Importing Institutions to Enhance Performance: Foreign Finance and China’s IC Firms
Douglas B. Fuller Department of Political Science Massachusetts Institute of Technology
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Importing Institutions to Enhance Performance: Foreign Finance and China’s IC Firms
Abstract This paper argues that characteristics of the financial linkage and the operational strategy of the firm explain the level of technological upgrading undertaken by the firm in the IC (integrated circuit) industry in China, which is defined as the People’s Republic of China excluding the Special Administrative Regions of Hong Kong and Macao. The financial linkage is a binary variable with a firm either being linked to domestic or foreign financial institutions. The operational strategy of the firm is also a binary variable with firms possessing a China-based operational strategy or a foreign-based strategy. Firms with China-based operational strategies are firms with the majority of core operations in China or the majority split relatively evenly between China and the ECEs (ethnic Chinese economies), which here are Taiwan, Hong Kong, Macao and Singapore. The findings of this paper are that foreign-domestic hybrid firms combining China-based operational strategies with foreign financial linkage contribute the most to technological upgrading in China while firms with foreign financial linkage and foreign-based strategies contribute some technological upgrading and domestically linked firms with China-based strategies contribute very little to technological upgrading. The author found no firms that combined domestic financial linkage with foreign-based operational strategies. The paper also argues that there is the background condition of the industry effects that allow new, small-scale start-ups to compete with established firms in the IC industry.
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Introduction This paper argues that characteristics of the financial linkage and the operational strategy of the firm explain the level of technological upgrading undertaken by the firm in the IC (integrated circuit) industry in China. The financial linkage is a binary variable
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with a firm either being linked to domestic or foreign financial institutions. Linkage is determined by the source of the majority of the firm’s finance, whether informal or formal, and is considered broadly to include finance resources derived from state procurement as this method is an important one for politically favored firms in China, which here is considered to be the People’s Republic of China minus the SARs (Special Administrative Regions) of Hong Kong and Macao. The foreign financial linkages under consideration are linkages to the financial institutions of advanced capitalist economies, which include the OECD countries as well as the economies of Taiwan, Singapore and Hong Kong for the purposes of this paper. In theory, another set of linkages could be linkages to financial institutions in the developing world outside of China, but the research undertaken by this author found no such linkages among the population of IC firms under consideration. The operational strategy of the firm is also a binary variable with firms possessing a China-based operational strategy or a foreign-based strategy. Firms with China-based operational strategies are firms with the majority of core operations in China or the majority split relatively evenly between China and the ECEs (ethnic Chinese economies), which here are defined as Taiwan, Hong Kong, Macao and Singapore. Firms with foreign-based operational strategies are firms with a majority of their core operations outside of China or, in the case of ECE firms, with few core operational activities in China. The paper also considers the industry effects of the IC industry as a background condition that contributes to the outcome. The findings of this paper are that firms with China-based operational strategies and foreign financial linkage contribute the most to technological upgrading in China while firms with foreign financial linkage and foreign-based strategies contribute some
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technological upgrading and domestically linked firms with China-based strategies contribute very little to technological upgrading. The author found no firms that were domestically linked with foreign-based operational strategies. The evidence for the contribution of the firms to technological upgrading in China will be examined in the area of microelectronics (meaning semiconductors or, even more colloquially, computer chips). This area was chosen because microelectronics is commonly seen as one of value centers and technology drivers of the IT (information technology industry (Macher et al 1999) and the sophisticated technology involved makes this segment of the IT industry a good critical case of routes to technological upgrading. The sub-sectors of semiconductors examined are fabrication (chip-making) and design. Assembly and testing of ICs is excluded because this sector is relatively less technology-intensive. ICs are a critical case because FIEs (foreign invested enterprises) are generally assumed to be unwilling or unable to transfer the most sophisticated technologies to host countries (Song 1998). If such firms are fostering technological upgrading in the advanced technology of microelectronics, then such firms may be even more willing and capable to upgrade in other areas in the IT industry in China. As China like most developing countries is far behind the international technological frontier, the technological development to be examined is not innovation, the creation of new technologies that advance the global technological frontier, but technological upgrading, the adoption and improvement of technologies new to China. The benchmark for measuring technological upgrading is considered to be the level of technology available in the Chinese economy not the individual firm’s prior technological performance. The benchmark for technological upgrading is also measured
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in terms of China’s position relative to the global technological frontier to discount any gains made through the product cycle (Vernon 1966) that do not alter China’s relative position in the global technological hierarchy. Furthermore, the standard of whether technology has passed into the local economy from the firm, either through the training of local staff in technical skills or through the training of local suppliers, will be used to ensure that technology is embedded in the local economy. For firms in which the technology remains in foreign hands, including returnees, the technology is not considered embedded in the local economy as the firm could pull up its stakes at any time leaving nothing of technological value for the Chinese economy. Chinese or JV (jointventure) firms were assessed on the same grounds. This paper argues that the small technology FIEs that are active in China’s technology sector cannot simply be placed in one of two boxes, foreign and thus by implication at a remove from China’s development, or domestic, and thus by implication at the heart of what drives development. In short, these firms are hybrids of domestic and foreign institutions. These firms are homegrown in the sense of predicating their operational strategy on making use of the domestic resources, particularly the human resources, and, consequently, becoming embedded in and contributing to the local economy. They are foreign in the legal sense of often being registered as such, and, in the more financially fundamental sense of their investment capital being foreign sourced. In a certain sense, these firms are domestic firms that have also borrowed institutions of finance rather than just capital across national boundaries. This paper will explain why these firms as opposed to more clearly indigenous enterprises played such an important role in China’s technological upgrading and then seek to demonstrate that these
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enterprises have contributed to China’s technological development despite their apparent foreign character. The first section will review the general debate on FDI and the role of MNCs in development and then the same debate in the context of China’s development. The second section will explain why the hybrid firms as opposed to indigenous firms contributed so much to China’s technological development as the proxy for economic development. The third section will explain the industry effects of the IT industry. The fourth section will offer evidence of the contributions made by these foreign-domestic hybrids. The conclusion will consider how the foreign hybrids in China change conceptions of the roles of domestic and foreign enterprise in development.
