eu china technologytranfer survey of issues

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EUChina Technology Transfer: A Survey of IssuesKirit Vaidya, David Bennett and Xiaming Liu

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EU China Technology Transfer: A Survey of Issues1

Kirit Vaidya, David Bennett (Aston Business School) and Xiaming Liu (Birkbeck College,

University of London)

ABTRACT

This paper assesses the contribution of international technology transfer to the

development of Chinas technological capability. It is based on studies of (a) the

motivations of European businesses transferring technology to China and (b) an

assessment of Chinas revealed comparative advantage in selected sectors. The

dominant initial motivation of European firms in transferring technology is market

access but for a large proportion of them there are also other strategic considerations -

use of China as a production base and reacting to competitors moves. Continued

innovation, protection of the core proprietary knowledge and collaborative ventures in

China is the combination of strategies of these firms in response to the risk of loss ofcompetitive advantage as a consequence of technology transfer. The comparative

advantage analysis shows that Chinas competitiveness is mainly in low-tech labour-

intensive products but the country is gaining comparative advantage in a selection of

medium-tech sectors (e.g. consumer electronics) and in the high-tech product groups,

telecommunications and automatic data processing equipment. This is largely following

the path of earlier latecomer industrialisers of East Asia. FDI and related technology

transfer, leveraged through market access, and the emergence of new firms, especially

in the telecommunications and electronics sectors have been crucial in developing

capabilities and competitiveness.

1. INTRODUCTION

China has become something of a model for industrial and economic development since the

initiation of the open door policy for trade and investment in December 1978. The countrys

economic growth has been in the 7 to 10 per cent per annum range since the early 1980s

leading to an increase of 350 per cent in GDP per capita between 1980 and 1999. Foreign

trade has grown in absolute terms and as a proportion of both GDP and world exports.

Whereas in 1980 exports amounted to only 6 per cent of GDP, by 2002 the figure was 22 per

cent. Chinas share of world exports has grown from 0.9 per cent in 1980 to 7 per cent in 2002

and China has become one of the worlds largest recipients of foreign direct investment (FDI).

Between 1985 and 2002 total realised FDI amounted to US$ 444 billion and between 1993

and 2000, it accounted for almost 14 per cent of total fixed investment in the economy (Wei

and Liu 2001, http://www.chinafdi.org.cn/english).

1 Please address correspondence to Kirit Vaidya,Aston University, Birmingham B4 7ET,United Kingdom, email: [email protected], Tel: +44 (0)121 359 3611, Mobile: +44(0)7712 583524, Fax: +44 (0)121 333 3474.
mailto:[email protected]:[email protected]


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Economic liberalisation in general, and especially the establishment of Special Economic

Zones, enabled China to take advantage of its low-cost labour factor endowment in line with

the Heckscher-Ohlin comparative advantage theory (Yeats, 1989, 1992). The result was fastgrowth of exports of low-tech labourintensive products (Chan et al, 1999). The importance of

foreign invested enterprises as exporters also increased as foreign firms took advantage of

favourable cost and policy conditions. The proportion of Chinese exports of manufactures

from foreign invested firms grew from 12.5 per cent in 1990 to 31.5 per cent in 1995 and 48

per cent in 2000 (Wei and Liu 2001, http://www.chinafdi.org.cn/english).

During the 1980s, mainland China captured export growth in the textile and clothing sectorsfrom Hong Kong, South Korea and Taiwan, as their labour costs increased and they developed

comparative advantage in more technologically advanced industries (Yang and Zhong, 1996).

As the Chinese economy has developed, the expectation is that there will have been a gradual

movement towards more capital and technology intensive exports in line with the stages theory

of comparative advantage as factor endowments change with the development of more

advanced skills and capabilities over time and the cost of labour goes up with the success of

the labour-intensive stage (World Bank, 1993).

A major aim of Chinas science and technology (henceforth S&T) policies has been to buck the

stages model and shift rapidly from labour-intensive, low-tech production and exports to more

advanced technology sectors. Until the early 1980s, Chinas S&T development relied primarily

on state owned research and development organisations operating under tight government

controls. The S&T policy initiatives such as the 863 Plan and the Torch Plan in the 1980s

attempted to (a) revitalise scientific research institutions, (b) direct them to generatetechnologies which could be applied commercially, and (c) create better linkages between S&T

institutions and state enterprises (Simon and Rehn, 1988; Simon and Goldman, 1989; Wang,

1993). Later policies initiatives made higher S&T expenditure commitments, put the onus for

developing capability on firms, recognise the role of foreign enterprises as providers of

technology and support start-ups of high-tech firms (Suttmeier, 1995; Ministry of Science &

Technology, 1997; State Economic and Trade Commission, 2002).


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Increased international technology transfer was expected to play an important role in

upgrading Chinese technological capability. Until the late 1970s the bulk of technology imports

were in the form of complete sets of equipment or turnkey plants in the petrochemical, steel,

electricity generation equipment and mining machinery industries. The turnkey projects wereexpensive and the potential for developing Chinese technological capability based on these was

limited (Bennett et al, 1997a). From the 1980s, government policy encouraged technology

transfer through all modes and expected FDI, especially in joint ventures, as the most

important mode of technology transfer. FDI was encouraged by tax incentives which were

especially favourable for foreign-invested firms operating in Chinas SEZs and other areas

designated for special treatment.

The aim of Chinese policy appears to be to speed up the acquisition of capabilities and

competitive advantage in advanced technology sectors by complementing domestic S&T

development with international technology transfer. This paper explores the contribution of

international, and especially European, technology transfer to the development of Chinese

technological capabilities and competitiveness. A European focus is claimed for this paper

because it is based on studies of European companies transferring technology to China.

However, many of the technology transfer issues are similar to those for other industrialised

countries. Indeed, the main differences in the features of technology transfer and their

implications for Chinese technological capabilities are between East Asian companies (mainly

from Hong Kong, Macao and Taiwan) and those from other industrialised countries (mainly

US, Japan and the EU countries). Therefore, the paper does not entirely focus on EU-China

technology transfer issues. The somewhat wider remit complements the other papers in the

volume by addressing issues associated with international technology transfer at the level of

businesses.

Section 2 provides an overview of the role of FDI and other modes of technology transfer in

East Asian industrial development. Section 3 considers evidence on the motivations for

technology transfer of European businesses and carries out a strategic analysis of its

contribution to developing technological capability in China. Changes in the sectoral

distribution of production in manufacturing and development of comparative advantage in

selected sectors are examined in section 4 for evidence of changes in capabilities. Section 5


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draws some conclusions on the role of technology transfer for Chinas technological trajectory,

especially identifying the more advanced sectors in which Chinas capability is developing.

2 AN OVERVIEW OF THE ISSUES AND CONTEXT

Hayter and Han (1998) assess the efficacy of FDI as a means of acquiring know how by China.

The assumption underlying the open door policy was that FDI was essential for the transfer

of technological (and other) know how into the Chinese economy (Sit, 1985). However, based

on the literature on multinational enterprises (Dicken, 2003; Dunning, 1980; Dunning 1993),

Hayter recognises the paradox inherent in the role of FDI as a source of know how for host

economies since such know how is a part of the firm-specific knowledge which is the source of

the competitive advantage of investors. The implications of this paradox for the contribution oftechnology transfer to the development of Chinese industrial capability are considered in this

section.

