliciesofeconomicreformandopeningupin1978.The
governmentandDengXiaopinginparticularbecameawarethatamoreefficientand
productiveeconomywasneededandthattheroleofthegovernmentneededtobe
lessened.Thereformsplayalargeroleinthedevelopmentandadvancementofthe
Chineseeconomy.

Thecapacityofacountrytodevelopitstechnologyisanimportantconditionfor
economicdevelopment(Tidrick,1986;Piek,1998).Therefore,thereformoftheChinese
economyhasbeenaccompaniedbyamajorefforttoraisethelevelofscience&
technology(Xiaojuan,1997).Itwasinsufficienttocompetewithworldclasstechnology
(GarrettJones,Xielin,1997;Piek,1998;Xiaojuan,1997)andscience&technology
activities(e.g.R&D)werecarriedoutinstateR&Dinstitutesandmissedeverylinkto
theeconomy.Theinstitutionalenvironmentdidnotsupporttechnologicaldevelopment
inotherthanstateruninstitutesandforeigninvestmentwasnotallowed.R&Dactivities
werenotcommercialised.Furthermore,theeducationalsystemwasirrationaland
resourceswerewasted.Thenumberofhighlyskilledworkerswaslowandtheaverage
levelofscienceandtechnologywasfarbehindothercountries.Inaneraofhigh
technologydevelopment,suchastheminicomputer,personalcomputer,
semiconductors,biotechnologyandtelecommunications,Chinaneededtocatchup.
Marketbasedincentivemechanismsneededtobeenhancedandinstitutionalconditions
improved,whilereducinggovernmentinterventionsinordertofosterselfsustainable
developmentofthehightech,knowledgebasedindustry(OECD,1999;Bayganand
Freudenberg,2000).So,technologicalchangeandinstitutionalchangegohandinhand.

Thepurposeofthispaperistoshowthedevelopmentoftechnology,relatedinstitutions
andbusinesssincethereformsstartedin1978.Wearespecificallyinterestedinthe
emergenceofhightechnologydevelopmentintheprivatesectorandanewtypeof
organization:theNewTechnologyEnterprises(NTEs)ortechnologicalentrepreneursin
theDevelopmentZones.

Sincethereforms,programsandlegalchangesarecrucialinunderstandingthe
developmentofscienceandtechnologyinChina,wewilldiscussthisinthenextpart.
Wewillshowthesearchfortherightwayofupgradingandimprovingthetechnology
andcommercialisingitthroughahightechindustry.Phaseswillbeidentifiedand
characterisedaccordingtothereformsandtechnologydevelopment.Inthelastphaseof
development,wewillshowtheroleoftechnologicalentrepreneursNTEsandthe
importanceofforeigninvestment.

PartThreewilldiscusstheroleofinternationaltechnologytransferinthedevelopment
oftechnologyingreaterdetail.Thesetwopartstogethergiveahistoricaland

evolutionaryoverviewofthedevelopmentofthescienceandtechnologysystemandthe
connectionbetweentechnology,institutions,andbusiness.

TheFourthPartwillshowthecurrentstatusofthescienceandtechnologysystemin
moredetail.Informationinfrastructure,educationalsystemandinnovativecapability
formthesupportingenvironmentforthehightechnologyindustry(OECD,2000)and
ultimatelythebasisforprivateR&Dandtechnologicalentrepreneurship.

TheFifthPartthendiscussesthemainfeaturesofthehightechindustry.Weidentifythe
informationandcommunicationtechnology(ICT)sectorasthemostimportantsectorof
theindustry.Thissectorisinterestingbecauseitisgrowingfastandgotalotofattention
inthereformsandprogramssince1978.SpecificallytheroleofNTEswhoarepre
dominantlyICTorientedinDevelopmentZonesisinterestingandimportant.Ashort
introductiontothemainpartsoftheICTsectoristhenprovided:telecommunications,
computerhardwareandsoftware.

WewillarguethattheroleofNTEsisimportantinthedevelopmentofprivatehigh
technology(R&D).TheyoperateinanetworkofR&Dinstitutes,highereducation
institutesandCASresearchinstitutesandgetincentivesfromstateplansandmarket
demand.Thecurrentsupporting(institutional)environmentisaresultoftheevolution
oftechnologyandbusinesspolicyandinternationaltechnologytransfer.Inthe
conclusionweproposeasystemfortechnologicalentrepreneurshipandidentify
computerhardwareandsoftwareaskeysectorsforNTEsandhightechnology
development.

2.EvolutionoftechnologyandbusinessinChina:institutionalchange

TheevolutionoftechnologyinChinaisstronglylinkedtothedevelopmentofthe
reformsandprogramsthatthecentralgovernmentinitiated.Wewillarguethatthereare
fourphasesofdevelopmenttobedistinguishedafter1978.However,westartwitha
shorthistoricalnoteoftheperiodbefore1978tounderstandtheChineseinsatiabledrive
toreform.
AfterMaotookpowerin1949,alleconomicactivitieswereguidedbyastateplan.All
research,developmentandengineeringwascontrolledandcoordinatedbytheState
DevelopmentPlanningCommissionandtheStateScienceandTechnologyCommission.
TheCulturalRevolutionstartedin1967afterMaosdisappointmentoftheintelligentsia
inChina.Theconsequencewasahalttoscienceandtechnologydevelopmentfor10
years.MaodiedandDengXiaopingimposedanewregimebymeansofthe
promulgationofZhousFourModernizations.Thereformsstartedin1978.Table2.1
givesadetailedoverviewofallrelevantreforms,programs,andeventsandwewill
discussthephasesintheevolutionoftechnologyinChina.

Table2.1:TheevolutionoftechnologyandbusinessinChina
Year
1949 1977

Initiative
Planned economy

Activities
All research, development and engineering

1967 1976

Cultural Revolution

All science & technology came to a halt, except for


military
Initiation process of economic reform (agricultural
sector first)
Program for long-term development: 8 S&T priority
areas; rehabilitation and improvement of R&D
institutions; elaboration of planning practice
First education law: Regulation on Academic Degrees
in the Peoples Republic of China
Three main areas of focus: agriculture, high-tech
development, and social development
Solving technical problems raised by enterprises using
resources at research institutions and universities
Basic scientific research and technical development

1978
1978

1978 1985 National


Science and Technology
Programme

1980
1982
1982
1984

1984
1985

1986 (adopted
in 1984)
1986
1986

Key technologies R&D


Program
Tackle Plan
State plans for key
laboratories & industrial
experiments
Decision on Reform of the
Science and Technology
Management System
1986 2000 Programme
for Scientific and Technical
Development
863 Plan

1986

Spark Plan

1987

Stipulations of the State


Council for Furthering the
Reform of the S&T
Management System

1987
1988

Torch Plan

1988

Zhongguancun

Initiators (funds)
Control and coordination by State Development Planning
Commission and the State Science and Technology Commission
(SSTC)
Central government

National government

National Peoples Congres (NPC)


MOST
(Government budget)

Reform of the industrial sectors


Creating a technology market with supporting
institutions

State Council

Program for long-term development

National government

Compulsory Education Law


7 key high-tech areas: biotech, IT, automation,
energy, new material, 2 military areas
Agricultural technology

NPC
MOST
(Government budget)
(Government funded, bank loans and self-raised funds)

Urging industrial R&D institutes to enter into


enterprises

State Council

Technology Contract Law


Creating a supportive environment for development of
new technology enterprises;
Establishment of national high tech industrial
development zones; incubators of innovation
First high tech zone

National Peoples Congress


State Council, Ministry of Science and Technology (MOST)
(Bank loans and self-raised funds)

Beijing, MOST

1990
1992
1992

Dissemination Plan
Climb Plan

1993

Decision on Several
Problems Facing the
Enthusiastic Promotion of
Non-Governmental
Technology Enterprises
Golden Projects: Golden
Card, Golden Bridge,
Golden Custom

1993

1994
1995

1995

1997

1997

Decision on Accelerating
Scientific and Technological
Progress
973 Program

National Center for Science


and Technology Evaluation
(NCSTE)

1998

1998

Venture capital

1999

2001
2001

Commercialization of R&D results


Basic research
Dengs Southern Tour: Large inflow of foreign
investment
Encouraging policymakers to form a new generation
of technology firms: entrepreneurial spin-offs from
universities or government research institutes

SSTC (government budget, bank loan, self-raised funds)


(Government budget)

Adoption of IT in key sectors: IT banking, national


telecom backbone, computer networking for foreign
trade
Company Law
Education Law (commitment to a universal education
as well as to one that will produce both
scientists/academics and skilled laborers)
Promoting and developing high-technology; training
workers, further opening-up.

State Informatisation Expert Group

Continuation of the Climb Plan; promoting S&T


development in relatively mature research
environments
Established to provide an objective peer review of
government-funded S&T research
Ministry of Post and Telecommunications merges with
the Ministry of Electronics and Information in to the
Ministry of Information Industry
First venture capital funds set up by local
governments.
Constitutional change to establish status of private
and non state sector enterprises

10th Five-Year Plan (2001


2005)

Chinese government

NPC

State Council

MOST
(Government budget)
MOST

A result of the 1998 establishment of the National Foundation for


Technological Innovation in technology-based SMEs by the State
Council.
NPC (the ideological shift was made at the 15th Party Congress in
1997 where the legitimacy and contribution of private enterprises
was acknowledged)

China enters WTO


Software, computer manufacturing,
telecommunications, lasers and aerospace identified
as pillar industries

Basedon:Dahlman&Aubert(2001),Saxenian(2003),Yuan&Gao(1992),Gu(1995),U.S.Embassy(2002),Hendrischke(2003),Feinstein&Howe
(1997)

19781984:Restoration
Thefirstperiodisaperiodofrestoration.Theprocessofeconomicreforminthe
agriculturalsectorwasinitiatedtorestoretheScience&Technologysystem(S&T)to
preCulturalRevolutionstate.Thebelievewasthatthesuccessoftheneweconomic
developmentplanscouldbebuiltuponpreCulturalRevolution(Soviet)model.The
19781985NationalScienceandTechnologyProgrammewasannouncedin1978to
rehabilitateR&Dinstitutions1.Theprogramfocusedonlongtermdevelopmentandset
eightS&Tpriorityareas2.
Intheearly1980s,however,thegovernmentrecognizedthedifficultiesofthe
fulfillmentofeconomicobjectives.Thefocussoonbecametheelaborationofplanning
practices,thedevelopmentofaKeyTechnologiesR&DProgrammebytheMinistryof
ScienceandTechnology(MOST),andstateplansforkeylaboratoriesandindustrial
experiments.TheKeyTechnologiesProgrammewasenactedin1982andputemphasis
onthedevelopmentofagriculture,new/hightechnologyandsocialwellbeing.The
TacklePlanwasalsoinitiatedin1982,tosolvetechnicalproblemsraisedbyenterprises
usingresourcesatresearchinstitutionsanduniversities.
Besidesinitiativesforrestoringthetechnologysystem,therewerealsoreformsin
education.In1980theFirstEducationLawwasenactedtoregulateacademicdegrees.
Theemphasisshiftedfromquantitytoqualitybyintroducingacademicstandards.
Slowlytheneedforuniversaleducationbecameclear.Thegovernmentrecognizedthe
needtoreformthissystemtobeabletofulfilltheireconomicplans.
Whilethereformsintheindustrialsectorstartedinthemid1980s,the
governmentalsostartedtorecognizethedeficienciesinthecurrentsystem.Thecentral
concernwasthelackoflinkagesbetweentheS&Tsystemandtheeconomy.