1.1 The Political Economy of FDI and Development: The Causes and Effects of MNC Direct Investment
Synthesizing the state of knowledge on MNCs’ operations in the early 1970s, Raymond Vernon in Sovereignty at Bay (1971) argued that the MNCs that went abroad were operating in innovative oligopolistic industries and wanted to expand or protect their oligopolistic advantage in foreign markets.1 John Dunning built on this idea, to which he was a main contributor in any case, to create the eclectic approach to FDI, or OLI (ownership-location-internalization) theory of FDI to explain which firms invested overseas, where they chose to invest overseas and why they invested directly rather than contractually. Essentially, he argued that firms in oligopolistic industries, firms with market power, were the ones to invest directly abroad.2 The implication of the
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oligopolistic argument is that these investing firms have some inherent capabilities, technological or economic, that might potentially be passed on to the host economy. However, these works do not deal directly with the political forces necessary. The literature on late development (Gerschenkron 1962, Amsden 1989, Amsden and Chu 2003, C. Johnson 1982, Wade 1990, Woo 1991), despite varying emphases of particular works, argues strongly that in developing countries the state or the state in alliance with local capital must work to build up the relative position of local firms vis-àvis the foreign multinationals (MNCs) in order to develop economically. The state or an alliance of the state and local firms should work to marginalize the MNCs’ role in the domestic economy attempting to extract maximum gains in terms of technology and investment for minimal gains in access to the local market at least until the local firms are able to compete head-to-head with the foreign competition. In essence, the late development scholars recognize foreign investment as potentially harmful in the manner the dependency theorists characterized and recommend a strong dose of state or state in alliance with business to turn the threat into opportunity. The literature on the inherent nationality of multinationals (Hu 1992, Wade 1996, Hirst and Thomson 1999) argues that MNCs will concentrate more of their core functions within the home economy rather than in host economies even in advanced industrial economies. Their approach towards determining whether or not MNCs have retained national characteristics is to examine their sales and other operations, particularly high value-added operations, such as R&D. The major recent studies suggest that in fact most of the MNCs are still very national in character despite all the talk about globalization. Their major markets are often close to home and their major value-added activities take
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place in their home base. The varieties of capitalism literature strongly argues that the strategies of firms are tied to the home institutions (Hall and Soskice 2001). An implication of varieties of capitalism is that the firms and home economies are institutionally so intertwined that the firms need to be within their home institutional milieu for their core activities, especially firms of the coordinated market economies. Thus, foreign firms, being outside of their own institutional milieu cannot be expected to conduct core activities in the host environment. The implication of these studies is that domestic control of economic activity matters even in narrow economic terms as domestic control equates to higher value-added activities being concentrated in the home economy. While FDI is not inherently harmful, FDI that displaces domestic firms is. 1.2 FDI and China Recent work on China (Huang 2003, Huang and Khanna 2003) has specifically identified the weakness of local firms and the corresponding dominance of foreign firms in various industrial sectors as a major problem for economic development in China. Huang and Khanna’s work makes explicit the implicit argument of Huang’s Selling China that relying on FDI as opposed to indigenous firms may be detrimental to economic development, but here the analysis will focus on the arguments in Selling China as they are more developed than space in Huang and Khanna’s article could allow. Yasheng Huang’s Selling China (2003) employs onto OLI theory to argue that the FDI entering in China is of inferior quality, if the standard of judgment is what technological inputs and knowledge such FDI brings to China. FDI is not a route to technological upgrading, but a sign of China’s serious structural problems.
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While agreeing with Huang’s overall assessment of the structural problems of China’s political economy, detailed below, this paper argues that a significant portion of the FDI coming to China has been critical to China’s technological upgrading despite the fact that the FDI is different from the FDI from the MNCs described by Vernon and Dunning. The main drivers of technology upgrading in China are MNCs, but they are generally firms of small and medium sized enterprises, which if they have any market power, achieve that power through developing niches rather than leveraging scale economies. Many of these firms are nominally firms of the ECE (ethnic Chinese economies) in that the invested funds are from these economies though the actual management is often comprised of Chinese returnees primarily from the US. Huang’s Selling China argues that through FDI China is really being sold out. His reaction is not the ideological reaction of a dependency theorist, but a reaction to what he deems to be the unfair price for which China is sold. In short, foreigners capture future returns from China, but do not have to give back much in the way of knowledge. Huang’s argument is based on some solid evidence including the fact that China’s large FDI inflows cannot be explained by a savings-investment gap given China’s extremely high rate of savings and the clear case he makes for financial discrimination in China, a political pecking order of firms in his terminology. Huang’s argument of how this supposedly raw deal for China came about extends the OLI theory of FDI, which posits that foreign firms directly invest in order to overcome market failures that prevent them from transplanting firm-specific advantages contractually, to look at the weakness of domestic institutional arrangements. In other words, if the OLI theory as modified by Caves (1996) postulates that the relative
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competitiveness of foreign firms vis-à-vis competitiveness of domestic firms leads to FDI, Huang postulates the relative foreign competitiveness vis-à-vis Chinese competitiveness leads to FDI in China. On the surface, these two theories appear to be the same, but Huang stresses the institutional weakness of China as lowering Chinese competitiveness leading to a higher incidence of FDI than one would expect given the level of foreign competitiveness. Huang proceeds to attack FDI from the perspective of FDI being the result of Chinese structural weaknesses rather than a sign of China’s growing economy. The corrective course of action is to reform China’s institutions, which are biased in favor of the inefficient state-owned sector to the detriment of developing a flourishing private sector to displace FDI. In Huang’s view, the problem with FDI coming to China is a problem of the low quality of FDI as much as one of high quantity. Huang bases his critique of FDI in China on the fact that a large portion of it comes from ECEs, which he argues are technologically less advanced than the OECD countries. He accepts the notion that ECE MNCs are ‘Third World” MNCs in terms of pursuing “untraditional business strategies” that are not innovative and technology-intensive (Huang 2003: 153). In other words, FDI from ECEs a priori is not good FDI. By showing that some of the FDI from ECEs as well as elsewhere is technologically-intensive, this paper will force a reassessment of Huang’s assertion that FDI to China has made very limited know-how and technological contributions so that FDI is at most a second best alternative to the development of capable indigenous firms. Huang, borrowing from some of the more prominent studies on FDI, also emphasizes that FDI to other developing countries has primarily been in oligopolistic
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industries. This characterization is probably true for Latin America and, to a lesser extent, Eastern Europe, as Huang’s cited studies focus on these areas, but export-oriented FDI in East Asia was not solely in oligopolistic industries. Despite FDI in East Asia lacking this oligopolistic nature, the FDI was technologically beneficial to these societies, especially Taiwan (Kawakami 1996). The technology-intensive MNCs from the ECEs do tend to be smaller in scale than those MNCs from the advanced world operating in oligopolistic industries, but they are able to be both small and innovative by taking advantage of the external economies of scale and scope provided by the modularized IT production chain, which will be explained in greater detail in the next section.3 Thus, the link between oligopolies and the innovation is broken by the emergence of these small, innovative enterprises operating in the IT industry. With China receiving at least some technology from the ECE-driven foreign investment, Huang’s raw deal of selling China’s future returns for nothing has to be reassessed. Beyond the fact that the FDI brings more to China than Huang maintains, this method of development must be measured against feasible alternatives, and the alternatives, as covered in the next section, do not appear to be ones attractive by the yardstick of fostering development. Huang also assumes that foreign domination of certain sectors means foreign domination forever. Taiwan’s electronics industry was dominated by foreign firms in the recent past and is no longer in such a situation. I would argue that China’s path to domestic technological upgrading paradoxically is through increased interaction with foreign firms precisely because of the potential offered by the Chinese technological diaspora and the lack of the type of institutions geared toward developing indigenous capabilities that Taiwan had (Kawakami 1996).
