Enterprises, Industry and Innovation in the People's Republic of China: Questioning Socialism from Deng to the Trade and Tech War

By Alberto Gabriele

This book analyses and critically evaluates the development  of two key components of China’s economy: the network of productive enterprises, and the national innovation system, from the inception of market-oriented reforms to the present day. The approach is a partly novel one, albeit inspired to classical political economy, rooted in the structure and evolution of social relations of production and exchange and of the institutional setting in these two crucial domains. The main findings are twofold: First, the role of planning and public ownership, far from withering,  has being upheld and qualitatively enhanced, especially throughout the most recent  stages of industrial reforms. Second, enterprises are increasingly participating - along with universities and research centers - in a concerted and historically unparalleled effort to dramatically upgrade  China’s capacity to engage in indigenous innovation. As a result, China’s National Innovation System has been growing and strengthening at a pace much faster than that of the national economy as a whole. The book also presents a speculative and provisional perspective on the validity, and meaning, of the claim that the country’s socioeconomic system is indeed a form of socialism with Chinese characteristics. It will be on interest to students and scholars researching China, politics, and development economics.

 

• Language: English
• Publisher: Springer
• Release date: Apr 6, 2020
• ISBN: 9789811521218

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© Springer Nature Singapore Pte Ltd. 2020

A. GabrieleEnterprises, Industry and Innovation in the People's Republic of Chinahttps://doi.org/10.1007/978-981-15-2121-8_1

1. Introduction: China as the First Example of a New Class of Social Economic Formations

Alberto Gabriele¹ 

(1)

Sbilanciamoci Rome, Rome, Italy

1.1

This book analyzes two key features of contemporary China: the gradual evolution of enterprise forms since the inception of rural and industrial reforms and the development of a modern innovation system. In this attempt, I strive to focus on the multi-causal processes of change occurring in the underlying socioeconomic relations of production and exchange, with an eye towards identifying relatively deeper causal processes. As emphasized repeatedly in the chapters that follow, these processes cannot be adequately interpreted as a pure manifestation of the simple State vs. Market opposition. In fact, the complex and evolutionary interactions between state-led industrial and other development-oriented policies, on one hand, and (relatively) automatic market mechanisms working in a quasi-by-default manner, on the other hand, constitute the essence of China’s distinctive economic model.

Most of this book is devoted to the perusal, interpretation and targeted re-aggregation and re-elaboration of official Chinese statistics, without pretending to extract excessively ambitious and deterministic conclusions from limited available evidence. This task is carried out in Parts I and II.

However, in my view, there is not such a thing as a fully objective and non-ideological human being. Social scientists are far from being an exception. Thus, the least dishonest stance consists in acknowledging our own interpretative standpoint. I briefly expose my one in this introduction.

From an epistemological perspective, the conceptual foundations of this work are those of the Classics and of the Marxian tradition, with the twin categories of mode of production and socioeconomic formation as basic starting points.

A good synthetic definition of mode of production is as follows: "A mode of production is an articulated combination of relations and forces of production structured by the dominance of the relations of production" (Hindless and Hirst 1975, p. 9). In most cases, in this book I refer to the concept of mode of production as an abstract archetype, an internally consistent set of rules and laws that are supposed to govern relations of production and exchange according to some principles, and that usually is practically realized in each specific context in the real world only to a limited extent.

The category of socioeconomic formation is less well-known. Here I use it to refer to the "specific complex of social relations of production and exchange obtaining in a certain country or group of countries during a long period of time" (Gabriele and Schettino 2012, p. 24).

Yet, I try to partly re-interpreter these foundations taking into account the lessons of historical experience, as tools that can help—along with other ones—to understand twenty-first century complex socioeconomic systems. The latter can be examined through the lens of judiciously juxtaposing their concrete performance with the main tenets of what is theoretically believed to constitute their core principles. In fact, socioeconomic systems can be synthetically described according to their position in a multidimensional space, determined by conceptual vectors that describe key structural economic and social characteristics.¹ Such characteristics have both positive and normative components, and can be quantified strictu sensu only in some cases, while in others they can be evaluated only on the basis of heuristic assessments that are arbitrary to some extent (see Elliot’s 1978; Gabriele and Schettino 2012). Complementarily, different real-world socioeconomic systems can also be appraised in a comparative fashion.