19851986:Technologymarket
OnMarch1985theDecisiononReformoftheScienceandTechnologyManagement
SystemwastakenbytheStateCouncil.Recognizingthelinkageproblem,theprogram
triedtoforgehorizontallinksbetweenresearchlabsandenterprisestofacilitatetheflow
oftechnologiesfromthestateS&Tsystemintoindustry(Lu,2000).Thiswasaturning
pointinthehistoryoftechnologyinChina,becausefromnowonthereformofthe
systemitselfwasthefocus.Thegoalofthe1985Decisionwastoforgeatechnology
marketwithsupportinginstitutions.Chinatriedtointegratetheresearchsystemwith
theeconomicsysteminthe1980stoovercometheproblemoftheseparateculturesof
productionandresearch.(Turpin,Xielin,GarrettJones,Burns,2002).

In1986the19862000ProgrammeforScientificandTechnicalDevelopment
wasimpolemented.Theprogramconsistedofplansforbasicandappliedresearch,
technicaldevelopmentandcommercializationoftheresults,technological
popularizationandabsorptionofforeigntechnology(Feinstein&Howe,1997).
Furthermore,in1986the863PlanwasimplementedbytheMOST,whichidentified

MostS&TactivitiesareR&DactivitieswhicharecarriedoutinR&Dinstitutes
Agriculture,energyresources,materials,computing,lasers,spacescienceandtechnology,highenergy

1
2

physicsandgeneticengineering.

sevenkeyhightechareas:biotechnology,IT,automation,energy,newmaterialsand
twoothermilitaryareas.Sincethenthedevelopmentofresearchonhightechnologies
hasenteredanewstageinChina.Besidescatchinguptechnologically,thestrategicgoals
were:trainingscientistsandengineers,promotingS&Tinrelatedareas,advancinga
technicalbasisforeconomicandsocialdevelopment,andtransformingresultsinto
productiveforce.ThepromotionofS&Tinrelatedareasisalsosupportedbyfor
instancetheSparkPlan(1986)toupgradeagriculturaltechnology.Furthermore,the
CompulsoryEducationLaw(1986)improvedthequalityofeducationsinceeverychild
wasrequiredtofulfillnineyearsofeducation(sixyearsprimary,threeyearsjunior
secondary,andthreeyearsseniorsecondary).

However,commercializationisacomplicatedprocess,andnoteasilyreachedby
justcreatingtechnologicalmarkets.Attheendof1980sitbecameclearthetechnological
marketwasinsufficientandneededfurtherreform.Gu(1995)identifiedseveralfactors
influencingthefailingofthetechnologymarket:uncertaintiesoftechnological
innovation,inexperienceofusers,andunderdevelopedmarketinstitutions.

19871992:Institutionsandindustry:merginginitiativesandspinoffs
ThesecondturningpointinthehistoryoftechnologyaretheStipulationsoftheState
CouncilforFurtheringtheReformoftheS&TManagementSystemin1987.TheState
CouncilurgedindustrialR&Dinstitutestoenterintoenterprises,becausethereformsof
the1980sfailedtodevelopaconsistenttechnologypolicy.Policycontinuedtofocuson
publicresearchinstitutesinsteadoftheindustryandtheresourcespredominantlywent
tostateownedinstitutesratherthanthepotentiallymoreinnovativenongovernmental
enterprises(Saxenian,2003).Forinstance,eventhoughthe863Programmerewarded
Chinawithworldlevelhightechachievements,theprogramdidnotbringmanynew
productstomarket(Saxenian,2003).Thelinksbetweencommercialenterprisesand
researchwerestillhardtofind.Furthermore,sincetheeducationalsystemwasnotreally
advancedanddevelopedyet,therewasaproblemofgettingenoughhighlyeducated
personnel.Manyofthescarcehighlyskilledstudentswhohadgoneabroadsincethe
reformsdidnotreturn(ChinastatisticalYearbook,2002).

The1987StipulationsencouragedR&Dinstitutestoenterintoenterprisesby
protectingthepreferentialpositiontheyenjoyedandprovideincentivestomerge(Gu,
1995).AmajorsteptopromotethisprocesswastheenactmentoftheTechnology
ContractLaw(1987).ThisLawstatesthatitisformulatedamongotherthingsto()
protectthelegitimaterightsandinterestsofthepartiestotechnologycontracts()

ThemergingofR&Dinstitutionsintoenterprisesprovedtobeharderthanexpected
becauseitwasdifficultfortheinexperiencedenterprisestoincorporateaR&Dinstitute.
In1988theMOSTandStateCouncilinitiatedtheTorchPlan.Thisplanwasintroduced
tofurtherpromotethelinkagebetweenscience&technologyresearchand
commercialization.Themainpurposewastocreateasupportive(institutional)
environmentforthedevelopmentofnewtechnologyenterprises.Therearetwoimportant
aspectsofthisprogram.

First,theProgrammesupportedtheintegrationofR&Dassetswithcommercial
productionwithinnewlycreatedenterprises.Thesenewtechnologyenterprisesor
NTEswerebasicallyspinoffsofR&Dinstitutes(ofe.g.universities)3.TheProgramme
providedsupportinseveralways:incentives,preferentialstipulationsandbasic
intellectualpropertyrights(Gu,1995),whichleadtoaspeciallegalstatusoftheNTEs.
Second,thesupportive(institutional)environmentwascreatedbythedesignationof
DevelopmentZonesforNewTechnologyIndustries.Thesupportwasmainlyfinancial
andNTEscouldtapintonetworksoffinance:R&Dinstitutions(forsomeventure
capital),banks(forexpansionfunds),andZones(forinvestmentininfrastructure).
However,itmustbenotedthatventurecapitalwasrelativelyunderdeveloped,whichis
oftenseenasoneofthemajordrawbacksinthedevelopment.Realventurecapital
investmentstartedwiththelocalgovernmentinitiativesin1998.
Gu(1995)findsthatthemaininitiatorsofNTEsweretheinstitutesoftheChinese
AcademyofSciences,R&Dinstitutesbelongingtocentralministries,R&Dinstitutes
belongingtolocalgovernmentsandR&Dinstitutesofhighereducation.Themajorityof
NTEswereengagedininformationtechnologyrelatedactivities(Gu,1995).Thefirst
hightechzonewascreatedintheZhongguancunareainBeijing.In2004,thisareais
dubbedChinasSiliconValleyandisaworldclassresearchanddevelopmentcenter.
Ithasmorethan500R&Dcenters,over40ofwhichweresetupbymultinational
corporations.Thereareover4000enterprisesemployingmorethan200.000personsand
focusingoninformationandbiotechnology.ManymoreZonesweresetup:Shanghai,
with400enterprises,100.000employeesandShenzheng,with100enterprisesand40.000
employeesareamongthelargest.

Intheearly1990s,thegovernmentintroducedtwootherplans:Dissemination
Plan(1990)andClimbPlan(1992).Thefirstwastofurtherimproveandpromotethe
commercializationofR&Dresultsandthesecondwastopromotebasicresearch
activities.However,theTorchplancanbeseenasthemajorbreakthroughoftechnology
inChina.Itisforthefirsttimethatscience&technologyandcommercialinitiativesare
successfullylinked.Thecontinuedeffortofthegovernmentintermsofsupportingplans
andprojectsisthebasisforthesuccessoftheirinitiatives.However,eventhough
succesful,itwasinsufficienttocatchuptechnologically,asthegovernmentbecame
aware.

1992onwards:Openingupandtechnologicalentrepreneurship
Apolicyshiftregardingforeigninvestmentandincreasedencouragementand
promotionoftechnologicalentrepreneurshiparethecharacteristicsofthisphase.A
majorturningpointinthehistoryoftechnologyinChinaismarkedbyDengXiaopings
SouthernTourin1992.Dengpromotedliberalization,reformandforeigninvestmentin
theSouthernprovinces.Chinesegovernmentpolicytowardforeigninvestmentshifted
dramatically,offeringforthefirsttimesignificantdomesticmarketaccesstofirmsthat

AlthoughtheTorchProgrammewastheformalsupportforspinoffenterprises,theemergenceofthem
wasalreadyauthorizedbythe1985Decision.
3

broughtinadvancedtechnology.Oneofthemajorreasonswasthegrowingawareness
thatonlyindigenous,domestictechnologydevelopmentisnotenoughtocatchupwith
therestoftheworld(Naughton,1999).Thegovernmentprovidedmoreandmore
marketaccesstoforeigninvestors,amongwhichweremanymultinationalcorporations.
ThispolicyshiftledtoamassiveflowofforeigndirectinvestmentintoChina.Part3
dealswithinternationaltechnologytransfersandforeigndirectinvestmentingreater
detail.

Thegovernmentencouragedandpromotedtechnologicalentrepreneurshipwith
severaldecisionandprograms.TheDecisiononSeveralProblemsFacingthe
EnthusiasticPromotionofNonGovernmentalTechnologyEnterprisesin1993
encouragedpolicymakerstoformentrepreneurialspinoffsfromuniversitiesor
governmentresearchinstitutes.Thisdecisionrecognizedthatnonstateenterprises
couldplayarolebuildinganew,moremarketorientedeconomy.The1993Decision
wasfollowedbythe1995DecisiononAcceleratingScientificandTechnological
Progresstopromoteanddevelophightechnology,trainworkersandfurtheropenup.
TheGoldenProjectsin1993encouragedtheadoptionofITinkeysectorssuchasIT
banking,nationaltelecombackbonedevelopment,andcomputernetworkingforforeign
trade.TheProjectshaveplayedamajorroleindevelopinginformationnetworksand
infrastructure.The973Program(1997)wasacontinuationoftheClimbProgramto
promoteS&Tdevelopmentinrelativelymatureresearchenvironments.Thefurther
developmentanddisseminationoftechnologywassupportedbytheestablishmentof
theNationalCenterforScienceandTechnologyEvaluation(1997),whichprovided
objectivepeerreviewofgovernmentfundedS&Tresearchandthecreationofthe
MinistryofInformationIndustry(1998).TheMIIisnowasuperagencyoverseeing
telecommunications,multimedia,broadcasting,satellites,andtheInternet.

TheenactmentoftheCompanyLaw(1994),theEducationLaw(1995)andthe
importantconstitutionalchangein1999toestablishthestatusofprivateandnonstate
sectorenterpriseswerecruciallegalreforms.Theyshowthecommitmentofthe
governmenttouniversaleducationandtheideologicalshiftofthegovernmentinwhich
thelegitimacyandcontributionofprivateenterpriseswasacknowledged.Finally,in
2001ChinaenterstheWTOandthe10thFiveYearPlan(20012005)emphasizesthe
economicimportanceoftheinformationandcommunicationtechnologyindustry.The
hightechindustryisnowfullyacknowledgedandsupportedbythegovernment.

