ECON

The Chinese Economy, vol. 40, no. 6, November–December 2007, pp. 6–23. © 2007 M.E. Sharpe, Inc. All rights reserved. ISSN 1097–1475/2007 $9.50 + 0.00. DOI 10.2753/CES 1097-1475400601

ZHONGXIU ZHAO AND KEVIN HONGLIN ZHANG

China’s Industrial Competitiveness in the World

Abstract: This article studies China’s industrial competitiveness using international perspectives and comparison. Adopting the index of competitive industrial performance developed by the United Nations Industrial Organization (UNIDO), we assess China’s position in the world and analyze the dynamics of its industrial capabilities, focusing on five drivers of industrial capability: skills, technological efforts, inward foreign direct investment (FDI), royalty and technical payments abroad, and modern infrastructure. We find that China’s big jump in industrial competitiveness is largely associated with its participating international production networks. The corresponding dangers with such connection, however, are low domestic value added and merely serving as an export platform. China can become a global industrial power only if it succeeds in upgrading industry and domestic innovation.

What is the state of China’s industrial competitiveness in the world? Perhaps the clearest impression is one of rapid economic growth since 1979, when China started its economic reforms and open-door policy. However, as a developing country in the era of globalization, China faces the challenge of how industrial enterprises can become and remain internationally competitive.

Zhongxiu Zhao is a professor at the School of International Trade and Econom- ics, University of International Business and Economics, Beijing, China. Kevin Honglin Zhang is an associate professor in the Department of Economics, Illinois State University, Normal, IL 61790–4200.

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The ability to compete internationally is the basic condition for growth in the industrial sector. Relying on such static endowments as primary resources and cheap unskilled labor may be a good way to start, but it is a bad way to continue. How does a country build its industrial capabili- ties and compete in the global market? Some strategies or approaches emerge: building capabilities through domestic research and development (R&D); building capabilities through foreign direct investment (FDI); and building capabilities through a combination of these two. China adopted the first strategy in the period 1949–1978 with certain achievements in basic industrial capabilities at quite high costs. The second approach was followed in the next two decades with significant success but it also faced serious challenges. China has succeeded by drawing in foreign technol- ogy largely by plugging into global value chains, becoming suppliers of labor-intensive products and components, and improving domestic capabilities. Since 2006 China has shifted to the third strategy of upgrad- ing its industry through domestic technology innovation in international production networks. China’s goal is to combine its reliance on FDI with strong industrial policy, targeting the activities it wishes to enter and the functions it wishes to upgrade.

China made the right choice to participate in globalization in the late 1970s, and made a timely move to the third strategy. In the two decades starting in 1979, the best strategy for China with no strong technological capabilities was to find its way into the production systems of global value chains and let local capabilities develop slowly. After gaining certain industrial strength from global production systems, China recognized that it was difficult to sustain economic growth as industries upgrade and wages rise unless it could raise their skill, technological, and insti- tutional bases. Plugging into global value chains seems unable by itself to ensure that China can automatically upgrade its capabilities. Yet such upgrading is essential. Moreover, global productions systems are highly concentrated, and the concentration rises with the sophistication of the technology. Thus domestic innovation in technology is called for.

The purpose of this article is to study China’s industrial competitiveness from international perspectives and compare them. We focus on the following three issues: (a) theory and evidence of industrial competitiveness in the global markets—factors that determine a country’s industrial capabilities should be identified and relevant empirical evidence should be provided; (b) China’s industrial competitiveness in the world—using the index of competitive industrial performance developed

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by the United Nations Industrial Development Organization (UNIDO), we assess China’s position in the world and analyze the dynamics of its industrial capabilities in the period 1985–1998; and (c) problems and challenges for China to sustain its industrial growth since 1998—some policy issues facing China are identified in recent industrial development, especially how to increase domestic value added in global production systems and what should be done in industrial upgrading and domestic innovation.