1.2

This book focuses on the evolution of some key elements of China’s ownership relations and planning and governance mechanisms (mostly in the industrial sector), and on the core characteristics of the country’s national system of innovation. On this basis, I try to propose a few basic conclusions on two main issues:

1.

the nature and effectiveness of the reforms and their impact on economic and technological performance;

2.

the validity—if any—of the CPC’s official claim that Socialism with Chinese Characteristics is a reality,² and which are its key challenges and perspectives.

The first issue is complex and challenging. Yes it is relatively mundane, as it is one more example of a very common type of social science exercise—even taking into account that it is applied to a very large and very special country as China is. Conversely, the latter issue belongs to a qualitatively different epistemological level. In my view, given the peculiar teleological foundations of the Popular Republic of China (PRC), on which the Communist party of China (CPC) justifies its leadership and what it regards as its historical mission, an evaluation of China’s development trajectory cannot skip it altogether.³

Therefore, it is legitimate and reasonable to critically consider the relationship between empirical and quantifiable socioeconomic realities, on one hand, and the hard-to-grasp, multidimensional, yet far from hollow concept of socialism, on the other hand. However, of course, this issue has to be addressed with particular intellectual modesty. Consistently, I try to discuss it in a very cautious and provisional framework, taking into account inter alia the limited scope of this work. In fact, the core of the book analyzes two key components of PRC’s socioeconomic system, but leaves out other very important questions. For instance, I refer only cursorily to the evolution of the state-controlled financial system, to China’s unique role in global international trade and to the promotion of the Belt and Road initiative (BRI), and to the relationship between the speed and pattern of economic growth and the emergence of geographic and social imbalances and inequalities (as well as to the targeted policies aimed at reining in them).

A fortiori, this circumscribed study cannot be expected to shed much light on other, even more complex and intricate contradictions and challenges. Among them, the most paramount stem from the interactions and tensions between two distinct, albeit interrelated domains. One is that of economic development, planning and governance mechanisms, and of their impact on measurable socioeconomic indicators such as GDP growth, economy-wide structural change, productivity, poverty, income distribution, and many others. The other domain is the quest for the enhancement of individual freedom, participation and capabilities, as well as the effective realization of socialist democracy (see Liangyu 2017).⁴

This books sticks almost exclusively to the first domain. Moreover, it covers only a few of its multiple dimensions (for instance, as mentioned above, it does not explore the very important issue of income distribution). It does not venture into the second one.

Of course, this is easier said than done. Even remaining within the first domain of analysis, I am aware in particular of the risk of falling into a specific epistemic trap. The trap consists in mixing up the positive (objective) level of analysis, with the task of comparing its results with the normative goals that have traditionally been associated with the worldwide socialist movement. In order to minimize this risk, the latter endeavor is only attempted in this Introduction and in Annex A.

1.3

Arrighi’s Adam Smith in Beijing provides a pioneering, original and deep interpretation of PRC experience as an example of idiosyncratic, non-capitalist, market-creating development embedded in the longue durée approach⁵:

The economic resurgence of China - whatever its eventual social outcome - has given rise to a new awareness among a growing group of scholars that there is a fundamental world-historical difference between processes of market formation and processes of capitalist development. Integral to this new awareness has been the discovery (or rediscovery) that trade and markets were more developed in East Asia in general, and in China in particular, than in Europe, through the eighteenth century. (Arrighi 2007, p. 24)

Arrighi bases his analysis on two pillars. One is Adam Smith’s early distinction between market development in general and capitalism (which can be interpreted as constituting only one of its possible variants. The other is the concept of Industrious Revolution,⁶ a process where markets and demand for commodities expand along a labor-intensive path. Industrious revolutions can unfold without the increase in capital-intensity and major technical changes typical of industrial revolutions, but can be instrumental to create the markets that eventually allow the latter to flourish, along patterns that can differ profoundly in different areas of the world (see Smith 1776; De Vries 1994, 2008; Arrighi 1994, 1999, 2007; Arrighi et al. 2003; Gunder Frank 1998; Sugihara 1996, 2003; Hayami 2015).

In reference to China’s case, Arrighi refers in particular to Sugihara’s interpretation, who "conceives of the Industrious Revolution, not as a preamble to the Industrial Revolution, but as a market-based development that had no inherent tendency to generate the capital- and energy-intensive developmental path opened up by Britain and carried to its ultimate destination by the United States… Sugihara’s central claim is that the instrumentalities and outcomes of the East Asian Industrious Revolution established a distinctive technological and institutional path which has played a crucial role in shaping East Asian responses to the challenges and opportunities created by the Western Industrial Revolution" (ibidem, p. 33).