Fromrestorationtotechnologicalentrepreneurship
TheevolutionoftechnologyandbusinessinChinaisaprocessoflearning.The
developmentisguidedbythepolicydecisionsthatsettheinstitutionalenvironment.
Thevariousstagesinhistoryshowtheevolutionofandinteractionbetween
technologicaldevelopmentandinstitutionaldevelopment.Thepoliciesofthefirstphase
(19781984)aimatrestoringthetechnologicalsystemtopreCulturalRevolutionlevel.
However,intheearly1980sitbecameclearthatthereweretoomanydeficienciesinthe
systemandthatstructuralreformwasneeded.Thesecondphase(19851986)is
characterizedbyreformstoforgehorizontallinksbetweenresearchlabsandenterprises

10

tofacilitatetheflowoftechnologiesfromthestateS&Tsystemintoindustry.Themain
goalofthe1985Decisionwastocreateatechnologymarketwithsupportinginstitutions.
The863Programwasoneofthemostinfluentialprogramsanddeterminedfocusforthe
followingyears.Attheendof1980sitbecameclearthatthetechnologicalmarketwas
insufficientandneededfurtherreform.Thethirdphase(19871992)ischaracterizedby
additionalattemptstourgeR&Dinstitutesintoenterprises(1987Stipulations)andthe
TorchPlantocreatenewtechnologyenterprisesinasupportiveenvironment.Hightech
spinoffs(NTEs)wereformallysupportedandDevelopmentZonesforNewTechnology
Industriesweresetup.Eventhoughthelastdecisionissuccessful,itwasinsufficientto
catchuptechnologically.Thefinalphase(1992)ischaracterizedbytheopeningup
approachofDengXiaopingtoattractforeigninvestmentandadvancedtechnology.
Furtherdecisionsandprogramscharacterizedtheencouragementandpromotionof
technologicalentrepreneurshipbythegovernment.Entrepreneurialspinoffsarefurther
promoted,andeducationandtrainingarefurtherdeveloped.Importantdecisionsare
theCompanyLawandtheconstitutionalchangewhichacknowledgedthelegitimacy
andcontributionofprivateenterprises.Theroleofforeign(direct)investmentin
technologydevelopmentisincreasinglylargeinthisphase.

3.InternationalTechnologyTransfer

ThereformprocessstartedwiththecollapseoftheMaoistdoctrinesofselfrelianceand
wasbasicallyastrategytoachievetheFourModernisations4throughtechnology
transfer(Howe,KuehandAsh,2003).Foreigntechnologytransferisalsoawaytobuilt
technologicalcapabilityupon,besidesindigenousknowledgeandexperience.The
transferofforeigntechnologytoChinahelpedtheprocessoftechnologydevelopment.
Foreigndirectinvestmentbecamethemainvehicleoftechnologytransferinthe1990s.
Internationaltechnologyanddomesticpolicyinitiativesshapedandcontinue
toshapethedevelopmentoftechnologyanditsroleintheeconomy.Thissectiondeals
withthegeneralopeningup,thephasesoftechnologytransferandtheutilizationof
foreigndirectinvestment.

3.1Import/export:openingup
Thevalueofimportsandexportsandthebalancebetweenthemshowtheaccelerated
openingupoftheeconomy(Figure3.1).Afterthereformswereinitiatedboththevalue
ofimportsandexportsshowalargeincrease.Thevaluesalmostdoubledinthefirsttwo
yearsandmorethantripledbetween1980and1985.Intheperiodbetween1985and
1995itdoubledagaintwice.ThisindicatestheopeningupoftheChineseeconomyand
ispredominantlyinfluencedbyDengsSouthernTripin1992.Thebalanceofexports
andimportsisevenmoreinteresting.Thevalueofimportsiscomparableorsometimes

TheFourModernizationswerefirstannouncedbyZhou(1973)andpromulgatedbyDeng(1992).They
standfortheupgradeandadvancementofagriculture,industry,nationaldefense,andscienceand
technology.
4

11

evenhigherthanthevalueoftheexportsuntiltheearly1990s.Thisindicatesan
unfavourablebalanceofforeigntrade,butactuallyisastrategyoftheChinese
governmentaswillbeshowninthefollowingsectionstoimportproductsand
knowledge.Lateron,theexportsarelargerthantheimports,whichindicatesabetter
balanceoftrade.

Figure3.1:Valueofimportsandexports

25000,0
4000,0

3500,0

20000,0
3000,0

2500,0
100 million Yuan
100 million Yuan
15000,0
2000,0

1500,0

10000,0
1000,0

500,0

5000,0
0,0

-500,0

0,0
-1000,0
1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
1978
Year

Source:ChinaStatisticalYearbook2002
Total exports
Total imports
Balance Export - Import

Thereformsintheimport/exportpoliciesarethemainpillarsinthedevelopmentofthe
openingupofChina.Piek(1998)identifiedthreemajorreformprograms:

1.
2.
3.

OpenDoorPolicyearly1970s:exchangevisitsbetweenChineseandWesternspecialistsand
academics,andstudentsbeingsentabroad;
SpecialEconomicZones1980s:coastalprovincesweregivenpreferentialtreatmentto
attractforeigninvestors;
Breakingmonopolyofstatetradingorganisationsandforeignexchangecorporations.

Duringtheprocesslocalitiesgotmoreauthority(decentralisation)andenterpriseswere
givenmoreresponsibility.Itcreatedmoreopportunitiesforregions,localitiesand
enterprisestoestablishtheirownlinkswiththeexternalworld.Thereweremanyways
ofimportingnewknowledge:investment,capital,jointventures,andsoon.Thisinturn
ledtoabroadtransferoftechnologyandtheestablishmentofnetworksofrelationsand
institutionstofurtherdeveloptechnology.AsPiek(1998,p.35)observed
decentralisationofinstitutionsandliftingofstatesmonopolyintheforeignsector
stimulatesdomesticenterprisestoentertheworldmarket.Theacquiringofaseatinthe
WorldBankandtheIMFinthemid1980sandmorerecentlyenteringtheWTO
influencedthisdevelopment.Concluding,generalreforminitiativesofthegovernment
increasedthecooperationbetweenChinaandtheworld.

12

Table3.1showsthesharesofhightechimportsandexportsoftotalimports/exports(of
manufactures).Thesharesofhightechimportsincreasedduringthelastdecade.This
indicatesthattheChinesefocusedonhightechnologydevelopmentandusedimportsof
hightechmanufacturesasawayofgatheringknowledge.Theshareofhightech
importstototalimportsalmostdoubledinthelastdecadetoonethirdofthetotal
manufacturesimports.Theexportofhightechmanufacturesdoubledaswelland
becameonequarteroftotalmanufacturesexportsin2001.Theincreaseinexportscanbe
explainedbythefactthatChinahasdevelopedproductsthataregoodenoughfor
export,aftertwodecadesoflearning.

Table3.1:Hightechimportsandexportsasshareoftotalimportsandexports(ofmanufactures)
1992

import 17,31%
exports 12,33%

1993
16,61%
12,97%

1994
18,79%
14,05%

1995
18,15%
15,49%

1996
18,17%
17,20%

1997
20,90%
17,50%

1998
25,31%
19,81%

1999
28,57%
21,53%

2000
30,76%
23,42%

2001
33,05%
25,28%

Source:AdoptedfromSchaaper(2004)

3.2Phasesininternationaltechnologytransfer
Theimportoftechnologycanbeunderstoodinphases5andisdefinedasthetransferof
thescientificknowledgeandproductiontechnologyrelatedtoacertaingood
(Jiangping,1997,pp.8283).Therearedifferenttypesofimport:wholeplant,licenses,
technicalservices,consultancy,coproduction,andforeign(direct)investment.

Since1979,changesinthestatemanagementofimportingtechnologytookplace.The
newlyformedStateCommissionforImportsandExportsintendedtohelpthe
technologyimportbutfailedbecauseitwasntinlinewiththedecentralisationand
reformoftherestofthesystem.Chinastechnologyimportsweremanagedunder
centralauthority.After1982,theStateEconomicCommissiondecentralizedpartofthis
authoritytolocalgovernments

19811987
Jiangping(1997)reportsthattheimportoftechnologygrewthroughoutthewhole
period.Alargepartoftheseimports(invalue)camefromJapan,theUnitedStates,and
formerWestGermany.Mostoftheimportswerefortheenergy,rawmaterials,
machinery,electronics,lightandtextileindustries.Thestilllargestatecontrolled
importsoftechnologyinthisperiodwerefocusedontwomajorprogrammes:the3,000
itemplan,aimedatrenovatingtechnologyinexistingenterprises,andthetwelve
productionlinesplan,aimedatimportingtwelvelinestodevelopproduction.

ThissectiondrawsheavilyonJiangping(1997)

13

19881991
In1988,theStateEconomicCommissionwasabolishedduringtheincreasinglyfast
transformationofstateownedenterprises.TheStatePlanningCommissiontookover.
Moreauthoritywasgiventolocalgovernmentstomanagetheimportstotheirown
plans.However,thediversityofplansoflocalgovernmentmadeitincreasinglydifficult
forthecentralgovernmenttogetafullpicture.Thenumberoftechnologyimports
declinedsignificantlyasaconsequenceofChinascontractionarymacroeconomicpolicy.
However,thevalueofthecontractsincreased.Thestructureofimportschangedtowards
morewholeplantimports,largelybecausethe1986LawonForeignEnterpriseswhichformally
grantedlegalrightstowhollyownedforeignenterprisesinChina.Theimportsfocusedmainly
onenergy,oilandpetrochemicals.Theseimportsweremainlyobtainedfromthe
CommonwealthofIndependentStatesandItaly.

19922001
In1992,themanagementoftechnologyimportswastransferredtotheStateEconomic
andTradeCommissionandtransformedthesystemfromtechnologyimportcontrol
toscaleoffundscontrol.Thechangingroleofthegovernmentwascrucialinthis
periodofinstitutionalreformandfocusedontheestablishmentofthesocialistmarket
system.Whereasthegovernmentwasthemainactorintechnologyimportsinthe1980s,
inthe1990senterprisesbecamemoreindependentandwerethemselvesresponsiblefor
theimportoftechnologyandtheassociatedrisks.Themacrotargetshadtobesetbythe
government,butthemicrocontrolandcontentoftheimportsbecametheresponsibility
oftheenterprises.Inthisperiod,therewasadeclineintechnologyimports.Thefocusof
importschangedinfavourofelectronics,textiles,motorvehicles,machineryadlight
industry.Inthe1990s,manyimportswerecloselyrelatedtoforeigndirectinvestment.
DuetoboldliberalisationofthepoliciesofDengXiaopingafterhis1992SouthernChina
Trip,manyforeigninvestorssetupjointventuresandimportedadvancedtechnology.
Thetechnologicalprogresswaspromotedthroughforeigninvestment,becauseforeign
investmentinChinadidnotonlybringcapitalbutalsomanagementskills,technology
andequipment.