Industrial Competitiveness

Theory and Evidence

Why does industrial competitiveness matter? Since the Industrial Revo- lution, manufacturing has been the engine for economic growth and for transforming the economic structure of poor countries. In particular, it has been the catalyst for shifting them from simple, low-value activities with poor growth prospects to activities with high productivity, increas- ing returns, and strong growth potential (UNIDO 2002). The growth of technology-driven economic activities in the past two decades does not change this fact, despite the rising share of services in income and the much-hyped growth of the “new economy.” Indeed, rapid technical progress makes industrialization even more important to developing countries.1

Industrial performance reflects the complex interaction of many fac- tors, including institutions, skills, technologies, infrastructure, network- ing, political and social stability, and other factors. To make analyses useful and also workable, we have to be limited to a few of the most important determinants, instead of including all factors. A recent study by UNIDO (2002) identified five drivers that are directly relevant to in- dustrial competitiveness: skills, technological effort, inward foreign FDI, royalty and technical payments abroad, and modern infrastructure.

Skills

Skills have always been important for industrial performance. But they have become even more crucial because of the explosive growth of the weightless economy and the high information content of industrial activities.

NOVEMBER–DECEMBER 2007 9

Technological Effort

Technological effort is a crucial driver of industrial development, even for industrial latecomers. Countries that import technologies must engage in conscious learning to master the technologies and adapt them to local conditions. The more advanced and complex the technology, the greater the learning effort required.

Inward FDI

FDI is an important way of transmitting skills, knowledge, and technol- ogy to developing countries and so is an important driver of industrial performance. Multinational corporations (MNCs), generally the leading innovators in their industries, are engaging in more technology transfer, re- flecting the rising cost and pace of technical progress and the reluctance of innovators to sell valuable technologies to independent firms. MNCs also provide capital, skills, managerial know-how, and access to markets.

Royalty and Technical Payments Abroad

Royalty and technical payments abroad are meant to capture arm’s-length purchases of know-how, patents, licenses, and blueprints—imports of embodied technology in nonequity forms.

Modern Infrastructure

While traditional infrastructure (railways, roads, ports, water supplies) is still important to industrial performance, modern infrastructure—related to information and communication technologies (telephone mainlines, mobile telephones, personal computers, and internet hosts)—reflects industrial competitiveness.

Table 1 reports the multiple regression estimations of competitive industrial performance (CIP) over its determinants in 1985 and 1998 (UNIDO 2002).2 The following findings emerge from the table. Domestic R&D and access to foreign technology through FDI and licensing have a powerful influence on industrial performance. In fact, R&D is statistically the most important factor in both 1985 and 1998 and over time. This finding highlights the need for domestic technological effort, even at low levels of industrial development. Licensing foreign technology is

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also statistically significant, but its role appears to be diminishing. By contrast, the role of FDI has grown in significance. The significance of skills is also increasing, consistent with the rising importance of human capital and technology for industrial competitiveness. Infrastructure remains important in both 1985 and 1998.

Global Perspectives of China’s Industrial Competitiveness

The most direct and relevant measurement of a country’s industrial capabilities is the CIP index, constructed by UNIDO (2002). The index is based on four indicators: manufacturing value added (MVA) per capita, manufacturing exports (MX) per capita, and the shares of medium- and high-tech products in manufacturing value added and in manufactur-

Table 1

Regression Results for Industrial Competitiveness, 1985 and 1998

Independent variables 1985 1998 Initial effects

Skills 0.09* 0.13* 0.26***

(1.83) (1.82) (2.91)

R&D 0.44*** 0.47*** 0.49***

(9.30) (8.85) (5.27)

FDI –0.11 0.18*** 0.07

(–1.58) (3.38) (0.65)

Royalties 0.38*** 0.25*** 0.34**

(5.23) (5.99) (2.90)

Infrastructure 0.20** 0.20** –0.13

(2.24) (2.02) (–0.85)

Development dummy –0.20*** –0.02 –0.30**

(–3.19) (–0.40) (–2.92)

Adjusted R2 0.93 0.88 0.81

Observations 75 85 75

Source: UNIDO Scoreboard database (UNIDO 2002), box 4.2. Notes: The model of initial effects uses the 1998 CIP index as the dependent variables and 1985 data for the independent variables. *, **, and *** indicate significance at 10 percent, 5 percent, and 1 percent, respectively. All statistical tests for functionality, heteroskedasticity, and collinearity are satisfied. The potential problem raised by the high correlation between the independent variables does not affect the result.