The initiation of the open door policy can be formally traced to the Act of Joint Venture

Enterprises adopted in 1979 which recognised the legal rights of international firms and

permitted FDI in the form of joint ventures with local partners with a minimum 25 per cent of

foreign equity but no maximum. Initially FDI was limited to the four Special Economic Zones(SEZs) of Shenzen, Zhuhai, Xiamen and Shantou but later laws extended the permissible areas

and offered further advantages such as patent protection, tax concessions and setting up of

wholly owned subsidiaries. As Table 1 shows, a very large proportion of the investment has

come from Hong Kong, Macao and Taiwan though the proportion from these sources has

diminished over time. The most important other sources of FDI are Japan, US and the

European Union (EU). In the last 5 years, EUs FDI has been on par with that from the US

and above that from Japan. However, since the EU economy is larger than the US andJapanese, it could be argued that EU FDI is relatively low. The fall in the total proportion of

FDI from the 5 sources in the table over the period shows a clear trend of diversification of

sources including higher investment from Singapore and Korea in Asia (Simon, 1995) and the

rest of the world.

The distribution of FDI is significant for the transfer of know how since there are clear

differences in the motivations for investment and level of technology transferred between HongKong, Macao and Taiwan on the one hand and the older industrialised countries. A number of


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studies (for example, Chen, Chang and Zhang, 1995; Young and Lan, 1997; Shi, 2000; Zhao

and Zhu, 1998) show that FDI from Hong Kong, Macao and Taiwan tends to be by smaller

enterprises in relatively low-tech sectors to take advantage of low labour costs. The low-tech

investment from these sources has been a cause of some disappointment because of itsperceived low value in developing technological capability. However, investment and sub-

contracting from Hong Kong, Macao and Taiwan have developed production and management

capabilities to a standard required for exporting, and offered access to export markets. Such

production and management capabilities were the base from which the industrialised countries

of East Asia were able to develop their capabilities in stages and move up the product life cycle

to gain more advanced skills (OECD, 1996 and Hobday, 1995). It can also be argued that the

paradox of know how transfer through FDI by multinationals is less relevant for investmentsfrom Hong Kong, Macao and Taiwan because the technology transferred is typically mature

and the knowledge, skills and market access offered by foreign investors are complemented by

the cost advantages offered by producers in China.

Table 1. Share of major source countries of realised FDI into China, 1986-2002

Unit: %

YearHong

Kong/MacaoTaiwan Japan US EU Total (from 5

sources)

1986 59.2 - 11.7 14.5 8.0 93.5

1987 69.1 - 9.5 11.4 2.3 92.2

1988 65.6 - 16.1 7.4 4.9 94.0

1989 61.2 4.6 10.5 8.4 5.5 90.2

1990 54.9 6.4 14.4 13.1 4.2 93.0

1991 57.0 10.7 12.2 7.4 5.6 92.9

1992 70.0 9.5 6.5 4.6 2.2 92.9

1993 64.9 11.4 4.8 7.5 2.4 91.1

1994 59.8 10.0 6.2 7.4 4.6 87.9

1995 54.6 8.4 8.3 8.2 5.7 85.3

1996 51.0 8.3 8.8 8.3 6.6 82.9

1997 46.5 7.3 9.6 7.2 9.2 79.7

1998 41.6 6.4 7.5 8.6 8.8 72.9

1999 41.4 6.5 7.4 10.5 11.1 76.7

2000 38.9 5.6 7.2 10.8 11.0 73.5

2001 36.4 6.4 9.3 9.5 8.9 70.4

2002 34.8 7.5 7.9 10.3 7.0 67.5

Average 53.3 7.8 9.3 9.1 6.4 84.5

Average(1997-2002) 39.9 6.6 8.1 9.5 9.3 73.4


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There is also disappointment about the level of technology that is transferred through FDI from

the industrialised countries. The initial policy to restrict FDI to cooperative ventures with

Chinese partners was an attempt at reducing this barrier. However, this device may not be

effective because of the unwillingness of foreign partners to transfer the know how, the natureof the know how and the inability of Chinese partners to benefit from it. There have been cases

where cooperative ventures have been formed simply to take advantage of tax incentives and

other privileges with limited interest in collaboration (Young and Lan, 1997). Even within a

fully cooperative venture, foreign companies may wish to limit transfer of know how to protect

their core competences.

There is Chinese dissatisfaction with Japanese show how transfer instead of the preferredknow how transfer. Japanese firms may be reluctant to transfer the most advanced

technology because of its strategic importance, but the Japanese approach also reflects

preference for an incremental hands-on approach to ensure effective transfer of appropriate

technology compatible with their own strategic objectives (Simon, 1995; Grow, 1995). The

Japanese approach tends to be more software focused involving more collaboration training.

The US approach by contrast is more hardware focused and apparently more appealing to

Chinese technology recipients because US firms tend to supply the most advanced hardware.Broadly, the European approach is somewhere between the Japanese and US. European

companies in general, and German companies in particular, are much admired in China for their

excellence in engineering, emphasis on quality and thoroughness in transfer once the

technology transfer decision has been made (china.com.cn). Volkswagen is singled out as a

company which has taken great care in transferring technology and increasing local sourcing,

though the range of models for which volkswagen has transferred technology has been limited.

Alcatel (Belgium) is also admired for its demonstration of commitment to China by transferringadvanced technology.

Effectiveness of transfer also depends on the nature of the knowledge, the mode of transfer,

the effort and commitment of the owner and the capability and commitment of the recipient. At

one extreme, the technology could be fully explicit and can be acquired from written

instructions, design drawings and prototypes. At the other extreme, it could be fully tacit in

the skills and knowledge of persons in an organisation. Transfer of tacit knowledge typicallyrequires closer long-term collaboration between the partners. In practice, most technologies
http://www.china.com.cn/http://www.china.com.cn/


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are not at one extreme or another but include varying combinations of explicit and tacit

knowledge. There are also different levels of competences such as ability to use the

technology, adapt it, stretch it and eventually to become more independent by developing,

designing and selling it (Lall, 1992; Barbosa and Vaidya, 1997). Therefore capability in atechnology does not arise from a single act of technology transfer but either from continuing

collaboration between the supplier and acquirer or further development efforts by the acquirer.

China is not the first country to face the problem of developing technological capability from

limited know how transfer by foreign investors. In other East Asian countries which faced

similar problems, Matthews (2001) has identified patterns of developing technological

capabilities which include (a) a foundation of manufacturing competence based on low-techsub-contracting, (b) attainment of higher levels of capability and new product development

through existing capabilities to leverage market access, for example through OEM (Own

Equipment Manufacture) orders from international firms, and (c) using the knowledge gained

from OEM to leverage greater technological capability and a stronger market position through

ODM (Own Design and Manufacture) and OBM (Own Brand Manufacture). The leveraging

process is complemented by deepening internal technological knowledge and capability

through training, R&D and accessing external sources of knowledge such as public sectorinstitutions and national researchers, technicians and managers working in industrialised

countries. The internal manufacturing and R&D capabilities also enable firms to combine know

how acquired from different sources.

Linsu Kim (1997) and Seongjae Yu (1999) have identified similar ingredients and patterns in

the industrial development of South Korea and the success of Samsung in advanced electronics

products. Hobday (1995) emphasises the role of learning at the firm level, starting with sub-contracting and going backwards along the product life cycle to gain more advanced

capabilities. Matthews (2001) identifies three models for leveraging the development of

capability. The first is the Korean model under which large domestic firms were supported and

encouraged by the State to enter new technology sectors. The second is the Taiwan model

under which public agencies acquired new technologies, developed product and process

expertise and diffused the technology to enterprises. The third is the FDI model followed by

Singapore in which conditions were created for multinationals to transfer know how.Matthews (2001) recognises some features of all three models in China. Nolan and Yeung


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(2001) and Nolan (2001) draw attention to the success of some large public sector enterprises

in restructuring and developing capabilities and competitiveness.The experience of other Asian

late industrialisers provides the context for examining the role of international technology

transfer in the development of Chinas technological capabilities.