2001onwards
TheaccessiontotheWTOisoneoflastbigcontributorsinthisprocessandmeantanew
phase.ChinasaccessedtheWTOonDecember11,2001,andcommittedtoeliminate
variousregulatorymeasureswhichimposedrestrictiontoforeigntechnologytransfer.
AlongwiththecountrysaccordwiththeUnitedStates(1999)andEuropeanUnion
(2000),Howe,KuehandAsh(2003),expectthatChinaisasopenasmanynewly
industrialisedcountriesby2005.ThemainimplicationsofChinasWTOaccessionJiang,
2002):

withderegulationofFDI,manyexportorientedFIEs(foreigninvestedenterprises)are
likelytotargetoutputtothedomesticmarket;
automobiles,chemicals,andelectronicsarelikelytorestructureduetothedismantlingof
importtariffandnontariffbarriers,sincethesewerehighlyprotected;

14

thenewlyemergingindustriestelecommunications,banking,insurance,and
professionalservicesandcommercialdistributionswillbefloodedwithforeign
investmentandMNCs;
withtheaccession,manyMNCsenteredandwillenterChina

OnJanuary1,2002,anewpostWTOregulatoryframeworkwaspromulgatedbythe
StateCouncil:RegulationsofthePRConImportandExportofTechnology.The
MOFTECandotherrelevantdepartmentsundertheStateCouncilstartedtoprovide
detailedguidancefortechnologyimport,suchascontractregistration,cataloguesof
restrictedtechnologies,etcetera.Thismarksanimportantstepforindividualenterprises
andisconformWTOrequirements.Althoughmanyuncertaintiescontinuetoexistthe
termsofcontractarebecomingincreasinglyclearforbothforeignanddomestic
investorsandtechnologytransferors(Jiang,2002).Forthesereasonsthe2001WTO
accessioncouldberegardedasthestartofafourthphaseofinternationaltechnology
transferandthedevelopmentoftheChineseeconomy.

3.3Utilizationofforeigncapital
Sinceforeign(direct)investmentbecameincreasinglyimportantinthe1990s,wetakea
closerlookattheforeigncapitalfigures(Figure3.2).Theturningpointisintheearly
1990s.Eventhoughapproximately30%oftheforeigncapitalisstillfromloansorother
foreigninvestments,foreigninvestmenthasbecomepredominantlydirectinvestment
(FDI).
Figure3.2:Utilizationofforeigncapital
Figure 3.2: Utilization of foreign capital
100%

80%

Other foreign investments

FDI

60%

40%

20%

Foreign Loans

0%
19791984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Years

Source:ChinaStatisticalYearbook2002

Foreign Loans

FDI

Other foreign investments

AccordingtoSunetal.(2002,p.82),FDIisconventionallydefinedasaformof
internationalinterfirmcooperationthatinvolvesasignificantequitystakeinoreffective
managementcontrolofhostcountryenterprises.BasedonSunetal.(2002)andYietal.

15

(2004)6wesuggesttwophasesofFDIflows,basedonindustrycategories.Thefirstphase
isbetween1979and1991.InthefirsthalfofthisphaseFDIconcentratedonlyon
nationalindustriesandcoastalzones;lateralsoonmanufacturingindustriesandmore
centralzones.Duringthisphase,theOpenDoorpolicywaspredominantlyrestrictedto
thecoastalregion,foreignershadlimitedaccesstotheChinesedomesticmarket,andthe
rangeofindustriesinwhichforeignerscouldinvestwasrestricted.Thesecondphase
startedin1992,whenthescopewasbroadenedtolargeinfrastructureand
manufacturing.Thislastperiodtheopeningupwasextendedtoallregions,thepace
wasaccelerated,thedomesticmarkethasbeenfurtheropened,thedirectionshifted
fromaregionaltoanindustrybasedorientation.Ingeneral,mostofFDIflowsfrom
Asiancountries,incontrasttomostofthetechnologyimportsduringthefirststagesof
technologyimports(Jiangping,1997).

Yietal.(2004)identifiedfourwaysinwhichFDIentersChina:jointventureenterprises
(JVEs),cooperativeoperationenterprises(COEs),foreigninvestmententerprises(FIEs)
andcooperationdevelopment(CD).TheamountsofactuallyusedFDIbyentrymode
showsstructuralchanges(Yietal.,2004)(Figure3.3).
Figure 3.3: Actually used amount of FDI by entry mode
Figure3.3:ActuallyusedamountofFDIbyentrymode
Figure3.3:ActuallyusedamountofFDIbyentrymode
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

CD

FIEs

COEs

JVEs

0%
1979- 1983
1982

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Years

Source:ChinaStatisticalYearbook2002

JVEs

COEs

FIEs

CD

Until1992,thetotalamountofFDIwassmallandtheonlyentrymodesusedwereCOE
andCD.Theturningpointisintheearly1990s.Fromthispointonwardstheamountof
foreigninvestmententerprisesincreasestoashareofalmost50%oftotalFDI.Theshare
ofCOEandCDdeclinedwhenmorestructuralinvestmentswereallowedandforeign
investorsmadestrongercommitments.ThedevelopmentofFDIandtypesofFDIentry
modesisstronglylinkedtotheregulatoryreformsregardingforeignfirms(Table3.2).

Eventhoughtheysuggestthreephases,webelievethattheonlyrealturningpointcanbeinthe
early1990s,basedonthefiguresandpolicyshifts.
6

16

Table3.2:Phasesinregulationsforforeignfirms
Phase
Regulatoryreform
19791985
LawofthePRConJointVenturesUsing
ChineseandForeignInvestment
19861991
PRCLawonForeignEnterprises
1992
1990AmendmentstotheJointVentureLaw
1991IncomeTaxLawforEnterpriseswith
ForeignCapitalandForeignEnterprises
1992DengXiaopingsSouthChinatour

Endofphase
Highinflation
TianmanSquareIncident

Whatisinteresting,however,isthattheturningpointintheearly1990swasactuallynot
causedbyaspecificregulationalthoughsupportedbybutbyDengXiaopings
liberalisationquest.WhatisalsostrikingisthelearningpaththattheChinese
governmenttook.Thereformsfollowedpoliticaleconomicincidentsandtheyarethe
motorbehindthestepbystepestablishmentofaforeignenterprisefriendly
environment.Theforeigninvestmentsmeantanefficientwayofimportingtechnology
andrelatedexperienceandskills.

Tosumup:Inthe1990sthetechnologyimportsdeclined,buttheforeigndirect
investmentsincreased.Theforeigninvestmententerprisebecomesthemainvehiclefor
MNEstouseFDItoenterChina.FDIbecameanewchannelfortechnologyimport
besidecapitalaccumulationandimportingmanagementskills

3.5Systemoftechnologydevelopment,institutionsandbusiness
WeinvestigatedtheevolutionoftechnologyandbusinessinChina(part2)andthe
internationaltransferoftechnology(thispart).Oneoftheobserveddevelopmentswas
thatliberalization,openingupandvariousreformsfavouring(private)
entrepreneurshipleadtoamoremarketorientedtechnologysystem.Theroleofprivate
initiativesisincreasinglyvalued,asistheroleofforeigninvestment.Figure3.4shows
thecurrentsystemoforganizationalformsfortechnologicaldevelopment.Itisthis
systeminwhichtechnologicalentrepreneurshipispossible.

Figure3.4:Organizationalformsfortechnologydevelopment
Figure 3-4: Organizational forms
for technology development

Technological entrepreneurship

State-owned
enterprises
State-collective
joint operation enterprises

Government funded
State planning
Hybrid: government &
domestic funded

Collective, private,
Domestic funded
shareholding cooperative,
(non-government)
etc. enterprises
Foreign funded
enterprises

Technology
programs

Market
Technology
demand

Foreign
investment

17

4.Infrastructure,educationandinnovativeness:thebasisforprivateR&D

Alongwithyearsofdomesticreformsandinternationaltechnologytransfer,the
supportingenvironmentdeveloped.Havingadynamicandefficientinformation
infrastructureiskey.Educationisanotherkeyelementforaknowledgeintensive
industry.Furthermore,thenumberofskilledworkersandS&Tactivitiesundertakenare
indicatorsfortheinnovativecapability.Thispartpresentskeyfiguresoninformation
infrastructure,theeducationalsystemandgivesanddiscussesindicatorsforthe
innovativecapabilityofChina.

4.1Informationinfrastructure
Theinformationinfrastructurearethephysicalconditionsforthedevelopmentof
technology.Infrastructurecomprisesoffixedtelephones,mobiletelephones,networks,
computers,Internetconnections,etc.Agoodinformationinfrastructurecontributesto
trade,investmentandgrowth.Ithelpsfirms,institutions,andentrepreneurstoreduce
costs,increasemarketcoverageandachieveeconomiesofscale(Dahlman,Aubert;2001).
TheinformationinfrastructureinChinahasgrownmorethanthreetimesasfastasthe
totaleconomy(Dahlman,Aubert;2001).Table4.1showskeyfiguresofthedevelopment
oftheinformationinfrastructure.

Table4.1:Developmentofinformationinfrastructure

1990
1995
2000
2001
2002

ICT expenditure (%
2,90
5,40
5,70
5,85

of GDP)
PCs (per 1,000

0,43
2,27
15,90
19,04
27,64
people)

Local telephone
685,0 4070,6
14482,9
18036,8

subscribers (10.000)
Mobile telephone

1,8
362,9
8453,3
14522,2
20700
subscribers (10.000)

Internet users (per


0,049
17,37
25,67
46,01
1000 persons)

Source:ChinaStatisticalYearbook2002,WorldDevelopmentIndicators,WorldBank,EVD

ThetotalICTexpendituresasapercentageofGDProsefrom1,91%(1992)to5,85%
(2002);anincreaseofalmost300%in10years.TheChineseexpendituresareonly
slightlylowerthanUKandUS(6,12%and6,49%,WDI)andevenhigherthanFranceor
Germany(5,19%and5,18%).So,withrespecttoinvestmentinICT,Chinaisdoingvery
well.
Theavailabilityofpersonalcomputersrosefrom0,43per1000peoplein1990to
27per1000peoplein2002.Althoughthisgrowthseemsimpressive,itmustbenoted
thatthereisalongwaytogo.ComparedtoEUandUS,with340650per1000persons
onaverage,itisfarbehind.Oneofthemajorreasonsisthefactthatalargegroupofthe
populationisstilllivinginpovertyintheruralareas.

18

Chinasfixedlineandmobilephonenetworksaretheworldssecondlargestand
thepagingnetworkistheworldslargest.Therearefourfixedlinecarries:China
Telecom,ChinaUnicom,ChinaRailcom,andChinaNetcom.Thefirsttwoareessentially
controlledbytheMinistryofInformationIndustry.ChinaNetcomisalsoownedbythe
stateforalargepart(MinistryofRailwayandStateAdministratorforRadio,Filmand
Television).In1999ChinaTelecomwasbrokenintofourcompaniesfocusingonfixed
line,mobile,paging,andsatelliteservices.ChinaMobileandChinaUnicomprovide
mobiletelephoneservices.InternetaccessisprovidedbyChinaTelecom,ChinaUnicom,
ChinaNetcom,ChinaMobile,ChinaRailcomandChinaSatellite(satellitetelephone).
ThefirstconnectionfromMainlandChinatotheInternetwasestablishedin1993.
TheWorldBankreported33,7millionChineseonlinein2001andInternetuseis
heaviestintheBeijing,ShanghaiandGuangdongareas.Chinahasnineinterconnected
Internetbackbonenetworksandthesenetworksaretheonlyonesauthorizedtoconnect
totheglobalInternet.Internetconnectivityisgrowingreallyfastfrom2000usersin1993
to33,7millionin2001(asreportedbytheWorldBank).Again,itmustbenotedthatthis
figureisstilllowwith(approx.)2.8%ofthetotalpopulationisanInternetuser.InChina
thereare46Internetusersper1000personsin2002.ThisisnotmuchcomparedtoUS
andEU,whereratesvaryfrom330550usersper1000(WDI).However,thegrowth
ratesareremarkableandboomthedemandforfiberopticcables,switches,routerset
ceteras.TheInternetbackbonedevelopmentbusinessistheprimetargetofnew
investmentin2001accordingtoDahlman&Aubert(2001).

