Can indigenous enterprises upgrade under open economy? The case of China

Publication Date30 September 2013
AuthorXiang Dai
SubjectEconomics,International economics
Can indigenous enterprises
upgrade under open economy?
The case of China
Xiang Dai
Institute of Industrial Economics, Chinese Academy of Social Sciences,
Beijing, China and
School of International Economics and Trade,
Anhui University of Finance and Economics, Beijing, China
Purpose – The purpose of this paper is to econometrically examine whether indigenous enterprises
can upgrade under open economy by using micro-firm data.
Design/methodology/approach – In order to make clear the impact of outward development on
the indigenous manufacturing export enterprises’ productivity from micro level and to propose policy
recommendation, the research group selected indigenous manufacturing export enterprises in
Kunshan China as research objects and made a large-scale survey. Based on micro-firm data from
survey, the paper carries out empirical analysis.
Findings – After controlling some other variables including innovation activity, human capital and
enterprises scale, empirical result shows that export activity, establishing connections with FDI
enterprises, industry clusters formed under open economy all have significant and positive effect on
upgrading of indigenous enterprises.
Originality/value – This paper is the first to use micro-firm data obtained from survey to examine
factors affecting indigenous enterprises’ upgrading capability of China.
Keywords Chinese indigenousenterprises, Open economy, Upgradingcapability
Paper type Research paper
1. Introduction
Since 1990s twentieth century, profound changes have taken place in global division
system, that is, the movement of production factors especially capital across nations
is becoming dramatically convenient and frequent, and global fragmentation of
production is developing simultaneously at a higher speed. Based on the characteristics
of factors intensities of different production links, the above changes mean that different
stages or tasks of the same product value chain can be fragmented and reallocated to
different nations or regions where there is different factors abundance. Thus, the
boundary of global division among nations is not “final product” but different stages or
tasks of the same product which has certain factor intensity feature like labor intensity,
capital intensity, knowledge intensity, technology intensity, etc. That is to say, the
production of one final product is the outcome of multi-nations participation, or we can
say that one final product is the output of production factors’ input from different
nations. To certain extend, the above pattern of global division can be defined as “global
factors division”. The new global division can create more opportunities for different
nations to participate global division. China’s opening up is just developing under this
background. By taking advantage of its comparative advantage factor like abundant
The current issue and full text archive of this journal is available at
Received 26 August 2012
Revised 30 March 2013
Accepted 7 April 2013
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 6 No. 3, 2013
pp. 145-167
qEmerald Group Publishing Limited
DOI 10.1108/JCEFTS-08-2012-0014
and cheap labor, China grasped the opportunity resulting from international industrial
transfer to engage in global factors division, and realized the rapid development of
manufacturing industry ultimately. Increasing share of “made in China” commodities in
international market indicates the achievements gained by China since its opening up
under the background of global factors division.
However, due to the status quo of factors abundance at the initial stage of opening up
to the outside world, China has to engage into global factors division system in terms of
low-road, and mainly develops labor-intensive manufacturing industry, or low end of
high end industries. Undoubtedly, this development pattern helps China realize high
economic growth, however, this development pattern also faces problems of sus tainable
development (Hong, 2002; Liu, 2007; Wei, 2009; Yung et al., 1984). It is beyond doubt that
with the rapid development of Chinese economy and increase in cost of production
factors, and with more and more other developing nations’ participation in the global
competition, it is necessary and urgent for China to transform its mode of economic
development. Just because of this, Chinese Central Government decides to promote
economic development by targeting at transforming development mode during the
12th five-year plan period. Under this background, it has important theoretical and
policy implications to study the determinants of China indigenous enterprises’
upgrading in open economy, because it is not only the issue related to the enhancement
of indigenous enterprises’ competitiveness and their sustainable development ability,
but also an issue related to the sustainable development of Chinese open economy.
2. Literature review
As for the manufacturing industries’ upgrading in developing nations who engaged in
today’s global factors division system, many studies are carried out based on the
framework of global vertical integration (GVC). Yung (1984) pointed out that under
the background of global fragmentation of production, since the consumers may have
much more strict requirements on the product quality, safety performance and feature
of environmental protection, MNCs from developed nations will help indigenous
enterprises to improve product design and production ability by means of contract of
technology transfer and patent license. Beyond the above main channels, Evenson’s
(1995) research exclaims further that since original equipment manufacturer in
developing nations may easily to get information feedback from international
monopolistic purchaser about product style, product quality, product function and
product design, etc. which will of course be helpful to the improvement of indigenous
enterprises’ technology level. Similarly, Humphrey and Shmitz (2002) find that when
enterprises engage in the GVC driven by the international purchaser, considering the
self-competiveness and interest, international purchaser will take measures to stimulate
the suppliers in developing nations to quicken upgrading pace and move from process
upgrading to commodity upgrading to function upgrading and finally to chain
upgrading. Compared to Humphrey and Shmitz’ work, Gereffi (1999) reports the specific
path for indigenous enterprises in developing nations who engaged in global production
network, that is to say, learning by doing effect and learning by practicing effect can help
the indigenous enterprises to upgrade along the following path: import parts and
components and assembly !focus on the production of parts and components and the
whole product !design its own product !establishand sale its own brand product in
foreign market. Memedovic (2003) states that, to some extent, Four Little Dragons in Asia

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