This section has provided (a) an overview of some major questions on the role and limitations

of international technology transfer in developing technological capability and (b) a basis for

assessing developments in China. Based on our work on technology transfer from Europe and

on changes in Chinas production and trade pattern for manufactured goods, we draw

conclusions on:

the role and limitations of foreign enterprises in developing technological know how;

development of Chinas comparative advantage in selected sectors, and

the learning models being pursued by China and the technological trajectory they imply.

3. TECHNOLOGY TRANSFER TO CHINA BY BUSINESSES: MODES,MOTIVATIONS AND DILEMMAS

Since the early 1980s, European and other companies have been transferring technology and

other know how to China along with increased FDI in return. Many foreign firms have enteredinto collaborations2 with Chinese partners involving some technology transfer because of

policy constraints and incentives and possible advantages of local knowledge, connections and

market access offered by local partners. Evidence from a survey of selected EU companies

transferring more advanced technology to China (Bennett et al, 2001) is examined here.

The following sectors and technology areas in which Europe is considered to have particular

technological strengths were identified for inclusion in the study:

aerospace and aviation

specialist electronics

power generation equipment, other energy and energy management

life sciences, pharmaceuticals and biotechnology

materials and materials design

2

The focus here is on technology based collaborations of strategic importance and not on limited technologylicensing agreements and one-of transactions for mature technologies.


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motor vehicles and components

machinery, machine tools and computer integrated manufacturing

telecommunications equipment.

The list includes some advanced technology sectors3 and other less advanced sectors identified

by the European Commission (CEC, 1995, 1998) as the sectors for technology cooperation

with China and therefore the study enables a broad strategic assessment of the implications of

different levels of technology transfer.

Interviews were conducted with senior managers involved in strategic decisions relating to

their companies technology transfer to China. Table 2 indicates the broad sectors in which theactivities of the sample companies fall. The firms range from very large global conglomerates

to much smaller specialists4. The parent companies are based in eight EU countries (Denmark.

Finland, France, Germany, Italy, Spain, Sweden and UK). The most strongly represented

sectors are specialist electronics, power generation equipment, other energy and energy

management and telecommunications.

Table 3 summarises the nature of the technologies transferred, features of technologyrecipients, and the reasons for the technology transfer. The figures in the table are percentages

of the total number of technologies transferred. All the firms had transferred at least one

technology, 16 two technologies and 10 had transferred three technologies giving a total of 46

technologies. It is striking that only 13 per cent of technologies transferred were

established/mature. Evidently, competition and the leverage of the market and other strategic

advantages offered by China were important considerations in transferring technologies (a)

comparable with competitors, (b) providing a technological lead, and (c) based on recent

innovations. Earlier studies of technology transfer by European firms to China (Bennett et al,

1997b; Glaister and Wang, 1993) draw similar conclusions on European firms motivations for

technology transfer.

3Based on R&D intensity data, OECD (2001) identifies aircraft and spacecraft, pharmaceuticals, office,accounting and computing machinery, radio, television and communication equipment and medical and

precision and optical instruments as high-tech.

4 Most of the companies did not object to being named but the decision was taken not to disclose any of thenames because two companies wished to remain anonymous.


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Table 2: Sectors represented by the respondent companies

Aerospaceandaviation

Lifesciences,

pharmaceuticalsand

biotechnology

Machinery,machineto

ols

andcomputerintegrated

manufacturing

Materialsandmaterials

design

Motorvehiclesand

components

Powergeneration

equipment,otherenergy

andenergymanageme

nt

Specialistelectronics

Telecommunications

equipment

Companies

1 Energy management X

2Energy processes

X3 Gas turbine equipment X X X

4 Glass manufacturer X X

5 Machine tools 1 X

6 Machine tools 2 X

7 Machine tools 3 X

8 Machine tools 4 X

9 Machinery X

10 Motor vehicles 1 X

11 Motor vehicles 2 X

12 Pharmaceuticals X

13 Powergen 1 (equipment) X14 Powergen 2 (controls) X X

15Rubber sealingproducts X X

16 Specialist electronics 1 X

17 Specialist electronics 2 X X

18 Telecomms 1 X

19 Telecomms 2 X

20 Telecomms 3 X

A large proportion of the technologies (83 per cent) required training and learning within

continuing collaboration between suppliers and acquirers. Seventy four per cent of technology

transfer was horizontal, a feature common to transfer between industrialised and industrialising

countries. Technology collaborations with local producers in the same sector enable better

market access but also increase the threat of local acquirers becoming potential competitors.

Developing longer term alliances with Chinese partners could reduce this threat. In addition, a

substantial proportion of companies sought to benefit from low cost production.


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Table 3: Features of technology transfer transactions of 20 EU companies

Percentage ofTechnologies

Features of technology

Product 50Process 9

Product & process 41

Own recent innovation 20

Technological lead over competitors 30

Comparable to competitors 57

Generally used technology (uses across sectors) 30

Specialised technology for the sector 70

Established/mature technology 13

Transferable through supply of equipment and designwith limited training and experience

17

Not transferable without practical training and learning

through experience over time

83

Features of technology recipient(more than one response possible)Producer in the same sector 74

Customer 20

Supplier 13

Reasons for transfer(more than one response possible)Market access 80

Forming long term technological/commercial alliance 39

Cost advantage 57

Favourable policies and incentives in host country 33Policy requiring local sourcing and/or technology transfer 46

As part of company globalisation strategy 48

Response to competitors moves (actual or potential) 33

Other 7

As Table 4 shows, joint ventures dominate with up to 58 per cent of the technologies

associated with this mode of transfer, again indicating a long-term strategic position being

taken by a substantial proportion of companies, though a small but significant proportion ofcompanies have transferred technology to wholly owned subsidiaries. Joint ventures clearly

offer Chinese partners opportunities to acquire technology. In addition, recent studies show

evidence of substantial spillover effects in selected sectors (Liu et al, 2001; Liu, 2002) related

to FDI and not only technology based alliances and demonstrate the capabilities of Chinese

firms in these sectors to learn from demonstration and employee turnover effects.


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Table 4: Modes of technology transfer

Percentage ofTechnologies

Mode of Technology Transfer (more than one answer possible)One-off sale 6Licensing 21Subcontracting relationship 10Co-production 15Joint venture 58Setting up a wholly owned subsidiary 15

Note: Figures do not add up to 100% as some modes of technology transfer included more than onearrangements. For example, some joint ventures also incorporate licensing agreements.

Most of the respondents planned to expand operations in China and transfer more advanced

technology in the future. However, there were also concerns about the protection of their

technologies. Seventy-eight percent of the firms felt that intellectual property rights relating to

their technologies were not adequately protected. Although, advanced technology had been

transferred, 75 per cent of companies stated that they had not transferred key parts of their

technologies. Only 25 per cent of the companies had transferred R&D capacity though 47 per

cent stated that they had plans to do so in the future.

Table 5 summarises the answers to questions relating to assessment of local capability to

absorb and use technologies and to replicate them, thereby posing a future competitive threat.

In general the respondents accepted that there was capacity in China to absorb and eventually

to replicate the technology. It was estimated that 25 per cent of the technologies transferred

could be absorbed and used within one year and a further 44 per cent within 3 years. The

companies recognise the risk of loss of competitive advantage through transfer and the

growing capabilities of Chinese companies. The most common responses to the threat were to

maintain a lead through R&D (90 per cent of respondents) and collaboration with Chinese

partners (50 per cent) and restricting amount/type of technology transferred to China (50

per cent). Clearly many firms seek to combine maintaining advantage through R&D with

defensive strategies to protect their competitive advantage. For Chinese companies, market

leverage and the other attractions of China to foreign companies have offered opportunities to

develop technological capabilities but there are likely to be differences between sectors in this

respect.


