Industrial organisation in China: Theory building and analysis of new dimensions

IDE Research Bulletin

March 2018

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Background and aim of the research project

By the early years of the 21st century, domestic firms in China succeeded in establishing a strong presence in the domestic market across a range of sectors. A growing accumulation of research has shown that important parts of Chinese manufacturing industries dominated by domestic Chinese firms often exhibit distinctive patterns of industrial organisation (Fujimoto and Shintaku ed. 2005; Marukawa 2007; Watanabe ed. 2014). The first is vertical disintegration, where key value chain functions are split up and undertaken by separate firms. The second is arm's-length relationships between firms that are responsible for different value chain functions. This is unexpected insofar as one might expect vertical disintegration to require more explicitly co-ordinated value chain governance between the fragmented parts. The third is entry of a large number of firms, including those equipped with limited levels of general capabilities. The resulting intense competition between many firms, as well as economies of scale in the production of intermediate inputs, enabled Chinese industries to attain remarkable levels of price-based competitiveness.

Despite the growing research on this topic, a number of issues remain underexplored. First, there is a question of what constitute the essence of industrial organization in China, and if there is a distinctively "Chinese model" of industrial organization—in parallel with the Japanese model of relational contracting developed by Asanuma (1999), Sako (1992) and others, or the model of modular production that initially emerged in the US (Sturgeon 2002). Despite recent attempts to extract the common essence across industries and formulate them into a conceptual framework (Fujimoto and Shintaku eds. 2005; Marukawa 2007; Watanabe 2014), the work is still at inception. More research is needed to lay down the theoretical underpinnings of the Chinese industrial organisation.

Second, there is a question of whether organisational patterns found in the literature, most of which covered periods up the early 2000s, is a temporal phenomenon occurring at a specific stage of development or a fundamental and enduring characteristic of Chinese industries. Indeed, the above model seems to have worked well for Chinese firms serving the low-end domestic market until the early 2000s, but after that important changes started to take place. On the one hand, as a result of the rapid rise in per capita income, Chinese consumers started to opt for increasingly differentiated products in terms of quality, functionality, and brands. On the other hand, technological changes such as progress in information technology, environmentally-friendly technology, or new materials also affected some industries. The question of how Chinese firms respond to these changes and whether or not the firms’ responses transform the original patterns observed up to the 2000s remain to be explored.

Third, there is an issue of whether the organisational pattern can be transferred abroad as Chinese firms internationalise via exports or direct investment. It is well-known that the internationalisation of the Japanese model required lead firms that were able to recreate some elements of the model overseas through practices such as, for example, follow sourcing (encouraging or obliging domestic suppliers to open up plants where assemblers were creating new operations). More research is needed to identify whether the Chinese model would follow a similar course. This issue, along with the second one discussed above, would serve as a test of resilience and adaptability of Chinese industrial organisation.

This research project has addressed the above three questions. By synthesising original data and existing empirical studies with relevant theoretical literature, it has sought to develop an improved understanding of industrial organisation that lay behind the remarkable growth of Chinese manufacturing industries.