China as an Entrepreneurial State

China as an Entrepreneurial State: A New Perspective

Why Industrial Policy Matters in China

  • China's development is state-led, making industrial policy a defining feature.
  • There is a heavy reliance on industrial policy for industrial catch-up and technological upgrading.
  • Institutional particularities shape industrial policy, rooted in centralized governance.
  • China is a unique laboratory for industrial policy research.
  • It shares similarities with the Asian Tigers but is distinct in governance, policy execution, and economic structure.
  • China is transitioning towards an Entrepreneurial State, where state intervention coexists with market-driven innovation and private-sector dynamism.

Why We Need Industrial Policy

  • Industrial policy has been central in economics since WWII, playing a crucial role in both developing and industrialized nations' economic reconstruction (Andreoni & Chang, 2019).
  • Definition: Industrial policy refers to government strategies to influence industrial growth, technological development, and economic structure.
  • Financial Instruments:
    • Direct Support.
    • Indirect Support.
  • Trade & Market Protection Instruments.
  • Innovation & Technology Support Instruments.
  • Human Capital & Infrastructure Development.
The Infant Industry Argument
  • Infant industry is an early-developed industry that needs protection to grow until reaching competitiveness against foreign competitors.
  • Need tariffs to protect from imports and subsidies to promote competitiveness in export.
  • Investment in R&D and finance for expansion, etc.
Other Arguments
  • Market failures, government as the market fixer.
  • From the transition between rural economy to industrial economy, state need to facilitate the structural change.
  • High risks in R&D investment, thus, state needs to invest first to crowd in more social investment.

Historical Context

  1. 1950s-1960s: Emergence of structuralist development theory, viewing market failures as specific to underdeveloped economies.
  2. 1980s: Rise of neoclassical economics and neoliberalism, challenging the structuralist view and emphasizing market efficiency.
  3. 1982: Chalmers Johnson introduces the concept of the developmental state in his book "MITI and the Japanese Miracle".
  4. 1990s onwards: Growing recognition of the entrepreneurial state model, particularly in the United States.
  5. 2020s: Mission-oriented policy to solve grand social and public issues such as climate change.

The Developmental State

  • The developmental state paradigm resulted from the East Asian economic development miracles from 1960s to 1990s. This paradigm regained momentum in the aftermath of the 2008 global economic crisis while the legitimacy of neoliberalism and self-regulating markets have been heavily questioned.
  • Chalmers Johnson first conceptualized the DS.
  • The role of the state and institutions in achieving economic objectives are highlighted.
Key Features
  • Emphasis on catch-up as national legitimacy, political elite committed to economic growth with power, authority to promote the policy agenda (strong ambition).
  • Strong ambition to promote economic growth is linked with nationalist sentiments to modernize the country after war. Usually, economic growth and catch-up is the top priority of the national interest.
  • Embedded autonomy, close relationship established between elite bureaucracy and the private sector, as business and industry are under state guidance.
  • Rely on hierarchical bureaucracy such as the ministry of International trade and industry to direct the economic goals.
  • Focus on specific industries, especially heavy industries.
  • Examples: Japan, South Korea, and other East Asian countries.

Entrepreneurial State

  • Traditional economic theories often assume the state should only correct market failures.
  • However, the Entrepreneurial State actively shapes and creates markets, driving innovation and long-term economic transformation.
  • The Entrepreneurial State is not just a regulator but an active investor in high-risk, high-reward innovations.
  • Governments play a proactive role in funding early-stage research and industrial transformation.
    • Example: The U.S. government played a key role in developing breakthrough technologies like the Internet and GPS.
Key Features
  • Mission-oriented, usually grand mission, need collaborations across sectors—government, industry, and academia—to tackle.
  • Heavy investment in R&D and basic research, Funds long-term scientific projects that the private sector avoids because of risks.
  • Government as a market maker, investing in infrastructure, education, and regulation. State actively creates a market in green products.
  • Focus on long-term technological leadership, Prioritizes sustained investment in frontier industries over short-term market gains.
  • Foster collaboration between public, private, and social entities through policies that encourage startups, university research, and public funding mechanisms.
    • Example: The United States, particularly through institutions like DARPA and NASA.

Key Debates in Industrial Policy

  1. How do we evaluate the effectiveness of individual policies within a mixed package of industrial policies designed to promote a specific industry?
  2. What is the fundamental rationale for industrial policy: market fixing or state guidance? How much should the state intervene?
  3. Is industrial policy truly effective? Should it be abandoned if it lacks demonstrable efficacy?
  4. Does the state possess the capacity to effectively implement industrial policy? Government failure: Weak institution, rent-seeking, picking the wrong sector.

Limitations of Current Debate

  1. Market competition: The debate on industrial strategies remains confined to whether to employ industrial policy rather than how to get it right. Most is confined by market and neoclassical economic theory related to perfect competition. Market as the mechanism to coordinate the resources, while the government does not have the ability to simultaneously coordinate.
  2. False Dichotomy: Market or state, not market and state, false dichotomy reject the discussion on how state and market can better work together to improve the overall competitiveness of one country's industries.
  3. Insufficient Outcome Orientation: The debate fails to center goals around development, public purpose, and the common good. For example, the goal of made in China 2025 is to improve the Chinese industrial capability. Need to be mission or goal oriented to implement industrial policy.