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Table 5: Assessment of Chinese capability to absorb, use and replicate technologies

Local capability to

absorb and use

Local capability to

replicate% within 1 year 25 2

% between 1-3 years 44 27

% between 3-10 years 25 48

% More than 10 years 6 23

Information from the survey has been used here to make a broad strategic assessment of

differences between sectors in the Chinese partners potential for acquiring capabilities. Two

features of the technology transferred which affect this potential are the level of technology

and the comprehensiveness of the technology being transferred. In Figure 1, the level of

technologies transferred by European companies have been evaluated from the information on

whether they (a) were the companies own recent innovations, (b) provided a lead over their

main competitors, (c) were comparable to their main competitors, or (d) were established

mature technologies.

Comprehensiveness of technology HighLow

High

Level of

technology

Low

Medium

Medium

High

Figure 1: Risk of loss of advantage for European firms and

potential for Chinese capability development

Motor vehicles 1 Motor vehicles 2

Pharmaceuticals

Powergen 2

(Controls)

Specialist electronics 1 & 2

Telecomms 1,2&3

Powergen 1

(equipment)

Machine tools 3

Glass manufacturer

Energy processes

Low

The term comprehensiveness in Figure 1 refers to the completeness of the technology that is

transferred. Comprehensiveness may range from a small part of the product or process

technology at one extreme (for example final assembly of a product from imported parts) to

complete product and process know how. The risk of loss of advantage is very low for an


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established technology which is only partially transferred. Such technology may be available

from other sources and is unlikely to be a core element of the competitive advantage of the

supplying company. For the Chinese partner, the capability attained will be limited. By

contrast, supply of the complete technology in which the owner has a technological lead willpose a much higher risk for the supplier but also offer Chinese partners greater potential for

developing capability. For example, Motor vehicles 2 has transferred a complete assembly

line and sources 90 per cent of parts locally, so the comprehensiveness of the technology is

high. On the other hand, the level of technology transferred is not high since it is for assembly

of an old model and the assembly plant uses established technology. The risk of loss of

advantage is reduced for the supplier but the comprehensiveness of the technology and local

sourcing provide a base for developing capability. In contrast Motor vehicles 1 is onlyconducting more limited transfers currently so the risk tends towards the low region and the

capability transferred is more limited.

The arrows in Figure 1 show the future direction of movement according to company

responses. For example, for Power generation 1 (equipment), the technology being

transferred is neither very advanced nor very comprehensive at present but the companies

accept that because of Chinese government policy pressures and strategies of competitors, theywill have to move in the direction of more advanced and comprehensive technology transfer.

Glass manufacturer has transferred advanced process and product technology (while

withholding the key elements) and does not see the need to go any further. The Specialist

electronics companies and Pharmaceuticals (for insulin) are protecting their advanced

technology by partial transfers while the Telecommunications companies have transferred

some of their most advanced and comprehensive technologies and the machine tools

companies have transferred fairly comprehensive technologies for selected models and wereintending to provide know how for more models.

Figure 2 provides a broad strategic appraisal of technology suppliers preferences and the

benefits of technology transfer for Chinese companies. Potential for capability development

of each companys technology transfer in Figure 2 has been derived from the companys

position with respect to the level of technology supplied and its comprehensiveness in Figure 1

and market growth is based on current growth rates in the relevant sector in the Chinese andworld markets. Arguably, the preferred position for the technology supplier in Figure 2 (and


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offering low potential for developing capability) is the bottom right hand corner, which

represents high market growth and low risk of loss of advantage. If all foreign technology

suppliers took this position, the potential for developing capabilities for Chinese firms would

be very limited. As Figure 2 shows, this is far from the case. European Telecommunicationscompanies have transferred the most comprehensive and advanced technologies (Figure 1) and

seen very high growth rates in recent years in China and worldwide. The mirror image of this is

that Chinese companies have opportunities to develop their capabilities and strengthen their

competitiveness. Evidence on this sector is examined further in the next two sections.

Potential

for

developing

capability

High

Low

Market growth

Low potential,

low market growth

HIgh potential andmarket growth

Lowest potential,

high market growth

Machine tools 3

Powergen 1

(equipment)

Energy processes

Glass manufactureSpecialist electronics

Telecomm 1,2&3

Pharmaceuticals

Motor

vehicles 2

Motorvehicles 1

Powergen 2

(controls)

Risk reduction through

R&D

Low High

High potential,low market growth

Fig 2 Technology transfer and potential for Chinese capability development

Machine tools 3 and Energy processes are in internationally mature markets but with

strong market prospects in China. For such products it may be difficult for companies located

in Europe to maintain competitive advantage. A possible strategy for these firms is to develop

collaborative ventures in China (as is the case with Machine tools 3) again offering high

potential to Chinese firms to develop capabilities. The remaining companies fall in-between in

terms of long-term prospects and risk. They are in China for market reasons, but for most of

their products (glass, power generating equipment, automobiles and insulin) the international

market is relatively mature internationally and their longer-term market prospects rest with

more advanced technologies and products. Market leverage offers Chinese firms opportunities

to acquire established technological capabilities in these sectors.


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The overall conclusion is that the paradox inherent in the conflicting objectives of technology

recipients and suppliers is resolved by the market leverage and competitive pressures which

lead the suppliers to provide more know how than they intended. For Chinese firms to fully

benefit it is necessary to develop their own complementary capabilities as the experience of thesuccessful firms in Korea and Taiwan indicate.

4. MANUFACTURING SECTOR PRODUCTION AND COMPARATIVE

ADVANTAGE: EVIDENCE OF INCREASED CAPABILITIES ?

The main question addressed in this section is whether there are any discernible effects of

development of high technology capability in Chinas production and export performance.

Table 6 shows the shares of manufacturing sectors in the total manufacturing output in 1985,1996 and 2001, ranked according to their contribution to total manufacturing output in 2001.

The table also shows changes in the shares of the sectors between 1985 and 2001. For

example, textiles and garments sectors share of manufacturing output at 11.6 per cent in

2001 was the largest of all sectors. However, it had fallen from 17.3 per cent in 1985. The last

column in Table 6 shows the 2001 share as a fraction of the 1985 share for each sub-sector.

Therefore, the number 0.7 for textiles and garments in this column shows that the share in

2001 was about 70 per cent of the share in 1985. As the output of the manufacturing sectorwas growing rapidly over this period, this fall in share still implied an increase in the actual

value of output.

At this level of aggregation, it is difficult to distinguish precisely between high, medium and

low technologies. However, based on OECD classification of sectors, electronics and

communications, and medical and pharmaceutical products are high technology sectors. The

share of medical and pharmaceutical products increased gradually over the period. Forelectronics and communications, the share increased gradually from 4.5 per cent in 1985 to 5.6

per cent in 1996 but the increase was much sharper since 1996 to 11.3 per cent in 2001.

Caution must be used in interpreting the above evidence since the available data are at a very

aggregate level and therefore each of the industrial sectors in Table 6 covers a wide range of

products. For example, manufacturing of basic calculators, now a relatively low technology

activity, is part of the electronics and communications sector.


