China’s industrial policies aim to build national champions via acquiring technological knowledge abroad. This goal may be in line with the current worldwide wave of economic nationalism, but it is likely to collide with the strategic aims of increasingly globalized Chinese companies.
The new U.S. president and the Chinese government have one thing in common: they look at industrial policy from a national and territorial perspective. Under his slogan “America First,” Donald Trump wants to create new jobs on U.S. territory and to defend existing jobs against imports. One of the aims of China’s “Made in China 2025” strategy is to acquire foreign technological knowledge to leapfrog the development of China’s own manufacturing sector.
Both sides are willing to pursue their national industrial dreams with an array of steering instruments – from imports tariffs or restrictions to subsidies and tax incentives for companies willing to produce within country boundaries.
In a globalized world, however, such government targets clash with the targets of internationally active companies and corporations. Their goals are not national but corporate. They gather knowledge and other assets within company boundaries by hiring skilled staff and purchasing technology or entire companies abroad, as well as by setting up affiliates, conglomerates and joint ventures all over the world. Their target is to ensure control and command over these assets against competitors.
Building national champions fit for global competition
This will increasingly be the case for Chinese companies as their global expansion continues, at least for those in private ownership. The recent surge of global foreign direct investment (FDI) of Chinese capital is subject to one overarching target: gaining access to new knowledge, new funds and new markets. Unlike many companies from Western industrialized countries, Chinese foreign investors don’t chase the benefits of cheap labor but try to tap the knowledge pool of host countries.
This is in line with the government’s strategy of purchasing foreign technology to leapfrog stages of innovation back home in China. The goal is to create national champions who can take on the international competition in China and in other global markets.
But Chinese companies have further-reaching plans. They are willing to create new knowledge outside of China’s borders if this knowledge benefits the company’s innovation and global expansion. In 2015, Huawei Technologies Co. Ltd. invested about USD 170 million in India, creating the its largest R&D project outside of China.
Globally active companies don’t care about national industrial goals
The knowledge created within the boundaries of Huawei will help China broaden its knowledge base by increasing the technological level of this successful Chinese company. But this does not mean that this knowledge now belongs to China.
Chinese government planners applaud the quest of strong domestic companies to capture market shares and profits abroad. But globally active companies don’t make their business plans to meet the national policy goal of establishing “China” as a technological leader.
In a globalized economy, technology transfer, or rather diffusion, goes both ways. The Huawei project in India is explicitly tied to the Indian government’s industrial policy “Make in India.” It generates employment for nearly 5,000 Indian software engineers. Once these people change countries or employers or set up their own enterprises, the “Chinese” knowledge generated at the Huawei facility is spread around the globe.
As of today, Chinese companies are more closely associated with state goals than their competitors in democratic countries. This is certainly true for state-owned companies, but even private businesses are subject to a certain degree of government control and intervention. Yet, this is bound to change once more of these companies compete on global markets – against foreign companies or against one another.
These companies’ CEOs will want to decide when and how to share knowledge with other players based on their business interests – even if this undermines their national government’s industrial policy goals. “China’s interest” is not equivalent with the interest of a Chinese company struggling to survive in a competitive global environment.
Discriminating against foreign companies would ultimately hurt China
Chinese planners should also be under no illusion about the extent to which strong Chinese companies will be able to replace foreign competition inside China. Discriminating between Chinese and foreign firms in China or making the diffusion of knowledge subject to government approval could turn into a boomerang, cutting Chinese companies off from the free exchange of knowledge and ideas that is the basis of economic innovation.
Despite the progress of domestic competitors, foreign companies operating in China will continue to be a major breeding place for smart manufacturing technology. Germany’s Siemens, for example, conducts research on smart traffic management systems and medical technology in its R&D centers in China. The technological knowledge generated at these centers is not for exclusive use in China, but is the basis for solutions in other emerging markets like India and Brazil. For instance, computed tomography systems, which were developed in China, are being marketed in these countries today and will help improve Siemens’ market position worldwide as well as in China.
Many Chinese companies will undergo a transformation similar to that of Western corporate giants like Siemens. With increasing cross-company equity participation between Chinese and non-Chinese firms, they will have to develop a global corporate policy. That would make a territorially oriented Chinese industrial policy less reasonable and more costly to enforce.
The recent surge of outward Chinese FDI will strengthen the competitive position of Chinese firms that acquire state-of-the art knowledge in smart manufacturing. But this knowledge will be applied not only in China, but wherever these firms run their Business.