Why Regional Innovations Differ in China

Makino, Shige（牧野成史）

Three major regions in China are paving the way in economic growth and innovation. While they are all successful, each has achieved its success in a different way. Understanding the characteristics of the interaction between the government and local and foreign firms in each region can lead to greater development

By Megan Li, PhD Candidate, Department of Management, CUHK Business School

In China, the Bohai Sea Delta (BSD), Pearl River Delta (PRD) and Yangtze River Delta (YRD) regions have been the center of economic growth in China for decades and have attracted significant attention from academics and practitioners. These regions have all undergone rapid development since their establishment, accounting for 58.15 percent of China’s GDP despite covering only 9.51 percent of the national territorial area, according to the 2010 national statistics[1].

However, there is a startling divergence among the three regions in terms of GDP, innovation, actual inflow of foreign capital and other key economic indicators. Most reports have shown that YRD is much better at using foreign capital while BSD is better at promoting endogenous R&D. Although PRD was established first and has the most open coastal area, it now faces serious industrial transformation dilemmas. Many studies have attempted to explain why the economic performance of these regions differs by comparing a variety of location-specific characteristics, as in any regional studies. However, systematic investigations have not been conducted and no consensus has been reached.

Our study[2] attempts to provide a clearer picture of the economy patterns of the three regions in China by comparing the three regions through archival data and interviews with one of the leading scholars in regional innovation in China.

With the collected data and interviews, the team characterizes the regional economic patterns through the interaction among the government, foreign firms and local firms. We found that BSD has the greatest government involvement and the lowest level of foreign dependence, whereas PRD enjoys the greatest dependence on foreign firms with the least government involvement, and YRD reveals a low-to-moderate degree of involvement from both the government and foreign firms.

In BSD, local firms play a dominant role in creating the foundation of regional innovation and the government directly supports the process. The nature of the innovation pattern in this region can be described as internal R&D under government control. In PRD, on the other hand, foreign firms control the core innovative knowledge and local firms use this knowledge to produce products mainly for export. This pattern can be described as internal production with external knowledge. And in YRD, local firms hold a strong independent-learning position and the involvement from the government and foreign firms vary from low to moderate. With these distinct industrial development backgrounds and different patterns of interactions between local firms, governments and foreign firms across the three regions, the result is different patterns of government and business ties.

The findings of this study have important implications for business practice. An understanding of the regional development can help entrepreneurs to identify the often invisible contextual factors embedded in their own region, such as the effects of institutions and social ties on business. Hence, entrepreneurs should be aware of the interactions among government, foreign firms and local firms and adjust their strategies accordingly.

More specifically, local firms should be cautious about what different social ties will bring them. In the BSD, governmental ties provide firms with direct access to the resources necessary for innovation, but may not enhance their learning capabilities. In the PRD, business ties with foreign firms give local firms access to advanced technologies, but innovative knowledge is not improved. In the YRD, both types of connections improve indigenous firms’ innovation through learning. Thus, when endogenous innovation is emphasized in regional innovation systems (RISs), firms should be aware that even though some social ties can help improve their innovation performance, they may not always enhance their innovative capability.

The role of the government in facilitating regional innovation diverges across regions. As China is transitioning from a planned economy to a market one, the government’s role should also shift from guiding to facilitating the economy. However, this study showed that China’s economic regions have not developed as such, and thus the government should adjust its role in regional development accordingly.

Although government involvement was lowest in PRD, a good relationship with government officials can still significantly improve a firm’s development in this region. And while government involvement was highest in BSD, the firms in this region tend not to keep a close connection with their government officials as compared with the other two regions. One possible explanation is that as these firms grow, they accumulate their own knowledge and business networks that can provide resources for innovation without much of the government’s help. Although governmental ties can provide local firms in BSD with direct access to resources, they can also use their own business ties which tend to be longer-lasting because business partners often share interests and ongoing interactions that enhance trust and commitment to the collaboration[3].

However, the priority for government officials is to gain political promotion over subordinate officials which may be different from that of the firms. The different interests may prevent long-term relationships between government officials and firms. In addition, as government involvement increases, governmental ties are less likely to enhance a firm’s legitimacy. Therefore, while increased government involvement may increase innovation in PRD, it may not be the case in BSD.

In conclusion, as China is transitioning from a planned economy to a free market economy, it is crucial for Chinese government and firms to recognize the regional divergence in terms of economic patterns. To improve national competitiveness, it is necessary for an emerging economy to transit from imitation to innovation, during which learning is the key. In this transitional process, it is very likely for government to play a critical role by setting the economic policies, such as providing privileges to innovative industries and emphasizing on innovation-related activities. This government practice has proved to be successful in building national competitiveness in other countries, such as Korea and Singapore. Therefore, the Chinese government should also put learning and capability building of local firms as a priority, and identify the diversity in regional economic development patterns as well as take corresponding actions.

Note:

The Bohai Sea Delta (BSD) The Bohai Sea Delta (BSD) is the economic hinterland surrounding Beijing and Tianjin. It also includes areas in Hebei, Liaoning and Shandong which surrounds the Bohai Sea. The Pearl River Delta (PRD) The Pearl River Delta (PRD) in Guangdong province, China is the low-lying area surrounding the Pearl River estuary where the Pearl River flows into the South China Sea. It is one of the most densely urbanized regions in the world and one of the main hubs of China’s economic growth. PRD is often considered an emerging megacity. The Yangtze River Delta (YRD) The Yangtze River Delta (YRD) generally comprises the triangle-shaped territory of Wu-speaking Shanghai, southern Jiangsu province and northern Zhejiang province of China.

References:

[1] Zhang XY, Zhao X, Ma X, Wang DP. 2010. Study on the financial industrial agglomeration in Bohai Sea Delta—Based on the comparison with Yangtze River Delta and Pearl River Delta. Science & Technology Information 22: 25-26.

[2] Li, Megan Y., Makino, Shige, and Jiang, Chunyan.”Regions and Innovation: Evidence from Three Economic Zones in China (study under review).

[3] Poppo L, Zhou KZ, Ryu S. 2008. Alternative origins to interorganizational trust: an interdependence perspective on the shadow of the past and the shadow of the future.Organization Science 19(1): 39-55.