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Table 6: Share of manufacturing sectors in total manufacturing output

Change in share

Manufacturing sector 2001 1996 1985 2001(%) / 1985(%)Textile and garment industries 11.6 12.5 17.3 0.7

Electronic & telecommunicationsequipment

11.3 5.6 4.5 2.5

Transport equipment 9.1 7.8 6.9 1.3

Raw chemical materials andchemical products

8.9 10.0 9.6 0.9

Food processing and manufacturing 7.8 8.4 6.7 1.2

Electrical equipment & machinery 7.7 6.3 6.4 1.2

Tobacco processing 6.1 6.4 6.7 0.9

Medical & pharmaceutical products 4.0 3.0 2.1 1.9

Metal products 4.0 4.1 4.30.9

Beverage manufacturing 3.6 3.9 2.9 1.3

Special purpose equipment 3.5 4.4 3.7 1.0

Smelting & pressing of ferrousmetals

3.3 8.4 9.8 0.3

Smelting & pressing of non-ferrousmetals

3.3 2.6 2.9 1.1

Plastic products 3.0 2.7 2.2 1.4

Papermaking & paper products 2.6 2.8 2.6 1.0

Leather, furs, down & relatedproducts

2.2 2.3 1.3 1.7

Rubber products 1.4 1.6 2.70.5

Printing & recording mediumreproduction

1.4 1.4 1.6 0.8

Instruments, meters, cultural &office machinery

1.3 1.2 1.7 0.8

Chemical fibre 1.2 1.6 1.6 0.8

Timber processing, bamboo, cane,palm fibre & straw products

1.1 1.2 1.0 1.1

Cultural, educational & sportproducts

1.0 1.0 0.8 1.3

Furniture manufacturing 0.7 0.7 0.9 0.8

Total 100.0 100.0 100.0

Source: China Statistical Yearbook, various issues.

While the relatively high technology industries appear to have been the gainers, the low-tech

and labour intensive textile and garment industry was the biggest loser in relative terms. This

does not necessarily mean that Chinas industrial production has shifted significantly away from

labour intensity overall. The shares of other labour intensive industries such as plastic products,

leather, furs, down and related products actually rose. The picture for the medium technologyindustries was mixed with increases in the shares of electrical equipment and machinery, and


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food processing, but declines in rubber products and instruments. The shares of special

purpose equipment manufacturing and metal products remained about the same. There is

therefore some evidence of an increase in the share of high technology industries, especially in

the electronics and telecommunication equipment sector, and a relative decline in thecontribution of low technology, labour intensive industries between 1985 and 2001.

Revealed comparative advantage (RCA) indices have been calculated at the more

disaggregated 3-digit SITC (Standard International Trade Classification)5 level to assess

changes in Chinas comparative advantage between low-tech, medium-tech and high-tech

industries. The RCA index represents a countrys share in world exports of a given product

group divided by its share in the world exports of all goods (or an appropriate category ofgoods such as manufactured products6). Therefore country is RCA index for product j is:

RCAij = (Xij / Xwj ) / (Xit / Xwt)

where the w subscript denotes world exports and the t subscript denotes exports of all

products. The RCA index shows a countrys share in world exports in a product group relative

to its share in the world exports of all goods. For example, if a country has 6 per cent of theworld market in computers, whereas its share of world exports of all products is 2 per cent, the

RCA (also known as the export specialisation index) for computers is 3.The value of the index

over 1 indicates that the country has a stronger position in the world market for computers

than its average position for all products exported. Conventionally, a country is said to have a

revealed comparative advantage in product j if the RCA index has a value more than one and a

revealed comparative disadvantage if the index has a value less than one. In addition, changes

in the RCA index over time indicate improving or declining comparative advantage.

Table 7 lists 28 product groups separated into high, medium and low-tech, based on OECD

(2001) and Table 8 shows their RCA indices for the years 1987 to 2001. All the sectors

identified by the OECD as high-tech based on R&D intensity criteria are included in the list

though some of these are included as medium-tech sectors because in the Chinese context this

5 Date at this level of disaggregation in UN International Trade Statistics Yearbooks from 1987 have been used.


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is a more appropriate classification for them (see note under Table 7). For comparison, RCA

indices have been calculated for a selection of medium and low-tech sectors. Unfortunately,

available data do not allow for a more refined product classification based on four or five digit

levels. Consequently within the high-tech product group, there may be some low-tech productsand low-tech product groups may include some higher-tech products (see note under Table 7).

Therefore, the categorisation of product groups according to technology levels in Table 7 is an

approximation.

Table 7: Product groups in the study

High TechAircraft and related products

Automatic data processing equipmentElectro-medical and x-ray equipment

Medium TechCycles (motorised and non motorised)Electric power machinery

Electrical machineryEngines and motorsHousehold type equipmentLorries and other specialised motor

vehiclesOffice machinesOptical instruments

Low TechFootwear

Toys and sporting goods etc.Mens outerwear (not knit)

Medicinal and pharmaceutical products

Telecommunications equipment, parts andaccessories

Other power generating plantsOther road motor vehicles

Radio broadcast receiversRailway vehiclesRotating electric plantsShips and boats etc.

Sound recorders, phonographsTelevision receivers

Travel goods and handbags

ToolsWatches and clocks

Note: OECD (2001) classifies radio and television equipment, office machines and optical instruments as high-tech. These have been put in the medium-tech category in this study since Chinese production in these sectors

has been predominantly manufacturing and assembly based on established technology. Within each group inTable 7 there may be some products which do not fall strictly within the technology levels assigned. Forexample, tools have been classified as low-tech, but they may include high-tech precision tools. Similarly,watches and clocks could include high precision electronic components for watches.

It is possible for the RCA values to be distorted by government interventions such as export

subsidies. However, assessments of the significance of such distortions in China indicate that

they have been declining in importance since 1979 and so the RCA indices and other indicators

6

As the concern of this paper is with comparative advantage of manufacturing sub-sectors. the value of allmanufactured products has been used as the base in calculating the RCA indices. All products would includeagricultural and other primary products.


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of trade performance for manufactured products broadly reflect changes in the competitiveness

of Chinese producers (Foster, 1998; Zhang, 2000). According to Table 8, China has a

comparative disadvantage (i.e. average RCA index less than 1) in high-tech product groups

overall indicated by the unweighted average RCA indices, a comparative advantage in theselected low-tech product groups and a mixed situation in the medium-tech sectors. However,

the table also shows evidence of improving comparative advantage in some medium-tech and

high-tech sectors.

Two of the high-tech product groups, automatic data processing (ADP) and

telecommunications equipment show the most striking changes in RCA indices between 1987

and 2001 (see table 8). RCA indices for automatic data processing (ADP) start from a verylow base in 1987 but rise consistently to show revealed comparative advantage by 2001. A

number of foreign computer and peripherals manufacturers such as Compaq, IBM, HP and

Delta Electronics (Taiwan) have invested in China as a part of global outsourcing of

electronics products, components and peripherals and to gain access to the growing Chinese

market (Asiamoney, 1997). Chinese enterprises such as Legend and the Founder Corporation

have also upgraded their capability to manufacture computers (principally for the domestic

market) and components and peripherals for export (Business Week, 1997, and authorscompany interviews).

Telecommunications equipment (SITC 764) also starts from comparative disadvantage in

1987 and is the only other high-tech product group to achieve advantage during the period.

Both exports and imports of SITC 764 consisted mainly of telecommunications parts and

sound equipment (SITC 7649). Although exports of this sector have been growing, imports

are also large and growing resulting in a trade deficit in this sector. The rising RCA, the largevolume of trade in parts and imports being greater than exports indicate integration of the

Chinese telecommunications sector with the world industry and strong domestic demand for

telecommunications equipment. Exports may consist of relatively low-tech products and

components such as analog switches and hand-sets with more advanced products being

imported (Tan, 2002). However, evidence from the two European telecoms companies in our

survey (see section 3) suggests that participation in joint ventures has enabled a number of

Chinese telecommunications manufacturers to develop the capability to copy advancedtechnology foreign products and adapt them to the local market.