Dahlman&Aubert(2001)comparedthegrowthoftheinformationinfrastructurewith
othercountriesintheEastAsiaandPacificRegion.Theyreport(p.8384)thatChinahas
thehighestgrowthrateoffixedmaintelephonelinesandPCsper100inhabitants.
Furthermore,thegrowthinmobilephonespercapitawasamongthefastestgrowing
countriesintheregion.Summingup,theICTexpendituresarecomparabletoadvanced
countriesandthegrowthratesarephenomenal,butChinaisstillbehindinmost
respects.

4.2Education
DuringtheCulturalRevolution,theeducationalsystemofChinawasnonexistent.After
1978,therewasalackoftrainedtalent,anirrationalhighereducationsystem,uneven
andunequaldevelopmentratestosatisfytheneedsofaneconomicandtechnological
boom.Themaingoalwastorevitalizetheeducationalsystemandmanyreformswere
initiated.DengXiaopingrecognizedthattheFourModernizationscouldhelptodevelop
science,technology,andintellectualresourcesandtoraisethepopulationseducation
level.In1980theFirsteducationlawwasenactedtoregulateacademicdegreesandset
achievementasthebasisforadmissionandpromotionineducation.Thecommitment
tomodernizationwasreinforcedbythe1986Compulsoryeducationlaw,whichmeant9
yearcompulsoryeducationandgoodqualityhighereducation.In1995theEducation
Lawwasenacted,whichmeantacommitmenttoauniversaleducationaswellastoone
thatwillproducebothscientists/academicsandskilledlabour.

19

Chinaseducationsystemiscomposedof4components:1)basiceducation,2)
occupational/polytechniceducation,3)commonhighereducationand4)adult
education.Basiceducationcomprisesofpreschooleducation,primary(6years)and
junior(3years)andsenior(3years)middleschooling.Adulteducationcomprisesof
schoolingeducation,antiilliteracyeducationandotherprogramsorientedtoadult
groups.Commonhighereducationcomprisesofjuniorcollege,bachelor,masterand
doctoraldegreeprograms.
Upto1999,therewere1,071commoncollegesanduniversitiescountrywide
offering2,754,500seatstothoseapplyingforjuniorcollegeandbachelorprograms,
19,900seatstothoseapplyingfordoctoralprogramsand72,300seatstomasterprogram
applicants,andaccommodating54,000doctoralcandidatesand179,500master
candidates(CERNET).AlthoughChinahasmadesubstantialachievementsinthe
scienceeducation,itstillcannotmeettheneedsofsciencedevelopmentandconstruction
ofthecountry.Programslike211Projectforeducationdevelopment,the21stCentury
EducationRevitalizationPlan,TechnologyInnovationProjectandKnowledge
InnovationProgramcontinuetoreformtheeducationalsystem.

Table4.2showsthebasicfeaturesoftheeducationalsystem.Thenumberofschools
decreasedonalllevels.Probablymanyschoolswereclosedbecausetheywereinefficient
orobsolete.Thenumberofteachersincreasedonalllevels.Morenewstudentsenrolled
inhighereducationandsecondaryschoolsandmorestudentsgraduatedonalllevels.

Table4.2:Featuresofeducationalsystem

Schools:

Teachers:
(full-time, 10.000 persons)
New student enrollment:
(10.000 persons)
Graduates
(10.000 persons)

Higher education
Secondary schools

1985
1016
104848

1990
1075
100777

1995
1054
95216

2000
1041
93629

Primary schools

832309

766072

668685

553622

Higher education
Secondary schools

34,4
296,7

39,5
349,2

40,1
388,3

46,3
472,3

Primary schools

537,7

558,2

566,4

586,0

Higher education
Secondary schools

61,9
1789,8

60,9
1815,8

92,6
2354,1

220,6
3103,2

Primary schools

2298,2

2064,0

2531,8

1946,5

Higher education
Secondary schools

31,6
1279,1

61,4
1497,5

80,5
1636,9

95,0
2302,3

Primary schools

1999,9

1863,1

1961,5

2419,2

Number of students studying abroad

4888

2950

20381

38989

Number of returned students

1424

1593

5750

9121

7315028

18779501

38490806

(84%)

(75%)

(67%)

Education funds (in brackets: state share)

1990 = 1991

Source:ChinaStatisticalYearbook2002

Itisinterestingtolookatstudentsstudyingabroadandthenumberofreturns.Thisis
relatedtothesocalledbraindrain.Thetrendsince1995isthatmorestudentsgoabroad

20

thanthatreturn.Thisisadisturbingsituation,becausetheideaofthegovernmentisthat
thestudentsreturnwithsuperiorknowledge.Inturningthistrend,thegovernment
enactedaprogramtoreward100returningstudents.

Withrespecttothemanagementoftheeducationalsystem,alothasbeenchanged.The
previousirrationalandsegmentededucationstructure,overlappeddisciplinesand
wasteofresourceshasbeenchanged.Universitiesarenolongerfundedexclusivelyby
thegovernment.Thegovernmentalsoallowedprivatelyfundededucational
institutions.Furthermore,privateschoolingontheotherlevelsisalsoallowed.AsTable
4.2shows,theshareineducationalfundsofthestateisdeclining.However,thisdoes
notmeanthatthegovernmentinvestslessineducationbutthatthereismore
investmentfromothersources(thetotalfundsmorethandoubleevery5yearthelast
decades).ChinaalsoreceivededucationalaidfromUNESCO,UNICEF,UNFPA,UNDP,
WorldBankandmanyotherinternationalorganizations.Anotherlargechangeisthe
newtwolevelmanagementsystemconsistingofcentralandlocalgovernmentswiththe
latterasthemainmanagementbody.Thelocalgovernmentisplayingakeyrolein
compulsoryeducation,whilecentralandprovincialgovernmentaredominantinhigher
education.Inoccupationalandadulteducation,socialpartnersincludingindustrial
organizations,businessesandpublicinstitutionsareplayingamoreandmoreimportant
role.However,thelocalgovernmentsareincreasinglystimulatedtodevelophigher
educationandenhancetherelationshipbetweeneducationandregionaleconomicand
socialdevelopment.

4.3Innovativecapability
TheinnovativecapabilityoftheChineseeconomyisadeterminantofthepotentialofthe
Chineseeconomytodevelopandmarketinnovativenewproductsandservices.To
determinethispotentialwelookattwothings.Ontheonehandyouhavethelabour
market:howmanyhighlyskilledworkersarethere?Ontheotherhandyouhavethe
scientificandtechnologicalactivitiescarriedoutbyskilledworkers.Scienceand
Technologyactivitiesrefertoorganizedactivitieswhicharecloselyrelatedwiththe
creation,development,disseminationandapplicationofthescientificandtechnical
knowledge(ChinaStatisticalYearbookindicators,2002).ScienceandTechnology
activitiesareclassifiedinto:R&Dactivities,applicationofR&Dresults,andrelatedS&T
services.R&Dactivitiesarethoseactivitiesthataimatincreasingtheknowledgeand
usingtheknowledgefornewapplicationofscienceandtechnologybysystematicand
creativeactivities:basicresearch,appliedresearchandexperimentsanddevelopment.
Theresultsoftheseresearchactivitiesarepublishedinjournalarticles,resultinpatents
ornewproducts/services.

Table4.3showsbasicstatisticsonhighlyskilledworkers.Overall,thereisasteady
increaseinresearchersandS&Tpersonnel.Withrespecttothenumberofresearchers
perthousandpersonsemployed,Chinaisfarbehindothercountries.IntheEUwere4,7
researchersperthousandonaveragein1991and5,9in2001.Singaporehas8,2

21

researchersperthousandin2001andJapanevenmore:10,2perthousand(Schaaper,
2004).IfyoucomparethenumberofresearchersinR&D,Chinaisfarbehindaswell.For
instance,Germanyhasover3.000researcherinR&DandJapanevenmorethan5.000
researcherspermillionpeople(WorldDevelopmentIndicators).

Table4.3:Basicstatisticsonhighlyskilledworkers

Researchers per thousand persons


employed
Persons engaged in S&T activities
(10.000 persons)
Researchers in R&D (per million
people)
S&T personnel in higher education
(10.000 persons)

1994

1995

1996

1997

1998

0,8

0,8

0,8

0,9

0,7

265,5

270,1

273,2

288,6

353,0

350,8

453,6

1999

2000

2001

0,7

281,4

290,6

322,3

314,1

473,2

387,2

419,9

545,1

32,6

34,5

34,2

35,2

36,6

Source:ChinaStatisticalYearbook1998,2002;WorldDevelopmentIndicators,World

Bank;Schaaper(2004)OECDdatabase

Table4.4showsthebasicstatisticsonscientificandtechnologicalactivities.Thefunding
forS&Tactivitieswasincreased:between1997and2001thetotalfundsmorethan
doubled.S&Tfundsconsistoflabourexpenses,purchaseoffixedassets,R&Dexpenses,
fundamentalresearch,appliedresearchandexperimentaldevelopment.Thestateis
responsibleforonequartertoonethirdofthefunds.Furthermore,theproportionof
R&DexpendituretoGDPisincreasing:italmostdoubledbetween1997and2001.What
isalsointerestingtoseeitthelargeincreaseintransactionvalueofS&Tactivitiesinthe
technicalmarket.Thetotalvaluemorethandoubledin5years(19972001).Altogether,
onaveragethefunding,expendituresandvaluedoubledin5years,indicatingalarge
growthofS&Tactivities.

Table4.4:Basicstatisticsonscientificandtechnologicalactivities
Funding for S&T activities (100
million yuan; in brackets: state
share)
Proportion of R&D expenditure to
GDP (%)
Transaction value in technical
market (100 million yuan)
Funding for S&T (100 million yuan;
in brackets: state share) In higher
education
Proportion to total S&T funding
Total patents certified

1997
1181,9
(26%)

1998
1289,8
(27%)

1999
1460,6
(32%)

2000
2346,7
(32%)

2001
2589,4
(25%)

0,64%

0,69%

0,83%

1,00%

1,09%

351

436

523

651

783

102,946
(48%)

166,778
(58%)

200,000
(55%)

73,076
(50%)

84,957
(48%)

6.18%

6.59%

7.05%

7.11%

7.72%

50992

67889

100156

105345

114251

Source:ChinaStatisticalYearbook2002

Withinhighereducationthemostimportantsourceforhighlyskilledworkersthe
S&Tfundingisstructureddifferently.Morethanhalfofthetotalvalueisobtainedfrom
thestate,sincemostuniversitiesrelyongovernmentfunding.Italsoimplicates,

22

however,thatapproximately45%ofthefundingisfromnongovernmentsources,e.g.
businessenterprises,foreigninvestment,internationalinstitutions,etc.Thisisinline
withthepreviousobservationthathighereducationisbecominglessdependentonstate
funds.TheproportionofS&TfundinginhighereducationtototalS&Tfundingshows
thatS&TfundsthatgotohighereducationS&Tresearchactivitiesisincreasing.

