The Development of Telecommunications and Its Impacts on Chinese Economic Growth

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(1)International Master’s Program in Asia-Pacific Studies College of Social Sciences National Chengchi University. Master’s Thesis. 立. 政治大. ‧ 國. 學 ‧. The Development of Telecommunications and its. n. al. er. io. sit. y. Nat. Impacts on Chinese Economic Growth. Ch. engchi. i n U. v. Student: Chun-Nan Lee Advisor: Dr. Jr-Tsung Huang. June 2010.

(2) Acknowledgements. I would like to express my sincere gratitude to my advisor, Dr. Jr-Tsung Huang for his valuable guidance, support and encouragement throughout my study with topic refinement, literature exploration, proposal initiation, methodology framework and academic writing. He deserves strong recognition for the freedom he gave me, for the share of his knowledge and. 治政大 me with precious Other members in the thesis committee also provided 立 advice and comments. I sincerely thank Dr. An-Pang Kao and Dr. Chi-Keung for the patience in instructing me to complete this research.. ‧ 國. 學. Li for the recommendations on the definition of telecommunications infrastructure and the advices on statistical method and variable discussion. ‧. for future research. With the help of these committee members, I enhanced. y. Nat. sit. my research quality to a higher level than I thought possible.. n. al. er. io. Last, but not least, a very special thank to my family for the generous. i n U. v. emotional support to successfully achieve one of the goals in my life.. Ch. engchi. i.

(3) Abstract. The study examines the development of telecommunications and its impacts on Chinese economic growth since telecommunications has been undergoing dramatic reforms in the 1980s. On November 2001, China was officially the WTO member to open the market for foreign investors. It is obvious that the telecommunications infrastructure development can play a key role in economic growth in China. Furthermore, China has become the. 政治大. world’s single largest telecommunications market since 2002.. 立. In this research, I present evidence that it empirically not only. ‧ 國. 學. investigates the telecommunications development and its impacts on economic growth, but also tests their relationship with initial economic. ‧. condition, fixed investment, population growth, foreign direct investment as. sit. y. Nat. well as telecommunications infrastructure development using the panel data. io. al. er. approach with a dynamic fixed effect model for the span of time from 2003 to. n. 2008. I find that that mobile phone user density to be the new proxy for. Ch. i n U. v. telecommunications infrastructure in China contributes in a major way to the. engchi. economic growth. It means that mobile communication systems do have positive impact and effect on the regional economy of China. It is a crucial determinant as findings indicate a significant and positive correlation between telecommunications development and regional growth in China, after controlling for a number of other factors. Results also show that investment in telecommunications is subject to diminishing returns.. Key words: telecommunications, fixed effect model, panel data ii.

(4) Table of Contents. Chapter 1. Introduction………………….…………………………………... 1. 1.1 Research Background and Purpose……………………...…... 1. 1.2 Research Structure and Framework…………………….……. 5. Chapter 2. Literature Review……………………………………………….. 8. 2.1 Theoretical Foundation…...……………………………………. 8. 2.2 Empirical Literature................................................................ 13. Chapter 3. 政治大. Telecommunications Development in China…………………. 立. 24. 3.1 Restructuring Institutes and the China’s. ‧ 國. 學. Telecommunications Development………………………….... 24. 3.2 The Evolution of China’s Telecommunications Industry. ‧. 29. Methodology Framework and Data Source………………..…. 44. sit. y. Nat. Chapter 4. Development………………………………………….……….... io. al. er. 4.1 Dynamic Panel Data Approach………………………………... n. 4.2 Measurement of Variable and Data Sources………………… Chapter 5. Ch. n engchi U. iv. Empirical Analysis and Results………………………………... 44 48 55. 5.1 Regional Telecommunications Development and Regional Economic Growth……………………………………………….. 55. 5.2 Empirical Analysis and Results………………………………... 59. 5.3. Summary……………………………………………………….... 67. Chapter 6 Conclusions……………………………………………….…….. 71. References……………………………………………...……….. 77. iii.

(5) List of Figures. Figure 1. Research Framework…………………………………………... 7. Figure 2. Number of Telephone Subscribers (1949~1975)……………. 32. Figure 3. China’s Teledensity (1952~2003)……………………………... 33. Figure 4. China’s Telephone Subscribers (1978~2005)……………….. 34. Figure 5. Growth Rate of GDP and Teledensity (1975~2002)…………. 39. Figure 6. Growth of Netizens and Internet Penetration Rate in China... 41. GDP and Internet Subscribers per Capita (2008)………….... 59. Mobile Phone User Density and Annual Growth Rate of. ‧. Real GDP per Capita (2003-2008)……………………………. Nat. y. Figure 11. 58 58. io. sit. Figure 10. 57. GDP and Mobile Phone Subscribers per Capita (2008)…….. 學. Figure 9. n. al. er. Figure 8. 政治大 GDP and Telephone 立 Subscribers per Capita (2008)………... GDP per capita of Chinese provinces in 2008……………….. ‧ 國. Figure 7. Ch. engchi. iv. i n U. v. 67.

(6) List of Tables. Table 1. Relevant Literatures and Studies on the Development of Telecommunications and its Impacts…………………………. Table 2. 20. Telecommunication Capacity Growth During the First-Five Year Plan……………………………………………………….... 31. Table 3. Telecommunications Statistics (2003~2006)……………….... 35. Table 4. Basic Telecommunications Service Providers……………….. 38. Table 5. Fixed-Asset Investment in Telecommunications as Percent. 43. Variables of Their Expected Signs, Mean and Standard. 61. ‧ 國. Table 7. 40. Market Share for China’s Telecom Operators………………... 學. Table 6. 政治大 of GDP…………………………………………………………... 立. Regression Results from Modeling……………………………. io. sit. y. Nat. n. al. er. Table 8. ‧. Error Value…......................................................…………….. Ch. engchi. v. i n U. v. 66.

(7) 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. 政治大 The purpose of this立 study is empirically to investigate the impact of the. not only in market structure but also in regulatory institutions (Tan, 2003).. ‧ 國. 學. 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.. n. al. Ch. er. io. sit. y. Nat 1.1 Research Background and Purpose. i n U. v. Petrazzini and Krishnaswamy (1998) indicated that telecommunications. engchi. 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).. 1.

(8) 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.. 政治大 poor before the 1980s compared 立 to other nations, but significant expansion Generally, telecommunications infrastructure in China was extremely. ‧ 國. 學. 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,. y. Nat. io. sit. decreasing price, increasing subscriber, adoption of more advanced. n. al. er. technology, better service quality and more competition.. Ch. i n U. v. Regarding the first round of split and restructuring of telecommunications. engchi. 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.. 2.

(9) 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. 政治大 However, none of these立 companies had a market share above 50% then. Netcom was the third, and China Unicom lowered to the fourth place.. ‧ 國. 學. 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.. y. Nat. io. sit. In terms of the past empirical analysis, it was focused on the effect of. n. al. er. telecommunications development on economic output. Michael (2000). Ch. i n U. v. researched that telecommunications are an essential implement to economic. engchi. 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.. 3.