East Asian and China’s development gave rise to a hybrid political-economic formation that favored East Asian economic revival, contributing to radically transform the structure of the previously Western-dominated global economy, and questioning existing theories on the very nature of economic development. The Maoist the revolutionary upheaval recovered national sovereignty and established the foundations for modern industrialization, but also resulted in excessive anti-market biases and recurrent systemic disruption. In this context, Deng’s gradual reforms can be seen as a sort of vengeance of history, as they progressively steered back the country towards a path of non-capitalist market development not inconsistent with the one the Middle Kingdom had gone through in the most successful phases of its millennial history, before succumbing to imperialist encroachment:

As Smith would have advised, Deng’s reforms targeted the domestic economy and agriculture first. Despite, or perhaps because of, their organizational variety, in retrospect TVEs may well turn out to have played as crucial a role in the Chinese economic ascent as vertically integrated, bureaucratically managed corporations did in the US ascent a century earlier. …As for the appeal of Deng’s reforms to the citizenry at large, we must first acknowledge the considerable extent to which the success of the reforms has been based on prior achievements of the Chinese Revolution (pp. 361–369).

Arrighi concludes his magnum opus hinting at a major issue that is quite consistent with this book’s quest to shed some light on the ultimate historical significance of China’s rise:

The central question from which we began is whether, and under what conditions, the Chinese ascent, with all its shortcomings and likely future setbacks, can be taken as the harbinger of that greater equality and mutual respect among peoples of European and non-European descent that Smith foresaw and advocated 230 years ago. The analysis developed- in this book points towards a positive answer but with some major qualifications (p. 379).

1.4

Jacques (2009) provides another important and heterodox contribution, clinging more on the political and cultural dimensions than on the economic one.

Jacques’ central thesis is that is not such a thing as one, well-defined Western-led modernity. Rather, we are witnessing the birth of multiple modernities. In such a long-term global scenario, China’s uniqueness and diversity is the key factor behind China’s extraordinary development experience, contrary to the still-widespread belief that its success has been due mainly to the assimilation of Western practices and values⁷:

The reason for China’s transformation (like those of the other East Asian countries, commencing with Japan) has been the way it has succeeded in combining what it has learnt from the West, and also its East Asian neighbours, with its own history and culture, thereby tapping and releasing its native sources of dynamism. We have moved from the era of either/or to one characterized by hybridity …. A key question concerns which elements of the Western model are indispensable and which are optional. Clearly, all successful examples of economic transformation currently on offer are based upon a capitalist model of development, although their economic institutions and policies, not to mention their politics and culture, display very wide variations. (p. 415)

Jacques identifies eight defining differences between China and the rest of the world, that are mostly based on China’s peculiar and idiosyncratic culture and history.

First, China is not a conventional nation, but a civilization-state. Second, China will probably try to shape its relationship with East Asia in terms of a tributary-state system.⁸ Third, Han Chinese’ attitude towards race is different from that of other, less ethnically and culturally homogenous peoples. Fourth, China operates on a quite different continental-sized dimension with respect to other nation-states.⁹

Fifth, the nature of the Chinese polity is highly specific… China has not had organized religion in the manner of the West during the last millennium…The state did not, either in its imperial nor in its Communist form, share power with anyone else: it presided over society, supreme and unchallenged. (p. 424)

Sixth, Chinese modernity, like other East Asian modernities, is distinguished by the speed of the country’s transformation. It combines, in a way quite different from the Western experience of modernity, the past and the future at one and the same time in the present. (p. 425)

Seventh, since 1949 China has been ruled by a Communist regime…. In the light of recent Chinese experience, however, Communism must be viewed in a more pluralistic manner than was previously the case: the Chinese Communist Party is very different from its Soviet equivalent and, since 1978, has pursued an entirely different strategy. It has displayed a flexibility and pragmatism which was alien to the Soviet Party. …Whatever the longer term may hold, the Chinese Communist Party, in presiding over the transformation of the country, will leave a profound imprint on Chinese modernity and also on the wider world. It has …invented and managed the strategy that has finally given China the promise, after a century or more of decline, of restoring its status and power in the world to something resembling the days of the Middle Kingdom. In so doing, it has also succeeded in reconnecting China to its history, to Confucianism and its dynastic heyday. …Given that Confucian principles had reigned for two millennia, the Chinese Communist Party, in order to prevail, needed, amongst other things, to find a way of reinventing and re-creating those principles. (p. 427).