Theresultsoftheseactivitiesareforapartcapturedinthenumberofpatents.Inthelast
5years(19972001)thenumberofpatentscertifiedmorethandoubled,withthelargest
increasebetween1998and1999.Besidespatents,journalarticlesarealsoresultsof
scienceandtechnologyactivitiesandthusanindicatorforinnovativecapability.Table
4.5showsthebasicstatisticsonpublishedjournalarticlesinChina,EUandUS.

Table4.5:Basicstatisticsonpublishedjournalarticles

China
France
Germany
United Kingdom
United States

1990
4999
21584
27317
36671
179978

1995
6995
26265
34442
39980
179051

1999
11675
27374
37308
39711
163526

Source:WorldDevelopmentIndicators,WorldBank

Whatisstrikingisthesteadyincreaseofthenumberofjournalarticlespublishedin
Chinaandtheconstant(EU)orevendecreasing(US)streamofarticles.AlthoughChina
isstillfarbehindwithrespecttothenumberofarticlespublishedperyear,thegrowth
trendimpliesthatChinaisabletocatchup.

Summingup,thefundingsideoftheinnovativecapabilityofChinaissufficient.
However,therearestilltoofewskilledworkersandChinaisbehindintermsof
publishing/commercialisingresults.Thegovernmentisawareofthisandfocuseson
highereducationandtherelatedfundingofS&Tactivities.

5.TheHighTechindustry

Inthepastsectionswedescribedtheevolutionoftechnology,institutionsandbusiness
inChina,theroleofforeigninvestments,thesupportinginfrastructureand
technologicalentrepreneurship.Thehightechindustrybecameincreasinglymarket
orientedandiscrucialinthedevelopment,disseminationandapplicationoftechnology
intheChina.Beingoneofthefastestgrowingindustriesandrecentlyearmarkedasa
pillarindustry,thehightechindustryinChinaisinteresting.Wewillidentifythemost
interestingsectorsandarguethelargeroleofNTEs.

23

5.1Technologyorganizations:players,initiatorsandregulators
Severalinstitutionsareactiveinpromotingandregulatingthehightechnologyindustry
andscience&technologydevelopment.TheMinisteryofScienceandTechnology
(MOST)isresponsibleformanypromotionprograms.TheKeyTechnologiesR&D
Program,the863Program,andtheTorchProgramareallinitiativesoftheMOST.
TheprogramsfundedS&Tprojectsininstitutesofhighereducation,R&Dinstitutes,
enterprisesandcompanies.

TheChineseAcademyofSciences(CAS)isChinasfamousnaturalscienceand
technologyresearchorganization.Ithas123researchinstitutes,employingover60,000
scientificandtechnicalpersonnel.Researchfocusesonmathematicsandphysics,
chemistry,earthsciences,biologyandtechnology.In2000,theCASincreaseditsmarket
orientationbytransformingmoreandmoreofitsinstitutionsoftechnologydevelopmentinto
businessenterprises.Attheendof2001,13CASinstitutionshadbeentransformed(CAS,
2004):12becamelimitedliabilityfirmsandonemergedintoastateruncompany.The
firmsperformedwellandreachedatotalturnoverof81billionYuan(USD9.7billion)
from2000to2001.TheCAS(2004)websitealsoreportstohaveprovidedjob
opportunitiesforabout40,000peopleoutsidetheAcademy.

ThefollowingsixcompaniesaredirectlyunderCAS(CAS,2004):ChinaSciences
Group;ChinaInvestmentCorporationForSciences&TechnologyCICSTD;Oriental
ScientificInstrumentImport&ExportGroup;HuajianGroupLtd.Co.;KejianGroup;
LegendGroup(in2003renamedLenovoGroupLtd.).Asthenamessuggestmostof
thesecompaniesconsistofmanyothercompanies.WetaketheChinaSciencesGroup
andHuajianGroupLtd.Coasexamples.

ChinaSciencesGroup(CSG):CSGhas30whollyorpartiallyownedmemberenterprises.China
DaHengCorporation,theBeijingHopeComputerCorporationandtheBeijingSanHuanNew
MaterialsHightechCorporationarethemostimportantones.CSGemploys2700persons(70%
professionalsand12%managers).Thewebsitereportsthatin2000turnoverreachednearlyRMB
2.31billion,includingRMB170millionprofitincome.Theirbusinessfocusesonresearching,
developing,producingandmarketingelectronicdatadevices,computeranditssoftware,
medicalinstrument,newmaterials,newenergy,andbiomedicine(CSGwebsite,2004)7.

HuajianGroupLtd.Co.:Thiscompanyfocusesoncomputerlanguageinformationprocessing,
tradeorientedsystems,onlineinformationintegratedprocessingsystemsandembedded
applicationsoftware.DirectlyundersupervisionoftheGrouparethreecompanies:Huajian
MachineTranslationCo.Ltd.,HuajianHuizhiScience&TechnologyCo.Ltd.,HuajianDigital
TechnologyCo.Ltd.,andseveralothercompanies.Thesecompaniestogetherhavenineother
companiestosupervise.

BesidesthecompaniesdirectlyundertheCAStherearemanyothercompanieslinkedto
theCAS:BeijingZhongKeSanHuanHighTechCo.;DahengNewEpochTechnology;
etc.TheChineseAcademyofEngineering(CAE)andtheStateNaturalScience

Althoughrealestate,technicalconsultingandservice,andpatentagentservicesforclientsinandoutside
Chinaarealsowithinbusinessscope.
7

24

FoundationCommittee(NSFC)aretwootherimportantinstitutionsinthetechnology
sector.TheCAEwasestablishedin1994andisakeyadvisoryinstitutionforthe
engineeringcommunity.TheNSFCwasestablishedin1986topromoteandfinanceS&T
research.

5.2FeaturesoftheHighTechindustry:ICTaskeysector
Theindustrygrewatanaverageannualrateof21.2percentinthe19962000period
(CERNET,2004).Thetotalindustrialsectorgrew11%less.Thesamestoryholdsforthe
exportsofhightechproducts:Thetotalexportsgrewby10.4%,whereasthetotalhigh
techexportsgrewby38.4%.Theproportionofhightechmanufacturesexportsrosefrom
17.2%to25.28%oftotalmanufacturesexportsandamongtotalexportsfrom8.4%to
14.9%.Thereare24.293enterprisesinhightechdevelopmentareas,employing2.761.433
personsgeneratingUSD22,7billioninexportvalue(ChinaStatisticalYearbook,2002).
Theregionaldistributionofhightechactivitiesisunequal.Thebestperformingand
largesthightechareasare:theYangtzeRiverDelta,thePearlRiverDelta,theBohaiSea
Rim,andareasalongtheShenyangDalianexpressway.Beijing,Shanghai,Shenzhenand
Xianthecountrysfourbestknownhightechcities.Beijinghasbyfarthelargest
hightechareawith7911enterprises,282.720employeesgenerating17%ofallHighTech
enterprisesgrossoutputvalueand13%ofallhightechexports.

ButwhatexactlycompriseshightechnologyintheChinesecontext?Accordingto
Article4oftheConditionsandMeasuresontheDesignationofHighandNew
TechnologyEnterprisesinNationalHighandNewTechnologyIndustryDevelopment
Zones(CERNET),highandnewtechnologyisdividedinto:

(1)microelectronicsandelectronicinformationtechnology;
(2)spacescienceandaerospaceandaeronauticaltechnology;
(3)optoelectronicsandoptical,mechanicalandelectronicintegra
tiontechnology;
(4)lifescienceandbiologicalengineeringtechnology;
(5)materialscienceandnewmaterialstechnology;
(6)energyscienceandnewenergy,highefficientenergy
conservationtechnology;

(7)ecologyandenvironmentalscience;
(8)earachescienceandoceanengineering;
(9)basicmatterscienceandradiationscience;
(10)medicalscienceandbiomedical
engineering;
(11)othernewprocessornewtechnology
applicableinthetraditionalindustries.

Source:CERNET(MinistryofEducation,China)

Furthermore,the10thFiveYearPlan(20012005)identifiedsoftware,computer
manufacturing,telecommunications,lasersandaerospaceaspillarindustries.Taking
bothtogether,wehaveagoodideaofwhathightechnologymeansintheChinese
context.Weidentifythemicroelectronicsandinformationtechnologysectoraskey
sectors.Besidesthecentralgovernmentsfocus,wealsobelieveitisoneofthemost
dynamicandvibrantsectorsofthelasttwodecades.TheChinaStatisticalYearbook
providesdataonlargeandmediumsizedindustrialenterprisesintheHighTech
industry,whichcorroboratesourchoice.Table5.1providesbasicstatisticsonS&T
activitiesin2001.

25

Table5.1:LargeandmediumsizedindustrialenterprisesintheHighTechindustry(2001)

invention

Export

Total revenue
(10.000 yuan)

Expenditure
technological
activities
(10.000 yuan)

Scientists and
engineers

Technological
activities
personnel

1) Electronics and

Communication
113217
39606
1599800
52220694 4240727 902
Equipment

% of total
41%
48%
62%
59%
60% 74%

2) Electronic
Computers and Office
18249
5992
261554
15540968 2457322
78

Equipment

% of total
7%
7%
10%
18%
35%
6%

Totals of medium and


large industrial
273668
81875
2588452
87865003 7078571 1223

enterprises

1) and 2) together of
48%
56%
72%
77%
95%
80%
total

Source:ChinaStatisticalYearbook,2002

ThefiguresshowthatthesecategoriesareresponsibleforalargepartoftheHighTech
industrysactivitiesandoutput.Togethertheyemploy48%ofthetechnicalpersonnel,
56%ofthescientistsandengineers.Furthermore,theygenerate77%ofthetotalrevenue
andareresponsibleforalmostallexports(95%).Theyarealsothemostinnovative
sectorsastheyhave80%oftheinventions.Althoughthefirstcategoryisresponsiblefor
mostofthesefigures,thesecondcategoryhaslargerevenuesandexportfigures.This
indicatesthatthemicroelectronicsandinformationtechnologysectorsarethemost
importantsectorswithinthehightechindustry.ThisresultisinlinewithMeng&Li
(2002)reviewofthegrowingimportanceoftheICTindustryintheChineseeconomy.
ThenextsectionshowthefeaturesoftheICTsectors.

5.3Telecommunications
Thetelecommunicationsmarketwitnessedanincrediblegrowthandtheprospectsare
good.AccordingtotheEVDreport(2004)onChinasICTsector,thetelecommarkethad
atotalsalesofUSD60,5billionin2002;agrowthof32,2%comparedto2001.The
markethastheattentionofthegovernmentspolicies.

Thegrowthofthemobiletelephonemarketisremarkableandsurpassingthefixedline
market.Thetotalnumberofmobiletelephonesubscribersincreasedto207millionin
2002.Inthesameyeartheproductionofmobiletelephonewasincreasedto120million
peryear.MarketleadersinproductionareNokia,MotorolaandSiemens8butin2002
morethan30%wasproducedbydomesticmanufacturers(comingfromonly2%in
1999).Themajordomesticproducersare:TCL,Bird,Keijan,Haier,Amoisonic,Konca,

BesidesNokia,MotorolaandSiemens,AlcatelandEricssonareforeigninvestorsintelecommunications.