(10) 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. 政治大 They found that both transport 立 and telecommunications facilities have been. sectors for seven costal China’s growth during the second half of the 1980’s.. ‧ 國. 學. 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. y. Nat. io. sit. economic growth. In the estimation, the introduction of the number of. n. al. er. telephones per capita as a proxy for telecommunications development. Ch. i n U. v. confirms the significant impact on economic growth performances and. engchi. 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 4.

(11) 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. 政治大 The purpose of this立 study is to understand:. telecommunications have overtaken fixed line subscribers since 2003.. Does the telecommunications industry contribute in a major way to. ‧ 國. 學. . the economic growth particularly after the restructuring implemented. . ‧. after WTO accession?. Does the economic growth level significantly influence the adoption. y. Nat. io. sit. of telecommunication development (fixed-line telephone user density,. n. al. er. mobile phone user density and Internet user density) across regions in China?. Ch. engchi. i n U. v. 1.2 Research Structure and Framework The research procedure is adopted to help accomplish this study. First, this study decides the research purpose. Second, review the related theoretic literatures to research purpose. Next, the study can find the foundation of telecommunications liberalization and its development in China. It is also to look up some research books and textbooks to resolve problems about the selection of research method and the resources of variable information. This study provides empirical evidence of the relationship between 5.

(12) telecommunications development and regional economic growth in China with a panel dataset by dynamic fixed effect model covering 31 regions of China over the period from 2003 to 2008 while controlling for a set of other variables including initial economic condition, fixed investment, employment growth, population rate, foreign direct investment, human capital and urbanization etc,. Regarding the data collection, The China Statistical Yearbook and International Telecommunication Union Yearbook and World Bank Indictor provide most of data.. 政治大 the impacts of telecommunications development on regional economic 立. Eventually, it is combined the literatures and empirical results to discuss. ‧ 國. 學. growth in China. The framework of this study is arranged as follows: Chap 2 examines a review of the theoretical foundation and empirical literatures.. ‧. Chapter 3 provides a briefly overview of China’s telecommunications development, and makes an evaluation of the relationship between. y. Nat. io. sit. telecommunications industry and economic growth. As China became the. n. al. er. single largest telecom market in 2002, it has been the most successful. Ch. i n U. v. developing country for spreading telecommunications access in a remarkably. engchi. short period of time. To understand the evolution and complex internal mechanisms of the extremely competitive scenario are essential for this study. The model will be presented in the forth chapter. Methodologies used in this study and variable measurement are listed in Chapter 4. Chap 5 presents the results of empirical analysis of the data. The last part of this study concludes with discussion based on the results of empirical estimation.. 6.

(13) Determination of Research Purpose: The Development of Telecommunications and its Impacts on Chinese Economic Growth. Literature Review. The Development of Telecommunications Infrastructure in China. The Results of Different Methodologies. 政治大 Data Collection. 學. Introduction of Methodology. ‧ 國. 立. ‧. Analysis of Empirical Results. y. Figure 1 Research Framework. n. al. er. io. sit. Nat. Conclusion. Ch. engchi. 7. i n U. v.

(14) Chapter 2. Literature Review. The content of literature review in this chapter will be covered the direct effects and empirical observations of telecommunications development on economic growth.. 2.1 Theoretical Foundation. 治政大 and national development have become items in macro environment 立 economic since it is one of the major forces to drive the goal of developments The issues of economic growth related to telecommunications. ‧ 國. 學. in economic growth in the national market place (Rabayah, Awad and Naser, 2008). According to OECD’s report (2004), telecommunications infrastructure. ‧. developments play an important role in modern economies as in new. y. Nat. sit. economic activities. It becomes more efficiency, and social and economic. er. io. welfare are enhanced for all stakeholders in an economy via positive. al. n. iv n C U point of view of h e nways Gillis (2004) came up with the several from i the gch. externalities as regulatory reforms take effect. Furthermore, Oyedemi and. telecommunications in which it can influence economic growth:4 I.. Reduction of Regional Infrastructure and Development Gap One of the reasons for the persistent gap between rural and urban areas. in any country is the telecommunications infrastructure gap, which results in the information gap between rural and urban areas. Governments and other financially able parties should establish communication technology links to 4 Oyedemi, T and Gillis, B., “Macro Environment and Telecommunications 2004: Direct Effects of. .. Telecommunications on Economic Development, ” Telecommunications and Social development. http://cbdd.wsu.edu/kewlcontent/cdoutput/TR501/page66.htm. 8.

(15) facilitate information transmission.. II.. Telecommunications as an Input to the Economic Production Process Telecommunication services in any business entity are to some extent a. low cost substitute for information handling labor for helping the industries more by increasing the productivity of each of these traditional inputs and thus increasing the efficiency of the entire production process.. 政治大 Telecommunications 立increases not only the efficiency of market. III. Market Efficiency Effect. ‧ 國. 學. operations by facilitating information flow, but also arbitrage opportunities in financial markets, which in turn lower the capital costs of production.. ‧. IV. Spillover and Externality Effects. y. Nat. io. sit. In addition to its direct contribution to end-subscribers, the. n. al. er. telecommunication networks generate significant spillover effects in other. Ch. i n U. v. sectors of the economy. By possessing the characteristics of infrastructure. engchi. capital, telecommunication networks generate substantial externalities both on the supply side and on the demand side.. V.. Coordination of Economic Activity Telecommunications help in the coordination of economic activity by. allowing easy acquisition and transfer of information among economic units. At the aggregate economy level, telecommunications helps social planners to coordinate different economic activities at reduced communications costs.. 9.

(16) VI. Global Telecommunication Connections Global telecommunications can influence the global economy through similar mechanisms for helping the rapid movement of information from one country to another and allow optimal utilization of available technology, products and services around the world, thus helping to improve the global economy. From the economic point of view, telecommunications development can lead to economic growth through both direct and indirect channels. The. 政治大 can be appropriately evaluated 立 in the frameworks of growth theories.. importance between economic growth and telecommunications development. ‧ 國. 學. Neoclassical Growth Theory. ‧. In the neoclassical model5 which was developed by Ramsey (1928), Solow (1956), Swan (1956), Cass (1865) and Koopmans (1965), there is a. y. Nat. io. sit. constant return to scale aggregate production function with substitution. n. al. er. between capital and labor (Ding, 2005). One feature of this model is the. Ch. i n U. v. convergence property: the lower the starting level of real per capita GDP and. engchi. the higher is the predicted growth rate which derives in the model from the diminishing return to capital (Barro, 1997). It leads the growth process within an economy to eventually reach the steady state where per capita output, capital stock, and consumption grow at a common constant rate equaling the exogenously given rate of technological progress as a primary source of growth (Islam, 1995). Islam also mentioned that there are three important 5 Antonietta Campus (1987) mentioned that Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often as mediated thro ugh a hypothesized maximization of income-constrained utility by individuals and of. \. cost-constrained profits of firms employing available information and factors of production, in accordance with rational choice theory.. 10.

