Miami1177598932.Pdf (567.64
MIAMI UNIVERSITY The Graduate School
CERTIFICATE FOR APPROVING THE DISSERTATION
We hereby approve the Dissertation
Of
Irina Aervitz
Candidate for the Degree:
Doctor of Philosophy
Director (Dr. John M. Rothgeb)
Reader (Dr. Walter Arnold)
Reader (Dr. Venelin I. Ganev)
Graduate School Representative (Dr. Margaret Ziolkowski)
ABSTRACT
THE DRIVING FORCE BEHIND THE AUTOMOTIVE SECTOR IN CHINA AND RUSSIA: THE ROLE OF THE STATE IN TECHNOLOGY APPROPRIATION
by Irina Aervitz
The focus of this study is automobile industry in China and Russia. Specifically I am looking at the state attempts to encourage technology development in the automobile sector. My goal is to look for variations in the overall policy environment created by the state with regard to technology enhancement in the automobile industry in China and Russia and particularly focus on policy implementations at the enterprise level by observing the way enterprises appropriate technology by using various sources of technology appropriation provided by the state policies.
I believe that this research is important because it reviews the literature on the role of the state in industrial development and introduces the concept of “technology appropriation.” Technology appropriation lies in the heart of the companies’ technological competitiveness and is based on the sources of technology made available to companies by the regulatory environment created by the state. Most importantly, this project offers analysis of the empirical data collected during a series of interviews in the domestic and foreign enterprises operating in both countries. This analysis attempts to lift the “curtain” over the companies’ technology-oriented strategies and the way they take advantage of the existent state policies affecting the process of technology appropriation.
THE DRIVING FORCE BEHIND THE AUTOMOTIVE SECTOR IN CHINA AND RUSSIA: THE ROLE OF THE STATE IN TECHNOLOGY APPROPRIATION
A DISSERTATION
Submitted to the Faculty of
Miami University in partial
fulfillment of the requirements
for the degree of
Doctor of Philosophy
Department of Political Science
by
Irina Aervitz
Miami University
Oxford, Ohio
2007
Dissertation Director: Dr. John Rothgeb
©
Irina Aervitz
2007
CONTENTS
Chapter I...... 1
Introduction...... 1
Literature Review ...... 6
Institutional and Social-structural Theories ...... 6
Those Who “Brought the State Back” ...... 6
Embeddedness Literature ...... 8
The Developmental State...... 10
Alternative Theories ...... 12
Neoclassical Economists ...... 12
Cultural Argument ...... 14
Theoretical Framework...... 15
Independent Variable ...... 18
Terminology: Technology Appropriation ...... 20
Notes on Methodology ...... 24
Case-Oriented Comparative Method...... 24
Case Selection and Interviews...... 26
Interview as a Method ...... 30
Dependent Variable ...... 30
Chapter II ...... 31
Comparing Russia and China ...... 31
Automobile Industry Development in Russia: Historic Overview ...... 32
iii
Automobile Industry Development in China: Historic Overview ...... 37
Conclusion ...... 42
Chapter III...... 43
Policies Regarding Technology Development in Russia...... 45
Development Strategy of the Automobile Industry ...... 45
State Protectionist Measures...... 46
Science & Technology Research and Development System in Russia ...... 47
Investment Policies...... 51
Investment at the Local Level...... 53
Institutional and Other Barriers to Investment...... 55
Implications for Technology Appropriation ...... 57
Policies Regarding Technology Development in China...... 60
Foreign Companies and Technology Transfer...... 60
National-level Science & Technology (S&T) Research and Development System...... 62
Structure of S&T System ...... 62
Automotive Industry as a “Pillar” Industry...... 66
Special economic zones and R&D ...... 67
Intellectual Property Rights and International Agreements ...... 69
Implications for Technology Appropriation ...... 71
Conclusion ...... 73
Chapter IV...... 76
Sources of Technological Development in China – Introduction ...... 76
iv
Case of Foton Motors and Sources of Technology...... 81
Purchase of Technology...... 82
Purchase of Consulting Services...... 85
Type of Technology...... 86
Support from the State ...... 87
Allocation of Finances from Investors ...... 87
Foton and R&D...... 88
Sources of Technology Appropriation from Foreign Partners...... 89
Technology Transfer from Foreign Companies via Joint Ventures ...... 89
Shanghai GM...... 90
Beijing Jeep Corporation ...... 91
FAW/Volkswagen ...... 92
Policies Encouraging Localization...... 94
Export Encouragement ...... 95
Conclusion ...... 96
Chapter V ...... 98
Sources of Technological Development in Russia – Introduction ...... 98
Volga Automotive Plant (AvtoVAZ ...... 103
Historic Overview ...... 103
State Subsidies or other Forms of Financial Support...... 105
Allocation of Finances from Investors ...... 106
AvtoVAZ own R&D Programs...... 106
Technology Transfer from Foreign Companies via Joint Ventures ...... 107
v
Kama Automotive Plant (KAMAZ)...... 108
Historic Overview ...... 108
State Subsidies or other Forms of Financial Support...... 110
KAMAZ own R&D Programs ...... 111
Technology Transfer from Foreign Companies via Joint Ventures ...... 112
Sources of Technology Appropriation from Foreign Companies ...... 114
Foreign Auto Enterprises and Localization Policies...... 114
GM in Russia...... 114
ZAO Sommer-Novtruck...... 115
Benteler, Veliky Novgorod ...... 116
Readiness of the Market to Absorb Technology ...... 118
Boellhoff Sales Office in Veliky Novgorod...... 118
Tenneco Automotive Volga ...... 119
Conclusions...... 120
Available Sources of Technology...... 120
Foreign Companies as Source of Technology...... 120
State Subsidies or other Forms of Financial Support...... 121
Allocation of Finances from Investors ...... 121
Localization Requirements ...... 122
Own R&D Projects ...... 122
Purchase of Expertise and Technology...... 122
Chapter VI...... 123
Summary and Conclusions...... 123
vi
Overview ...... 123
Industrial Development in China and Russia ...... 126
Policies Affecting Technology Appropriation in Both Countries...... 127
Chinese and Russian Enterprises and Technology Appropriation ...... 129
Foreign Companies as Source of Technology Appropriation...... 130
Local Content Requirements ...... 131
Exports...... 132
State Subsidies or other Forms of Financial Support...... 132
Allocation of Finances from Investors ...... 133
Own R&D Projects ...... 133
Purchase of Expertise and Technology...... 134
Conclusion ...... 134
Bibliography ...... 136
Appendix...... 142
Table 1: Number of interviews by affiliation ...... 142
Table 2: Overall number of company cases in each category...... 142
Table 3: Production in Units in 15 Leading Automobile Producing Countries...... 143
Table 4: Presence of OEMs in Developing Markets...... 144
Table 5: Budget and non-Budgetary Debts in the Auto Sector in Russia, 1998...... 145
Table 6: Russian Car Market ...... 145
Table 7: Local Production of Cars by Russian Manufacturers...... 146
Table 8: Local Production of Cars by Foreign Manufacturers
vii in Russia...... 146
Table 9: Auto Output and Changes in Auto Assembling Plants –China ...... 147
Table 10: Changes in the Administrative Authority of the Auto Industry in China ...... 148
Table 11: Gross Domestic Expenditure on R&D...... 148
Table 12: Number of Researchers...... 149
Table 13: Science and Engineering (S&E) Doctoral Degrees ...... 150
Table 14: Science and Engineering Articles by Country/Region ...... 151
Table 15: Customs Duties on Used Imported Cars in Russia...... 151
Table 16: Excise Duties on Imported Cars, Russia...... 151
Table 17: Customs Duties on Selected Automotive Parts, Russia...... 152
Table 18: Federal Allocations to Science Foundations in Russia ...... 152
Table 19: Part of AvtoVAZ Balance Sheet as Part of 2004 AvtoVAZ Annual Report Pertaining to R&D Investments...... 152
Table 20: Explanation for Weak Bargaining by Chinese Firms for more Advanced Technology from their U.S. Partners...... 153
Table 21: Explanations for Why U.S. FDI has not Substantially Contributed to Improving Chinese Innovation Capabilities ...... 153
Table 22: National R&D Statistics ...... 154
Table 23: R&D as a Percentage of GDP by Country ...... 154
Table 24: Expenditures on R&D-China ...... 154
Table 25: Expenditures on R&D-China ...... 155
Table 26: Percentage of Components Sourced Locally by Joint Ventures in China ...... 156
Table 27: List of Major Shareholders at KAMAZ ...... 156
viii Chapter I:
Introduction
The focus of this study is automobile industry in China and Russia. Specifically I am looking at the state attempts to encourage technology development in the automobile sector and the way auto enterprises engage in technology appropriation in the context of the regulatory environment created by the state policies in both countries. At first glance, Russia and China share a number of characteristics that include Communist legacy, cheap labor, attempts of heavy state involvement into industrial development, etc. Furthermore, the two countries are going through economic and industrial transition. However, one might notice differences as well. For example, the model and speed of industrial development seem to differ. As mentioned above, the subject matter of this research is the auto industry in both countries. Ironically, despite the fact that the Soviet Union helped China’s automotive sector in the 1950s, the performance of the Russian car industry today seems to be less impressive than the Chinese aggressive auto production growth.1 Prior to 1956, when the first truck was built by Changchun’s First Auto Works in collaboration with the Soviet Union, China had almost no auto manufacturing. In the present time, practically every auto original equipment manufacturer (OEMs) is in China producing cars with domestic partners.2 In the past decade, a number of Chinese car makers like Chery, Great Wall, Foton and others established their own production independently from foreigners and now aspire to develop a Chinese national car. This auto production boost in China also implies a developed network of domestic component manufacturers.
Whether the automobile industry in Russia fell victim to the liberal economic reforms in the post-Soviet period that cut state support and introduced instability as a result of battles over ownership and overall redistribution of resources during privatization or the industry was clinically dead with regard to innovation and economic competitiveness a long time prior to the reforms is a legitimate question. However, in this project I focus on the state policies creating the environment for the auto enterprises to function in in the aftermath of the major surgical operation in Russia – the privatization of state enterprises that was mostly completed by the end of the 1990s. The separation into the pre- and after-trauma experience is, of course, an abstraction. The liberal economic reforms had a dramatic effect on the post-reform industry development and willy-nilly shaped the
1 Please see data on production levels in both countries in Table 3 in the Appendix. I also draw comparisons between the auto industry performance in China and Russia further in Chapter I.
2 Techterms, computer and technology terms defined and explained, [accessed October 2006],
1 current state of affairs. It is difficult to disregard continuity. To avoid the “do not look back” attitude, I will give a short contextual introduction into the historic development of the industry after the collapse of the Soviet regime; but primarily I will investigate the regulatory environment for the auto industry development starting from the second half of the 1990s. What was done by the state after the “storm” better reflects, in my opinion, the state capacity or failure to create a conducive regulatory environment for technology appropriation. The jury is still out, however, on the question what has more destructive ramifications for industrial development or, speaking allegorically, which is a bigger “storm”: a chaos of the Yeltsin reforms of the 1990s or the oil-based “managed economy” agenda of the Putin administration. Russia is an economy in transition as well as China, but it should not discourage us from an attempt to look for similarities and discrepancies between the two.
Of course, to assume that that the Chinese automobile industry is currently more industrially competitive than the one in Russia due to the state policies encouraging technology development is quite audacious. I am shooting at the moving targets in this situation. Both countries are transforming their automobile sector. Furthermore, there is a historical gap of ten years between China and Russia with regard to the starting point of the industrial transition. The economic reforms in Russia of the 1990s started a decade after Deng Xiaoping’s reforms in China. Furthermore, China is an attractive region for automotive manufacturing due to a number of social, demographic and geographic reasons, which Russia might not share. Furthermore, Russia has been through a very painful conversion of political institutions, which China may or may not encounter in the future. The question of validity of sectorial comparisons across countries is a difficult one. However, I see my goal as a researcher in this particular project to look for variations in the overall policy environment created by the state with regard to technology enhancement in the automobile industry and particularly look at policy implementations at the enterprise level by observing the way enterprises appropriate technology by using various sources of technology appropriation provided by the state policies. Therefore, I incorporate two levels of analysis: environmental and enterprise or macro and micro. I have to admit, however, that I pay more attention to the empirical enterprise- or micro-level analysis in this research rather than to the description and analysis of the environmental or macro level because micro level is the most important component of the concept of the “technology appropriation” that I am introducing in this project. Technology appropriation, as a concept, reflects the way enterprises appropriate technology in the created environment rather than focuses on the environment itself. I will discuss the terminology of this project and the way I operationalize “technology appropriation” further in this chapter. I attempt to address the challenges of comparative analysis of one industry across countries underlined above in the following ways:
To avoid to the best of my abilities the danger of being ambiguous about the time dimension of the project, my earnest attempt is to compare the “present” state of affairs in the automobile industry in both countries. I define “present” as the end of the 1990s up to present day. The reasons for choosing this particular timeframe are the following: the major case for the empirical observations in China, the commercial vehicle manufacturing company Foton, was established in 1996; by the end of the 1990s, the
2 primary cases for the Russian portion of the analysis, AvtoVAZ and KAMAZ, have gone through major ownership tribulations in the aftermath of the collapse of the Soviet Union in 1991. In my opinion, Foton, as a new enterprise or a sort of tabula rasa, better reflects the effects of the reforms because it did not bring a historic baggage like, for example, First Auto Works, an auto maker that was established in the 1950s, to the new era of Chinese industrialization. Of course, this timeframe is an abstraction because there are always cases of policy and factor continuity across time, but it allows narrowing the scope of analysis to avoid various methodological and conceptual complications. It should be noted, however, that the necessity of abstraction does not pardon oversimplification. Similar caution that is attributed to clarifying the time scope of research should be used to avoid neglecting the historical context. Therefore, I describe the historical context of the automobile sector development in both countries that goes back in time and beyond the defined time scope. I make a clear distinction, however, between the period being compared and the historical introduction for the purposes of contextual understanding.
As mentioned above, I employ two levels of analysis in this project: environmental and enterprise or macro and micro. As noted, more attention in this research is attributed to the micro level of analysis rather than a macro level. Therefore, the major conclusions are drawn at the micro level as well. I do attempt, however, to describe and analyze the overall legal context and make parallels to the way these policies are implemented at the enterprise level. The reason for this imparity is simple: I possess more empirical data at the enterprise level rather than at the environmental level. Most interviews were conducted at the enterprise level, not government level. The notion of “environment” is difficult to conceptualize. As well known, environment consists of various agents, including formal and informal institutions (North 1991). The environmental factors manifest themselves differently at different levels, including local versus central dimensions (political geography). The literature on political and social embeddedness (Peter Evans 1992, 1995; Mark Granovetter 1985; Zukin, Sharon, and DiMaggio 1990) is primarily concerned with the way political and economic actors are “rooted” or “embedded” into different political, social, economic networks and interrelations that exist in the environment. Peter Evans (1992) stated that industrial competitiveness depends not only on the state structure and policies or “internal coherence”, but also on “external connectedness” with societal elements that can be called embedded autonomy. Please see literature review that discusses the theoretical approaches on the state and the concept of embeddedness further in the text. My conceptualization of environment is rather basic: I look at the state policies directly or indirectly affecting the process of technology development, which is eventually exercised at the enterprise level. So I look at the far end of these policies or, speaking metaphorically, I try to “catch the dragon by its tail”– their inevitable usage at the micro level. Of course, the environment consists not only of state policies, laws, and regulations but other elements as well, which go beyond the regulatory dimension and which might play an equally (or sometimes even more) influential role in the process of technology appropriation. In general, the scholars who belong to the “embeddedness” literature camp focus on analyzing the relationships between various societal actors, elements, processes, or structures (for example, various institutions and their metamorphosis over time and the way they affect the work of
3 enterprises; the impact of elite structures, the issue of corruption, etc.) that ultimately affect industrialization or economic outcomes. In this research, I primarily focus on the policies and attempt to reflect upon the context that these policies create. The primary focus of the “embeddedness” literature – “external connectedness” with and within social structures - is somewhat beyond the research scope of this project. I use the policy- focused theoretical perspective as a jumping board for my conceptualization of the “environment.” I introduce though a geopolitical dimension by briefly discussing local deviations from central policies when applicable.
I understand that social embeddedness of an enterprise is an important issue especially in such “heavy” socially embedded societies as China and Russia, where decisions are frequently reached on the basis of favoritism, bribes, kinship, etc. The way to avoid the simplification that institutionalism is accused of is to focus not only on the policy per se but also on its effectiveness and implementation, which this project engages in. That is why micro-level enterprise-focused empirical observations are the key to illuminating the issue of policy effectiveness. Furthermore, this project is concerned with a set of policies that directly or indirectly, in the view of the author, affects the process of technology appropriation. This entails a certain degree of interpretation concerning the choice of policies that create sources for technology appropriation. In other words, in many respects this project ventures into the terra incognita.
I believe that the explanation for the Chinese success lies in the role of the state in industrial development. Inspired by the discrepancies in the models of industrial development in China and Russia, I attempt to identify, describe, and analyze the role of the state in creating the legal and institutional framework for technological growth in the automotive sector in both countries. Specifically, I talk about the sources of technological development made available to companies. This discussion is exemplified by the cases of Foton Truck Factory in China and KAMAZ and AvtoVAZ in Russia as domestic manufacturers and also a number of joint ventures and foreign companies in both countries.
The research is essentially concerned with the question of why the state policies matter in explaining differences in industrial competitiveness between China and Russia. To address this question, I will try to describe the policies in place and how they affect enterprises. The hypothesis is straightforward: the more sources of technology appropriation are made available to automotive firms (so that enterprises can attract, retain, and develop technology) in a country, the more industrially competitive the automobile sector is in this country. In this project I frequently use such terms as “less or more coherent” or “less or more conducive” with regard to the overall regulatory environment in both countries. I agree that these terms are deficient because they are based on value judgment that, I have to admit, is inappropriate for scholarly exercise. Therefore, I would like to emphasize that in this project I use these terms only with regard to the number of sources of technology available (hence this is the way I operationalize my independent variable, which, of course, incurs a number of limitations that I will discuss further) and, therefore, merely as a substitution for saying that the regulatory environment in a country has more or fewer sources of technology
4 appropriation made available to the companies. However, the prerequisite for counting the sources of technology is that they do not just exist on paper but actually work. When I compare the number of sources of technology appropriation it is not a simple math exercise. It is more complicated than focusing on the quantitative aspect of comparison. In my opinion, the question of the effectiveness of policies is crucial. I will address the issue of formal vs. actual presence and usage of the sources of technology appropriation in both countries in my empirical observations at the enterprise level. The very purpose of focusing on enterprises and the way they operate in the created regulatory environment is to see what is really out there with regard to the policies that work or what exists primarily for the sake of appearances. Therefore, the substitute terms like “conducive” and “coherent” sometimes make more sense because they embrace the qualitative aspect of the “sources of technology appropriation,” which is the effectiveness of the policies seen from the enterprise perspective. The enterprise focus is critical to measure the “number” of the sources made available because the “number” is essentially about effectiveness, implementation, and usage. It should be noted, however, that I do not focus on the ability of enterprises (management talent, strategy, etc.) in both countries to make use of the technology sources available; it is mostly about the “conduciveness” of the regulatory environment created by the state. The companies exemplify and test the way the environment works.
I believe that this research is important because it gives a thorough review of the literature on the role of the state in industrial development and introduces a concept of “technology appropriation,” as opposed to technology transfer, for instance. Technology appropriation lies in the heart of the companies’ technological competitiveness and is based on the sources of technology made available to the company by the regulatory environment created by the state. The introduction of this term and its implication for the investigation of the state’s role in industrial development I consider to be a theoretical contribution of this project. Most importantly, this project offers analysis of the empirical data collected during a series of interviews in the domestic and foreign enterprises operating in both countries. This analysis attempts to lift the “curtain” over the companies’ technology-oriented strategies and the way they take advantage of the existent state policies affecting the process of technology appropriation. Furthermore, the comparison between the two transitional economies is important even in itself. China and Russia have a tremendous effect on the world economy and it is essential to understand at least one aspect of their industrial competitiveness at a time. In this case, it is the automotive industry competitiveness.
In Chapter I, I discuss the vast literature on the role of the state in economic development (institutional and social-structural theories) and the alternative perspectives that emphasize market forces and cultural factors as independent variables causing economic success or the lack of it. Further this chapter accentuates the role of the state in technology development as an influential variable affecting the speed of industrialization and overall economic growth. This chapter also offers the definition of “technology appropriation” that, according to the author, determines the process of technological development. The introduction of this term and its implication for the investigation of the state’s role in industrial development, as mentioned above, is a theoretical contribution of
5 this project. Furthermore, the chapter introduces the research question and hypothesis and describes the methodology involved in addressing the proposed research question. To discuss the literature in place and to draw attention to the state’s role in technological development as a useful factor are the major objectives of this chapter.
Institutional and Social-Structural Theories
Those Who “Brought the State Back.”
There are different approaches that tackled the question why some countries succeed more than others in industrial development. These approaches came up with diverse explanations or factors responsible for success or failure of industrial development. One of these theoretical frameworks focuses on the leading role of the state. This approach emphasizes policies and institutional arrangements that enhance economic performance in general and industrialization in particular. It is the so-called comparative institutional perspective that originates in the works of Max Weber.
In Politics as a Vocation Weber (1946) defined a state as “a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory.” According to Weber, there are three foundations of legitimacy: traditional, rational, and charismatic. The main form of rational-legal legitimacy is bureaucracy. The bureaucrats obey because they follow written and enforceable rules. Although every bureaucrat has a self interest, which is an autonomous factor that has its influence on the operation of institutions, bureaucrats are constrained by the legal and institutional frameworks that compose the ultimate authority of the state. The state is described by Weber as an active actor that enforces its decisions. Therefore, according to Weber, the state matters.
Gerschenkron (1962) emphasized the role of the state in the industrialization process in Europe. The importance attributed to the role of the state in all aspects of political and economic processes was stressed by Skocpol. Skocpol sharpened the focus on the autonomy of the state and the way the state influences the society. After decades of treating the state for granted, the state became a central object of theory and empirical research. According to Skocpol, the state is not only part of a bigger system or society, but also an independent agent. As Skocpol states, there is a theoretical gap or lack of research demonstrating the causal relationship between the state and different aspects of social, political, and economic life: role of the state in social transformation, international affairs, industrialization, domestic policy making, class-formation, development of national ideas, etc. (Skocpol 1985: 28).
Another proponent of the state-focused analysis of economic development is Alice Amsden. She addressed the miracle of Taiwan’s economic growth by emphasizing the role of the state: “the state in Taiwan has played a leading role in the process of capital accumulation. It has positioned itself to prevail on key economic parameters such as the size of the surplus extracted from agriculture and the rate of profit in the industry”
6 (Amsden 1885: 78). Of cause, Amsden mentions other factors that enhanced the economic development of Taiwan, including history (colonial heritage, the Guomindang state, foreign aid, etc.). Her task is not to undermine other factors and prioritize the state involvement as the critical factor, but to demonstrate, using the Taiwanese case, under what circumstances the state intervention was conducive to economic and industrial growth. She writes that Taiwan is just a striking example of the positive association between state intervention and the acceleration of economic development. (Amsden 1985: 99)
Dietrich Rueschemeyer and Peter Evans (1985) explored the conditions for effective state intervention with an assumption that effective state intervention is “an integral part of successful capitalist development” (Rueschemeyer and Evans 1985: 44). The scholars argue that even the believers in the virtues of the market admit that “in both early and late industrialization, state policy is assumed to affect the forms and the rate of capital accumulation and to play a major role in determining whether the negative distributional effects that normally accompany capitalist industrialization will be mitigated or made worse” (Rueschemeyer and Evans 1985: 44). However, the major concern of the authors is not to underline encore the role of the state, because it is self-obvious that the effective state intervention enhances economic performance, but to discuss the conditions under which effective state intervention takes place.
The first prerequisite of successful state intervention identified by the authors, following Max Weber’s analysis of bureaucracy, is the existence of coherent bureaucratic machinery that presupposes: “corporate cohesion of the organization, differentiation and insulation from its environment, unambiguous location of decision-making and channels of authority, and internal features fostering instrumental rationality and activism (in particular, suitable hiring and promotion practices as well as organizational designs that minimize obstacles to personnel replacement and to the restructuring of roles and bureaus needed)” (Rueschemeyer and Evans 1985: 50). Another important condition for the successful state intervention is the autonomy of the bureaucracy from a variety of societal pressures (Rueschemeyer and Evans 1985: 68).
Weiss, reiterating the theme that the state and society mutually influence each other, introduces the term “governed interdependence”. This model of state/society relationship presupposes that a strong state and a strong society coexist (Weiss 1998: 37). This concept is “able to incorporate both the strength of the state and that of the private sector” (Weiss 1998: 37). Interdependence presupposes that the government depends on the business in terms of providing new jobs, paying taxes, contributing to the nation’s wealth; business depends on the state in terms of providing for helpful laws, assistance in negotiations on the international level, etc. Both entities, the state and business, are engaged in the negotiating process. Weiss implies that this model provides for a better transformative capacity of the state.
Pearson (1997) mirrors Weiss in arguing that business is an influential societal force in today’s China, which acts as a counterweight to the influence of the state. Pearson contends that the model of state corporatism is characteristic of the Chinese state. Though
7 the Communist Party dominates all aspects of life in China, including business, the business elite in China is not completely subordinate to the state. The business agrees to cooperate only when it is confident that the state takes the business interests into account. That is why, recognizing the role of business, Pearson entitled her book “China’s new business elite”. Therefore, in light of the discussion concerning the role of the state, social structuralists argue that it is not the state per se, but also the structural factors that the state operates in that determine economic development. The discussion of the state/society relations opens a door to the embeddedness literature that currently dominates the analytical discourse on the factors of economic development.
Literature on Embeddedness
In later writings Peter Evans (1992, 1995) explored the concept of “embedded autonomy” that presupposed “a project shared by a highly developed bureaucratic apparatus and a relatively organized set of private actors who could provide useful intelligence and decentralized implementation” during the “most impressive periods of industrial growth” (Evans 1992: 165). In his article, Evans (1992) examines the state role in the developmental context – during the period of industrial transformation – in a number of industrializing countries that reached different industrial results. He discusses the cases of the so-called “predatory” African state, Zaire, and the successful “developmental” states of East Asia, Korea and Taiwan, and the cases with “intermediate” results, Brazil and India. He does not attribute the success of East Asia and the partial success of India and Brazil solely to the role of the state. However, it is hard to underestimate, as he notes, the positive effects on industrialization that the state in these countries had. Evans accentuates that industrial transformative capacity depends not only on the state structure and policies or “internal coherence”, but also on “external connectedness” with societal elements that can be called embedded autonomy (Evans 1992: 176). The developmental states of East Asia, according to Evans, were able to successfully integrate this embedded autonomy, which enhanced their industrial growth.
It was Karl Polanyi (1944) who opened the discussion on the embedded relationships between market, social, and political institutions in Europe during industrialization. Embeddedness, according to Polanyi, is the complex interrelatedness of actors within their social, political, and cultural environments. Polanyi dichotomizes the embeddedness of state, social, cultural institutions and the market forces. The market forces symbolize, in Polanyi’s view, extreme rationalization and disembed economic activity.
A few decades later, Mark Granovetter (1985), one of the founders of the embeddedness framework, argued that economic action (even in the context of the capitalist economy) always remains embedded in structures of social relations. Sociology, therefore, offers a useful tool box for analyzing these social relations such as social networks, for example, and their effect on economic outcomes, power hierarchies, informal institutions, etc. Granovetter criticized institutional economists for underestimating the social aspects of economic relations and focusing primarily on formal institutional structures and policies.
8 Generally speaking, the current embeddedness literature emphasizes the societal elements that affect economic outcomes, which inevitably diverts attention from the straightforward analysis of policies toward a complex world of societal interconnectedness and relations where actors are “imbedded.” The objective of this literature is to capture the complexity of the causal links between various social factors. Vast literature on embeddedness embraces different social science fields like economic sociology, political economy, even anthropology and seeks to explain economic outcomes using the embeddedness framework. Economic sociologists emphasize institutional and structural causes of economic development or regression (Zukin, Sharon, and DiMaggio 1990). Political economists are concerned about political embeddedness of an enterprise and focus on power issues, elite structures, corruption and other formal and informal institutions that affect the work of an enterprise (Fields 1995).
What seems to separate the embeddedness literature from the literature focusing on state structures and policies, or as Evans put it, “internal coherence”, is that the latter tends to use dichotomies: institutional environment vs. companies or regulatory environment vs. companies. The embeddedness literature denounces this “simplistic” dichotomization and advocates the analysis of complex causal relations such as informal social networks that transcend the boundaries of a regulatory environment (Ibata-Arens, Dierkes, and Zorn 2006: 7). In light of this criticism, I understand the limitation of this project. However, it is my conscious decision to engage in a policy-focused analysis. I understand that the analysis of complex social interactions and the analysis of the regulatory environment are not self-exclusive and can be successfully combined to complement each other. Social embeddedness of an enterprise is an important issue especially in such complex societies as China and Russia, where decisions are frequently reached on the basis of favoritism, bribes, informal relations, etc. I believe, however, that formal institutions like policies still matter and this research focuses on illuminating the way an enterprise operates in this regulatory environment. The critics of the policy-focused approach refer to it as a “naïve legal formalism” (Suchman and Edelman 1996). The way to avoid “naiveté” is by focusing not only on the policy per se but also on its effectiveness and implementation, which this project engages in. That is why micro-level enterprise-focused empirical observations are the key in illuminating the issue of policy effectiveness. Furthermore, this project is concerned with a set of policies that directly or indirectly, in view of the author, affects the process of technology appropriation. This entails, however, a certain degree of interpretation concerning the choice of policies that create sources for technology appropriation.
Ibata-Arens, Dierkes, and Zorn (2006: 10) criticize the tendency of political economists in the institutional camp to attribute importance to national-level differences in which institutions structure economic activities. Particularly Ibata-Arens, Dierkes, and Zorn denounce overemphasizing the role of the state as a mediator between market and society. The major criticism lies in frequently prescriptive nature of the comparative cross-border state-focused analysis that implies policy recommendations (Ibata-Arens, Dierkes, and Zorn (2006: 10). Naturally, those scholars who concentrate on analyzing various intricate locally-embedded social structures and their effects on economic development would steer clear of prescriptions and would tend to perceive local
9 embeddedness structures as unique. Even though there is much truth in approaching the question of economic outcomes from the perspective of unique societal structures, the goal of this project is to engage in cross-country comparative analysis, which is also a legitimate ground. The focus on the state also represents a legitimate ground for analysis especially if the research question is on the effects of the policy environment. Thus, ideologically, or better to say, with regard to theoretical framework preference, this project is more oriented toward the comparative analysis literature that focuses on the role of the state, not societal embeddedness. The concept of the “developmental state” is an important part of this literature.
Developmental State
One of the crucial concepts in the institutional approach is the concept of the “developmental state.” This concept was first introduced by Chalmers Johnson in 1982 in his book MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975. Johnson notes that one of the goals behind the introduction of the “developmental state” concept was an attempt to look outside the conventional dichotomy between the free- market American capitalist model and centrally-controlled Soviet economy.
Johnson was accused by critics of overemphasizing the role of the state. Johnson stresses that he never said that the state played the most significant or the sole role in the Japanese economic development. The accusations were a result, as he implied, of a sharp division into two extremes: “rational choice” version of Western economic individualism and the Soviet-style state-centered economy (Johnson 1999: 34). The critics were not ready to embrace the new model of capitalism – “developmental state”. Johnson accentuates that this rigidity to broaden one’s horizons, inability to see beyond conventional “truths” and be “country-specific” might result in inefficiency and crisis like in the case of the economic experiments in Russia after the collapse of the Soviet Union (Johnson 1999: 36).
The major thesis of the book MITI and the Japanese Miracle is that “the postwar Japanese economic “miracle” should be attributed to “conscious and consistent governmental policies dating from at least the 1920s” (Johnson 1999: 37). Johnson contrasts the so-called “regulatory” state or “market-rational” state, which “concerns itself with the forms and procedures – the rules, if you will – of economic competition, but it does not concern itself with substantive matters” (Johnson 1999: 37). The US may serve as an example of the “regulatory state.” Japan is a good example of a state in which the developmental orientation predominates (Johnson 1999: 37). The “developmental state” gives its first priority to development. A unique feature of the Japanese model of the “developmental state” was that MITI (Ministry of International Trade and Industry) was engaged in a special type of protectionism: “MITI made every effort to suppress imports of finished goods, particularly those that competed with domestic products, but it urgently sought imports of modern technology and machinery” (Johnson 1999: 38).
10 At first, Johnson was reluctant to generalize the Japanese experience to the extent of creating a model of economic development, but his editor convinced him to describe the major features of the developmental state as a model. The first element of the model is the existence of small, inexpensive, but elite state bureaucracy staffed by the best managerial talent available in the system (Johnson 1999: 38). The duties of this bureaucracy included: to identify the industries to be developed, to choose the best means of their development, and to supervise the development (Johnson 1999: 37). The second prerequisite is when the bureaucracy is granted special authority to exercise its powers, “take initiative and operate effectively” (Johnson 1999: 38). The third element of the model is the perfection of market-conforming methods of state intervention in the economy (Johnson 1999: 39). One of these methods is the administrative guidance. Johnson argues that in the “regulatory” state the laws and regulations serve the interests of lawyers who interpret them, but creative administration is lacking. In the “developmental state” like Japan a bureaucrat can be compared with a “diplomat negotiating an international agreement”, where the success or failure of the policy depends on his experience and expertise (Johnson 1999: 39). The final element of the model is the administrative agency or “a pilot organization like MITI” (Johnson 1999: 39). MITI is unique due to the diversity of its functions.
Cumings contributes to the further development of the conceptual discourse on the developmental state. Cumings traces the Japanese experience of state building to the European continental tradition and refers to such moguls of the European thought on the state as Marx, Weber, and Hegel. Cumings credits Johnson for “coining the term “developmental state” and establishing it as a third category alongside liberal and Stalinist conceptions” (Cumings 1999: 63). Unlike other theories on the Japanese “miracle” that explain this phenomenon from the cultural perspective (collectivism, etc), or as a market-driven process, Johnson attributes the Japanese development to the cluster of circumstances: “late development, lack of resources, the need to trade,” post-war economic and political crises, etc. that led Japan to become more mobilized around the development idea, and also the role of MITI as a unique administrative entity that consciously imposed a certain industrial policy (Cumings 1999: 63).
Woo-Cumings (1999) discusses other factors that influenced the developmental state in Northeast Asia: financial arrangements, bureaucracy, big business, authoritarianism, external pressures, and ideological underpinnings. Woo-Cumings draws comparisons between the so-called “appointive bureaucracy”, for example, in Latin America, that lacks initiative and is unstable and the powerful bureaucracy of Japan, for instance, consisting of the crème-de-la-crème – the most educated and technically efficient group of specialists with a coherent interest. Woo-Cumings also compares the Northeastern experience with India, where bureaucracy failed, despite its educated nature, due to its clinging to the liberal democracy sentiments without a clear vision and common interest.
11 Alternative Theories
The two alternative approaches to the emphasis placed on the role of the state in economic development are the neoclassical economic approach and culture-based argument. In the sections below I discuss these two approaches.
Further in the text I will address the question of theoretical framework that this project borrows in a more concrete manner.
Neoclassical Economists
The neoclassical economic approach emphasizes the role of the market and diminishes the role of the state in economic development. Market is perceived to be a self-regulating force that does not need any external interference. The neoclassical argument has been, however, disputed. The dispute between the opponents and proponents of the neoclassical model is demonstrated by the discussion over the US industrial policy that goes back to Jefferson and Hamilton.
As Caporaso and Levine note, the emergence of political economy brought with it a debate over the responsibilities of the state with regard to economic relationships. The debate still goes on. The two opposing views address the question of whether the state should regulate economic relationships and distribute the resources or this prerogative should be left to the market or, in other words, private agents pursuing their private interests in the market (Caporaso and Levine 1992: 1). In a nutshell, the debate concerns two competing concepts: an idea of a self-regulating market vs. an interventionist role of the state. This theoretical debate has a direct relevance to the discussion of the industrial policy as a mechanism of state intervention.
The classical liberal theory that originated in the work of Adam Smith portrayed the market as an “invisible hand” that regulates economic relationship creating equilibrium, therefore, the state intervention is not required or desired. In the 1930s, Keynes delivered a critique of the concept of the market self-regulation advanced by classical liberal economists. He emphasized the probability of the market failure. His critique of the market calls into question the minimal role attributed to the state by classical liberal economists (Caporaso and Levine 1992: 4). According to the Keynesian theory, the self- regulating market cannot be relied on to secure the livelihoods of those dependent on it. This assumption of the market failure to regulate economic relationship lays a foundation for state intervention.
The neoclassical approach towards industrial development has been especially popular in the US. The role of the state as an essential vehicle of economic prosperity has been always debated in the US. As Nester indicates, most Americans would agree in principle with Thomas Jefferson’s words that the government that governs least, governs best (Nester 1998: 1). Jefferson advocated pure individualism and private initiative when the government is providing the legal framework and order. The government role in the economy, according to Jefferson, is to leave it alone, the market should be free:
12 consumers demand certain products, entrepreneurs supply them. As Nester points out, Jefferson was ready to sacrifice American manufacturing capacity for the sake of agricultural development because he felt that America had a natural comparative advantage as an agrarian nation. Jefferson, like the founder of the free trade ideology, Adam Smith, believed that all nations as all individuals possess certain natural endowments in the production of which they should specialize.
Hamilton was an opponent of Jefferson concerning the role of the government in industrial development. According to Hamilton, free markets do not exist in the real world; “far-sighted governments manage markets to favor their own respective nation’s industries” (Nester 1998: 3). Thus, as Hamilton argued, the nation’s manufacturing capacity should be enhanced and should not be left to the “market whims” (Nester 1998: 3).
The neoliberal economic ideology has been historically prevailing in the US. The term “neoliberalism” describes economic policies that target economic growth by encouraging free market mechanisms like competition, pricing, etc. Encouragement of free market is achieved through “de-emphasizing” the role of state in economic regulation, or, in other words, deregulation. The state is seen as part of a problem rather than solution (Stiglitz 1998). The state and the market are viewed as rival forms of resource allocation. Thus, neoliberalism assigns a minimalist role to the state. The government’s primary function is to ensure macroeconomic stability, with an emphasis on price stability, removal of barriers on the way of trade liberalization, privatization and competition (Stiglitz 1998). The neoliberal approach is often referred to as ‘hands-off’ or ‘laissez-faire’.
The US politicians and intellectuals have a particular historic predisposition towards the concept of industrial policy. The idea of industrial policy, as Johnson notes, calls into question many of the economic beliefs that Americans have: their commitment to the market mechanism as the supreme arbiter of economic decisions, their reliance on adversarial rather than cooperative public-private relations, and their devotion to free trade (Johnson 1984: 5). Americans are afraid of state intervention into the private sphere because this model of the state/society relationship reminds them of the authoritative Soviet economic structures. However, as Johnson argues, President Reagan’s policies aimed to increase the US world economic competitiveness, high technology development, industrial restructuring represent “a first step toward an American industrial policy” (Johnson 1984: 4). One of the most vivid examples of the US industrial policy efforts is strategic development and protection of industries related to national security.
As the debate over the industrial policy and the role of the state in the US demonstrates, the neoclassical economic model of economic relationships as a theoretical approach was heavily politicized. Although ideologically the US has supported the laissez-faire approach to the organization of economic affairs, in reality this ideal model never existed. The US government intervenes into economic relationship in one way or another by supporting certain industries, imposing trade barriers, protecting domestic manufacturing, etc.
13 From the perspective of the neo-classical approach, Colander (1984) argued that the state intervention might lead to rent-seeking, or corruption, which negatively affects industrial growth. However, as Pingle notes, “the difference appears to be the kind of state intervention, not state intervention per se” (Pingle 1999: 13). It is true that the state involvement in economic relations resulted in some negative ramifications in a number of countries of Latin America and Africa, however, the “developmental state” in East Asia, on the contrary, was successful (Pingle 1999: 13). Furthermore, no capitalist country meets ideal liberal model criteria of economic relationship, all states have state-owned enterprises and envoy a variety of protectionist measures defending domestic industries from foreign competition. Even though all states are operating in a global market, the national interests are usually a priority.
This paper argues that though it is impossible to discard the importance of the market as a factor determining industrial growth, the neoclassical vision of the market is an ideal model that has never existed or exists now. Furthermore, the market and the state influences are not necessarily self-exclusive. The discourse on whether the state should intervene or not to enhance industrial growth is essentially not that important – intervention always takes place in one way or another - how this intervention is carried out and how it affects development are more significant and intriguing questions.
Cultural Argument
The basic assumptions of the cultural approach can be traced to the works of Max Weber. Weber’s comparative study of the economic implications of the great world religions was aimed at demonstrating that values and ideas can be active agents in institution building and economic relations. Karl Marx, on the contrary, stressed the importance of economic factors, for example, organization of production. Weber’s work on the influence of religion (Protestantism) was a response to Marx.
