Alternative Strategies for Technological Ascent? China Versus Japan

We compare the policies and ‘structural outcomes’ of Japan (1950-1980) with China (1980-2010) with respect to the openness of their economies. ‘Openness’ has three dimensions: trade, foreign direct investment, and intellectual property. It is easy to define and measure ‘protectionist’ policy on trade (e.g. tariff rates), less easy to define it on FDI, least easy on IP. Similarly with structural outcomes: on the first dimension we have (for example) the share of imports in GDP; on the second, the stock of FDI/GDP; on the third, we may look at royalty payments over GDP, but the numerator may be far from satisfactory. However, the ‘infant industry’ argument for trade has force on all three dimensions: the domestic firms in a developing economy may not survive, grow and mature if they face too much competition from imports, from foreign firms’ subsidiaries within the economy, or from domestic firms which are following a dependent technology strategy, that is buying ‘bundles’ of technology from ‘foreign frontier firms’ which save them the trouble (and deny them the learning experience) of developing their own competences. And the domestic firms which survive and even thrive by following such a dependent strategy may be permanently ‘infantilised’ (we give the example of the dominant Chinese firms in the automotive industry). So we should not look only ‘under the light’, but at the conditions affecting such dependence. We find these conditions more favourable to such dependence in China in the later period than in Japan earlier: first because of the tighter IPR conditions in advanced economies; second because of the stronger IPR legislation within China (at least after 2000) than in Japan in the earlier period; third because of corporate governance factors, which we explore. We also find Japan more protectionist on trade and FDI both in policy terms (slightly) and in terms of outcomes (massively).
The contrast between a relatively closed Japanese economy and an open Chinese economy begs questions about the extent of competitive pressures: were they adequate within Japan? We find they were, and again the nature of Japanese corporate governance appears to be a key explanatory factor. We close by posing the question: did China open too far too soon? Has it condemned itself either to direct dependence on foreign frontier firms – producing outside or inside its economy – or to indirect dependence via repeated purchases of bundled technology? And if it is in this situation, is that because of the obvious policy factors – cuts in tariffs, openness to FDI – or because of underlying failures of industrial policy and governance?