(17) predictions of neo-classical model. First, increasing capital relative to labor creates economic growth, since people can be more productive given more capital. Second, poor countries with less capital per person will grow faster because each investment in capital will produce a higher return than rich countries with abundant capital. Third, because of diminishing returns to capital, economies will eventually reach a point at which no new increase in capital will create. 政治大 income level is determined 立 by the country’s saving and labor force growth economic growth. This point is called a "steady state". The steady state. ‧ 國. 學. rates, and some of other parameters of technology.6. The concept of capital in this model can be use-fully broadened from. ‧. physical goods to include human capital in the form of education with a steady state ration of human to physical capital. Thus, regional economic. y. Nat. io. sit. growth differences can be interpreted as availability and mobility of capital. n. al. er. and labor inputs in the short run. Liu (2008) cited Clark’s argument that. Ch. i n U. v. availability and quality of infrastructure has the determinative force in. engchi. interregional production factor movements. Furthermore, Barro and Sala-i-Martin, 2004) pointed out that the production function is combined with a constant-saving-rate rule to generate an extremely simple general-equilibrium model of the economy. Ding (2005) revealed that while technological change is the one of primary growth sources, telecommunications can be regarded as this kind of general purpose technology and infrastructure. Given the direct and indirect channels through which telecommunications infrastructure functions in the 6 http://en.wikipedia.org/wiki/Economic_growth. 11.

(18) production process, these communications networks can be taken as a type of capital input and modeled in Solow’s neoclassical economic growth model which is criticized as not accounting for fixed effects and appropriate causalities and correlations (Ding, 2004).. Endogenous Growth Theory Endogenous growth theory is a response to criticism of the neo-classical growth model.7 This approach provides a theory of technical progress as one. 政治大 difference between the立 endogenous growth model and the Solow aggregate of the central missing elements of the neoclassical model that is the major. ‧ 國. 學. production function approach lies in the endogeneity of technical changes (Liu, 2008). In neo-classical growth models, the long-run rate of growth is. ‧. exogenously determined by either assuming a savings rate (the. Harrod-Domar model) or a rate of technical progress (Solow model).. y. Nat. io. sit. However, the rate of saving and technological progress remains unexplained.. n. al. er. Endogenous growth theory tries to overcome this shortcoming by. Ch. i n U. v. building macroeconomic models out of microeconomic foundations. The. engchi. existence of increasing returns to scale in the aggregate production function is a novelty in the endogenous growth theory. Technological change is treated as a separate factor in the aggregate production function as endogenous economic phenomenon has increased dramatically (Ding, 2005). The engine for growth can be as simple as a constant return to scale production function (the AK model) or more complicated set ups with spillover effects, increasing numbers of goods, increasing qualities, etc. According to the endogenous growth theory, telecommunications 7 http://en.wikipedia.org/wiki/Endogenous_growth_theory. 12.

(19) development shift from the incentive to accumulate physical capital to incentive across regions. Because networking is characterized by positive economic externalities related to diffusion and accumulation of the knowledge, stock can be achieved through investment in telecommunications infrastructure development. Waverman, Meschi and Fuss (2005) also explored the impact of telecommunications rollout on economic taken by the endogenous technical change approach that Investment in telecommunications generates a growth dividend because the spread of. 政治大 and enormously expands 立information flows.. telecommunications reduces costs of interaction, expands market boundaries,. ‧ 國. 學. 2.2 Empirical Literature. ‧. Empirical studies have revealed that successfully introducing effective competition in telecommunications development related to economic growth.. y. Nat. io. sit. Proper regulation that allows foreign market access and curbs market power. n. al. er. also plays an important part in procuring effective competition to achieve. Ch. i n U. v. ultimate liberalization. In most developing countries, impediments limiting. engchi. commercial presence continue to be the more common barrier to international transactions in telecommunication services (Warren, 2001). Petrazzini and Krishnaswamy (1998) highlighted that telecommunications restructuring have evolved differently in Asia and Latin America. While Asian governments have moved cautiously in bring changes to the sectors, the telecommunications reform felled in between two general trends: the choice of a high component of competition increased private participation, and no privatization of the national carrier set conditions that will trigger unique socio-economic effect. 13.

(20) Oliver Boylaud and Giuseppe Nicoletti (2000) used an original international database on regulation, market structure and performance in the telecommunications development to investigate the effects of entry liberalization and privatization on productivity, prices and quality of service over the period from the period of 1991 to 1997. No clear evidence could be found concerning the effects on performance of the ownership structure of the telecommunications infrastructure development. Donyaprueth (2001) showed that less-developed countries should realize. 政治大 study found that liberalization 立 reforms or extensive opening of the market did their telecommunications reform policies to their own pace and needs. This. competition-oriented policy alternatives.. Carlo, Khalid and Aristomene (2003) summarized that. ‧. ‧ 國. 學. not necessarily increase penetration rates of services better than other less. telecommunication development is evaluated on the basis of degree of. y. Nat. io. sit. effective competition in fixed and mobile networks; openness to foreign. n. al. er. investment and pro-competitive regulation. It is confirmed that the open. Ch. i n U. v. markets promoted efficiency in telecommunications. Moreover, the. engchi. performance of the sector also appeared to be critically driven by openness to competition and the quality of the regulatory framework. Contessi (2003) revealed that the privatization processes were significantly correlated with increases in teledensity; the share of foreign-ownership in the incumbent had a positive; and the establishment of a separate regulator had a positive significant effect on teledensity using a panel of 46 transitions and emerging economies for the period from 1989 to 2000. Tan (2003) reviewed the major theoretical debates regarding political and 14.

(21) economic systems and technology development focusing on China's telecommunications manufacturing sector. The finding was technology development in telecommunications with the political and economic environment in China had a close relationship and future impact. Park and Zhou (2004) traced the processes of telecommunications industry development in China. A series of restructuring efforts and policy changes since late 1980s aimed at transforming state-owned telecommunication departments into independent business entities, while. 政治大 basic telecommunications 立services while keeping state assets under state. keeping government ownership. It was an attempt to commercialize China’s. ‧ 國. 學. control for voiding a fundamental change to state ownership and its economic reform program to inject vitality into state-owned enterprises.. ‧. Wang (2006) examined that China’s telecommunications market had reformed and formed the nearly open pro-competitive market to foreign. y. Nat. io. sit. investors after WTO accession. Muhammad, Tang and Liu (2007) showed the. n. al. er. economic growth of the country was linked with the development of the. Ch. i n U. v. telecommunications industry. Its development had also achieved a. engchi. remarkable growth after liberalization.. Besides, the effect of foreign direct investment in the telecommunications development has gained importance in the last decade, but a little research had been carried out at empirical level. Roller and Waverman (2001) claimed that investment in telecommunications industry fostered growth with a structural model taking over 20 year period to examine the impact. Gary and Scott (1997) empirically showed the relationship between gross fixed investment, telecommunications infrastructure investment and economic growth determining the direction of influence and timing (Madden and 15.