Eighth, China will, for several decades to come, combine the characteristics of both a developed and a developing country. This will be a unique condition for one of the major global powers and stems from the fact that China’s modernization will be a protracted process because of the country’s size: in conventional terms, China’s transformation is that of a continent, with continental-style disparities, rather than that of a country. (p. 427)

In my view, this is a very interesting approach. Yet, Jacques pushes it too far, ending up into a sort of reductionism that risks to see the present and the future as little more than the reply of an old movie. Taking into account this caveat, I consider particularly correct and significant:

1.

the first and fourth differences, that rightly stress the importance of the size factor, in all is material and immaterial dimensions;

2.

the fifth and seventh differences, that identify important linkages between three apparently unrelated phenomena: the exceptionally little role of religion in China’s national culture; its centralized power tradition; the rise of the Communist Party and its ongoing historical mission;

3.

the eight difference, that pinpoints the often-overlooked fact that China is (and will still be for long time) both a leading global economic and technological power and a developing country.

1.5

Naughton (2017), in a perceptive essay in the Journal of Economic Perspectives, raises the one million dollar question: is China socialist? Instead of engaging in tiresome and ultimately unproductive doctrinal debates, he tries to define four crucial areas for discussion. These areas are: capacity, intention, redistribution and responsiveness. He finds that in terms of the first two criteria the PRC is indeed "plausibly socialist".

As emphasized in part I below, enterprises are among the most important economic organizations for any modern society. I agree with Naughton’s implicit premise that the traditional criterion based on the structure of property rights (private or public) is far from sufficient to determine in a clear-cut fashion whether the PRC is in fact or not a socialist socioeconomic system. In fact, all modern economies show a mix of public and private property of the means of production. Moreover, several rounds of reforms have profoundly transformed the ownership structure of China’s industrial sector. However, Naughton shows that they did not substantially undermine the prevalence of State-Owned and State-Held Enterprises¹⁰ (SOSHEs) and the hegemonic role of public ownership and of the state-led economic development leadership. The latter constitute very relevant non-capitalist elements that characterize the PRC as a distinctive, complex socioeconomic formation. This key point made by Naughton is shared and further developed in the remainder of this book.

However, on the third and fourth criteria—redistribution and responsiveness—China’s degree of approximation to what can reasonably be regarded as a fully and authentic socialist setting is far lower. I will not discuss this point further, but in my view Naughton is basically right also with respect to these issues. In sum, I appreciate very much Naughton’s perspective, and in writing this book I tried to adopt an approach close his relatively non-ideological and quasi-empiricist one.

1.6

Another, more recent book that calls into question many of the prevalent stereotypes on China is the work by Huang (2017). Huang discusses the roots of misperceptions about PRC in the West, and goes on evenhandedly to identify the positive and negative features of China’s development model. His contribution is a good empirical look at the contradictions of contemporary China. Another important contribution by Lin presents a comprehensive picture of China’s economy, yet it does not delve deeply into the industrial system and the innovations strategies.

This work deals with many of the issues discussed by Huang and Lin. It analyzes the evolution of PRC’s industrial and innovation systems, arguing that (without ignoring a multiple array of problems and shortcomings) their development constitutes so far the greatest achievement of the modernization drive began in the late 1970s. As I try to show in Parts I and II, the subsystem of industrial enterprise lies at the core of China’s national socioeconomic system, interacting with many other ones such as the National Innovation System, the financial system, the multilayered planning mechanism, the Belt and Road Initiative, and the regulatory frameworks operating in areas such as trade, competition, labor law, technological standards and environmental protection.

In this respect, and without pretending to demonstrate such a value judgement, I tend to believe that the Chinese economic system is now strong and developed enough to be structurally equipped to flexibly address key efficiency, equity, and environment sustainability issues¹¹—provided it survives the present historical predicament remaining basically intact. Additionally, as Sen (1970) and others have emphasized, enhancing the capabilities of individuals should by itself constitute a core ultimate goal of economic development in any country, and in this sense PRC is no exception.¹²

1.7

The analysis presented in this book focuses mainly on China’s homegrown problems and challenges, and on the policy initiatives enacted by the leadership in order to overcome them, steering the country towards its own idiosyncratic development path. However, paraphrasing John Donne’s famous line, no country is an island. The international scenario has been relatively stable until recently, allowing China to enjoy rather ample degrees of freedom to find its own path. However, this global setting has come to an end in a rather abrupt manner under Trump’s presidency, being replaced by one characterized by a trade and technological war that is likely to degenerate into a more generalized cold war. The danger of a ruinous escalation leading to a real war cannot be ruled out either. Clearly, these issues go beyond the scope of this book—and of that of any kind of economic analysis. However, where needed, I also discuss to a limited extent the external, largely geopolitical constraints faced by China’s development policies.