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Huang also needs to reconfigure his ideas about FDI in the context of globalization. FDI may mean foreign ownership, but the foreigners may not own much of what is generated by the invested firms, particularly human capital but also the fostering of clusters, industrial environments not embedded within one single firm. This critique of nationalist FDI-bashing was true before the recent accelerated economic internationalization i.e. there have always been positive externalities created by firms, foreign or domestic. Moreover, with the increase of economic internalization, there has been an increased complexity of the nature of investments so the concerns about control should perhaps diminish. Finally, the type of small enterprises active in FDI in the IT industry in China represents a very different type of firm than the firms identify as “national firms with international operations.” 4 Huang’s primary concern with the costs of FDI is that it allows foreign control over future returns.5 This perspective is not incorrect, but it needs to be qualified on several fronts. First of all, by Huang’s own estimate round-trip FDI, funds that go from China to Hong Kong and return to China to receive preferential FDI treatment, may be as high as 25% of China’s total FDI. Compounding this confusion over ownership, there is the problem of joint-ownership. A number of firms started by returnees have received venture capital funding from abroad, but these firms are partially owned by the returnees who found them and often receive funds from local funds (funds predicated on receiving foreign venture capital) as well. Furthermore, the returnees probably would not have returned to China were it not for the opportunities made available by the foreign venture capitalists. Thus, ownership of future returns is not necessarily leaving Chinese hands and the opportunity costs of eschewing foreign capital may be quite high.
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A much more important qualification is to consider what claims over future returns FDI actually controls. With foreign direct investment in a complex internationalizing economy, the difficult questions include not only what constitutes the nationality of the firm but assuming one can differentiate foreign firms from domestic firms, what do the foreigners actually own after investing in the domestic economy. While foreign investors have claims over the returns of firms, they do not have claims over the returns on the human capital generated or create their own. The skilled personnel once developed may move into other firms. Developing assets, particularly human resources, does not necessarily guarantee control of them in the future. If the foreign investors do not offer the human capital adequate compensation, the human capital will leave. There is a famous precedent for just this type of scenario in the IT industry. Silicon Valley acquired its very name because the investment plan for Fairchild did not offer adequate compensation for the engineering talent of the firm. Consequently, the engineering talent left in droves to found the core of America’s IC (integrated circuit) industry including such powerhouses as Intel and National Semiconductor.6 Ethnic networks operating in the IT industry compound the problem of identifying whom really owns the future returns on foreign invested enterprises created by complex ownership and principal-agent structures.7 Does a venture capital firm founded by Chinese Americans with investments in China conducted by Taiwanese nationals with mainland Chinese partners returning from the US, who may or may not be US citizens, mean that the future returns on these investments will be owned by the US? The confluence of the Chinese technological diaspora, the segmentation of the IT industry and the role of the ECEs, especially Taiwan, in the IT industry all contribute to
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making the FDI-centered strategy more positive in both straight economic and technological terms as well as in terms of control or sovereignty considerations. In short, Huang’s correct depiction of the discrimination faced by most private firms in China does not lead automatically to a FDI-based development strategy that surrenders economic sovereignty in exchange for sub-optimal economic performance (vis-à-vis a private enterprise-centered strategy) in the middle to long-term. The traditional approach towards determining whether or not MNCs have retained national characteristics is to examine their sales and other operations, particularly high value-added operations, such as R&D. The major recent studies suggest that in fact most of the MNCs are very national in character (Hu 1992, Wade 1996 and Hirst and Thompson 1999). These works focus on the large MNCs of the Triad (US, EU and Japan) economies, but today there are growing numbers of small innovative firms in the IT industry involved in transnational activities. The smaller size is not what sets these firms apart as a new type of foreign direct investor. What sets them apart is that they were often formed and definitely expanded their operations in an era when the telecommunications revolution made coordinating international operations infinitely easier.
Thus, when they were building their core competencies, many of these firms
predicated their strategy on building competencies in different parts of the globe.8 On top of this, the firms had the ability to access a wide range of industrial services or external economies due to the rising modularity of the IT industry so they could operate on a larger scale than their internal operations alone would allow. These external economies allows initially small-scale innovative firms to become core rather than remain peripheral players in the IT industry so these firms, such as Mediatek from Taiwan or Broadcom
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from the US, cannot be dismissed as irrelevant oddities. Whereas IBM and Philips, two of the most internationalized of the large MNCs, 9 had numerous R&D operations outside of their home base, they still retained large R&D bases at home because these institutions and their associated competencies had been built up over time in an era before the telecommunications and modularization revolution made dramatically lowered the cost of managing over a distance and managing across firm boundaries. Institutional stickiness would predict that the traditional large MNCs would be slower to re-orient to a more global strategy than the newer MNCs appearing in the IT industry. In China, one witnesses exactly this phenomenon of the larger, older MNCs lagging behind the newer foreign technology enterprises in developing core operations in China, but an investigation of the limited contribution of the large MNCs is beyond the scope of this paper and its concern to explain the prominent role of small FIEs in technological development in China. A number of other scholars simply ignore or dismiss the foreign contribution to technological learning in China. Nolan (2001)’s tactic is to invoke the policies of past industrializers in promoting national firms to explain why foreign contributions are irrelevant to successful development. However, the theory of industrial policy does not lead automatically to a nationalist orientation (Chang 1994) and the modularity of the IT industry strongly suggest that such scale- and technology-fixated orientations may be self-defeating (Naughton 1999). Thus, the question Nolan peremptorily dismisses, what can foreigners contribute to a nation’s technological upgrading-cum-learning, is the one worth asking. Adam Segal’s Digital Dragon (2002) does not dismiss the foreigners completely, but places such great emphasis on whether or not there is a good
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environment for minying keji qiye or minying qiye for short, privately-managed technology enterprises,10 as the independent variable explaining China’s IT development that foreigners are simply left out of the equation. Gilboy’s (2002) Manufacturing China, other than a brief evaluation of MNC’s R&D operations, is focused on domestic manufacturers. Given that Gilboy is trying to evaluate the effects of the political arrangements on China’s innovation system, this strategy makes sense, but the strategy begs the question of whether or not the foreign operations in China operate under the same incentive structure of their domestic Chinese counterparts. This paper argues that beyond the technology they embody and the technology networks they tap into, foreign firms’ ability to foster technological upgrading in China draws on the discipline of the foreign financial system under which they operate. The domestic political economy may malfunction as much as Gilboy claims, but the foreign firms both benefit from the strong links to foreign financial institutions, which provide the discipline that maintains incentives to foster learning and innovation, and from the weak links to the political arrangements that corrode the learning and innovative incentives for China’s domestic firms. Finding technological learning among foreign enterprises in China would be a critical sidebar to the works of Nolan, Segal and Gilboy, if not for the fact that the technological upgrading among foreign enterprises is the main force for technological learning in the IT industry.