In The Protestant Ethic and the Spirit of Capitalism Weber talks about the influence of religion on economic development, and specifically, on the development of the modern form of capitalism. Capitalism is the pursuit of profit by means of continuous, rational, capitalistic enterprise. Protestantism, according to Weber, was more likely to develop economic rationalism or capitalism than Catholicism. In the Protestant ethic, economic acquisition is no longer considered a means of subsistence: it is the ultimate purpose of a man’s life. However, Protestantism is also a product of economic stratification. Religious affiliation is not only a cause of the economic conditions, but appears to be a result of them as well. Thus, Weber indicates that culture and economic structures are interlinked and mutually reinforcing.
A proponent of the cultural approach, Peter Berger (1988), discussed in his work the East Asian developmental model or the economic success of the so-called Four Little Dragons – South Korea, Taiwan, Hong Kong and Singapore. He observes that the successes of these states have impressed other countries, sometimes not pleasantly, for example the steel and automobile industries in the US (Berger 1988: 4). These four countries share
14 common economic features: high growth rates, an improvement in the standards of living, a highly active government role in shaping the development process, an economy geared by exports, etc (Berger 1988: 5). These features, however, do not exist in the vacuum, as the scholar states. According to Berger, they are linked to the cultural and social features, which include: “a very strong, achievement-oriented work ethic; a highly developed sense of collective solidarity, both within the family and in artificial groupings beyond family; the enormous prestige of education, with the concomitant motivation to provide the best education for one’s children; and severe (some would say, brutally severe) meritocratic norms and institutions, which, while egalitarian in design, serve to select out elites when they are at an early age” (Berger 1988: 5). Thus, as the scholar argues, these cultural features are integral parts of the East Asian developmental model.
Selitchev (2004), a Russian economist, provides a counterargument to the cultural approach. According to this scholar, only the state as an organ of the economic micro and macro management can be the major coordinator of the dynamic country development. In the role of the state resides the success of the economic reforms in China and other countries of East Asia (Selitchev 2004: 31). The author does not agree with the assumption (influenced by Max Weber and his theory that Protestantism created more favorable conditions for capitalistic development in the West than any other religious/social systems) that the economic development can be attributed to cultural factors like Confucianism in the Chinese case. The author gives an example of South Korea. In the 1950s, South Korea was going through a substantial economic decline. Koreans were described as lazy and economic growth was hard to imagine. However, as Selitchev says, due to the government economic policy South Korea now is a success story.
Of course, there might be alternative theories explaining, for example, the economic miracle of the current Eastern giant, China, including such absurd as that China is being helped by extraterrestrial intelligence. The goal of this research is not to emphasize the importance of state intervention as the most important factor; other factors might be involved as well. As Skocpol noted, it is hard to separate state from society, it is equally hard to separate one factor of economic growth from another. The goals for legitimate research can be to determine whether the state policies are effective in promoting industrial development and which policies account for better results. This research, following Pingle’s observations (1999), argues that the fact of state involvement does not guarantee success in industrial development, the way intervention is carried out is more important as an explanatory variable accounting for the variations in industrial development.
Theoretical Framework
Institutional and socio-structural approaches emphasize the role of the state in industrial development and address the question of variations in industrial performance. Currently there is a vast literature that feeds upon these two approaches. The scholars who ally with these perspectives (Johnson 1982; Rueschemeyer and Evans 1985, Amsden 1985, Evans 1992, 1995; Harwit 1992; Hart 1992; Cumming 1999; Woo-Cumming 1999; Pingle
15 1999) created the so-called substantive theoretical frameworks that, following Skocpol’s directions, attempt through empirical research to show the relationship between the state and economic performance. This project discusses the theoretical model offered by Vibha Pingle (1999) in a greater detail. This discussion is necessary to explain why I consider the role of the state in technological development to be one of the decisive variables affecting industrial development worthy of thorough investigation.
The factors involved in enhancing industrial competitiveness, according to Pingle, include implementation and success of government policies, institutional structures, the degree of corruption and red tape, investment environment, etc. Vibha Pingle (1999) embraces these indicators in her analytical framework, which she calls a “developmental ensemble.” The author uses the term “developmental ensemble” to explicate the patterns of relationship between the state and industrialists that affect industrial performance. The developmental ensemble, in Pingle’s classification, has four dimensions: 1) a cohesive state structure, 2) bureaucratic autonomy from societal interests, 3) encouragement from political superiors, 4) and informal channels of communication between bureaucrats and industrial actors (Pingle 1999: 3). The concept of the developmental ensemble was inspired by institutionalist and socio-structural approaches. The developmental ensemble implies the existence of “autonomous, coherent, and flexible” institutions and policies (Pingle 1999: 3).
Pingle (1999) compares three industries in India (software, steel, and automobile) that have different levels of development. The software industry is far ahead of the other two industries (steel and automobile). The scholar suggests that the discrepancies in the performance of these industries can be explained by different degrees of the “pockets of shared understandings” within bureaucrats, within industrialists, and between bureaucrats and industrialists (Pingle 1999: 2). The scholar argues that the presence of developmental ensemble enhances industrial development and entrepreneurship.
Vibha Pingle (1999) is comparing different industries in one country, thus she has the cultural variable under control (the same country). However, the sector-specifics are hard to account for. The software industry in India seems to enjoy a more favorable treatment by the state than the steel and automobile industries. The Indian government pays special attention to this particular sector vis-à-vis other sectors because India is trying (quite successfully) to make software industry its competitive edge in the world market. Therefore, it is hard to compare the variation in the performance of these three industries, because they don’t have equal base for development. Furthermore, the world market affects different industries in different ways.
Therefore, this research will take a slightly different path. I compare one industry – automotive industry – in two countries. Thus, this project has the sectoral argument (different industries are developing differently) under control. This project also assumes that the global market affects the development of the same sector in different countries in a similar way.
16 Pingle’s analytical model of the “developmental ensemble” has elements of the social embeddedness framework. However, for the reasons discussed in the introduction to this chapter, this project does not pursue the operationalization of such variables as “state autonomy” or “informal channels of communication between bureaucrats and industrialists.” However, I was inspired by the way Pinge pays attention to the policies as part of her comparative framework.
I would argue that such a concrete variable as state’s policies aimed at promoting technology deserves a closer scrutiny. Despite its modest form, it has much explanatory potential; it is quite generalizable and easy to deal with in terms of conceptualization and measurement. This chapter further discusses the way this variable is operationalized in this research. It should be mentioned that Pingle also emphasizes the importance of the state’s efforts to promote technology but not as a separate independent variable.
Joseph Schumpeter (1934), a genius of economic thought of the 20th century, emphasized the vital significance of technological development for economic competitiveness. Schumpeter understood competition as first and foremost technology competition: “the competition from the new commodity, the new technology, the new source of supply, the new type of organization…-competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives” (Schumpeter 1952: 84). Therefore, after Schumpeter, technological innovation is considered indispensable for economic and industrial growth.
Jeffrey Hart (1992), unlike Pingle, prioritizes the factor of technological development over other factors that influence international competitiveness of industries. Hart compares the steel, automobile, and semiconductor industries in five major industrial countries (the US, Japan, Germany, France, and Britain) with regard to their international competitiveness. Hart emphasizes that technological development is central for the ability of a country to design, produce, and distribute goods and services at costs that are globally competitive (Hart 1992: 6). Thus the application of productivity-enhancing technologies improves its competitiveness. The state’s policies encouraging foreign companies to locate their design, production, and distribution technologies in a country increase the industrial competitiveness of this country. In short, technology is a capacity multiplier.
Mowery and Nelson (1999) name technology as one of the four critical factors behind industrial leadership. The other three factors are resources, institutions, and markets. The researchers note that empirically oriented economists have long ago understood that firms and national complexes of firms differ in their access to and command over technology.
Technological innovation does not happen by itself though. Of course, market forces play an important part in its realization, but technology is expensive and frequently demands government intervention especially in developing economies or late industrializers. In late industrializing countries the state plays a heavier role to make up for their disadvantageous position in the world market; this intervention should, however, have a planned character, as Amsden (1989) notes. Amsden describes the late industrialization
17 of South Korea and the efforts of the government to enhance technology catching up process by, for instance, inviting foreign talent to supervise industries or investing into domestic educational programs, etc. The state should make an effort, however, to implement developmental strategies cohesively and consistently. It should not stifle the entrepreneurial initiative by over-control or allow bureaucrats indulge in rent-seeking activities and let them feed upon foreign aid, legal and institutional flaws (Amsden 1989: 46-52). Amsden saw the state as a mediator of the market forces but still admitted the necessity of its active role in technology enhancement.
The government’s efforts to promote technology have a direct effect on industrialization. In fact, it is an integral part of every industrial policy. Linda Weiss (1998) mentions this factor as part of the state transformative capacity concept, which, according to Weiss, accounts for industrial competitiveness. The present research project is concerned with this very explicit or even simple factor that might determine industrial growth - the attempts of the state to promote technology as part of industrial policy. The focus on this variable might help to explicate, for example, the phenomenon of the Chinese industrial miracle. The two sections below discuss the conceptualization of the independent and dependent variables and also some terminology involved.
Independent Variable
For the purposes of this research, I conceptualize the state efforts to enhance technological development as a variable consisting of two components: the state policies aimed at creating a legal environment that makes certain sources of technology available for the automotive enterprises (policy focus) and the way enterprises make use of this environment (enterprise focus). For further reference, I term the first component as the sources of technology appropriation and the second – the process of technology appropriation. Why is this distinction important? It is important because it makes the variable more reality-reflective, dynamic, tangible, and, therefore, grants it with more explanatory power. This variable combines two aspects of one phenomenon: the description of the legal environment that the government creates to enhance technological development in the automotive sector and the way the companies operate in this environment. For this project, I have to admit, the micro- or enterprise-level of analysis is more important because it is empirical in nature, helps illuminate the effectiveness of policies, and represents a crucial element of the concept of technology appropriation – appropriation of the technology sources at the enterprise level.
We should assume, however, that the automotive enterprises in both countries are equally capable to take advantage of this environment and equally equipped with managerial talent, strategic thinking, ability to absorb technology efficiently, etc. This research does not focus on comparing the ability of the companies in Russia and China to compete. Of course, in the real world, the ability to absorb technology and use it effectively differs across different nations and enterprises. This ability normally should serve as an intervening variable between state policies and overall industrial competitiveness unless we discuss countries that have similar industrial capabilities to absorb and develop technology in one particular sector. Although I strongly believe that China and Russia
18 have similar technology capacities due to the historic similarities between the two industries (the developing status of their economies, minimal exports of domestic models, etc.), the main reason to treat the companies in both countries as equally positioned and capable is because of the analytical emphasis on state polities.3 It is an attempt to take the “company” element out of the equation in the same manner a researcher frequently takes the “human” element out.
It should be noted though, that the cases of domestic enterprises that this research employs are, indeed, similar across several categories such as size, market share, and ownership. The two Russian cases are the leaders in sales and the largest enterprises in Russia: AvtoVaz, the largest manufacturer of passenger cars in Russia, and KAMAZ, the largest manufacturer of trucks in Russia. KAMAZ is owned by the governments of the Republic of Tatarstan and the Russian Federation. Until fall 2006, AvtoVAZ was state controlled after a hostile takeover of a controlling stake by the state arms trade agency Rosoboronexport in 2005. It should be noted, however, that in the autumn of 2006, the management team changed again. At present, the ownership structure of the company is quite ambiguous. From the Chinese side, it is Foton Motors, a state-owned manufacturer of a full range of commercial vehicles. Unlike AvtoVAZ and KAMAZ that have a long historic baggage and have been through the tribulations of the economic crisis in Russia in the 1990s, Foton is a comparatively new company, established in 1996. It is, however, one of the most successful and largest enterprises in the commercial vehicle manufacturing in China. Furthermore, this research focuses on the availability of the sources of technology transfer in the automotive sector and the way companies take advantage of these sources rather than the ability of companies to absorb different types of technology due to their technological limitations or the quality of human resources, etc.
The technology appropriation tactics of automotive enterprises mirror government policies. The way the firms operate in the regulatory framework created by the state reflects the coherence, consistency and overall conduciveness of the government policies to enhance technological development and, correspondingly, industrial competitiveness. As mentioned above, this project defines “conduciveness” of policies in terms of the number and effectiveness (measured at the enterprise level) of the sources of technology appropriation made available to the companies by the policy environment created by the state. The illumination of the complex relationship between the policy-focused and enterprise-focused aspects of one phenomenon (state policies promoting technology development) might lead to a better understanding of how this phenomenon affects industrial competitiveness.
I categorize the sources of technology made available to companies by the government as follows: joint ventures with foreign auto manufacturers; policies aimed at increasing a local content; policies encouraging exports; state subsidies or other forms of financial support; foreign direct investment (FDI) (even state-owned enterprises attract foreign investment); R&D programs; purchase of technology; purchase of consulting services.
3 In the present time, China is aggressively conquering new markets in Africa, South America and even Russia. The new aspirations of China-based auto companies are to export to Europe and the US.
19 Chapter IV and Chapter V propose a directory of the sources of technological advancement available to the companies in China and Russia respectively. These chapters offer empirical observations and analysis based on interviews conducted in the automotive companies by the author during a series of field research trips to China and Russia in 2005 and 2006.
Presumably, the more sources of technology are made accessible through state policies; the more successful the companies are in exercising technology appropriation. Technology appropriation is a process of obtaining, retaining, and developing technology by automotive enterprises, which directly affects technological and, correspondingly, industrial competitiveness of the automotive sector. The sources of technology identified above are the integral parts or components of the technology appropriation concept. As mentioned above, this research is concerned with identifying the relationship between state policies that create a conducive environment for technology appropriation and automotive enterprises that use this environment for exercising technology appropriation.
The technology appropriation process is exemplified by automotive enterprises located in China and Russia and discussed in Chapters IV and V. Chapter II focuses on the automotive sector development in Russia and China. It is a historical introduction and does not entail any comparative conclusions pertaining to the research question of this project. Chapter III elaborates on the state policies affecting the process of technological development in both countries. The timeframe for the discussion of the policies is from the end of the 1990s till the present day. It is essential, however, to discuss the importance and novelty of the technology appropriation as a concept for the purposes of this research, which is ultimately interested in applying the state-focused theoretical framework to explain industrial performance. The next section is dedicated to illuminating this concept.
Terminology: Technology Appropriation
As discussed above, this research project uses an independent variable combining two components: sources of technology appropriation and process of technology appropriation (what is being done at the enterprise level). It is essential to explain what the concept of technology appropriation entails and why I find it utilitarian for the objectives of this endeavor.
When it comes to technological development, usually the term “technology transfer” is used to explicate the flow of products, knowledge and information from one party to another. Technology transfer can be also generally defined as the process of developing practical applications for the results of scientific research. Technology migrates from research institutes to enterprises. Stam uses the following definition of technology transfer: “Technology transfer concerns the acquisition, development, utilization and maintenance of knowledge, including technical knowledge (hardware, software and humanware), and takes place between governments, institutes, enterprises, and individuals” (Stam 2004: 22). Broadly speaking, technology transfer is a process of learning or, as Brooks defines it, “a way of linking knowledge to need” (Gallagher 2006:
20 5). Thus technology transfer as a process involves not only the transfer of tangible assets like machinery, the intangible assets like process organization know-how or application technology, but also it is a process of communication and learning between all parties involved. Another aspect of technology transfer is an international dimension, when technology transcends borders. Usually, in this context, technology transfer is understood as an import of product, process, organizational and other types of technology by less industrialized countries from more industrialized states. Technology transfer is a complex and multifaceted phenomenon. The above definitions seem to overlook, however, the role of the state in creating, stipulating, and retaining a favorable legal and institutional environment for the process of domestic technological upgrading. Since this research focuses on illuminating the technological competitiveness from the angle of the domestic state policies, I consider the term “technology appropriation” as more relevant than “technology transfer.” It reflects the internal efforts of the “receiving” country.
Busser and Sadoi (2004) analyzed the modes of technology transfer in the automotive sector in the East and South-East Asian countries. The authors argue that the success of the South-East Asian automobile industry can be attributed to both conducive government policies and technology transfer from foreign (mostly Japanese) firms (Busser and Sadoi 2004: 13).
Gallagher (2006) has produced a thorough empirical research on the patterns of technology transfer from the US to Chinese automotive firms and the effects of technology transfer on the overall competitiveness of the automotive industry in China and, specifically, the deployment of cleaner environmentally friendly technology. The researcher notes that conceptually technology transfer occurs in the context of technology deployment or diffusion. Diffusion presupposes the transfer of technology through a number of channels embedded in the social system (Gallagher 2006: 130). Foreign direct investment (FDI) is considered to be one of the major channels of technology transfer. Gallagher, unlike Busser and Sadoi (2004), argues, however, that FDI does not necessarily contribute to technology advancement as the cases of the US/China joint ventures in the automotive sector demonstrate. The reasons are multiple: US firms don’t feel responsible for illuminating their partners on latest technology, the structure of joint ventures is inadequate, etc (Gallagher 2006: 135). The author does admit, however, that there is a technology spillover effect caused by joint ventures with regard to Chinese subcontractors and suppliers. The quality of components had to be improved to measure up to the foreign brand names.
The book of Gallagher offers some policy recommendations based on the conclusion that the Chinese government has not been very successful in attracting and retaining cleaner and energy-efficient technology in the automotive industry through international technology transfer. The recommendations include imposition of policies and regulations on emission standards, on fuel standards, etc. The author also suggests the support of internally generated R&D and educational programs (Gallagher 2006: 150-153). These recommendations, in my opinion, transcend the boundaries of technology transfer from the US partners to the Chinese automobile enterprises; they directly concern domestically
21 ignited initiatives. Although the Gallagher’s empirical study is inspiring, this project takes a slightly different path.
The issue of external help versus domestic actions to enhance technological sophistication is, indeed, crucial for this research. In fact, I argue that there is a new trend emerging in China today: a shift from technology dependence on foreign partners toward more self-reliance and home-grown initiatives.4 The diversity of domestically-generated sources of technology is aggrandizing. At present, as the Chinese automotive enterprises become more experienced and financially successful and the state policies more liberalized, the domestic initiatives to achieve technological “leap forward” are not limited to appropriating technology from foreign partners in a rigid joint venture context or the state-sponsored R&D or educational programs; they might as well include the tactics of the Chinese enterprises to invite outside expertise and resolve to consulting services, develop technology internally, or even purchase different types of technology without entangling themselves in a joint venture with a foreign partner. Chinese enterprises are becoming more self-sufficient, which implies a more complicated mode of technology enhancement within China. Bell and Marin (2004) emphasize the knowledge- creating activities by the domestic firms inside the “receiving” or host country in their research of the spillover effects of FDI in emerging economies like Argentina in the 1990s. Furthermore, Richard Li-Hua rightfully notes that technology transfer is a two- way process between the transferor and the transferee, which presupposes an active role played by both parties (Li-Hua 2006: 209).
Thun (2006) in his new book dedicated to the way political and economic institutions in China shape industrial competitiveness, argues that, indeed, it is firms that are at the heart of the industrial development process: “ All firms must deal with the challenges of human capital (training workers, bargaining with labor), access to financial capital and governance of its utilization, and inter-firm relations (relationship with suppliers of both inputs and technology, customers, and other members of a supply network)….The ability of firms within a sector to meet these needs is central to the process of industrial development, and success is fundamentally shaped by the context of institutions and organizations in which the firms operate.” (Thun 2006: 9). This project has been influenced by this argument. The decisions of Chinese and Russian automobile makers to increase their technological competitiveness lie in the heart of technology appropriation process and can take place only within the legal and institutional framework stipulated by the state.
In my opinion, the term “technology transfer” has a strong connotation of something borrowed from the outside, frequently, from outside the country. It also has a slight connotation of passive attitude or dependence on the benevolence of foreign partners rather than aggressive and proactive patterns of behavior, which, in my opinion, characterize better the industrialization realities in both China and Russia today. This research emphasizes the emerging importance and complexity of domestically-generated
4 Aervitz, Irina, China's Auto Makers Spurn Foreign Suitors, Asia Times, China Business, June 6, 2006, [accessed October 2006],
22 technology development initiatives and state policies without, however, degrading the significance and relevance of “outside” channels of technology transfer like FDI or, specifically, joint ventures with foreign partners. In other words, technology development is not a by-product of FDI, it has a variety of sources both domestic and foreign. However, even when we talk of the “foreign” sources of technology, they cease to be “foreign” as soon as they are adopted, adjusted, and tailored by domestic companies to fit the overall local conditions and policies of the state. The “borrowed” technology has to be adopted even from a purely economic point of view to account for the differences in the characteristics of the local market, the production infrastructure, even national taste, climate, etc (Mansfield 1975: 373). The term that, in my opinion, better reflects the complexity of the phenomenon, its essence as a process, and its dual nature (domestically generated sources of technology versus the so-called external sources of technology) is “technology appropriation.”
The above conclusions were sparkled by the framework suggested by Terdudomtham (2004) who discusses a diversity of the channels of technology promotion reflected in the Thai government policies in the automotive sector. The policies include local content requirements, R&D promotion, export promotion, and human resources development. Another scholar was influential for this research: Radosevic (1999), following the convictions of Gerschenkron (1962), provides a very thorough examination of the channels, mechanisms, and context of technology transfer employed by technological latecomers to “catch up” with more advanced countries or leaders. Radosevic distinguishes between the formal channels of technology transfer (FDI, joint ventures, and licensing) and non-formal or embedded channels – the transfer, which is embedded in long-term relationships like subcontracting, co-operative alliances, different types of spillovers, etc (Radosevic 1999: 20). This research discusses some of the sources of technology advancement identified above in relevance to the case studies of the specific automobile enterprises in China and Russia. I cannot, naturally, comment on all hypothetical sources due to the lack of information and a limited number of enterprise cases involved. Of course, there are also such forms of technology transfer as reverse engineering and copy-catting. China has a lot of notoriety in this department. However, it is hard to account for the effects of these forms of technological appropriation or even prove that they actually take place.
This project defines “technology appropriation” as the process of acquiring, developing, retaining, utilizing, and diffusing tangible (hardware) and intangible (software, human resources, process technology, etc.) types of knowledge that takes place in a domestically created legal and institutional environment stipulated by the state and often implemented by the companies in need of technology. This project discusses two aspects of technology appropriation in the context of the Chinese and Russian automotive sector: sources of technology appropriation available and process of technology appropriation exemplified by the automobile factories in both countries.
It is necessary to justify the choice of terminology in order to operationalize the variables involved. As Siew-Yean (2004: 61) contends, the success of technology transfer is practically impossible to measure unless you discuss what sources of technology are
23 involved, types of technology acquired, and even its objectives. These indicators are not only industry and company-specific, but also country-specific and involve complex multi-layered assessment techniques. The measurement depends on how you define technology transfer as well. I am not arguing that “technology appropriation” is easier to measure in general, but the way this project defines it makes it more operationalizable: I look at the government policies and the way they are utilized by automobile companies.
I believe that both indicators are important for evaluating the level of influence that the state has on industrial development. The coherence and consistency of policies regarding technology development matter. The utilization of these policies by firms matter even more, in my understanding. This research concentrates on both indicators with the assumption that they might account for the differences in the industrial competitiveness in China and Russia.
The indicators reflecting state efforts to promote technology are operationalized in the following way:
State policies to promote technology development: Investment climate policies regulating foreign enterprises; provisions on joint ventures and local content, tax benefits for technology and innovation-related projects, national- level state-sponsored R&D facilities and projects; international agreements with regard to technology transfer that the state signed, etc.
Utilization of policies: The utilization aspect of the policies outlined above was addressed during the interviews with the executives of domestic and foreign firms, and joint ventures in the Russian and Chinese automotive sector. Interviewees’ names and affiliation information are not disclosed due to the requirement to maintain confidentiality.5 Please see the analysis of the interview data in Chapters IV and V.
Notes on Methodology
Case-Oriented Comparative Method
Traditionally a case study is defined as a research method that involves a thorough, in- depth analysis of a particular event or phenomenon. Case studies are contextually deep: “one knows more about less”, while comparative method tends to generalize: “one knows less about more” (Sartori 1991: 24). Sartori emphasizes that case-studies are theory- building, while comparative analysis is theory-controlling.
A case study implies that the attention of the researcher is undividedly drawn to this particular event or phenomenon, so that a researcher is gaining a full and insightful understanding of the case under investigation. Case studies are held in opposition to
5 This research has been approved by the Institutional Review Board for Human Subjects Research at Miami University in Oxford, Ohio.
24 quantitative methods that rely on large samples. Case studies possess a double capacity to generate and test hypotheses (Flyvbjerg 2006).
Yin (2002) defined a case study in a slightly different way. He proposed to look at a case study as a research strategy, an empirical inquiry that investigates a phenomenon within a broader context. Case study research may include single and multiple case studies and even incorporate quantitative evidence (Yin 2002). I appreciate Yin’s position on a case study as a research strategy for a number of reasons. First, it allows for comparative case studies to be carried out. Second, it implies that the so-called “exploratory” case studies are legitimate. When the problem under investigation is new, exploratory case studies help identify questions, select measurement constructs, and develop measures. Exploratory case study can be perceived as an oxymoron because they attempt both: to empirically scrutinize one phenomenon and produce a measurement tool for similar investigations in the future. I think that this project represent the exploratory type of research strategy. However, there are risks involved: this type of research strategy is susceptible to premature conclusions, which could be hypothetically avoided if more time and attention is applied to an in-depth analysis. I am willing to take this risk, however. Third, Yin’s definition allows for the existence of multiple cases that are being compared along certain lines and contribute to the better illumination of the general problem or question under investigation, which ultimately constitutes a context, where these cases operate. To be specific, in this research the general phenomenon that I attempt to investigate is the policy environment pertaining to the process of technology appropriation in Russia and China. The enterprises that I use as cases (they are ultimately under my empirical scrutiny) are designed to illustrate the effectiveness of the technology development regulatory environment. I will discuss the logic behind the case selection and their categorization further in this chapter. However, I would like to note that I have three critical cases: Foton in China and AvtoVAZ and KAMAZ in Russia. A critical case can be defined as having strategic importance in relation to the general problem. I also use subordinate cases that include joint ventures in both countries and foreign wholly owned enterprises in Russia (due to a specific characteristic of the Russia’s policy environment that permits foreign companies to establish auto production in Russia independently from domestic partners). These cases are to illustrate a number of sources of technology appropriation made available to domestic companies. One of these sources is, naturally, technology transfer from foreign partners in a joint venture. The cases are organized into the sets of cases along the lines of the sources of technology appropriation that they refer to. Ownership is important but this category is already included in the “sources of technology” categorization. First, the division of enterprises into the ownership categories is provided.6 It should be noted that sometimes it is hard to define the ownership structure of the enterprises under investigation, but I try nevertheless. Second, I think that the comparison of cases along the sources of technology categories is logical and makes more sense for the purposes of this research.
Thus, this project employs a case-oriented comparative method. Ultimately, according to George and Bennett (2005), the goal of case studies is to test hypotheses and develop a new theory that is generalizable across settings. Comparative element is, thus, intrinsic to
6 Please see Table 2 in the Appendix.
25 a case study. As Ragin contends, case-oriented methods often stimulate the development of new substantive theories (Ragin 1987: 44). The comparison between China and Russia does not only contribute to the intellectual debate over the role of the state in industrial competitiveness, but also has policy-related applications. In this project, I, however, refrain from making any policy prescriptions.
This research investigates if the state’s policies with regard to technology development are accountable for the variation in industrial performance. The objective is generally inspired by the position of the state-focused institutionalist approaches. I follow the guidelines offered by Ragin for this type of research design: “the investigator uses theory to aid in the identification of relevant differences; the differences identified are then shown to be causally relevant to the outcome of interest; and on the basis of the differences identified by the investigator formulates or refines a general explanation of the phenomenon of interest” (Ragin 1987: 47). Thus I seek to identify the differences in the institutional and legal context that the state creates with regard to technology appropriation in Russia and China. I employ a two-dimensional perspective looking not only at the state regulations per se, but, most importantly, at the way enterprises operate in the framework of these regulations.
I think that the comparative case-study method is appropriate for the purposes of this research for a number of reasons: case-oriented comparative method works well when the number of cases is small and it also stimulates a rich dialogue between ideas and evidence. Ragin contends: “because these methods are flexible in their approach to the evidence – few assumptions are made – they don’t restrict or constrain the examination of evidence. They don’t force investigators to view causal conditions as opponents in the struggle to explain variation. Rather, they provide a basis for examining how conditions combine in different ways and in different contexts to produce different outcomes” (Ragin 1987: 51-52)
Russia and China are going through a transition from a centrally-controlled economy to the market economy. The state has historically played an enormous role in economic relations in both countries. Today Russia is frequently referred to as “managed capitalism” due to the overwhelming influence of the President Putin governance on all aspects of political and economic life in Russia. Despite the reforms to liberalize different sectors of the economy in China, this country still represents a centrally-controlled economy with a decisive role attributed to the government. Of course, there are differences between the two countries, for example, the length and the model of the economic transition. However, the comparison between the two countries is instructive. More and more politicians and economists in Russia (for example, Selitchev 2004) start to talk about the developmental model of the Chinese economic reform that Russia “should” emulate.
Case Selection and Interviews
As was mentioned above, a series of interviews with senior executives and midlevel managers were conducted in the domestic and foreign enterprises and joint ventures in
26 China and Russia in the summers 2005 and 2006. Most meetings in China were arranged by the author. A number of key meetings were, however, arranged within a framework of the China political economy seminar administered by the Political Science department of Miami University of Ohio that took place in the summer 2005. All meetings in Russia were arranged by the author. The low level of refusals to have an interview can be explained by the fact that all interviews were conducted off the record. Of course, a promise of anonymity increased the amount and quality of information provided during interviews. Some of this information has never been published before, which places additional responsibility on the author’s shoulders to keep the sources anonymous. Since industrial development and technology transfer are very sensitive topics that directly affect the economic competitiveness of the enterprises in both countries, the dealings with sources require additional caution. Keeping my promise of confidentiality to the sources increases the chances of future successful fieldwork in both countries.
During interviews most respondents both in China and Russia were interested to obtain my reading of the government policies in the auto industry and market situation in Russia and China. I tried to provide as much objective information as I could but refrained from expressing my preliminary judgments and from making specific references to my previous interviewees or their organizations of affiliation to avoid corrupting the interview process or exposing my sources.
When several people were interviewed together, I categorize it as one interview. On several occasions I had several conversations with one person to address follow-up questions and verify information obtained from other sources. These conversations I categorize as multiple interviews. I also held supplemental interviews with other firms, industry experts, and academics both in China and Russia. Naturally, I verified the information obtained during interviews by documents, academic and press publications and other relevant literature on my case enterprises in both countries. This practice allowed me to double-check the quality of information and obtain different perspectives on one issue.
Due to the reasons underlined above, I take an extra caution of keeping all my sources confidential. Although specific companies are referred to in the text, no reference is directly connected to a specific individual. I code the interview sources as follows: an interview code contains the number of the interview in historic succession or the order in which the interview was held and letters “c” (corporate source like an interview with a company executive, but not necessarily with the representative of the case company) and “e” (outside industry expert. It is a category that can include academic, think tank, and other educated sources). Please see Table 1 for the information regarding the number of interviews held in different categories of sources based on my coding system. The general sequence of interviews is the following: the first series of interviews in Russia in May and June of 2005, the first series of interviews in China in July 2005, the second stage of interviewing in China in February-April 2006 and the second stage of interviewing in Russia in June-August 2006. The total number if interviews in China is 32. The total number of interviews in Russia is 39. The total number of interviews is 71.
27 Most questions at the interviews dealt with the current situation in the industry. The themes raised in the interviews are as follows:
1. State investment encouragement polices ; 2. Joint ventures; 3. Intellectual property rights policies; 4. Local content regulations; 5. Policies encouraging exports; 6. Tax or other benefits for technology development projects; 7. State subsidies, national-level state-sponsored R&D projects or other forms of financial support; 8. Purchase of technology or consulting services by enterprises; 9. Special economic zones and automotive enterprises.
These themes reflect the major characteristics of the legal environment created by the state with regard to the process of technology appropriation.
The cases for this study include domestic and foreign firms, and joint ventures in the Russian and Chinese automotive sector. Geographically, the enterprises in China and Russia are located in areas that are comparable with regard to the level of infrastructural and transportation development. In China, these enterprises are situated along the Eastern coast and in the Northeast. In Russia - central regions close to Moscow and in the Northwest. It was important for comparative considerations and to better illuminate the effect of state policies to include a diversity of enterprises (for example with regard to their ownership) because the comparison of cases is administered along the sources of technology lines, which requires diversification of cases.
It should be noted, however, that foreign automobile building enterprises are allowed to establish their production facilities in China only in a joint venture with a Chinese partner. Furthermore, all domestic car makers in China are state-owned. Foreign capital owned car makers are allowed to build autos in Russia. The Russian government also allows private auto companies to operate in the market. Please see Table 2 that categorizes the cases in both countries with regard to their form of ownership.7
The following enterprises in China and Russia represent the major case studies for this research:
7 The form of ownership is sometimes an ambiguous phenomenon in the Chinese and Russian contexts. A company in Russia, for example, can be officially a private corporation but closely controlled and managed by the state. In China, a company can be officially state-owned but attract outside investment in exchange for shares or trade shares in a stock market. I used the official status of the enterprise to categorize it.
28 China:
- Foton Motors, Beijing: a state-owned enterprise, manufacturer of a full range of commercial vehicles, including heavy, medium and light duty trucks, dump trucks, trailers, and special-purpose vehicles.
- Daimler Chrysler/Foton joint venture feasibility study project, Beijing: a unit devising a joint venture to produce heavy and medium duty trucks, engines and components.
- FAW-Volkswagen, Changchun, Jilin Province: a joint venture between FAW (First Auto Works) and Volkswagen.
- Shanghai GM, Shanghai: a joint venture between GM and SAIC (Shanghai Auto Industry Corporation) to produce passenger cars.
- Beijing Jeep Corporation, Ltd. It is a joint venture with Beijing Automotive Industry Holding Co. Ltd. and Daimler Chrysler (China) Ltd.
Russia:
- AvtoVAZ, Togliatti: the largest manufacturer of passenger cars in Russia.
- KAMAZ, Naberezhnye Chelny: the largest manufacturer of trucks in Russia. - KAMAZ-Diesel, Naberezhnye Chelny: an engine factory and is a separate joint stock company but a member of the KAMAZ family and the major engine supplier of KAMAZ.
- GM/AvtoVAZ, Togliatti: a joint venture, manufacturer of a passenger car Chevrolet-Niva.
- KAMAZ/Cummins, joint venture feasibility study project, Moscow: a unit devising a joint venture to manufacture diesel engines for light and medium duty trucks.
- Tenneco Automotive Volga, Togliatti: supplier of exhaust systems to GM/AvtoVAZ in Togliatti.
- ZAO Sommer-Novtruck, Veliky Novgorod: a German manufacturer of semi- trailers and trailers.
- Boellhoff, Veliky Novgorod: a German auto component supplier.
- Benteler, Veliky Novgorod: an engineering bureau creating solutions for ride and handling safety and emission.
29
It is important to note that the discussion of the case companies was not entirely based on the sources from that company. The sources might include individuals from other companies or outside experts. The reference to an interview in Chapters IV and V does not imply that the interview source is from that organization, it only implies that this individual is knowledgeable about the company being discussed.
Interview as a Method
The interview method has a number of disadvantages: a validity concern, a limited control over the process of data collection, etc (Manheim and. Rich 1991: 134). An attempt was made, however, to address these challenges. To tackle the validity concern (people might distort information consciously or subconsciously) I verified the information provided by the respondents by other sources: interviews with other respondents, newspaper articles, etc. Another concern is availability. Using face-to-face interviews as a data collection technique depends on the respondents’ willingness to cooperate, their time limitations, social or official position, etc. Interview as a research method is not entirely under the researcher’s control. Availability is a challenge for elite interviews such as the interviews with business executives. I obtained references from people who are known to potential interviewees to overcome the accessibility challenge.
As mentioned above, this research used elite interviewing, which is a special form of the personal interview, when the researcher is particularly interested in the respondent’s interpretations of events and issues ( Johnson and Joslyn 1991: 177). Most of the questions used during an elite interview should be open-ended questions ( Johnson and Joslyn 1991: 177). The purpose of the elite interviews is to identify people’s thoughts, opinions, and perceptions. Elite interviews demand thorough advance preparation and are usually unstructured. Unstructured interviews, as opposed to structured interviews, are more flexible, usually focus on themes and do not involve predetermined and strictly formulated questions. In structured interviews, the fixed sequence of questions and their wording might be important and meaningful even in themselves depending on the research design.
Dependent Variable
The dependent variable is the level of industrial competitiveness To operationalize the variable of “industrial competitiveness” I borrow some of the indicators offered by Jeffrey Hart (1992). Hart uses the following indicators of the “industrial competitiveness”8 that might be helpful for comparative purposes in the cases of Chinese and Russian automotive industries: “In a specific industry, a country that is increasing its share of global production, increasing (or decreasing relatively slow) its levels of employment, increasing its revenues and profits, and experiencing very few industrial crises relative to other countries has increased its international competitiveness” (Hart 1992: 12). Hart admits that it is impossible to present statistical evidence for all these
8 Hart’s dependent variable
30 indicators. I will use two indicators to emphasize that Chinese automotive sector is currently more competitive than its Russian counterpart. Since the focus of this project is automotive industry, I operationalize “industrial development” in terms of the volume of production (in units) and presence of original equipment manufacturers (OEMs). Export is not included. However, there is some evidence that China is getting ahead of Russia with regard to auto exports especially to the developing countries of Africa and South America, as well as to the Middle East. I present the statistical data on the three indicators identified above in Chapter II. The next chapter will discuss the development of the automobile building sector in Russia and China. It is a historical introduction and does not entail any comparative conclusions pertaining to the research question of this project. Chapter III elaborates on the state policies affecting the process of technological development in both countries. The timeframe for the discussion of the policies is from the end of the 1990s till the present day. Chapter IV and Chapter V will propose a directory of the sources of technological advancement available to the companies in China and Russia respectively. Chapters IV and V will offer empirical observations and analysis based on the interviews conducted in the automotive companies by the author during a series of field research trips to China and Russia in 2005 and 2006. Chapter VI will summarize the findings of this research project.
Chapter II:
Comparing Russia and China
At present, Russia is engaged in economic transition from the Soviet centrally-controlled industrial development towards a market economy. As some evidence shows, Chinese automobile industry is currently ahead of its Russian counterpart with respect to productivity or, following the vocabulary of this project, it is more “industrially competitive.” The dependent variable that this project attempts to account for is the level of industrial competitiveness. To operationalize the variable of “industrial competitiveness” I use the following two indicators: volume of production in units and the presence of world original equipment manufacturers (OEM). Regarding production, Table 3 (please see in the Appendix) demonstrates that China occupies the third place after the US and Japan among the 15 largest motor vehicle producing countries while Russia has the 13th place. Furthermore, China’s production output grew by 33.2 % between 2003 and 2004, which shows how dynamically the automotive industry is developing in China. In Russia, the increase in the volume of production between 2003 and 2004 amounted to 3.4%, which is almost 10 times lower than in China for the same period. Another indicator that reflects industrial development is the presence of original equipment manufacturers (OEMs). The high involvement of OEMs in the automobile sector in such transitioning economies as China and Russia usually indicates that there is
31 a developed network of local suppliers - component parts’ manufacturers. Table 4 shows the OEMs involvement in developing markets, including Russia and China. According to the table, every large OEM is present in China, while Russia has the smallest number of OEMs in 2004 as compared to Brazil, China, India, Mexico, Poland, and Thailand.
The results of the automotive industry development in China in the past two decades are impressive. Russia has a long historic legacy of automobile industrialization beginning with Stalin’s efforts in the 1930s. In 1991, the Soviet Union fell apart, which was followed by an economic and industrial collapse. In a couple of years at the beginning of the 1990s, the productivity in the automobile industry fell to the levels of the 1930s. However, the situation in Russia is changing now for the better: foreign direct investment into the automotive industry is growing as new plants are being built and local manufacturers are maturing. The next sections deliver a historic overview of the development of the automobile industry in both countries. The purpose of these sections is to present a contextual introduction into the policies regarding technology appropriation in China and Russia. It is the discussion of the policies related to technology development in both countries in Chapter III (next chapter) that serves for comparative analysis.
Automobile Industry Development in Russia: Historic Overview
In the Soviet Union, the state in the form of the Ministry of the Automobile Industry controlled the production of component parts and automobiles through the system of more than 5,000 enterprises that were connected to the automobile manufacturing in one way or another (Zhuk 2000). The Soviet motor vehicle industry was created in the 1930s for industrial and defense purposes and manufactured mostly trucks. Passenger cars accounted for only 12% of the total output before the World War II and 31 % in 1960 (Sintserov 1998). Only after 1972, passenger car production became the leading sector. In 1990, Russia was the fourth largest manufacturer of trucks and the eighth largest producer of cars in the world. Of course, the quality of vehicles left much to be desired and the industry was not internationally competitive. However, the situation deteriorated even further after the collapse of the Soviet Union and the consequent pro-market economic and political reforms that took state subsidies and state-supplied clientele (for instance, defense enterprises) away from the auto makers forcing them to become self- sufficient and compete. The process of adjustment and restructuring is still going on and it might be too early to draw conclusions. The fact is, however, that the transition process for the Russian auto makers has been painful for a number of reasons. Some of these reasons may include chronic deficiencies of the Soviet era, the inability to adapt to the new environment, and even the failure of the reformers to help auto companies make a smoother turn through establishing a more efficient legal system that could have prevented certain social forces like racketeers or “ambitious businessmen” from taking advantage of the legal ambiguity and tearing the former state property apart. The jury on this matter is still out.