In the chapters that follow I focus mainly on the evolution of China’s industrial system and on the recent development of the national innovation system. Most of the statistical analysis covers the period from 2000 to 2016. In order to understand and interpreter these two complex structures and their transformations, I rely inter alia on systemic categories inherited from the nineteenth century intellectual tradition, such as mode of production, socioeconomic formation, social relations of production and exchange, value, surplus, capitalism, and socialism.

Most of these categories are technical ones belonging to the Classic and Marxian school of thought, and therefore they can be accepted or refuted by scholars of different intellectual formation. The latter two, however, are commonly found in non-specialist political debates and in the media. Yet, their very meaningfulness in the postmodern era of the twenty-first century has been questioned by many. My answer to the question of whether or not terms such as capitalism and socialism are still relevant and significant is a qualified yes. On one hand, I acknowledge the naïveté and inadequacy of any attempt to gauge whether China is in fact capitalist or socialist in a black and white, dichotomous fashion. On the other hand, I reaffirm the permanent validity of the concepts of capitalism and socialism as modes of production, and strive to painstakingly and systematically analyze their relative prevalence and reciprocal dialectics in present-day PRC, seen tentatively as a new, complex type of socioeconomic formation.

1.8

I now turn to a quick summary of Parts I and II to illustrate the above theses and observations. In these core parts of the book I analyze China’s specific form of industrialization, that has been revolving around a mixture of capitalist and non-capitalist firms. These chapters focus in particular on the subsequent rounds of SOE reforms and on the increasingly crucial role of technical progress and innovation, spearheaded by the interaction between enterprises and other components of the country’s national innovation system. I also discuss the results of several empirical studies based on ample statistical evidence, questioning the orthodox assumption taking for granted that all State owned enterprises are by their own nature inefficient.

Part I describes the evolution of different types of non-capitalist market-oriented enterprises in China, in order to understand the nature of the industrial system of the PRC in the first two decades of the twenty-first century and its likely further evolution. Chapter 2 introduces and defines the concept of non-capitalist market-oriented enterprise, stressing that its scope is far wider than that of state owned firms and cooperatives. The concept is meant to identify a minimum common kernel shared by many variegated forms of enterprises that have populated the landscape of China’s complex journey in the market-socialist era, and still constitute the backbone of PRC’s economy. Chapter 3 focuses on the agrarian reform, that led to the demise of communes and the surge of two new forms of non-capitalist production enterprise, the Household-based Farm and the TVE. The following chapters are dedicated to an evolutionary investigation of the subsequent waves of industrial reform, from the timid experiments in the 1980s to the ongoing corporatization drive, that has now reached its mature stage. In doing so, my vantage point is that of prioritizing the relationship between the mix of ownership structures and enterprise behavior. In the subsequent chapters, I present a number of indicators on the deterioration and subsequent recovery of SOSHEs’ performance and profitability. I also show that the recurrent rumors on the death of China’s public industry have been greatly exaggerated.

Part I terminates with some concluding remarks. The impact of the 2007–2008 world capitalist crisis forced China to react swiftly, launching a powerful anti-cyclical expansionary investment drive that necessarily pivoted on directly and indirectly state-controlled industrial firms. The massive channeling of huge investment resources towards public industry led to a new stage in the traditional debate between more and less market-oriented observers and social scientists. Under the progressive hardening of the external geopolitical environment, eventually culminating with the US launching of the trade and tech war in 2018, these controversies eventually reverberated in the progressive re-orientation and firming up of the Party’s strategy towards a more complex and self-reliant development strategy.¹³

The retreat of private industry caused by the world crisis and the enhanced dominance of the state-owned and state-controlled sector of the economy led some Chinese and foreign observers to worry whether—in spite of the official lip service paid to the decisive role of market forces in allocating resources—too many barriers were still unfairly and inefficiently protecting SOSHEs in many competitive sectors. However, many other voices—in the Party, the community of social scientists, and the public at large—found in the new international crisis and in the subsequent deterioration of the US and EU domination of the WTO-sanctioned multilateral globalization regime new ammunition to criticize neoliberal monopoly capitalism. They also strongly criticized the excesses undergone under the pro-market drive (which included some debatable forms of financial liberalization), and the inordinate expansion of the private sector that had been taking place since the 1990s.