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ing exports. The first two indicators reflect industrial capabilities. The other two reflect technological complexity and industrial upgrading.3 A ranking of eighty-seven economies (selected on the basis on data avail- ability for inter-economy comparison) for 1985 and 1998 by the CIP index was published in the Industrial Development Report 2002/2003 (UNIDO 2002).

The ranking for 1998 reveals an expected pattern: industrialized countries congregate near the top, middle-income developing economies (including China) around the middle, low-income developing countries and least-developed economies at the bottom. In general, the CIP index ranks changed little between 1985 and 1998. But some exceptions exist because leaps in the rankings are nevertheless possible. China rose in the CIP ranks by twenty-four places between 1985 and 1998—the largest jump in the world during that period. Table 2 presents the ranking and index values of 1985 and 1998 for the top ten countries, China, and three other large economies (Brazil, India, and Russia).4

The rise of China in the CIP rank is largely associated with its participation in global production systems. China exploited competitive advantages in both labor-intensive and technology-based (assembly and testing) activities. Its special economic zones, with strong presence of exporters from Hong Kong and Taiwan, substantially drove its low-tech activities. MNCs and some dynamic domestic firms drove exports of technologically complex products. Exports by foreign affiliates in 1998 accounted for 48 percent of China’s total exports, and the share rose to over 60 percent in 2006.

Showing the top ten economies that gained most market share during 1985–2000, Table 3 indicates dynamic competitiveness (static competi- tiveness being shown by market shares at a point in time) and reveals the ability of a country to keep up with changing technologies and export patterns.5 The lists in Table 3 contain the most dynamic exporters in the world by technology category (resource-based, low-technology, medium-technology, and high-technology products).6 China is the larg- est winner, leading in all sectors except resource-based manufacture, in which it ranks third.

China has indeed improved its industrial competitiveness in the past two decades, due largely to expansion in exports. However, China’s ex- port boom is inflated in part by its processing trade and foreign-invested enterprises. It also should be emphasized that export market shares are hard to gain and hard to sustain. Export market shares may be gained

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Table 2

Competitive Industrial Performance Index, 1985 and 1998

Rank Index value

Country 1998 1985 1998 1985

Singapore 1 6 0.883 0.587

Switzerland 2 1 0.751 0.808

Ireland 3 15 0.739 0.379

Japan 4 2 0.696 0.725

Germany 5 3 0.632 0.635

United States 6 5 0.564 0.599

Sweden 7 4 0.562 0.633

Finland 8 7 0.538 0.494

Belgium 9 8 0.495 0.489

United Kingdom 10 12 0.473 0.426

Brazil 33 27 0.149 0.140

China 37 61 0.126 0.021

Russia 44 0.077

India 49 50 0.054 0.034

Source: Computed from UNIDO 2002.

because of temporary advantages such as preferential market access for labor-intensive, low-technology goods. A genuine improvement in export competitiveness can result from the upgrading of human resources or the use of improved technologies.

The information reported in Table 4 offers a closer look at China’s position in terms of four indicators of the CIP index and five drivers of industrial competitiveness.

Maufacturing Value Added

China’s rank rose by two places, from sixth to fourth in the years 1985– 1998. China’s MVA share in the world rose by two points, from 4.25

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Table 4

China’s Position in the World: Four CIP Indicators and Five Drivers

1998 1985

Rank Value Rank Value

MVA ($ million) 4 355,540 6 105,698

Share of MVA in the world (%) 4 6.31 6 4.26

MVA per capita ($) 55 287.0 63 100.6

MX ($ million) 7 167,681 28 6,049

Share of manufacturing exports in the world (%) 7 3.96 28 0.49

MX per capita ($) 52 135.4 74 5.8

MVA: share of high- and medium- tech industry (%) 22 51 19 49

MVA: share of low- and resource- based industry (%) 49 51

MX: share of high- and medium- tech industry (%) 29 36.6 48 4.1

MX: share of low- and resource- based industry (%) 54.6 19.5

Skills (Harbison-Myers Index) 59 9.75 67 5.15

Share of technical tertiary enrollments in population (%) 66 0.1. 64 0.08

Productive enterprise-financed R&D per capita ($) 44 0.9 46 –

FDI inflows per capita ($) 49 30.1 65 0.8

Royalty and license payments abroad per capita ($) 57 0.3 64 –

Modern physical infrastructure 55 69.6 77 3.0

Source: Computed from UNIDO 2002. Notes: MVA = manufacturing value added; MX = manufacturing exports; FDI = foreign direct investment; and modern physical infrastructure is defined as number of telephone main lines per 1,000 people.