32 The economic transformation of Russia can be divided into two periods: before and after the 19 August 1991 coup. During the Soviet Coup of 1991 also known as the August Putsch or August Coup, a group of hard-core communists attempted to take control of the country. The coup failed. The President of the Russian Socialist Republic at that time, Boris Yeltsin, denounced the plotters and managed to mabilize the population against them. Before the coup, some attempts had been made by Gorbachev to reform the existing centralized economic system. After the coup and the consequent collapse of the Soviet Union, the new economic policies were established aimed at a total transformation of Russia into a free market economy. Yeltsin declared the new economic program on October 28, 1991. The Russian economy was in crisis: huge budget deficit, empty shops, and inflation. Egor Gaidar, a liberal economist, was appointed Minister of Economic Development and became the architect of the first stage of the liberal economic reforms in Russia. His policy was characterized by the pursuit of a reduction of inflation, balanced budget, cutting back subsidies, opening up the domestic economy to the world market, etc. All these measures were later termed the “shock therapy.” In January 1992, the policy of price liberalization was implemented and the restrictions on trade were lifted. Consumer price inflation rose sharply. Inflation soon consumed all savings of the population.
The privatization process was initiated by Yeltsin and his crew of liberal reformers in 1991. Anatoly Chubais, a renowned privatization champion, was appointed by Yeltsin Chairman of the State Committee on the Management of State Property (GKI) as well as Minister of Privatization. In 1992 and 1993, during the opposition struggle between Yeltsin and the Parliament, most privatization reforms were introduced by Presidential decrees rather than parliamentary action.
The Chubais privatization program was adopted by the government and the Parliament after intense negotiations in June of 1992, and contained all the basic elements of corporatization and insider benefits except the voucher program. Vouchers were chosen by Chubais as the mechanism of mass privatization in late spring 1992 and adopted by the presidential decree (Boycko, Shleifer and Vishny 1995: 72). The basic elements of the Russian privatization reform included corporatization, insider benefits, voucher privatization, and voucher auctions. The goal of corporatization. was to let managers appropriate shares of the enterprises, which they managed. Insider benefits gave opportunities to the employees to become shareholders. The incentive behind voucher privatization was to let students, retirees, military personnel, health and education workers, and the rest of the population participate in privatization. However, due to the economic illiteracy and the lack of financial resources, the majority of the population did not take advantage of this initiative. Voucher auctions, in their turn, provided an excellent occasion for corruption, manipulation, and machination. For instance, at one of these auctions in 1994, Khodorkovsky, a Russian oligarch with a tragic fate, acquired 20% of Apatit, a chemical plant in the Murmank region.9 By early 2001, 130,180 enterprises formerly owned by the state had been privatized, representing exactly two-thirds of the
9 By 2004, Khodorkovsky became one of Russia's most powerful oligarchs. He was later convicted on the charges of fraud and tax evasion and received a nine-year sentence. His prosecution is believed to be politically driven.
33 total” (Sakwa 2002: 290). Chernomyrdin replaced Gaidar as Prime Minister in January 1993. “Black Tuesday” occurred on October 11, 1994, when the ruble lost 20 percent of its value. Another financial crisis shocked the country in August 1998.
The dynamics underlined above were nicknamed by the Russian general public as “piratization” or “prikhvatozation” from the Russian word “khvatat’” – to grasp. The implication behind these terms is clear: the economic transition process in Russian was characterized by high levels of corruption and an active role played by the former Soviet elite or nomenklatura. Kryshtanovskaya and White (1998: 88) allude that the state was “stolen” by elites during privatization. The state assets were redistributed among different interest groups, mainly the former nomenklatura or the Soviet elite and the mafia. After the disintegration of the Soviet Union, the state control over the automotive industry substantially decreased. By the end of the 1990s, more than 93% of enterprises and organizations of the former Ministry of Automobile Industry became joint stock companies.10
As a result of the property and overall economic restructuring, manufacturing production dropped: “Between 1990 and 1995, GDP fell by 50 percent, compared to a cumulative fall of some 31 percent in the US GDP during Depression” (Sakwa 2002: 284). The 1992 price liberalization resulted in an upsurge of production costs that surpassed any possible increases in car prices. Enterprises spent their assets trying to close the gap between prices and manufacturing costs. The situation gave rise to barter trade, veksel (bill-of- exchange) schemes and manual payment offsets. In the mid-1990s, AvtoVAZ, the largest Russian car manufacturer holding almost 80% of the market, was making 85% of its transactions through barter schemes (Ashrafian and Richet 2001).
As a result, enterprises lacked “real” money, which forced them to increase barter trade as well as payment arrears to federal and regional budgets and financial organizations. Table 5 (see the Appendix) shows the situation with regard to debt in the automobile sector in 1998 as reflected in the financial statements of the automobile enterprises. Huge arrears quickly mounted up under the weight of penalties. Car producers became surrounded by large numbers of intermediaries, which used dubious schemes to obtain cars in return for supplies of materials and components through these intermediaries at prices several times higher than average market prices. Estimates show that AvtoVAZ was buying components at prices 15-20% higher than the market price (Ashrafian and Richet 2001).
High costs caused by barter trade schemes, payment arrears, obsolete technologies and ineffective management resulted in high prices of Russian cars. This high price in combination with a low quality led to the popularity of foreign cars, especially, used foreign cars among Russians.
10 Main Directions of State Policy for Development of the Automobile Industry in Russia until 2005, The National Auto Component Association, [accessed April 2006],
34 The automobile production declined by 28 % between 1990 and 1996. In the 1990s, the output of commercial vehicles decreased by almost 80 % - to the level of 1936 (Sintserov 1998). In the mid-1990s, all automobile plants retained the Soviet style of organization and were incapable of self-financing or effective marketing. The lack of the post-Soviet government subsidies had placed most enterprises in danger of extinction.11
The demand for commercial vehicles drastically diminished after the collapse of the Soviet Union because the major clients of the automobile industry – the army and the Ministry of Agriculture – became bankrupt.12 However, there are prospects for the revival of the industry due to the rising consumer demand for affordable passenger cars. The Russian automotive industry has always produced cheap and low-quality vehicles mainly for domestic consumption. However, in the post-Soviet period, even when the industry underwent a substantial decline, it remained a lucrative target for appropriation by different interest groups because a lot of Russian people still dreamed of owing a car. In the Soviet era, the demand for passenger cars was not satisfied.
Today many of the enterprises that were affiliated with the automobile manufacturing are either bankrupt or have restructured their operations. Most of them belonged to the defense sector. But even those that stayed employ 140,000 people and annually produce and sell products worth $ 5 billion, or almost 2.5% of the GDP. Total production of all Russian auto factories is 1 million passenger cars and 200,000 trucks per year (Zhuk 2000).
In 1994, only 84 autos were registered per 1,000 people. Russia has the seventh largest car fleet in the world with over 22 million registered vehicles. With a total population at 144.5 million, 152 people out of 1,000 own a car. There is a potential for growth in internal consumption of domestically produced vehicles, especially if we take into account that in 1998 the Russian government raised tariffs on imported cars up to 20- 30%, which occasioned a 14% decrease in imports.13 The ruble devaluation in 1998 improved the price competitiveness of domestic cars as well. The ruble devaluation and high import tariff changed the situation in favor of domestic manufacturing.
Ashrafian and Richet are optimistic about the prospects of the automotive industry in Russia. They argue that in Russia the automotive industry is potentially export-oriented. Traditionally the Soviet Union exported to the Central and Eastern Europe, India, Latin America, and the Middle East, but the levels of export fell tremendously during the transitional process. Now the development of the industry depends on the ability to regain back the market shares in these traditional markets, and on the growth of internal demand, which is related to the improvement of the Russian living standards (Ashrafian
11 U.S. Library of Congress, Russia-Manufacturing, [accessed August 2006],
12 Ibid.
13 The Russian Automotive Market, Industry Overview (2004): Ernst and Young, March 2004, [accessed August 2005],
35 and Richet 2001: 30). They also argue that the production of cars is supported, among other factors, by fairly high levels of development of the Russian metallurgy and petrochemical industries. Ashrafian and Richet contend that “the car industry has outdated equipment and produces obsolete models, but overall its production base is quite strong, although in urgent need of restructuring” (Ashrafian and Richet 2001: 30).
Another factor that indicates the possibility of potential growth in production is the fact that the Russian fleet is old. In 1999, almost half of the Russian passenger car fleet was over 10 years old, a third was between 5 and 10 years old and only 20% of cars were less than 5 years old (Ashrafian and Richet 2001: 30). The internal consumption is growing. Russia’s car industry is estimated at between $ 12.3 and 13.5 billion in 2003 as compared to $10.7 billion the previous year. Purchase of Russian passenger cars (including foreign models produced in Russia) accounted for $ 4.784 billion, a 15% increase compared to 2002.14 Furthermore, the car loans are becoming increasingly affordable, with interest rates falling from between 15% and 18% to between 7% and 10% since the end of 2002.15 It should be noted that the percentage rate on loans is lower in large urban centers like Moscow and St. Petersburg than in the periphery of Russia.
The automobile industry in Russia is still an important industry and there is much politics involved in it: jobs, social networks that some of these enterprises still maintain in the community, the political game over ownership that surrounded these enterprises during privatization, and of course, state involvement or, sometimes the lack of it, in the industry development.
The state lost much of its control over the industry in the post-Soviet period during the privatization process and other economic reforms. There have been some attempts on part of the state in the post-Soviet period to enhance its involvement in the development of the industry by struggling for shares in strategic enterprises like auto plants (for example, KAMAZ and AvtoVAZ), pursuing protectionism by imposing tariffs on imported cars, or creating conducive incentives for foreign investment and other measures that benefit domestic manufacturing. These attempts did not seem, however, systematic and consistent especially with regard to technology enhancement. A Russian political economy analyst Kokoshin in the report “Industrial policy of Russia in the 21st century” (2004) notes that in the 1990s the state policy regarding technology development was indeed passive due to the lack of financial resources and strategic vision. The state failed to create appropriate financial and institutional mechanisms for successful technology appropriation. The report offers three conceptual solutions: identify technology that has a strong promise to enhance economic competitiveness, mobilize Russia’s current technological potential or appropriate relevant technology from abroad, and create the appropriate institutional base for appropriating all this technology.
14 Ibid.
15 Ibid.
36 An evaluation of the auto industries in developing countries usually prompts a heated debate over the role of the state in their development. One side wants to let the market competition freely rein; the other side seeks a greater role of the state in influencing investment and production decisions (Abrenica 1998). The countries that had and still have the state-supported development programs in the auto industry include Japan, South Korea, Taiwan, China, India, and even recently Thailand, Indonesia, Malaysia, the Philippines and Vietnam. Russia took a different path. After the experience of the 100% controlled economy under the Soviet regime Russia attempted liberal economic reforms. The reforms were, however, characterized by the elite-driven nature of the transition and involved high levels of corruption and the lack of effective legal basis.
At present, Russian-owned OEMs still account for about 90% of car unit production in Russia. However, the market share of Russian-designed vehicles seems likely to decrease for several reasons. One of these reasons is that Russian OEMs do not appear to have the funding or technical capability to develop an internationally competitive car. (The Review of the Russian Automotive Component Sector 2004: 15) Foreign brands are coming to Russia to establish production facilities. Tables 6-8 (see in the Appendix) provide latest data (2002 and 2003 years) on the Russian car market, the domestic and foreign manufacturers in this market, and imports.
Despite historic legacies, the Russian automobile industry is not dead. It has a tremendous potential for development and the Russian state seems to have started paying more attention to it. The next Chapter outlines major policies aimed at contributing to the technological development of this sector in Russia that were initiated in the period starting from the end of the 1990s till the present day. These policies create a legal and institutional environment for exercising technology appropriation by automobile companies in Russia. The analysis of these policies serves for comparative juxtaposing of the technological appropriation process in the auto sector in China and Russia.
Industry Development in China: Historic Overview
The purpose of this section is to give a short introduction into the historic development of the Chinese auto sector. No comparisons between the Russian and Chinese industrial transformation will be drawn in this section. Its purpose is purely introductory and aimed at providing a short overview of the main characteristics and trends in the Chinese auto sector since its establishment in the middle of the twentieth century. It also discusses some social and structural elements that affected the industry development like the dynamics of the relationship between local and central authorities in the aftermath of the “open door” policy for foreign investment into the industry in the 1980s and change of the institutions supervising the auto sector over its progress. It should be said that there is no doubt that these issues are important for understanding why the auto industry in China is as it is today. The embeddedness literature discussed in Chapter I is particularly interested in social and structural factors that affect industrial outcomes. I admit that it is unfortunate that I do not contribute much time to discussing these issues especially from
37 a historical angle. However, since my primary goal is to look at policies that, in my view, in the present time, constitute the environment where technology appropriation is taking place as conducted by the auto enterprises, I can only briefly touch upon these factors. In this section I also bring some statistics on the position of the Chinese auto industry in the world market regarding its R&D competitiveness and prognosis for the future. These data are presented for contextual reasons and are not used for the comparative analysis between China and Russia.
The Chinese economic program of “four modernizations” was announced in February 1978. The first period of the reforms (1978-1984) focused on agriculture. One of the features of the agricultural transformation was the permission to launch family cooperatives. The second period (1984-1992) was characterized by the dismantlement of the Soviet style centralized economic system and the shift toward a market-oriented system. The construction of the “socialism with Chinese characteristics” began. The third period of the transition (1992-1997) continued market-oriented reforms and further industrialization. In March 1992, Deng Xiaoping announced that China should not be constrained by ideological and political arguments about which name the reforms should carry – socialism or capitalism, implying that the economic transition was not about the name, but the process.
The major goals of the economic strategy were declared as follows: 1) optimization of the enterprises’ management; 2) increase of the market progress; 3) deepening of the reform; 4) quickening of the economic growth. The economic reforms in China are characterized as being slow and gradual as opposed to the Russian quick transformation of the 1990s that combined pro-market economic reforms and pro-democracy political reforms.
Prior to 1956, when the first truck was built by Changchun’s First Auto Works in collaboration with the Soviet Union, China had almost no auto manufacturing. The Second Auto Works in Hubei Province began the production of five-ton trucks in the 70s. Passenger car production received less attention. Trucks, buses, and military vehicles were the priority. However, in 1958, the FAW produced its first Red Flag limousine, a luxury car for top officials, and the Shanghai Automobile Assembly Plant started manufacturing Phoenix model. By 1960, the whole country produced just 98 cars (Harwit 1992:143). “By 1980, there were some 56 plant sites, at least one in nearly every province, mainly producing various types of trucks and buses, and 192 other factories making all sorts of special utility vehicles, including semi-trailers, cold-storage trucks, garbage trucks, etc” (Harwit 1992: 172-173).
During the Cultural Revolution the passenger car manufacturing was not encouraged – passenger cars were produced in small numbers and for the party leaders exclusively. The government also put strict limits on imports of truck and cars. However, at the beginning of the 1980s, following the reforms of Deng Xiaoping, some experts in automotive manufacturing started to call for coordination and cooperation between the factories rather than self-reliance advocated in the 1950s and 1960s. In the middle of the 1980s, China was importing heavily in order to satisfy the domestic demand in passenger cars. In 1981, the number of imports reached 105,775 units (Harwit 1992:144). At that point,
38 the government realized the necessity to build its own auto industry with the help of foreign manufacturers who were expected to bring technology, capital, and management skills.
As noted, in the 1980s, China began to realize the importance of developing its automotive industry. Table 9 (see in the Appendix) demonstrates the historical rise in the production capacity in the Chinese auto industry exemplified by a number of assembly plants. Japan was a good example of the efficient export-oriented auto sector contributing to the overall development of the Japanese economy. At the very least, China wanted to have a program of import substitution. To reach these goals China needed to import technology. Thus, the Chinese bureaucracy had to conceive an action plan that would encourage technology transfer and localization of components on the one hand, and, on the other hand, would not leave the door to the Chinese market wide-open for foreign manufacturers to come and compete with domestic enterprises.
Since the beginning of the intensive industrialization process in the 1980s, the development of the auto industry was characterized by the following traits: decentralization of policies, heavy reliance on technology borrowing from foreign partners, and weak implementation of environmental regulations.
Eric Harwit (1992) discusses the role of the local, provincial, and central authorities in the development of the automotive industry in China at the beginning of the 1990s. He emphasizes high decentralization of policies pertaining to the sector development. Harwit investigates four cases: Beijing Jeep, Shanghai Volkswagen, Guangzhou Peugeot, and Panda Motors – the first foreign investment projects in China in the 1980s. The research focuses on the success of the investment initiatives based on the interaction between different interest groups involved in these auto projects: local, provincial, central governments and the foreign companies. These four companies have experienced different levels of success depending, according to the author, on the level of involvement and efficiency of the local and central government officials. Table 10 (see in the Appendix) shows the changes in the central administrative authority of the auto industry in China.
At the municipal level, a city mayor had the most power to influence joint ventures with foreign capital. In addition, each city had a vice mayor who incorporated auto industry into his/her portfolio. For example, Guangzhou’s vice mayor, Xie Shihua, was in charge of the sector and was the board chairman of Guangzhou Peugeot for a couple of years in the middle of the 1980s (Harwit 1992: 147). There were also the so-called “automotive leading small groups” in both Beijing and Shanghai consisting of a vice mayor and the representatives from the city economic, planning and international trade committees, and from the auto corporations (Harwit 1992:147). In Beijing, in the 1990s, the group consisted of 15 people, in Shanghai – 20. These groups tried to establish the avenues for the local industry development and provide a polygon for coordinating efforts among all governmental bodies (Harwit 1992: 147). The different municipal level committees were in charge of a variety of tasks related to the auto sector projects with foreign capital: planning, implementation, and control. The major objective of the automotive industrial
39 groups was to link the suppliers to the car manufacturers under their jurisdiction. The Shanghai Automotive Industrial Corporation (SAIC) had so much power at one point that it was deciding how much money a company would receive in the form of loans (Harwit 1992:148).
At all three levels, foreign investment was successfully attracted with the exception of the Peugeot project due to the rivalry between the regional and municipal governments. Overall the Chinese industrial policy was more or less successful with the lessons learned and “rising localization rates indicated that the country had, at a minimum, successfully absorbed foreign technologies, and that the companies could make significant future contributions in this regard” (Harwit 1992:165-166).
At present, China faces environmental challenges partially due to the increasing number of vehicles being produced and purchased and the lack of government attention toward the implementation of higher emission standards and other environmental regulations. The book Personal Cars and China (2003) is a fruit of collaboration between the Chinese Academy or Engineering and the US National Academy of Engineering and National Research Council. According to this report, if China’s number of motor vehicles per capita were comparable to the world average, its fleet would have to total 160 million, with 10 million new and replacement vehicles purchased each year (Chinese Academy of Engineering and National Research Council 2003: 1).
Another trait of the Chinese auto sector since the industrial transformation in the 1980s is heavy reliance on borrowed technology. Until the end of the 1990s, nearly all cars manufactured in China were produced by joint ventures. The technology contained in the world-class cars and trucks manufactured in China has been provided largely by joint ventures without the transfer of the intellectual property that would allow Chinese members of the joint ventures to develop their own capabilities. Intellectual property includes not only patents, but also a range of propriety information such as trade secrets, special manufacturing techniques, design processes, and systems engineering (Chinese Academy of Engineering and National Research Council 2003: 45). Thus, according to the authors, “the result is that, at present, China does not have the independent capability to develop world-class vehicles.” (Chinese Academy of Engineering and National Research Council 2003: 3).
In my opinion, the above analysis is too pessimistic. China has achieved outstanding technological results within a very short period of time since the beginning of the economic reforms in the 1980s. The legal and institutional framework for the transfer of technology from foreign partners is still in the stage of construction. However, there is one trend in the Chinese state policies regarding technology development that can be traced all the way through these two decades: a government effort to support, develop, and enhance competitiveness of domestic manufacturers. By all extends and purposes, in light of state regulations, foreign joint ventures in China are equal partnerships with mutuality of interests rather than unequal unions.
40 At present, the list of major Chinese enterprises includes: FAW Group Corporation, Dongfeng Motor Corporation (DMC), Shanghai Automotive Industry Corporation (SAIC), China National Heavy-duty Truck Group (NHDTG). The joint ventures are: GM (Shanghai GM, Shenyang Gold Cup GM, Liuzhou Wuling Motor Company), Ford, DC, PSA Peugeot-Citroen Group, Renault, Toyota, Honda, Nissan, Hyundai (Chinese Academy of Engineering and National Research Council 2003: 52-57).
According to the report of the Academy of Engineering and Chinese National Research Council, presently China spends a smaller percentage of its GDP on automotive research than any of the automobile exporting countries (2003: 3). Tables 13-14 in the Appendix provide data on R&D expenditures, number of researchers, science and engineering doctoral degrees and research articles produced in China, US, European Union, and Japan in the period from 1991 till 2001 or 2002. The tables also offer projections for 2005 and 2010 years. Although China, indeed spends less than the above three regions, as Table 13 illustrates, the annual percent growth for the period from 1995 till 2002 in gross domestic R&D expenditures is 22 percent in comparison to 6 percent in the US and 5 percent in the EU and Japan. This growth rate is very impressive. Furthermore, the table projects that by 2005, China will surpass Japan in R&D spending, and in 2010, will surpass the EU and reach the level of the US. Similar dynamics can be traced in statistics on the number of researchers, number of science and engineering doctoral degrees, and research articles in the four regions. I have to admit that I do not possess similar data to compare China with Russia. That is why I discuss these data in this introductory section. I present these data solely for the purposes of positioning the Chinese automobile sector with regard to its competitiveness in the world market. The goal of presenting this statistics here is to show that China is developing its R&D capabilities in the automobile sector with an impressive rate. However, it should be noted that the Chinese auto sector is not internationally competitive yet regarding its levels of technological sophistication.
When in 1991, the Chinese Government published its five-year plan (1991-1995) the automotive industry was referred to as a “pillar industry” that would drive the economy into the twenty-first century. In 2001, China had 18 million vehicles, of which 5 million were passenger cars. Therefore, the Chinese auto market has a huge potential for growth and, correspondingly, represents a great opportunity for auto manufacturers. The growth of the car market is strongly associated with the growing income. According to the recent five-year plan (2001-2005), the goal set for the auto industry was 1 million cars a year.
At present, the industry is also encouraged to produce, independently of foreign manufacturers. It is expected to create a Chinese national economy car that utilizes a 1.3- litre engine, meets Chinese emissions and fuel economy standards and could be purchased for less than RMB 80,000 ($ 9,800). The current trend of the state policies regarding the auto industry is consolidation of enterprises. The 2001-2005 plan for the auto industry calls for its massive restructuring – from 118 individual manufacturers to 3 large automotive groups and from several hundred parts suppliers to 5-10 large supplier groups. Auto industry consolidation is seen as a strategy to become competitive for the Chinese auto industry.
41 The Chinese government will continue to invest in enhancing technology capabilities such as advanced gasoline and diesel power trains, the application of sophisticated electronic controls, emissions control technologies, the use of new materials, and the application of complex engineering methods to optimize vehicle performance, etc. However, even in light of the deficiencies of the Chinese automotive industry in comparison to world leading car manufacturing countries (which can be attributed to its relatively short history), China’s car industry is developing dynamically and today China is referred to as the “world’s manufacturing base”.
Conclusion
Chinese automobile industry is currently ahead of its Russian counterpart with regard to such indicators of industrial competitiveness as volume of production in units, levels of employment, and the presence of world original equipment manufacturers (OEM).
Russia has a long legacy of industrialization beginning with Stalin’s efforts in the 1930s. Due to intrinsic structural deficiencies the Soviet automobile industry had not been internationally competitive. The situation deteriorated even further after the fall of the Soviet Union, when the national-level science and technology programs almost ceased to exist, the defense industry that had been a client for almost all automobile enterprises collapsed, economic tribulations drove most auto companies to the brink of bankruptcy, and the privatization reform prompted chaotic redistribution of property. In a couple of years the productivity in the automobile industry fell to the levels of the 1930s. However, the situation in Russia is changing now for the better: foreign direct investment into the automotive industry is growing as new plants are being built (both foreign and domestic) and local manufacturers are maturing.
China’s car industry is developing dynamically. The progress of the sector was not linear, however. One of the negative side effects of industrialization is the environmental problem. The industry, however, managed to achieve astonishing results in the past two decades due to the industrial policy of the Chinese government that opened the door to foreign direct investment into the industry. Foreign manufacturers who came to China in search for market have been seen as one of the sources of technology. Now the emphasis is being placed on supporting domestic companies and domestic efforts of R&D. In the heart of the government policies now is an ambition to create a Chinese world-class vehicle. At present, the major goals of the Chinese state with regard to the automobile industry are to increase technological competitiveness and develop new environmentally friendly technology.
The next chapter will discuss in detail the regulatory environment created by the state in the automobile sector in China and Russia in the present time and will draw comparisons between the two countries.
42 Chapter III:
This Chapter discusses the idiosyncrasies of the current government policies regarding technology appropriation in Russia and China. The timeframe for this comparison is the end of the 1990s and the present day. In this section, I will attempt to draw comparisons across the policies in both countries along the following sets of sources of technological advancement that are made available (to a different degree) to companies in both countries
a. Joint ventures with foreign auto manufacturers; b. Policies aimed to increase local content; c. Policies encouraging exports; d. State subsidies or other forms of financial support to state-owned enterprises; e. Allocation of finances from investors (even state-owned enterprises attract investment and sell shares); f. Own R&D programs; g. Purchase of technology; h. Purchase of consulting services.
These sources of technology appropriation are discussed in greater detail in the subsequent chapters (Chapters IV and V) that focus on the micro- or enterprise-level analysis. Enterprises use the above sources of technology appropriation to obtain and develop technology and ultimately become more competitive. These sources originate in the state policies that directly or indirectly influence the process of technology enhancement in the automobile industry. The above sources roughly fall into the following categories of policies in the auto sector:
1. Investment policies, including legislation on ownership in joint ventures with foreign partners and regional investment regimes like special economic zones (SEZs) (sources a, c and e); 2. Legislation on local content requirements (source b); 3. Legislation regulating technology transfer and intellectual property rights (sources a, e, g, h); 4. State trade protectionist measures ( source d); 5. National system of R&D (sources c, d, f, and g); 6. Industrial policy or the government strategy of the sector development (combines most sources).
It should be noted that this division of policies into categories along the lines of the technology appropriation sources is tentative. Some policies create or linked to more than one source of technology appropriation. For example, the national system of R&D (directly or indirectly) sets the overall quality standards and generates innovation solutions, which affect export initiatives and competitiveness of the domestic products inside the country; provides financial support for R&D projects at enterprises; supplies enterprises with personnel trained and educated at the national institutes of higher
43 education and engineering schools; and overall enhances the level of technological sophistication and competitiveness of the national products through the system of centrally or locally supported R&D programs. Investment policies regulate joint venture arrangements. The issue of the ownership ceiling in a joint venture possesses critical importance for the process of technology appropriation because it is closely related to the expectation of technology transfer from a foreign partner. In a joint venture, a domestic partner usually expects a foreign partner to share technology. In other words, if a country allows a foreign partner to have no more than 50 percent of ownership in a joint venture and the other 50 percent is owned by the domestic company, ownership presupposes control (real or imaginable) by the domestic company over the process of technology transfer from a foreign partner. On the other hand, investment policies may allow wholly owned foreign enterprises to be established in the auto sector in a particular country. In this case, a foreign car maker is encouraged to keep technology to itself and technology sharing is limited to enhancing technological and quality sophistication of domestic suppliers, which, nevertheless, constitutes a positive spillover effect in the domestic auto sector.
Some policies are interrelated with regard to their effect on technology appropriation. For example, regulations on technology transfer from foreign partners in a joint venture are frequently part of the overall legislation on foreign direct investment (FDI). Furthermore, they are related to laws on intellectual property rights. There is, of course, a discrepancy with regard to legislation across the two countries, some of the country-specific legislation fits into the above categories of policies, some does not. Thus, it is a difficult task to categorize technology appropriation policies in both countries. I have to leave myself some room for interpretation. Furthermore, there is an issue of direct and indirect effects. It is hard to track, for example, how policies encouraging exports affect the process of technology appropriation. In this case, it is possible to talk only about a presumed growth of technological sophistication among domestic manufacturers to meet quality standards for successful exports. The same is true about local content requirements – they produce a spillover effect when foreign car makers, which are required to outsource their components to domestic suppliers, demand higher quality and technology standards. Localization requirements increase technological advancement of domestic component manufacturers.
Therefore, due to the categorization problem, sometimes the choice of the policies being discussed seems arbitrary. However, I attempt to show the inner logic of my choices and justify it when necessary. I also pay more attention to a particular set of policies. This inequality is related to the problem of data availability. In order to compensate for this “inequality of treatment,” I try my best at discussing a particular policy at the enterprise level rather than at the macro level if I think that the essence of the policy is better exemplified by the micro-level empirical evidence.
As mentioned in Chapter I, this project is skewed toward the micro level of analysis. Therefore, I prefer to think of all the above policies as the regulatory environment. Enterprises operate in this environment and take advantage of various sources of technology appropriation that this environment offers. However, in this chapter, I make a
44 honest effort to present, describe, compare, and analyze the legal basis for the technology appropriation process in both countries.
Policies Regarding Technology Development in Russia
This section describes the policies that the Russian government produced with regard to technology development. I break down the policies into the following broad categories: investment policies, which include local content requirements, state protectionist measures, and overall government automobile development strategy. This section also discusses the current state of affairs regarding national science and technology system. Some of these policies directly affect the process of technology appropriation, some affect it indirectly, but all of them create a context within which this process takes place.
Development Strategy of the Automobile Industry
The Government of the Russian Federation approved a development strategy of the automobile industry till 2005 on December 26, 1998. A decision was made also to give a status of the national program to this document. This document is probably one of the first strategic efforts by the government to shape the direction of the automobile industry development after the collapse of the Soviet industrial complex. The document projected that in the year 2000, 55,000 buses would be offered for sale in the Russian market, from which 48,000 units would be made in Russia, and in 2005 – 65,000 buses, from which 55,000 buses would be of Russian production. In 2000, 170,000 trucks (160,000 units of the Russian production) would be introduced to the Russian market. In 2005, the volume of trucks in the market would increase up to 240,000 units, and all of them would be produced in Russia.16
The strategy put an emphasis on the production of small and extra small class cars, and also light trucks and large cargo trucks, which presupposes the appropriation or development of the relevant technology. According to the Ministry Economy of the Russian Federation, the development of the automobile industry required a large attention to be given to cooperation with foreign companies: Ford, Fiat, Renault, and others to produce cars and component parts in Russia.17 The main objective of the Russian automobile industry development strategy, as outlined in the document, was to increase industrial competitiveness in the external and internal markets.
In 1998, the machine-building complex of Russia consisted of 7 sub-industries and integrated 3,666 enterprises and organizations. 30 corporations, associations and concerns and also 7 financial-industrial groups were part of the auto industrial complex. The 1998
16 Report on Automobile Industry of Russia and CIS (1998): Foreign Investment Promotion Center, December 1998, [accessed August 2005], < http://www.fipc.ru>.
17 Ibid.
45 machine-building industry development strategy outlined the following policies: fewer purpose-oriented programs financed from the federal budget, reduction of the enterprise profit tax up to 20-25%, and also cancellation of the profit tax for the first three years for the newly created firms. The document also presupposed the re-structuring of the enterprises’ debts on tax payments.18 On the one hand, the government almost stopped directly subsidizing the industry; on the other hand, it offered tax benefits to allow enterprises to get out of debt and invest cash into development.
By 2000, according to the development strategy, 1.1 million automobiles per year would be manufactured, and by 2005 - up to 2 million units per year. The industrial policy of Russia was conceived as being a two-stage strategy. The first stage presupposed the creation of financial and institutional premises to provide for the technological renovation in potentially competitive branches and productions. The second stage outlined till 2000 was planned to ensure active growth of an industrial production.19
State Protectionist Measures
One of the methods to encourage domestic manufacturing is to raise tariffs on imports. This measure not only helps national producers, but also pushes foreign OEMs to establish assembly production in the country and outsource to local auto parts manufacturers, which, in the end, prompts domestic suppliers to increase the level of their technological sophistication.
In the post-Soviet period, the Russian market became flooded with imports of foreign cars. These foreign imports endangered domestic manufacturing. In 1994, only 65,000 automobiles were imported legally, from about 250,000 to 500,000 entered Russia illegally. Therefore, in the 1990s, most cars in Russian cities were foreign.20 The share of foreign autos in the Russian fleet of cars rose from 2% in 1992 to 17.5% in 1997. The majority of imported motor vehicles were second-hand products (80% among trucks) (Sintserov: 1998). Ironically, at one point, the car fleet of the Russian government consisted primarily of foreign cars. The state eventually rediscovered its role as a protector of local manufacturers in 1998.
It was OAO Avtoselkhozmashholding, a large auto holding, which suggested in 1998 that the Russian Government should increase the duties on imported automobiles up to 20- 30% to protect domestic enterprises. OAO Avtoselmashholding promised that as a result of this measure Russian budget would collect about 300 million USD per year. The most important incentive was, however, to support domestic automobile enterprises. OAO Avtoselkhozmashholding also expressed the necessary to limit import of automobiles
18 Ibid.
19 Ibid.
20 U.S. Library of Congress, Russia-Manufacturing, [accessed August 2006],
46 manufactured more than 5 years ago, and cars with the right steering wheel.21 The state did not leave the concerns of the domestic auto manufactures unattended and the tariff was introduced.
The import tariffs were raised up to 20-30%. To import new and used cars to Russia became less profitable. The exact amount of tax is calculated on the basis of the type (e.g. passenger cars, trucks and special purpose vehicles), class, and age of automobiles. There are also import quotas on automobiles of more than 5 years old and cars with the right steering wheel.
A new Russian law came into effect at the end of 2003. It is called the “Government Decree of 11.11.2003 # 681 on Entering Amendments to the Customs Tariff of the Russian Federation on Light Vehicles.” Table 15 (see in the Appendix) gives an overview of the custom duties on used imported cars. In addition to the customs duties on cars imported into Russia, there are Federal taxes. The major taxes are the excise duty and value added tax (VAT). Table 16 displays excise duties on imported cars. Table 17 shows customs duties on selected automotive parts as of January 2004.
Due to the protectionist measure underlined above, the consumption of domestic models increased and, correspondingly, the production. The Russian auto fleet has grown about two times over the last ten years with an average annual growth rate of 8% (Ashrafian and Richet 2001: 30). The growth dynamics have been characterized by a rapid increase in the number of locally manufactured cars.
In the present time, due to the raised tariffs, a growing demand in passenger and commercial vehicles, and more coherent investment policies encouraging local manufacturing, foreign car makers are shifting from exporting to Russia to establishing production facilities in Russia. Foreign car makers are settling on the Russian ground. Ford Focus, for example, is one of the most popular cars in Russia. You have to get in line a couple of months in advance to purchase a Ford Focus manufactured in Vsevolozhsk, near St. Petersburg. The key to Ford’s success is affordability, a good credit program, and a solid after-sale service especially in the North-west and central parts of Russia.
Of course, at this stage, foreign firms establish mostly assembly production but the “night is young.” Russia possesses solid petrochemical industry and metallurgy, skilled labor, a growing network of domestic suppliers, and capital. Because of high oil and gas prices and the islands of economic development, Russia has money ready to be spent on cars and other luxury items or commercial vehicles involved in construction, trade, transportation, and extraction of resources.
Science & Technology (S&T) Research and Development System in Russia
21 Report on Automobile Industry of Russia and CIS (1998): Foreign Investment Promotion Center, December 1998, [accessed August 2005], < http://www.fipc.ru>.
47
In the Soviet Union, the system of higher education and research and development was structured, centrally-controlled, state-financed, and allegedly directly tied to the needs of industries. After the fall of the Soviet Union, the Soviet industrial base collapsed together with the R&D system. Scientists started to leave Russia probably signifying one of the biggest brain-drain processes in the history of the 20th century. The total number of scientists today is less than half of what it was in the Soviet Union. Today, unlike the US, Europe and Japan, Russia is unable to conduct research activities across the board due to the lack of state financial support. In the 1990s, Science Minister Mikhail Kirpichnikov was talking about the necessity to take science off the state support.22 The idea of entrepreneurial or self-supportive science became popular in light of the liberal economic reforms. Another popular trend was the creation of autonomous science foundations.
The most active foundations in Russia in the 1990s were foreign ones. One of the most active in supporting research in the natural sciences was George Soros International Science Foundation, which provided $130 million between 1993 and 1996 to the scientific community.23
In 1992, the first Russian government science foundation – the Russian Foundation for Basic Research (RFBR) (mostly for natural sciences) was created. A separate foundation for humanities – Russian Foundation for the Humanities (RFH) was founded in 1994. However, the budget funds available to the foundation were very modest, which implies small grant size. For research projects today the average grant is about 7,000 US dollars per year for a group of 5-10 researchers. The average researchers’ salaries fluctuate around 300 US dollars per month.24 Table 18 (in the Appendix) displays data on the percentage of state funding of science foundations. By law, the government has an obligation to contribute 8% of the total expenditures on civilian science to the RFBR and RFH. As Table 18 shows, this obligation was not met in the years of 2000-2003. Furthermore, the inadequacy of this funding is apparent if compared with the 20% of total US government expenditures on basic research and academic institutions allocated by the NSF. Also there are delays in funding, frequently up to 5 or 6 months.25 Private philanthropy has just started to develop in Russia; the increase in the volumes of private finance onto science and technology is halted by the lack of tax incentives for donors and other legal uncertainties. Therefore, science foundations in Russia are underfunded and hardly provide a strong foundation for further research and development.
22 Ol’khovatov, Andrei and Eliot Marshall (1999): Making Science Pay, Science, 03/19/1999, Vol. 283, issue 5409.
23 Dezhina, Irina and Loren R. Graham (2005): Science Foundations: A Novelty in Russian Science, Science, 16 December 2005, Vol. 310, no. 5755, pp. 1772-1773.
24 Ibid.
25 Ibid.
48 Russia’s GDP in 2005 is $1.539 trillion, China’s GDP in 2005 is $8.182 trillion. 26 According to Table 23 (see in the Appendix) China spent 1.01% of its GDP on research and development, Russia – 1.09% in 2000. Thus Russia spends approximately 6 times less on research and development than China in view that China’s GDP is approximately 6 times bigger than Russia’s GDP. It is half the level of France and Germany, and an almost 60% decline from the 1990s.27
There is hope, however, for Russian science, which is closely related to the development of the market in Russia. This hope is embodied in the growing number of well-trained graduates in computer science, physics, mathematics, and engineering. Presently, the Russian academia produces 200,000 science graduates a year.28 Russian universities and scientific institutions are slowly adapting to the realities of the market economy, as this figure indicates. However, today the concern is that these young scientists are not going to fill the ranks of the academia to teach others, but are recruited by the private sector and foreign universities. The main reason is low salaries. Foreign multinationals in Russia like Intel are hunting for new Russian science graduates. According to the 2004 report of the Moscow State University, by the year 2010, 42% of Russian scientists will be over 60 years old.29 Allegorically speaking, at present, science in Russia is a “retirement community.”
The Russian Academy of Science (RAS), the national academy of Russia, includes more than 400 research institutes from all across the Russian Federation. It allocates 35% of the Russian government R&D spending. The Academy has a long history of excellence and has represented that heart of the Russian science community for centuries. The Academy was founded in St. Petersburg by Peter the Great. RAS has nurtured multiple Russian Nobel Prize laureates during its history and invited foreign scientists. Those invited to work there included mathematicians Leonhard Euler, Christian Goldbach, Nicholas and Daniel Bernoulli, astronomer and geographer Joseph-Nicolas Delisle, physicist Georg Wolfgang Kraft and many others. The Academia funded the 1733–43 second expedition of Vitus Bering's Second to Kamchatka and Peter Simon Pallas's expeditions to Siberia. In 1925, the Soviet government recognized the Russian Academy of Sciences as the "highest all-Union scientific institution" and renamed it the Academy of Sciences of the USSR.