The most crucial question was still revolving around the developmental, growth-enhancing and stabilizing function of SOSHEs in a developing socialist-oriented country like China. In our view, on balance, the main outcome of this dialectical confrontation was to lead the current Chinese leadership to prioritize the task of strengthening, innovate and revitalize the socialist core of PRC foundations.

A fortiori, this set of strategic questions is becoming more salient under the new Cold-war-like geopolitical new normal presently prevailing worldwide. In this respect, it is essential to realize—in the complex, nonlinear, nondeterministic context in which all large modern economies operate—that the more an activity is strategic with respect to the functioning of the national economy as a whole, the more crucial its systemic enabling function. Conversely, considerations about firm-level competitiveness and profitability take a relatively back seat—as far as basic budget constraint-related and sustainability conditions are met. SOSHEs operating in relatively competitive markets shall concentrate on innovation, technical progress, and the nurturing of internationally competitive national champions, maintaining healthy financial and profitability conditions. Their strategic function is indeed mostly sector-specific and firm-related. Other not-so-strategic firms operating in natural or quasi-natural monopolies shall focus relatively more on the goal of smoothing the functioning of the rest of economy, besides producing surpluses in order to provide dividends to state coffers.

Besides that, however, SOSHEs shall fulfill other two key functions. One of them is a classic macroeconomic one—to act as anti-cyclical stabilizers and structural, growth-enhancing investors of last resort. China’s experience appears to confirm that a socialist-oriented state with a sizeable public sector can effectively push up aggregate investment beyond the level that would prevail under even state-guided capitalism. The other key function of SOSHEs—one that becomes more and more crucial as far as a developing country advances on its catching-up path—is to perform as innovation engines.¹⁴

Some more general and theoretical observations are also warranted. The constraints imposed by the permanent operativeness of the law of value apply both to capitalism and socialism, limiting planners’ degrees of freedom. Therefore, the advantages of public property are maximized where planning-compatible,¹⁵ but flexible and relatively self-propelling forms of socialist-oriented social relations of production and exchange can unfold—particularly so in partly competitive and not very strategic sectors. In other words, in a system strategically moving away from capitalism, the law of value applies more stringently to those sectors that concentrate most commodity production and exchange activities.

Consistently, large public productive assets should chiefly be managed through multiple layers of holding bodies. Only managers and workers in productive enterprises have access to first-hand firm-level and production-line information. Thus, these actors shall directly focus on production, the lowest link of the overall value chain. Conversely, higher-echelon governance shall operate mainly via indirect financial levers, pursuing monetary-denominated objectives.

There is nothing simple in such a modernized version of strategic, socialist-oriented industrial planning. Socialist ownership must be realized by means of a complex and multi-layered chain of command, dealing with capital in its own proper and distinctive intrinsic form, that of value. In fact, there is ample justification for the need of maintaining and enhancing the value of public industrial capital, thereby striving to maximize public wealth. On balance, corporatization-oriented reforms of public industry appear so far to be suitable to the present stage of development of China’s economy. In the longer term, only time can tell whether or not, and to which extent, the most recent reforms of SOSHEs will be ultimately successful.

1.9

Part II focuses on the new type of national innovation system (NIS) that China is attempting to develop and institutionalize, aiming to achieve a smooth interrelation among the various sectors and layers of generation and diffusion of knowledge through a pragmatic blend of planning and market mechanisms.

For all at least relatively advanced countries, the NIS constitutes the most crucial component of any development strategy. China’s innovation strategy has the ambition of adapting and further perfecting world-class best practices from technological global leaders and successful late industrializers. Part II of this book analyzes the main features of China’s NIS and tries to evaluate, in light of available evidence, to which extent it has been able to advance so far on this path. The main finding is that PRC’s innovation strategy is unique in at least two crucial aspects.

The first is China’s sheer size, which has allowed it to build up a NIS that ranks first worldwide according to the absolute level of many indicators (i.e., the number of R&D personnel, the number of patents), and ranks second (after that of the US) according to the holistic criterion of evaluating its overall innovation potential. In this respect, it is important to remark that China has accomplished this feat at a stage when it still lags far behind all traditional technological leaders in terms of per capita educational, technological, and research achievements, as well as in terms of per capita income.

