This document discusses how China's industrial policy has become ineffective due to the regional fragmentation of production in East Asia. The traditional approach of supporting large domestic firms to become vertically integrated national champions no longer applies when production occurs across regional networks. China's policy now needs to focus on upgrading firms within industries and enhancing linkages within the regional economy, as foreign investment is concentrated in downstream sectors and light industries regardless of China's stated policies. The analysis is based on extensive firm-level trade and investment data showing these trends over multiple industries and decades.

1. Asian Regionalism and Fragmented Production:
China and the Limits of Industrial Policy
Mark P. Dallas
Professor of Political Science & Asian Studies, Union College
EUSA Asia Pacific Annual Conference
June 11th, 2015

2. Conclusion
China’s Industrial Policy (and trade policy) ineffective
due to regionalization of East Asian production

3. Traditional Industrial Policy
 Domestic National Champions
Large, internationally competitive
Vertically-integrated/Conglomerates
Connections with domestic supply base
Final products
 Export Competitiveness (in advanced economies)
 Distort Markets (“Get Prices Wrong”): trade policy, finance, etc.
 Upgrade across Whole Sectors: Low  Medium  HighTech

4. State support:
Large SOEs, large COEs…now, large Private firms
Beijing and provinces
Finance (get prices wrong), resource access, gov’t approvals
Joint venture:
Technology transfers
FDI:
Promoted/Restricted industries
Local content requirements: supply base
China & Industrial Policy
Build National Champions

5. Fragmentation of Production

6. Regional andTrans-regional Production Networks

7. Industrial Policy
Fragmentation:
Core competency specialization:
design, engineering, etc.
Global leading-edge supply base
Intermediate goods: value-added.
Enhance Linkages w/ Inter. Economy
Sector: high & low fragments
Upgrade firms WITHIN sectors
Fragmented Production
 Domestic National Champions
Vertically-integrated
Build domestic supply base
Final products
 Export Competitive
(in advanced economies)
 Distort Markets (“Get Prices Wrong”)
 Upgrade across Whole Sectors:
Low  Medium  HighTech

8. RegionalTrade Agreements
Trade Policy:
“Demand-side”
Final goods market access
Advanced economies
Trade-oriented:
tariffs, RoO, harmonization
Fragmentation:
“Supply-side” policy importance
Intermediate goods
Supplier countries AND Final markets
“Trade-investment-services-IP nexus”
(R. Baldwin)

9. 1995-2010 China
Annual Survey of Industry
~200-300,000 Firms/yr.
525 Industries
Firms > 5 million RMB Sales
2000-2012 China
Transactional Trade Data
~200 million transactions
(Census data)
7,188 Product Codes (8-digit HS)
Firm info. included
Effectiveness of China’s Industrial Policy
inWorld of Fragmented Production?
Electronics & Light industries: ~50-60% exports
(upstream & downstream)

10. China (1995)
Foreign Firm’s Share of Fixed Assets
All industries greater than 30% foreign ownership share

11. Foreign Firm’s Share of Fixed Assets
All industries greater than 40% foreign ownership share
China (2010)

12. Two-digit level
Cotton
Cotton
Yarn
Cotton
Cloth
Dye/
Print
Garments
Exports
• Wovens
• Knitwear
•Wovens
• Cotton Knitwear
• Cotton Products
Cotton
Spin/Weave
Cotton
Dye/Print
Four-digit level
China (2010)

13. Textile & Garment Industry:
Share of Assets owned by Foreign Firms
Upstream Downstream

14. 1995-98
2007-10
Share of Foreign Assets
~Timber/Wood Industries ~
Over 15 years
Upstream Downstream

15. 1995-98 2007-10
Share of Foreign Assets
~ Leather, Fur, Feather Products ~

16. 1995-98 2007-10
Share of Foreign Assets
~ Food Processing ~

17. 1995-98 2007-10
Share of Foreign Assets
~ Plastic, Rubber Industries ~

18. Upstream Downstream
Beijing: “Catalogue for Guidance of FDI” (外商投资产业指导目录）
Supports high-tech, capital intensive, upstream….precisely the opposite outcome
 Highest concentration of FDI often not in high-tech
 Downstream, labor-intensive fragments
 Low Entry Barriers: one would not expect FDI concentration

19. Electronics, Telecomm. Equipment
(2007-2010)
19

20. Downstream Fragments
Trade Competitiveness?
Domestic & Foreign Firms
~ Light Industries: lowest barriers to entry
~ More stark results in high-tech sectors