After the collapse of the Soviet Union, the Academy was granted an autonomy. At present, acccording to the RAS Charter and the Federal Law, RAS is an autonomous entity that operates without interference of any state or other structures. The Academy is
26 CIA, [accessed August 2006],
27 Bush, Jason (2004): A Renaissance for Russian Science, Business Week, August 9, 2004, [accessed September 2006],
28 Ibid.
29 Ibid.
49 free to exercise control over the activity of the institutes, laboratories and other bodies in the field of fundamental research and training of specialists.30 Today, however, RAS is being attacked by the state and specifically Putin administration that want to gain more control over the Academy and impose modernization reforms. Current Russian Science Minister Andrei Fursenko has vowed to modernize the Academy and its institutes. The incentive behind the call for modernization is that RAS needs to shrink in size, focus its spending on world-class quality research, be cost-effective, and incorporate the system of peer review of labs and competitions.31 In September 2006, the Kremlin unveiled amendments to the science law that would give Rusian President Vladimir Putin’s cabinet the right to approve the selection of future RAS presidents and the RAS Charter.
The vital blow is, however, the withdrawal of the property tax exemptions, which RAS has enjoyed for the past decade. RAS has substantial land assets, including expensive real estate in the center of Moscow and in St. Petersburg. If the Kremlin’s ultimate goal is to strip RAS of its financial base and redistribute the property, not modernization of the Russian science and technology system, then the future of the Russian science is gloomy.
In the automotive industry, research and development is primarily conducted and financed by auto companies. For example, AvtoVAZ, the leader of Russian automobile building, that has 73% of the market share in Russia in the segment of passenger car sales, spent 2,818 mln. Rubles (which is approximately 97 mln. US dollars) on patents and other intellectual property products in 2004. The total expenditures on research and development constituted 6% of the total annual revenue – the average level of R&D expenditures among world makers.32 Please see part of AvtoVAZ balance sheet pertaining to R&D investments (patents, etc.) in Table 19 (see in the Appendix).33 Interestingly in 2001 and 2000, as reflected in the table, there were no R&D investments made. This indicates that Russian car makers are maturing fast and, taking into account, the current lack of state funding of R&D in the auto sector in Russia, the future of the Russian automotive industry R&D lies in the hands of the Russian companies. For the sake of comparison, the 2004 R&D expenditures of the Foton Motor Co. Ltd, a leading commercial vehicle manufacturer in China founded in 1996, constituted 4.1% of total annual revenue, which is about 91 mln. US dollars.34
30 The Russian Academy of Science, Rossijskaja Akademiia Nauk, official web site, [accessed November 2006],
32 AvtoVAZ Financial Report 2004, financial statements, [accessed October 2006],
33 In the AvtoVAZ Balance Sheet, these expenditures are positioned in the fixed assets section, which implies that they are long term investments into appropriating intellectual property rights in the form of patents, etc.
34 Foton Nine Years, 1996-2005, Beiqi Foton Motor Co. Ltd, information brochure, 2005.
50 Investment Policies
To attract investment and technology into the automobile industry the state made efforts to create conducive environment for foreign companies to assemble and produce cars in Russia. In February 1998, President Yeltsin signed Decree 135 “On the additional measures to attract investments into the Russian automobile industry.” According to this document, large-scale projects are granted considerable privileges if foreign investors contribute more than $ 250 million and agree to localize 50% of components in Russia within first five years. In return, a foreign auto manufacturer is relieved of the large share of customs duties when importing equipment and component parts. This decree was in force until July 1, 2006. A foreign car maker can also be exempt from regional taxes in a number of regions (Kursk, Nizhny Novgorod, Yaroslavl, Leningrad region) and can receive federal tax exemptions.35 Other measures to improve investment regime include: access of foreign insurers to the Russian market; adoption of the Organization for Economic Co-operation and Development’s (OECD) Principles of Corporate Governance; possibility for foreigners to purchase land in Russia; more simplified procedures for importers, etc.36
As a result of these measures, production of foreign models in Russia reached 53,570 units in 2003, which represents a market share of 5.3%. Current big players are Ford Motor Company and GM, with respective outputs of 16,261 and 21,579 units. At this pace, foreign carmakers’ output in Russia could account for up to 40% of the total production output by 2010.37 Foreign brands produced in Russia include: BMW (assembly of BMW vehicles since 1999 in affiliation with Avtotor – a Kaliningrad-based company fully owned by domestic investors); Chevrolet (production of Chevrolet-Niva model, a joint venture with AvtoVAZ in Togliatti since 2002); Citroen (assembly of the Citroen Berlingo (SKD) since 2000 with TagAZ in Taganrog; Ford Motor Company (production of Ford Focus in Vsevolozhsk since 2002); Hyundai (assembly of Hyundai Accent at Taganrog since 2001); Iveco (production of Iveco brand trucks by UralAZ in Chelyabinsk); KIA (assembly of KIA vehicles since 1997 by Avtotor); Renault (assembly of Renault Symbol and Logan via a joint venture with the city of Moscow (Avtoframos); Scania (bus production since 2002 in Leningrad region); Volvo (Siberian- Scandinavian Bus Company as a joint venture between Volvo and Irtysh Group assembles Volvo buses in Omsk Toyota and Nissan are constructing assembly plants close to St. Petersburg. Nissan and Toyota each invested $200 million to set up these production bases, and VW spent €380 million, which is the record.
35 As demonstrated in the following section on local investment policy, exemptions from regional budgets are currently not substantial due to the fact that Putin redirected a large portion of local taxes into the Federal budget.
36 The Russian Automotive Market, Industry Overview (2004): Ernst and Young, March 2004, [accessed August 2005],
37 Ibid.
51 Russian President Vadimir Putin continues to exercise the investment policy regarding foreign car manufacturers outlined above. At the meeting with Putin in April 2005, Viktor Khristenko, Minister of Industry and Energy, discussed the prospects of the Russian auto industry development and announced that one of the major objectives of the industrial policy was to encourage foreign manufacturers to build factories in Russia even if it was just an assembly production. In late March, the government made a decision to introduce preferential duties on parts imported for car assembly.38 In 2005, 10 leading automobile manufacturers from Japan, South Korea, North America, and Germany came to Russia. Due to these ten production projects, the industrial output in Russia is expected to be increased significantly from 180,000 units to 800,000-900,000 units per year in 2010.39 Furthermore, a new customs procedure for the industrial assembly of automobiles will come into effect in Russia at the end of 2006. The list of car components for industrial assembly that can be imported into Russia at a reduced customs duty of up to 5 percent will be expanded. The list contains components for the assembly of complex automobile systems like an engine, transmission, etc.
A foreign investor can come to Russia to manufacture cars under a number of conditions. It is a two step process. As outlined by the Ministry of Industry and Energy, during the first stage, within the first eighteen months, the car maker should conclude work on establishing a welding line, paint shop, and an assembly conveyor belt. The time frame may be somewhat longer for firms that have to build production premises from scratch. A new plant should be expected to produce at least 25,000 units a year. The second stage is localization. Within 42 months, the investor should localize production up to 10%, by the 60th month – up to 20% and by the 72nd month – up to 30%. The idea is that many of the components will be made in Russia, which will positively affect domestic component parts’ manufacturers and give an energy boost to metallurgy, electronics, and chemical industries.
Therefore, this strategy is one of the key parameters that will allow Russia’s traditional manufacturers to maintain their market share – about a million cars a year – and to increase the number of foreign cars made in Russia to about a million by 2010 and keep imports at an acceptable level. 40 Importantly, this scheme concerns not only cars, but also individual major units such as engines and gearboxes like a project to manufacture gearboxes that KAMAZ is now implementing.
“The Review of the Russian Automotive Component Sector” (2004) argues that many Russian automotive component suppliers are making quality improvements to fit international standards. These improvements include:
38 President of Russia’s website, Beginning of a Meeting with Minister of Industry and Energy Viktor Khristenko, April 14, 2005, [accessed September 2005],
39 Ibid.
40 Ibid.
52
1. Russian firms are investing their own resources into creating international-level quality management systems. 2. Some of the Russian auto component manufacturers have ISO-9001:2000 quality certifications. 3. Even some Russian car makers are starting to introduce Japanese techniques for production quality and efficiency improvement (Toyota Production System or Lean Production). (The Review of the Russian Automotive Component Sector 2004: 8-9)
Unlike China, Russia allows foreign car makers to establish 100% foreign capital enterprises in the automotive sector.41 China has a 50% ownership ceiling provisions in the automotive industry, which implies joint ventures. However, there is a mutual interest in joint ventures in Russia. Foreign investors perceive joint ventures as a testing ground to enter the market, establish assembly production, become more familiar with the Russian institutional and legal context, and familiarize themselves with potential suppliers. Russian partners seek to close the technology gap. Of the Russian auto companies surveyed by the Roland Berger German consulting company, 72% believe that Western companies in Russia have to take a stake to modernize the Russian industry.42There is a rising concern, however, among “nationalistic” forces in Russia that a joint venture assembly production does not necessarily entail technology transfer to the Russian partner. The counter argument is that local content requirements imposed upon either a joint venture or 100 percent foreign capital enterprise inevitably enhance technology sophistication through educating or “taming” local suppliers.
Investment at the Local Level
Following the Chinese experience of SEZs, Russian President Putin signed the Federal Law on SEZs in July 2005. The law was passed by the Duma – the lower house of the Russian Parliament. The bill introduces customs and tax privileges for investors that will open enterprises in the newly established SEZs. Two kinds of zones will be created: technical development zones and manufacturing zones. The companies in these zones will be exempt from local tax on property and land for five years, and freed from import and export duties to stimulate exports and industrial development. Thus, the zones will be customs-free areas.
According to this legislation, Russia will have more than 10 economic zones built between the end of 2007 and beginning of 2008. The federal government plans to contribute $280 million from the federal budget for the infrastructure projects in these
41 Foreign Investment Legislation Review, Russian Investment Partner, Legislation, [accessed April 2006], < http://www.fipc.ru/fipc2001/legislation/legislation.html.>.
42 Joint Study on the Russian Car Market, Roland Berger Strategy Consultants, September 22, 2005, Munich, [accessed August 2006],
53 zones. Among the candidates for the special economic zone status with the focus on technology development are Moscow, Moscow region, St. Petersburg, Novosibirsk, and Tomsk, for manufacturing – regions in the Far East, Siberia, and the Volga River.
The investment environment is expected to improve after the creation of these zones and after Russia joins the World Trade Organization (WTO). Putin’s administration actively pushed the issue of the Russia’s entry into the WTO at the last G8 (‘Great 7’ and Russia) summit in St. Petersburg in the summer 2006. Russia’s acceptance into the renowned trade organization is expected to improve the overall investment environment in the country.
Russia is, however, less successful than China in attracting investment, especially at the local level. In 2002, China attracted more than $50 billion in investment – Russia accumulated approximately the same volume of investment over the period of 10 years! Presently regional governments in Russia seem impotent when it comes to creating a good investment environment because they lack the authority to provide additional tax incentives. Most tax revenues in Russia are allocated by the federal budget. The federal budget accumulates recourses and further distributes them to cover regional and municipal expenses like heath care, public education, etc. The tax share to the regional and municipal governments has been cut by the Putin tax reform in the past several years. Property tax, for example, accounts for only 2% of municipal revenues; the rest goes to the federal budget. Thus, regions can not promise any substantial local tax exemptions for investors. Furthermore, there is not enough money in the local budget to spend on infrastructure, which, according to the Chinese SEZs’ model, is crucial for creating a favorable investment climate.
At present, regional authorities also lack an ability to provide a secure and stable political environment because their own future is quite ambiguous. In 2005, Putin had his bill passed on the abolition of direct elections of governors. The bill stipulates the appointment of governors by the president, and then the approval of candidates by local parliaments. Due to the current political situation in Russia, there is a very high probability that governors would be approved by the regional legislatures as the ‘doctor’ prescribed. The justification offered for encroaching on local governance was to strengthen the federal government in wake of deadly terror attacks like the tragic event in Beslan, a school siege by terrorists in 2004 in North Ossetia, Russia. How local governance and terrorism are causally related was not explained, however. As a result, regional governors lack political legitimacy to guarantee a stable political climate for investors. This system of appointments can hardly be wholesome for attracting investment locally because it is rather based on favoritism than merit.
Just a few years ago, before Putin introduced a tax reform depriving local budgets of a large tax lump that became diverted into the federal budget, some regions in Russia managed to offer local tax exemptions to investors. Of course, the extent of preferential treatment was less significant than in the case of the Chinese SEZs. Still regions were able to attract investors offering these tax benefits. Among these regions are Kaliningrad
54 Special Economic Zone, the first and still the only SEZ in Russia, Kursk, Nizhny Novgorod, Leningrad, and Novgorod regions.
Current policies pertaining to investment encouragement in Russia are somewhat contradictory. The state sends a mixed message to the investors. On the one hand, there are announced attempts to improve the investment climate, including the recent initiative to create several SEZs, on the other hand, due to the reasons underlined above, the government is undermining the possibility of local investment inflows.
Institutional and Other Barriers to Investment
The fact that the patenting system is weak and ineffective in Russia and that intellectual property rights are rarely respected impedes the “official” modes of technology transfer. On the other hand, it boosts “unofficial” innovation, which is, whether we want it or not, integral part of technology appropriation process. From the perspective of potential investors, the lack of respect of intellectual property rights is, of course, bad and can prevent the decision to enter the Russian market.
The Coalition for Intellectual Property Rights (CIPR) argues that in Russia the companies most affected by counterfeiting and infringement of their products are fast-moving consumer goods, tobacco, alcohol, personal health care, and the automobile industry.43 According to the CIPR survey, 28 percent of survey participants stated that more than 10 percent of their products are copied while a number of consumers believe more than 25 percent of the products they purchase are counterfeits. According to CIPR President Peter Necarsulmer, foreign companies are not the only ones that suffer from Russia’s lack of IPR protection. “IPR violations not only hurt businesses in Russia, but cost the Russian government billions of rubles in uncollected revenues from counterfeit products evading taxes and duties.” IPR violations are barriers to new investment and impede Russia’s effort to join the WTO.44
Russia is a signatory to the Paris Convention and a member of the World Intellectual Property Organization (WIPO). At present, Russia is also pursuing vehemently its determination to join the World Trade Organization (WTO). The survey of 50 major foreign investors in Russia conducted by CIPR revealed that counterfeiting, trademark piracy and other intellectual property infringements are costing businesses in Russia an estimated $1 billion a year. Half of the companies surveyed stated their yearly losses attributed to IPR violations amount to at least $1 million, and a third said losses were between $5 million and $50 million.45
43 The Coalition for Intellectual Property Rights (CIPR) is a private-public partnership dedicated solely to the advancement of intellectual property protection and reform in the Baltic States, Russia, Ukraine, and other countries of the former Soviet Union.
44 Intellectual Property Rights: A Key to Russia’s Economic Revival, The Coalition for Intellectual Property Rights (CIPR), [accessed September 2006],
45 Ibid.
55
Furthermore, there are institutional and administrative barriers to enter Russia for foreign car makers or any company. Although the process of obtaining business license varies across regions, the average new business applicant must deal with 20-30 agencies and fill out 50-90 registration forms. The process is not just bureaucratized; it also presents fertile grounds for corruption. It is not rare that a company has to pay ten times the cost of a license to various individuals in the bureaucratic apparatus (Broadman 2000: 4).
As illustrated, the Russian government tries to create a more conducive environment for investment into the automobile industry. The attempts are promising and have already brought some results even though Russia is far behind the countries of East Asia with regard to the volume of investment into the auto industry. The efficiency of the state protectionist measures is also minimal if historically compared with, for example, the MITI policies in Japan. In the meantime, the conditions for investment into the automobile industry are attractive in terms of access to the market and a good labor force.46
Russia will inevitably make a shift from a foreign “screw-driver” assembly production towards a higher technology production. This shift is possible because production is cheap (cheap labor, low transportation costs and logistical expenses) and there is a high consumer demand in Russia. It is cheaper to produce component parts and assemble locally. Foreign OEMs in Russia are an important player that is going to play a strategic role in the Russian auto industry development, especially with regard to the process of technology appropriation.47 For European investors Russia is closer culturally than, for example, China.48 However, China attracts much more investment into the auto industry. This can be partially attributed to administrative and bureaucratic hurdles in Russia and a few inconsistencies of the government investment policy.
For example, under the 1998 year decree on local content requirements (encouragement of local production of components by providing tax incentives for foreign auto companies), only one foreign manufacturer in Russia – Ford – managed to comply with the conditions applied.49 The problem was that Ford had to provide a detailed schedule of production one year in advance to obtain tax exemptions, which was a very challenging task. Then the degree was suddenly abolished in 2006 and a number of companies that actually planned to work under it did not receive enough time to change their tactics.
Another example of the state failures is that the government does not have sufficient environmental regulations and ecological measures to measure environmental harms produced by car emissions. The EU quality requirements (Euro III and IV) are being
46 Russia’s Auto Market (2003): Autobeat Daily, December 18, 2003.
47 Interview “e” # 2.
48 Ibid.
49 Interview “e” # 3. Please see the descriptions of the degree provisions in Chapter III.
56 imposed slowly.50 This inconsistency can be attributed to the fact that the state wants to back up domestic manufacturers that deliver low-quality and non-environmentally friendly products. This kind of protectionism is not beneficial for overall technological advancement of the industry.
Russia is a country with a weak government. The government in Russia does not have a necessary credit of trust in the society and business community. However, Russia is not a failed state either like Afghanistan, for instance. Since the Russian state is not strong, it is torn apart by different strategic interests. 51 The possibility of the political bargaining is very high in Russia, as a result – political and economic instability and inconsistency of strategy towards industrial development in general and car industry in particular. During privatization the state strategic inconsistencies manifested themselves in the auto industry. Since this industry was not considered as a key strategic industry like, for example, oil and gas, the state allowed Soviet management and even criminal elements to monopolize the privatization of auto manufacturers in Russia. The flip side of the privatization process was the virtual shutdown of state support of the R&D programs in the auto sector.
At present, the only two niches where the Russian (former Soviet) auto industry is competitive internationally are military production (heavy weal military vehicles that are innovative technologically and sold worldwide) and equipment and vehicles used in emergency situations.52 These vehicles are up to the world standards and in some instances even higher.
Implications for Technology Appropriation
To summarize, the implications of the policies described above for the process of technology appropriation include:
1. The fact that the Russian government in 1998 outlined a development strategy for the automobile industry signifies a revived interest of the state towards the industry after the hardships of the “transition” period in the aftermath of the collapse of the Soviet automobile industrial complex. The production plan in units is an important part of the strategic approach based on the analysis of production capabilities and budgeting. This planning process puts pressure on domestic producers, and correspondingly, generates expectations of support from the government at the enterprise level. In other words, it ideally creates a context for the dialogue between auto manufacturers and the government agencies based on mutual drive to reach the imposed goals, rather than on personal interests, cronyism or other informal grounds. Another important aspect of the strategy is the declared reliance on foreign car makers to establish production facilities in
50 Ibid. 51 Ibid.
52 Interviews“e” # 1 and 10.
57 Russia. The expected result of this policy is a technology spillover effect or the “domino” reaction that would indirectly increase the technological sophistication and quality of domestic partners and suppliers. The effectiveness of this investment policy (with regard to technology appropriation) depends, in my opinion, on the nature of the production facility being established. If it is a joint venture, technology transfer is expected (even though it might not be delivered to the satisfaction of the Russian partner) as part of a joint venture deal. Since the Russian government (unlike China) in an effort to encourage investment into the automobile industry allows wholly owned auto production enterprises to be established in Russia, it posits certain restrictions on direct technology sharing. The automobile industry development strategy clearly declares the end of the heavy Soviet-style subsidizing of auto enterprises. On the other hand, however, the government offered tax benefits to allow enterprises to get out of debt and invest cash into development. For domestic automobile companies, it means self- reliance in developing independently, buying or attracting technology and innovation from a foreign partner in a joint venture. In other words, without state subsidies for R&D, auto enterprises in Russia operate in the environment of tough market competition.
2. Another characteristic of the Russian regulatory environment pertaining to the process of technology appropriation in the auto sector is the government efforts to protect domestic manufacturers against foreign competition and encourage FDI into production within Russia by imposing high import tariffs. The implication for technology appropriation is that when foreign OEMs establish production (even assembly) in a country and outsource to local component manufacturers, it prompts domestic suppliers to increase the level of their technological capabilities and quality to meet the standards of a foreign car maker. The same is true about the local content requirements as part of investment policy. As a result, foreign car makers are settling on the Russian ground.
3. If to agree with the assumption that the nationally supported system of science and technology development is necessary for the country’s industrial competitiveness, then Russian automobile sector is currently in trouble. Private companies do not seem to be able to maintain the expenditures related to large- scale R&D programs. The research institutes that in the past constituted the Soviet system of R&D are currently autonomous or semi-autonomous from the state but do not seem to generate the cutting-edge innovation and technology products that are internationally competitive. The underfunded education system does not encourage postgraduate research and teaching, which imposes limitations on the supply of the engineering cadres to the auto enterprises. In light of some statistical data, Russia spends approximately six times less on research and development than China. The lack of the solid R&D system in Russia, in my view, negatively affects the technological competitiveness of the domestic automobile makers.
58 4. As stated above, due to the current investment policies, Russia is able to attract foreign investment into establishing auto production bases in the country. Leading automobile manufacturers from Japan, South Korea, North America, and Germany have come to Russia in the past several years. The industrial output in Russia is expected to grow. To encourage domestic manufacturing the government reduced import customs duty on complex key components (engine, transmission, etc.) for localized assembly. The purpose of this initiative is to create a foundation for import substitution in the future. Despite criticism that these investment policies create conducive environment for primitive assembly production (referred to as screw-driver assembly), the goals of the government are clear: encourage investment, increase domestic industrial output and with regard to technology development – amplify technological competitiveness of local suppliers by imposing local content prerequisites. There are deficiencies, however, of these investment policies that lie, in my opinion, in the lack of decentralization. China’s success of local investment regimes to attract FDI, which are referred to as special economic zones, pinpoints to the virtue of decentralization of the investment policies.53 In Russia, the political trend in the recent years under Putin’s administration was the centralization of power and, correspondingly, the weakening of the local autonomy. Fiscally this centralization has been manifested by the diversion of a large lump of local taxes into the federal budget. From the political angle, regions were deprived of the system of the governors’ elections (governors are appointed now by the president and approved by the regional legislature), which, to my mind, creates an atmosphere of political instability and dependence on the “wind from the capital,” speaking allegorically. For attracting investment locally, in my opinion, this political and fiscal centralization has negative effects. Another intrinsic problem is the weak implementation of intellectual property rights in Russia, which impedes investment and “official” modes of technology transfer. The patenting system is also weak. These deficiencies prompt reverse engineering and other forms of unofficial technology transfer. This project does not focus on the illumination of the “unofficial” sources of technology transfer. As illustrated, even though Russia has succeeded in attracting FDI into the auto industry in the past couple of years,
53 I use “special economic zone (SEZ)” as an umbrella term that embraces various forms of China’s economic zones with an investment encouragement regime that presupposes special policies and flexible measures provided by the central government and administered locally. Please see legislation on SEZs at International Electronic Commerce Network, Laws and Regulations on Investment, [accessed November 2006], < http://en.ec.com.cn/english/publishInfo/200540.jsp#investment >. There are currently 49 national-status zones in China that are divided into the following groups: national economic & technological development zones (ETDZ); national free trade zones (FTZ); national hi-tech industrial development zones (HIDZ); national Taiwanese investment zones (TIZ); national border & economic cooperation zones (BECZ); national export processing zones (EPZ); national tourist and holiday resort (THR). The reason why I use “SEZ” as an umbrella term for the above forms of economic zones is because all the above forms of economic zones emerged from the original four SEZs located in Guangdong Province (Shenzhen, Zhuhai and Shantou) and Fujian Province: (Xiamen). The legislation regulating the status and work of these zones has been expended to the newly established zones. Thus, ultimately all economic zones in China are regulated by the same legislation on SEZs. Furthermore, due to this legal heritage, bureaucrats in newly established zones refer to their zones as SEZs, as ascertained during interviews in some of China’s SEZs in the summer 2005.
59 Russia is still behind the countries of East Asia with regard to the volume of investment into the auto industry.
I discussed above some of the traits of the legal and institutional environment, in which the process of technology appropriation takes place in Russia. The next section will discuss similar policies in China. The conclusion to this chapter (Chapter III) draws parallels between the two countries.
Policies Regarding Technology Development in China
This section describes the policies that the Chinese government has produced with regard to technology development. I break down the policies into the following broad categories: technology transfer from foreign companies, national-level system of R&D facilities and projects, technology development enhanced by special economic zones (SEZs), and international agreements on intellectual property rights. These policies create a context within which the process of technology appropriation takes place.
Foreign Companies and Technology Transfer
China’s investment and industrial policies include procedures for technology transfer in the form of joint ventures’ provisions for collaboration in production, research, and training and local content requirements. Joint ventures producing automobiles with foreign partners are required to have 40% of local content. In 1999, the DFI International report stated that China received more foreign direct investment than any other developing nation and ranked second only to the US.54 In the automotive sector, foreign manufacturers that want to enter the Chinese market are expected not only to bring investment, but also to share technological innovation and development in a joint venture arrangement with a domestic partner. The FDI into the auto industry in China that presupposes establishment of car building production facilities, unlike Russia, has been restricted by the government policy to joint ventures only (Sit and Liu 2000: 656). At present, foreign enterprises are required to establish a joint venture with a Chinese partner with no more than 50 percent of ownership, which frequently creates a 50/50 percent ownership structure.
A joint venture is usually referred to as “multiple forms of contracts such as licensing and technology transfer, as well as sharing research and development expenditure or setting up a common organization” (Faure 2000: 67). In the Chinese context, a foreign company usually brings to the table technology, equipment and expertise, financial investments,
54 A consulting firm specializing in research, analysis, and advising senior executives in industry and government on issues of strategy, technology, and innovation. See the report at Bureau of Export Administration, Office of Strategic Industries and Economic Security, Defense Market Research Report, 1999, p. ii, [accessed August 2006],
60 experience in the international market, reputation, management skills, and logistics organization know how. A Chinese company usually contributes buildings, rights to use land, labor, knowledge of the Chinese market and distribution channels, and expertise in dealing with high officials, bureaucracy, and local authorities (Faure 2000: 69).
Technology transfer is always part of a joint venture agreement. The US companies coming to China seek approval for joint venture manufacturing partnerships, among other things, by establishing an institution, center or lab devoted to joint research and development: “Compared to donations of equipment and scholarships as well as training for Chinese workers, the new R&D initiatives would appear to involve more technology transfer to China.”55 For example, GM entered China through partnership with Shanghai Auto Industry Corporation (SAIC). As part of the cooperation agreement, GM had to help create a R&D center for engineering and design – Pan Asia Technical Auto Center.
The major motivation for the US companies to give up technology to the Chinese partners is to gain a foothold into the Chinese market. Obviously the technology transfer would not take place if the Chinese government did not impose its requirements and expectations on foreign partners with regard to technology transfer. The collaboration with foreign joint ventures on research and development of high-tech products is also paralleled by the government efforts to develop domestic high-tech research independently from foreign partners.
The Chinese government puts an emphasis on industry-specific and high-technology imports of foreign technology. There are primarily three legal documents that govern the terms under which foreign enterprises transfer technologies to China: Detailed Rules for Implementation of Regulations on Administration of Technology Import Contracts (January 1988); Provisional Regulations on Guiding the Direction of Foreign Investment (Issued June 1995; Implemented (October 1996); Catalogue for Guiding Foreign Investment in Industries (Issued with Provisional Regulations June 1995; Implemented October 1996).56
These regulations were issued by China’s State Council and are implemented and enforced by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). The Detailed Rules outline the terms under which foreign firms may enter a joint venture agreement with a Chinese partner(s). These rules were an attempt by the Chinese government to make the legal framework for FDI more transparent for prospective investors. The Provisional Regulations denote in which sectors foreign investment is permissible (i.e., agriculture, energy, telecommunications, raw materials, and advanced technology). Technology transfer from foreign enterprises is an explicit requirement for the market access. According to the China Country Commercial Guide, 1996-97, “The government’s stated intention in promulgating the new guidelines is to better channel foreign investment into infrastructure building and basic industries, especially, in the case
55 Ibid., p. iii.
56 Ibid., p. 26.
61 of the latter, those involving advanced technologies and high value-added export-oriented products.”57 These policy guidelines were designed to encourage foreign investors to move away from labor-intensive projects in manufacturing towards joint ventures involving advanced technology and production of high value-added goods. These policies indicate the efforts of the government to enhance the marketability and industrial applicability of the imported technologies. Sometimes these efforts do not work, however, as Gallagher (2006) indicates. He summarizes the explanations why the Chinese firms fail to take full advantage of their U.S. partners with regard to technology transfer in Tables 20 and 21 (see in the Appendix).
National-level Science & Technology (S&T) Research and Development System
Structure of S&T System
At the end of the 1970s, Deng Xiaoping proclaimed science and technology to be one of the “four modernizations.” This prompted a transformation and modernization of the S&T system in China. The key organizations responsible for civilian and engineering research in China are: The Ministry of Science and Technology (MOST), The Chinese Academy of Science (CAS), The National Natural Science Foundation of China (NSFC). The Ministries of Defense, Health, Agriculture and the State Forestry Administration and other economic agencies have significant research operations also administer a variety of research projects. The Ministry of Education oversees and financially supports all universities in China.58
The Ministry of Science and Technology (MOST) provides policy guidance on the S&T systemic reform agenda, and formulates policies on how to strengthen basic and applied research and technology development, especially in the high tech area. The Ministry provides funds for S&T programs in both basic and applied research.59 The Chinese Academy of Sciences (CAS) CAS oversees over 100 independent research institutes, which conduct scientific research in all branches of the natural sciences. These institutes receive funding from CAS, MOST, and the National Natural Science Foundation of China (NSFC). In addition, institutes earn money by owning and operating spin-off enterprises.60 The National Natural Science Foundation of China (NSFC) was modeled after the National Science Foundation of the United States when it was founded in the mid-1980s. NSFC funds peer-reviewed basic and applied research in natural science
57 Ibid., p. 27 58 An Evaluation of China’s Science and Technology System and its Impact on the Research Community (Summer 2002): A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, p. 4, [accessed August 2006],
59 Ibid.
60 Ibid.
62 fields such as physics, mathematics, and chemical and life sciences. Principal grant awardees are Chinese universities and CAS research institutes.61
Between 1994 and 1998, nationwide R&D funding as a percentage of GDP was between 0.6% and 0.7%. In the recent years, this indicator has increased sharply, to 0.83% in 1999 and 1.01% in 2000. Although most developed countries’ R&D ratios range between 2% and 2.5%, China stands out as a heavy spender among developing countries. Mexico’s R&D spending, for example, ranged from 0.31% in 1994 to 0.4% in 1999, while India’s score varied from 0.81% to 0.86% in the same time period. China’s government reported investing more than 57.6 billion RMB ($6.9 billion) in S&T in 2000, an increase of 4.8% over the previous year.62 One of the biggest winners in the area of basic and “applied basic” research has been the NSFC. Between 1996 and 2000, NSFC’s budget doubled to 1.2 billion RMB ($145 million).63
In 1995, there were roughly 1.8 million students in China enrolled as undergraduates in science, engineering, agriculture and medicine programs. By 2000, this number had more than doubled to 3.3 million.64 Mandatory retirement and layoffs have opened the door for younger, better-educated scientists to move into senior research and management positions. At most CAS organizations the majority of their staff is less than 45 years of age.65 China ranked 12th worldwide in major international scientific publications in 1992, in 1999, it reached the 8th place. It ranked 17th in the Scientific Citations Index (SCI) in 1992, by 2000, it had reached the 8th place for the number of papers cited. China’s record in the Engineering Index (EI) is even better. As far back as 1992, China ranked 6th. By 1999, China ranked 3rd among all nations, with its share of the total increasing from 4.3% in 1998 to 7.4% in 1999.66
China still heavily relies on imported technology. In the high-tech area imports increased rapidly: China’s high tech trade deficit grew from 7.6 billion RMB ($920 million) in 1997 to 15.5 billion RMB ($1.9 billion) in 2000.67
As reported to the Organization for Economic Cooperation and Development (OECD), China’s Gross Expenditure in Research and Development (GERD), a commonly used indicator of the strength of a country’s S&T community, rose from 34.9 billion RMB in
61 Ibid.
62 Ibid., p. 5.
63 Ibid.
64 Ibid.
65 Ibid., p.6.
66 Ibid.
67 Ibid., p.7.
63 1995 to 89.6 billion RMB ($10.8 billion) in 2000.68 GERD as a percentage of GDP has also increased. After remaining around 0.6% of GDP for nearly two decades, GERD as a percentage of GDP reached one percent in 2000. Table 22 (see in the Appendix) shows China’s GERD, annual growth of GERD, and GERD as a percentage of GDP between 1995 and 2000. China has the largest R&D expenditures among the so-called developing economies. Table 23 compares GERD as a percentage of GDP for several countries. Since this project compares China and Russia, it is important to note here that China’s GDP is approximately 6 times bigger than Russia’s GDP.69 India’s GDP in 2005 constituted $3.699 trillion.70 Therefore, in terms of amounts of money spent on R&D China leads among the developing countries.
As the report “US Commercial Technology Transfers to the People’s Republic of China” by DFI International states, by 1993, more than half of China’s large state-owned enterprises (SOEs) had created technical development centers aimed to enhance the technological competitiveness of the Chinese companies.71 The Chinese government established numerous National Engineering Research Centers (NERCs) all over the country to enhance domestic technological innovation.72 These centers are part of China’s strategy to reform its science and research system. The NERCs are subordinate to China’s State Sciences and Technology Commission (SSTC), equal in status to China’s civilian ministries and senior to China’s other research institutes and universities. The NERC system is controlled by the central government but designed to promote applied research developed by government, industry, and university-based research institutes. Provincial or local government departments or research institutes can apply for a NERC status.73 As conceived in the Eighth Five-Year Plan (1991-1995), about 200 NERCs would be established by the year 2000 employing between 30,0000-40,0000 engineers nationwide.74
The highly regarded Chinese Academy of Sciences (CAS) has also established over 500 commercial enterprises in the high-tech sector as part of a government program to
68 The market exchange rates (8.3 RMB = 1 U.S. dollar) may understate the level of Chinese R&D activity because of differences in purchasing power. Purchasing power parity exchange rates for the Chinese RMB are significantly higher than market rates.
69 Russia’s GDP in 2005 is $1.539 trillion, China’s GDP in 2005 is $8.182 trillion. See at CIA, [accessed August 2006],
70 Ibid.
71 See the report at Bureau of Export Administration, Office of Strategic Industries and Economic Security, Defense Market Research Report, 1999, [accessed August 2006],
72 Ibid., p. ii.
73 Ibid., p. 13.
74 Ibid., p. 11.
64 develop “technical enterprises” as subsidiaries of existing research institutes.75 CAS is aimed to drive technological innovation across government and business communities. It is China’s premier scientific institution that employs more than 50,000 technicians. “The Academy’s “Industry-Academic Research Plan” calls for industry and university cooperation on 100 designated projects involving 100 key-state-owned enterprises on 10 major science projects over the next five years in an effort to further the commercialization of technology.”76
Another source of R&D is, naturally, universities. The Chinese government introduced an element of competition and market orientation into the relationship between the government and universities. Chinese domestic policies on science and technology push China’s academic community to pursue wide-ranging, profit-making, industry-relevant research projects. From the mid-1980s, China’s state officials started to develop more specific policies targeted at commercializing and applying the new technologies. To promote more cooperation between industries and research institutions the Chinese government made funding competitive and dependent on the applicability of new technology to industrial and commercial purposes. In the 1980s, China established National Science Foundation aimed to supervise this link between industries and technology enhancement in research institutions. The principle behind was expressed at the China State Council in May 1995 in a “Decision on Accelerating Scientific and Technological Development”: “Anchor at one end and let the other end be free.” This principle implies that the state (“anchor”) provides partial funding to the state R&D projects in hopes that these projects would generate revenues through industrial and commercial implementation.
A special role in technology development and application was attributed to China’s state- owned enterprises. They have been designated by the central government as engines of industrial and economic growth: “One result of these programs is that by 1993, more than half of China’s large state-owned enterprises had established technical development centers, founded for the purpose of improving production efficiency as well as increased product quality and marketability.”77 24.86 billion yuan has been spent on establishing technical development centers by large and medium-sized Chinese enterprises in 1993 in comparison to 5.3 billion yuan in 1985.78 For example, SAIC, one of the government agencies, Shanghai Auto Industry Corporation is a joint venture partner with GM and Volkswagen. GM helped to establish a R&D center for engineering and design – Pan Asia Technical Auto Center.
The general directive of the S&T system is to enhance research implementation – the system encourages research institutes to launch commercial spin-offs based on successful applied research in their laboratories especially in the high-tech sector. The major trend is
75 Ibid., p. ii.
76 Ibid., p. 13.
77 Ibid., p. 9.
78 Ibid.
65 to introduce a market-oriented approach into administering and financing various research institutes in China. With various forms of government support, including tax incentives, most of the 242 research institutions in China had been turned into companies or technology intermediaries by 2000 (Yang 2004: 51). The goal behind this restructuring is to enhance applied research.
The system of NERCs, the CAS plans, and a variety of other government projects demonstrate China’s commitment to a highly coordinated but a market-driven research and development strategy. It is difficult to obtain data on the impact of China’s science and technology programs on national economic competitiveness. However, the Chinese government estimates that about six percent of China’s export growth can be attributed to advances in domestic R&D. Furthermore, according to the State Science and Technology Commission, the state continues to provide half of all Chinese R&D. The accumulative Chinese national spending on R&D in 1995 is summarized in Table 24. Table 25 provides information on key indicators of technological advancement present in China.
Automotive Industry as a “Pillar” Industry
The Chinese government identified several industrial sectors as “pillar” industries. The “pillar” industries include machinery, electronics, petrochemicals, automobiles, and construction. The state has a preferential treatment of these industries in terms of providing financial and legal support or helping them out against international competition by creating, for example, trade barriers against imports.
By 2010, the Chinese government intends to merge and consolidate the existing state enterprises, and to grant preferential treatment to eight Chinese companies partnered with foreign automakers. The ultimate goal is to create a Chinese version of the “Big Three” 79 American automobile makers.
In February 1994, China’s State Planning Commission adopted the “Automotive Industry Industrial Policy” (AIIP), which was published on July 4, 1994 in the People’s Daily (Renmin Ribao). The purpose of the publication was to provide more transparent investment guidelines for prospective foreign investors. Requirements for Establishing an Auto Manufacturing Joint Venture in China include:
1. “An office responsible for technological research and development must be set up within the enterprise. The office will have the capacity to update products;” 2. “The enterprise must have a capacity for manufacturing products which attain the international technological levels of the 1990s;” 3. “The joint venture enterprise will obtain the foreign exchange it needs mainly through exporting its products;”
79 DFI International (1999): US Perspectives on Technology Transfers to China. Part 2. See the report at Bureau of Export Administration, Office of Strategic Industries and Economic Security, Defense Market Research Report, p. 47,[accessed August 2006],
66 4. “The joint venture must give priority to locally made spare or component parts when they need them.”80
The auto industrial policy includes very explicit requirements for high levels of local content: 40 percent local content at start up (that had previously been required only after the third year in operation), 60 percent by the second year and 80 percent by the third year for passenger cars. Similar local content requirements exist for auto components. For trucks the levels of localization requirements are even higher.81 Table 26 (see in the Appendix) provides data on the volume of local content maintained by auto joint ventures in China. These requirements indicate that the Chinese government attempts to enhance the volume of domestically produced automobile parts as substitutes for imports. These local content provisions automatically affect the level of technological sophistication among local manufacturers.
The localization provisions allow the state to protect its domestic auto industry while still attracting foreign investment and technology. The goal of the industrial policy is to find the balance between protectionism and FDI attraction, which in turn stimulates technology appropriation. The tactics of the state to encourage technology transfer are local content requirements, import substitution, ownership ceiling in a joint venture with a foreign partner, etc. These are the centrally-conceived guidelines. At the local level, the special economic zones create additional incentives for investment and technology transfer.
Special economic zones and R&D
Due to the policies of the “developmental state, when the government in China played an active and coherent role in attracting investment, in 2003, foreign direct investment in China topped $ 53 billion.82 In order to create a favorable investment environment and to encourage overseas firms to invest in China, since the year 1979 the Chinese government has gradually set up a relatively complete legal system for investments. This system includes industrial policies, regional policies and financial policies.83 At the regional level, it is special economic zones (SEZ) that possess the most successful mechanisms to attract investment and develop technology.
One of the most important preferential treatments for investors is tax incentives. The income tax rate is 15% in economic zones, high-tech industrial zones, economic and
80 Article 31, Chapter Six: “Policy on Using Foreign Funds,” of China’s 1994 Auto Industrial Policy, [accessed August 2006],
82 Diana Farrell, Paul Gao, and Gordon R. Orr, “ Making Foreign Investment Work for China,” The McKinsey Quarterly. China Today, (2004) New York: McKinsey & Company, p. 25.