In fact, PRC’s NIS has progressed along both the quantitative and the qualitative dimensions much faster than the economy as a whole, making China the only extraordinary outlier of its kind among all countries in the world. In fact, China has developed a NIS of extraordinary absolute size and of a relative size and comparable quality close to those of the most advanced capitalist countries, while its overall degree of economic development is still that of a middle-level developing country.

The second aspect is related to China’s specific form of synthesis of markets and state mechanisms. For lack of a better phrase, and stressing the idiosyncratic and heuristic usage of the term, I refer to this mechanism as twenty-first century Chinese market socialism. It confers on its leaders, at least potentially, an outstanding advantage in the crucial area of strategic planning, i.e. a superior capability to command the allocation of national resources, in order to earmark them strategically towards key goals accordingly to a clear set of priorities.¹⁶ This superiority is particularly apparent in the decisive area of innovation.

There are three distinctive characteristics that make this NIS unique and strongly socialistic¹⁷ in nature (more so than probably any other part of the Chinese socioeconomic system), to a degree that qualitatively sets it apart from those of both developed and developing capitalist countries:

1.

the ability and determination on the part of the state to channel towards R&D a very high and growing share of national surplus;

2.

the predominant role played by non-private actors such as public universities, research centers, government organizations, SOSHEs and other non-capitalist market-oriented enterprises;

3.

the scope, impact, relevance and ambition of long-term national R&D and innovation plans.

Nevertheless, such a powerful interventionist role of the Chinese state in the task of developing and shaping the NIS is carried out in a market-compatible¹⁸ strategic framework, utilizing heavy-handed planning tools along with price- and incentive-based policy instruments.

China’s R&D expenditure has skyrocketed, shifting mostly towards productive enterprises and following a trend similar to that of Western technological leaders. However, most of the (still insufficiently developed) basic and applied research—the activity with the strongest impact on truly radical innovation—is still carried out by public universities and research centers. Conversely, most of China’s R&D is less intrinsically innovative and short-term market-oriented, and a large part of it is carried out by privately-owned enterprises (POEs). Having reached this stage of development, China faces the new challenge of re-equilibrating R&D’s internal balance, supporting mostly basic and applied research.

The overall outcomes of the huge R&D effort in China appear so far to have fallen somewhat short of the extraordinary achievements realized decades ago by the first Asian NICs. However, R&D outputs have risen very rapidly, and so did labor productivity, high-tech production and exports, and industrial overall productivity, measured both by engineering criteria and by the intrinsically flawed but still popular and (usually) roughly and heuristically useful economic concept of total factor productivity, or TFP.¹⁹

Among industrial firms, POEs exhibit a high propensity to engage in R&D (mostly in the D component) and more ability to translate it into new saleable products. Their innovative capability appears to have been improving more rapidly than that of SOSHEs. Yet, most POEs enterprises still fail to carry out any R&D, and most private entrepreneurs are risk-averse and not particularly tech-savvy.

However, SOSHEs are actually performing better than private ones at least along some dimensions of overall innovative capability. Two elite groups of state-controlled enterprises have been performing best. One is constituted by the very large SOEs and other SOSHEs controlled by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). These firms are highly prioritized by planners, and follow a long-term strategy aimed at maximizing the overall systemic impact on the development of China’s economy as a whole. The other group is formed by SOSHEs run through a more indirect, multi-tiered and longer command chain. These corporatized entities operate autonomously in competitive markets, and in the domain of S&T and R&D policies exhibit a behavior that is intermediate between that of SASAC enterprises and that of POEs. My own empirical research, carried out on the basis of official Chinese statistics, shows that the research capabilities of non-capitalist market-oriented enterprises have made important progresses. Along with other publicly-controlled organizations, they are responsible for the bulk of PRC’s R&D and innovation activities.²⁰ The main conclusion is that the core component of China’s NIS is still constituted by public, non market-oriented organizations. Most of basic research and the bulk of applied research in China is carried out by public universities and research centers. Central SOSHEs are also evolving increasingly capable to engage in strategic research activities, in order to achieve systemic breakthroughs in key scientific fields.²¹

China’s NIS is developing along a dual but not necessarily contradictory path:

1.

POEs and market-oriented SOSHEs focus on market-oriented development, are responsible for most of the recognizable R&D spending and patented national innovations;

2.