NOVEMBER–DECEMBER 2007 15

percent to 6.31 percent. Yet the rank in MVA per capita was fifty-five, although this showed a rise of eight places from sixty-third.

Manufactured Exports (MX)

From 1985 to 1998, China raised its share of world manufactured exports by 3.5 points (from 0.49 percent to 3.96 percent), and its rank rose from twenty-eighth to seventh as a result. But per capita exports from China were still very low ($135 versus $2,035 for the United States).

Technological Structure of MVA and MX

China’s MVA and MX are becoming more technology-intensive, moving from low-tech and resource-based products to medium- and high-tech products.7 But China’s manufacturing structure remained stable over the period 1985–1998, with 49 to 51 percent of high- and medium-tech in total. China made great progress in the technological composition of its manufacturing exports, with the largest increase in the share of medium- and high-tech exports (from 4 percent to 37 percent).8

Table 4 also presents China’s ranks in the five drivers of industrial competitiveness. China made significant progress in skills, with a rise in rank from sixty-seventh to fifty-ninth. China sharply increased its imports of foreign technology from 1985 to 1998, as reflected in its improved ranks in FDI and royalty payments. China also slightly improved its ranks in R&D. It invests almost as much in enterprise-financed R&D as the Russian Federation and nearly three times as much as India. Moreover, China accounts for 17 percent of tertiary enrollments in the developing world and lags behind only the United States and the Russian Federation in the number of tertiary students enrolled in technical subjects. However, China’s skill base appears weak relative to its size. Large improvements in infrastructure did not happen in the years 1985–1998, but did occur in the period 1999–2006.

Two points are worth mentioning about China’s position in world industrial competitiveness. First, manufacturing activity remains heavily concentrated in industrialized countries, although China is increasing its share, but in intensity of industrialization (measured by manufacturing value added per capita), China is still far behind. Second, among devel- oping regions, China is the best industrial performer in most respects, though it lags in manufacturing value added per capita. It has the high-

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est growth rates in manufacturing production and exports. It is far more export oriented than other developing regions. It has a more technologi- cally advanced structure and is rapidly improving all its main drivers of industrial performance.

Challenges and Prospects

Challenges facing China may be seen from its strategy of building industrial capabilities through FDI. China’s large upward leaps in high- and medium-tech manufactures and high- and medium-tech exports are associated with its participation in international production networks through inward FDI, which sharply raises the share of complex products in exports and MVA (Zhang 2002; 2006). This is not to say that the strat- egy is the only way to upgrade technology in developing countries. In fact, it may not even be the best and most sustainable way. It introduces new production technologies and raises exports, but local capabilities may not develop or deepen if China fails to move beyond final assembly of high-tech products. To build genuine technological capabilities in complex activities, China has embark on a slower, costlier, and riskier process of advancing from assembly to real manufacturing, and from there to local design and development. China needs to do much of this without investment by multinational corporations—even restricting foreign entry to encourage the development of deeper capabilities in local enterprises.

Prospects for China’s industrial competitiveness may be suggested from a look at its country characteristics. China is special due to its large population size. China’s position in world gross domestic product, exports, and per capita income are presented in Tables 5 through 7. Ac- cording to the World Bank (2006), China’s gross domestic product (GDP) in 2005 is in fourth place using the Atlas method based on exchange rates, and China has the second-largest economy in the world (just after the United States) using the purchasing-power-parity (PPP) method, which many people believe is closer to the truth. But still China’s GDP is only about 70 percent of that of the United States (Table 5). It is expected that China may be the world’s largest economy (using the PPP method) in 2015, given the growth rates of China and the United States.