(22) Savage, 1997). Roller and Waverman (1996) confirmed how telecommunications infrastructure affected economic growth. They used evidence with a structural model from 21 OECD countries to examine the relationship between telecommunications infrastructure investments and economic performance. They estimated a model which endogenizes telecommunications investment by specifying a micro-model of supply and demand for telecommunications investments. Finally, they found that the. 政治大 much reduced and statistically 立 insignificant. Wallsten (1999) explored the. impact between telecommunications infrastructure and aggregate output was. ‧ 國. 學. effects of privatization, competition, and regulation on telecommunications performance in 30 African and Latin American countries using fixed effects. ‧. regressions from 1984 to 1997. Privatizing an incumbent was negatively correlated with mainline penetration and connection capacity. Privatization. y. Nat. io. sit. combined with an independent regulator was positively correlated with. n. al. er. connection capacity and substantially mitigates the negative effect on mainline penetration.. Ch. engchi. i n U. v. Wallsten (2000) used an original and new dataset to analyze the effects of privatization, competition and regulation that privatization under the right institutional environment can lead to substantial performance improvements. Government tended to give the newly privatized firm a monopoly concession on telecommunications services while some contend was necessary to encourage investment. In addition, the involvement of foreign capital in the construction and operation of telecommunications infrastructure is often limited by legislation, administrative management. Limitations range from total exclusion from the 16.

(23) entire market to equity caps in sensitive market segments before liberalization. Konan and Maskus (2002) developed a CGE model to consider the services liberalization, which yields the benefits in aggregate welfare and reorients production toward sectors of benchmark comparative advantage. However, a reduction of services barriers in a way that permitted greater competition through foreign direct investment generated large welfare gains. Fink, Mattoo, and Rathindran (2002) examined the political economy in the telecommunications sector using a sample of 160 countries for the. 政治大 for the analysis of the effects 立 of competition that it is effective to increase. analysis of the effects of privatization, and a smaller sample of 40 countries. ‧ 國. 學. teledensity and telecommunications productivity based on open market. Bernardo et al., (2002) explored the financial and operating performance of. ‧. 31 national telecommunication companies in 25 countries using panel data estimation techniques. The financial and operating performance of. y. Nat. io. sit. telecommunications companies improved significantly after privatization.. n. al. er. Konan and Assche (2004) used a quantitative analysis with CGE model. Ch. i n U. v. of the welfare impact of improved domestic market access for foreign telecom. engchi. providers that the domestic telecommunications industry was initially monopolized. The research found not only limited foreign market access was welfare improving if regulation can prevent the domestic incumbent and the foreign services provider to form a cartel but also results emphasized the importance of market structure and the regulatory environment on the success of telecom liberalization. Ding and Haynes (2006) showed empirical evidence as well with a dynamic fixed effects model on the links between telecommunications infrastructure and regional economic growth during the period of 1986 to 2002 in China. The results showed that telecommunications 17.

(24) infrastructure endowment was a key factor in regional economic growth in China. Michael (2008) found the effects of telecommunications using the panel data approach with a dynamic fixed effect model on long-run economic growth. It was evidences that between telecommunication infrastructures and regional growth indicated a significant and positive correlation; and showed that investment in telecommunications was subject to diminishing returns. Ding, Haynes and Liu (2008) found that the system GMM estimation which was proposed by Caselli et al. (1996) and the system GMM estimator. 政治大 consistent and efficient立 estimates than ordinary least square (OLS) and developed by Blundell and Bond (1998) was more likely to produce. ‧ 國. 學. fixed-effect estimation. Findings indicated a significant and positive relationship across 29 regions during 1986 to 2002 between. ‧. telecommunications infrastructure and regional economic growth in China empirically testing the results by applying different panel data approaches to. y. Nat. n. al. er. io. across China.. sit. the study of telecommunications infrastructure in regional economic growth. Ch. i n U. v. After reviewing the literature above, most of them focused on studying. engchi. the development of telecommunications and its impacts on economic output or productivity with some evidences of a causal relationship between telecommunications infrastructure development and economic growth in both directions with using different data resources, different time periods, and different methodologies. And only few journal articles are for China’s studies. Moreover, most studies of the mutual relationship between telecommunications development and economic growth have been primarily based on cross-sectional country data or regional data of developed countries. Maddala (1999) attempted to examine the causal relationship 18.

(25) running from telecommunications development with economic growth by taking a sample of transitional economies in Central and Eastern Europe. These studies showed that it appears to be two ways, or mutual causality between telecommunications development and real economic growth at the aggregate level. Ding (2005) also indicated that in fact telecommunications investment may have various effects for economies at different stages of development between developed and developing countries. Finally, it is important to find. 政治大 between economic growth 立and telecommunications development and its the adaptive methodology to investigate the interdependent relationship. ‧ 國. 學. impacts during the period of 2002 to 2006 after WTO accession especially. Datta and Agarwal (2004) indicated that there is a two- way causation. ‧. between telecommunication development and economic growth in OECD which shows that telecommunications infrastructure plays a positive and. y. Nat. io. sit. significant role in economic growth using a similar data set which corrects for. n. al. er. omitted variables bias of single equation cross-section regression after. Ch. controlling for a number of other factors.. engchi. 19. i n U. v.

(26) Table 1 Relevant Literatures and Studies on the Development of Telecommunications and Its Impacts Reference. Approach. Indictor. Study Period. Wallsten. Panel. . Number of operators. (1999). data. . Number of main lines. approach. . Payphones. . Connection capacity. . Labor efficiency. . Price of local calls. 1974~1997. Main Findings . Competition measured by mobile operators not owned by the. 政治大. incumbent is correlated with increases in the per capita number of mainlines, payphones, and connection capacity, and with. data. . GDP per capita. approach. . Main line growth rate. . Mobile competitors. . Year fixed effects. . Mobile competitor. . of the firm’s sale price . Panel. . Time trend. (2002). data. . Teledensity. approach. . per capita GDP. . Population. . Mobile competition. . Mobile subscriber. . Digital technology. The increased revenues to the government come with a cost that are correlated with a 20 to 40% decrease in telephone network. io. Fink et al.. Exclusivity periods are associated with approximately a doubling. growth. 1985~1999. Both privatization and competition lead to significant. v. improvements in performance. n. al. . y. (2000). 1987~1998. sit. Population. er. . ‧. Panel. Nat. Wallsten. decreases in the price of local calls. 學. ‧ 國. 立. Ch. engchi. . i n U. A comprehensive reform program produced the largest gains: an 8% higher level of mainlines and a 21% higher level of productivity compared to years of partial and no reform. . Mainline penetration is lower if competition is introduced after privatization, rather than at the same time. 20.

