Chapter 1 Introduction
1.1 Research Background and Purpose
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Chapter 1 Introduction
During the last two to three decades, telecommunications industry in developing countries has been undergoing dramatic reforms. Park and Zhou (2005) investigated that the liberalization1 started with the adoption of contractual responsibility system in the late 1980s aimed to improve the economic development, and it has been a complex relationship between political and economic systems in China. It led to the fundamental changes not only in market structure but also in regulatory institutions (Tan, 2003).
The purpose of this study is empirically to investigate the impact of the level of telecommunications development on the regional economic growth in China using a dataset of 31 regions for the span of time from 2003 to 2008.
This chapter presents research background and purpose in advance;
research structure and framework lately.
1.1 Research Background and Purpose
Petrazzini and Krishnaswamy (1998) indicated that telecommunications liberalization means introducing competition into the telecommunications services to set up new businesses as long as they comply with the game rule and regulation defined by government who possess the administration combining multiple roles as policy-maker, regulator and operator limiting the development of new markets and services. Telecommunications
infrastructure development can play a key role in economic growth to lead
1 The term “liberalization” generally describes and accepts here “an inclusive definition of three distinct sets of measures, namely liberalizing international trade, privatizing publicly owned companies and allowing entry in certain sectors, possibly de-monopolizing state-owned companies” (Contessi, 2003).
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leapfrogging2 development with providing vital economic growth in the emerging market. Tan (2003) examined that one of the major changes is from the previous central planning economy to gradually move into
market-dominated economy led to the penetration of Chinese economy by market forces. It is obvious that China has gradually shifted its priority from political struggle to economic growth since 1978, and telecommunications development was officially recognized as one of the critical infrastructures for achieving economic growth.
Generally, telecommunications infrastructure in China was extremely poor before the 1980s compared to other nations, but significant expansion has happened mostly in the past two decades, which makes China the largest infrastructures in the world. As a result of market restructuring and regulatory re-arrangement from 1990’s, China’s telecommunications services have witnessed a dramatic change toward higher penetration rate,
decreasing price, increasing subscriber, adoption of more advanced technology, better service quality and more competition.
Regarding the first round of split and restructuring of telecommunications in China in 1999 because of the imbalance of market share, China Telecom was broken up and the businesses of mobile, paging and satellite were divested and became independent corporations. Eventually, the entire industries were made up of several operating companies bone by China Telecom: China Telecom, China Unicom, China Netcom, China Jitong, China Railcom and China Satellite. The market share of China Telecom was
2 Singh, J. P. (1999) uses the word “leapfrogging” in three ways. First, it is meant to imply that telecommunications can help developing countries skip over stages of development and become members of post-industrial society.
Second, leapfrogging is used in a “engine of growth” sense to mean that telecommunications can help developing countries accelerate their pace of development. Finally, leapfrogging is used in a technical sense to signify skipping over the technological frontier or product cycle.
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decreasing from 64.35% in 1999 to 50.52% in 2001.3
Li and Wang (2003) studied that the telecommunications industry in China was rather competitive in 2002. At the same year, China became the world’s single largest telecommunications market and experienced the second round of reform. After that the distribution of market share has
changed greatly. It was made up of six operating companies and about 4,000 companies that provide value added businesses. In terms of market share, China Mobile became the biggest operating company in China; China Netcom was the third, and China Unicom lowered to the fourth place.
However, none of these companies had a market share above 50% then.
Linked with the infrastructure expansion, China’s technology capabilities in telecommunications has upgraded to a much higher level because of attracting nearly all the significant infrastructure providers to engage in various production activities and technology transfer.
In terms of the past empirical analysis, it was focused on the effect of telecommunications development on economic output. Michael (2000) researched that telecommunications are an essential implement to economic development and have a dramatic impact on GDP led to an increase in foreign direct investment. Recent studies appear to be sufficient empirical evidences to indicate a positive and significant relationship between
telecommunications development and economic growth. Ding (2005) found that developed economies are highly correlated with developed
telecommunication infrastructure. Furthermore, Hu and Zhou (2002) found evidence of a causal link between telecommunications development and
3 Li, M. and Wang, J. (2003), “China’s Telecommunications Universal Service in a Competitive Environment,” UNU/WIDER Project Conference on Spatial Inequality in Asia.
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economic growth which shows that economic development will be
constrained by the insufficiency of basic infrastructure: while the penetration rate of china increases by 1%, the GDP will increase by 0.5%,. Zahra, Alam and Mahmood (2009) also proved the causal relationship between
telecommunications infrastructure development and economic growth that the direction of causality is from telecommunications to GDP per capita growth.
Mody and Wang (1997) used panel data on the output of 23 industrial sectors for seven costal China’s growth during the second half of the 1980’s.
They found that both transport and telecommunications facilities have been the engine of growth during this short time period from 1985 to 1989.
Demurger (2001) using panel data for a sample of 24 Chinese provinces from 1985 to 1998 examined that the development of telecommunications in rural areas helps reduce the burden of isolation and has a positive impact on economic growth. In the estimation, the introduction of the number of telephones per capita as a proxy for telecommunications development confirms the significant impact on economic growth performances and verifies Mody and Wang’s (1997) results on the positive effect of
telecommunications growth. Canning (1999) also approved that investment in telecommunications infrastructure in particular has a positive effect on economic growth. The effect of telecommunications development leads to growth by increasing the demand for services used in their production; the economic return on these investments are far greater than the return from the investment, because there is a direct and an indirect effect on the production.
In terms of methodology, most empirical studies employed the determinants of growth with simple correlation methods or Solow-type
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production function. It typically requires the assumption of an identical production function for all countries or regions (Ding and Haynes, 2004).
Moreover, Poot (2000) highlighted that regression analysis remains the most commonly adopted research methodology.
In this research we defined that telecommunications development is measured as the fixed-line telephone subscriber density, mobile phone subscriber density and the number of Internet subscriber density separately different than prior studies because mobile phone subscribers in the proxy of telecommunications have overtaken fixed line subscribers since 2003.
The purpose of this study is to understand:
Does the telecommunications industry contribute in a major way to the economic growth particularly after the restructuring implemented after WTO accession?
Does the economic growth level significantly influence the adoption of telecommunication development (fixed-line telephone user density, mobile phone user density and Internet user density) across regions in China?