China is the nation that gained most of the world export share over the years 1985–2005 (from 1.4 percent to 7.3 percent). In 2003, China had already become the third-largest exporting country, and its export

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Table 5

China’s GDP in the World in 2005

Rank/country Atlas method (US$ billion) PPP method

(international $ billion)

1. United States 12,455 12,409

2. Japan 4,506 3,944

3. Germany 2,782 2,418

4. China 2,229 8,573

5. UK 2,193 1,927

6. France 2,110 1,830

10. Brazil 794 1,627

12. India 785 3,816

14. Russia 763 1,560

Source: Computed from World Bank 2006.

growth rate in 2005 was 28 percent, the highest in the world (Table 6). It is likely that China will become the number one exporter within a decade, if it keeps up its rapid growth of exports.

What per capita income indicates is not as bright as GDP and exports. According to the World Bank (2006), gross national income (GNI) per capita for China in 2005 is $1,740 (using the Atlas method), ranked as 128th in the world, and is only 4 percent of the U.S. GNI per capita ($4,370). The corresponding figures using the PPP method are inter- national $6,660, ranked as 107th, and 16 percent of that of the United States. It is safe to say that China is a developing country and may not catch up with developed countries in terms of per capita income in the near future (see Table 7).

China seems to have several advantages that may help it to become a global industrial power, including its current industrial capacity and export competitiveness, its large country size, and its strong centralized government. In aggregate terms (although not per capita terms), China already has the highest industrial capacity and export competitiveness in the developing countries and is in the top place in the world. For ex- ample, China is by now the dominant global player in many industries, especially those that are labor intensive (Shenkar 2005; UNCTAD 2002b).

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Table 6

Top Ten Exporting Nations in the World in 2005

Rank Country Value of exports

($ billion) Share in the

world (%) Growth (%)

1 Germany 970.7 9.3 7.0

2 United States 904.3 8.7 10.0

3 China 762.0 7.3 28.0

4 Japan 595.8 5.7 5.0

5 France 459.2 4.4 2.0

6 Netherlands 401.3 3.9 12.0

7 Italy 377.9 3.6 9.0

8 UK 366.8 3.5 4.0

9 Canada 359.6 3.5 14.0

10 Belgium 329.6 3.2 7.0

Source: World Trade Organization (WTO) 2006.

China-based factories make 70 percent of the world’s toys, 60 percent of its bicycles, 50 percent of its shoes, and one-third of its luggage. In those product categories, it is often impossible to find a non-Chinese product on store shelves.

China’s industrial capability in terms of technology is also in a good position to upgrade. A huge effort has been made by China to build com- petitiveness in medium-technology industries. The strategy used in China is to integrate domestic firms into the global production chain through FDI. In some ways, medium-tech exports show national technological capabilities better than do high-tech exports. The assembly activities of foreign-invested enterprises play a role here too, but less so than in high- tech exports, because strong export performance in medium-tech is often based on deeper local manufacturing. Mobility also plays a role. Parts and components of high-tech equipment can often be shipped around the world more easily than those of heavy industries. In China medium-tech exports are led by both MNCs and domestic firms (Zhang 2004).

The Chinese government, of course, is not content with remaining a low-tech, labor-intensive manufacturer. In fact China has worked very hard in industrial upgrading. For instance, through attracting and utilizing FDI, China is already active in certain capital- and technology-intensive

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Table 7

China’s GNI per Capita in the World 2005 (Atlas Method and PPP Method)

Countries Atlas method (U.S. dollars) PPP method (international dollars)

United States 43,704 41,950

Japan 38,980 31,410

Germany 34,580 29,210

Russia 4,460 10,640

Brazil 3,460 8,230

China 1,740 6,660

India 720 3,460

Source: Computed from World Bank 2006.

industries. China builds half of the world’s microwave ovens, one-third of its TV sets and air conditioners, a quarter of its washers and mobile phones, and one-fifth of its refrigerators. These products represent the fastest-growing segment of its exports as well as its new manufacturing sectors.

