Local state and China’s local innovation system

One of the major characteristics of the Chinese economic reforms has been its local state activism²⁴ that

23 The reason that we did not select Zhangjiang Science Park in Shanghai is that Zhangjiang is designed to host foreign manufacturing firms rather than to create an environment for linking domestic R&D institutes and firms.

24 Jean C. Oi, ‘Fiscal Reform and the Economic Foundations of Local State Corporatism in China’, Woeld Politics 45(1), (1992), pp. 99-126; Jean C. Oi, ‘The Role of the Local State in China's Transitional Economy’, The China Quarterly 144, (December 1995), pp. 1132-49; Nan Lin, ‘Local Market Socialism: Local Corporatism in Action in Rural China’, Theory and Society 24(3), (1995), pp.

301-54; Andrew Walder, ‘Local Governments as Industrial Frms: An Organizational Analysis of China's Transitional Economy’,

results in, as Segal describes, ‘a national economy that looks like a mosaic of regional economies’.²⁵ Most of the existing studies either focus on local states’ role in manipulating regulations by allowing local and foreign enterprises to receive maximum tax advantages and exemptions,²⁶ or on local officials’ active role in facilitating the collaboration of foreign firms with local firms to maximize local firms’ market share,²⁷ or on local bureaucrats’ actions that try to integrate the local R&D system with domestic firms in shaping the local innovation system and promoting industrial upgrading.²⁸ Few studies, however, have investigated how the local state at different levels uses strategies to concurrently pursue technological innovation that may or may not be able to create a local innovation system.

China’s R&D system has undergone a thorough transformation since 1978. In general, the tendencies of the reform were from centrally planned to local and market-oriented, from stressing state-owned enterprises’ role in innovation to emphasizing the importance of non-state, high-technology enterprises, from isolation of R&D from industrial production to an increase in their integration.²⁹ One of the most representative policies to do with local and regional development was the Torch Program which was initiated in May 1988.³⁰ The main task of the Torch Program was to establish high- and new-technology industry development zones in select cities that would create the environment for the linkage between R&D (universities and research institutes) and production activities in high-technology industries so as to raise the productivity of the national economy.

Many MNCs also established their R&D centers in Beijing, Shanghai, and Shenzhen to take advantage of tax

25 Adam Segal, Digital Dragon: High-Technology Enterprises in China (Ithaca: Cornell University Press, 2003), pp. 9.

26 You Tien Hsing, , Making Capitalism in China: The Taiwan Connection (New York: Oxford University Press, 1998); David Zweig, Internationalizing China: Domestic Interests and Global Linkage (Ithaca, NY: Cornell University Press, 2002); Jenn-Hwan Wang and Chuan Kai Lee, ‘Global Production Networks and Local Institutional Building: The Development of the Information Technology Industry in Suzhou, China’, Environment and Planning A 39(8), (2007), pp. 1873-88.

27 Eric Harwit, China's Automobile Industry: Policies, Problems and Prospects (Armonk, Ny: M.E. Sharpe, 1995); Weidong Liu and Peter Dicken, ‘Transnational Corporations and Obligated Embeddedness: Foreign Direct Investment in China's Automobile Industry’, Environment and Planning A 38(7), (2006), pp. 1229-47.

28 Weiping Wu ’Cultivating Research Universities and Industrial Linkages in China: The Case of Shanghai’, World Development 35(6), (2007), pp. 1075-93; Zhou, ‘Synchronizing Export Orientation with Import Substitution: Creating Competitive Indigenous High-Tech Companies in China’.

29 Evan A. Feigenbuam, ‘Who's Behind China's High-Technology 'Revolution?’, International Security 24(1), (1999), pp. 95-126;

Xielin Liu and Steven White,’Comparing innovation systems: a framework and application to China's transitional context’, Research Policy 30(7), (2001), pp. 1091-1114.

30 S. L. Gu, China's industrial technology: market reform and organizational change (London; New York: Routledge,1999);

Segal, Digital Dragon: High-Technology Enterprises in China; C. Huang, C. Amorim, M. Spinoglio, B. Gouveia, and A. Medina,

‘Organization, program and structure: an analysis of the Chinese innovation system policy framework’, R&D management 34(4),

incentives. It is against the above background that local governments everywhere in China have made an effort to develop their local economies through the projects of high-tech parks. Due to their abundance of local intellectual endowments, the Beijing and Shanghai municipal governments have not only developed their own high-tech parks but also intended to utilize the elite universities and R&D institutes located in their cities to generate the linkage of R&D and local firms in order to facilitate a so-called indigenous innovation.

The local state’s role in helping the formation of a regional system of innovation has been theorized and intensively studied by many scholars.³¹ In these studies, some common elements are stressed, including the state’s role in building a friendly environment for innovation, legal framework for intellectual property rights protection, good infrastructure for firms to reside, comfortable living conditions for scientists and engineers, etc. In sum, what is needed is a milieu of innovation rather than the friendly environment for production.³² Lundvall even stresses that innovation needs an environment that can generate collective learning, in which different actors can easily communicate and share ideas with others which may generate new ideas and innovation.³³

In order to generate a milieu of innovation, the local state has a critical role to play. That is, it not only needs to become an active actor in building good infrastructure, but also has to attract capital to reside so as to take advantage of R&D institutes nearby. Many already have found that local states in China are very active in promoting local economic development.³⁴ Nevertheless, this local developmental state perspective mainly focuses on how a local state provides necessary and almost unconditional services to businesses, for instance, it provides specific service to returnees and foreign capital, as to attract them to invest in the localities. This

31 Bengt-Åke Lundvall, ed, National System of Innovation: Towards a Theory of Innovation and Interactive Learning (NY:

Pinter, 1992); R. Camagni, ‘Introduction: from local 'milieu' to innovation through cooperation networks‘, in Camagni, R., ed, Innovation networks: Spatial perspective (London: Belhaven Press, 1991), pp. 1-9; A. Saxenien, Regional advantage: Culture and competition in Silicon Valley and Route 128. Cambridge (MA.: Harvard University Press, 1994); A. Malmberg and P. Maskell, ‘The elusive concept of localization economies: towards a knowledge-based theory of spatial clustering’, Environment and Planning A 34, (2002), pp. 429-449; H. Bathelt, A. Malmberg, and P. Maskell, ‘Clusters and knowledge: local buzz, global pipelines and the

process of knowledge creation’, Progress in Human Geography 28(1), pp. 31-56.

32 Lundvall, National System of Innovation: Towards a Theory of Innovation and Interactive Learning; M. Castells, The Rise of Network Society (London: Blackwell, 1996).

33 Lundvall, National System of Innovation: Towards a Theory of Innovation and Interactive Learning.

34 Oi, ‘Fiscal Reform and the Economic Foundations of Local State Corporatism in China’; Andrew Walder, ‘Local

Governments as Industrial Firms: An Organizational Analysis of China's Transitional Economy’, American Journal of Sociology 101(22), (1995), pp. 263-301; Zweig, Internationalizing China: Domestic Interests and Global Linkage; Segal, Digital Dragon:

perspective, however, has not paid too much attention to the relationship among different levels of the local state and their role in building infrastructure so as to facilitate an innovation milieu. Our case study on both Beijing’s ZGC and Shanghai’s Yangpu will show that the former’s institutional arrangements have

outperformed the latter in terms of creating a local innovation system.