83 “Policies on Foreign Investment,” [accessed August 2005],
67 technological development zones.84 In SEZ foreign enterprises can enjoy tax exemption in the first two years after making profits and income tax reduction by half in the following three years. Foreign high-tech enterprises enjoy tax exemption in the first two years after making profits and income tax reduction by half in the following six years. In addition to these policies, the export-oriented enterprises enjoy the income tax reduction by half as long as the volume of its annual exports accounts for more than 70% of the general sales of the enterprise. These enterprises enjoy other benefits if they purchase domestically made equipment within the volume of the total investment. Foreign enterprises are exempt from business tax in technological transfer.85
All the policies described above provide a general framework or a model of investment encouragement. This model is implemented with a certain degree of diversity at the local level. Even if the central government makes a policy, when it comes to the local application the authorities in a SEZ make adjustments. The central government seems to understand that adjustments should be made. Each economic zone offers a specific package of benefits that include tax incentives, infrastructure, consulting services, special treatment to particular industries, etc. SEZs usually have industrial specializations; however, they still compete with each other.
Bureaucrats in SEZs in China are efficient, professional, and, most importantly, have room for initiative. SEZs have financial freedom from the central government and, therefore, an organizational interest in attracting as much investment as possible. To summarize, the more investment a SEZ attracts, the better off it is financially. SEZs resort to innovative methods and techniques to attract investment ranging from providing a coherent package of ‘baby-sitting’ services for investors to a list of additional benefits and tax incentives that go somewhat beyond the standard central government investment policies.
Suzhou Industrial Park (SIP), for instance, is one of the fastest growing and the most competitive industrial development zones in the world. The park was created in 1994. The park is referred to as ‘one of the nine new-tech cities in the world,’ and the ‘New Silicon Valley.’ The zone provides infrastructure, leases the land out, establishes R&D and educational facilities. The SIP encourages imports of high tech technology and exports by providing various tax incentives. Raw materials and semi-finished products can be transferred or traded freely within the EPZ. Tax is exempt for products, machinery and equipment transferred between other EPZs. It is the only place in China that provides tax rebate on exports. It is the first and the last experiment of this kind in China. Enterprises also don’t pay duties on raw materials (components) if they use these components in the park to produce exports.86
84 “Preferential Treatments Extended,” [accessed August 2005],
86 Data from the information brochure: “Suzhou Industrial Park Investment Guide. 2005 Investment Guide,” Suzhou, China, 2005.
68 The administration of this zone is like a transparent business corporation that has little in common with a stereotypical government bureaucracy. The SIP is a good example of a ‘leap-frog’ growth based on good development strategy and a talented management team.
To illustrate how efficient local bureaucrats can be or, in other words, how the central government regulations undergo adjustment at the local level in China the story of the Honda plant in Guangzhou Development District (GDD) is important. A Honda factory was established in GDD in 2003. Up until 2004, the legislation regulating the investment in the auto industry permitted a foreign manufacturer to have no more than 50% of ownership in a joint venture with a Chinese partner. Honda received a special treatment in the zone. It was allowed to have 65% of ownership in a joint venture with a Chinese partner. The ownership distribution in Honda in GDD is the following: 65% of shares belong to Japan (Honda Motor – 10%, Honda Motor (China) – 55%), 35% - China (Guangzhou Automobile – 25%, Dongfeng Motor – 10%).
Honda received special treatment because the local authorities of GDD appealed on Honda’s behalf with the central government. The process of the application approval took six months. The reason why the central authorities made an exception for Honda is because the Honda production facility in GDD was built to produce exports. The Chinese state has a general policy of encouraging exports. In 2004, the new legislation came into force permitting foreign companies in the auto industry to have up to 70% of shares if they export.
The case of Honda demonstrates that the central government directives are not perceived as direct orders at the local level. The authorities in SEZs make adjustments, negotiate with the central government on behalf of their investors, and generally approach the central government directives with pragmatic flexibility.
Intellectual Property Rights and International Agreements
China has all the necessary legislation with regard to intellectual property rights. For instance, the Trademark Law or Regulations on Prohibiting Infringement of Commercial Secrets are available on-line on the web site of the State Administration for Industry & Commerce of the People’ Republic of China.87
During the socialist era China had no intellectual property rights. Later on, under Deng Xiaoping China embarked on economic reforms and started to attract investment and learn from the foreign experience. In 1984, the government adopted a German pattern system. There exist several types of patterns in China: pattern for invention, design, etc. In 1988, the legislature on the protection of trade marks was adopted. In 1993, a pattern law was amended. In 1997, China joined the Paris Convention – the first international convention on intellectual property rights. At present China enjoys a variety of laws and
87 State Administration for Industry & Commerce of the People’ Republic of China, [accessed September 2006],
69 regulations on copyright, unfair competition, etc. With regard to legislation on intellectual property rights China is fully equipped. Implementation is a different issue.
The state in China has different intellectual property protection laws but they are not implemented properly. On the one hand, violations of property rights create jobs and allow technology “borrowing”; on the other hand, the Chinese government lost credibility or face in the international community for allowing violations of intellectual property rights. One might argue that over the last decade, the weak implementation of property rights in China positively affected technological development. Rigid compliance with the intellectual property rights in the West cause brand monopolization and inhibit innovation. At the beginning of the 20th century, in the United States, there was no respect for intellectual property rights. America engaged in pure innovation and chaotic development of technology. China is now catching up technologically with the rest of the so-called developed world.88
Though this research focuses on the domestic factor – the role of the state – in industrial development, it is, nevertheless, important to discuss international agreements involving the issues of technology transfer and intellectual property rights because they create a context for the state actions. No one denies that international agreements modify state behavior and, at the same time, state behavior and interests define international agreements. International agreements are a two-way street: external influences affect the domestic situation and, vice versa, domestic forces affect the international system. China entered the WTO and has to comply with a set of agreements on intellectual property rights and, specifically, the Agreement on Trade-Related Aspects of Intellectual Property Rights or TRIPS, which helps attract FDI.
China expressed its wish to join the WTO in the mid-1990s. China actively participated in negotiations with the US as one of the most influential WTO member on the China’s membership in the WTO. One of the key issues at the negotiation table was granting China with a most-favored-nation status or a normal trade relations (NTR) status. As a result of a long negotiation process, in 1999, the US agreed to grant China with the NTR status and back up its entrance into the WTO in exchange for Chinese concessions on tariffs and quotas and expended rights for American enterprises in China (Rothgeb 2001: 232). With regard to technology transfer and the auto industry, the US-China 2000 trade agreement outlined the following steps that China pledged to take: reduce tariffs on autos from an average of 80-100 percent to 25 percent and on auto parts to an average rate of 10 percent by 2006; eliminate auto quotas by 2005 (Rothgeb 2001: 233).
Membership in the WTO presupposes compliance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The agreement covers the standards concerning the availability, scope, and use of intellectual property rights. The TRIPS discusses such issues as copyrights, trademarks, industrial designs, and patents.89 All
88 These opinions were expressed during an interview “e” # 6.
89 The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), the WTO, [accessed June 2006], < http://www.wto.org/english/tratop_e/trips_e/t_agm4_e.htm#1>.
70 these issues have a direct relevance to technological development in the auto industry. China has been routinely criticized for violations of intellectual property rights. However, in light of the WTO membership, the Chinese leadership started to pay more attention to the respect of intellectual property rights. The good will of the Chinese government is extremely important for the implementation of this agreement. Under the TRIPS, as under practically every WTO agreement, it is the member state that is responsible for its enforcement: “Members shall make available to right holders civil judicial procedures concerning the enforcement of any intellectual property right covered by this Agreement.”90 If the obligations under the TRIPS are not fulfilled, then the WTO members can refer to the WTO dispute settlement processes.
Implications for Technology Appropriation
To summarize, the implications of the policies described above for the process of technology appropriation include:
1. At present, if a foreign car maker wants to build a production facility in China, the only way to do it is by establishing a joint venture with a Chinese partner. A joint venture usually has a 50/50 percentage of ownership distribution. Technology transfer is always part of a joint venture agreement either in the form of technology sharing within a joint venture or a foreign partner helps establish a R&D facility like in the case of a joint venture between GM and Shanghai Auto Industry Corporation (SAIC). The major motivation for foreign companies to give up technology to Chinese partners is to gain a foothold into the Chinese market. The Chinese government imposes requirements and expectations on foreign partners, otherwise technology transfer would not take place. But even in light of the above provisions, sometimes technology sharing does not happen. Chinese enterprises also engage in independent R&D programs. Technology transfer from foreign partners and independent R&D are the sources of technology appropriation for Chinese firms.
2. China’s Gross Expenditure in Research and Development (GERD), a commonly used indicator of the strength of a country’s science and technology system, rose by approximately three times from 1995 to 2000. GERD as a percentage of GDP has also increased. After remaining around 0.6% of GDP for nearly two decades, GERD as a percentage of GDP reached one percent in 2000. China has the largest R&D expenditures among the so-called developing economies. The major trends in the Chinese national-level Science & Technology (S&T) research and development system are an introduction of market principles and encouragement of applied research. The Chinese government introduced an element of competition and market orientation into the relationship between the government and universities. China’s academic community is expected to pursue wide-
90 Ibid.
71 ranging, profit-making, industry-relevant research projects. To promote more cooperation between industries and research institutions the Chinese government made funding competitive and dependent on the applicability of new technology to industrial and commercial purposes. The general directive of the S&T system is to enhance research implementation – the system encourages research institutes to launch commercial spin-offs based on successful applied research in their laboratories especially in the high-tech sector. The Chinese government estimates that about six percent of China’s export growth can be attributed to advances in domestic R&D. China still, however, heavily relies on imported technology. The implications of the above dynamics on the process of technology appropriation at the enterprise level are massive. There is evidence that state-owned enterprises still receive funding for R&D projects. Especially export-related projects are considered most eligible for funding. Furthermore, due to the encouragement of applied research and cooperation between industries and enterprises, both parties are expected to benefit from this relationship. Enterprises receive innovative solutions and products, research institutes – funding either from the state or enterprises. Companies in China are strongly encouraged, due to the market- oriented reforms in the national S&T system, to invest their own resources into R&D. In sum, the S&T system in China combines reliance on state funding with market elements.
3. Chinese automobile industry is the so-called “pillar” industry. The state has a preferential treatment of these industries in terms of providing financial and other forms of support. Part of the preferential treatment is the consolidation plans - the Chinese government plans to consolidate the existent auto companies into about eight large manufacturing groups. Another manifestation of the special treatment is the local content requirements for foreign partners in the car and component production joint ventures. Ultimately the localization requirements are aimed at enhancing the volume of domestically produced automobiles and parts as substitutes for imports. They also affect the level of technological sophistication among local manufacturers and allow the state to protect its domestic auto industry while still attracting foreign investment and technology. The ultimate goal of the automobile industrial policy is to find the balance between protectionism and FDI attraction, which in turn stimulates technology appropriation. Another tactic implemented by the state to encourage technology appropriation from foreign partners is an ownership ceiling in a joint venture with a foreign partner. These are the centrally-conceived guidelines. At the local level, the special economic zones (SEZs) create additional incentives for investment and technology transfer. Special economic zones successfully attract investment due to a combination of incentives, which include infrastructure, tax exemptions, efficient bureaucracy, favorable customs regimes, and an ability to negotiate on behalf of an investor with the central government like in the case of Honda in Guangzhou Development District (GDD), when Honda was allowed to retain 65% of ownership due to its export obligations and efforts of the zone’s officials. The favorable investment policies both at the central and regional levels that
72 encourage foreign car and auto component makers to come to China ultimately provide a source of technology appropriation for domestic manufacturers - either partners in joint ventures or suppliers. The legislation on joint ventures and local content requirements is conceived to prompt foreign firms to share technology.
4. With regard to legislation on intellectual property rights China is fully equipped. Implementation is still problematic. However, membership in the WTO presupposes compliance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In light of the WTO membership, the Chinese leadership started to pay more attention to the respect of intellectual property rights. Respect for intellectual property rights has a direct relevance to technological appropriation in the auto industry. It imposes higher standards on enterprises concerning the way technology is appropriated. Compliance with international agreements on technology appropriate also attracts FDI.
Conclusion
The variations across the policies affecting the process of technology transfer in China and Russia can be summed up in the following way:
1. The national system of science and technology (S&T) in China is more financially supported and subsidized by the state than in Russia even in light of the recent reforms to introduce market elements and competition into the S&T system by the Chinese government. There also seems to be a closer tie between research institutes and enterprises in China than in Russia. The Chinese government makes a conscious and systematic effort to increase technological competitiveness of Chinese industries by establishing various research and educational institutions that train and supply engineering and scientific cadres to the industry. The link between research/educational institutions and industries in Russia has deteriorated during the period of economic transition in the 1990s.
2. Investment policies at the central and regional levels seem to be more consistent in China than in Russia. Special economic zones in China play an important role in attracting investment. The overall centralization agenda of the Putin administration focused more on the central government efforts to attract investment rather than on fostering locally-administered investment regimes.
3. Automobile industry has a “pillar industry” status in China, which presupposes a favorable treatment and strategic approach toward the industry development. In Russia, the automobile industry is less prioritized than, for example, the so-called strategic or export-oriented industries like oil, gas and the defense sector.
4. China encourages technology transfer through introducing restrictions on ownership in joint ventures in the automobile sector. Russia allows wholly owned
73 enterprises to be established on its territory, which might limit the potential sharing of technology with domestic partners.
I elaborate on the above points below: The policies affecting technology development in Russia in the automobile sector can be broken down into the following categories: the state strategy of the auto industry development, investment policies, which include local content requirements, state protectionist measures, and the system of science and technology. The Government of the Russian Federation approved a development strategy of the automobile industry till 2005 on December 26, 1998. This document is probably one of the first strategic efforts by the government to shape the direction of the automobile industry development after the collapse of the Soviet industrial complex. The Russian government engages in protectionist measures like high import tariffs to help domestic manufacturers and prompt foreign auto companies to establish production facilities in Russia, which will enhance the level of technological sophistication among Russian auto component suppliers. The local content requirements have the same effect. The investment policy undertaken by the Russian government has brought some positive results despite bureaucratic hurdles, legal and institutional deficiencies regarding, for example, intellectual property rights implementation. The weak area is the national level science and technology system, which was severely undermined by the collapse of the Soviet Union. The major burden of R&D expenditures currently lies on the shoulders of the auto companies, not the state. The Chinese government produced a number of policies affecting technology development. I break down the policies into the following broad categories: technology transfer from foreign companies, national-level system of R&D facilities and projects, technology development enhanced by special economic zones (SEZs), and international agreements on intellectual property rights. These policies create a context within which the process of technology appropriation takes place.
The major motivation for the US companies to give up technology to the Chinese partners is to gain a foothold into the Chinese market. The Chinese government imposes local content requirements and ownership ceiling limitations on foreign partners. The collaboration with foreign joint ventures on research and development of high-tech products is paralleled by the domestic system of science and technology development. Automobile industry is a “pillar” industry in China, which enjoys more scrutiny and control from the central government, on the one hand and, on the other hand, a preferential treatment in terms of financial support.
The tactics of the Chinese state to encourage technology transfer are local content requirements, import substitution, ownership ceiling in a joint venture with a foreign partner, etc. These are the centrally-conceived guidelines. At the local level, the special economic zones create additional incentives for investment and technology transfer.
74 China entered the WTO and has to comply with a set of agreements on intellectual property rights and, specifically, the Agreement on Trade-Related Aspects of Intellectual Property Rights or TRIPS, which helps attract FDI.
There are a number of significant differences between China and Russia regarding policies affecting technology appropriation. The investment policy in Russia is being criticized for the lack of government control over the technology appropriation process that foreign car makers in Russia are expected to intensify. Most foreign OEMs in Russia establish assembly production, which limits, as some critics note, the possibilities for technology transfer to domestic suppliers. Furthermore, at the present time, foreign OEMs prefer to establish 100% ownership enterprises (Ford, Toyota, etc.) as opposed to joint ventures. Chinese government, in comparison, allegedly has a better grip over technology transfer from foreign partners because of the 50% ownership ceiling requirement in car making enterprises. Russia allows foreign companies to have 100% ownership in almost all industries.
Another significant difference is the absence of the state-supported system of science and technology (S&T) in Russia as opposed to China. One of the indicators of R&D progress is the number of graduates in engineering, science, and technology. In 1995, there were roughly 1.8 million students in China enrolled as undergraduates in science, engineering, agriculture and medicine programs. In Russia, the number is about 200,000 per year for the recent years. Furthermore, China spends 6 times more on technology development than Russia and more than most developing countries. Even though the Chinese government introduced elements of competition and market orientation into the relationship between the government and universities; it still supports science and technology system financially. Chinese domestic policies on science and technology push China’s academic community to pursue wide-ranging, profit-making, industry-relevant research projects. In Russia, the national system of S&T is underfunded in general and even more so in such industries as the auto sector, which considered less strategically important than the extractive, export-oriented oil and gas industries and the defense industry that exports arms and ammunition.
Another difference is the efficiency of special economic zones in China in attracting investment in the auto industry. Russia has weaker regional institutions of investment encouragement especially in light of the recent attempts of the Putin government to increase centralization on all levels, including investment policies. Local governments have been stripped from an ability to grant substantial local tax exemptions because a large lump of local taxes was redirected to the Federal budget.
Overall, China has a more elaborated legal framework with regard to imports of technology than Russia. Technology transfer from foreign enterprises is an explicit requirement for market access in China. In Russia, it seems to be an expectation more than an actual requirement, in my opinion. This argument can be exemplified, among many things, by the cases of conditionality attached to joint venture agreements in China like the establishment of the Pan Asia Technical Auto Center – the result of the partnership between Shanghai Auto Industry Corporation and GM.
75 The Russian government tries to create a more conducive environment for investment into the automobile industry. The attempts are promising and have already brought some results even though Russia is far behind the countries of East Asia with regard to the volume of investment into the auto industry. The conditions for investment into the automobile industry are attractive in terms of access to the market and a good labor force. However, China attracts much more investment into the auto industry. This can be partially attributed to administrative and bureaucratic hurdles in Russia and a few inconsistencies of the government investment and industrial policies. These inconsistencies may be explained by the fact that the Russian state is torn apart by different strategic interests and the possibility of the political bargaining is very high in Russia.
Chapter IV:
Sources of Technological Development in China – Introduction
Chapter III discussed government policies in China with regard to science and technology development. These policies create an environment where domestic companies and joint ventures with foreign partners operate. Naturally, Chinese companies use the available legal and institutional framework to appropriate technology through transfer from foreign partners, purchase, or independent R&D to increase their economic efficiency.91 This chapter will focus on the analysis of the empirical data obtained during a series of interviews conducted with the executives and midlevel managers of the Chinese enterprises and joint ventures and other experts in the summer 2005 and spring 2006.92 It should be noted that the respondents were not necessarily the representatives of the case companies discussed in this chapter. The purpose of this chapter is, using the examples of concrete enterprises, to describe the way companies make use of the current policies affecting technology appropriation in China. In short, this chapter is about policies’ application and usage. Based on empirical observations, this chapter categorizes the different sources of technological advancement available to the companies in China due to the existent government policies. This list of sources also provides a comparative framework for juxtaposing the Chinese and Russian cases.
As was mentioned above, the interviews used for this analysis were unstructured due to the elite nature of interviews and the sensitivity of questions on technology development but addressed consistent themes related to the potential sources of technology appropriation in China.93 The interviews were conducted in English, which is a
91 Please see the definition of technology appropriation in Chapter I.
92 Please see the list of themes discussed during interviews in Chapter I and further in the text.
93 Questions used during an unstructured interview are usually open-ended questions. Unstructured interviews, as opposed to structured interviews, are more flexible, usually focus on themes and do not involve predetermined and strictly formulated questions.
76 recognized limitation of this research. For reasons of confidentiality, the names of the respondents and their affiliations are concealed. The information on technology appropriation strategies is sensitive because it has a potential to provide advantage to competitors in a highly competitive automobile production market. The interviewees also refused to discuss a number of issues especially related to the “shadow” role of the Chinese government in the development of the sector, which may manifest itself in financial assistance for R&D purposes to the state-owned auto makers.94 All interviewees were guaranteed full anonymity.95 A number of interviews were carried out in the framework of the China Political Economy Seminar that took place in the summer 2005 and was conducted under the auspices of the Political Science Department at Miami University in Oxford in Ohio.
Due to the reasons underlined above, I take an extra caution of keeping all my sources confidential. Although specific companies are referred to in the text, no reference is directly connected to a specific individual. I code the interview sources as follows: an interview code contains the number of the interview in historic succession or the order in which the interview was held and letters “c” (corporate source like an interview with an executive or manager, but not necessarily with the representative of the case company) and “e” (outside industry expert. It is a category that can include academic, think tank, and other educated sources). Please see Table 1 for the information regarding the number of interviews held in different categories of sources based on my coding system. The total number of interviews in China is 32.
Most questions during interviews dealt with the current situation in the industry. The themes raised are as follows:
1. State investment encouragement polices; 2. Joint ventures; 3. Intellectual property rights policies; 4. Local content regulations; 5. Policies encouraging exports; 6. Tax or other benefits for technology development projects; 7. State subsidies, national-level state-sponsored R&D projects or other forms of financial support; 8. Purchase of technology or consulting services by enterprises; 9. Special economic zones and automotive enterprises.
94 The reason why I refer to the state financial support or subsidy as a “shadow” source of technology appropriation is because the recent China’s entrance into the WTO imposes certain restrictions on the use of subsidies by the Chinese government. The WTO has a settlement mechanism, which allows the retaliation by the trade partners against the country that, according to the ruling of the WTO, violated trade agreements or engaged in unfair trade like in the case of the US accusing the EU of subsidizing Airbus. Thus, it is hard to track the state financial inflows – there is no official data on the matter.
95 This research has been approved by the Institutional Review Board for Human Subjects Research at Miami University in Oxford, Ohio.
77 These themes reflect the major characteristics of the legal environment created by the state with regard to the process of technology appropriation. This research discusses two different types of enterprises (Chinese state-owned company and joint ventures) to better illuminate the effect of state policies across an enterprise spectrum. Foton, a state-owned truck company, represents, however, the major case. It should be noted that foreign automobile building enterprises are allowed to establish their production facilities in China only in a joint venture with a Chinese partner. Furthermore, all domestic car makers in China are state-owned. Therefore, I discuss two types of enterprises in the Chinese context: a state-owned domestic car manufacturer and five joint ventures. Please see Table 2 that categorizes the case companies in China regarding their form of ownership.96
The following enterprises in China represent the major case studies for this research:97
China:
- Foton Motors, Beijing: a state-owned enterprise, manufacturer of a full range of commercial vehicles, including heavy, medium and light duty trucks, dump trucks, trailers, and special-purpose vehicles.
- Daimler Chrysler/Foton joint venture feasibility study project, Beijing: a unit devising a joint venture to produce heavy and medium duty trucks, engines and components.
- FAW-Volkswagen, Changchun, Jilin Province: a joint venture between FAW (First Auto Works) and Volkswagen.
- Shanghai GM, Shanghai: a joint venture between GM and SAIC (Shanghai Auto Industry Corporation) to produce passenger cars.
- Beijing Jeep Corporation, Ltd. It is a joint venture with Beijing Automotive Industry Holding Co. Ltd. and Daimler Chrysler (China) Ltd.
It is important to note that the discussion of a case company was not entirely based on the sources from that company. The sources might include individuals from other companies or outside experts. The reference to an interview in Chapters IV and V does not imply that the interview source is from the organization being discussed. It indicates only that this individual is knowledgeable about that particular company.
96 The form of ownership is sometimes an ambiguous phenomenon in the Chinese and Russian contexts. A company in Russia, for example, can be officially a private corporation but closely controlled and managed by the state. In China, a company can be officially state-owned but attract outside investment in exchange for shares or trade shares in a stock market. I used the official status of the enterprise to categorize it.
97 The fifth joint venture is the case of Honda in Guangzhou Development District (GDD).
78 The major case for empirical observations in China is a state-owned truck factory Foton Motor. Foton Motor is an excellent case for this purpose because it is a comparatively new state-owned enterprise established in 1996. The state policies introduced in the beginning of the 1980s and aimed at boosting industrial development, including technology-related policies, have been influential since the foundation of Foton allowing us to trace the effects of the policies and the way the company used them across a time frame of ten years.
This chapter briefly discuses the experiences of a number of other companies (mainly joint ventures) in China. These examples are engaged to demonstrate three major aspects of the state efforts to attract technology from foreign partners or, in other words, provide sources of technology for Chinese auto companies: technology transfer from foreign companies via joint ventures, policies encouraging localization and exports. The reason for incorporating additional cases is because Foton’s experience with gaining technology through joint ventures is limited and also because Foton is only indirectly affected by the state policies encouraging localization, which mainly target joint ventures with foreign partners and the beneficiaries of these policies – local component suppliers. Localization policies are policies encouraging joint ventures to buy components from local component manufacturers. The requirements of local content increase the level of technological sophistication and product quality among Chinese suppliers by imposing international quality standards that local suppliers must comply with. Foton Motor is a vehicle manufacturer, not a component supplier. The state policies encouraging exports also affect the level of technological development among Chinese auto components’ suppliers by imposing higher quality standards. The export policies have the so-called spillover effect. It has been confirmed that the subsidies and annual increments in long term bank loans have stimulated the exports of state owned enterprise in those provinces that have done most of the exporting. Exports of foreign invested enterprises were also important (Eckaus 2004).
There are several mechanisms of export encouragement that the state can exercise. The so-called “illegal” mechanism to enhance exports is state subsidies to state-owned enterprises. The “legal” mechanisms include export duty and tax exemptions for both Chinese enterprises and joint ventures with foreign companies. Another way to encourage exports is like in a case of Honda, which will be discussed further in this chapter, to allow a foreign partner to have more than 50 percent of ownership in a joint venture. In this project, I only briefly touched upon the issue of export duty and tax exemptions for exporting companies in Chapter III while discussing regional investment regimes. Therefore, in this project I mainly focus on “legal” policies of export encouragement. It should be noted, however, that there is a thin line between the so-called “legal” and “illegal.” Due to China’s recent membership in the WTO, the Chinese government is cautious about engaging to open subsidizing. The WTO allows China’s trade partners to reciprocate if the WTO rules that the cases of subsidizing constitute unfair trade or violate trade agreements. However, China has been criticized by its trade partners (especially the US) for using export duty reductions or exemptions as unfair practice. China’s trading partners even frown upon the fact that China has so many state-owned enterprises, which are allegedly supported by the state. According to a press release from the Office of the U.S. Trade Representative (USTR), China applies a series of measures
79 that, by allowing for refunds, reductions or exemptions from taxes and other payments appear designed to subsidize exports of manufactured goods or support the purchase of domestic over imported equipment and certain other products.98
State subsidies to increase exports constitute a controversial and difficult issue to discuss. Countries are inventive in devising various camouflaged measures of export amplification to avoid the “subsidy” stigma. Subsidizing can take multiple forms and names. Sometimes it takes years for the WTO experts to attest that subsidizing actually took place. The WTO has a number of mechanisms to ascertain the form and amount of subsidizing, for example, the Protocol on the Accession of China to the World Trade Organization (WTO). The document contains provisions of a company-based specificity test and authorization for the importing country to use alternative benchmarks in calculating Chinese subsidies. In addition, the Protocol excludes China from invoking the privatization exception available to developing country members under the Agreement on Subsidies and Countervailing Measures. In March 2007, China has terminated its central bank program that allowed a select group of large exporters to take advantage of discounted loans. The United States and several other countries had challenged the program as a prohibited export subsidy and requested World Trade Organization (WTO) dispute settlement consultations. The loan program was among several Chinese activities the United States has identified as possible violations of WTO rules.99
This chapter proposes a directory of sources of technological advancement available to companies in China as a result of government policies:
1. Joint ventures with foreign auto manufacturers; 2. Policies aimed to increase local content; 3. Policies encouraging exports; 4. State subsidies or other forms of financial support to state-owned enterprises; 5. Allocation of finances from investors (even state-owned enterprises attract investment and sell shares); 6. Own R&D programs; 7. Purchase of technology; 8. Purchase of consulting services.
98 Jaroslaw Anders and Kathryn McConnell, United States Files Trade Complaint Against China’s Subsidies, 02 February 2007, USINFO, Bureau of International Information Programs, U.S. Department of State, [accessed March 20, 2007],
99 Challenged by Trade Partners, China Ends Export Credit Subsidy, 12 March 2007, USINFO, Bureau of International Information Programs, U.S. Department of State, [accessed March 20, 2007],
80 The nature of the transferred or developed technology is an important category that indicates the maturity of technological advancement. The nature of technology can be classified into the following categories:
a) product technology; b) manufacturing process technology; c) design; d) logistics and sale organization.100
Although these categories are important, due to the limitation of time, space and available data, this project briefly discusses different types of appropriated technology and their implications in the section dedicated to the case of Foton Motor and leaves a deeper analysis to future research.
Case of Foton Motor and Sources of Technology
The current section, using the example of Foton Motor, focuses on the five sources of technology development, as discussed at the beginning of this chapter:
1. State subsidies and other forms of financial support; 2. Allocation of finances from investors; 3. Own R&D programs; 4. Purchase of technology; 5. Purchase of consulting services.
This section discusses the case of Foton Motor and the way this company operates in the current policy environment regarding technology appropriation. Foton Motor is a new state-owned company. Beiqi Foton Motor Co., Ltd. was established in 1996. Almost a decade later, in 2004, a sales volume reached about 350,000 automobiles, according to the company statistics.101 Foton Motors was listed on Shanghai stock exchange in 1998. Since 1999, the company’s light duty truck has been ranked the first for the six successive years both in sales and market share. In 2003, Foton was recognized as an automobile enterprise with the highest development speed and growth rate in China. In
100 Defined broadly product technology is a know-how associated with a particular product. Hybrid engine is an example of product technology. Process technology refers to a particular method used to make a particular product. Process technology is considered a more sophisticated type of technology to appropriate than product technology due to the secrets surrounding manufacturing process and the possibility of the so- called reverse engineering. Design technology is a separate type of technology. The ways the sales and logistics systems are organized also constitute a know-how product. All these types of technology are protected by the intellectual property laws.
101 Creation of a Business Miracle, Beiqi Foton Motor Co., Ltd., Overseas Enterprise. Also at Foton site,
81 2004, 341,000 vehicles were sold and Foton brand value amounted to 10.6 billion Yuan.102
The growth of the enterprise was extraordinarily quick. In 2003, Foton Motor and Daimler Chrysler signed a framework agreement for strategic cooperation. The company not only sells in China, but also exports abroad. In 2004, Foton exported about 9,000 units.103 Foton light duty and medium-heavy duty trucks are popular overseas because their price is competitive. The company exports to the Middle-East, Eastern Europe, Southeast Asia, and Africa. Africa buys most of Foton’s products. The key to success is the market niche that the company occupies – trucks and buses, and also the diversity of the products that the company offers. Foton Motor manufactures a full range of commercial vehicles.
The company employs about 28,000 employees. The ownership structure is the following: 39% belongs to the state, 34% - tradable shares, and 27% belongs to Foton dealers, suppliers, after-sales service enterprises, etc.104 The state is a silent partner and receives profits. As was stated during all interviews at Foton, the state does not become engaged in the operation of the company and managerial decisions. The current trend in the automobile industry and especially in the new less regulated sectors like IT is that the state involvement seems to wither more and more with the attraction of new investors.
At present, Foton holds 40 percent of the market share in commercial vehicle manufacturing in China. The keys to success are innovation, market orientation, resource integration, HR system, and benchmarking. Foton independent R&D projects are part of the overall development strategy. To enhance technological competitiveness Foton seeks, however, cooperation with a variety of partners, including Daimler Chrysler. An English consulting company Lotus is assisting Foton in fulfilling a number of R&D projects. The company has a wide range of products and it is keen on enlarging the range of products even further, including a passenger car. The company is investing into R&D programs and the construction of the new R&D center, which is being constructed at an astonishing speed.105 About 1,000 employees work at the R&D division, including foreign and domestic engineers.
Purchase of Technology
As was mentioned above, in the past, most Chinese companies relied on their foreign partners in a joint venture for technology. However, the situation is changing now.106 Chinese companies rely less joint ventures as a source of technology and, at present,
102 Ibid.
103 Ibid. 104 Ibid.
105 Interview “c “ # 8.
106 Interview “c” # 11
82 prefer to purchase technology from foreign companies without engaging in joint venture arrangements. Mostly, of course, it is new technology. This is a recent trend attributed to the financial successes of Chinese auto enterprises that invest their own financial resources into purchasing technology. One of the examples of these auto enterprises is Foton Motor. Foton is one of those “self-made” companies. Its joint venture experience is very limited.
Daimler Chrysler (DC) and Foton signed an agreement on technology transfer in the framework of their joint venture feasibility study agreement in 2003. Unfortunately, a joint venture has not been created yet. There are objective reasons for that: DC is the only international automaker in China that produces both commercial and passenger vehicles.107 DC has two joint ventures in passenger car manufacturing and in commercial vehicle manufacturing. According to the “2/2” regulation, only two joint ventures are allowed in each category. “2/2” regulation stipulates that an international automaker can have only two joint ventures in passenger car manufacturing and two – in commercial vehicle manufacturing.108
The DC joint ventures in China include:
1. The first joint venture in China with Beijing Automotive Industry Holding Company (BAIC) to produce jeeps: Beijing Jeep. BAIC is also the major shareholder of Foton. 2. DC and BAIC to produce Mercedes-Benz C-class and E-class sedans. The project is planned to manufacture 25,000 units. 3. DC, Fujian Motor Industry group, and China Motor Corporation from Taiwan produce Mercedes-Benz Sprinter and Vito/Viono vans in Fuzhou, Fujian Province. The project is planned to manufacture 40,000 units. 4. DC has a joint venture in bus production in Fuzhou, Fujian.109 This joint venture is not very successful and might soon vacate the place for Foton/DC joint venture to produce heavy and medium duty trucks, engines and components.
Because DC has already two joint ventures with Chinese companies in commercial vehicle manufacturing, Foton/DC joint venture is hard to establish. However, this problem does not constitute the only obstacle in the way of the joint venture. Another obstacle is the reluctance of Foton to “marry” or engage in a joint venture with DC. The prospective joint venture in heavy duty trucks’ production is conceived to target the Chinese market. If this joint venture focused on exports instead, the state would have a vested interest in creating it. Even the “2/2” limitation could be positively resolved.110
107 Interviews “c” # 15 and # 17.
108 Later in the text this policy will be referred to as a “2/2” policy.
109 Corporate website of DaimlerChrysler, [accessed September 2006], < http://www.daimlerchrysler.com/>.
110 Interview “c” # 17 and interview “e” # 8.
83
The joint venture project is failing because there might be not enough support from Mercedes Benz (MB), partner of DC. Foton/DC automatically becomes a competitor of MB in China, if MB decides to come to the Chinese market with MB trucks. Chinese trucks are in a lower price range than European trucks, their “not-quite-cutting-edge- technology” quality might poorly reflect on the image of Mercedes Benz trucks.111 Although this might be partially the reason why DC/Foton joint venture project has been dragging for more than two years without much progress, I argue that the failure should be attributed more to Foton’s hesitation to build a joint venture than to anything else. DC is in China for the market, not to help Foton in technological development.112 DC does not offer new technology; it seeks to produce a stable quality product with an affordable price tag for the Chinese market. Essentially, DC offers “second hand” technology. Foton is already capable of purchasing this kind of technology without entangling itself into a joint venture arrangement.
DC plans to create a joint venture in truck manufacturing rather than in engine manufacturing.113 DC/Foton joint venture, if created, automatically becomes a competitor of Foton trucks in the Chinese market. The recent project of Foton to create a joint venture with Cummins, an American engine manufacture, has more potential to be successful because it is conceived as an engine rather than a truck production. In the spring 2006, Cummins and Foton signed a joint venture feasibility study to produce light duty diesel engines in China. It is a 50/50 percent joint venture that will produce two types of engines based on Cummins designs. A 50/50 percent ownership requirement in a joint venture between Chinese companies and foreign OEMs (original equipment manufacturer or car manufacturers in the case of automotive industry) is the state regulation. Otherwise, foreign companies are not allowed to enter the Chinese market. The “50/50” arrangement applies only to car manufacturers, not component manufacturers. Foton and Cummins are expected to invest capital, equipment, land and technology. Cummins leads in China in thee segment of heavy duty diesel engines. The company is located in Columbus, Indiana. Foton is the leading producer of light duty trucks. This joint venture will be the 9th production operation for Cummins in China.
With regard to the future of DC/Foton joint venture, DC is totally dependent on Foton’s benevolence. DC does not have any leverage for negotiation with the Chinese government unlike, for example, Honda in the Guangzhou Development District. In the case of Honda there were two major forces that pushed the project of a joint venture to its final realization allowing Honda to have 65 percent of ownership in a joint venture: the authorities of the special economic zones and the central state policies to encourage exports. Special economic zones (SEZs) are the third-interested party when it comes to the establishment of a joint venture in a SEZ; they are interested in attracting investors, so
111 Interview “c” # 18 and interview “e” # 9.
112 Interview “c” # 20.
113 Interview “c” # 13.
84 they would negotiate with the central government on the investors’ behalf. DC joint venture with Foton is not located in a special economic zone. In fact, DC was initially interested in using Foton production facilities as part of the joint venture agreement rather than in building a new factory. DC is not allowed to talk to the central authorities directly, only through Foton.
Initially DC did not have adequate knowledge about the benefits that SEZs had to offer to foreign companies.114 Furthermore, the market is shrinking. Currently there are not many “vacant” large Chinese auto manufacturers in SEZs to have a joint venture with. DC came to Foton mainly because of the land and production facilities that Foton offered. Foton was the only “single” truck manufacturer available: Don Feng is married to Nissan (Renault group, which is the major competitor of Mercedes Benz is Europe), China National Heavy Duty Truck Group Co. Ltd. (CNHTC) is married to Volvo, etc.
To conclude, Chinese companies have shifted their focus from relying on joint ventures with foreign partners as a source of technology to purchasing technology. The lack of commitment from Foton towards a joint venture with DC demonstrates this shift of strategy among Chinese auto enterprises. Foton wants technology but does not want to share its profits with anyone. It prefers to purchase technology.115
Foton strictly abides by the laws against violations of intellectual property rights.116 At present, the state pays a closer attention to the violations of property rights. Violators are being publicly condemned and prosecuted. Respect to intellectual property rights became a daily rhetoric of politicians both in China and abroad. The general trend now is that all Chinese partners in joint ventures are paying royalties or license fees to their foreign partners for the technology being transferred. One of Foton’s principles is to purchase components that are manufactured only with a license.117 In the present time, the process of “emulating the best practices” is purely legitimate.
Purchase of Consulting Services
Foton seeks technological expertise from outside sources. One of them is the current partnership of Foton R&D division with a consulting firm Lotus. Lotus is an old English car manufacturer, which currently provides consulting services and produces only one product - a sports car. Lotus is consulting Foton on a variety of projects: employee training, quality control system, organization of the manufacturing process, design, etc.118 Foton’s ambition is to export to Europe and the US. Thus, the challenge is to increase the
114 Interview “c” # 10.
115 Interviews “c” # 12 and 15.
116 Interviews “c” # 12, 17 and 18.
117 Ibid.
118 Interview “c” # 21.
85 quality of the product, for example, upgrade the emission standard. Lotus is engaged in a new project – development of Foton passenger car model. Foton does not possess much experience in passenger car manufacturing.
Type of Technology
The nature of technology either appropriated through a joint venture or purchased is a very important category that helps us understand the whole process of technology appropriation in China. Product technology was not difficult to borrow and emulate.119 The Chinese partners are more in need of process technology and management skills.
With regard to intellectual property rights, Chinese partners pay royalties to foreign partner for technological know-how. Toyota is an example of the company that generously shares its technological know-how (to a certain extent) with its partners worldwide.120 However, Toyota is always going to be a couple of steps ahead of its counterparts in developing economies. Toyota has a business strategy of the economy of scale that is based on outsourcing.
At present, the Chinese are outsourcing mainly product technology, not process technology.121 Chinese cars are cheap and labor-intensive: process technology is not prioritized by Chinese manufactures. European and Japanese manufacturers prioritize process technology. For example, Nissan pays attention to such issues as ergonomics, time and process management (every step is calculated), etc. The speed of assembly at Nissan is impressive (60-70 cars an hour) unlike the average production speed in a Chinese enterprise at 10 cars an hour at maximum. Labor in China is cheap but less skilled. In Europe and the US, workers receive approximately $40 US an hour. Naturally, in China labor is 20 or even more times cheaper. For international major car manufactures like Toyota and Nissan process technology is as a global comparative advantage.
Price is the major comparative advantage of Chinese companies. Even joint ventures are not advanced with regard to process technology because they produce mainly for the Chinese market using cheap labor. However, the goal of the Chinese automotive industry for the next five years is to enter the European and American markets.122 The quality will be increased to the required level to meet the European and American standards of quality and environmental regulations.