Transition to Mission-Oriented Innovation Policy (MOIP)

Overview of MOIP
  • Mission-Oriented Innovation Policy (MOIP) represents a paradigm shift in policymaking, focusing on goal-driven approaches to tackle complex societal challenges. MOIP has its roots in the mission-oriented programs of the 20th century, such as the Apollo Moon Landing and various national defense initiatives.
  • Unlike traditional economic policies that emphasize market-driven growth and sector-specific support, MOIP aligns various sectors and stakeholders towards achieving ambitious goals and grand missions that need collaborations—such as addressing climate change. (OECD, 2019).
The Core of Missions (Mazzucato, 2018)
  • According to Mazzucato (2018), the core of missions within MOIP involves setting bold and inspirational goals with clear direction, fostering cross-sectoral collaboration, driving innovation at scale, and promoting an inclusive society to address societal challenges effectively.

MOIP Policy Framework

  • Mission: Strategic orientation.
  • Policy Coordination: Horizontal and Vertical.
  • Policy Implementation.
  • Policy Evaluation.
  • Source: Organisation for Economic Cooperation and Development (OECD).

China’s Developmental State Legacy and the Transition to Mission-Oriented Innovation Policy (MOIP)

Governance Structure
  • China’s governance structure, rooted in the Developmental State (DS) model, provides an advantage in transitioning towards a Mission-Oriented Innovation Policy (MOIP) framework.
  • Top-Down Mission Leadership: The nature of the CPC is at the core of China‘s strategic mission leadership, guiding the direction of national development and ensuring that all government and industry levels are aligned with the Party’s overarching goals. The goals adapt from economic growth to green transformation.
  • Multilayer Government Coordination: Central and provincial governments coordinate closely to implement mission objectives consistently across the country.
  • Local Implementation and close state-business alliances: Local governments and private sectors play a critical role in executing missions.
  • Continuous Evaluation and Adaptation: The CPC regularly assesses the progress of national missions and adapts strategies as needed, ensuring that policies remain relevant and effective in the face of changing circumstances.

Discipline & Coordination Mechanisms

  • Vertical Interventions (Discipline Mechanisms):
    • Mission.
    • Outcome Evaluation & Policy Adaptation/Learning.
  • Horizontal Processes (Coordination Mechanisms):
    • Development Path & Industry Evolution.

Mission-Oriented: Made in China 2025

  • Introduced in 2015 by the Xi administration, but planning preceded Xi Jinping's coming to power in 2013.
  • Ten key industry sectors were singled out for upgrades in key areas: next-generation IT and telecommunications, advanced manufacturing, and robotics as well as transportation and logistics, the agricultural and energy sector, and new energy vehicles (NEVs).
  • Extends to the extraction and processing of basic materials and to pharmaceuticals (see EUCCC, 2016, for a thorough review of the sectors targeted by MiC2025).

Characteristics of China's Industrial Policy

  • Top Level (National Planning Framework): MiC2025 as the central directive.
  • Mid Level (Five-Year Plans): Broad national targets and economic management.
  • Lower Level (Sectoral & Industry-Specific Policies): Detailed plans like New Energy Vehicle (NEV) Plan 2021-2035.
  • Bottom Level (Provincial and Local Adaptation): Regional five-year plans aligned with national strategy but tailored to local needs. Multi-layer hierarchy to implement industrial goals.

The Developmental State Model and China’s Traditional Automotive Industry

  • State-Centered Industrial Planning: China’s government plays a central role in the development of the traditional automotive industry through top-down planning and strategic support. Key state departments like MOST, NDRC, and MIIT, along with local governments, implement policies that guide the sector's growth. This support has fostered large national champions such as FAW, SAIC, and Dongfeng.
  • Emphasis on vertical policy, lack of horizontal coordination policy
  • The automotive industry is a strategic sector crucial for national development. The state provides extensive support through subsidies, tariff protections, and favorable policies, ensuring that SOEs like FAW, SAIC, and Dongfeng receive the necessary resources to thrive domestically and expand globally. Private enterprises are less supported, and lack the cooperations between SOEs and private enterprises.
  • Rely on local state competitions: Due to the subsidies, most provinces wish to develop auto industries regardless of endowments to boost the local economy. Thus, many firms lack the minimum economic scale to produce, which is inefficient.
  • Technological Catch-Up: China focuses on closing the technological gap with advanced economies through joint ventures with global automakers like Volkswagen, GM, and Toyota. These partnerships have enabled Chinese companies to adopt advanced technologies, improving their competitiveness both at home and internationally.

