Industrial Policy with Chinese CharacteristicsBy: Douglas Ridley

Industrial Policy Defined• Industrial Policy (IP) is the broad spectrum of policies that a

government uses to provide support for sectors of the economy where development is deemed to be in the national interest.

• Internationally, these policies seek to give domestic companies and industries a competitive advantage abroad

• Domestically, Industrial policies are implemented to protect domestic companies and industries from foreign competition, often during the initial development of an industry, when it is not large enough to be able to compete.

Difference Between American and Chinese Industrial Policy• In China, business exists as a means for the development of the state. In

the United States, the government exists to facilitate the needs of the private sector

• In the U.S., direct government intervention is used to respond to crisis, whereas in China, it plays a direct role in long term strategic planning

IP Development Timeline• 1980 – 1984 – Chinese Delegations visit Japan to see how they are

implementing industrial policy – trying to replicate Japan’s high growth rate

• 1988 – State Planning Commission creates Industrial Policy Planning Division

• 1989 – 1994 – First trial industrial programs (widely seen as a failure due to a lack of resources)

• 2004 – Advocates of Industrial Policy come into power with Hu Jintao Source: Sebastion Heilmann and Lea Shih, University of Trier

How Policies are Implemented • Catalogues – list encouraged, permitted, restricted, and unwanted

industries• 5 Year Plans• Strategic Plans• Industry Specific Plans

Source: China Business Review

Catalogues• Encouraged Industries are supported by the government through

direct investment, tax exemptions, cheaper land and utilities, and less bureaucracy

• Permitted Industries are allowed to do business in China, but are given no benefits. Foreign companies are often put into this category.

• Restricted Industries are sectors that the government considers essential to the state. These include public utilities, telecom, weapons manufacturing, and infrastructure. Private companies have very limited roles in these industries

• To be eliminated industries are industries the government is actively working to phase out.

Source: China Business Review

The Logic Behind IP Development• Industrial planning allows

officials to engage in long term strategic planning, instead of simply reacting to the whims of the market

• Putting national investment into companies that are acquiring resources abroad allows them to effectively compete in international bidding

• Myth: Industrial Policy means that there is no competition, and therefore no incentive to innovate

Drawbacks • Growth without

development • Preferential treatment for

domestic companies keeps foreign companies from entering the Chinese market

• Businesses don’t have a say in creating the policies that affect them. Policies often look good on paper, but don’t work in practice

Conclusion • Chinese Industrial Policy will serve as a model for developing nations

and eventually force developed western nations to adapt by expanding their own industrial policies to include cross-sector long-term strategic planning.

Reform • Politically insulated research bodies should be given a formal say in

deciding whether or not industrial policies are adopted by the politburo

• Additional transparency should be provided in the hiring process for researchers, to ensure that candidates are selected on merit

• Instead of promoting officials based on the growth rate, there should be anonymous performance reviews by their coworkers and members of the public in their jurisdictions

Works Cited • U.S. International Trade Commission. (2007). China: Description of

Selected Government Practices and Policies Affecting Decision-Making in the Economy (USITI Publication No. 3978). Washington, DC: Government Printing Office

• Sebation Heilmann & Lea Shih. (2013). The Rise of Industrial Policy, 1978-2012. Harvard-Yenching Institute Working Paper Series

• Exec. Order No. 13534. National Export Initiative (2010). Retrieved from: whitehouse.gov

• Julie Walton. (2013). "Coming to Terms with Industrial Policy." China Business Review. US-China Business Council.