119 Interviews “c” # 14, 19, and 23. Interviews “e” # 7 and 9.
120 Interview “c” # 16.
121 Interview “c” # 23. Please see the definitions of product and process technology above.
122 Interviews “c” # 8, 9, 12, 16, 19, 23 and “e” # 8 and 9.
86 Support from the State
It is a well-known fact that Chinese car manufacturers and suppliers receive subsidies from the state. Almost all automotive enterprises in China are state-owned enterprises. Of course, the cases of direct financial support are not disclosed, especially in light of the recent entrance of China into the WTO. However, Foton seems to have received substantial credits from the state banks under very favorable conditions.123 Clearly directly or indirectly the state supports Foton financially. In China, it is not easy for companies to receive a bank loan. The so-called “national status” companies are more favorably treated when it comes to loaning from state banks. For example, Chery, an economy class car manufacturer, is known to receive both direct subsidies and loans from the government. At present, Chery is one of the most successful car manufacturers in China with the highest profits in the passenger car segment. Partially this economic success can be attributed to the Chery’s business model and especially its car model QQ. There might be, however, other reasons as well. For instance, in the spring 2006, the central government lifted restrictions on low-emission small size vehicles within the city limits of Beijing and Shanghai, which drastically increased the sales of QQ. The restrictions were lifted due to the environmental concerns and in preparation for the Olympic Games that will take place in China in 2008. This policy automatically favored Chery and its profits skyrocketed within weeks. Chery became the fastest growing passenger car manufacturer in China and celebrated the production of 600,000 units in 2006.
The Chinese government pushes its manufacturers to export. Exports are directly related to technology advancement. The exported Chinese vehicles should comply with certain emission standards: Euro IV for exports to Europe, and at least Euro II for exports to the Middle East, Russia, and Eastern Europe.124 Foton has a very aggressive export policy, which is highly encouraged (and in the case of Foton, financially encouraged by the state through financial support, as implied by a number of interviewees).125
Allocation of Finances from Investors
As was discussed above, Foton Motor is a state-owned enterprise. However, the ownership structure is not as straightforward as it might seem. The official distribution of shares is the following: 39% belongs to the state, 34% - tradable shares, and 27% belongs to Foton dealers, suppliers, after-sales service companies, etc. Foton shares are traded in
123 Interview “c” # 20 and 21. 124 Emission standards are requirements that set specific limits to the amount of pollutants that can be released into the environment. Many emission standards focus on regulating pollutants released by automobiles and other transport vehicles. The European Union has its own set of emission standards that all new vehicles must meet. The European emission standards range from Euro 0 to Euro IV. Euro V is scheduled to be introduced in 2008.
125 Interviews “c” # 20 and 21 and “e” # 9.
87 the stock market. The company was listed on Shanghai stock exchange in 1998. Foton attracts investment from a variety of sources.
In the present time, the ownership reform is being implemented by the Chinese state: practically all state-owned enterprises are allowed to have private investors. Foton managed to allocate money from about 100 different investors, mostly Chinese.126 However, some of the investors come from abroad, for instance, Malaysia.
In China, the central government is involved less and less in the actual operation of business even if it is a state-owned company. The level of state involvement depends, however, on the industry. The more strategic industries like energy, automobile manufacturing, and defense are still controlled. The auto industry is the so-called traditional industry that carries a historical baggage. New industries like IT enjoy fewer regulations. However, the general framework for the investment policies offered by the central government, and most importantly, its implementation at the local level matter (for instance, in SEZs). In China, the state creates a positive investment environment.
Foton and R&D
Foton spends 4.1 percent of total annual revenue on R&D, which constituted 730 million Yuan in 2004, according to Foton information brochure.127 Foton is keen on building its own R&D capabilities. Currently about 1,000 engineers are working at Foton R&D division. A new R&D center is being constructed. The construction started in the spring 2006 and is planned to be completed in the summer 2006. The construction goes on literary 24 hours a day, 7 days a week. The new R&D project is to develop a Foton passenger car. The field behind the current Foton factory has been purchased to build a passenger car plant. Another new project is a Foton hybrid bus; the model of this bus was introduced in the spring 2006.
Foton is experiencing the shift in the company’s strategy from assembling towards an emphasis on technology.128 At the beginning, Foton focused more on assembling trucks from the components provided by the suppliers. Most Foton suppliers have shares in Foton, so there is a system of interdependency and reliability. Foton’s unofficial motto used to be “following not leading,” which means that Foton focused not on developing new cutting edge technology product, but rather on settling for the average.129 Foton had to learn how to walk before running. It is not surprising since it is a very young company founded in 1996. The company’s shareholders were more interested in Foton building a reliable good quality product, which brings quick revenues, rather than making long-term
126 Interview “c” # 20.
127 Creation of a Business Miracle, Beiqi Foton Motor Co., Ltd., Overseas Enterprise. Also at
128 Interview “c” # 11.
129 Interview “c” # 8.
88 investments into know-how. However, at present, Foton is experiencing a shift of strategy – it invests more and more into product development.
Realistically, the quality of Foton products is currently suitable for the domestic market, India, the Middle East, and Russia. The ambitions of Foton to go to Europe and the US might take a couple of years to be realized. Foton is seriously focusing on developing technological capabilities in areas of the organization of logistics and sales, manufacturing process, design, and management skills and techniques. Foton hires experienced managers and engineers especially from the pool of the Chinese returnees who studied, worked, and lived in the US and Europe and then came back to China.
Sources of Technology Appropriation from Foreign Partners
The sections below discuss three sources of technological advancement made available to Chinese auto enterprises by the legal environment that the Chinese state creates. These sources include technology transfer via joint ventures, policies encouraging localization, and exports.
Technology Transfer from Foreign Companies via Joint Ventures
This section focuses on the cases from the Chinese auto sector that emphasize the effect of the government policies (outlined in Chapter III) to attract technology via joint ventures with foreign manufacturers. According to the Chinese regulations, an international automaker can have only two joint ventures in passenger car manufacturing and two – in commercial vehicle manufacturing.130 Another regulation is a 50/50 percent ownership requirement in a joint venture between Chinese companies and foreign OEMs (original equipment manufacturers) in the automotive industry. Otherwise, foreign companies are not allowed to enter the Chinese market. The “50/50” arrangement applies only to car manufacturers, not component manufacturers.
In 2004, the new legislation came into force permitting foreign companies in the auto industry to have up to 70% of shares if they export. The decision to allow a higher ownership ceiling for joint ventures was made in light of the recent China’s entry into the WTO and, most importantly, due the state efforts to enhance technological advancement by encouraging exports.
At first sight the “50/50 ownership” policy and the “2/2 joint venture limitation” policy seem contradictory. One encourages technology transfer through a joint venture, the other limits the number and nature of joint ventures. However, these regulations are not self- exclusive and do not seem to inhibit the possibility of successful technology transfer. The rational behind these regulations is to create a balance: they are intended, on the one
130 Later in the text this policy will be referred to as a “2/2” policy.
89 hand, to prevent foreigners from taking over the Chinese market driving the national companies out of the game, and, on the other hand, to stimulate the competition among foreign OEMs located in China. “2/2” and “50/50” arrangements provide for enough technology flow with a certain degree of control over the market maintained by the state. Even the Chinese market has its limitations though. There is place for only a number of foreigners and Chinese companies in the market.131 The state tries to balance between the benefits that joint ventures bring and their disadvantages that include, for example, an increased competition in the market between foreign and Chinese companies. The Chinese government, naturally, supports its own manufacturers.
Chinese automobile companies are seeking technology, international car makers are eager to provide this technology in exchange for the benefits that a joint venture brings. International car makers obtain the following advantages: 1) access to the Chinese market; 2) access to infrastructure; 3) knowledge of local context. Chinese automakers obtain: 1) foreign investment; 2) foreign technology.
In the recent past, almost 70-80% of Chinese technology in the automotive sector was transferred from foreign partners in a joint venture.132 Technology is usually part of the investment that a foreign partner brings to the table. The Chinese partner pays royalties in the sequence of a fixed term, usually 30 years, or during the existence of the joint venture. However, as the case of Foton demonstrates, Chinese companies are now becoming more independent and diversify their technology sources to include purchase of technology, attraction of outside consultants, and independent R&D.133 At present, technology appropriation process is more complex than it used to be just a few years ago and does not limit itself to joint ventures as a source of technology. However, joint ventures are still important sources of technology and should be discussed in detail.
Shanghai GM
Probably the best example of a successful technology transfer via a joint venture is Shanghai General Motors (SGM). GM was one of the first foreign auto manufacturers, which came to China. In 1997, SGM was established as a 50/50 percent joint venture with Shanghai Auto Industry Corporation (SAIC). GM brought capital - over one billion US dollars.
The essential part of the joint venture agreement was to establish a R&D institute – Pan Asia Technical Automotive Center (PATAC). In the case of SGM it was a harmonious union. SAIC brought the understanding of the Chinese context and ability to work with the government. GM brought investment and technology to China together with
131 Interview “c” # 9.
132 Interview “c” # 23.
133 Ibid.
90 technologically advanced new car models. The proximity to the state through SAIC had a very positive effect on the SGM success. SGM produces Cadillac, Chevrolet, and Buick models in China. PATAC provides engineering and design services to SGM and other companies. PATAC currently employs 900 employees and has complete capabilities to design, engineer and validate vehicles. PATAC also executes model modifications and adjustments for the Chinese market.134
SGM has two factories in China: the Shanghai North plant, which has a capacity of 160, 000 units, and the South plant with the capacity of 150,000 units.135 When GM came to the Chinese market the company recorded amazing profits.136 At present, it faces a more severe competition from other foreign companies that followed GM and established their own joint ventures in China. SGM is still the number one passenger car manufacturer in China.
In the case of SGM not only was product technology transferred, but also process technology. The SGM North factory is exceptionally automated. For example, the robots in the body shop put all components together and check the fit and the correctness of all dimensions. SGM also has an intricate multistage coating procedure that incorporates several layers of paint and layers against corrosion. The plant has an automated stamping press. The SGM North factory manufactures technology intensive components: engines, transmission, etc. Furthermore, SGM exports auto components abroad, which indicates a certain extent of technological sophistication.
Beijing Jeep Corporation
The second case of technology transfer from a joint venture is Beijing Jeep Corporation (BJC). In 2001, Beijing Automotive Industry Holding Co. Ltd (BAIC) signed an agreement with Daimler Chrysler (China) Ltd. to create a joint venture - Beijing Jeep Corporation (BJC). Thus, BJC is a comparatively new venture and currently represents an assembly production that assembles 6 models with almost 90 percent of components coming from the suppliers in China. The ownership structure is the following: 57% - Beijing Automotive Industry Holding Co. Ltd; 32% - Daimler Chrysler Corporation; 11% - Daimler Chrysler (China) Ltd.137 Technology transfer is a part of the agreement on the joint venture.138 High hopes are being placed on engaging Mitsubishi into R&D projects. At present, Mitsubishi is part of DC family due to the merger of DC with Mercedes Benz. Mercedes Benz is the major shareholder of Mitsubishi.
134 Interview “e” # 6.
135 Interview “c” # 5.
136 Ibid.
137 According to the BJC’s 2-year anniversary booklet, 2003.
138 Interview “c” # 2.
91 In 2005, the company announced that it was moving to a new location. The new site is on the outskirts of Beijing. The current location is closer to the center of Beijing. This relocation is related to a number of factors: the company is moving towards a more technologically-oriented production due to new resources that the partnership with Mercedes Benz brings, high cost of land in central Beijing, etc. The company has very ambitious plans for the future.
FAW/Volkswagen
FAW/Volkswagen joint venture has two production facilities: one is in Changchun and the other is in Shanghai. FAW/Volkswagen achieved impressive results with regard to technological advancement and quality. The models Audi A6, Jetta, and Bora TDI received a variety of prizes for excellence and quality.139 In 2004, the sales volume reached more than 300,000 units and sales. Sales volume of Bora and Jetta reached 238,100 units. In January 2004, FAW/Volkswagen announced that it produced 1 million cars during the existence of the joint venture. By February 2004, FAW/VW manufactured 1 million engines.140
The FAW/Volkswagen model Bora 1.9L TDI is referred to as the most economical car in the world. Another model Audi A6 TDI is equipped with the most advanced direct- injection turbocharged diesel engine (TDI). “With a full tank of diesel fuel it can continuously drive for 1000 km.”141 All models have a high local content - from 60% to 90% localization of components. Therefore, the FAW/Volkswagen joint venture possesses advanced technology sophistication and demonstrates high levels of technology appropriation.
FAW/Volkswagen is 60% state owned and 40% belongs to the Volkswagen group. The production capacity is 600 thousand units per year. The management structure consists of the Board of directors (Chinese and Volkswagen members) and the Board of management. The Board of management has three managers from FAW and two Volkswagen managers. In the Board of management, everyone has a veto power, which means that they have to constantly seek consensus. This structure has an intrinsic capacity to maintain balance of power between the two major shareholders and provide for the fulfillment of the projects and obligations that both sides agreed upon.142
At FAW/Volkswagen, apart from product development, management organization know- how represents another aspect of technological advancement. Originally the management
139 FAW/Volkswagen Annual Report 2004, FAW/Volkswagen factory in Changchun. Also see at
140 Ibid.
141 Ibid.
142 Interview “e” 3.
92 know-how was transferred by hiring expatriates. Currently the joint venture employs about 20-30 expatriate managers plus a constant flow of temporary experts from Germany.143 Usually foreign managers have a contract for three years. The original incentive to hire expatriates was an assumption that the Chinese needed management skills and that these skills should be transferred from foreign managers. As was discovered later, Chinese managers have extensive experience of car production especially at FAW, the cradle of the Chinese auto industry. Overall, at present, FAW/Volkswagen uses foreign managers for two reasons: they provide know-how for the organization of the management process and good contacts in Germany.
FAW/Volkswagen offers training for its staff in the following ways:144
- According to the joint venture agreement that presupposes technology transfer, Volkswagen provides technical training to the Chinese employees in Germany.
- FAW/Volkswagen provides training within the company. FAW/Volkswagen has a Personal Development Department, which administers training in the German language, electronics, engine manufacturing, etc.
- The FAW/Volkswagen employees are sent to a variety of universities in China.
To conclude, there is a technology gap in China. In order to bridge this gap the Chinese state attracts foreign know-how. One of the sources of technology is joint ventures with foreign companies. There are different incentives for the Chinese and foreign partners. Foreigners are attracted by the market opportunities in China. They also outsource components or use cheap labor in China in order to compete globally with other car makers. The Chinese rely on foreign investment and technology. Therefore, technology appropriation process within joint ventures is primarily driven by the market. However, the state provides a legal framework where the appropriation takes place.
The automotive industry in China is heavily controlled by the state and the state’s role in regulating technology transfer is apparent. On the one hand, the policies of the Chinese state focus on attracting investment and technology, on the other hand, on indirectly protecting domestic manufacturers through “50/50” or “2/2” arrangements. These policies are not, however, self-eliminating or inconsistent. These policies maintain a balance between protecting domestic manufacturers and creating opportunities for them to obtain technology from a variety of sources, including foreign partners.
143 Interview “c” # 3.
144 Interview “c” # 5.
93 Policies Encouraging Localization
The Chinese government encourages localization as a means of technological sophistication. In the automotive sector, the state imposes on all foreign car manufacturers operating in China a policy requiring 40 percent of local content. At present, companies localize due to a variety of market-related factors: in the course of time, enterprises managed to “educate” a network of domestic suppliers that provide a good quality product at a competitive price; it is expensive to import components due to the cost of transportation, the cost of negotiations and administrative efforts, customs regulations, etc. Market, therefore, plays an important role in encouraging localization, but it was originally the state policy that prompted the process of technological “learning” among Chinese parts’ manufacturers through imposing a certain volume of local content on foreign car makers in China.
There are specific requirements concerning not only the volume of a local content, but also the type of components. For example, in commercial vehicle manufacturing, there are component localization formulas that have to be implemented by a foreign company in China. 145 The formulas pertain to the number and type of components that a foreign car maker is required to localize. The components are divided into key-parts and other components.
1. Key Parts: one formula: 2+3: 2 major key-parts: engine block, cylinder head, injection system and 3 other key-parts: crank-shaft, turbo charger, injector, con-rod, alternator, starter, camshaft.
2. Other Components: two formulas: 1+4 or 2+2: 1 major component: engine, body and 4 other components: transmission, front axle, rear axle, frame, steering, brake system or
2 major components: engine, body and 2 other components: transmission, front axle, rear axle, frame, steering, brake system
Beijing Jeep Corporation (BJC) localizes up to 96 percent of the components.146 The plant assembles cars from the components that they outsource locally. Many global auto manufacturers are already in China, thus, in the present time, it is easier to build a
145 Information about state regulations are obtained from the site of Chinese Chamber of Commerce, [accessed August 2006],
146 The BJC’s 2-year anniversary booklet, 2003.
94 network of component suppliers. Jeep 2500 has the highest local content among all BJC models. The engine for Jeep 2500 is also produced locally. The case of BJC is a good example of the way foreign manufacturers encourage local component manufacturers to grow technology and quality-wise. There has been a shift from primitive assembly from imported components towards a more sophisticated technology-oriented production of key-parts in China.
First Auto Works (FAW) Foundry is an example of the local supplier that produces a high-quality product. According to the company’s brochure, FAW Foundry Co., Ltd. is a whole capital company belonging to China FAW Group Corporation.147 It consists of First Foundry, Second Foundry, Special Foundry, Non-ferrous Foundry, Foundry Mould & Tooling Plant, Technology Center, Wuxi Subsidiary Company, Dalian Subsidiary Company and CFU Casting Co. Ltd. (joint venture). Now it is one of the biggest auto casting production bases in China.148 FAW Foundry Co. Ltd. has 19 major molding lines. FAW foundry has R&D (Foundry Research Institute) and design capacities. It holds ISO 9001, QS 9000 and VDA 6 quality system approvals. The company’s castings are claimed to be exported to the United States, Japan, and some European countries, according to the FAW brochure.
Domestically FAW Foundry mainly supplies FAW/Volkswagen. The company also produces components (about 17% of the output) for GM, Ford. FAW Foundry is part of a larger corporation - China FAW Group Corporation (the first truck production base in China).149 FAW Foundry enjoys access to extensive R&D programs provided by FAW Group Corporation and FAW/Volkswagen.
As was emphasized above, localization is a source of technological development for domestic suppliers. The volume of localization implemented by joint ventures with foreign partners in China indirectly reflects the level of technological sophistication that the domestic auto component manufacturers reached.
Export Encouragement
Automobile exports imply better quality and technological advancement of the products. One of the examples of the way the Chinese government encourages exports is the Honda case. Although it is known that Foton Motor receives support from the government to enhance exports of Foton products, the mechanism of this encouragement is not transparent. Foton is a state-owned enterprise and this information is confidential. Honda Automobile (China) Co. Ltd. and the Guangzhou Development District, where Honda factory is located, appealed to the Central government to increase the foreign percentage
147 Also see at FAW Foundry, Changchun,
149 FAW Group Corporation is composed of FAW Car Co., Ltd., FAW Foundry Co., Ltd, and FAW-VW Auto Co., Ltd. It is one of the oldest and largest state-owned enterprises in China.
95 of ownership in the joint venture under the condition that Honda would export its products abroad.
As was discussed in Chapter III, Honda receives an exceptional treatment in Guangzhou Development District (GDD). The unique status of Honda is a good example of the way central government regulations undergo adjustment at the local level in special economic zones. Honda was established in GDD in 2003. Up until 2004, the legislature regulating the investment in the auto industry permitted a foreign manufacturer to have no more than 50 percent of ownership in a joint venture with a Chinese partner. Honda received a special treatment in the zone with regard to the ownership ceiling in a joint venture – at present, Honda possesses 65 percent of shares in a joint venture with Chinese partners. In 2004, however, the new legislature came into force permitting foreign companies in the auto industry to have up to 70% of shares if they export. Honda received special treatment back in 2003 due to the appeals of the local authorities with the central government on Honda’s behalf. The central state policy encourages exports. Honda produces and exports cars and parts, the current capacity – 50,000 units.150 That is why the exception was made. The model that is being exported to Europe is Jazz, a Honda economical car.
With regard to process technology, Honda has a high standard of automation: general assembly is performed by robots, welding is also automated, electronic coating is performed by robots. Honda Automobile (China) sends its Chinese staff to Japan for training and also has internal training programs. Now there are about 60 expatriates from Japan for technical support, but the number is constantly decreasing. Currently local content is 60% but Honda expects to localize more. Honda cars have Euro IV environmental standard – the highest possible at present.
The state in China is actively imposing Euro III, and Euro IV emission standards on Chinese auto manufacturers. The export encouragement measures are aimed at increasing the competitiveness of the Chinese vehicles in the world market. The state policies constantly push Chinese manufacturers to upgrade technology.
Conclusion
This chapter proposes a directory of sources of technological advancement available to companies in China as a result of government policies:
1. Joint ventures with foreign auto manufacturers; 2. Policies aimed to increase a local content; 3. Policies encouraging exports; 4. State subsidies or other forms of financial support; 5. Allocation of finances from investors; 6. Own R&D programs; 7. Purchase of technology;
150 Interview “c” # 6.
96 8. Purchase of consulting services.
This list of technology appropriation sources provides a comparative framework for juxtaposing the Chinese and Russian cases. The Russian cases will be discussed in the proceeding chapter.
Joint ventures as a source of technological development are discussed using the examples of Shanghai GM, Beijing Jeep Corporation, and FAW/Volkswagen. Foreign auto manufacturers and Chinese partners in joint ventures are driven by different incentives to form a joint venture. The Chinese rely on foreign investment and technology. Foreigners are attracted by the knowledge of the domestic market and contacts in the government that the Chinese partner brings to the table. Furthermore, due to the state regulations in the auto industry, a joint venture is the only way for foreign companies to enter the Chinese car-making market.
The automotive industry in China is controlled by the state. On the one hand, the policies of the Chinese state focus on attracting investment and technology through imposing a 50/50 percent ownership requirement in a joint venture, on the other hand, on indirectly protecting domestic manufacturers through the limitations on the number and nature of joint ventures that a foreign car manufacturing company can form in China. These policies are not, however, self-eliminating or inconsistent. These policies are aimed at maintaining a balance between protecting domestic manufacturers and creating opportunities for them to obtain technology from a variety of sources, including foreign partners.
The cases of Beijing Jeep Corporation and First Auto Works (FAW) Foundry in Changchun are discussed to demonstrate the government policies regarding localization. The government imposes at least 40 percent of local content and the rules regarding the type of the localized components. Local content requirements constitute a source of technological development for domestic suppliers. The volume of local content indirectly reflects the level of technological sophistication that domestic auto component manufacturers reached in the course of industrialization.
Exports also mean better quality and technological advancement of the products. One of the examples of the way the Chinese government encourages exports is the case of Honda Automobile (China) Co. Ltd. in the Guangzhou Development District. Since Honda exports, the company was granted with a special treatment allowing for 65 percent of ownership in a joint venture.
The case of Foton Motor is discussed in the context of the five sources of technology: 1). State subsidies or other forms of financial support; 2) Allocation of finances from investors (even state-owned enterprises attract investment and sell its shares; 3) Own R&D programs; 4) Purchase of technology; 5) Purchase of consulting services.
As was mentioned above, in the past, most Chinese companies relied on their foreign partners in a joint venture for technology. About 70-80% of Chinese technology in the
97 automotive sector was transferred from foreign partners in a joint venture. However, the situation is changing now. Chinese companies are becoming more and more independent by purchasing technology from foreign companies without engaging in a joint venture arrangement. One of these companies is Foton. Foton also uses consulting services to attract technology. One of the consulting companies that Foton recently hired is Lotus Consulting, a former famous English car manufacturer that now offers consulting services in the automobile building sector.
At present, the Chinese are outsourcing mainly product technology, not process technology. However, the goal of the Chinese automotive industry for the nearest five years is to enter the European and American markets. The quality will be increased to the required level to meet the European and American standards of quality, environmental regulations, and emission standards. To meet these technological challenges, Foton attracts investment from private sources and from the state. The company invests these resources into its own R&D program aimed at increasing the quality and competitiveness of the products, developing new products, enhancing process technology, devising new strategies and techniques in the organization of sales, logistics solutions, and enlarging and developing management skills’ pool.
To conclude, as the case of Foton demonstrates, Chinese companies are now becoming more independent and diversify their technology sources to include purchase of technology, attraction of outside consultants, and independent R&D. At present, technology appropriation process in China is more complex than it used to be just a few years ago and Chinese companies do not limit themselves to joint ventures as a primary source of technology.
Chapter V:
Sources of Technological Development in Russia – Introduction
Chapter III discussed state policies in Russia with regard to science and technology development. These policies create an environment where domestic companies, joint ventures with foreign partners, and foreign car and component makers operate. In Russia, foreign car makers, unlike in China, are allowed to establish wholly owned manufacturing facilities and build cars without engaging themselves in joint ventures with Russian companies. Joint ventures still happen, however, because foreign companies seek domestic partnerships to access the market. Russian firms participate in joint ventures because they seek technology.
In the 1990s, the Russian government introduced local content requirements in the automobile industry that are similar to Chinese policies. This implies that there has been some growth of technology sophistication among Russian suppliers due to technology transfer from foreign companies. Russian companies use the available legal and
98 institutional framework to appropriate technology through transfer from foreign partners, purchase, or independent R&D to increase their economic efficiency.151 This chapter focuses on the analysis of the empirical data obtained during a series of interviews conducted in the Russian enterprises, foreign companies, and joint ventures in Russia in the summers of 2005 and 2006. The purpose of this chapter is, using the examples of concrete firms, describe the way companies make use of the current policies affecting technology appropriation in Russia. This chapter is about policies’ application and usage. Based on empirical observations, this chapter categorizes different sources of technological advancement available to the Russian companies in light of the existent government policies. This list of sources also provides a comparative framework for juxtaposing the Russian and Chinese cases.
As was mentioned above, interviews were conducted with the executives and midlevel managers of the Russian enterprises, foreign car makers operating in Russia, and joint ventures between Russian and foreign firms as well as industry experts in the summers of 2005 and 2006.152 The interviews were unstructured due to the elite nature of interviews and the sensitivity of questions on technology development but addressed consistent themes related to the possible sources of technology appropriation in Russia. The information on technology appropriation strategies is sensitive because it has a potential to provide advantage to competitors in a highly competitive automobile production market. The interviews were conducted in Russian, which is the researcher’s native language. For reasons of confidentiality, the names of the respondents and their affiliations are concealed. The interviewees were guaranteed confidentiality. All interviewees stated that they were comfortable with the interview procedure.153
As was mentioned above, a series of interviews with senior executives and midlevel managers were conducted in the domestic and foreign enterprises and joint ventures in China and Russia in the summers 2005 and 2006. All meetings in Russia were arranged by the author. The low level of refusals to give an interview can be explained by the fact that they all were conducted off the record. Of course, a promise of anonymity increased the amount and quality of information provided during interviews. Some of this information has never been published before, which places additional responsibility on the author’s shoulders to keep the sources anonymous. Keeping my promise of confidentiality to the sources increases the chances of future successful fieldwork in Russia.
When several people were interviewed together, I categorize it as one interview. On several occasions I had several conversations with one person to address follow-up questions and verify information obtained from other sources. These conversations I categorize as multiple interviews. I also held supplemental interviews with other firms,
151 Please see the definition of technology appropriation in Chapter I.
152 Please see the list of the themes discussed during interviews in Chapter I and further in the text.
153 This research has been approved by the Institutional Review Board for Human Subjects Research at Miami University in Oxford, Ohio.
99 industry experts, and academics both in China and Russia. Naturally, I verified the information obtained during interviews by documents, academic and press publications and other relevant literature on my case enterprises in both countries. This practice allowed me to double-check the quality of information and obtain different perspectives on one issue.
Due to the reasons underlined above, I take an extra caution of keeping all my sources confidential. Although specific companies are referred to in the text, no reference is directly connected to a specific individual. I code the interview sources as follows: an interview code contains the number of the interview in historic succession or the order in which the interview was held and letters “c” (corporate source like an interview with a company executive, but not necessarily with the representative of the case company) and “e” (outside industry expert. It is a category that can include academic, think tank, and other educated sources). Please see Table 1 for the information regarding the number of interviews held in different categories of sources based on my coding system. The total number of interviews in Russia is 39.154
Most questions at the interviews dealt with the current situation in the industry. The themes raised in the interviews are as follows:
1. State investment encouragement polices ; 2. Joint ventures; 3. Intellectual property rights policies; 4. Local content regulations; 5. Policies encouraging exports; 6. Tax or other benefits for technology development projects; 7. State subsidies, national-level state-sponsored R&D projects or other forms of financial support; 8. Purchase of technology or consulting services by enterprises; 9. Special economic zones and automotive enterprises.
These themes reflect the major characteristics of the legal environment created by the state with regard to the process of technology appropriation.
The cases for this study include domestic and foreign firms, and joint ventures in the Russian automotive sector. It was important for comparative considerations and to better illuminate the effect of state policies to include a diversity of enterprises regarding their ownership structure. Foreign capital owned car makers are allowed to build vehicles in Russia. Please see Table 2 that categorizes the cases with regard to their form of ownership.155
154 21 – in 2005 and 18 – in 2006.
155 The form of ownership is sometimes an ambiguous phenomenon in the Chinese and Russian contexts. A company in Russia, for example, can be officially a private corporation but closely controlled and managed by the state. In China, a company can be officially state-owned but attract outside investment in exchange for shares or trade shares in a stock market. I used the official status of the enterprise to categorize it.
100
The following enterprises in Russia represent the major case studies for this research:
- AvtoVAZ, Togliatti: the largest manufacturer of passenger cars in Russia.
- KAMAZ, Naberezhnye Chelny: the largest manufacturer of trucks in Russia.
- KAMAZ-Diesel, Naberezhnye Chelny: an engine factory and is a separate joint stock company but a member of the KAMAZ family and the major engine supplier of KAMAZ.
- GM/AvtoVAZ, Togliatti: a joint venture, manufacturer of a passenger car Chevrolet-Niva.
- KAMAZ/Cummins, joint venture feasibility study project, Moscow: a unit devising a joint venture to manufacture diesel engines for light and medium duty trucks.
- Tenneco Automotive Volga, Togliatti: supplier of exhaust systems to GM/AvtoVAZ in Togliatti.
- ZAO Sommer-Novtruck, Veliky Novgorod: a German manufacturer of semi- trailers and trailers.
- Boellhoff, Veliky Novgorod: a German auto component supplier.
- Benteler, Veliky Novgorod: an engineering bureau creating solutions for ride and handling safety and emission.
It is important to note that the discussion of the case companies was not entirely based on the sources from that company. The sources might include individuals from other companies or outside experts. The reference to an interview discussing a particular enterprise in Chapters IV and V does not imply that the interview source is from that organization. It only indicates that this individual is knowledgeable about the company being discussed.
The major cases for empirical observations in Russia are AvtoVAZ, the state-controlled largest passenger car manufacturer in Russia, and KAMAZ, the state-owned largest truck manufacturer in Russia (75% of KAMAZ shares are owned by the governments of Russia and Tatarstan). These cases are ideal for the purpose of understanding how state policies affect the legal environment where Russian companies are struggling to survive and gain economic competitiveness, specifically, through appropriating new technology. AvtoVAZ and KAMAZ share similar historic baggage of being the leading car makers in the Soviet Union and going through rough adjustment during the post-Soviet economic
101 reforms. At present, these two domestic companies are claimed to be threatened by foreign competition in the Russian market, which presupposes that they try to bridge the technological gap between themselves and foreign auto enterprises that became established in Russia in the last decade due to the government efforts to attract foreign investment. The story of these two companies is illustrative of the way government policies affect domestic companies and the way these companies compete. Technology appropriation is a recognized avenue to enhance overall economic competitiveness.
However, this chapter briefly discusses the experiences of a number of joint ventures. The existence of these companies provides a number of sources of technology appropriation for domestic companies in the framework of such policies as localization requirements and joint venture agreements on technology transfer. The requirements of local content increase the level of technological sophistication and product quality among Russian suppliers by imposing international quality standards that local suppliers must comply with. Another type of enterprises discussed is 100% foreign capital owned companies located in Veliky Novgorod, a historic city between Moscow and St. Petersburg. This sort of enterprises is a unique feature of the Russian auto sector if to compare it with the Chinese automobile industry because China does not allow wholly foreign capital owned auto enterprises in the market. It is important to discuss how the fact that these enterprises are allowed in Russia affect the overall process of technology appropriation. The cases of two German enterprises based in Veliky Novgorod were chosen for this purpose. Novgorod region where Veliky Novgorod is located has a favorable investment regime administered and promoted by the local administration. That is why the case of Veliky Novgorod is suitable for illuminating the effect of the local authorities on technology appropriation in the framework of the existent investment policies.
This chapter proposes a directory of potential sources of technological advancement available to companies in Russia as a result of government policies:156
a. Joint ventures with foreign auto manufacturers; b. Policies aimed to increase local content; c. State subsidies or other forms of financial support; d. Allocation of finances from investors; e. Own R&D programs; f. Purchase of technology and consulting services.
The nature of the transferred or developed technology is an important variable that indicates the maturity of the technological advancement. The nature of technology can be classified into the following categories:
a) product technology; b) logistics and sale organization;
156 It should be noted, however, that these sources are available to different degrees. Furthermore, some of them might not be available at all. The purpose of this investigation is to find out to what extent these sources are available to Russian enterprises.
102 c) manufacturing process; d) design; e) management skills and techniques.
These categories are only briefly discussed in relevance to the cases under investigation. Although these categories are important, due to the limitation of time, space and available data, this project leaves a deeper analysis of these categories to future research.
Volga Automotive Plant (AvtoVAZ)
Historic Overview
The public joint stock company AvtoVAZ is the largest car manufacturer controlling 68% of the entire passenger car production in Russia in 2003 (against 72% in 2002). It is ranked seventeenth among the biggest carmakers worldwide.157 AvtoVAZ was set up in the late 1960s in collaboration with Fiat. On January 5, 1993, AvtoVAZ was privatized and AO AvtoVAZ was formed. In October of 1993, Boris Berezovsky, famous oligarch, director of the VAZ dealer subsidiary LogoVAZ, and Aleksandr Voloshin, head of Esta Corporation set up AO All-Russia Auto Alliance (AVVA). Aleksandr Voloshin consequently became Yeltsin’s secretary of state. The Alliance was created around AvtoVAZ, which received 25% of the charter capital amounting to 10 billion rubles. LogoVAZ, the Swiss firm Forus, and the Federal Property Fund each got 15% of the shares. AO Kujbyshevneft and the Incorporated Bank received 10% each, and the Samara administration and AvtoVAZ Bank received 5% each.
The Alliance issued an AO AvtoVAZ bonded loan for the project to build a plant for producing a “people’s car” (later called Kalina) with a repayment period till December 31, 1996. In the 1990s, Boris Berezovsky was appointed as AVVA’s general director; Esta Corp. became the official distributor for AVVA and traded in AvtoVAZ bonds.158 That is probably how Berezovsky made his first million. Later AVVA became related to the notorious Chara Bank, a financial pyramid, which invested a large portion of funds (gathered from the population) in Alliance shares. The pyramid collapsed together with people’s hopes to own a “people’s car.” In 2005, the first Kalina was finally produced at AvtoVAZ.
In 1995, AvtoVAZ experienced an unexpected loss of 53 billion rubles. In October 1996, AvtoVAZ board of directors approved a repayment schedule for the enterprise’s arrears. AvtoVAZ total budgetary arrears had reached 10 trillion rubles. In November 1996, at a
157 The Russian Automotive Market, Industry Overview (2004): Ernst and Young, March 2004, [accessed August 2005],
158 Zhuk, Roman (2000): Auto Industry 1991-2000, October 2, 2000, [accessed August 2005],
103 meeting of the Payments and Settlements Committee chaired by First Vice Premier Vladimir Potanin, a decision was made to initiate bankruptcy procedures for AvtoVAZ.
In 1995, Vladimir Kadannikov, head of the company’s production operations, became Vice Premier of Russia. In August 1996, he resigned. In November 1996, Kadannikov was elected to the company’s board of directors and became its president. Despite the fact that a decision was made to initiate bankruptcy procedures, the government and AvtoVAZ found a temporary consensus. The company’s board of directors agreed to issue supplementary shares and to transfer the rights to place these shares in the Russian Federal Property Fund. Due to this arrangement, the repayment of budgetary arrears was postponed. The government reserved the right to sell the supplementary issue as a single block to a strategic investor.
At the meeting of AvtoVAZ board of directors, a decision was reached to create a number of new independent companies like AOOT VAZ, where all production facilities were supposed to be transferred. However, the state was more interested in maintaining the unity of the enterprise. The federal authorities were trying to persuade AvtoVAZ shareholders to keep it intact. As a result, at the meeting of AvtoVAZ shareholders, the shareholders abandoned the idea of moving assets to new companies in exchange for the government’s promise not to raise the question of AvtoVAZ bankruptcy.
In 2000, the factory’s largest shareholder, the All-Russian Auto Alliance (AVVA) owned 33.32% of its shares, while AvtoVAZ itself owned about 80% of the Alliance’s shares. Another large block of the auto giant’s shares belonged to the central office of the Automobile Finance Corporation (AFC), 49% of which was also controlled by AvtoVAZ. AVVA owned 10% and the Swiss firm Forus Services S.A. owned 15%, another 26% of AFC capital was owned by the Fit Company founded by several individuals including Kadannikov and other AvtoVAZ top managers. These people controlled the largest car factory in Russia and one of the largest in the world with an annual turnover of more than $2 billion.159 This ownership structure lasted till 2005, when the company was taken over by the state arms trade agency Rosoboronexport.
As was illustrated, though the state lost ownership of AvtoVAZ, it still tried to manipulate the process of privatization in this company. Federal government threatened to initiate the firm’s bankruptcy. In exchange for not bankrupting it, the state managed to obtain control rights over the supplementary issue of AvtoVAZ shares and, most importantly, prevented the split of the company into new and independent enterprises. The central government wanted to preserve the unity of the enterprise due to the strategic interest in the one of the biggest automobile manufacturers in the country.160
Another reason for the special attention paid by the federal state to the company was the social responsibility that the company maintained in the community. AvtoVAZ is a “Russian Detroit” with a city (Togliatti) built around the factory. Since the majority of
159 Ibid.
160 Interview “c” # 4.
104 the city’s population is either employed by or affiliated with AvtoVAZ, it would not be an exaggeration to say that the company affects the life of every single citizen of Togliatti in one way or another.
The dynamic relationship between the state and AvtoVAZ reached its peak in 2005. As a result of the hostile takeover, the company was repossessed by the state in the form of the state arms trade agency Rosoboronexport. Kadannikov together with almost all top managers was squeezed out and replaced with new Rosoboronexport managers. The ownership structure changed as well. Reportedly, Kadannikov and other old shareholders were forced to sell their shares. At present, the AvtoVAZ website vaguely outlines the ownership structure in the following way: 85% belongs to Rosoboronexport and other affiliated companies, 1.5% - federal property, 13.5% - individual shareholders.161
In 2005, AvtoVAZ experienced an almost complete change of top management. Only two old top managers survived.162 The new management team is young, inexperienced in automobile manufacturing, and comes from Moscow, which implies that the newcomers do not know much about the local political context. Rosoboronexport is a trade enterprise specializing in military exports.
The new management of AvtoVAZ introduced “dragon rules” concerning economization of expenditures, including, measures to prevent stealing at workplace. Some measures seem to be quite extreme, for example, armed guards in the production premises.163 Although investment inflow was expected to rise with the change of owners, no substantial investment was made into the modernization of the equipment, technological development, or into infrastructure.164 The Kalina project mentioned above was financed and completed by the old Kadannikov team.
Although the changes at AvtoVAZ in 2005 produced a shock reaction in the city of Togliatti and in the rest of Russia, President Putin’s attempts to gain control over strategic enterprises in Russia (oil, gas, defense, and now automobile) are well-known.
State Subsidies or other Forms of Financial Support
As was demonstrated in the section above, the state engagement at AvtoVAZ was rather limited to control than financial backing and support. Partially this position of the government can be explained by the fact that the state lost most of its control over the enterprise in the middle of the 1990s, when AvtoVAZ was privatized. In 2005, the state took over AvtoVAZ in the form of the state-owned trade agency Rosoboronexport.
161 AvtoVAZ official site, [accessed August 2006],
162 Interview “c” # 17.
163 Interviews “c” # 17, 18, and 22.
164 Interviews “c” # 19 and 22.
105 However, the situation with regard to investment has not changed.165 In 2005, AvtoVAZ launched a new model Kalina, the project that was fully financed by AvtoVAZ during the old management headed by Kadannikov.