(27) Rossotto. Panel. . Growth rate of trade partners. et al.. data. . Real effective exchange rate. (2003). approach. . GDP per capita. . Telecommunications. products. . Fixed line. approach. . Teledensity. . GDP. . Population. . Urbanization. Better telecommunications performance is found to be a determinant of foreign direct investment inflows. 1989~2000. . Privatization processes are significantly correlated with increases in teledensity. . The foreign participation in the incumbent generates positive benefits. ‧. Nat. . Real GDP per capita. Haynes. data. . Fixed investment in GDP. (2004). approach. . Growth of population. . Teledensity. . Employment in total. 1986~2002. . FDI in fixed investment. Ding. Panel. . Real GDP per capita. (2005). data. . Fixed investment in GDP. approach. . Employment. Telecommunications is both statistically significant and positively correlated to regional economic growth in real GDP per capita in. al. China. n. population. . er. Panel. io. Ding and. y. data. . sit. (2003). Better performance of telecommunications strengthens export. 政治大. ‧ 國. FDI. telecommunications liberalization on sector performance. 學. . First introduces a model to assess the benefits of. performance in manufacturing, including exports of intermediate. 立. Panel. . . performance. Contessi. 1990~1999. Ch. . engchi. iv n Usuggesting thereby that regions at an earlier stage of. Telecommunications investment is subject to diminishing returns,. development are likely to gain the most from investing in telecom infrastructure. 1986~2002. . Telecommunications infrastructure endowment is significantly and positively correlated to regional economic growth. . 21. The impact of telecommunications investment on growth is.

(28) subject to diminishing returns. . Human capital. . Growth of population. . Transportation percentage. that the socioeconomic characteristics played an important role in. . Teledensity. determining the initial adoption and diffusion speed of mobile. . The determinants of mobile communications adoptions indicates. 政治大. communications. 立. . GDP. (2007). data. . Human capital. approach. . Telecommunication capital. 2001~2005. . Mobile subscriber. . Fixed-line subscriber. . Price. . Graphic area. . Diffusion rate. studies is unambiguous for high income countries . For medium and lower income countries, TI contributes to total growth. . The intensive growth of TI has resulted in a large impact on GDP growth. . GDP per capita. Batuo. data. . Teledensity. (2008). approach. . Growth of population. . Investment. . GDP. . Population. y. al. n. Panel. sit. io. Enowbi. ‧. Teledensity. The evidence of positive gains to economic growth from previous. Nat. . . er. stock. impact on the diffusion rates of mobile communications. ‧ 國. Panel. Higher levels of real capita income and openness had a positive. 學. Stetsenko. . C h1984~2005 engchi. . iv n UIt is significant and positive correlation between. telecommunication infrastructures and regional growth in Africa. . Investment in telecommunications is subject to diminishing returns. 22.

(29) Ding et al.. Panel. . Real GDP per capita. (2008). data. . Fixed investment in GDP. produce consistent and efficient estimates than OLS and. approach. . Growth of population. fixed-effect estimation. . Employment. . Teledensity. . Human capital. . Industrial output in SOE. . Transportation percentage. 1986~2002. . . The results suggest the system GMM estimation is more likely to. Findings indicate a significant and positive relationship between. 政治大. telecommunications infrastructure and regional economic growth. suggest robust results for this particular assessment. 1985~2003. 學. ‧ 國. 立. in China and the empirical results from different estimations. Panel. . Real GDP per capita. al. (2009). data. . Fixed investment in GDP. correlated to the real GDP per capita, after controlling for. approach. . Growth of population. investment, population growth, past level of GDP per capita and. . Teledensity. lagged growth. . Initial economic condition. . Telecommunication. suggesting thereby that countries gain more and more with the. infrastructure. increase in telecommunication investment. . . Telecommunication is both statistically significant and positively. ‧. Zahra et. Nat . n. al. Ch. er. io. sit. y. Telecommunication investment is subject to increasing returns,. Granger’s causality test confirms the causal relationship between. iv n Urelationship is significant from telecommunication to GDP per. telecommunication infrastructure and economic growth, but the. engchi. capita side but insignificant on GDP per capita to telecommunication development side. Source: Arranged by this research. 23.

(30) Chapter 3. Telecommunications Development in China. This chapter provides a brief overview of telecommunications development in China and makes an evaluation of the relationship between telecommunications industry and economic growth. As China became the single largest telecom market in 2002, it has been the most successful. 治政大complex internal short period of time. To understand the evolution and 立 mechanisms of the extremely competitive scenario are essential for this study. developing country for spreading telecommunications access in a remarkably. Telecommunications Development. Nat. y. ‧. ‧ 國. 學. 3.1 Restructuring Institutes and the China’s. sit. The dynamism of global telecommunications markets is widely attributed. er. io. to rapid technological development and an increasingly liberal policy. al. n. iv n C U h and have embarked on reform paths, expansion of their e nwitnessed g c h i significant. environment. Over the past decade, a large number of developing economies. telecommunications networks and striking improvements in productivity.8 Most developing countries nationalized telecommunications services in the 1960s. By the 1980s it was clear that nationalized monopoly telecommunications firms in developing countries could not effectively provide services. Since the inception of the so-called “Open Door Policy” in China, China gradually shifted its priority from political struggle to economic. 8 Fink, C., Mattoo, A. and Rathindran, R. (2002), “An Assessment of Telecommunications Reform in Developing Countries,” Policy Research Working Paper Series 2909, The World Bank.. 24.

(31) development, and its economy has achieved the highest growth in the world. With the three major forces effects: state concerns, foreign influence, and market forces. China’s telecommunications market has experienced from central-and-command, highly protected mechanisms towards a pro-competitive market orientation.9 Wallsten (1999) noted that these countries began to reform their telecommunications industry spurred by changes in technology and other international organizations.10 In China, the structure of public telecommunications is a government. 政治大 was established in 1949. 立MPT as an executive agency directly managed and monopoly under the Ministry of Posts and Telecommunications (MPT) which. ‧ 國. 學. controlled the operations and productions. But from the early 1980s, China’s telecommunications development has caught up with the rest of the world. ‧. because of the lower quality service and unsatisfactory capacity compared with countries. In 1998, the MPT was replaced by the new Ministry of. y. Nat. io. sit. Information Industry (MII) due to reorganization.. n. al. er. The MII took two large scale reshuffling actions targeting the inefficient. Ch. i n U. v. state-monopoly. The first restructuring split China Telecom’s business into. engchi. fixed-line, mobile and satellite in 1999. China Mobile and China Satcom were created to run the mobile and satellite business respectively but China Telecom continued to be a monopoly of fixed-line services. The second restructuring in 2002 split China Telecom geographically into North and South: China Telecom (North) kept 30% of the network resources and formed China Netcom (CNC) and 70% of the resources were retained by China Telecom 9 Loo, P. Y. (2004), “Telecommunications Reforms in China: towards an Analytical Framework,” Telecommunications Policy. 10 Wallsten, S. (1999), “An Empirical Analysis of Competition, Privatization, and Regulation in Africa and Latin America”.. 25.

(32) (South) or simply the new China Telecom.11 Eventually, China does not yet have a telecommunications law, although the government has indicated that the relevant bodies are working on drafting one. The Regulations on Telecommunication issued in September 2000 (State Council Directive 291) provide the overall legal framework for the sector. The regulations stipulate the separation of the government from the business of providing telecommunications services; the requirement for a licence for basic telecommunications and value-added services; the process of negotiating. 政治大 of service tariffs; and the 立standards for the quality of services. Other basic rules interconnection between networks for new service providers; the management. ‧ 國. 學. governing the sector include the Regulations for the Administration of Foreign Invested Telecom Enterprises and the Administrative Measures for. 2002.. ‧. Telecommunications Business Operating Permits, which entered into force in. y. Nat. io. sit. In 2008 Ministry of Industry and Information Technology (MIIT) has been. n. al. er. established by the State Council replaced MII to formulate and implement. Ch. i n U. v. telecommunications policy subject to State Council approval of important. engchi. strategic policy documents which is the state agency responsible for regulation and development of the postal service, Internet, wireless, broadcasting, communications, production of electronic and information goods, software industry and the promotion of the national knowledge economy. The new ministry is built around the core functions of the old MII that includes formulating the government's development strategies, guidelines, policies and overall plans as well as promoting the informatization process of the national 11 International Business Publications (2007), “China: Telecommunications Industry Business Opportunities Handbook”.. 26.