26

Shouxin,NanfangshouxinandDongfangtongxin(EVD,2004).Withrespecttothe
servicesandnetworkproviders,theChineseenterprisesareincontrol.Sixcompanies
providethebasicservicesand4400companiesdelivervalueaddedservices.In2002
ChinaMobilehadthelargestmarketsharewith37,4%,followedbyChinaTelecom
(32,5%),ChinaNetcom(16,6%),ChinaUnicom(12,2%)andothers(1,4%).

AlthoughthereisforeigninvestmentinChinastelecommunicationsmarket,itismostly
inmanufacturingequipmenttosupplytheoperatingcompanies.Foreigninvestmentin
theseoperatingcompaniesisprohibited.Thereare,however,longtermplansfor
openingupthetelecommunicationsmarket.Asof2003therewerenolimitationsfor
serviceswithaddedvalueandbasicservicesaspaging.Forthemobileservices,the
openingupisplannedin2006andforthefixednetin2007.Forbothmobileandfixed
servicesthereareseveralcitiesthatdoallowforeigninvestment;slowlyChinaraisesthe
numberofopencities(EVD,2004).

Themajorprobleminthissectoristhatisrelativelyclosedtomarketcompetition.
Althoughattemptsaremadetoopenupspecificsectorswithinthetelecommunication
market,manycrucialservicesandoperationsremainunderstatesupervision.
Furthermore,foreigninvestmentisdifficult,especiallyintheoperationssideofthe
telecommunicationsmarket.WorldBankanalysis(reportedinDahlman&Aubert,2001)
showsthatthereareseveralsectorthatneedtobeliberalisedandderegulated.The
marketstructureisshowninTable5.2.

Table5.2:Marketstructure
Segment
Localcalls
Longdistancecalls
Internationalcalls
Mobile(GSM)
Datacommunications
Radiopaging
Satelliteservices

Structure
Duopoly:ChinaTelecom,ChinaUnicom
Limitedcompetition:ChinaTelecom,ChinaUnicom,ChinaMobile
Monopoly:ChinaTelecom
Duopoly:ChinaMobile,ChinaUnicom
Limitedcompetition:ChinaTelecom,ChinaUnicom,Jitong,Netcom
Competition:>2000operators
Competition

(adoptedfromDahlman&Aubert,2001;source:WorldBankanalysis)

5.4Computerhardware
ThecomputerhardwareindustryinChinahasitsrootsinthelate1950s.Thefirst
Chinesemadecomputerwascompletedin1958.However,subsequentdevelopment
wasslowandhindered.Inthe1980sitwascrucialforChinasindependentlydeveloped
computerindustrytocatchupwiththeworld.Chinaincreaseditsimportsoflargeand
midrangecomputersfromtheUSandJapan(IBM,DEC,Unisys,Fujitsu,Hitachiand
NEC).Itsmainactivitywastheassemblyofimportedkits.Withtheopeningup,
startingin1992,Chinascomputerindustryenteredaperiodofrapidgrowthand
intensifiedcompetition.Thegovernmentsdesiretocatchuptechnologicallyisalsothe
leadingelementinthecomputerindustrystrategy.

27

Thelate1990sarecharacterizedbyachangeincompositionofthecomputermarket,
indicatingthesuccessofthegovernmentspolicy.WhereastheforeignPCmakershad
60%ofthemarketintheearly1990s(Chung,1999inK&D,2001),domesticcompanies
have80%ofthemarketin1998(Kreamer&Dedrick,2001).Inthelastyears,thelargest
sharesbelongpredominantlytoChinesefirmsandnewplayersareChinese(Table5.3).

Table5.3:MarketsharesoflargestPCmakersinChina(in%)
Legend
IBM
HP
Compaq
Founder
Great Wall
Dell
Tongfang

1997
10,7
7,5
6,5
6,7
3
1,6

1998
14,4
6,5
5,7
4,3
3,7
1,9

1999
21,5
6,2
5,6
2,9
5,9
3,5

2000
26,4
4,8
3,7

2001
27,5
4,2

2002
27,3
4,6

2003
27
4,7

8,4
4,6
2,9
1,5

8,9

9,1

10,7

3,9
3,8

5
4,9

6,9
7,1

Source:AnnualreportsLenovo(formerlyLegend)

AttheforefrontoftheChinesefirmsisLegend,anScience&TechnologyEnterprise.As
aresultsofreformsandprogramsinthe1980s,theScience&TechnologyEnterprises
cameontothescene.LegendisoneofthefourleadingScience&TechnologyEnterprises
(Lu,2000).Theywerethefocusinthegovernmentsframeworktopromotehightech
industrydevelopment.ThesetupoftheorganizationswasclosetoWesternhightech
ventures.Themainpurposewastocommercializethetechnologicalknowledgeofthe
stateS&Tsector.

LegendwasaspinoffoftheInstituteofComputingTechnologyunderCAS.Ithas
becomethelargestPCmakerinChina.Theotherleadingenterpriseswere:Stone,the
firsttocommercializeaChinesewordprocessor;Founder,becametheleaderin
pictographiclanguageelectronicpublishingsystemsafterittookoveragovernment
project(Project748);andChinaGreatWallComputer,aspinoffoftheComputer
IndustryAdministrationBureauunderMEI.Itisoneofthetop,domesticallydeveloped
PCmakersandlargestsupplierofOEMcomponentsandperipheralsinChina.Allhave
incommonthattheyarenongovernmental(exceptGreatWall,whoacceptsstate
budget),young,competitive,andamongthefirstjointstockcompanieslisted.However,
itmustbenotedthatallenterprisesarestillcontrolledbyholdingcompaniesofthe
government9.

Taiwanesefirmsplayaleadingroleintheindustry(Kreamer&Dedrick,2001).Inthe
early1990s,TaiwanesePCmakersenteredChinawithlowendoperations.Themain
pruposewastheuseoflowcostproduction.Since1995,thecompetitionfromUSfirms
grewandTaiwanincreaseditsinvestments.MostinvestmentisdirectedtoJiangsu

Stoneisofficiallyacollectivelyownedenterpriseandtheotherthreearestillstateowned
enterprises.
9

28

Province,Shanghaiandnearbycities.Between1999and2001Acer,Twinhead,Inventec,
Compal,Quanta,FICandArimainvestedinChina.Theleveloftechnologyis
increasing,withnotebooks,LCDmonitors,scannersandmotherboardproduction.
BesidesproducingforforeignmultinationalsinChina,theTaiwanesefirmsalso
manufactureforChinasdomesticcompanies(Kreamer&Dedrick,2001).

IntheprocessChinahasbecomealargeplayerintheglobalPCproductionnetwork.
Almostnocomputerswereproducedin1990,butin2001Chinaproducedalmost9
millionmicrocomputers.(ChinaStatisticalYearbook,2002)Thegrowthis(partly10)
drivenbydomesticdemand.Thenumberofcomputersgrewrapidlyfrom500.000in
1990toover7millionpruchasesin2000.Thedomesticvendorshavetwothirdsofthe
PCmarket,sincethehightarriffsonimportedPCsandperipheralsdriveforeign
competitorstobuildproductionfacilitiesinChina(asforinstanceIBM,Dell,HPand
Acerdid).Mostofthehardwareproductionisdoneinthesoutherncoastalregions.The
Shanghaiarea,SuzhouIndustrialParkandBeijingsZhongguancunhightech
developmentzonearetheothermajorproductionsites.Manyhightechenterprisesin
thesezonesarespinoffsandoperateinaninnovationnetworkofinstitutes,foreign
enterprisesandotherspinoffs.

Software11
Theindustryemergedlaterthanthehardwareindustry,asinmanyothercountries
(Zhang&Wang,1995).Inthe1980smostsoftwareproductsweresoldtogetherwiththe
computerhardwareandwereveryspecific.Thereweresomesoftwareprojectsscattered
aroundvariousinstitutionsbuthardlyanycommercialR&Dexisted.Furthermore,the
legalinfrastructurewas(andis)tooweaktoprotectintellectualproperty.Inthelate
1980ssomefirmswereauthorizedtocommercializesoftwareproductsandinthe1990s
thesoftwaremarketstartedtoemergeanddevelop.TheInternethypebroughtmoneyto
thesoftwareindustryandtheindustrystartedtoexpand.From1992to2000therewas
anaverageannualgrowthrateofover30%.In2000thegovernmentpublishedoneofthe
mostimportantpoliciesforthesoftwareindustry:Noticeofcertainpoliciestopromote
thesoftwareandintegratedcircuitindustrydevelopment.Thisdocumentmeant:
reducedeffectiveVAT(17%=>3%);noenterpriseincometaxforthefirsttwoyears;a
taxrateofonly10%forkeysoftwareenterprises;shortenedapprovalperiodsfor
foreignstockmarkets;notariffsandVATforallimportsoftechnology;directexport
rightsforallfirmswithoverUSD1millioninrevenues;andtherighttosetsalarylevels
andgrantbonusestoinventors(Saxenian,2003).Theresultwasamoreopenand
competitivesoftwaremarket.

AccordingtoDedrick&Kreamer(2001)Chinaalsohasbecomeamajorexportplatformfor
componentsandperipherals.
11WerefertoSaxenian(2003)foradetailedoverviewofthesoftwareindustryinChina.Inthissectionwe
focusonthemostimportantfeatures.
10

29

Thedomesticmarketisdominatedbysoftwareservices(54%in2000,Saxenian2003),
followedbyproducts(40%in2000,idem)andexports(only6%in2000,idem).Tschang
&Xue(2003)reportthattheindustryshowshighgrowthratesinallsectors(>30%).At
theendof2002,EVDreports(2004)thatChinahasover4700softwareproducers,644of
whicharefinancedwithforeigncapital.ThisisclosetotheIDC(2000)estimationof2000
registeredcompaniesand3000softwarerelatedcompanies.Table5.4listsexamplesof
ChinesesoftwarefirmsandforeignsoftwarefirmsinChina.Themarketisextremely
fragmentedwiththousandsofsmallenterprises.Furthermore,manyofthelargest
softwaredevelopersarediversifiedfirms,sinceitisdifficulttobeaspecializedsoftware
producerinChina(Saxenian,2003).ThereasonforthisisthatmorethanhalfofChinas
totalsoftwareoutputisinsoftwareservices(primarilysystemsintegration).Duetothe
weakpropertyrightsregime,manycompanieschoosefortheintegratedservices,since
theydonotfacetheriskofpiracy.

Table5.4:examplesofChinesesoftwarefirmsandforeignsoftwarefirmsinChina
Chinesesoftwarefirms
BeijingLegendSoftwareCo.Ltd.
PekingUniversityFounderGroupCo.
BeijingUFSoftGroupCorporationLtd.
KingsoftCompanyLtd.
KingdeeInternationalSoftwareGroup
ShanghaiHuatengSoftwareSystemsCo.
ShenzenZhongxingTelecomCo.Ltd.