Allocation of Finances from Investors
As the case of AvtoVAZ demonstrates, the Putin administration has a consistent policy of establishing control and regaining ownership over the strategically important enterprises in Russia. Before AvtoVAZ this policy was limited to gas and oil industries and the media. Currently Rosoboronexport controls 85% of AvtoVAZ shares. At present, in Russia, due to the negative experiences of external investors of Yukos, now Sakhalin project, and a number of other cases, foreign investors are legitimately expected to be apprehensive to invest into large automobile companies with potential interest from the state like AvtoVAZ.166
AvtoVAZ own R&D Programs
During the Kadannikov “rule” AvtoVAZ paid close attention to developing technology and investing into equipment purchases.167 For example, AvtoVAZ purchased new German equipment for the Kalina conveyer line and new Slovenian equipment for the coating shop. However, most of the robots used in the Kalina production are developed and put together by AvtoVAZ R&D center. Furthermore, as part of the Soviet legacy, AvtoVAZ still holds a personnel development center, which provides professional education and training to the AvtoVAZ workers and the engineering staff.168 It should be also noted that the money spent on Kalina project was invested entirely by AvtoVAZ.169 The conveyer is arranged following the GM model of flexible production. The Kalina conveyer line is not very long, but curved, and different components are delivered to the proper base by movable platforms. This model resembles a conveyer line model in a GM/AvtoVAZ plant, a joint venture of AvtoVaz and GM, located just across the fence from AvtoVAZ. This model guarantees flexible delivery of components at different
165 Ibid.
166 Yukos is an oil company that previously belonged to the former oligarch Khodarkovsky who has been convicted on the charges of tax evasion and machination during privatization. The Sakhalin-II Project is an oil and gas development on the northeast shelf of Sakhalin Island owned by Shell. Shell is being forced by the Russian government to hand over its controlling stake in the world's biggest gas project. As announced in December 2006, the Anglo-Dutch company is to cut its stake in the $20bn Sakhalin-II Project in favor of the state-owned energy group Gazprom.
167 Interview “c” # 17.
168 Interviews “c” # 23 and 27.
169 Interviews “c” # 23, 18, and 27.
106 stages of production. 170 The Kalina model was launched in 2005 and quickly started to dominate the traffic scene in the city of Togliatti.
As was discussed in Chapter III, in Russia, in the automotive industry, research and development is primarily conducted and financed by auto companies. AvtoVAZ spent 2,818 mln. Rubles (which is approximately 97 mln. US dollars) on patents and other intellectual property products in 2004. The total expenditures on research and development constituted 6% of total annual revenue – the average level of R&D expenditures among world car makers.171 Please see part of AvtoVAZ balance sheet pertaining to R&D investments (patents, etc.) in Table 19 (see in the Appendix).172
Technology Transfer from Foreign Companies via Joint Ventures
AvtoVAZ has a joint venture with GM – GM/AvtoVAZ located next door to the AvtoVAZ plant in Togliatti. The joint venture was established in 1999 to produce Chevrolet Niva, based on the Lada Niva model, and Chevrolet Viva, based on the 1998 Opel Astra. The ownership structure is approximately the following: 30% - GM, 30% - AvtoVAZ, 30% - the European Bank of Reconstruction and Development (EBRD). As part of a joint venture agreement, GM brought used equipment to the table. The equipment was from an old GM factory in Hungary.173 Officially AvtoVAZ brought intellectual property to the table – its model Niva, which was turned into Chevrolet – Niva, and production facilities in the land adjoining the AvtoVAZ plant. The land under the GM/AvtoVAZ plant is rented for 99 years. Consequently, the joint venture bought license for the Niva model from AvtoVAZ.174 AvtoVAZ is the major supplier of GM/AvtoVAZ. The joint venture took a loan at the European Bank of Reconstruction and Development (EBRD).
The GM/AvtoVAZ model Chevrolet Niva is quite successful. The Viva model, on the contrary, failed. Viva was incorrectly marketed – too expensive for the Russian market at the price of $ 15-16,000.175 At GM/AvtoVAZ, Viva was assembled from German CKD.176
170 Interviews “c” # 6, 10, 11, 22 and 27. At the time when the interviews were conducted (summers of 2005 and 2006), the researcher was denied access to the new Kalina plant for the reasons of commercial confidentiality. The researcher, however, managed to visit the GM/AvtoVAZ plant in the summer 2005.
171 AvtoVAZ Financial Report 2004, financial statements, [accessed October 2006],
172 In the AvtoVAZ Balance Sheet, these expenditures are positioned in the fixed assets section, which implies that they are long term investments into appropriating intellectual property rights in the form of patents, etc.
173 Interview “c” # 13.
174 Interviews “c” # 6, 7, 10, and 13.
175 Interviews “c” 6, 17, 18, and 22.
107
At the beginning, GM/AvtoVAZ hired expatriates for the management positions, in the course of the joint venture operation, most managers were replaced by local employees. Foreign management started to introduce new ideas into the process, logistics, and overall management organization. For example, GM/AvtoVAZ borrowed Toyota lean logistics management model – “just-in-time”, when components are delivered in time (not kept at the warehouse) for each production stage.177 Generally, this model is not very applicable in Russia due to the quality of roads and inefficiencies of transportation services. The reason why the “just-in-time” model was more applicable to GM/AvtoVAZ is because almost all components (75%) come from AvtoVAZ, including, engine, body, transmission, etc., which are delivered literarily over the threshold due to the vicinity of the two plants. The dependence of the joint venture on AvtoVAZ resulted in arguments every time AvtoVAZ raised prices on the components. Overall, in 2005, GM/AvtoVAZ localized about 99% of all components. The spillover effect of the introduction of the lean logistics system was a closer scrutiny toward the organization of work place and ergonomics. However, Chevrolet Niva model is not very different from the original AvtoVAZ model.178
Despite all the management innovations that were undertook in a joint venture, AvtoVAZ' hopes to receive technology from GM did not quite realize.179 The technology transfer did not go beyond the necessity to increase the quality of components supplied to the joint venture. However, though Kalina was entirely an AvtoVAZ project, some technology borrowing occurred with regard to the organization of the conveyer line. It has a curved shape; different components are delivered via carts to the proper location, which allows more flexibility. Thus, technologically, AvtoVAZ managed to benefit from the joint venture. It should be noted that GM is expanding its production in Russia. In 2006, GM announced that it would build a 100% foreign capital owned assembly plant near St. Petersburg.
Kama Automotive Plant (KAMAZ)
Historic Overview
KAMAZ was created in 1969. In 1990, KAMAZ open joint stock company was established. The united production complex of KAMAZ Inc. consists of 13 large special- purpose plants developing, producing, assembling vehicles and components and also
176 CKD stands for “Completely Knocked Down” and means a complete kit needed to assemble a vehicle. It is a common practice among car manufacturers to import knocked down kits to their foreign locations to avoid high import taxes and assemble vehicles locally. 177 Interviews “c” # 6, and 7.
178 Interviews “c” # 6, 7, 10, 17, and 18.
179 Interview “c” # 10.
108 marketing end products. The KAMAZ Group of companies consists of 110 enterprises including NefAZ OJSC (Neftekamsk city) and Avtopritsep-KAMAZ OJSC (Stavropol city). Share of KAMAZ Inc. is 51% in each of these two companies.180
KAMAZ is the largest truck manufacturer in Russia. The factory produced the first truck in 1976. Today, 60,000 employees work at KAMAZ. Most of them received education from professional schools and the University located in Naberezhnye Chelny, a city with the population of 600,000. KAMAZ still has an important social function to perform in the community. The city was planned around KAMAZ: Naberezhnye Chelny literally stretches along the single major street that accommodates the traffic flow from and to KAMAZ. Furthermore, the company’s administrative buildings are scattered all over Naberezhnye Chelny allowing KAMAZ to completely dominate the city life and landscape.
In June 1990, the government of the USSR turned KAMAZ into a corporation: 38% of the shares became the property of the Soviet Union, 13% - of the Republic of Tatarstan, and the remaining stock was put on sale.181 Tatarstan authorities were concerned about safeguarding the economic interests of the republic and closely watched the process of ownership change at KAMAZ. In December 1993, Prime Minister of Tatarstan, Mukhammat Sabirov, and KAMAZ general director Nikolai Bekh agreed on a transfer of ownership of the factory premises to KAMAZ joint-stock company in exchange for 20% of the charter capital as a compromise with the Tatar authorities.
In July 1994, the State Committee for the Management of State Property of Tatarstan prohibited KAMAZ from selling its real estate. However, up to that moment KAMAZ as a joint stock company managed to sell real estate for a total value of 100 billion rubles.182 In November 1994, the mayor of Naberezhnye Chelny sanctioned the OMON (quick reaction squad) to evict the businesses that occupied the premises of KAMAZ.
In 1993, the KAMAZ engine factory was destroyed by fire. For one year KAMAZ had placed engines of other engine manufacturers into KAMAZ trucks. The enterprise was in a serious financial and operational turmoil. In December 1994, Russian President Yeltsin signed the decree “On State Support for Restructuring and Development of AO KAMAZ Enterprise.” In January 1998, negotiations on KAMAZ fate were held at the London headquarters of the European Bank for Reconstruction and Development (EBRD), one of the KAMAZ largest creditors. The interests of several Russian creditor banks were represented by Vneshtorgbank. At that meeting a decision was made to have additional shares issued, which resulted in 75% of KAMAZ capital being concentrated in the hands of the governments of Tatarstan and Russia and the creditor banks. KAMAZ obtained a
180 Official web site of KAMAZ, [accessed August 2006],
181 Zhuk, Roman (2000): Auto Industry 1991-2000, October 2, 2000, [accessed August 2005],
182 Ibid.
109 credit from the European Bank of Reconstruction and Development to purchase equipment for the engine factory that was completely destroyed by fire.
In 1999, the Russian government approved a decision to restructure AO KAMAZ federal budgetary arrears. Furthermore, the government of Tatarstan pardoned KAMAZ debts to the regional budget as well. In July 2000, the Tatar and Russian governments put a state representative, Vice Premier Il’ya Klebanov, on the board of directors. Today, KAMAZ is a state enterprise since the governments of Russia and Tatarstan are KAMAZ’s largest shareholders. Please see the table of KAMAZ largest shareholders in Table 27 in the Appendix. No strategic decision at KAMAZ is reportedly being made without consultations with Tatarstan’s President Shaimiev, who, in turn, reports to the Russian government and regularly places bureaucrats on KAMAZ board of directors.
State Subsidies or other Forms of Financial Support
As was illustrated above, the authorities of the Republic of Tatarstan and the Russian federal government have always paid special attention to KAMAZ. Despite the opposition of management and due to the financial problems faced by KAMAZ, regional and federal governments managed to safeguard control over the company as its largest shareholders during the uncertainty of the economic transition in the 1990s. That is why, as a way to help KAMAZ financially, the Russian and Tatar governments pardoned KAMAZ budgetary arrears to the federal and regional budgets correspondingly in 1999. The experience of KAMAZ with regard to the excused budget debts is different from AvtoVAZ that was fully privatized in 1993. However, no additional financial backing was and is received from the authorities.183
As indicated on the company’s web site, in 2005, the Russian government started the realization of major long-term development programs. Among them there are two primary federal programs, adopted by the Russian Government till the year 2010, which determine economic status of the country. These are the program of modernization of the haulage system and the overall strategy of the development of the automobile industry in Russia. KAMAZ is one of the 18 strategically important enterprises of Russia. Thus, KAMAZ expects that these government policies “will be a governing factor for development of the company.”184 However, there is no direct financial aid coming from the government for R&D purposes. KAMAZ has its own R&D center, which is entirely supported by KAMAZ.
183 Interview “c” # 20.
184 Official web site of KAMAZ, Press Releases, 2006, [accessed December 2006],
110 KAMAZ own R&D Programs
According to the report of Director General of KAMAZ Inc., in 2002, KAMAZ successfully fulfilled its contract obligations on delivery of heavy-duty trucks to Iraq, under the UN auspices. Export volumes in 2002 exceeded 6,000 units. For the third time in a row, Ministry of Commerce of Russia declared KAMAZ Inc. to be the best Russian exporter among vehicle manufacturers.185 For export purposes, KAMAZ had to make technological adjustments to comply with the international quality and environmental standards. In 2002, together with “Aerospace Equipment” International Financial & Industrial Group and in cooperation with “BelRusAuto”, KAMAZ launched a joint project on the development of Euro III and Euro IV diesel engines and other vehicle components, such as: 125 kg/cm torque gear box, etc.186 In 2004, KAMAZ-Diesel, an engine factory, which is part of the KAMAZ family, launched the production of a new gear box model. In 2003, KAMAZ-Diesel produced the first engine according to the Euro III standard.187 KAMAZ is ready now to introduce Euro IV engine.188
KAMAZ is reported to have been increasing its portfolio of patents and licenses for years. By the end of the 2002 year, KAMAZ obtained certificates for 58 models of vehicles and chassis, as well as for the total range of spare parts that needed certification to meet Russian standards. At the same time, more than 60 trucks and chassis were certified in accordance with the eight International Rules of UNECE.189 This made it possible to increase the 2003 export volume up to 30 % from the total sales volume in 2002.190
According to KAMAZ 2006 report to shareholders, Sergey Kogoghin, Director General of KAMAZ, claimed that the company would embark on KAMAZ reengineering program which is currently under development and is set to be realized by 2012. The program provides for major engineering reequipment, improving logistics, freeing needless production spaces, and fully renovating model range of KAMAZ products. The modernization program costs 1.4 billion Euros. Reengineering program is to be confirmed by the Board of Directors in February 2007. The program anticipates growth
185 Official web site of KAMAZ , Report of Director General to KAMAZ shareholders, 2002, [accessed December 2006],
186 Ibid.
187 Shishkina, N.A. (2005): KAMAZ-Diesel. Time to Get Younger (KAMAZ-Dizel. Vremja Molodet’), OAO KAMAZ-Diesel, Naberezhnye Chelny.
188 Interview “c” # 19.
189 The United Nations Economic Commission for Europe (UNECE or ECE) was established in 1947 to encourage economic cooperation among its member States. It is one of five regional commissions under the administrative direction of United Nations headquarters.
190 Official web site of KAMAZ , Report of Director General to KAMAZ shareholders, 2002, [accessed December 2006],
111 of labor productivity by 6 times, lowering of power inputs by 2.5 times, and curtailing production premises of KAMAZ facilities. Both borrowing costs and extra emission resources will be used to finance the program which is to be realized in 2008. It is decided to change production strategy of the company. Originally KAMAZ planned the production volume of 52,000 trucks by 2010 but the Group will achieve this volume already in 2007. Director General of the auto giant claims that the production volume will reach 80,000 trucks by 2010.191
Technology Transfer from Foreign Companies via Joint Ventures
KAMAZ-Diesel has a joint venture with a German company ZF Friedrichshafen AG to produce gearboxes. It is an assembly production with components imported from Brazil. This joint venture has about 40% of localization at KAMAZ since about 20 components for a gearbox are outsourced at KAMAZ. The ownership is distributed between KAMAZ and ZF Friedrichshafen AG.192 Germans brought equipment to the table in exchange for access to the market, KAMAZ contributed production premises in exchange for technology. KAMAZ is the major client for the joint venture gearboxes. The employees for this joint venture were hired from KAMAZ-Diesel engine factory.193 The joint venture helped KAMAZ-Diesel launch its own line of a new gearbox model in 2004.194 Thus, in this case, some technology transfer did take place.
In 2006, KAMAZ announced a new joint venture with Cummins, a US based world leader in diesel engine manufacturing on the production of diesel engines for 5 ton trucks. On 24 January 2006 in Naberezhnye Chelny, Russian Federation, Steven Chapmen, Vice- President of Cummins Inc. and Irek Gumerov, Deputy Director General of KAMAZ Inc. on components, signed an agreement on establishing Cummins Kama, a joint venture for assembly of B series (120-175 h.p.) engines for Russian market. Cummins Kama is conceived as a joint venture with USD 20 million of authorized capital. Each company has a 50% share in the authorized capital.195
Cummins expects to gain a market share in the Russian engine market via the joint venture with KAMAZ. Cummins plans to use the KAMAZ distribution and after-sales service networks. Cummins Kama intends to sell engines to a variety of customers, not only KAMAZ. Cummins is going to take advantage of the new investment legislation
191 Official web site of KAMAZ , Report of Director General to KAMAZ shareholders, 2006, [accessed December 2006],
192 Interview “c” # 18.
193 Ibid.
194 Interview “c” # 19.
195 KAMAZ official web site, press releases, 25 January 2006, [accessed July 2006],
112 allowing import of components for the assembly of complex systems like engines at a reduced tariff. The new joint venture will import part of the components from China and assemble them in a production facility near KAMAZ in Naberezhnye Chelny.196
KAMAZ is brining investment and expects to receive technology in exchange. KAMAZ is familiar with Cummins engine because KAMAZ purchased these engines in the past. For KAMAZ the incentive to create a joint venture is to boost up KAMAZ own trade mark: if the engines are produced by the Cummins/KAMAZ joint venture, the trucks are believed to gain more trust and popularity among Russian consumers.197 However, the intellectual property rights will belong to the joint venture, not KAMAZ.198 The joint venture will rent out production facilities from KAMAZ-Diesel and employ about 200 employees. The joint venture will have to attract additional investment. The plan is to produce 25,000 units a year.199
KAMAZ invested money into the deal, which is quite for Russia. A Russian partner usually brings production premises or equipment to the table. The reason for this is that KAMAZ expects technology transfer from the venture and Cummins is literary like an engine of technology for KAMAZ.200
Cummins has been in the Russian market for about 20 years selling coalmining, oil and gas, even agricultural equipment and components. Cummins Kama is the first Cummins production facility in Russia, however, and the first joint venture as well. Cummins automotive division is expected to be generating less than 10% of its income in Russia.201
In sum, for KAMAZ, the joint venture means improvement of quality, technology appropriation, and image improvement. For Cummins, it is an entry ticket to the Russian market of engine manufacturers. The Russian state imposes a variety of quality standards, for example, Euro III by 2008. This will prompt certain changes in fuel market – the quality of gas and its availability should be improved. Cummins hopes that the Russian government will continue its protectionist measures against imports, which will benefit local producers, including this joint venture.202
Today most Russian enterprises don't seem to have a coherent strategy of attracting investment and technology. The process is slow especially in such enterprises as
196 Interview “c” # 24.
197 Interviews “c” # 18 and 24.
198 Interview “c” # 26.
199 Ibid.
200 Interviews “c” # 24 and 26.
201 Interview “c” # 24.
202 Interview “c” # 26.
113 KAMAZ and AvtoVAZ.203 Among Russian car manufacturers, the most successful in attracting technology seems to be SeverstalAvto.204
Sources of Technology Appropriation from Foreign Companies
Foreign Auto Enterprises and Localization Policies
GM in Russia
At the beginning of GM operations in Russia in the end of the 1990s, GM established an assembly production in the city of the Elabuga, Tatarstan, and assembled the Blaster model from CKDs. It was the so-called screwdriver assembly, which is highly criticized by the protectionists in Russia due to the insignificant technology spillover effect that this type of assembly creates.205
The assembly in Elabuga was shut down and the GM production operation was moved to GM/AvtoVAZ in Togliatti. GM has recently opened a plant in Ukraine in collaboration with South Korea. The plans for Russia include setting up a GM (wholly owned) plant near St. Petersburg. Currently, Russian legislature allows foreign car manufacturers to import certain amount and types of components at a reduced customs duties.206 It is a WTO related decision. However, foreign car manufacturers will have to localize up to 30% and invest into building a production facility. The reduced import customs duties are not enough to cover the expenses related to launching a production facility. Furthermore, GM has to “bring up” a pool of local suppliers to comply with the localization requirements.207 The position of GM as of the summer 2005 indicates that the company was not quite ready to take full advantage of the investment incentives that the Russian government offered and comply with the localization policies. GM did not believe that it would find quality suppliers in Russia.208 However, the situation is changing. As was mentioned in Chapter III, the Russian market is becoming more competitive as new foreign OEMs enter it. For instance, Toyota, Nissan, and Volkswagen and others are currently building production bases in Russia. Reportedly, these are not screw-driver
203 Interview “c” 15.
204 Interview “c” # 12 and interviews “e” # 5, 8, and 10. Please see a note on Severstal financial group in the section on localization policies.
205 Interview “c” # 12.
206 See the section on investment policies in Russia in Chapter III.
207 Interview “c” # 12.
208 Ibid.
114 type of assembly but full-blown technology intensive operations that will outsource components locally.
Russian components and car makers are becoming more technologically sophisticated. GM was approached by Selerstal to purchase technology.209 Severstal is a Russian steel manufacture, one of the world leaders in steel production. Severstal Group was established on June 3, 2002 and is originally comprised of three divisions: a metallurgical division, Severstal Resource and SeverstalAvto, an automaker. SeverstalAvto is very active in accumulating different production bases. In 2004, it purchased ZMA car plant in Naberezhnye Chelny, a former KAMAZ plant producing a line of a miniature passenger car Oka. SeverstalAvto financial group is also producing the SsangYong Rexton, a SUV model, at UAZ (Ulyanovsky Avtomobile Plant).210
ZAO Sommer-Novtruck
ZAO Sommer-Novtruck is a wholly owned German production company manufacturing semi-trailers and trailers in Veliky Novgorod. The enterprise was set up in 1996 and currently employs 200 employees. In 2006, it was the only enterprise with 100% of foreign ownership in the commercial vehicle manufacturing sector in Russia.211 In the passenger car manufacturing sector, there is only Ford factory near St. Petersburg.
Sommer decided to establish a production facility with 100% of foreign ownership, not a joint venture, because Sommer was (until very recently) a private company and the owners wanted full control over the operations.212 Furthermore, there were some concerns raised about technology sharing in a hypothetical joint venture. Originally Sommer came to Veliky Novgorod because Veliky Novgorod and Belfield (where Sommer is based in Germany) are twin cities with good relationship between the two municipalities. From the very beginning, Sommer enjoyed a favorable treatment of the Novgorod city and region administrations. An investor is made feel so comfortable that he/she can call any bureaucrat in the administration directly, which is impossible in larger cities like Moscow and St. Petersburg. 213 The local administration is so supportive because of the favorable investment climate that it attempts to build in the Novgorod region. The advantages for the local community are jobs, taxes to the local budget, and the initial investment amount.
209 Ibid.
210 SeverstalAvto, Wikipedia, [accessed December 2006],
211 Interview “c” 25.
212 Ibid.
213 Ibid.
115 Sommer Novtruck has its own construction bureau or R&D bureau in Veliky Novgorod. Its main goal is to make adjustments of German technology towards Russian reality. Sommer Novtruck does not rely on external expertise. The enterprise produces a German product based on German technology with substantial changes to adapt to the Russian conditions.214 Sommer Novtruck manufactures about 400-600 units per year because the production is order-based. It also sells almost 99% of its products in Russia because the company is here for the Russian market. The enterprise mostly sells to transportation companies that place specific orders and requirements based on the type of cargo they carry. Another issue is the Russian habit to overload trailers, which also creates an additional challenge to build trailers with stronger platform able to carry an extra load. Another Russian specific is the quality of roads. There are about 3,000 units of trailers sold annually in Russia today, so the market is still developing.215
Sommer Novtruck is quite possessive of its technology. Furthermore, Sommer Novtruck type of production does not have a capacity to produce a technology spillover effect on local suppliers because it does not require outsourcing many components.216 Furthermore, the production is very labor-intensive and requires mostly raw materials. The case is indicative of the frequent criticism by the “nationalistic forces” with regard to the lack of the state coherent strategy towards the development of the auto sector in Russia: enterprises like Sommer Novtruck do not bring technology to Russia.
Benteler, Veliky Novgorod
The German company Benteler Group is one of the most important steel tube manufacturers in the world. It employs 21,230 employees in 34 countries. The company has automotive, steel tube, and distribution business decisions. The automotive division develops and produces components, modules and systems for ride and handling safety and emission. The enterprise produces chassis systems, safety systems, design electronics, exhaust systems, engine application, and engineering application systems. Benteler places special emphasis on R&D.217 The major Benteler plants are in Germany and China.
Similar to Sommer Novtruck, Benteler is a wholly owned company in Veliky Novgorod. It is an engineering bureau that works for the German headquarters of Benteler. The bureau employs 15 Russian engineers in Veliky Novgorod who develop certain technological solutions based on the order placed by the German headquarters. The company came to Veliky Novgorod because of the successful experience of Sommer
214 Interviews “c” 25 and “e” 9.
215 Ibid.
216 Interview “e” 9.
217 Benteler official web site, [accessed July 2006],
116 Novtruck and a favorable treatment of investors offered by the Novgorod administration.218
Originally, when Benteler came to Veliky Novgorod in the end of the 1990s, the company had very ambitious plans for the Veliky Novgorod office. The plans were to sell components to the newly built Ford factory near St. Petersburg and Renault in Moscow.219 Veliky Novgorod is conveniently located between Moscow and St. Petersburg. The company also wanted to build an assembly factory in Veliky Novgorod for the same clients. The company hoped to manufacture 100,000 units of bumpers, emission systems, security systems, etc. The reason why the project to establish a manufacturing facility failed is because components became too expensive. In 1998, when a financial crisis occurred, the firm’s plans collapsed with the Ruble. Another reason was that very few car manufactures in Russia at that point were ready to purchase Benteler components. At that moment, Benteler offered Euro III emission technology, which was too pricy for Russian companies and not required by the law. In 1998, decision was made to establish only an engineering office to outsource local skills. In 1999, the office was established. Benteler hired fresh engineers from Novgorod State University and sent them for severe training in Germany for 1.5 months.220
The market in Russia is becoming more competitive. More and more foreign companies are establishing production facilities in Russia (Toyota, Nissan, Volkswagen, etc.) Russian automakers like Severstal and SOK, a financial group that acquired an old Soviet plant Izhevsk Mechanical Works (IZhMASh) that manufactured the notorious IZH models and now purchased the license to produce KIA cars, are aggressively appropriating technology and conquering the Russian market.221 As a result, car makers, foreign and domestic, will soon demand the high quality components that Benteler offers. If Benteler starts producing in Russia, it might also indirectly affect the technological sophistication level of Russian auto manufacturers.
As the cases of the foreign enterprises discussed above showed, foreign companies are allowed by the overall Russian legal investment environment to abstain from technology transfer. In China, in the auto sector, foreign companies are forced into joint venture arrangements, which, in my opinion, increases the chances of technology spillover. Even the case of the joint venture of GM/AvtoVAZ demonstrated more potential for technology appropriation by AvtoVAZ from GM than the cases of the 100% German capital owned enterprises in Veliky Novgorod. It is important to note that the division into the two types of investment policies (central and regional) is essential for the discussion of technology transfer both in China and Russia: local authorities play their own role and have their own interests, as the case of the favorable investment climate in
218 Interview “c” # 16.
219 Ibid.
220 Ibid.
221 On line magazine Auto News, [accessed July 2006],
117 Veliky Novgorod shows. Because of this climate, “technology-stingy” (speaking allegorically) Sommer and Benteler were welcomed in the city. Another concern is whether the Russian market is ready to absorb certain types of technology. The next section discusses this issue using the example of the sales representative office in Russia of a large German auto component manufacturer and technology-related consulting service provider.
The state in Russia does not seem to have a clear strategy of foreign investment into the auto industry. The state policies are sporadic, rigidly written and poorly administered. For example, under the 1998 year decree on local content requirements (encouragement of local production of components by providing tax incentives for foreign auto companies), only one foreign manufacturer – Ford – managed to comply with the conditions applied.222 The problem was that Ford had to provide a detailed schedule of production one year in advance to obtain tax exemptions, which was a very challenging task. Then the degree was suddenly abolished in 2006 and a number of companies that actually planned to work under it did not receive enough time to change their tactics. Another example of the state policies’ deficiencies is that the government does not have sufficient environmental regulations to control environmental harms produced by car emissions. The EU quality requirements (Euro III and IV) are being imposed slowly.223 This inconsistency can be attributed to the fact that the state wants to back up domestic manufacturers that deliver low-quality and non-environmentally friendly products. This kind of protectionism is not beneficial for overall technological advancement of the industry.
Readiness of the Market to Absorb Technology
Boellhoff Sales Office in Veliky Novgorod
Boellhoff is another German company that has a representative office in Veliky Novgorod. It is a world famous supplier of fastening, assembly, and systems technology. It produces a wide variety of screws and, most importantly, offers such services as logistical solutions, application-related consultancy, fastening techniques, etc. The company employs 2,000 employees in the factories located in Germany, France, Eastern Europe, and China. The focus is placed, however, on services and R&D rather than on mere production. The areas of expertise include: E-business, design support, product improvements, standardization, optimization of the manufacturing process, etc. The company also purchases products from a number of suppliers world-wide, then distributes these products through its distribution network that consists of warehouses in Germany and Eastern Europe and supported by a sophisticated logistics systems.224
222 Interview “e” # 3. Please see the descriptions of the decree provisions in Chapter III.
223 Ibid.
224 Official site of Boellhoff, [accessed July 2006],
118 In Veliky Novgorod, however, the company currently has only a sales representative office and is hesitant to establish a production facility in Russia. There are several reasons for this. The company’s products are oriented toward a process technology-aware auto manufacturer. The economization of production costs results from optimization of the manufacturing process: more advanced technology of screws, for instance, produces economization of time, and, as a result, an economization of cost. It is more time-efficient to have a clip screw rather than an old-technology screw that has to be manually attached to a cabin, for instance. And, of cause, the company offers consultancy services how to optimize the manufacturing process. Furthermore, the company possesses serious product technology as well – the materials used for screws, other innovations that permit to economize time, effort, and increase the quality of the end product.225
However, the car makers in Russia, both foreign and domestic, do not seem to be ready for the products that Boellhoff offers. They focus more on labor rather than process optimization. Most auto enterprises in Russia are labor intensive. Furthermore, Russian companies like AvtoVAZ, KAMAZ, etc. are less concerned with the quality of the end product. They can still compete in the segment of domestic affordable cars. The market is growing, however. Many foreign OEMs will open production facilities in Russia, which means tighter competition. This competition might prompt foreign companies and Russian enterprises to shift focus from labor-intensive manufacturing toward process technology focused manufacturing.
In other words, at present, the Russian auto sector is not ready for the services and products provided by Boellhoff even though they are “just” screws. To take advantage of Boellhoff screws, for instance, the technology adjustments must be integrated into the production at the earliest stages of project development. This imposes certain challenges, especially, in Russia.226 Boellhoff has only one representative office in Russia located in Veliky Novgorod. The company has just come to the Russian market. However, the products that the company offers are intimidating for the auto manufacturers in Russia.
Tenneco Automotive Volga
Tenneco Automotive Volga, an exhaust system manufacturer based in Togliatti, faces the same challenges as Boellhoff – lack of interest of car manufacturers in Russia, especially domestic, toward purchasing higher quality, more technologically complex, and correspondingly, more expensive components.227 Tenneco Automotive is a leading global supplier of ride control, emissions control and elastomer products. In Russia, Tenneco manufactures such components as exhaust systems and at the time of the interview, the joint venture GM/AvtoVAZ was its major client.
225 Interview “c” # 28.
226 Ibid.
227 Interview “c” # 14.
119
Conclusions
Available Sources of Technology
This section discusses major conclusions drawn from the cases presented above. This research proposes a directory of sources of technological advancement actually available to the Russian companies as a result of government policies:
1. Joint ventures with foreign auto manufacturers; 2. Policies aimed to increase local content; 3. Own R&D programs; 4. Purchase of technology and consulting services.
Further in the text I discuss why such sources of technology appropriation as state subsidies or other forms of financial support and allocation of finances from investors are less available to the companies in Russia than in China.
At first glance, the list of the sources available to Russian firms is shorter than the same list for Chinese companies, according to the observations drawn from the companies under investigation. This conclusion might indicate that the environment in Russia created by the state policies is less conducive for technology appropriation since there are fewer sources available. The next chapter is dedicated to juxtaposing the Chinese and Russian cases in greater detail.
Foreign Companies as Source of Technology
In Russia, foreign car makers, unlike in China, are allowed to establish wholly owned manufacturing facilities and build cars without engaging themselves in joint ventures with Russian companies. Sommer Novtruck is a wholly owned German manufacturer of trailers located in Veliky Novgorod. The case of this company and the case of the Benteler engineering bureau in Veliky Novgorod demonstrate that these foreign auto companies are indeed quite possessive about their technology and only minimal technological spillover effect can be reported as a result of their operations. These two companies do not outsource components and therefore, do not help local suppliers enhance their technological sophistication through imposing stricter quality requirements. It should be noted, however, that these two companies are specific cases, they are not car makers. But they can be compared (with regard to their minimal technological effect) with wholly owned foreign car makers that import components or even CKDs for “primitive” assembly production in Russia.
The situation with joint ventures regarding the process of technology appropriation from foreign partners by Russian companies is better. The instances of technology appropriation were identified in the cases of GM/AvtoVAZ and KAMAZ-Diesel/ ZF Friedrichshafen joint ventures.
120
In China, in the auto sector, foreign companies are forced into joint venture arrangements, which, in my opinion, increases the chances of technology spillover. In addition to the overall central government policies allowing foreign auto manufacturers in Russia to establish wholly owned production facilities, it is essential to discuss the role of local investment policies as a separate factor with regard to technology appropriation environment. Local authorizes have their own interests, as the case of the favorable investment climate in Veliky Novgorod shows. Because of this climate, Sommer Novtruck and Benteler were welcomed in the city.
However, even if to take into consideration the minimal effects of wholly owned foreign auto companies in Russia with regard to technology appropriation, the technological development of local supplies still seems inevitable. The market in Russia is becoming more competitive. More and more foreign companies are establishing production facilities in Russia (Toyota, Nissan, Volkswagen, etc.). Even Russian automakers like Severstal and SOK are aggressively appropriating technology and conquering the Russian market. As a result, car makers, foreign and domestic, will soon demand high quality components. If companies like GM, Cummins, Benteler, Boellhoff, Tenneco start outsourcing to Russian suppliers, they will inevitably affect the technological sophistication level of Russian auto component manufacturers.
Currently the Russian manufacturers like KAMAZ and AvtoVAZ are reportedly not ready to embrace certain types of technology. The market is growing, however. Many foreign OEMs will open production facilities in Russia, which means tighter competition for domestic players. This competition will prompt foreign companies and Russian enterprises to shift focus from labor-intensive manufacturing to process technology.
State Subsidies or other Forms of Financial Support
As was demonstrated, the state financial support of R&D projects at AvtoVAZ and KAMAZ was limited. Even when in 2005, the state took over AvtoVAZ in the form of the state-owned trade agency Rosoboronexport, the situation with regard to investment has not changed. The Russian and Tatar governments pardoned KAMAZ budgetary arrears to the federal and regional budgets in 1999. The experience of KAMAZ with regard to the excused budget debts is different from AvtoVAZ that was fully privatized in 1993. However, no additional financial backing was and is received from the authorities by KAMAZ.
Allocation of Finances from Investors
Due to the government involvement in the ownership of KAMAZ and AvtoVAZ, these companies do not attract outside investment. Because of the political climate in Russia when the state seeks gaining control over such large and presumably strategically important enterprises like AvtoVAZ, external investors might feel generally apprehensive to invest into the existing Russian automotive companies. On the other hand, Russian
121 government encourages investment into the automotive sector and creates benevolent investment policies that allow foreign component and car manufacturers to come to Russia and establish wholly owned enterprises. Not surprisingly, foreign OEMs do prefer to “do it alone” and not entangle themselves into joint ventures with Russian companies, which limits the possibility of direct technology transfer but still leaves room for indirect technology spillover effect due to the local content requirements. Russian supplies are expected to increase the quality of their products. Thus, foreign companies are the source of technology for domestic companies in Russia mainly due to the localization policies.
Localization Requirements
The only foreign company in Russia that in 2005 took advantage of the local content policies that grant tax exemptions was Ford. However, as mentioned above, more foreign manufacturers are expected to come to Russian and comply with the local content requirements. The Russian market is becoming more competitive as new foreign OEMs enter it. For instance, Toyota, Nissan, and Volkswagen and others are currently building production bases in Russia. Reportedly, these are not screw-driver types of assembly but full-blown technology intensive operations that will outsource components locally. The experience of GM/AvtoVAZ with regard to localization was limited – the major supplier of GM/AvtoVAZ is AvtoVAZ. However, even this experience has reportedly positively affected the quality of AvtoVAZ components and enhanced AvtoVAZ technological growth.
Own R&D Projects
Both AvtoVAZ and KAMAZ are actively engaging in R&D to the best of their financial abilities. In 2005, AvtoVAZ launched a new model Kalina - the project that was fully financed by AvtoVAZ during the old management headed by Kadannikov. Kalina was fully developed by the AvtoVAZ R&D center. KAMAZ has a similar R&D record especially with regard to its engine and gearbox development projects. Both companies consistently acquire patents for their technology achievements as their financial statements indicate.
Purchase of Expertise and Technology
It is generally known that KAMAZ and AvtoVAZ purchase equipment for their production operations. This project, however, possesses little knowledge to report purchases of technology and external expertise with regard to these two companies. This does not mean that other Russian companies do not attract external support and buy technology. For example, the relatively “young” enterprises like Severstal and SOK have been reported to purchase technology and invited external experts. The difference can be attributed to the fact that KAMAZ and AvtoVAZ are “old” companies with a baggage of Soviet-type management, highly self-sufficient type of production organization (following the Ford model) when all key components are manufactured by the company itself, and own R&D facilities, which implies that they are more used to developing
122 technology on their own even though in the post-Soviet period, these companies ceased to receive R&D related aid from the state. Of course, in the present time, taking into account the existent levels of market competition in Russia and the comparatively obsolete technology that both companies have to offer, this strategy of complete technological self-sufficiency might not be economically effective.
The cases investigated in this project (as all case studies) have limited generalization ability. However, there is some logic behind the choice of these cases and overall they provide a sketch of the environment where the process of technology appropriation in Russia takes place. KAMAZ and AvtoVAZ are the largest domestic manufacturers in Russia. Correspondingly, the discussion of their joint venture experience is quite relevant to the discussion of the technology appropriation sources available to domestic enterprises in Russia. The cases of three wholly owned German enterprises in Veliky Novgorod are also not accidental. They illuminate the effect of wholly owned foreign enterprises on the process of technology appropriation and also point to the role of local authorities in attracting this type of enterprises. Novgorod region (and its capital Veliky Novgorod) has a reputation of an investment favorable regime, which partially explains why these companies came to this region.
The availability of the potential sources of technology appropriation in Russia discussed above depends on state policies. The reported inconsistencies of the government policies affecting technology appropriation in Russia hinder successful appropriation of technology by domestic companies. The section below discusses some of the conclusions regarding the future of the Russian automobile industry and specifically the level of its technology sophistication.
Chapter VI:
Summary and Conclusions
This chapter summarizes the conclusions drawn from the examination of the Russian and Chinese state policies affecting the process of technology appropriation in the automobile sector (Chapter III) and the experiences of auto enterprises in both countries of using the sources of technology appropriation made available to them by the overall policy environment (Chapters IV and V).
Overview
The focus of this study is the automobile industry. The development of the Russian automotive sector with regard to industrial advancement, productivity, and competitiveness is currently less impressive than the growth of the auto sector in China. It is not, however, surprising since the economic reforms in Russia started a decade after
123 the Deng Xiaoping’s reforms in China. Furthermore, China is an attractive market for automotive manufacturing due to a number of social, demographic and geographic reasons, which Russia might not share.
This project believes, however, that the explanation for the Chinese success lies in the role of the state in industrial development and specifically the state policies regarding technology enhancement. Inspired by the discrepancies in the models of industrial development in China and Russia, this project attempted to identify, describe, and analyze the role of the state in creating the legal and institutional framework for technological growth in the automotive sector in both countries. I talked about the sources of technological development made available to companies. This discussion was exemplified by the cases of Foton Motor truck factory in China and KAMAZ and AvtoVAZ in Russia as domestic manufacturers and also by a number of joint ventures with foreign partners and foreign companies. Thus, the efficiency of the regulatory environment was explored at the enterprise level using the examples of concrete automobile companies in both countries. This research mainly employed this micro-level analysis. However, I also attempted to describe the policies in place and how they affect enterprises.
The research was essentially concerned with the question of why the state policies matter in explaining differences in industrial competitiveness between China and Russia. To address this question, I tried, as noted above, to describe the policies in place and the way the whole regulatory environment affects enterprises. The hypothesis is straightforward: the larger the number of sources of technology appropriation made available to automotive firms (so that enterprises can attract, retain, and develop technology) is, the more industrially competitive the country is. It should be noted, however, that it is not about the ability of enterprises (management talent, strategy, etc.) in both countries to make use of the technology sources available, it is mostly about the conduciveness of the environment created by the state. Furthermore, the “number” of policies is determined not only with regard to their actual existence, but also with regard to their effectiveness.
I believe that this research is important because it gives a thorough review of the literature on the role of the state in industrial development and introduces the concept of “technology appropriation,” as opposed to technology transfer. Technology appropriation lies in the heart of the companies’ technological competitiveness and is based on the sources of technology made available to the company by the legal environment created by the state. The introduction of this term and its implication for the investigation of the state’s role in industrial development I consider to be a theoretical contribution of this project. Furthermore, this project offers analysis of the empirical data obtained during a series of interviews in the domestic enterprises, joint ventures with foreign partners and foreign companies operating in China and Russia during the summers of 2005 and 2006.228 The comparison between the two transitional economies is important even in
228 This research has been approved by the Institutional Review Board for Human Subjects Research at Miami University in Oxford, Ohio.
124 itself. China and Russia have a tremendous effect on the world economy and it is essential to illuminate the underpinnings of their industrial competitiveness.