(33) economy and the social service. China owns the world’s largest telecommunication networks in terms of both network capacity and number of subscribers, and its industry has experienced double-digit growth in the past decade. China’s 11th Five Year Plan started from 2006 stated that in the coming five years the Chinese government expects the telecommunication services to grow at an average annual growth rate of 10% and the revenue generated by the service segment to reach USD 114 billion by 2010.12 Also by 2010, the number of total. 政治大 reach 200 million. Telephone 立 service is expected to be available in each and. telephone subscribers is expected to reach 1 billion and Internet subscribers to. ‧ 國. 學. every village in China by the end of 2010. In 2008 pushed by the Chinese government aimed at restructuring the domestic telecommunications industry. ‧. has brought around a wave of rapid development and deployment of telecommunications infrastructure throughout the country. In May, plans were. y. Nat. io. sit. announced to restructure and merge its telecommunications operators, and. n. al. er. the purpose of shakeup in China is planned to achieve the aim to promote full. Ch. i n U. v. competition. It is despite the fact that "no one single operator will gain all the. engchi. benefits" and "internal competition between the merged entities may exist".13 Under the planning, the government has reconsolidated and reorganized carriers: China Unicom and China Netcom merged; China Mobile acquired China Tietong; and China Telecom acquired the basic mobile services unit of China Satcom as well as the assets and customers of China Unicom’s Code Division Multiple Access (CDMA) network. Besides, the restructure also. 12 U.S. Commercial Service (2006), “Doing Business in China: A Country Commercial Guide for U.S. Companies” 13 http://www.businessweek.com/globalbiz/content/may2008/gb20080529_310359.htm. 27.

(34) emphasizes three key areas for reform:14 . The first area of reform concerns competition in the mobile service markets. Upon the completion of the reorganization, the government issued three third-generation (3G) licenses to the remaining three carriers. New regulations will govern roaming fees and settlement. It also highlights the need to maintain China’s involvement in developing fourth-generation (4G) wireless technology standards.. . Second, the notice promotes domestic innovation through a. 政治大 administrative立 oversight. Finally, the state owned assets supervision combination of financing practices, government assistance, and. ‧ 國. 學. and administration authorities are urged to examine independent innovation as a performance measure in assessments of. . ‧. telecommunications carriers.. Finally, the notice seeks to balance different government priorities.. y. Nat. io. sit. The notice aims to promote Chinese telecom carriers’ global. n. al. er. leadership while also ensuring national security. The state-owned. Ch. i n U. v. carriers are urged to reduce redundant build-outs and allocate. engchi. resources more efficiently, thereby promoting the value of state-owned assets. As for foreign direct investment, the notice emphasizes the respective strengths of Chinese and foreign telecommunications companies, and urges them to cooperate in research and development in order to open new markets, both foreign and domestic, and achieve mutual benefits.. The new structure married the fixed line and mobile operators each other. 14 Hogan & Hartson LLP (2008), "February 2008 China Update", China Update.. 28.

(35) Such a step is expected to generate renewed demand for foreign equipment suppliers, and lead to the issuance of third generation, 3G licenses. More specifically, these developments are expected to create new opportunities for manufacturers of mobile, data, and optical communications equipment.15 In 2009, The MIIT formally issued 3G mobile phone licenses to three mobile operators, a move that is expected to lead to billions of dollars being invested in building new networks: China Mobile was awarded a license for TD-SCDMA, the domestically-developed 3G standard; China Telecom and China Unicom. 政治大 respectively. The MIIT also 立 issued 23 regulations on the requirements of 3G. received licenses for the U.S.-developed CDMA2000 and Europe's WCDMA,. ‧ 國. 學. network operation, covering such aspects as market competition, consumer rights, subscriber information security, telecommunication charges. ‧. management and facility building. It is estimated the 3G mobile phone sales would top RMB 300 billion and the network investment would lead to RMB 2. y. Nat. n. a. er. io. sit. trillion in private-sector investment during the period of 2009 to 2011.. v. 3.2 The Evolution ofl China’s Telecommunications Industry ni Development. Ch. engchi U. Noam (1994) sets the stage with a multistage evolutionary model of public telecommunications networks and argues that the evolution of networks is driven by the dynamics of group information and their transformation into politically based redistribution. Initially, network expansion in the first phase makes economic and technical considerations; next is due to political imperatives; the success of full services provision actually undermines the foundation of its exclusivity in the third phase; the final stage is the 15 http://www.buyusa.gov/china/en. 29.

(36) consolidation of various national sub-networks into global operators. In terms of the evolution of networks, it is a logical progression and can be separated: . The cost-sharing network. Expansion is based on the fixed costs and increasing the value of interconnectivity;. . The redistributory network. The network grows trough politically mandated transfers among subscribers;. . The pluralistic network. The uniformity of the network breaks apart. 政治大 The global network. 立 Various domestic subnetworks satisfy. because the interests of its numerous participants cannot be settled; . ‧ 國. 學. internationally and form networks that transcend territorial constrains.. ‧. Harwit (2008) stated that when the new Communist Chinese government was established on 1 November 1949, the telecommunications industry had. y. Nat. io. sit. been ravaged by years of war. The country with a population of over 500. n. al. er. million had some 310,000 phone lines. Liang and Zhu (1994) researched that. Ch. i n U. v. the First Five-Year Plan (1953~1957) was one of steady economic growth and. engchi. telecommunications expanded rapidly. The telecommunications development generally matched the growth of the national economy. China’s telecommunications density experienced a fast growth due to a small starting base. Investment in telecommunications averaged 0.55% of total state investment annually. However, the growth rate of teledensity16 was stagnated about 5~6% from the 1950s to 1970s compared with 0.05% in 1949 and 0.13% in 1957. More than 90% of counties had no telecommunications facilities in the 16 Teledensity means the number of landline telephones in use for every 100 individuals living within an area. A teledensity greater than 100 means there are more telephones than people. In low-income countries in Asia, teledensity stands at 1.36 (Ben and Giriji, 1998).. 30.