2. Why Foreign Firms Drive Technological Upgrading in China
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What foreign technology enterprises bring to China are the institutions of advanced capitalist markets, particularly the institution of venture capital as formed in the US, an institution mimicked by the ECEs.11 In other words, technological upgrading in China succeeds due to institutional borrowing across national boundaries by foreign firms. The institutions of the US play a prominent role because the US has been at the forefront of the development of the financial institutions geared toward encouraging new innovative enterprises, essentially venture capital, and has also been at the forefront of reorganizing the IT industry into the new modular model (Steil et al 2002: 17; Lee et al 2000; Kenney 2000). These institutions offer better institutional support for technology enterprises by going beyond just monitoring company performance to aiding and advising firms in their basic strategy and introducing them to other firms with which to do business (Lee et al 2000; Kenney 2000). Still, the critical function these venture firms serve is to efficiently manage capital to create technology enterprises. They efficiently manage capital because if they do not they die as the extinction of some venture funds when the Internet bubble burst demonstrated. They efficiently manage capital to create technology enterprises as opposed to other types of enterprises simply because the creation of technology enterprises is what these firms know and have practiced since their inception, their core competency (Lee et al 2000; Kenney 2000). In short, borrowing these foreign financial institutions also forces discipline on the technology firm to pursue technology because the foreign venture capitalists will pull out the funding if the firms do not meet expectations concerning their technology strategy. The American model of venture capital has spread to the ECEs and their pattern of behavior is quite similar to the American one though with less emphasis on the initial seed funding stage. Often these
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foreign venture firms are connected to both technological clusters at home and the major clusters abroad, such as Silicon Valley (Saxenian et al 2002: 30). Many of the hybrid firms covered in this study have connected to foreign finance through the venture route so it is worthwhile to consider what venture capital offers beyond more efficient monitoring of credit. Due to the tight credit leash of having to go through several rounds of venture funding, these enterprises also avoid the trap of pursuing technological upgrading regardless of the costs, a route common to state-funded projects, particularly in China as will be shown in case studies within the dissertation.12 Secondarily, the foreign connection encourages extensively utilizing the international industrial production chain of IT. Interacting with these international production chains pushes firms to learn and gives them greater opportunities to do so than a mere focus on the still developing home market would. Finally, the foreign connections encourage competing in advanced international markets as opposed to focusing solely on the local Chinese market. The opportunities presented in the advanced international markets encourage firms to do hone their technology to be able compete in such markets. The access to such international markets is the least important factor as more of the Chinese economy has large functioning and growing product markets so foreign and domestic firms attempt to pursue these new opportunities. Nonetheless, there is still a gap between the extensive advanced international market opportunities pursued by foreign technology firms in China and the lesser involvement with international markets of the local technology firms. The latter two factors at first appear to have no connection to the foreign financial connection, but because the foreign financial connection is venture finance, there is still a connection. The venture firm will offer what it knows and what it
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knows is the international markets and production rather than the ins and outs of the China market. The importance of venture finance not withstanding, the financial institutions of the advanced economies in general offer credit on the basis of stricter monitoring than the Chinese financial system provides. The argument here is not that the advanced economies have perfectly efficient financial systems, but that they have more efficient systems than the Chinese one. The middle and large MNCs, including those from the ECEs, do not use venture funding, but still have much tighter credit constraints than their domestic Chinese counterparts. Thus, when they do choose to embark on technological activities in China, they do so with much more efficiency than their Chinese counterparts (Sigurdson 2002 July/August.) In contrast to foreign finance, China’s financial system is as lax as the venture capitalists from the advanced technopoles are strict. The Chinese state-run financial system is geared towards supporting SOEs and other favored enterprises (Huang 2003, Steinfeld 1998). Huang and Steinfeld both point out that this easy credit results in poor performance in SOEs, but Huang makes a further contribution by pointing out that this financial discrimination badly impacts the growth of a thriving private indigenous business sector that could compete with foreign enterprises. Instead, efficient private enterprises have to compete with foreign firms while laboring under a serious handicap of inadequate access to finance.13 Even with a financial system that keeps private firms weak, could not the state strengthen domestic firms through the tools of industrial policy just as Nolan advocates? The fragmented nature of the state both vertically (from the central to local levels) as well
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as horizontally across ministries (Moore 2002, Lampton and Lieberthal 1992) and the paternalistic policy networks within the state (Gilboy 2002, Moore 2002) have made the task of monitoring performance and rewarding and punishing accordingly nearly impossible.14 The inability of the state to monitor firm performance negates the very possibility that the Chinese state could conduct effective industrial policy other than the simplest infant industry protection provided indiscriminately to domestic firms (H. Chang 1994, Ben Schneider 1998). To direct credit to the firms capable of developing technology, the state needs to be able to monitor firm performance to determine which firms are capable and then direct credit to the firms that are capable of developing technology. Even when the Chinese state picks a strong firm to support, the very lax nature of the support, easy credit or guaranteed markets without an effort to push the firm to hone its competitive advantage, tends to corrode the ability of the firm to be an innovator over time. Steinfeld’s account of Shougang (Capital Steel) is an excellent example of an at least potentially good firm “gone bad” under the unintentionally malign largesse of easy credit from the Chinese state.15 The experience of government promotion in the IT industry, one of the designated pillar industries of China16, suggests that this industry is not an exception from the Chinese state’s severely limited capability in industrial policymaking. The large-scale 908 and 909 Projects in microelectronics both failed to advance the Chinese industry substantially if at all. Most damningly, the technology that was supposed to be acquired by the Chinese partners appears to have remained in control of foreign partners in the case of Hua-hong NEC, the firm created during the 909 Project, and only remarkably inferior technology was acquired by the time the project was fully
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implemented in the case of Huajing, the firm that participated in the 908 Project as will be covered in detail in the next section. MII (the Ministry of Information Industry) has not been able to prevent a price war between China Unicom and China Mobile for cellular phone service despite the fact that these are MII-owned enterprises.17 Naughton (1999) has made a general case for the inability of the Chinese state to upgrade technology-intensive sectors due to the application of inappropriate state-run, technologyobsessed “critical technologies” strategy that ignores how exactly the Chinese economy can make use of the technology in the world marketplace.