Chapter I discussed vast literature on the role of the state in economic development (institutional and social-structural theories, including the literature on embeddedness) and the alternative perspectives that emphasize market forces and cultural factors as independent variables allegedly causing economic success or the lack of it. Further this chapter accentuated the role of the state in technology development as an influential variable affecting the speed of industrialization and overall economic growth. This chapter also offered the definition of “technology appropriation” that, according to the author, determines the process of technological development. This project defines “technology appropriation” as the process of acquiring, developing, retaining, utilizing, and diffusing tangible (hardware) and intangible (software, human resources, process technology, etc.) types of knowledge that takes place in a domestically created legal and institutional environment stipulated by the state and often implemented by the companies in need of technology. The introduction of this term and its implication for the investigation of the state’s role in industrial development, as mentioned above, is a theoretical contribution of this project. Furthermore, the chapter introduced the research question and hypothesis and described the methodology involved in illuminating the proposed research question. To discuss the literature in place and to draw attention to the state’s role in technological development as a useful factor were the major objectives of Chapter I.
For the purposes of this research, I conceptualized the state efforts to enhance technological development as a variable consisting of two components: the state policies aimed at creating a legal environment that makes certain sources of technology available for the automotive enterprises (policy focus) and the way enterprises make use of this environment (enterprise focus). I termed the first component as the sources of technology appropriation and the second – the process of technology appropriation. This variable combines two aspects of one phenomenon: the description of the legal environment that the government creates to enhance technological development in the automotive sector and the way the companies operate in this environment.
The technology appropriation tactics of automotive enterprises mirror government policies. The way the firms operate in the legal framework created by the state reflects the coherence, consistency and overall conduciveness of the government policies to enhance technological development and, correspondingly, industrial competitiveness. The illumination of the complex relationship between the policy-focused and enterprise- focused aspects of one phenomenon (state policies promoting technology development) might lead to a better understanding of how this phenomenon affects industrial competitiveness.
Chinese automobile industry is currently ahead of its Russian counterpart with regard to such indicators of industrial competitiveness as volume of production in units, levels of employment, and the presence of world original equipment manufacturers (OEMs). These indicators constitute the dependent variable in this study, which I termed as
125 “industrial competitiveness.” I presented the statistical data on these indicators in Chapter II. Chapter II also discussed the development of the automobile building sector in Russia and China. This introduction into the history of the auto sector in both countries was not subsequently used for comparison and was mainly aimed at providing a broad historical context. Chapter III elaborated on the state policies pertaining to technological development in the auto industry in both countries. Some preliminary conclusions were drawn comparing the regulatory environment with regard to technology appropriation in both countries. Chapter IV and Chapter V proposed a directory of the sources of technological advancement available to the companies in China and Russia respectively. These two chapters offered empirical observations and analysis based on the interviews conducted in the automotive companies by the author during a series of field research trips to China and Russia in 2005 and 2006.
Industrial Development in China and Russia
In 1990s, after the fall of the Soviet Union, the Russian automotive industry was going through a hard adjustment process. The national-level science and technology programs almost ceased to exist, the defense industry that had been a client for almost all automobile enterprises collapsed, economic tribulations drove most auto companies to the brink of bankruptcy, privatization reform prompted chaotic redistribution of property, etc. In a couple of years the productivity in the automobile industry fell to the levels of the 1930s. The fact that the Russian government was weak and torn apart by a variety of strategic interests during the economic transformation of the 1990s partially explains the industrial degradation.
However, in the present time, the situation in Russia seems to be changing for the better: foreign direct investment into the automotive industry is growing as new plants are being built (both foreign and domestic) and local component manufacturers are maturing. This positive development can be partially attributed to a number of industrial and investment policies that were initiated by Yeltsin and continued by Putin even in light of the authoritarian and renationalization tendencies of the Putin administration. The major challenge of the Russian industrialization process, in my opinion, is the weakness of the governmental institutions and high levels of political bargaining among various interest groups, which causes certain inconsistencies in policies regarding technology appropriation in the auto sector.
China’s car industry is dynamically developing. The major concerns of the Chinese government with regard to the automobile industry are to increase technological competitiveness and to development new environmentally friendly technology. Foreign manufacturers who came to China in search for market are seen as one of the sources of technology. In the heart of the government policies now is an ambition to create a Chinese world-class vehicle.
126 Policies Affecting Technology Appropriation in Both Countries
The policies affecting technology development in Russia in the automobile sector can be broken down into the following categories: the state strategy of the auto industry development, investment policies, which include local content requirements, state protectionist measures, and the system of science and technology. The Government of the Russian Federation approved a development strategy of the automobile industry till 2005 on December 26, 1998. This document is probably one of the first strategic efforts by the government to shape the direction of the automobile industry development after the collapse of the Soviet industrial complex. The Russian government engages in protectionist measures like high import tariffs to help domestic manufacturers and prompt foreign auto companies to establish production facilities in Russia, which will enhance the level of technological sophistication among Russian auto component suppliers. The local content requirements have the same effect. The investment policy undertaken by the Russian government has brought some positive results despite bureaucratic hurdles, legal and institutional deficiencies regarding, for example, intellectual property rights implementation, etc. The weak area is the national level science and technology system, which was chronically deficient under the Soviet regime and became even further undermined by the collapse of the Soviet Union. The major burden of R&D expenditures currently lies on the shoulders of the auto companies, not the state. Another example of the state policies’ deficiencies is that the government does not have sufficient environmental regulations and ecological measures to measure environmental harms produced by car emissions. The EU quality requirements (Euro III and IV) are being imposed slowly. This policy deficiency can be attributed to the fact that the state wants to back up domestic manufacturers that deliver low-quality and non- environmentally friendly products. This kind of protectionism is not beneficial for overall technological advancement of the industry.
Russia will inevitably make a shift from a foreign primitive “screw-driver” assembly production towards a higher technology production. This shift is possible because production is cheap (cheap labor, low transportation costs and logistical expenses) and there is a high consumer demand in Russia. It is cheaper to produce component parts and assemble locally. The keys to industrial growth are a strong state strategy to create a conducive environment for investment and a set of legal mechanisms to prompt foreign auto manufacturers to share technology. The government has already introduced localization requirements, which enhance the overall technological sophistication of domestic component makers.
At resent, Putin tries to “reverse” the process of privatization, increase the presence of the state in the auto industry, and literary renationalize some of the auto enterprises, for example, AvtoVAZ. On the one hand, this trend shows an importance attributed by the state to the auto industry, which was not considered a strategic or key industry during the privatization process of the 1990s; on the other hand, the renationalization trend does not automatically imply good vision of future industrial development.
127 The Chinese government produced a number of policies affecting technology development. I broke down the policies into the following broad categories: technology transfer from foreign companies, national-level system of R&D facilities and projects, technology development enhanced by special economic zones (SEZs), and international agreements on intellectual property rights. These policies create a context within which the process of technology appropriation takes place.
The major motivation for the US companies to share technology with the Chinese partners is to gain a foothold into the Chinese market. The Chinese government imposes local content requirements and ownership ceiling limitations on foreign partners. The collaboration with foreign joint ventures on research and development of high-tech products is accompanied by the domestic system of science and technology development. Automobile industry is a “pillar” industry in China and enjoys more scrutiny and control from the central government on the one hand, and a preferential treatment in terms of financial and legal support, on the other hand.
The tactics of the Chinese state to encourage technology transfer are local content requirements, import substitution, and an ownership ceiling in a joint venture with a foreign partner. These are the centrally-conceived guidelines. At the local level, the special economic zones create additional incentives for investment and technology transfer.
China entered the WTO and has to comply with a set of agreements on intellectual property rights and, specifically, the Agreement on Trade-Related Aspects of Intellectual Property Rights or TRIPS, which helps attract FDI. Russia has applied for the WTO membership. The Working Party on the accession of the Russian Federation was established on 16 June 1993. In light of future entrance into the WTO, Russia can be expected to streamline its legislation and implementation of this legislation regarding intellectual property rights.
There are a number of significant differences between China and Russia regarding policies affecting technology appropriation. The investment policy in Russia is being criticized for the lack of government control over success of the technology appropriation process that foreign car makers in Russia are expected to intensify. Most foreign OEMs in Russia establish assembly production, which limits, as some critics note, the possibilities for technology transfer to domestic suppliers. Foreign OEMs are permitted by the state investment policies to establish wholly owned enterprises (Ford, Toyota, Nissan, etc.) as opposed to joint ventures with Russian partners. This creates a tension between a desire to attract technology on the one hand, and invite investment, on the other hand. The local authorities that have their own interests in attracting technology tend to choose investment over technology, as the case of Novgorod region demonstrates (this case is discussed in Chapter V). The Chinese state found a solution to this dilemma by not allowing wholly owned foreign car manufacturing enterprises in China and imposing a 50/50 percent ownership requirement on all joint ventures.
128 Another significant difference is the absence of the centrally-controlled, coherent, and structured system of S&T in Russia as opposed to China. China is committed to a highly coordinated but a market-driven research and development strategy. China produces more graduates in engineering, science, and technology than Russia. China spends six times more on technology development than Russia and more than most developing countries. Research in China is more application oriented than in Russia. The Chinese government introduced an element of competition and market orientation into the relationship between the government and universities. Chinese domestic policies on science and technology push China’s academic community to pursue wide-ranging, profit-making, industry-relevant research projects.
Another difference is the efficiency of special economic zones in China in attracting investment in the auto industry. Russia has weaker regional institutions of investment encouragement especially in light of the recent attempts of the Putin government to increase centralization on all levels, including investment policies. Local governments have been stripped from an ability to grant substantial local tax exemptions because the Putin government redirected a large lump of local taxes to the Federal budget.
Overall, the Chinese government seems to have a firmer grasp over the process of technology appropriation in the automobile industry than the Russian government. Technology transfer from foreign enterprises is an explicit requirement for the market access in China. In Russia, it seems to be an expectation more than an actual requirement. Automobile industry has a “pillar industry” status in China, which presupposes a favorable treatment and strategic approach toward the industry development. In Russia, the automobile industry is less prioritized than, for example, the so-called strategic or export-oriented industries like oil, gas and the defense sector.
Chinese and Russian Enterprises and Technology Appropriation
Chapter IV proposed a directory of sources of technology appropriation available to Chinese companies as a result of government policies:
1. Joint ventures with foreign auto manufacturers; 2. Policies aimed to increase a local content; 3. Policies encouraging exports; 4. State subsidies or other forms of financial support; 5. Allocation of finances from investors; 6. Own R&D programs; 7. Purchase of technology and consulting services.
Chapter V illuminated the following sources of technological advancement that the Russian companies are exposed to as a result of government policies:
1. Joint ventures with foreign auto manufacturers;
129 2. Policies aimed to increase local content; 3. Own R&D programs; 4. Purchase of technology and consulting services.
This list of technology appropriation sources provides a comparative framework for juxtaposing the Chinese and Russian cases. At first glance, the list of sources available to Russian firms is shorter than the same list for Chinese companies based on the case studies discussed in this paper. This might lead to the conclusion that the environment in Russia created by the state policies is less conducive for technology appropriation since there are fewer sources available. The following section compares Chinese and Russian cases alongside each source category.
Foreign Companies as Source of Technology Appropriation
Joint ventures as a source of technology appropriation in China were discussed using the examples of Shanghai GM, Beijing Jeep Corporation, and FAW/Volkswagen. The major incentives for Chinese companies to form a joint venture with foreign auto manufacturers in China are technology and investment. Foreign car makers in China are required to form a joint venture if they want to establish a production facility in China. The major government policy instrument to ensure that the rights and needs of the Chinese partners are observed is the 50/50 percent ceiling on ownership: a foreign partner can have only up to 50% of shares, except if it exports, then another regulation applies allowing 70% of ownership. Thus, on the one hand, the policies of the Chinese state focus on attracting investment and technology through imposing a 50/50 percent ownership requirement in a joint venture; on the other hand, the government indirectly protects domestic manufacturers through the limitations on the number and nature of joint ventures that a foreign car manufacturing company can form in China: two joint ventures are allowed in passenger car manufacturing and two – in commercial vehicle manufacturing. These policies are not, however, self-eliminating or inconsistent. They policies are aimed at maintaining a balance between protecting domestic manufacturers and creating opportunities for them to obtain technology from foreign partners in a joint venture.
In Russia, foreign car makers, unlike in China, are allowed to establish wholly owned manufacturing facilities and build cars without engaging themselves in joint ventures with Russian companies. The cases of two wholly owned German companies (Sommer Novtruck and Benteler) located in Veliky Novgorod, Novgorod region, which is conspicuous due to the favorable investment regime administered by local authorities, were chosen for empirical observations regarding the effect of foreign enterprises in Russian on the process of technology appropriation. These two cases demonstrated that only minimal technological spillover effect can be reported as a result of their operations. These two companies do not outsource components and therefore, do not help local suppliers enhance their technological sophistication through imposing stricter quality requirements. It should be noted, however, that these two companies are specific cases, they are not car makers. Nevertheless, they can be compared (with regard to their
130 minimal technological effect) with wholly owned foreign car makers that import components or even CKDs for “primitive” assembly production in Russia. As a contrast, the Chinese government ownership ceiling policy with regard to joint ventures among car manufacturers (not component manufacturers) seems helpful for prompting technology sharing.
The critical policy application issue for the Russian government is how to balance attempts to attract investment and procure technology from foreign car manufacturers at the same time. The position of local authorities like in the case of Novgorod region is more straightforward – local administration preferred investment. However, even though local authorities operate within the framework of the central government investment provisions, they have their own interests, as the case of the favorable investment climate in Veliky Novgorod shows. Because of this climate, Sommer Novtruck and Benteler were welcomed in the city.
In China, in the auto sector, foreign car makers are forced into a joint venture arrangement, which, in my opinion, increases the chances of technology spillover. Similarly to China, joint ventures in Russia constitute a source of technology appropriation for domestic auto makers as the cases of GM/AvtoVAZ and KAMAZ- Diesel/ ZF Friedrichshafen joint ventures demonstrate. However, the reluctance of foreign partners to engage in technology sharing is reported as well, for instance, in the case of the future joint venture between KAMAZ and Cummins.
However, even if to take into consideration the minimal effects of wholly owned foreign auto companies in Russia with regard to technology appropriation, the technological development of local supplies still seems inevitable. The market in Russia is becoming more competitive. More and more foreign companies are establishing production facilities in Russia (Toyota, Nissan, Volkswagen, etc.) Even Russian automakers like Severstal and SOK are aggressively appropriating technology and conquering the Russian market. As a result, car makers, foreign and domestic, will soon demand high quality components. If companies like GM, Cummins, Benteler, Boellhoff, Tenneco start outsourcing to Russian suppliers, they will inevitably enhance the technological sophistication level of Russian auto component manufacturers.
Currently the Russian manufacturers like KAMAZ and AvtoVAZ are not ready to embrace certain types of technology. The market is growing, however. Many foreign OEMs will open production facilities in Russia, which means tighter competition for domestic players. This competition will prompt foreign companies and Russian enterprises to shift focus from labor-intensive manufacturing to process technology.
Local Content Requirements
The cases of Beijing Jeep Corporation and First Auto Works (FAW) Foundry, Changchun are discussed to demonstrate the government policies regarding localization. The government imposes at least 40 percent of local content and the rules regarding the
131 type of the localized components. Requirements of local content are a source of technological development for domestic suppliers. The volume of local content indirectly reflects the level of technological sophistication that domestic auto component manufacturers reached in the course of industrialization.
The only foreign company in Russia that in 2005 took advantage of the local content policies that grant tax exemptions was Ford. However, as mentioned above, more foreign manufacturers are expected to come to Russian and comply with the local content requirements. The Russian market is becoming more competitive as new foreign OEMs enter it. For instance, Toyota, Nissan and Volkswagen are currently building production bases in Russia. Reportedly, these are not screw-driver types of assembly but full-blown technology intensive operations that will outsource components locally. The experience of GM/AvtoVAZ with regard to localization was limited – the major supplier of GM/AvtoVAZ is AvtoVAZ. However, even this experience has reportedly positively affected the quality of AvtoVAZ components and enhanced AvtoVAZ technological growth.
Exports
Exports also mean better quality and technological advancement of the products. One of the examples of the way the Chinese government encourages exports is the case of Honda Automobile (China) Co. Ltd. in the Guangzhou Development District. Since Honda exports, the company was granted with a special treatment allowing for 65 percent of ownership in a joint venture. The Chinese government pushes domestic manufacturers to export as well. Foton has a very aggressive export policy. In Russia, it is up to individual enterprises to have a successful export strategy since there are no specific policies rewarding exporting enterprises. KAMAZ, for example, is one of the most successful exporting enterprises in Russia.
State Subsidies or other Forms of Financial Support
As was demonstrated, the state financial support of R&D projects at AvtoVAZ and KAMAZ was limited. Even when in 2005, the state took over AvtoVAZ in the form of the state-owned trade agency Rosoboronexport, the situation with regard to investment did not change. The Russian and Tatar governments pardoned KAMAZ budgetary arrears to the federal and regional budgets in 1999 because KAMAZ was a state enterprise. The experience of KAMAZ is different from AvtoVAZ that was fully privatized in 1993. However, no additional financial backing was and is received from the authorities by KAMAZ.
The case of Foton Motor is discussed in the context of the five sources of technology appropriation: 1). State subsidies or other forms of financial support; 2) Allocation of finances from investors (even state-owned enterprises attract investment and sell its shares; 3) Own R&D programs; 4) Purchase of technology; 5) Purchase of consulting services.
132
Almost all automotive enterprises in China are state-owned enterprises. Of course, the cases of direct financial support are not disclosed, especially in light of the recent entrance of China into the WTO. There is some indication that Foton received substantial credits from the state banks under very favorable conditions. The so-called “national status” companies are more favorably treated when it comes to loaning from state banks. For example, Chery, an economy class car manufacturer, is known to receive both direct subsidies and loans from the government.
Allocation of Finances from Investors
Due to the government involvement in the ownership of KAMAZ and AvtoVAZ, these companies do not attract foreign investment. Because of the political climate in Russia when the state seeks gaining control over such large and presumably strategically important enterprises like AvtoVAZ, foreign investors might feel generally apprehensive to invest into the existing Russian automotive companies. On the other hand, Russian government encourages investment into the automotive sector and creates benevolent investment policies that allow foreign component and car manufacturers to come to Russia and establish wholly owned enterprises. Not surprisingly, foreign OEMs do prefer to “do it alone” and not entangle themselves into joint ventures with Russian companies, which limits the possibility of direct technology transfer but still leaves room for indirect technology spillover effect due to the local content requirements. Russian supplies are expected to increase the quality of their products. Thus, foreign companies are the source of technology for domestic companies in Russia mainly due to the localization policies.
As was discussed above, Foton Motor is a state-owned enterprise. However, the ownership structure is not as straightforward as it might seem. The official distribution of shares is the following: 39% belongs to the state, 34% - tradable shares, and 27% belongs to Foton dealers, suppliers, after-sales service companies, etc. Foton shares are on the stock market. The company was listed on Shanghai stock exchange in 1998. Foton attracts investment from a variety of sources. In the present time, the ownership reform is being implemented by the Chinese state: practically all state-owned enterprises are allowed to have private investors. Foton is claimed to have managed to allocate money from about 100 different investors, mostly Chinese. However, some of the investors come from abroad, for instance, Malaysia.
Own R&D Projects
Both AvtoVAZ and KAMAZ are actively engaging in R&D to the best of their financial abilities. In 2005, AvtoVAZ launched a new model Kalina - the project that was fully financed by AvtoVAZ during the old management headed by Kadannikov. Kalina was fully developed by the AvtoVAZ R&D center. KAMAZ has a similar R&D record especially with regard to its engine and gearbox development projects. Both companies
133 consistently acquire patents for their technology achievements as their financial statements indicate.
At present, the Chinese are borrowing mainly product technology, not process technology. However, the goal of the Chinese automotive industry for the nearest five years is to enter the European and American markets. The quality will be increased to the required level to meet the European and American standards of quality and environmental regulations. To meet these technological challenges, Foton attracts investment from private sources and from the state. The company invests these resources into its own R&D program aimed at increasing the quality and competitiveness of the products, developing new products, enhancing process technology, devising new strategies and techniques in the organization of sales, logistics solutions, and enlarging and developing management skills’ pool.
Purchase of Expertise and Technology
It is generally known that KAMAZ and AvtoVAZ purchase equipment for their production operations. This project, however, possesses little knowledge to report purchases of technology and external expertise with regard to these two companies. This does not mean that other Russian companies do not attract external support and buy technology. For example, the relatively “young” enterprises like Severstal and SOK have been reported to purchase technology and invite external experts.
About 70-80% of Chinese technology in the automotive sector is transferred from foreign partners in a joint venture. However, the situation is changing now. Chinese companies are becoming more and more independent by purchasing technology from foreign companies without engaging in a joint venture arrangement. One of these companies is Foton. Foton also uses consulting services to attract technology. One of the consulting companies that Foton recently hired is Lotus Consulting, a former famous English car manufacturer that now offers consulting services in the automobile building sector.
Conclusion
Presumably, the more sources of technology are made accessible through state policies; the more successful the companies are in exercising technology appropriation. Technology appropriation is a process of obtaining, retaining, and developing technology by automotive enterprises, which directly affects technological and, correspondingly, industrial competitiveness of the automotive sector. As demonstrated above, Chinese enterprises (exemplified by Foton Motor) have more sources of technology available to them to practice more successful technology appropriation than to Russian companies (exemplified by KAMAZ and AvtoVAZ).
In conclusion, this research attempted to propose a valuable concept of technology appropriation as an analytical tool to illuminate the sources of industrial competitiveness.
134 The auto sectors in Russia and China were used as case studies for this investigation. The concept of technology appropriation was conceptualized as consisting of two integral elements: the first element is the state policies affecting the process of technology appropriation and creating the sources of technology appropriation for domestic companies and the second element is the attempts of the domestic enterprises to use the sources of technology appropriation made available to them. This study outlined and categorized the list of the sources of technology appropriation and compared the experiences of the auto enterprises in Russia and China alongside the list. This research also compared the policies regarding technology development in both countries. The contribution of this research lies, in my opinion, not only in the analytical attempt to juxtapose the process of technology appropriation in the auto industry in both countries in order to explain why the Russian auto sector is less competitive than the Chinese automobile industry, but mostly in the introduction of the concept of technology appropriation itself. It should be noted that this study proposes the preliminary outline of the concept and tries to apply it as an analytical tool. The concept requires, however, further conceptualization, especially with regard to different types of technology being appropriated in the auto industry. Thus, much remains to be done. Further research should focus on the development of the concept and its practical application.
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Appendix
Table 1: Number of interviews by affiliation.
Country Corporate source - “c” code Industry expert - “e” code China 23 9 Total China: 32
Russia 29 10 Total Russia: 39
Total number of interviews: 71
Table 2: Overall number of company cases in each category.
State- Private Joint Foreign Car Foreign Owned Domestic Venture Car Maker Component Domestic Car Maker Manufacturer/ Car Maker Supplier Maker China 1 5 China Total: 6
Russia 1 1 3 1 2 Russia Total: 8
142
Table 3: Production in Units in 15 Leading Automobile Producing Countries: Country Production in 2004229 Production in 2003 Change in % USA 12.15 11.84 2.6% Japan 9.91 9.99 -0.8% China 5.34 4.01 33.2% Germany 4.94 5.02 -1.6% South Korea 3.62 3.12 16.0% France 3.61 3.56 1.4% Spain 2.83 2.96 -4.4% Canada 2.62 2.52 4.0% UK 1.87 1.83 2.2% Brazil 1.77 1.60 10.6% Mexico 1.41 1.50 -6.0% India 1.41 1.02 38.2% Russia 1.21 1.17 3.4% Italy 1.19 1.29 -7.8% Thailand 0.95 0.74 28.4% Source: The Russian Automotive Market, Industry Overview (2004): Ernst and Young, March 2004, [accessed August 2005],
229 Production in millions.
143 Table 4: Presence of OEMs in Developing Markets Brazil China India Mexico Poland Russia Thailand BMW Group BMW * * * * * * DaimlerChrysler Chrysler * * * * * Mercedes * * * * Mitsubishi * * * * Fiat Group Fiat * * * * IVECO * * * * * Ford Group Ford * * * * * * * Volvo * * * * * * * GM Group GM * * * * * * * Daewoo230 * * * * Opel * * * Subaru * Suzuki * * * * * Honda Group Honda * * * * * Hyundai Group Hyundai * * * * Kia * * * * PSA Group Citroen * * Peugeot * * * Renault-Nissan Nissan * * * * * Renault * * * * Toyota Group Toyota231 * * * * * * VAG Audi * * * * Skoda * VW * * * * * *
230 As of January 1, 2005 all Daewoo cars exported by GM-Daewoo are branded ad Chevrolet. The Daewoo brand name is allowed to be used only in South Korea, Poland, Romania, and Uzbekistan. See at The Russian Automotive Market, Industry Overview (2004): Ernst and Young, March 2004, p. 10, [accessed August 2005],
231 Toyota is currently building a factory in St. Petersburg, Russia. Note of the author.
144 Source: The Russian Automotive Market, Industry Overview (2004): Ernst and Young, March 2004, [accessed August 2005],
Table 5: Budget and non-Budgetary Debts in the Auto Sector in Russian in 1998 Accounts payable, total (in mln. rubles) including: 60, 782 Payments due to the budget 16,907 Of which, to the Federal budget 7,805 State non-budget funds 11,353 Payments to suppliers 23,136 Accounts Receivable, total (in mln. rubles) 24,244 Of this amount, from purchases 17,831 Source: Main Directions of State Policy for Development of the Automobile Industry in Russia until 2005, The National Auto Component Association, [accessed April 2006],
Table 6: Russian Car Market Built by: 2002 2003 2004 (1st Quarter) Thousa $ billion Thousand $ Thousan Thous nd units & units & billion d units & and & market market and market units market share share market share & share share market share Russian 842 3.7 870 4.3 222 1.4 manufacturers (59%) (35%) (58%) (35%) (68%) (47%) Foreign Makers 11 0.1 (1%) 54 0.6 22 0.3 Made in Russia (0.8%) (3.6%) (5%) (6.5%) (10%) New Imports 117 2.7 170 3.5 43 (13%) 0.9 (8.2%) (25%) (11.4%) (28%) (30%) Used Imports 447 4 (38%) 400 4 41 0.4 (31%) (27%) (32%) (12.5%) (13%) Total 1417 10.5 1495 12.4 328 3.0 (100%) (100%) (100%) (100%) (100%) (100% )
Source: Kansky, Alexander (2004): Industry Sector Analysis: Russian Automotive Industry, U.S. Foreign Commercial Service, June 2004, St. Petersburg, Russia,
145 Table 7: Local Production of Cars by Russian Manufacturers Company 2002 # of units and 2003 # of units and % of change market share market share AvtoVAZ 702,966 (73%) 699,889 (73%) -0.44 IzhAvto 65,751 (6.5%) 78,495 (8.3%) 19 GAZ 65,648 (6.5%) 56,783 (6%) -13.5 KAMAZ 38,500 (4%) 40,013 (4%) 4 UAZ 33,648 (3.5%) 32,748 (3.4%) -2.67 Roslada(owned by a 42,926 (4.5%) 28,718 (3%) -33.1 new manufacturing group SOK) SeAZ 19,435 (2%) 20,005 (2.1%) 3 Total 968,874 (100%) 956,651 (100%) -1.26 Source: Kansky, Alexander (2004): Industry Sector Analysis: Russian Automotive Industry, U.S. Foreign Commercial Service, June 2004, St. Petersburg, Russia,
Table 8: Local Production of Cars by Foreign Manufacturers in Russia Company Model produced 2002 # of units 2003 # of units GM-AvtoVAZ Chevrolet-Niva 323 21,759 SUV Ford, Vsevolozhsk Ford Focus 2,474 16,261 Avtotor-KIA KIA-Rio and others 3,473 6,987 Avtotor-BMW BMW, 3-5 series 2,241 1,428 TaGAZ Hyundai Accent 2,490 5,896 AvtoFramos Renault Clio 149 1,239 Symbol Total 11,150 53,570 Source: Kansky, Alexander (2004): Industry Sector Analysis: Russian Automotive Industry, U.S. Foreign Commercial Service, June 2004, St. Petersburg, Russia,
146 Table 9: Auto Output and Changes in Auto Assembling Plants -China Year Auto Number of Ratio Output (A) assembling (A/B) plants (B) 1956 1,651 1 1,651 1957 7,904 1 7,904 1958 16,000 8 2,000 1959 19,601 14 1,400 1960 22,574 16 1,411 1961 3,589 16 224 1962 9,740 17 573 1963 20,579 18 1,143 1964 28,062 19 1,477 1965 40,542 21 1,931 1966 55,861 22 2,539 1967 20,381 22 926 1968 25,100 25 1,004 1969 53,100 33 1,609 1970 87,166 45 1,937 1971 111,022 47 2,362 1972 108,227 49 2,209 1973 116,193 49 2,371 1974 104,771 49 2,138 1975 139,800 52 2,688 1976 135,200 53 2,551 1977 125,400 54 2,322 1978 149,062 55 2,710 1979 185,700 55 3,376 1980 222,288 56 3,969 1981 175,645 57 3,081 1982 196,304 58 3,385 1983 239,886 65 3,691 1984 316,367 82 3,858 1985 443,377 114 3,889 1986 372,753 99 3,765 1987 472,538 116 4,074 1988 646,951 115 5,626 1989 586,936 119 4,932 1990 509,242 117 4,352 1991 708,820 120 5,907 1992 1,061,721 124 8,562 1993 1,296,778 124 10,458 1994 1,353,368 122 11,093 1995 1,452,697 122 11,907
147 Source: Toshio, Tajima (2001): Formation of Chinese-type Industrial Organization and its Changes in the Process of Transition: A Case Study of Light-duty Truck Industry, in Jiang Xiaojuan, ed., China’s Industries in Transition: Organizational Change, Efficiency Gains, and Growth Dynamics, New York: Nova Science Publishers, Inc., 83-126.
Table 10: Changes in the Administrative Authority of the Auto Industry in China Year Authority 1952-64 Bureau of Automotive Industry, the First Ministry of Machinery Industry 1964 China National Automotive Industry Corporation (CNAIC) set up; Bureau of Automotive Industry cancelled 1966 CNAIC dissolved 1966-76 The First Ministry of Machinery Industry (the Cultural Revolution period) 1976-82 Bureau of Automotive Industry, the First Ministry of Machinery Industry 1982 CNAIC reestablished; Bureau of Automotive Industry cancelled 1987 CNAIC dissolved again; China National Automotive Industry Association became the central authority 1989 CNAIC set up for the third time 1993 CNAIC’s administrative function cancelled, and it became a pure business establishment; Bureau of Automotive Industry set up in the Ministry of Machinery Industry 1998 Bureau of Automotive Industry cancelled as a result of government reform; no central authority replaced it. Source: Sit, Victor F.S. and Weidong Liu (2000): Restructuring and Spatial Change of China’s Auto Industry under Institutional Reform and Globalization, Annals of the Association of American Geographers, vol. 90, no. 4: 653-673, p. 660.
Table 11: Gross Domestic Expenditure on R&D (billions of dollars) China United European Japan States Union 1991 12.5 161.4 114.8 66.9 1995 18.4 184.1 130.8 78.7 2000 48.5 265.2 175.7 98.3 2002 72.1 277.1 187.2* 107.8 Annual percent growth 1995- +22 +6 +5 +5 2002 Projected 2005 130.9 330.9 216.7 124.8 Projected 2010 China 22% growth 353.8 441.7 276.6 159.3 China 15% growth 220.6 441.7 276.6 159.3 * 2001
148 Source: Preeg, Ernest, H. (2005): The Emerging Chinese Advanced Technology Superstate. Manufacturers’ Alliance/MAPI and Hudson Institute. Table 2-4, p. 20.
Table 12: Number of Researchers (thousands of full-time equivalents) China United States EU Japan 1991 471.4 981.7 746.5 491.1 1995 522.0 1,036.0 817.0 552.0 2000 695.1 1,261.2 965.7 647.6 2002 810.5 N.A. 1,004.6 675.9 Annual percent +6.5 +5.0 +3.5 +5.0 growth 1995-2002 Projected 2005 979.0 1,690.1 1,152.8 905.8 2010 1,341.4 2,157.0 1,369.2 1,1156.0 Source: Preeg, Ernest, H. (2005): The Emerging Chinese Advanced Technology Superstate. Manufacturers’ Alliance/MAPI and Hudson Institute. Table 2-5, p. 22.
149 Table 13: Science and Engineering (S&E) Doctoral Degrees China United States France, Japan Germany, United Kingdom A. All S&E Doctorates 1990 1,069 22,868 22,127 3,704 1995 3,417 26,536 23,050 5,205 2000 7,304 25,951 27,571 7,089 2001 7,601 25,509 28,378 7,401 Annual percent growth +14 -1 +4 +6 1995-2001 Projected 2005 12,838 24,504 33,198 9,344 2010 24,718 23,303 40,391 12,504
B. Engineer Doctorates 1990 715 4,894 4,920 1,967 1995 1,659 6,008 4,864 2,791 2000 4,484 5,320 5,983 3,800 2001 4,432 5,502 5,832 3,964
Annual percent growth +18 -2 +3 +6 1995-2001
Projected 2005 8,593 5,075 6,564 5,005 2010 19,658 4,587 7,609 6,697 Source: Preeg, Ernest, H. (2005): The Emerging Chinese Advanced Technology Superstate. Manufacturers’ Alliance/MAPI and Hudson Institute. Table 2-6, p. 25.
150 Table 14: Science and Engineering Articles by Country/Region (thousands) China US West Europe Japan 1988 4.6 177.7 143.9 34.4 1995 9.3 202.9 200.0 47.6 1998 13.8 197.9 221.7 54.7 2001 21.0 200.9 229.2 57.4 Annual percent growth +15 0 +2 +3 1995-2001 Project 2005 36.7 200.9 248.1 64.6 2010 73.9 200.9 273.9 74.9 Source: Preeg, Ernest, H. (2005): The Emerging Chinese Advanced Technology Superstate. Manufacturers’ Alliance/MAPI and Hudson Institute. Table 2-8, p. 29.
Table 15: Customs Duties on Used Imported Cars in Russia Age Engine capacity (cc) Customs duty Under 3 years 1800-2300 25%, but not less than 1.8 2300-3000 Euro/cc 3-7 years 1800-2300 25%, but not less than 0.55 2300-3000 Euro/cc Over 7 years 1800-2300 2.2 Euro/cc 2300-3000 Source: Review of the Russian Automotive Component Sector (2004): Russia: Automotive Component Supplier Development Project, International Finance Corporation, Moscow, p. 91.
Table 16: Excise Duties on Imported Cars, Russia Engine type Excise Duty Automobiles with engine power less than 0 rubles per 1 ph or equal to 90 hp Automobiles with engine power above 90 14 rubles per 1 hp hp but not exceeding 150 hp Automobiles with engine power exceeding 142 rubles per 1 hp 150 hp Source: Source: Review of the Russian Automotive Component Sector (2004): Russia: Automotive Component Supplier Development Project, International Finance Corporation, Moscow, p. 91.
151 Table 17: Customs Duties on Selected Automotive Parts as of January 28, 2004, Russia Part Description Customs Duty Tires 20% per piece but not less than 6.2 Euro Bodies 15% per piece Gear box 5% per piece Suspension shock absorber Steering wheel Air bag Source: Source: Review of the Russian Automotive Component Sector (2004): Russia: Automotive Component Supplier Development Project, International Finance Corporation, Moscow, p. 93.
Table 18: Federal Allocations to Science Foundations in Russia232 % of total government allocations for civilian science
Foundation 2000 2001 2002 2003 RFBR233 5.75 5.8 5.8 4.9 RFH234 0.95 0.96 0.96 0.8 Source: Dezhina, Irina and Loren R. Graham (2005): Science Foundations: A Novelty in Russian Science, Science, 16 December 2005, Vol. 310, no. 5755, pp. 1772-1773.
Table 19: Part of AvtoVAZ Balance Sheet as Part of 2004 AvtoVAZ Annual Report Pertaining to R&D Investments as Part of Long-Term Assets (in million rubles) 2004 2003 2002 2001 2000 R&D 2,818 1,699 714 - - Expenditurers Source: AvtoVAZ Financial Report 2004, financial statements, [accessed October 2006],
232 By law, the government has an obligation of contributing 6% and 1% of the total government expenditures on civilian science to RFBR and RFH. However, as the table shows, this obligation was not met for the 2000-2003 years.
233 The Russian Foundation for Basic Research.
234 The Russian Foundation for the Humanities.
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Table 20: Explanation for Weak Bargaining by Chinese Firms for more Advanced Technology from their U.S. Partners. Explanation Beijing Jeep Shanghai Chang’An GM Ford Weak government X X guidance Naïveté about X X X options Questions of X X X propriety Feeling powerless X X Questions of X legality Local government X X interests Source: Gallagher, Kelly Sims (2006): China Shifts Gears. Automakers, Oil, Pollution, and Development, Cambridge, Massachusetts: The MIT Press, p. 102.
Table 21: Explanations for Why U.S. FDI has not Substantially contributed to Improving Chinese Innovation Capabilities. Explanation Beijing Shanghai Chang’An Jeep GM Ford U.S. firms do not feel X X X responsible for “teaching” their partners U.S. firms do not view X X X their partners as sources of innovation The structure of the joint X X X ventures is inadequate Chinese government X X X programs and policies are weak or inconsistent No binding international X X X rules govern FDI Source: Gallagher, Kelly Sims (2006): China Shifts Gears. Automakers, Oil, Pollution, and Development, Cambridge, Massachusetts: The MIT Press, p. 135.
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Table 22: National R&D Statistics 1995 1996 1997 1998 1999 2000 Gross Expenditure on R&D (billions of RMB) 34.9 40.5 50.9 55.1 67.9 89.6
Annual Growth of GERD (%) -0.6 9.5 24.9 10.9 26.0 17.9
GERD/GDP (%) 0.60 0.60 0.64 0.69 0.83 1.01
Source: An Evaluation of China’s Science and Technology System and its Impact on the Research Community (Summer 2002): A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, p. 10, [accessed August 2006],
Table 23: R&D as a Percentage of GDP by Country Country 1995 1996 1997 1998 1999 2000 China 0.60 0.60 0.64 0.69 0.83 1.01 Mexico 0.31 0.31 0.34 0.46 0.40 N/A India 0.81 N/A N/A N/A 0.86 N/A Russia 0.84 0.79 0.90 0.97 1.01 1.09 Japan 2.89 2.77 2.83 2.94 2.93 N/A United States 2.51 2.55 2.58 2.60 2.65 2.76 Source: An Evaluation of China’s Science and Technology System and its Impact on the Research Community (Summer 2002): A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, p. 11, [accessed August 2006],
Table 24: Expenditures on R&D-China Enterprise Expenditures 32% Government-sponsored R&D Research Institutions 44% Universities 14% Other 10% Source: US Commercial Technology Transfers to the People’s Republic of China, Bureau of Export Administration, Office of Strategic Industries and Economic Security, Defense Market Research Report, 1999, [accessed August 2006],
154 Table 25: Expenditures on R&D-China Type Time Period Level R&D Expenditure 1990 (64.2% Testing and Development; 28.5% Applied Research; 7.3% Basic Research) 1995 Approximately 0.5% of GDP (54.1% Technology Development; 39.8% Applied Research; 6.1% Basic Research) 2000 goal 1.5% of GDP (requires 30% growth in R&D spending per year) Patents 1992 Approximately 30,000 issued 1995 45,064 registered (54% of patent applications; 8% foreign registrants) Licensing 1992 $39m 1993 $62m (93.5% in industrial process technology) 1994 $36m 1995 $36m Scientists & Engineers 1995 Over 400,000 out of about 1.4 million total in R&D Research institutions (30%); Enterprises (29%); Academic institutions (21%); Other (20%) International Science Presently Government-government agreements with 83 & Technology foreign countries Agreements/Exchanges High-Tech Exports (as 1997 5.9% percentage of total 2000 goal 15% exports) 2010 goal 25% Source: US Commercial Technology Transfers to the People’s Republic of China, Bureau of Export Administration, Office of Strategic Industries and Economic Security, Defense Market Research Report, 1999, [accessed August 2006],
155 Table 26: Percentage of Components Sourced Locally by Joint Ventures in China Joint Venture 1985 1997 2003 Beijing Jeep 0% 20-30% 5-10% Shanghai VW 0% 88-90% 88-90% Guangzhou 0% 20% - Peugeot First Auto-VW - 15% 20% Dongfeng-Citroen - Not available 10% Shanghai GM - 0% 60% Guangzhou Honda - - 22% Source: Thun, Eric (2006): Foreign Direct Investment, Local Governments, and Auto Sector Development, Cambridge University Press, p. 71.
Table 27: List of Major Shareholders at KAMAZ Num Description Number of Shares % of equity 1 Ministry of property relations, RF 267 209 085 34,01 2 Foreign Trade Bank 152 483 688 19,41 Ministry of land and property relations, 3 91 109 919 11,60 RT European Bank of Reconstruction and 4 53 343 574 6,79 Development KAMAZ International Management, 5 30 040 041 3,82 CO, L.P. 6 Sberbank of the Russian Federation 22 168 470 2,82 Source: Official web site of KAMAZ, [accessed August 2006],
156