(37) coastal provinces (Shahid, Tang and Liu, 2007). Table 2 summarizes the main additions to facilities and equipment of this period.. Table 2 Telecommunication Capacity Growth during the First-Five Year Plan Capacity. Growth (%). 4,946. 11. 4,684 647,000 326,000. 24 64 327. Facility Telegraph circuits Long-distance telephone circuits Urban telephone exchange capacity (lines) Rural telephone exchange capacity (lines). 政治大. Source: Adapted from Liang & Zhu (1994).. 立. During the period of 1953 to 1970, telecommunications did not grow. ‧ 國. 學. steadily; only 0.8% (RMB 360 million) of total national investment went to the postal and telecommunications services because of various political and. ‧. economic reasons, and insufficient funds. China’s Great Leap Forward. Nat. sit. y. campaign included many irrational moves toward more local control and. er. io. resources to cause the enormous wastes in material and human resources as. al. iv n C absolute terms was further reduced to RMB 137.2U million which was 0.5% of hen gchi n. the state investment went down in the post and telecommunication sector in. the total national investment (Liu, 1988). In the Second Five-Year Plan. (1958~1962), the total investment in this industry was RMB 1.37 billion due to national security consideration. However, total national investment in telecommunications industry reached 1.4% (Tang and Lee, 2003). From the 1950s to the early 1980s, the telecommunications development in China was very slow because it was not a major priority during the command economy period while the Cultural Revolution brought chaos to nearly all parts of China’s political and economic system (Ding, 2005). The. 31.

(38) government did not put effort into extending the telecommunications network and the number of subscribers grew as Figure 2 shows.. (Million of subscribers) 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0. 1.7. 1.58 1.31. 1.26. 0.66 0.35. 0.22. 政治大 Number 立 of Telephone Subscribers (1949~1975). 1949. 1952. Figure 2. 1957. 1960. 1965. 1970. ‧ 國. 學. Source: Adapted from Harwit (2008).. 1975 (Year). ‧. Afterwards it became a priority because China recognizes it as an advance agent must take precedence in economic development. State and. y. Nat. io. sit. local authorities furnish the necessary foreign exchange to support the. n. al. er. importation of equipment and technology. Since the Sixth Five-Year Plan. Ch. i n U. v. (1980~1985), a number of telecommunications projects have been completed. engchi. to extend capacities and services. Besides, a variety of means were used to raise funds for industry development. It was accounted for only 31% compared with 50% of investment from individual enterprises, while foreign investment has remained negligible (Liang and Zhu, 1994). Since 1980 the growth rate of teledensity has generally been slower than the growth rate of GNP per capita. Telecommunications industry has developed both in capacity and operational efficiency. Both of them were required to meet the rising demand for services for China’s opening and reforms. As Figure 3 and Figure 4 shows the China’s teledensity and the number of telephone subscribers indicates, respectively. 32.

(39) Before mid-1980 the telecommunications development has been very slow steadily and mainly took place after 1980s (Ding, 2005 and ITU).. (Number of telephone per 100). 立. 政治大. ‧ 國. 學 ‧. Figure 3 China’s Teledensity (1952~2003). (Year). Source: Telecommunications Infrastructure and Regional Economic Development in. y. Nat. n. al. er. io. sit. China (Ding, 2005). Ch. i n U. v. Over the 1980s and into the next decade, central government changed its. engchi. mind about the role of telecommunications industry issued policies and directives to ensure telecommunications industry would see rapid growth for economic development. A number of preferential policies designed to encourage investment were promoted. A key step was to introduce “Three 90 percent policy” as played a vital role in propelling the telecommunications sector’s take off. Many directives came during this period to spur telecommunications growth including structural reorganization. Before 1990, the provincial offices took direct orders from the MPT. Following that year, the branches received autonomy accounting for their performance (Eric, 2008). 33.

(40) Many policies taken together were quite successful. In this period, the telecommunications sectors saw its share in national total fixed investment assume an upward trend, increasing from 0.74% in 1985 to more than 7.0% in 2001 (Ding, 2005).. 立. 政治大. ‧. ‧ 國. 學 sit. y. Nat. io. al. er. Figure 4 China’s Telephone Subscribers (1978~2005). n. Source: ITU World Telecommunication/ICT Indicators Database.. Ch. engchi. 34. i n U. v.

(41) Table 3 Telecommunications Statistics in China (2003~2006) Item. 2003. 2004. 2005. 2006. Main telephone lines (million). 262.7. 311.8. 350.4. 367.8. Main telephone lines per 100 inhabitants. 21.1. 24.1. 27.0. 28.1. Mobile service subscribers. 270.0. 334.8. 393.4. 461.1. Mobile service subscribers per 100 inhabitants. 21.0. 25.9. 30.3. 35.3. Public telephones (million). 15.6. 22.2. 26.8. 29.6. 20.6. 22.6. 111.0. 137.0. (million). Public telephones per 1,000 inhabitants. 立. 政 12.2治 17.1 大. Internet subscribers (million). 6.2. 7.2. Broadband subscribers (million). ... ... Broadband subscribers per 100 inhabitants. ... ... Internet subscribers per 100 inhabitants. 8.5. 10.5. ... 50.85. ... 3.85. ‧. ‧ 國. 94.0. 學. 79.5. sit. y. Nat. Source: ITU, World Telecommunication Development Report; ITU online information. io. n. al. er. ( www.itu.int/ ITU-D/ict/statistics); National Bureau of Statistics, China Statistical Yearbook. Ch. engchi. i n U. v. China's telecommunications has continued to grow during the overview period, and prices have been further liberalized. Penetration rates of fixed line services increased from 17.5 lines per 100 persons in 2002 to 28.1 lines in 2006; the corresponding figures for mobile telephones were 16.1 and 35.3, respectively. There has also been a significant increase in the use of Internet services. Overall, telecommunications services prices fell by about 53% during the period of 2002 to 2006. Meanwhile, the average charge rate per minute. 35.

(42) (ARPU/MOU)17 of China Mobile was reduced by 60% (see Table 3).18 China had six nationwide basic telecommunications service providers and about 22,000 providers of value-added services. Of the six basic providers, China Telecom and China Netcom accounted for 62% and 33% of the market, respectively, for fixed-line services at end 2006; the mobile service providers are China Mobile and China Unicom (with about one third of the market in 2006). The State remains the majority owner of all the basic telecommunication service providers19; however, private participation and. 政治大 China Netcom, China Telecom 立 and China Unicom) have been listed in different. foreign investment has been allowed gradually. Four companies (China Mobile,. ‧ 國. 學. stock exchanges. Foreign investment is around 25% in China Mobile, 25% in China Netcom, 22% in China Unicom, and 17% in China Telecom (see Table. ‧. 4).. Table 5 shows the growth in telecommunications investment versus. y. Nat. io. sit. overall GDP growth from the beginning of the reform to 2006. As indicated, the. n. al. er. fastest growth in telecommunication investment came in the year 1985 to 1994.. Ch. i n U. v. While the nation’s GDP grew an average annual pace of about 20% over this. engchi. period, investment in telecommunications rose at nearly triple rate with an annual increase of some 55% (Harwit, 2008). The average growth rate of teledensity from 1988 to 1991 doubled the rate of GDP growth and accelerated above 30% after 1992. Throughout the 1990s the growth rate of telephone lines consistently exceeded that of GDP, on average three to four times higher. 17 Average Revenue Per Subscriber (sometimes average revenue per unit) usually abbreviated to ARPU is a measure used primarily by consumer communications and networking companies, it is the total revenue divided by the number of subscribers. 18 Annual Report of China Mobile (Hong Kong) Ltd (2006). 19 These assets are held by the State-owned Assets Supervision and Administration Commission (SASAC) on behalf of the country, despite the Regulations on Telecommunications (issued in 2000), which stipulate the separation of the Government from the business of providing telecommunication services.. 36.