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The Industry Effects of the IT Industry The existence of differing institutional constraints under which foreign and
domestic IT firms operate only explains the difference in behavior, but leaves out the critical component of the international IT industry effects. Without the peculiar characteristics of the IT industry that allow small firms to compete, even small firms under the strict supervision and expert guidance of experienced venture capitalists would be unable to enter the IT industry and compete against the large MNCs ensconced in well-developed industrial infrastructures in their home bases. The IT industry has two features that dramatically lower the barriers for entry for small firms: modularity and rate of technological change. The basic idea of modularity is that processes (production chains in this case) can be broken down into parts (modules) with clearly defined (a) functions and (b) interfaces between the different modules.18 These clearly defined interfaces simply hand-over processes from one function (module) to the next. This modularization has in turn led to
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segmentation of the production chain because modularity allowed codification of the necessary information needed to establish an information interface between segments in the production chain. Firms can focus on their core competency and outsource those activities at which they are less capable. Modularity allows the total production chain to be de-verticalized and spatially dispersed because firms can function on one or two modules as the core business and source the other functions from other firms often at a geographical distance. While modularization allows for firms to focus on their core competency and for functional specialization to arise, without the rapid pace of technological change in the IT sector (Fine 1999; Steil et al 2002), the opportunities for new firms to compete would be limited (Steil et al; C. Christensen 1997; Foster 1986) even with a modular industry structure. The rate of technological change can be measured by the speed of new product generation (Fine 1999, Steil et al 2002). The reason for this lack of opportunities is that a slower pace of technological change allows returns to scale to play a greater role and this phenomenon leads to oligopolistic structures with high scale barriers to entry (Utterback and Suarez 1993; Steil et al). In the case of a modularized industrial structure, these oligopolies would be in individual or a small set of functions, such as an oligopoly of component design firms and an oligopoly of product manufacturers. In contrast, with rapid technological change, the established firms are often burdened by heavy sunk costs in obsolete technologies and industrial infrastructure that makes them vulnerable to new firms with the latest technology unhampered by the burdens of yesterday’s technology (C. Christensen 1997, Foster 1986).
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Thus, it is the combination of modularity and rapid technological change that gives new technology enterprises greater opportunities to survive and flourish globally as they can make use of a global network of up- and down-stream firms providing a variety of services while these new comers hone their own core competency. Modularity alone would just give access to an array of other functions necessary to take part in the industry. This access would lower scale barriers somewhat as everything would not have to be done in-house, but the scale barriers would still be very large as in whatever function the new entrant wanted to enter, the new entrant would face an oligopoly of established firms with formidable scale economies and expertise in the established technology. An example of this type of industry characterized by modularity (Lester and Sturgeon 2002) but a slow to moderate pace of technical change (Fine 1999) is the automobile industry. In the auto industry, there are essentially two modules, the branded manufacturers and their component suppliers. Both modules are oligopolies, and ones that are being increasingly concentrated (Lester and Sturgeon 2002). Thus, without modularity, the scale barriers are giant obstacles for new entrants, as they must invest in the whole range of industrial activities to enter the industry. With only modularity, the scale barriers are still formidable for new entrants. With modularity and rapid technological change, the returns to scale may actually be weaknesses as established firms are organizationally stuck wasting resources on the established technologies while new entrants outflank them with new and better ones (C. Christensen 1997; Foster 1986). In the past, IT firms could not easily access organizationally independent industrial infrastructures located at a distance (Saxenian 2000: 259). Each aspiring IT power needed to build up its own set of complete industrial infrastructure, often within
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the hierarchy of large-scale national champions. With modularity, IT firms do not require that all of these activities be co-located or organized within the hierarchy of the firm because they can access from afar the industrial infrastructure necessary to support their business.19 Traditional industrial policy with the goal of creating a national industry is no longer necessary and not even desirable if a national industry cuts the domestic industry off from the rich information flows within the international IT production chains. Attracting firms to do value-added activities in one’s locale is a viable alternative to mustering the capital necessary to support national champions and to building a complete set of the necessary infrastructure. The scale barriers for countries have lowered in conjunction with the lowering of scale barriers for new firm entrants. With easy access to the global industrial infrastructure, upgrading in the IT industry is no longer dependent on scale economies to develop vertically integrated giants nor dependent on coordinated investment to create the industrial infrastructure of smaller firms across a number of industry-related activities. Instead of building firms, the emphasis should be placed on the supportive policy environment for IT industry firms (incentives to enter the industry and to do continued investment in R&D and training), the training of the required technical personnel and the fostering of links to the global centers of the industry in hopes that economic opportunities and flows of knowledge will be fostered. None of these measures, however, suggests that foreign investment is necessary. Certainly all of these measures could be done in conjunction with local industry investment rather than foreign investment especially given the ease of entry for new small firms, but the institutional arrangements within China weaken private enterprise and state-owned firms alike making such a route to technological development unlikely to succeed.
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4.
The Evidence of the Contribution of Hybrid FIEs to Technological Development in the IT Industry In the area of microelectronics, the activities prior to recent years were limited to
old processing technologies lagging far behind the international frontier even in firms that had been the core of the PRC’s large microelectronics industrial projects, such as Huajing and Huahong NEC, and Huajing never managed to make any advances toward the technology frontier due to extremely slow implementation. The firms active in the industry until recently have been domestically linked (hereafter domestic firms for short) and these domestic firms have done little to upgrade technology. For Huajing, the government decided upon the plan in August of 1990 so the plan was dubbed the 908 Project. The government spent 2 billion RMB to complete the modest goals of the project to build a six-inch fab line with .8 to 1.2 micron process technology and a monthly output of 12000 wafers. Despite the modesty of the goals, the project took 8 years. The results of this long delay in ramping up the project were manifold. By the time the plant came on line, the technology was very backward as eight-inch fabs20 (fabrication facilities) with much more advanced process technology, .25-microns (in process technology, the lower the microns the more advanced the technology) were already mainstream (Y. Zhang 2002 and discussions with executives from Lucent, the main technology transfer partner, and CSMC, the firm that eventually rented Huajing’s fab, in the summer of 1998). For the next project, the 909 Project, the state was able to create a firm, in this case a Chinese majority-owned JV between a SOE, the Huahong Group, and NEC called Huahong NEC21, that did possess
25
the then latest wafer size (8-inch wafers) and process technology that lagged only about two generations behind the frontier (.35-microns versus .18-micron for the frontier). The process technology was the closest China had come thus far to the global technological frontier, but the real management and overall process remained firmly under Japanese control as NEC trained Chinese engineers in specific tasks while being careful to prevent knowledge of how to manage the whole fabrication process over to Chinese technical staff according to a source very familiar with Huahong NEC’s operations (Interview 107).22 For NEC, being careful about not releasing technology to its Chinese partners is a very rational strategy to protect their intellectual property as their technological investment in Huahong NEC is not well protected due to the Chinese state has a majority stake in the firm. The end result is what technology of NEC did bring to China to run the fab is not at all embedded in the local economy, and the firm has at best served as way to transfer a limited set of technical skills from NEC to Chinese workers. Domestic design firms that were limited to doing designs for very old technologies (Interviews 59, 88, 89, 104, 115, 122, 177) and often were widely known to be primarily involved in reverse engineering (Interviews 108, 147 and 189). The 5 largest domestic IC design houses all fit into the category of doing design for very old technologies, measured in industry terms by doing .5-microns and above designs, and were widely regarded as having done most of even these technologically old designs by reverse engineering of foreign products. Furthermore, a number of these firms were directly or indirectly dependent on government procurement for most of their sales, such as HuaHong IC’s sale of ICs (integrated circuits) for use in smart cards used in a variety of shanghai government services. Thus, even with reverse engineering, many of these
26
firms did not seem to have commercially competitive products outside of protected government markets. A foreign IC designer who tried to recruit local design staff from the top 5 local firms reported that the engineering staff of these firms had no real design experience as all they really knew how to do was to reverse engineer. In fact, they had negative experience in terms of forming habits of reverse engineering. In contrast, the hybrid FIEs have been able to make great stride in developing China’s technology. The most advanced fabrication facility operating in China, SMIC (Shanghai Manufacturing International Corporation) exemplifies the difficulty of pinning down the nationality of a firm. Registered in Cayman Islands with American capital, much of it probably Taiwanese capital “laundered” through Silicon Valley to prevent the Taiwanese government charging Taiwanese citizens of violating the law forbidding unapproved investments in the PRC, SMIC may be best characterized as a China-based, Taiwanese-run and American-invested FIE. Grace was founded by the son of Taiwanese Formosa Plastics Group founder, Wang Yong-qing, and is officially a subsidiary of a Hong Kong-based Grace to avoid Taiwanese regulations restricting certain types of hightechnology investments in the PRC. Given the scale of investment needed for IC fabs (on the order of over one billion USD for 8-inch fabs and two billion for the new twelveinch fabs), neither of these firms was financed in large part by venture funding as the scale of investment is too large, but these firms were financed in part by venture funds and completely by overseas funds until recently receiving supporting funds from the Chinese state. In any case, these firms are firmly connected to the international financial system as the main source for their funds thus far, and SMIC has already begun preparations to list on the Hong Kong and New York stock exchanges early in 2004.