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Table 8: Revealed comparative advantage, 1987-2001: selected product groups

SITC

No

1987 1989 1991 1993 1995 1997 1999 2001

High-tech product groups

541 Medicinal and pharmaceutical products 1.00 1.06 0.89 0.70 0.73 1.12 1.08 0.88

752 Automatic data processing equipment 0.03 0.05 0.10 0.26 0.62 0.87 1.17 1.47

764 Telecommunications equipment, partsand accessories nes

0.27 0.41 0.54 0.91 1.15 1.06 1.20 1.54

774 Electro-medical and x-ray equipment 0.02 0.05 0.11 0.04 0.11 0.12 0.09 0.22

792 Aircraft and related products 0.12 0.01 0.02 0.10 0.07 0.08 0.12 0.06

Unweighted mean (high-tech) 0.29 0.32 0.33 0.40 0.54 0.65 0.73 0.83

Medium-tech product groups714 Engines and motors nes 0.01 0.02 0.02 0.05 0.03 0.03 0.04 0.05

716 Rotating electric plants 0.46 0.68 0.83 1.57 1.44 1.44 1.46 1.31

718 Other power generating plants 0.07 0.06 0.13 0.12 0.27 0.21 0.20 0.30

751 Office machines 0.64 0.78 0.74 1.05 1.81 2.36 2.41 2.70

761 Television receivers 1.23 1.76 1.80 1.81 1.18 0.76 0.87 1.06

762 Radio broadcast receivers 3.92 5.93 5.21 3.78 3.80 4.59 4.04 3.51

763 Sound recorders, phonographs 0.09 0.30 0.35 0.88 1.52 1.77 2.06 3.15

771 Electric power machinery nes 0.17 0.56 0.76 1.91 2.35 2.10 2.59 2.40

775 Household type equipment nes 0.27 0.61 0.98 1.99 2.11 1.67 2.10 2.46

778 Electrical machinery nes 0.35 0.49 0.54 0.88 1.05 1.00 1.28 1.48782 Lorries, special motorised vehicles nes 0.02 0.04 0.04 0.07 0.08 0.05 0.03 0.04

783 Road motor vehicles nes 0.01 0.04 0.04 0.04 0.02 0.08 0.04 0.07

785 Cycles (motorised and non-motorised) 0.75 1.30 2.10 1.73 1.94 1.79 2.08 2.71

791 Railway vehicles 0.06 0.33 0.09 0.26 0.32 0.52 0.34 0.17

793 Ships, boats and related products 0.52 0.37 0.59 0.31 0.81 1.11 0.96 0.83

871 Optical instruments 0.20 0.33 0.39 1.09 1.35 1.82 1.75 1.52

Unweighted mean (medium-tech) 0.55 0.85 0.91 1.10 1.26 1.33 1.39 1.48

Low-tech product groups

695 Tools 3.11 1.95 1.49 1.68 1.60 1.26 1.19 1.20831 Travel goods and handbags 3.81 3.51 2.86 6.56 6.55 8.08 7.73 6.41

842 Mens outerwear (not knit) 4.04 4.32 3.84 6.44 6.09 4.54 3.93 3.89

851 Footwear 1.55 3.54 4.82 6.02 5.14 5.43 5.51 4.85

885 Watches and clocks 11.98 3.51 3.36 3.26 2.95 3.08 3.00 2.15

894 Toys, sporting goods and relatedproducts

3.40 5.44 4.99 5.43 5.01 6.65 6.35 1.37

Unweighted mean (low-tech) 4.65 3.71 3.56 4.90 4.56 4.84 4.62 3.31

Note: In this and following tables, nes = not elsewhere specified


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The medical and pharmaceutical products group started with a neutral position with the RCA

index very close to 1 and has remained at about the same level with some fluctuations over the

period. This group includes traditional Chinese medicines as well as Western pharmaceutical

products. The relatively high RCA at the beginning of the period is possibly because ofstrength in traditional medicines which is likely to have remained throughout the period. The

later changes in RCA are possibly explained by changes in export performance on western

medicines (CIEC, 1998). According to Nolan (2001), Sanjiu has been successful in the

domestic pharmaceuticals market and as an exporter by specialising in traditional medicines

while the pharmaceutical sector overall remains fragmented and unable to compete globally.

More recent small improvements in RCA can be attributed to higher exports of non-patented

generic medicines and collaborations of Chinese firms with foreign producers to benefit fromlower costs.

The RCA indices for aircraft and related products were well below 1 (not exceeding 0.2)

throughout the period. Much of the activity in this sector was negotiated off-set production

though some foreign manufacturers also took advantage of low labour costs in China to

manufacture parts and assemble complete aircraft for domestic and export markets (Mecham,

1993; Smith, 1991; Proctor, 1992). China has made several attempts to develop the civilaviation sector by restructuring enterprise and seeking collaborations with foreign firms. Given

the dominance of the two major players (Boeing and Airbus) in the global civil aircraft market

and the high R&D and specialist knowledge capability requirements, the restructuring efforts

have not been successful and Chinese enterprises operate mainly as sub-contractors for foreign

business (Nolan, 2001). Electro-medical and x-ray equipment also had consistently low RCA

indices for the whole sample period though there was some improvement in later years with

foreign companies such as Siemens and their Chinese partners developing export markets.

The results for the medium-tech products are mixed (Table 8). For some medium-tech

products, the RCA remains consistently low throughout the period (engines and motors,

other power generating plants,lorries, special motorised vehicles, road motor vehicles and

railway vehicles. The very low RCA category includes sectors which are not high-tech

according to OECD criteria but they typically require high levels of investment for production

as well as product development. The most striking examples of these sectors are the roadmotor vehicles and lorries sectors which are dominated by large multinationals which organise


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their production and suppliers on a global basis to serve the major markets of North America,

Western Europe and East Asia (Dicken, 2003). The Chinese industry has been highly

fragmented with over 100 vehicle manufacturers producing basic vehicles using outmoded

product and process technologies for the domestic market. While the government industrialstrategy identified automotive as an industry of strategic importance in the early 1990s and

announced plans for restructuring it with an important role for joint ventures with foreign

enterprises (Campbell Haynes, 1995), international vehicle manufacturers saw China as a

relatively small but fast growing market (Economist Intelligence Unit, 1997). While the policy

of encouraging foreign enterprises has continued, China has downgraded the strategic

importance of the industry in its industrial policy (Pilmanis, 1998). The low RCA index

indicates that China is very far from gaining competitive advantage in vehicle manufacture,though there is increased activity in this sector by foreign enterprises seeking to benefit from a

rapidly growing domestic market.

A number of medium-tech product groups (for example radio broadcast receivers, office

machines, cycles (motorised and non-motorised) household type equipment and optical

instruments) have high or rapidly rising RCAs. Although China had comparative advantage in

cycles (SITC 785) from as early as 1989, about 70 per cent of exports of this product groupis accounted for by non-motorised cycles, which should be treated as low rather than medium-

technology products. RCA indices for television receivers increase until 1993 but are lower in

later years, possibly indicating slower growth in exports in relation to other products.

The products with high and improving RCAs in the medium-tech category have some

distinctive features. A number of them are in the consumer electronic and electrical goods

sectors (e.g. sound recorders and phonographs household type equipment and televisionand radio broadcast receivers) and the remainder are in light electrical machinery (rotating

electric plant and other electrical machinery). A large number of public enterprises acquired

technology to manufacture televisions and other consumer electronics products in the 1980s.

By 1987, China had become the worlds largest producer of television receivers (Dicken,

2003) though its RCA index remained relatively low because of the high domestic demand.

According to Chinese government figures, the electronics industry was growing at 20 per cent

per year in the early 1990s and overseas sales of electronics products brought in nearly US$6.9billion in 1992 (OKane, 1994) and US$24 billion in 1997. Foreign investment in the abSpecial


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Economic Zones and restructuring and technological upgrading of some state enterprises

increased exports of products and components in these product groups under sub-contracting

arrangements or OEM (WTEC, 1997). For other medium-tech sectors such as household type

equipment and electrical machinery also, China offers a low-cost production base for OEMand sub-contracting arrangements though a number of firms such as Haier and Konka have

begun to export consumer products under their own brand names.