Higher-echelons of the NIS—public universities and research centers, many giant SASAC-managed conglomerates and some other large SOSHEs—are more strategic-oriented. Since the mid-2000s these strategic state-controlled industrial enterprises have financially and institutionally become much stronger. Many of them have been restructured and merged, and participate in several large national and local R&D and innovation plans.²²

The scope of the Made in China 2025 plan is more ambitious than those of its predecessors, as it poses numerical targets for production and market shares in key innovative sectors. Not surprisingly, it has alarmed the West and has been used as a key justification by the US for the launching of the trade war.²³ To achieve the goals of the plan under the present and forthcoming conditions of weakened cooperation and increasingly antagonistic confrontation with the world’s technological leaders, China needs to properly coordinate both tiers of its NIS as well as the rest of industrial, financial, trade and macroeconomic policies.²⁴

China’s overarching goal is to achieve a decisive qualitative leap in its NIS, drastically reducing its technological dependency on foreign powers and developing a systemic ability to generate world-class indigenous innovations.

1.10

The book ends with some (very brief) conclusions and two Annexes. Annex A cautiously and tentatively explores the relationship between China’s socioeconomic reality and the category of socialism, taking into account the findings of the preceding chapters. CPC’s narrative claiming that the PRC’s socioeconomic system is indeed as Socialism with Chinese characteristics is taken as the starting point of this discussion. Annex B briefly sketches a few crucial features of the evolution of world capitalism since its inception to the present time.

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Footnotes

1

Socioeconomic vectors belong to two categories. The vectors of the first category represent structural features of social production relations, and are thus essentially positive in nature. One of the most important vectors describes the relative weight of the State and of the market respectively in regulating economic activities (…).Another structural vector describes the distribution of the ownership of the main means of production. A third vector, strictly related to, yet not identical to the second one, identifies the class(es), or social group(s) controlling the economy as whole, and determining the joint process of accumulation and technical progress (…). The vectors of the second category are normative, and represent the degree of achievement of intermediate (e.g., GDP growth, energy consumption, speed of technical change) and final goals (such as poverty elimination, universal satisfaction of basic needs, equity in opportunities, an ethically and socially satisfactory income distribution, environment protection).(Gabriele and Schettino 2012, pp. 29–30)

2

As will be made clear in the remainder of this book, I maintain that, by and large, China’s one is indeed a socialist market economy, albeit transiting through a primitive stage of development (see CPC 2017a, b).

3

On the contrary, leaders in most other countries see themselves as doing their best to improve the welfare of their population following the natural and eternal laws of market economics, without claiming to pursue the establishment of a qualitatively different kind of society.

4

Xi Jinping, in the opening session of the 19th National Congress of the Communist Party of China (CPC), claimed that "China’s socialist democracy is the broadest, most genuine, and most effective democracy to safeguard the fundamental interests of the people" (Liangyu 2017). This statement is not likely to be shared by all Chinese and international observers.

5

This historical approach allows researchers to identify relatively constant geographic, geopolitical and cultural factors shaping the evolution of different socioeconomic formations in various epochs in a given territorial space.

6

The term was first proposed by Akira Hayami in a1967 1967 study on the Tokugawa period, published in Japanese.

7

"The problem with interpreting and evaluating China solely or mainly in terms of the Western lexicon of experience is that, by definition, it excludes all that is specific to China: in short, what makes China what it is. The only things that are seen to matter are those that China shares with the West." (Jacques 2009, p. 416).

8

This alleged difference is particularly odd. The existence of a tributary system in the past does not imply that China will try to establish its relationship with East Asian neighbors in more aggressive and exploitative terms than with anybody else, taking into account China’s national interest and the existing relations of power.

9

The first and fourth differences rightly stress the importance of the size factor, in all is material and immaterial dimensions.

10

Unless explicitly specified, along the remainder of the book the term SOSHEs is to be intended in its broadest meaning, encompassing both directly State-Owned Enterprises and all other enterprises controlled indirectly by central or local governments bodies.

11

A potentiality is not by itself an actuality. Without underestimating the progress achieved so far in overcoming its traditional GDP growth fixation and realizing the cruciality of problems such as income and wealth inequality and environmental degradation, it would be hard to claim that PRC leadership is in fact acting in a fully satisfactory fashion to achieve these goals so far, and even less that it will inevitably succeed in this endeavor.

12

See also Nussbaum (2002) and Khan (1998,