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These firms are precisely the type of FIE most likely to benefit China because they bring a large amount of well-trained personnel from abroad to help train local personnel which they will need due to their strategy of concentrating all of their operations in China aside from small sales offices abroad. Both firms have recruited extensively from Taiwan as well as recruiting ethnic Chinese from the US and Singapore. A special note on the recruits from Singapore is in order. Most of these are in fact originally from the PRC and were recruited by Chartered, the Singaporean foundry, because of the shortage of engineering talent in Singapore. However, once trained, many of these engineers left for the US. Whether or not they left Singapore for the US, many eventually came back to work for the new foundry start-ups. Despite these recruits from abroad, the fact that these firms are headquartered and operate production facilities solely in China logically means that the firms are basing their strategy on utilizing Chinese resources because accessing only resources located abroad would be a precarious strategy. This training demonstrates an extensive commitment to develop the local human resources, especially given that China’s microelectronics training in universities is relatively new. Given that the engineers from abroad are virtually all from the top tier of pureplay IC foundries (firms that concentrate solely on IC fabrication and do not do IC design), TSMC, UMC and Chartered, the firm is well equipped to depart best fabrication practice to new employees. While the management is all in Taiwanese hands at the moment in these two foundries, one of the firms, Firm X (this paper uses this code to protect the identity of the firm), is determined to localize as it sees fostering local fabrication talent as fostering its own comparative advantage (Interviews 13 and 174). A glance at the firm’s personnel
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confirms this logic. While there are 800 engineers from Taiwan and 200 Chinese engineers lured back from Chartered in Singapore, there are also 500 local engineers being trained. Knowing one of the top managers personally, this author also understands that some of these Taiwanese actually consider themselves Chinese nationals if not citizens of the PRC. Their goal in setting up Firm X was not solely for financial gain, but also a way to give back to the motherland. Simply placing a fab in China run by foreign personnel would not be an adequate contribution as it would be of dubious value in fostering development. Happily, nationalist passion and economic interest are combined in this goal of training local talent as luring IC engineering talent from abroad to meet Firm X’s future needs would most likely be prohibitively expensive given the general concerns among IC fabs about the relative scarcity of human capital driving up engineering costs. SMIC and Grace have done more than bring talent from Taiwan, the US and Singapore. SMIC has been able to link up with major IDMs (integrated device manufacturers) to acquire cutting edge process technology. The firm has made agreements with Toshiba, Fujitsu and TI to fabricate in return for process technology. None of the domestic Chinese champions have been able to attract this kind of international support because none of the domestic firms or their local managers had the kind of track record in the IC fabrication industry that SMIC’s managers, who had vast experience in Taiwan and the US, had. TI actually sent a team of approximately 40 engineers into the plant to help facilitate the technology transfer. SMIC has .18-micron technology, which is just a generation behind the current mass manufacturing technology of .13-microns, and SMIC is already operating two 8-inch fabs in Shanghai and building
29
a 12-inch fab in Beijing along with another 8-inch fab. Grace arguably has done slightly less well in attracting foreign partners. SST, an American design house that invested in Grace, has offered technology needed to fab its flash memory chips. The main partner is the rather small IDM, Oki, which is presenting Grace with slightly older technology to produce 64M DRAM, but .25-micron process technology is still very advanced for China. In terms of ECE firms in IC fabrication, the two Taiwanese powerhouses, UMC and TSMC have both set up production facilities in China, but the experience of the two firms diverges sharply. The reason for the divergence is the difference in operational strategy. UMC can be considered a hybrid as the firm is very interested in developing core activities in China while TSMC is a Taiwanese MNC with a non-China-based strategy. TSMC’s chairman, Morris Chang, has routinely criticized Chinese policies as anti-competitive and emphasized the shortcomings of China’s supposedly great market potential making it crystal clear that his firm does not see China as parts of its core operations. UMC’s fab in Suzhou is already running and the firm has the third highest number of US utility patents generated in China from 1997-2001. In contrast, TSMC’s plant is not yet running, the firm has virtually no R&D in China and is pursuing lawsuits against SMIC amid rumors that TSMC simply put a fab in Shanghai to try to undermine SMIC. As for non-ECE MNCs without a China-based strategy, only Motorola attempted to set up a fabrication facility in China, and the firm recently sold that facility to SMIC. For IC design, there are a number of hybrid start-ups created by returnees, a group that includes a few ethnic Chinese from outside mainland China who have come to China to found companies. These firms consistently have three characteristics: foreign venture capital backing, strategy of training and using Chinese engineers as the future of the
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firm’s technical staff and a level of technology much higher than what even the largest domestic firms have to offer measured in terms of both process design level e.g. design for a .18-micron process (sophisticated) or a .5-micron process (simple technology used to design chips that run electronic watches and other low-end consumer gadgets) and product and chip technology focus.23 There was one returnee start-up firm in Beijing that relied heavily on Chinese government backing, but the firm appears to have pulled the wool over the government’s eyes and does not yet appear to have a commercially viable chip that it sells outside of state procurement (Interview 200 and 234). In other words, this foreign-registered firm became linked to domestic financial system by pursuing politically awarded procurement and credit. A venture capitalist that had looked into investing in the firm harshly criticized the firm for doing a lot of propaganda work and little actual technological activity (Interview 171) even though the founders had the experience to pursue the technology rather than the government procurement route. This poor technological outcome fits the prediction that the key link is the financial environment rather than the link to returnees per se. The ECE design houses, primarily from Taiwan, all seem to have a plan to become operationally China-based so they are all considered to fit the foreign finance and China-based strategy criterion, the hybrid model. Some of them have been more successful in creating large operations in China in a few years. One firm has almost half of its engineering resources in China and has taken advantage of China’s prominent place in the manufacture of mobile phones to design chipsets for mobile phones. The table below shows the data comparing the technological contribution of foreign-linked firms, ECE-backed firms and domestic firms (locally controlled JVs24 and
31
domestic firms) with little or no connections with international finance, referred to in the table as domestic firms.