As expected, the RCAs for all the low-tech sectors are well above 1 (Table 8). Travel goods

and handbags, mens outerwear, footwear and toys and sporting goods are traditional

low-tech, unskilled and semi-skilled labour-intensive export products in which China has high

and rising RCAs throughout the study period. The main explanation for this is use of China asa low labour cost export base by foreign firms through sub-contracting, wholly owned

subsidiaries or joint ventures.

RCA indices for product groups do not show the level of exports and their importance for the

economy. For example, a high RCA for a product group with low world exports may represent

lower exports than a lower RCA in a product group with larger world exports. Further, an

increase in RCA may not represent an increase in exports since an increase in RCA may not bebecause of growth in exports from a country, but because of a fall in total world exports while

the country maintains its level of exports. From this point of view, high and/or growing RCA in

a product group with large and growing world exports represents a stronger performance and

a greater contribution to economic growth than a similar RCA in a smaller and slower growing

market.

Examining changes in RCA indices at the product group level alongside evidence on the sizeand growth of world exports for the products over the same period provides a better overview

of the impact of changes in comparative advantage on the economy. Table 9 provides this

overview. For each product group in Table 9, the numbers in brackets are, respectively, annual

world export growth in per cent between 1987 and 2001, the size of world exports in billion

US$s in 2001 (from UN International Trade Statistics Yearbooks), the 2001 RCA index

divided by the 1987 RCA index as an indicator of the shift in Chinas RCA over this p eriod,

and the RCA index in 2001. The first two (i.e. growth and size of world exports) are indicatorsof world market attractiveness, while the last two are indicators of Chinas comparative


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advantage. For example, for the office machines product group the annual rate of growth in

world exports is 1.6 per cent, the value of world exports in 2001 was US$11.6 billion, the

RCA has increased 4.2 fold between 1987 and 2001, and the RCA in 2001 was 2.7. The

product groups with large improvements in RCA, or those demonstrating a balance betweengood RCA improvement and an RCA value higher than 1 in 2001, have been shown in bold

italics in Table 9.

Among the high-tech product groups, Chinas strongest performance is in telecommunications

and automatic data processing equipment. These are two product groups with the highest

world market attraction indicators, shown by their world export growth and the size of the

world export market. The table also shows a number of low and medium-tech product groupsin which China has comparative advantage that fall into medium and high export attractiveness

categories (e.g. office machines, sound recorders and phonographs, household type

equipment, men's outerwear, toys and sporting goods, rotating electric plant, electric

power machinery,footwear and electrical machinery. Evidently, China has been improving

its comparative advantage in the two high-tech product groups with the highest world market

attractiveness and a number of low- and medium-tech world markets with medium or high

market attractiveness.


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Table 9 Export market attractiveness and China's comparative advantage

Value of world exports Small (less than $20b.) Medium (between $20 and $40b.) Large (more than $40b. but less than$100b.)

Very large (more than $100b.)

Annual growth of world exports

Low (less than 5%) Other power generating machinery (Medium-tech, 2.7%, $5.9b, 4.3, 0.3)

Sound recorders, phonographs (Medium-

tech, 3.7%, $23.1b, 34.9, 3.2)

Medicinal and pharmaceutical products(High-tech, 1.9%, $34.5b, 0.9, 0.9)

Railway vehicles (Medium-tech, 3.6%, $8.5b,2.8, 0.2)

Footwear (Low-tech, 4.1%, $37.8b, 3.1,

4.9)

Lorries, special motor vehicles nes(Medium-tech, 4.0%, $55.6b, 1.8, 0.04)

Office machines (Medium-tech, 1.6%, $11.6b,

4.2, 2.7)

Radio broadcast receivers (Medium-tech,

2.4%, $13.6b, 0.9, 3.51)

Watches and clocks (Low-tech, 1.9%, $13.5b,0.7, 2.15)

Medium (between 5% and 8%) Electro-medical and x-ray equipment (High-tech,6.4%, $14.5b, 11, 0.2)

Ships and boats etc (Medium-tech, 5.5%,$42.2b, 1.6, 0.83)

Electrical machinery nes (Medium-tech,

8.0%, $80.6b, 4.2, 1.5)

Cycles (motorised and non-motorised)

(Medium-tech, 7.0%, $17.1b, 3.6, 2.7)

Household type equip nes (Medium-tech,

5.7%, $33.7b, 9.1, 2.5)

Travel goods and handbags (Low-tech, 4.3%,

$11.1b, 1.7, 6.4)

Men's outerwear (not knit) (Low-tech,

7.1%, $35.3b, 1.0, 3.9)

Tools (Low-tech, 7.0%, $17.8b, 0.4, 1.2)

High (more than 8%) Optical instruments (Medium-tech, 10.1%,$9.3b, 7.6, 1.5)

Electric power machinery nes (Medium-

tech, 10.7%, $27.4b, 14.1, 2.4)

Aircraft and related products(High-tech, 9.0%, $113.1b, 0.5, 0.1)

Road motor vehicles nes (Medium-tech, 9.7%,$14.5b, 6.9. 0.7)

Television receivers (Medium-tech, 8.2%,$27.1b, 0.9, 1.1)

Automatic data processing equipment

(High-tech, 9.1%, $161.3b, 49, 1.5)

Rotating electric plant (Medium-tech,

8.4%, $29.8b, 2.8, 1.3)

Telecommunications equipment and parts

(High-tech, 11.3%, $181.8b, 5.7, 1.5)

Engines and motors nes (Medium-tech,10.0%, $53.1b, 4.7, 0.1)


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5. CONCLUSIONS: READING THE UNFORSEEABLE FUTURE

This paper has attempted to assess the contribution of international technology transfer to the

development of Chinas technological capability based on a study of the motivations and

dilemmas of European businesses transferring technology to China and an assessment of

Chinas revealed comparative advantage in selected sectors. The dominant initial motivation of

European firms is market access but for a large proportion of them there are also longer term

strategic considerations - continued presence in the Chinese market and use of China as a

production base. The market access motivation contrasts with that of East Asian investors

though not with that of firms from other industrialised countries. The main reason for the

importance of the market access motivation of European businesses is probably the

manufacturing sectors in which they have strengths. Auto production, pharmaceuticals,

chemicals, aerospace and specialist electronics have been less conducive to sourcing from low

labour cost countries in the same way as garments and electronics components and products

(Dicken, 2003).

Policy makers and firms in China tend to ask potential suppliers for the most advanced

technologies and are disappointed when this is not forthcoming. Some Chinese enterprises

consider the Japanese approach to technology transfer to be less open than that of other

industrialised countries and there may be some justification in the view that Japanese

management style is less conducive to close cooperation (Grow, 1995). Nevertheless, in the

longer term the Japanese approach to technology transfer appears to be more successful and

compatible with developing capability in stages (see section 2). There are no doubt differences

between firms from different countries in their technology transfer motivations, approaches and

effectiveness. Nevertheless, as the discussion of the telecommunications sector later in this

section shows, there are also sector specific circumstances (such as the intensity of competitive

rivalry, rate of technological change, government policies and development of Chinese

capabilities) which influence the technology transfer strategies of foreign companies

irrespective of their nationalities. Grow (1995) cites the example of Fuji Electric to

demonstrate the development of networks of collaborating businesses by Japanese companies.

However, it would be possible to cite examples of European companies (e.g. Siemens) and US

companies (e.g. Motorola) which have also developed networks of subsidiaries, joint ventures

and suppliers.