China undoubtedly has the advantage of size in terms of both popu- lation and natural resources. Its large country size leads not only to a possible huge domestic market, but also to the availability of abundant unskilled and skilled labor. The large market provides China with tre- mendous bargaining power, a trump card that was unavailable to other developing countries.9 The lure of its domestic market enables China to require technology transfer as a condition for foreign investor entry, capturing unprecedented benefits. For instance, China is the only coun- try in the world where domestic automakers maintain equity ventures with competing foreign partners, which makes it possible to learn “best practices” from both and end up with potentially more knowledge than either foreign party (Shenkar 2005; UNCTAD 2002a). The aim is to create Chinese multinational firms (like the Haier Group) that will hold their own in global markets and replicate the success of Toyota, Sony, and Samsung, but in a shorter time frame.

China’s large country size also means a vast pool of human resources, including not only an “unlimited” supply of unskilled labor, but also a large and growing number of engineers, scientists, and skilled techni-

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cians.10 The coexistence of cheap labor with increasingly abundant skilled personnel underlies China’s strategy of sustaining its dominance in labor- intensive industries even as it enters technology-intensive sectors. Un- like Japan and South Korea, China may not let go of the labor-intensive segment as it moves up the ladder. Instead, it will leverage its dominance in the labor-intensive segment to fund a major push into medium- and high-technology industries.

China’s strong centralized government turns out to be a big plus in promoting national competitiveness in global markets. Combined with large country size, a strong government enables China to realize its bar- gaining power over MNCs. A strong government also makes it possible for China to allocate resources more efficiently in industrial upgrading. For example, the large scale of improvements in China’s infrastructure conditions (highways, railways, and telecommunications) and the in- dustrial base and supply network would not be possible without active government intervention.

Conclusion and Policy Implications

China has been successful in its process of industrialization by participating in international production networks for the past two decades. The challenge facing China, however, is to have sustainable growth and to upgrade its industry. Building technological capabilities is a long, costly, and risky process, which many developing economies cannot afford entirely on their own. The emergent global setting opens up alternatives for developing countries to build up such capabilities. This is especially true in knowledge-driven sectors, where developing countries may not find other ways to enter global markets and gain ac- cess to new technology and knowledge. Although external sources can be used by developing countries to stimulate industrialization, building domestic industrial capabilities is a must if industrial growth is to be rewarding and sustainable.

The biggest opportunity for China lies in its potential to develop self-contained, technology-intensive, and large-scale manufactures that combine high-quality human capital with low labor and infrastructure costs. With support from its huge domestic markets, China could develop large-scale production and expand its global market share in both low and high-end industries. Following this process based on rapid upgrading, China could become a global industrial power through establishing mutu-

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ally reinforcing links between FDI, exports, and industrial capabilities. The outcome will be different if China does not follow such a route.

It may be used by MNCs as an assembly platform for low-value-added exports, and the benefits of rising trade and FDI could be extremely limited in terns of technological upgrading and industrialization. Even- tually China could become another Brazil or Mexico, developing, but not taking off.

Notes

1. Industry has long been the main source, user, and diffuser of technical progress and associated skills and attitudes. Industry promotes economic growth through applying technological progress to production; driving and diffusing innovation; developing new skills and attitudes; leading institutional development; producing beneficial externalities; stimulating modern services; generating dynamic compara- tive advantage; internationalizing economies; and modernizing enterprises (Chenery, Robinson, and Syrquin 1986).

2. To control for differences arising from levels of development not captured by other variables, a dummy variable is added (talking the value zero for developed and transition economies and one for developing countries). Regressions are conducted for 1985 and 1998. CIP for 1998 is also regressed on the independent variables in 1985 to capture the impact of the initial stock of the five determinants on subsequent performance (UNIDO 2002).

3. According to UNIDO’s classification of manufactured products by technology intensity (2002), four types are identified: (1) resource-based manufactures—mainly processed foods, simple wood products, refined petroleum products, dyes, leather (not leather products), precious stones, and organic chemicals; (2) low-tech manu- factures—mainly textiles, footwear, other leather products, toys, simple metal and plastic products, furniture, and glassware; (3) medium-tech manufactures—heavy industry products such as automobiles, industrial chemicals, machinery, and relatively standard electrical and electronic products; and (4) high-tech manufactures—com- plex electrical and electronic (including telecommunications) products, aerospace, precision instruments, fine chemicals, and pharmaceuticals.