Table 1 The Technological Contribution of IC Design Firms by Firm Type Total Firm Type Number of Range of Number Firms Process of Firms Contributing Technology Technologically in Designs (Measured in microns)
10 Foreignlinked Start-ups ECE/China- 6 based Strategy Firms 3 Domestic Firms
.35 to .18
11
.35 to .18
9
1.2 to .18
13
The assessment of each individual firm’s technological activities was purposely biased in favor of the domestic firms by giving domestic firms that were possibly making marginal contributions to China’s advancing towards the global technological frontier being counted as contributing and by discounting the contribution of the marginal foreign start-ups and ECE-backed firms. Only one ECE firm would have been discounted if marginally cases were included among the ECE successful upgrading cases and none of the foreign start-ups would have been discounted if the marginal cases had been included. The accounting of success cases was also biased in favor of domestic firms as there are hundreds of small domestic design houses doing reverse engineering that the author did
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not interview due to a desire to investigate the best the domestic firms had to offer given the time constraints. Thus, the few successful domestic firms most likely would have been drowned in a sea of reverse engineering firms if the total population of domestic firms could have been investigated. In contrast, the author did not try to interview only successful foreign-linked firms and the population of such firms conducting design activities in China is quite small. Excluded from the above chart were large established MNCs from the non-ECE world. The large MNCs from the non-ECE advanced industrial world have not been active in setting up true design activities in China though there are signs that the MNCs are beginning to gain interest as a number of foreign firms, such as Samsung and Broadcom, have announced their intentions to set up design centers. This author only come across two MNCs with true design centers as opposed to technical support centers for customers, and neither of these design centers was very large. One good example of these innovative start-up firms is IDTNewave. IDTNewave is a truly Greater China firm despite being founded and registered in Silicon Valley. The three founders are from Taiwan, Hong Kong and the PRC. First, they raised funds and set up a small “headquarters” in Silicon Valley. Then, they moved to Shanghai’s Caohejing technology zone to set up their true operations, an IC design house. The business model for the original Newave was to design older telecommunication chips in scaled half micron CMOS processes. For example, a typical CODEC designed using switch capacitor technology is fabricated in 1.25 µ processes. By redesigning this chip down to smaller process technologies, such as .5µ processes, there is a cost reduction and this is the advantage of Newave.25 Re-designing older telecommunications chips actually requires using the rare and very sophisticated mixed signal design, the mix of analog and
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digital designs. Since mixed signal designers are so rare, even in the US, very few have taken on such a business model. This firm grew successful enough to become a target for acquisition by IDT, a large US design house, for 80 million USD, a substantial amount to pay for design house. This firm demonstrates some typical characteristics. The founders were all returnees of a sort. They also were able to attract a number of other returnees to join the firm. Nevertheless, the firm has placed a strong emphasis on training local talent. The general manager and the senior circuit designer both teach at Fudan University part-time in order to provide students with adequate training to prepare them as designers. This teaching is not just a public service, but also affords these managers the opportunity to pick out the best students to recruit. 70 of the 80 design engineers are local and according to MIT electrical engineering professors who visited IDTNewave, the firm’s equipment for design is the best available. More importantly, they know how to use the equipment and are training others to use such equipment—something that cannot be said for some other operations in Shanghai. IDTNewave also amply demonstrates the hollowness of much of the rhetoric about the effectiveness of China’s public policy. While the administration of Caohejing points proudly to IDTNewave as a resident company that they claim to have helped to incubate and develop, the administration is hard put to point out what they actually did to promote IDTNewave aside from providing cheap office space and the tax advantages that go along with being in a technology zone. Caohejing is the rule rather than the exception among China's technology zones and science parks in providing little value-added incubation or support services. From the IDTWave’s perspective, Caohejing did enough
34
by providing the preferential policies, but the managers themselves did the heavy lifting of training technical personnel and identifying the correct product markets. Without any cushion from the state, the founders of IDTNewave would have been hard put to come back to China to set up shop so the government did at least lower the costs of entrepreneurial activity. This positive contribution of the local state under the aegis of centrally approved preferential policies is somewhat negated by the fact that these parks do not have the proper apparatus to evaluate which firms are actually innovative. Along with the truly innovative IDTNewave, there are numerous of firms of dubious innovation that enjoy the same preferential policies in this park and others across China.
4. Implications of Hybrid’s Contribution to Technological Upgrading The positive contribution of hybrid FIEs to China’s technological development suggests that Huang and Khanna’s connection of the economic prominence of FIEs with adverse (if for now deferred) consequences for economic development is unjustified. The calls by Peter Nolan for industrial policy to rectify the foreign domination are also questionable given the contributions the foreign firms can make. Connecting foreign prominence to calls for more active industrial policy, something Huang and Khanna avoid doing, is especially unjustified if one keeps in mind the warnings of Mushtaq Khan (2000) when he advises that countries need to embark to keep in mind the political institutional arrangements’ effects on any industrial or technology policy before judging these policies to be positive or negative for the country’s economic development.26 Given Nolan’s stated goal of economic development, China’s record and institutional structure suggest that further industrial policymaking would serve to thwart rather than achieve economic development.
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Nevertheless, asking why hybrid FIEs function differently than the expectations many scholars of China, late development and the national character of MNCs would predict actually leads to the conclusion that these enterprises function differently than foreign-invested enterprises should because they are not in fact foreign enterprises in the traditional sense. Most of the foreign-invested returnee start-ups in China have virtually no operations outside of China despite being officially headquartered in Silicon Valley or elsewhere. Their strategy is predicated on developing China’s human resources as their home operational base so in relation to China they are not footloose corporations that will depart at the slightest hint of better opportunities elsewhere. It is precisely this type of firm that is contributing the most to technological upgrading in both microelectronics manufacturing and design. The next largest technological contribution in microelectronics is made by the ECE-based technology firms, principally Taiwanese firms, that have placed utilizing China’s human resources as a significant part of their strategy with some firms even proclaiming China as a second “home” of operations. While the behavior of the ECE firms may be part of a more proactive stance towards upgrading foreign subsidiaries that some MNCs have (Song 1998), the desire to use China as part of the firm’s core strategy to have access to more human resources and larger “home” markets is what really sets these ECE hybrids off from traditional MNCs simply wishing to enter the China market. Excluding the large established MNCs that thus far have not contributed much to technological development in China’s microelectronics industry, the FIEs driving China’s technological change in the it industry are essentially hybrids of the national and foreign roots to a greater, the returnee start-ups, or lesser, the ECE-based firms, degree. Thus, their behavior does not
36
necessarily contradict the assumptions about the continued nationality of MNCs and the need for indigenous enterprises broadly defined for economic development. The case of FIEs’ critical role in China’s technological development does demonstrate that the nationality of the firm cannot simply be determined by the location of the firm’s sources of finance and shows the need to reconfigure conceptions about nationality of the firm to encompass these hybrid models that borrow institutions across national boundaries.