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The RCA analysis shows that telecommunications and automatic data processing equipment

are the two advanced technology sectors in which China has developed comparative advantage

rapidly in the last decade, thus confirming the conclusions of the strategic assessment based onthe survey of European companies with respect to telecommunications equipment. The other

sectors in which China has or is developing comparative advantage are low-tech labour

intensive sectors (garments, toys and sports products, travel goods, footwear and watches) or

medium-tech sectors such as consumer electronic and electrical products and selected

industrial products.

The Chinese technological trajectory, including the sector specialisation in electronics andelectrical products and telecommunications, appears to be following the East Asian latecomer

path in which early industrial development was based on gaining efficient manufacturing

capabilities in (a) consumer product industries with relatively low technology requirements,

and (b) low-tech labour intensive production processes in advanced technology sectors. Other

studies have shown that the rapid development of comparative advantage in the low-tech and

selected high-tech sectors has been through sub-contracting relationships with foreign firms,

which provide the required technological knowledge, world market access and new capital(Leung et al, 1991; Lan, 1996; Thorburn and Howell, 1995).

A distinction should be made between two models of capability development in China. The

first is for light consumer and industrial products for export which starts with relatively low-

tech production under sub-contracting or in foreign-Chinese joint ventures. Under the second

model, leveraging the domestic market plays a more important part initially and exporting

capability develops later. Examples of the latter include telecommunications, power generation,specialist electronics and machine tools. European industrial firms have contributed more to

Chinas capability development through the latter model because of the sectors in which they

have strengths. In both the models, more advanced capability development still requires the

ingredients and stages outlined in section 2.

Essential requirements for the success of low-tech export oriented sectors are (a) a favourable

policy regime, (b) domestic firms and sectors with the basic capabilities to respond to worldmarket demand and use the comparative cost advantage offered by the countrys factor


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endowments, and (c) inward FDI flows to take advantage of favourable cost and policy

conditions. However, as Matthews (2001), Linsu Kim (1997) and Hobday (1995) show,

gaining internationally comparable and competitive high-tech capabilities requires a process of

leveraging markets and acquisition of technology combined with deepening of firm levelcapabilities through learning and R&D.

Some elements of the process of leveraging acquisition of technology from foreign companies

through market access in a high-tech and initially domestic market oriented sector can be seen

in the telecommunications sector. The initial government approach to two European

companies (Siemens and Alcatel) to set up joint ventures to produce switches was a clear case

of using the potential market and favourable treatment to attract investment and technologytransfer (Tan, 2002). Initially, the government restricted entry of more foreign manufacturers

of switches but these restrictions served to heighten the interest of the excluded firms and

when the restrictions were removed, others followed. A number of domestic suppliers such as

Huawei and EastCom have also started producing and exporting lower-tech equipment.

Currently China is upgrading and equipping its networks with the most modern systems such

as SDH equipment (Synchronous Digital Hierarchy) for long distance transmission and GSM(Global System for Mobile Telecommunications). For two major European

telecommunications equipment companies interviewed, China is now the largest single market

for a range of products. However, because the market is large with high growth potential, they

also face fierce competition from companies from the USA (Motorola) and Japan (Fujitsu) and

therefore local production and technology transfer are parts of the strategy for maintaining a

strong position in the market. The main European suppliers of SDH equipment in China

include Ericsson, Siemens, Marconi Communications, and Alcatel. Other competitors areLucent Technologies and ECI Telecom (USA) and Nortel (Canada). Japanese companies such

as NEC and Fujitsu also supply equipment, but to a lesser extent. The main suppliers of GSM

equipment are Nokia and Ericsson (Europe) and Motorola (USA).

There are 10 foreign-invested plants making cellular mobile telephones, among which one is a

wholly owned foreign subsidiary and eight are majority foreign owned joint ventures. Ericsson

has been making switching equipment in China since the 1980s in collaboration with theBeijing Wire Communications Plant and now has eight joint ventures in China producing


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mobile telecommunications network equipment and cellular telephones. Alcatel started

production at its joint venture in Shanghai (Shanghai Bell) in 1985. Siemens has a number of

joint ventures for a range of products and Shanghai Nokia also has six joint ventures in China,

mainly manufacturing mobile telephones, GSM stations, networks and switches.

Chinese telecommunications manufacturers (joint venture partners and others) have acquired

the ability to copy foreign products and adapt them to the local market. One of the European

companies interviewed estimated that in some areas, the technology of the most capable

Chinese enterprises lags about 1 year behind that of western companies. For digital technology,

the knowledge is embedded in and protected by source codes. The Chinese side usually pushes

hard to have the source code included in the transferred technology. The company does notreveal the source codes and changes them every six months though in some cases, the source

code has to be provided for effective localisation of the product. For example, with pay phones

it is necessary to supply source codes for designing LCD displays with Chinese characters. The

company estimated that with the acquisition of the source code, the more capable Chinese

companies would be 90 per cent of the way to fully replicating the technology.

While the telecommunications equipment sector is of particular interest for Europe andEuropean companies, there are other sectors in which there is evidence of development of

more advanced capabilities, notably consumer electronics. Two of the leading consumer

electronics enterprises are Changhong and Konka. Changhong was set up as a public enterprise in

1958 with Soviet assistance. In 1973, it started a R&D programme to design and develop a TV set.

The product was unsuitable for mass production and the company imported TV production

technology from Japan along with many other Chinese companies in the mid-1980s. The technology

transfer arrangement with Panasonic continued and with the combination of imported technologyand its own R&D, the company has TV sets on the Chinese market comparable with imports and is

now one of the largest TV manufacturers in the world. In 1997, following a number of years of

business relationship, Toshiba and Changhong announced closer cooperation including supply of

advanced DVD technology by Toshiba and collaboration in procurement and manufacturing

between the two companies. Toshiba expected to gain better access to the Chinese market through

Changhongs marketing and distribution channels. Konka, the largest consumer electronics

enterprise in China, has entered the US HDTV (high definition TV market) at prices undercuttingpresent sellers.


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There are similarities in the Chinese technological trajectory and sectoral development with

trajectories in East Asia. However, there is not yet evidence of fully effective leveraging

strategies and getting close to the leading edge for selected technologies in telecommunicationsand electronics, in the mould of the successes of Taiwan and Korea in technologies such as

semi-conductors, LCD (liquid crystal display) and CDMA (code division multiple access) for

cellular phones. Chinas trade performance in these sectors should also be put in perspective.

In spite of the successes in exporting telecommunications and data processing equipment, in

1999 China was the ninth largest exporter in the world for both these product groups and its

exports were likely to have been of the less advanced type. Another issue of concern is the

apparent tendency of some major Chinese enterprises to diversify into too many sectors andproducts and dissipate the resources needed for deepening capabilities in core technologies.

For example, Haiers core business is in refrigerators and other domestic white goods and air-

conditioners but it has diversified into consumer electronics, computers and mobile phones

(The Economist, 2004). Legend, the largest computer manufacturer in China, is diversifying

into IT Services, cell phones, MP3 music players and personal digital assistants (PDAs) (Cohn,

2003).

The indications so far from East Asia and China are that for late industrialisers, the leveraging

strategy for developing capability is highly successful for certain types of advanced technology

sectors where the pace of technological change is fast, markets are growing rapidly and there

are a large number of competitors. Initially, it has been less successful in other major sectors

such as automobiles and pharmaceuticals. Given the sheer size of the Chinese economy,

Chinas accession to WTO, government policies which are difficult to decipher, and the

governance structures and strategies of Chinese enterprises, studying the technological

trajectory with Chinese characteristics and its impact on the world economy is going to be a

fascinating area for the unforeseeable future.

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