21. National-level
(and comprehensive)
Product-level
Firm-level
Branch/Subsidiary
Transactions
(by shipments)
TransactionalTrade Data
Database:
~ 200 milllion
transactions
~ 7,188 products
(Cotton, M&B shirts)

22. Export Specialization:
Footwear (n=2,417 firms)

23. Export Specialization
Largest 50 export firms

24. Import Specialization:
Footwear

25. “Elite” Exporters
“Basic” Exporters
Export “Channels”: Footwear
“Elite” Exporters
 Mostly Foreign Firms
 OECD export markets
 High unit prices
 Export and Import Specialization
 Stable export transactions

26.  Domestic National Champions
Large, internationally competitive
Vertically-integratedConglomerates
Connections with domestic supply base
Final products
 Export Competitiveness
(in advanced economies)
Fragmented:
Domestic: Upstream
(Intermediate Products)
Foreign: Downstream
(Final Products)
Tap into Global Supply chain
Domestic firms:
Low-end export “channels”
 Light industries: lowest barriers to entry
 Similar outcomes in other export industries

27. Implications
China’s Industrial Policy ineffective
Fragmented Production changes policy requirements:
More precise, targeted,
UpgradeWITHIN industry: design, engineering, logistics, services
China’s RegionalTrade Agreements:
“Deep” integration: trade-investment-services-IP nexus

28. Thank you!
dallasm@union.edu

31. Transactional Stability
 Largest exporting firms
 Firm’s monthly transaction
in relevant HS code.

32. Rising Wages
Will Firms:
Upgrade….
Move Inland….
…or Go?
…Some Inland
Investment
Toys 2001 & 2007

33. Domestic Firms, 2007
Assets: 3.7 Billion RMB
Inland Provinces: 13.4%
Foreign Firms, 2007
Assets: 11.6 Billion RMB
Inland Provinces: 3.5%
Domestic firms invest in inland
more readily…

34. Leather Footwear 2007
Foreign Domestic
Nanhai 73.3% 26.7%
Zengcheng 99.5% 0.5%
Zhongshan 96.0% 4.0%
Dongguan 96.0% 4.0%
Foreign Domestic
Licheng 39.3% 60.7%
Jinjiang 61.8% 38.2%
Foreign Domestic
Wenling 14.3% 85.7%
Ouhai 6.5% 93.5%
Yongjia 1.9% 98.1%
Lucheng 10.6% 89.4%
Largest 10 counties (43%)

35. Foreign Domestic
Jinjiang 94.1% 5.9%
Baiyun 99.6% 0.4%
Kunshan 93.2% 6.8%
Longgang 98.5% 1.5%
Fanyu 98.1% 1.9%
Baoan 98.5% 1.5%
Zhongshan 96.2% 3.8%
Dongguan 96.9% 3.1%
Toys 2007
Largest 10 counties (54%)
Foreign Domestic
Jiangdong 0.0% 100.0%
Chenghai 18.3% 81.7%

36. Link Micro-Macro Levels of analysis
Industry
Firm
Transactional
Regional
More to do: imports, value-added, profits, wages….”modular,” “captive” transactions?
Limitations and complementarity with case studies….

37. Thanks!
dallasm@union.edu

42. 1995-98
2007-10
Share of Foreign Assets
~ Electronics ~
Components  Final Goods
Components  Final Goods

43.  FDI most concentrated in light industries and electronics
 Within light industries, FDI concentrated in downstream
 Persistent over two decades
 A commercial logic, not policy/politics.
Disaggregating the ‘Value Chain’

44. “Export-oriented industries” (96)
(> 40% ofTotal Sales Exported)
59% of
Total Exports

45. “Export-oriented industries” (96) “Other industries” (429)
41% of
Total Exports
59% of
Total Exports
Exports

46. “Other industries”
Light Industries only
Exports
16% of
Total Exports
22% of
Total Exports
“Export-oriented industries”

47. Advanced Country Developing Country
Furniture Exports
Final Markets

48. Between 2000 and 2006,
Foreign Firms have increased market share in Advanced country
But decreased market share in developing countries

49. Advanced Country Developing Country
Footwear Exports

50. Advanced Country Developing Country
Leather Goods Exports

51. Advanced Country Developing Country
Garment Exports

52. Advanced Country Developing Country
Toys Exports