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    1. After 1993, the Chinese for nongovernmental, minban,was replaced byminying. I haveused the later term.

    chapter one

    High-Technology Enterprises in China

    During the last several years Chinas technological progress has notbeen insubstantial. I hope that during the 1990s, our progress willbe even quicker. Every country has to establish a clear strategic

    goal, and they must achieve it. In the realm of high technology,China must also take its place in the world.

    deng xiaoping,

    Statements on Science and Technology, 1992

    The melding of the traditional economy and information technol-ogy will provide the engine for the development of the economyand society in the twenty-first century.

    jiang zemin,

    22 August 2000

    One of the main goals of the economic reform process started in 1978 byDeng Xiaoping was to raise Chinas indigenous technological capabilities.Like their counterparts in other developing countries, Chinese leadershave been dissatisfied with and unwilling to accept their place in the inter-national division of labor. Policymakers in these countries want to leavebehind industries dependent on low labor costs and second- or third-gen-eration technologies, gradually replacing them with high-technology

    industries. These countries are not content to remain consumers of thenewest technologies produced by more advanced economies. Industrializ-ing states want to be as close to the cutting edge of technological innova-tion as possible; they hope to harness not only the economic but also thepolitical, military, and social benefits that are expected from technology-intensive development. They expect, in Dengs words, to take their placein the world.

    This book examines one set of policies adopted by China to create an in-digenous technological capability: the introduction and development of

    nongovernmental high-technology enterprises (minbanor minying keji qiye)in the information industries.1 Building new technology enterprises is not

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    Chapter 12

    2. Heading for the World by Relying on Science and Technology, Renmin Ribao[Peoplesdaily], 7 December 1988, inForeign Broadcast Information Service-China(hereafter FBIS-CHI), 12December 1988, 3132.

    easy, and many states, both developed and developing, have failed to findthe right mix of policy support and market incentives. Chinese success increating high-technology enterprises would deeply affect not only eco-

    nomic life within China but also the structure of the world economy andglobal politics.

    The creation of successful high-technology firms is the next critical stepfor China in building a modern economy. Much of the recent work on theChinese industrial economy has focused on either the difficulties of re-forming state-owned enterprises (SOEs) or on the growth of town and vil-lage enterprises (TVEs). As the foundation of Chinas industrial base, SOEs

    warranted the scholarly attention paid to them. These enterprises providethe basic industrial inputs for the economy, the bulk of fiscal revenue for

    local governments, and employment and social welfare for a large part ofthe urban population. As in other socialist economies, the foundationthese enterprises provided was somewhat shaky; they have been character-ized by low productivity, declining profit, and overstaffing. Banking reform,fiscal liberalization, and overall economic growth hinged on SOE reform.

    The shape of Chinas domestic economy, however, is changing. Theshare of industrial output produced by SOEs has gradually declinedthroughout the reforms, from 78 percent in 1978, to under 35 percent in1995. In 2001 SOEs accounted for only 20 percent of national industrial

    output. The decline in industrial output was made up in the nonstate andcollective sectors that have been the most dynamic parts of the Chineseeconomy. Employment and total factor productivity have grown muchfaster in the nonstate sector. TVEs now dot the Chinese countryside, andthey have produced a flood of light manufactured goods for the exportmarket. These small, flexible, market-oriented enterprises account for alarge part of the growth and dynamism of the Chinese economy over thelast twenty years.

    That said, Chinas leaders do not want to remain dependent on the TVEas the engine of growth forever. Central policymakers have been growingincreasingly hesitant about relying on a labor-intensive export strategy.China is eager not to miss the next wave of technological development, asit did in the 1960s, 1970s, and 1980s, and seeks to make government pol-icy more favorable to innovation. As one Chinese commentator writes,The greatest difficulty that all export-oriented enterprises in our countryface is to produce the right products; low labor costs will not last forever.Competition between products in the international market is in fact tech-nological competition.2

    One of the arenas in which the Chinese hope to compete is information

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    High-Technology Enterprises in China 3

    technologies (IT), and IT industries have grown rapidly in China. The do-mestic IT market was worth $168 billion in 2000, nine times larger than inthe beginning of the 1990s. During the 1990s, the IT sector registered the

    fastest growth rates among the countrys industrial sectors. By 2005, at theend of the Tenth Five-Year Plan, the Chinese expect to have invested $500billion in the sector, raising the contribution of IT to gross domestic prod-uct to 5 percent. Claims of the impact of information technologies and thenew economy in China have often been wildly overstated. Before the eco-nomic slowdown of 1999 and the Nasdaq market slump affected technol-ogy companies in the United States and China, many expected internetand other IT companies to create another Silicon Valley and completelychange the way business was done on the mainland. The fizzle of internet

    business in China has moderated some of the most breathless writing ontechnology development, but this correction does not diminish the needfor putting the growth of technology enterprises into a larger economicand political context. Understanding the transition from a state socialist toa market economy during the first two decades of reform required a de-scription of the difficult, stop-and-go process of state-owned enterprise re-form. Understanding the continued transformation of the Chinese econ-omy now demands an explanation of the process of creating an indigenoustechnological capability.

    The potential impact of competitive Chinese technology firms wouldreach far beyond the domestic economy. There is little doubt that in the fu-ture China will have a large economy; the Chinese economy has quintu-pled in size since the 1980s, and in 1992 the World Bank announced,based on the purchasing parity index, the Chinese economy was the

    worlds third largest. But without a high-technology capability, China is un-likely to become a modern global economic power like Japan or the UnitedStates. An indigenous technological capability would mean that, for thefirst time since the Ming Dynasty (13681644), China would be actively in-

    volved in defining, not just accepting, international technological stan-dards. A technologically advanced China will have less demand for foreigntechnology and may slowly move away from a development strategy basedon labor-intensive goods, import substitution, and export-led growth.

    Moreover, technological development addresses some of the largerstrategic concerns of the current Chinese leadership. Chinese technologypolicy reveals a historically rooted concern with technological autonomy,and an indigenous technological capability would reduce dependence onforeign technology, especially from Japan and the United States. More di-rectly, all modern Chinese leaders have struggled to achieve a rich coun-

    try, strong army (fuguo, qiangbing), and a high technology economy wouldlay the foundation for future improvements in military power, further com-plicating Sino-American military relations. After continued tensions acrossthe Taiwan Straits in 1999, Jiang Zemin reportedly linked a sound base in

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    Chapter 14

    3. Willy Wo-Lap Lam, Jiang Boosts Defense Funding, South China Morning Post, 1 Decem-ber 1999.

    technology and national defense to the success of the mainlands reunifi-cation strategy.3

    The process of creating nongovernmental enterprises in China has not

    resulted in either clear success or failure at the national level. Instead, theearliest results of attempts to create high-technology enterprises in the in-formation industries have been uneven; variation has emerged at the re-gional level. At the national level, the reforms of the state science and tech-nology system consisted of two programs: the decentralization of authorityfor research, development, and production to lower levels, and the cre-ation of new spin-off enterprises defined by hybrid property rights. In theideological context of the early reform period, the central governmentcould not promote private enterprises and instead created the category of

    minying qiye, or nongovernmental enterprise, as a hedge between the enter-prises found in centrally planned economies and the firms that operate inmore open markets. But the central government never clearly defined whatthe nongovernmental category meant. Originally intended as a new type ofproperty rights structure, minyingin fact came to cover all types of propertyrights, including state-owned, collective, and private.

    Local governments interpreted the meaning of nongovernmental differ-ently, and so the implementation and r