Changing Lanes in China: Foreign Direct Investment, Local Governments, and Auto Sector Development

  • Published

Changing Lanes in China: Foreign Direct Investment, Local Governments, and Auto Sector Development by Eric Thun. Cambridge University Press, 2008, 346 pp.

The emergence of Japan as an economic power in the 1980s brought forward an intense discussion of the role of the state in economic development. The revisionist school on Japanese economic development represented by James Fallows, Karel Van Wolferen, and Chalmers Johnson highlighted the crucial role played by the state through such tools as industrial policy. Up to that point, classical economists had generally held that successful economic growth and state involvement in the economy were a contradiction in terms. The debate eventually died down as the Japanese economy gradually ground to a virtual halt following the real estate bubble in the 1990s.

Japan’s experience, however, was not lost on neighboring economies. To varying degrees, South Korea, Malaysia, Thailand, and Taiwan made use of public policy to enhance their local economies. Their success strengthened the perception that the state had a role to play in the economy. None of them, however, would challenge analysis as much as China has. That country’s economy dwarfs that of all its neighbors in terms of size and historical baggage, including its socialist experience. In Changing Lanes in China, Eric Thun clarifies some of the mystery. The author, who has studied at Harvard and MIT and now teaches at Oxford, spent eight years researching this book, including a number of stays in China. The complex picture that emerges in his book presents many lessons on what the state can and cannot do to promote industrial development. For Western governments, it offers an opportunity to acquire a more sophisticated understanding of the actors involved and their interaction in China’s emergence as a successful economic power.

Before delving into that country’s distinct pattern of industrial progress, Professor Thun offers an update on research in the area of political economy. In particular he examines the shift of focus away from the nation-state to local governments as the true source of distinct development. Prior studies, including those on Japan and South Korea, tended to describe the role of the national government in shaping economic progress. The new political economy, however, emphasizes regions and localities to show the visibility of different growth patterns at the local level. Thun refers to the literature on this subject—both theoretical treatments as well as specific cases involving China. What emerges is a complex geography of development involving the central government as one actor among many that influence the evolution of local industry.

The author’s discussion of auto manufacturing effectively reveals challenges faced by Chinese leaders. Not an arbitrary choice for inclusion in the book, the auto sector has symbolized the country’s emergence as an international power. indeed, all major economies have made this industry a prominent symbol of their growing influence. However, the complex linkages and coordination required for nurturing an industry from the ground up (e.g., assembly plants, networks of suppliers, and the nature of their relations) are mind-boggling. Taking advantage of technology as well as economies of scale requires staggering investments. Producing parts in accordance with quality standards alone can present major obstacles to suppliers unaccustomed to international competition.

Further complicating the picture are the distinct local political and economic institutions. Even though many cities and regions in China have similar endowments such as cheap labor and some access to capital, the relationships between them can be radically different. Thun’s major contribution resides here. China may present a united front to the world, but the domestic reality is much more complex. Negotiations leading to China’s membership in the World Trade Organization reflected the difficulties anticipated by foreign business. The commitment by China’s central government to comply with market-opening measures, for instance, meant nothing unless it could pressure the provinces and municipalities to conform.

Thun illustrates the variety of relationships by looking at the municipalities involved in the development of an indigenous auto industry. Shanghai benefited from a long history of industrial growth. Local leaders had experience in industrial planning, and Jiang Zemin (a former president) and Zhu Rongji (a former premier) were engineers. The fact that, for the most part, the business group owned the local industry that gradually became harnessed around the auto sector facilitated the coordination of planning. Bureaucracy also had a hand in much of the capital accumulation and distribution.

Beijing, however, with its fragmented bureaucracy and loose relations between firms, experienced a much less successful outcome than did Shanghai. In such a context, coordination becomes much more difficult. The bureaucracy had little leverage in accumulating capital and financing modernization of the local industry. Local suppliers that could not adapt were allowed to fail and close shop. Eventually car manufacturers developed links to suppliers in Shanghai. Thun also looks at other variations involving state-business cooperation in Changchun and Wuhan—two other major industrial centers in northeast and central China, respectively.

From a national security perspective, military observers would do well to study China’s development of its automobile sector. Creating an industry from the bottom up has given it a great deal of valuable experience and expertise in such areas as project management, state-business relations, skills enhancement, and coordination of supplier activities in the pursuit of a goal. A true measure of China’s success will come when the country exports its cars to foreign markets, a prospect that looks promising thus far. This development can only enhance Chinese confidence in other areas.

Richard Desjardins

Oakville, Ontario, Canada

"The views expressed are those of the author(s) and do not reflect the official policy or position of the US government or the Department of Defense."