(43) China now is the world’s largest telephone subscriber base. Currently its service revenue alone, equipment sales not included, accounts for approximately 2.52 percent of China’s total GDP in 2002 (Ding and Haynes, 2004). Harwit stated (2008) China’s telecommunications revolution proved by nearly all measures a dramatic success. Telecommunications policy making reached the top of government’s agenda because it was recognized that the government to manage the rapid economic development; the government. 政治大 important to provide the立 source of revenues be used to fund network. strongly believe that it was central to security and sovereignty; finally, it is. ‧ 國. 學. deployment because of strategic financial reasons (Laperrouza, 2006). In terms of the lack of importance given to telecommunications in the developing. ‧. countries especially in China before the early 1980s, telecommunications services were regarded as a “luxury” in china an often subject to cuts during. y. Nat. io. sit. hard time; the economic development discourse in china was set up in terms of. n. al. er. primary and secondary sectors and as a result service sectors including. Ch. i n U. v. telecommunications received marginal attention (Harwit, 2008).. engchi. Prior to its WTO accession, China’s policy protected the national emerging telecom industry. Only foreign equipment vendors were allowed to invest in China with the conditions on technology transfer. International telecom carriers were banned from accessing the market. As part of the WTO commitments, the Chinese government is opening gradually the carriers market to foreign investors. There are some geographical limits to this opening but they will be progressively relaxed. In 2005 foreign investors will be allowed to invest up to 50% in Internet services, up to 49% in the mobile sector and up to 25% in. 37.

(44) fixed-line basic services in some particular cities.20 Regarding the provisions on the administration of telecommunications enterprises with foreign investment, the government has promulgated the Decree of the State Council of the People's Republic China No.333 in 2001 and No.534 in 2008 respectively.21. Table 4 Basic Telecommunications Service Providers Service. Providers. Fixed-line service. 立. Mobile telephone service. China Mobile, China Unicom China Telecom, China Mobile, China Netcom,. ‧ 國. 學. Data. China Telecom, 治 China Netcom, China 政 Unicom, China TieTong 大. China Unicom, China Satellite, China TieTong (formerly China Railcom). ‧. IP telephony. China Telecom, China Mobile, China Netcom, China Satellite. sit. Nat. Satellite service. y. China Unicom, China Satellite, China TieTong. er. io. Source: Ministry of Industry and Information Technology (http://www.miit.gov.cn). al. n. iv n C U hattracted Since more investment was sector e n g ctohthei telecommunications and given the rapid pace of technological change in recent decades, according to the government statistics the number of fixed line urban and rural subscribers increased nearly from 5.3 million and 1.4 million in 1990 to 251 million and 116 million in 2006 respectively. By July 2001 the number of China’s mobile phone subscribers grew rapidly reached 120.6 million, surpassing that of the U.S. and making China the world’s largest mobile phone. 20 http://en.wikipedia.org/wiki/Telecommunications_industry_in_China 21 http://www.fdi.gov.cn/pub/FDI_EN/Laws/InvestmentDirection/GuidanceforSpecificIndustries/. 38.

(45) market because the technological advances had led to a rapid fall in the cost contributed to the exploding demand for mobile phone. In March 2002, China overtook the U.S. as the world’s largest fixed line telephone network in terms of capacity and subscriber base, with 190 million fixed line subscribers. Annual growth rate of telephone penetration were around 9% and 30% in the 1980s and 1990s, respectively. China’s total telephone customer base in 2003 was 85 times that of 1985 and 145 times that of 1978 (Ding, 2005).. (Growth rate) 60. 政治大. 立. 50. ‧ 國. 學 ‧ GDP growth. i n U. v. Figure 5 Growth Rate of GDP and Teledensity (1975~2002) Source: GDP and Teledensity Growth in China (Ding, 2005).. 39. 2001. 1993. er. sit engchi. 1991. 1989. Ch. 1987. 1985. 1983. 1981. 1979. 1977. al. n. 1975. io. 0. y. Nat. 10. 1999. 20. Teledensity growth. 1997. 30. 1995. 40. (Year).

(46) Table 5 Fixed-Asset Investment in Telecommunications as Percent of GDP Year. Investment (billion). GDP (billion). Investment as percent of GDP. 1978 1985 1987 1989. 0.255 1.34 2.14 4.01. 365 902 1,206 1,699. 0.07 0.15 0.18 0.24. 1991 1992 1993 1994. 6.89 13.7 35.3 69.4. 2,178 2,692 3,533 4,820. 0.32 0.51 1.00 1.44. 1995 1996 1997 1998. 85.6 91.1 105.6 150.1. 1999 2000 2001 2002. 160.5 222.4 255.3 207.3. 8,968 9,921 10,966 12,033. 1.79 2.24 2.33 1.72. 221.8 219.9 209.8 218.7. 13,582 15,988 18,387 21,087. n. Ch. engchi. y. 1.63 1.38 1.14 1.04. sit er. io. al. Source: Adapted from Harwit (2008).. ‧. ‧ 國. 立. 學. 8,440. 1.41 1.28 1.34 1.78. Nat. 2003 2004 2005 2006. 6,079 政 7,117治大 7,897. i n U. v. In addition, the Internet development in China on the past few years can also be highlighted. The size of netizens in China has continued to display the trend of rapid development. By the end of June, 2008, the amount of netizens in China had reached 253 million. The amount of netizens in the United States was 218 million by the end of 2007. Estimated by the growth speed of netizens in the United States in recent years, the amount of netizens in the United States would not surpass 230 million by the end of June 2008. Therefore, the size of netizens in China has leaped to the first place in the world, increasing 40.

(47) by 91 million from the same period last year. In the first half of 2008, the net increase amount of netizens in China was 43 million. By the end of June 2008, the Internet penetration rate in China had reached 19.1%. At present, only less than 1/5 of the Chinese residents are netizens. This penetration rate is slightly lower than the average Internet penetration rate in the world, 21.1% (see Figure 6).22. 立. 政治大. ‧. ‧ 國. 學 sit. y. Nat. io. al. n. Source: China Internet Network Information Center (2008). Ch. engchi. er. Figure 6 Growth of Netizens and Internet Penetration Rate in China. i n U. v. Although the growth of China’s telecommunications market in general is faster than most other regions in the world, the momentum of growth itself is slowing down. In 2005, the six Chinese telecom carriers, China Telecom, China Netcom, China Mobile, China Unicom, China Tietong and China Satellite, made an aggregated investment of US$24.4 billion in telecom industry, down 4.7% compared with that in 2004. This is because:23. 22 China Internet Network Information Center (2008), “Statistical Survey Report on the Internet Development in China”. 23 “China: Wireless Telecommunications”, U.S. Commercial Service, 2006.. 41.