The MOIP Model in NEV Industry: The Role of the National State in Adapting

Shifting State Functions
  • From Direct Control to Enabling Environment: The state’s role is evolving from directly leading and supporting industries to creating an enabling environment. This new role supports industry development through infrastructure and fosters competition among enterprises, making competition the primary driver of industry progress.
  • Reduced SOE Dominance: State-Owned Enterprises (SOEs) are no longer the central focus. The state now aims to balance the roles of SOEs and private enterprises, especially in expanding the automotive industry’s domestic and global presence.
  • Unified National Market (全国统一大市场）: The creation of a more unified national market reduces local competition, allowing for more coordinated and efficient industry growth.
  • Diminished State-Business Alliances: With the rise of competitive markets, particularly in the New Energy Vehicle (NEV) sector, the reliance on state-business alliances is decreasing. Private firms are now competing fairly with SOEs.
Emphasis on Innovation
  • Innovation as a Core Strategy: While the Developmental State model focused on industrial growth, MOIP prioritizes innovation as the key driver for achieving its missions. This shift involves fostering new technologies, business models, and regulatory frameworks that can effectively address complex societal challenges.

The MOIP Model in NEV Industry: The Role of the Local State in Adapting

  • Bottom-up Experimentation & Flexibility in Long-term Planning: MOIP emphasizes adaptive strategies through bottom-up experimentation. Policies are continually revised based on ongoing evaluations to ensure they meet their objectives effectively.
Local State Adaptation
  • Leveraging Existing Industry Strengths and Adaptation to Local Conditions: Local states implement industrial policies in line with central government directives but adapt them based on regional conditions and needs.
    • Example: In Anhui, local governments provide preferential conditions for attracting manufacturers, addressing gaps in the industrial chain by recruiting suppliers (e.g., Volkswagen).
    • Examples: Guangzhou Auto Group Aion and Shanghai Tesla
  • Path Dependency and Experimentation: Local strategies are shaped by a combination of top-down missions and local path dependencies. Continuous experimentation leads to the eventual formation of a competitive and collaborative NEV industry.

The MOIP Model in NEV Industry: Inclusive of More Actors

Involvement of Diverse Actors
  • Broadening Participation: As the fourth industrial revolution and the Internet transform production, more actors, particularly private firms, are becoming increasingly important in the NEV industry.
  1. Emergence of New Auto Companies: Companies like NIO, Li Auto, and XPeng, which have CEOs with Internet industry backgrounds, exemplify this shift.
  2. Involvement of Electronics and Telecom Firms: Companies such as Huawei and Xiaomi are also entering the NEV space, leveraging their expertise in electronics and communications.
  3. Industry Events and Forums: Platforms like Auto China EV100 and the New Energy Vehicle Forum have become crucial channels for industry information exchange.
  4. Role of Industry Associations: Auto industry associations play a significant role in facilitating collaboration among various stakeholders.
  • Public Engagement and Policy Development: Local governments are increasingly using online platforms to publish policy drafts and gather feedback, enhancing citizen engagement in the policymaking process.

Examples of Vertical & Horizontal Coordination

  • Vertical Coordination:
    • National Government.
    • Local Governments.
    • Example: "Guiding Opinions on Further Building a High-Quality Charging Infrastructure System" (2023) by the State Council
  • Horizontal Coordination:
    • Automotive Manufacturers.
    • Energy Providers.
    • Research Institutions.
    • Example: "Implementation Opinions on Strengthening the Integration and Interaction between New Energy Vehicles and the Power Grid" (2023) by the NDRC

China as Developmental vs. Entrepreneurial State

  • The state does not directly use SOEs to undertake economic activities.
  • The state sets the mission or goal as the overall direction of industrial development, thereby shaping the market.
  • A hierarchical bureaucratic system ensures implementation, with each level of industrial policy becoming more detailed.
  • Financial instruments (subsidies, tax incentives, state-backed funds) are provided to promote targeted sectors. Also, there is investment in R&D.
  • Local governments facilitate coordination between public, private, and social participants, ensuring effective implementation and local adaptation.

Discussion: Can Developing Countries Build Strong State Capacity for Industrial Policy?

Challenges
  • Weak Institutional Frameworks:
    • Many developing countries lack strong bureaucratic institutions for long-term planning and policy execution.
    • Latin America: Power is often dispersed among competing political factions, leading to frequent shifts in policy direction. Weak party discipline and ideological divides create fragmented governance, making long-term industrial policy difficult to sustain.
    • Africa: Many states experience a decentralized power structure where regional or ethnic groups hold significant influence, complicating national policy implementation.
    • Central governments often struggle to enforce uniform industrial strategies, as regional elites hold substantial autonomy over local economic policies.
    • Clientelism and patronage networks influence resource allocation, sometimes prioritizing political stability over industrial development.
  • Rent-Seeking & Corruption:
    • Risks of inefficient resource allocation due to weak governance.
    • According to Mushtaq Khan, corruption is not a problem; industrial policy success depends on political settlements, where elites have incentives to support productive economic transformation.
    • State capacity depends on the ability to distribute the rent to elites (e.g., in China, local states).
Question
  1. Can developing countries effectively implement long-term industrial policies without strong state capacity?

Discussion Question for Week 9

  • What lessons can be learned from China's industrial policy?