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1
Huang (2003) argues that the oligopolistic argument was Hymer’s (1976) as presented in his The International Operations of National Firms, but Vernon (1972) made this same argument earlier though he undoubtedly was involved in dialogue with Hymer and Dunning’s works, both of which he cites in “The Economic Consequences of US Foreign Direct Investment,” In Consequences of Mulitnational Enterprises: An Anthology. 2 John H. Dunning (1988) “The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions,” Journal of International Business Studies 19(1): 1-31. 3 Huang (2003): 53 and 75-76. Huang mentions works suggesting that MNCs from the ECEs do have particular skills that would explain their foreign investments, but he implicitly rejects these arguments by asserting that Chinese entrepreneurs should at least be competitive with entrepreneurs from the Third World. For the capabilities of Hong Kong MNCs, see Edward K. Y. Chen (1983) “Multinationals from Hong Kong,” In The New Multinationals: The Spread of Third World Entrepreneurship. Sanjaya Lall and Associates, Editors. (Chichester: Wiley and Sons), and Louis T. Wells Jr., (1978) “Foreign Investment from the Third World: The Experience of Chinese Firms from Hong Kong,” Journal of World Business 13(1): 39-49. 4 Yao-su Hu (1992). 5 Indeed, Huang’s criticism of FDI’s claim on returns appears similar to Gunder Frank’s emphasis on extraction of the surplus as the original dependency theory. 6 Martin Kenney and Richard Florida (2000) “Venture Capital in Silicon Valley: Fueling New Firm Formation,” In Understanding Silicon Valley: 108. 7 On ethnic-based technology networks, see memo by Hsu and Saxenian (1999) The Limits of Guanxi Capitalism: Transnational Cooperation Between Taiwan and the US. 8 Saxenian (2000) “The Networks of Immigrant Entrepreneurs” In The Silicon Valley Edge: 259. 9 According to Wade (1996), these two were firms with less than 50% of their R&D operations based at home though they both still conducted 40 percent or more of these operations in the home country. 10 For minying qiye, see G. Guiheux (2002) “The Incomplete Crystallization of the Private Sector,” China Perspectives 42: 24-35; Bennis Wai-yip So (2001) “Evolution of Minying High-tech Enterprises in China: Legitimizing Private Ownership,” Issues and Studies 37-5 September/October: 76-99; Scott Kennedy (1997) “The Stone Group: State Client or Market Pathbreaker?” The China Quarterly 152: 746-777. 11 Singapore also has a number of venture capital firms, but many of these firms have a close relationship to the Singaporean state and appear to make investments on the basis of other than commercial considerations. For the mysteries of Singapore’s ties to various Singaporean companies and the general lack of transparency in the Singaporean state’s investments funds, see Hugo Restall, “More Transparency Please,” The Wall Street Journal Europe, August 8-10: A9. 12 Naughton (1999) terms this type of technology-focused, state-run strategy as the “critical technologies” strategy and demonstrates that this strategy has been a failure in China. In Fazhan Zhongguo Gaoxin Jishu Chanye: Zhidu Zhong Yu Jishu (Developing China’s High and New Technology Industries: The Institutional System is More Important than the Technology), Wu Jing-lian (Beijing: Zhongguo Fazhan Chubanshe), p. 95 also criticizes this heavy reliance on the government and points out what was appropriate for non-commercial state projects, such as nuclear weapons and aerospace projects, is not appropriate for the development of commercially viable technologies. 13 Gregory et al 2000 also point out the severity of the problem of lack of access to finance for private Chinese firms. 14 While both Gilboy and Moore make the analytic distinction between such paternalistic or particularistic networks and the problem of soft budget constraints created by the financial system, these appear to be two sides of the same coin. 15 Steinfeld (1998)’s account of Shougang seems emblematic of the corrosive influence of weak capital constraints.
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16
Officially, the electronics industry is the pillar industry, but the electronics industry essentially is equivalent to the information technology industry. 17 Interview with Electronics Engineering Times journalist, Mike Clendenin in Taipei. June 2003. 18 Modularization is driven by the ability to digitize knowledge. While the telecommunication revolution has eased the cost of communicating over long distances, without the digitization of the information e.g. the ability to digitize designs or partial designs of integrated circuits, the telecommunications revolution would not have resulted in the reorganization of the IT industry. The telecommunications revolution plays only a supporting role by enhancing the ease and lowering the cost of operating of these modularized production chains. While Naughton (1999) recognized international production networks as the key organizational model of the global electronics revolution, he failed to pinpoint the key characteristic of modularity that makes this type of industrial chain so accessible to new entrants from the developing world. 19 Accessing industrial activities from a geographical distance could arguably be construed as due to the dramatic lowering of the cost and ease of long distance communication due to the telecommunications revolution as Saxenian argues, but without the codification of information within the industrial production chain that create the possibility of modularity, the cheap telecommunications alone would not facilitate easy exchange of information and firms would still have to co-locate in industrial clusters. 20 For wafers, the blocks of silicon upon which semiconductor circuitry is etched, the increasing wafer size corresponds to more advanced generations of fabrication facilities and to greater efficiencies as more chips can be created out of larger wafers. 21 NEC only has a 28.6% stake in the venture while the Ministry of Information Industry has a 42.84% share and the municipality of Shanghai has a 28.56% share through their respective shares of the Huahong Group (Naughton 1999: 13). 22 Due to the sensitivity of industrial information in China, interview subjects for the field research covering interviews in 2000-2003 were promised to remain anonymous both by name and by institutional affiliation in order to allow to them to talk freely about sensitive issues. 23 The latter measure involves making an assessment of what type of general design technology is used, such as digital versus analog or mixed signal technology, and for what type of product, such as central processing unit (difficult) or 4-bit micron-controller (easy). I acquired knowledge about how to assess these technical differences both through the interview process of canvassing various design engineers for their opinions on the level of difficulty of various design and by working closely with two senior electrical engineering professors at MIT’s Industrial Performance Center, Professors Sodini and Akinwande. 24 The one true JV in the domestic firm sample set is a 50/50 JV, but from three interviews with the firm, the financing and control of the firm appear to be firmly in Chinese hands. 25 This example of an sophisticated .5-micron design is also an excellent example about why the process technology measured in microns alone is a poor measure for the sophistication of the design as different products have varying degrees of technical difficulty controlling for process technology level. 26 Khan uses the case of Thailand to argue that Thailand’s lack of developmental state-like industrial policy was actually a saving grace given its political system as the entrenched patronage networks within the system would divert any rents created by industrial policy to patronage and away from incentives to upgrade the technological and industrial capacity of Thailand. In Khan’s typology of states, Thailand has not and could not achieve the development success of Korea by using Korean-style industrial policy, but at least Thailand by avoiding ambitious industrial policy-making avoided falling into the South Asia trap of private agents capturing the rents designed for economic development and wasting them.
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