4. Brazil, Russia, India, and China are called “BRIC” emerging economies. 5. Winners in Table 3 do not include large exporters that have not improved

their competitive position during the period 1985–2000 (for example, Japan in high-technology exports), even though they might have the largest market shares over the whole period.

6. World export patterns have changed significantly. The changes reflect structural shifts in production caused by new technologies, new demand patterns, new logisti- cal factors, new ways of organizing and locating production, new policies, and new international trade rules and preferences (UNCTAD 2002b; Zhang 2007).

7. Medium-tech and high-tech products accounted for more than 60 percent of global manufactured exports in 1998, mainly because of rapid growth in high-tech exports (Zhang 2006). MNCs, however, play a key role in international trade through integrated global production systems. The relocation of different stages of produc-

22 THE CHINESE ECONOMY

tion based on factor intensity in different countries results in considerable intra-firm trade. Integrated production systems are most prominent in the information and communication technology industries, where the high value-to-weight ratio of the product makes it economical to ship products and components around the world in search of the fine differences in costs (UNCTAD 2002a; Zhang 2006).

8. High-tech exports: China was in eleventh place in 1998, compared to not among the top twenty-five exporters in 1985. Medium-tech exports: China was not among the top twenty-five in 1985, but was in thirteenth place in 1998. Low-tech exports: China, not among the top twenty-five exporters in 1985, was the global leader in 1998. Yet its low-tech strengths do not detract from its strong performance in medium- and high-tech products. Resource-based exports: China was in twelfth place in 1998 (not among the top twenty-five in1985) and led in developing countries. Many developing countries rely heavily on primary exports, but competitiveness in processed primary products is firmly in the hands of industrialized countries, many without a large domestic resource base. Again, technology—mainly the ability to handle large, capital-intensive, and complex processing facilities—is of great im- portance. So are complex organization (large integrated production facilities across nations), marketing, and branding.

9. China is already the largest market for Boeing’s commercial aircraft and American machine-tool makers, and its automotive market is the most promising in the world. China is already Volkswagen’s biggest foreign market, ahead of the United States.

10. Another important source of technological, scientific, and managerial knowledge is in Hong Kong and Taiwan. A key strength thus is that China is not alone; rather, it is the hub of a cluster of complementary and increasingly integrated economies that make up Greater China (Shenkar 2005; Zhang 2004).

References

Chenery, H.B., S. Robinson, and M. Syrquin. 1986. Industrialization and Growth: A Comparative Study. Oxford: Oxford University Press (for the World Bank).

Shenkar, Oded. 2005. The Chinese Century: The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job. Upper Saddle River, NJ: Wharton School Publishing.

United Nations Conference on Trade and Development (UNCTAD). 2002a. World Investment Report 2002. New York: United Nations.

———. 2002b. Trade and Development Report 2002. New York: United Nations. United Nations Industrial Development Organization (UNIDO). 2002. Industrial

Development Report 2002/2003. New York: United Nations. World Bank. 2006. World Development Indicators 2006. Washington, DC. World Trade Organization (WTO). 2006. World Trade Report 2006. Geneva. Zhang, Kevin Honglin. 2002. “China as a New Power in World Trade.” In

China’s Access to WTO and the Global Economy, ed. H. Fung, C. Pei, and J. Johnson, 32–49. Beijing: Yuhang Publishing House.

———. 2004. “Maximizing Benefits from FDI and Minimizing Its Costs: What Do We Learn from China?” In Foreign Investment in Developing Countries, ed. H.S. Kehal. 78–91. Hampshire, UK: Palgrave/Macmillan.

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———. 2006. “FDI and Host Countries’ Exports: The Case of China,” Economia Internazionale / International Economics 58, no. 4: 113–27.

———. 2007. “Determinants of Complex Exports: The Case of China,” Econo- mia Internazionale / International Economics 59, no. 1: 111–22.

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