ForeignsoftwarefirmsinChina
IBM
Microsoft
Orcale
Sybase
ComputerAssociation
Novell
Lotus

Source:adoptedfromSaxenian(2003)andIDC (2001)

ThesoftwareparkshousemanysoftwarespinoffsofuniversitiesorCASinstitutes.The
TorchPlan(1988)oftheMOSTresultedintheestablishmentofatleasteightSoftware
IndustrialParksattheendofthe1990s:

ShengyangEastYuan(1995)
ChengduWestPark(1997)
ChengshaPark(1997)
JinanPark(1997)

BeijingPark(1998)
TianjingPark(1998)
WuhanPark(1998)
HangzhouPark(1998)

Furthermore,thesoftwareindustryhastiestotheolderhardwaresector.Many
hardwareproducers,suchastheLegendGroup,developedsoftwarearms.TheLegend
GroupseparateditssoftwarearmandrenameditasDigitalChina.Thesoftwareclusters
arehighlyinnovativeandoperateinanetworkofinstitutes,otherenterprise,
universitiesand(foreign)cooperators.Thesocalledguanxinetworksthrive(Saxenian,
2003)inthisdynamicandinnovativeenvironment.Furthermore,theweakintellectual
propertyrightsforceentrepreneurstorelyonmoreinformal,socialnetworks.

However,despitethefastpaceofdevelopmentthereareshortcomings.Theliterature
(e.g.Tschang&Xue,2003;Saxenian,2003;Zhang&Wang,1995)identifiedthe
following:1)insufficientventurecapital;2)insufficientintellectualpropertyrights

30

protection;3)weakEnglishlanguageabilities;4)shortageofskillsasaresultoftheslow
growthofthenumberofsoftwareprofessionals.Theseshortcomingsaskforfurther
industrialrestructuringandinstitutionalchange.Thedevelopmentofhumanresources
hasthefullattentionofthegovernmentsinceitfocuseson(higher)educationpolicy
reform.

6.Conclusion:innovationsystemfortechnologicalentrepreneurship

TheevolutionofhightechnologyandbusinessinChinaisaprocessoflearning,guided
bythepolicydecisionsofthegovernment,domestictechnologydevelopmentand
internationaltechnologytransferthroughforeigninvestment.Theinteractionbetween
theinstitutionalandeconomicenvironmentshapedthedevelopmentofhigh
technology.
Reforminitiativesandmanyprogramsandplansfosteredthedomestic
developmentoftechnologyandforgedlinkagesbetweenresearchandbusiness.
Technologyimportsinthe1980shelpedChinatocatchup.Inthelate1980s,the
governmentbecameawarethatfurtheropeningupoftheeconomywouldhelpto
upgradeandimprovetechnology.Severalreformsfavoringentrepreneurshipand
foreigninvestmentmadethemarketmoreopen.Foreigndirectinvestmentbecamethe
mainvehiclefortechnologyimport,capitalaccumulationandimportingmanagement
skills.Institutionalreformsmademoreorganizationalformspossibleandnetworksof
relationsemergedwhiletransferringtechnology.Inlittlemorethantwodecadesthelink
betweenR&Dandbusinessbecamestrongerandthegovernmentnolongercontrolsall
scientificandtechnologicaldevelopment.ThereformsinScience&Technology,
education,foreignpolicyandenterpriselawshaveledtoasysteminwhichtechnological
entrepreneurshipismadepossible.
AkeyexampleoftechnologicalentrepreneurshipistheNewTechnology
Enterprise(NTE).TheTorchProgram(1988)supportedNTEsinDevelopmentZonesfor
NewTechnologyIndustries.TheseNTEsaremainlyspinoffenterprisesfromR&D
institutesoruniversitiesandtheyaimatcommercializingtechnologicalknowledge.The
strongrelationsandinteractionwithresearchinstitutes,universities,foreignenterprises
andotherNTEsintheDevelopmentZonesmaketheseenterprisesinnovativeand
enablecommercialization.ThemajorityoftheseNTEsisoperatingwithintheICTsector.
Figure6.1showstheresultinginnovationsystemfortechnologicalentrepreneurship.
Thecentralgovernmentsetsageneralframeworkandinitiatestechnologyprograms,
whereasthelocalgovernmentimplementsthepolicies,interactswiththeenterprises
andprovidesbudgets.AgoodexampleofaninnovationsystemisaDevelopmentZone
forNewTechnologyIndustries.TheR&Dinstitutessomearepartofagovernment
programbutothersarefreestandinginteractwiththeenterprisesandotherpartsof
thesystem.TogetherwiththeinstitutesofhighereducationandtheChineseAcademy
ofSciences,theyprovidetheknowledgebaseofthesystem.ManyNTEsarespinoffsof
theseinstitutionsandthecomputerhardwareandsoftwaresectorsprovidegood

31

examples.Theprogramsandpoliciesprovideincentivesforprivatetechnology
developmentintheNTEs.Furthermore,theNTEsexperiencecompetitionfromthe
market,cooperatewithotherenterprisesandreceivedemandincentivesfrom
consumer.Thetransferoftechnologywithinthissystem(bothdomesticandforeign)
leadstoanetworkofrelationsandinstitutionstofurtherdevelophightechnology.

Institutes of
Chinese Academy

Government
R&D institutes
higher education
of Sciences

Local
Central
Policies
Programs

Technological
Technological

entrepreneurs (NTEs)
entrepreneurs (NTEs)

Competition /
Demand

Co-operation

Market
Consumer

- Sdescribedin
tate-owned -pFart4
oreign-owned
-Domestic
Features
- Mixed-owned - Private-owned
-Foreign (export)

hightechdescribedpa(rt5.
domestic)

Figure6.1:innovationsystemfortechnologicalentrepreneurship

However,eventhoughmarketcompetitionisenhanced,entrepreneurshipisfostered
andSMEsarepromoted,Chinaisstillfarbehindinthedevelopmentand
commercialisationoftechnology.Therearestilltoofewhighlyskilledworkers,the
informationinfrastructureistooweakandthecapabilitytoinnovateisstilltolow.
Furthermore,thestatestillhasmanysharesinmanysectorsandthuskeepscontrolling
partsoftheeconomy.

References

Baygan,G.,Freudenberg,M.(2000)VentureCapitalandEntrepreneurship:Nationaland
InternationalDimensions,STIWorkingPaper2000/7,OECD,Paris.

CAS(2004)http://english.cas.ac.cn/Eng2003/page/home.asp,ChineseAcademyofSciences,Peoples
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32

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34

Publications in the ERIM Report Series Research in Management


ERIM Research Program: Organizing for Performance
2004
Learning And Governance In Inter-Firm Relations
Bart Nooteboom
ERS-2004-003-ORG
http://hdl.handle.net/1765/1122
Organisational Learning And Multinational Strategy
Bart Nooteboom
ERS-2004-004-ORG
http://hdl.handle.net/1765/1123
Density And Strength Of Ties In Innovation Networks: A Competence And Governance View
Bart Nooteboom and Victor A. Gilsing
ERS-2004-005-ORG
http://hdl.handle.net/1765/1124
Innovation, learning and cluster dynamics
Bart Nooteboom
ERS-2004-006-ORG
http://hdl.handle.net/1765/1125
Empirical Tests Of Optimal Cognitive Distance
Stefan Wuyts, Massimo G. Colombo, Shantanu Dutta, and Bart Nooteboom
ERS-2004-007-ORG
http://hdl.handle.net/1765/1126
Entrepreneurship in Transition: Searching for governance in Chinas new private sector
Barbara Krug and Hans Hendrischke
ERS-2004-008-ORG
http://hdl.handle.net/1765/1128
Exploring Emotional Competence: Its effects on coping, social capital, and performance of salespeople
Willem Verbeke, Frank Belschak and Richard P. Bagozzi
ERS-2004-014-ORG
http://hdl.handle.net/1765/1174
The Impact of Business Ownership Change on Employee Relations: Buy-outs in the UK and the Netherlands
Hans Bruining, Paul Boselie, Mike Wright and Nicolas Bacon
ERS-2004-021-ORG
http://hdl.handle.net/1765/1263

A complete overview of the ERIM Report Series Research in Management:


https://ep.eur.nl/handle/1765/1
ERIM Research Programs:
LIS Business Processes, Logistics and Information Systems
ORG Organizing for Performance
MKT Marketing
F&A Finance and Accounting
STR Strategy and Entrepreneurship

Towards a Dynamic (Schumpeterian) Welfare Economics


Wilfred Dolfsma
ERS-2004-026-ORG
http://hdl.handle.net/1765/1264
The Three-Step Test-Interview (TSTI): An observational instrument for pretesting self-completion questionnaires
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ERS-2004-029-ORG
http://hdl.handle.net/1765/1265
Measuring the Knowledge Base of an Economy in terms of Triple-Helix Relations among Technology, Organization, and
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ERS-2004-035-ORG
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Some Economics of Digital Content
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ERS-2004-036-ORG
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Learning Opportunities And Learning Behaviours Of Small Business Starters: Relations With Goal Achievement, Skill
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ERS-2004-037-ORG
http://hdl.handle.net/1765/1429
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ERS-2004-051-ORG
http://hdl.handle.net/1765/1445
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ERS-2004-066-LIS/ORG
http://hdl.handle.net/1765/1549
Governance Modes For Systemic Innovation. Service Development In Mobile Telecommunications
J. van den Ende and F. Jaspers
ERS-2004-067-ORG
http://hdl.handle.net/1765/1539
Performance Management: A model and research agenda
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ERS-2004-068-ORG
http://hdl.handle.net/1765/1779
Human Resource Function Competencies In European Companies
Paul Boselie and Jaap Paauwe
ERS-2004-069-ORG
http://hdl.handle.net/1765/1451
Web-Based Organizing In Traditional Brick-And-Mortar Companies: The Impact On HR
Jaap Paauwe, Elaine Farndale and Roger Williams
ERS-2004-071-ORG
http://hdl.handle.net/1765/1609

Longevity in services: the case of the Dutch warehousing companies 1600-2000


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ERS-2004-072-STR/ORG
http://hdl.handle.net/1765/1571
Honing and Framing Ourselves (Extreme Subjectivity and Organizing)
Sawomir Magala
ERS-2004-076-ORG
http://hdl.handle.net/1765/1583
Cross-cultural compromises, multiculturalism and the actuality of unzipped Hofstede
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ERS-2004-078-ORG
http://hdl.handle.net/1765/1584
Perceptions about the ISO 9000 (2000) quality system standard revision and its value: The Dutch experience
T. van der Wiele, J. Iwaarden, R. Williams and B. Dale
ERS-2004-081-ORG
http://hdl.handle.net/1765/1736
Mystery shopping: A tool to develop insight into customer service provision
M. Hesselink, J. van Iwaarden and T. van der Wiele
ERS-2004-082-ORG
http://hdl.handle.net/1765/1737
A transparent role of information systems within business processes: A case study
Menno Verboom, Jos van Iwaarden and Ton van der Wiele
ERS-2004-083-ORG
http://hdl.handle.net/1765/1738
Central Unification versus Local Diversity: Chinas Tax Regime, 1980s-2000s
Ze Zhu and Barbara Krug
ERS-2004-089-ORG
The evolution of high-technology in China after 1978: Towards technological entrepreneurship
M.J. Greeven
ERS-2004-092-ORG
Effects of multiple network ties Knowledge transfer and sharing in a network: The effects of multiple ties
Irma Bogenrieder
ERS-2004-093-ORG
http://hdl.handle.net/1765/1781
Multiple Inclusion and Community Networks
Irma Bogenrieder and Peter van Baalen
ERS-2004-094-ORG
http://hdl.handle.net/1765/1782
The Performance Of Team Start-Ups In The First Phases Of The Life Course
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