Public Disclosure Authorized Shahid Yusuf and Kaoru Nabeshima TWO Public Disclosure Authorized DRAGON HEADS Contrasting Development Public Disclosure Authorized Paths for Beijing and Shanghai Public Disclosure Authorized Two Dragon Heads Two Dragon Heads Contrasting Development Paths for Beijing and Shanghai Shahid Yusuf Kaoru Nabeshima Washington, D.C. © 2010 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved 1 2 3 4 12 11 10 09 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-8048-2 eISBN: 978-0-8213-8128-1 DOI: 10.1596/978-0-8213-8048-2 Library of Congress Cataloging in Publication Data Yusuf, Shahid, 1949– Two dragon heads : contrasting development paths for Beijing and Shanghai / Shahid Yusuf and Kaoru Nabeshima. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-8048-2—ISBN 978-0-8213-8128-1 (electronic) 1. Economic development—China—Beijing. 2. Economic development—China— Shanghai. 3. Beijing (China)—Economic policy. 4. Shanghai (China)—Economic policy. I. Nabeshima, Kaoru. II. World Bank. III. Title. HC428.B4Y87 2009 338.951'132—dc22 2009036023 Cover design by Drew Fasick, Serif Design Group. Contents Acknowledgments . xi About the Authors . xiii Abbreviations . xv Chapter 1. Introduction and Overview . 1 Strategies for Beijing and Shanghai . 6 Rethinking Urban Development . 8 Chapter 2. China’s Development and Its Megacities . 11 Seven Factors Contributing to Chinese Success . 13 Outlook for the Future . 20 Chapter 3. Manufacturing Industry: Locomotive for Innovation and Growth . 25 Why a Broad Manufacturing Base Matters. 28 The Case for Complex Capital Goods. 29 Industrial Productivity and Innovation . 36 Chapter 4. Pitfalls of Early Deindustrialization . 49 Expansion of Services . 51 Five Stylized Tendencies and Their Implications . 61 Chapter 5. Economic Composition, Resources, and the Emerging Innovation Potentials in Beijing and Shanghai . 69 The Industrial Economy. 69 The Financial Sector . 89 Labor and Skills. 94 Tertiary Education and the Innovation System . 96 Innovation Outcomes. 119 Venture Capital . 129 Megacities: Moving to a More Innovative Economy . 134 v vi Contents Chapter 6. Making Industries Innovative . 137 Urban Strategy and Policy Directions . 143 Concluding Observations. 182 References. 185 Index. 213 Figures 2.1 GDP Composition of China, 1979–2006 . 12 2.2 Share of Exports in GDP and Growth of Exports in China, 1979–2007 . 12 2.3 Foreign Direct Investment Inflow to China, 1990–2007 . 15 3.1 Relationship between the Share of Manufacturing and Per Capita Income, 1960–2007 . 26 3.2 Relationship between the Share of Manufacturing and Growth for OECD Countries, 1961–2007 . 27 3.3 Relationship between the Share of Manufacturing and Growth for East Asian Economies, 1961–2007. 27 3.4 R&D Spending as a Share of Sales. 39 3.5 R&D Intensity by Industry in 10 OECD Countries. 39 3.6 Top R&D Spending Sectors among Top 1,000 R&D Spenders . 40 3.7 Share of U.S. Patents by Industry, 1986. 42 3.8 Share of U.S. Patents by Industry, 2006. 43 5.1 GDP Composition, 1995–2007 . 71 5.2 Share of Establishments, 1995 . 78 5.3 Share of Establishments, 2004 . 79 5.4 Share of GVIO, 1995. 79 5.5 Share of GVIO, 2004. 80 5.6 GVIO in Shanghai, by Ownership Categories, 1994–2007 . 81 5.7 GVIO in Beijing, by Ownership Categories, 1995–2007 . 83 5.8 Full-Time Equivalent of R&D Personnel . 84 5.9 R&D Expenditure by Different Organizations, 2000–06. 84 5.10 Distribution of R&D Expenditure in Shanghai, by Type of Activity, 2001–06 . 104 5.11 Distribution of R&D Expenditure in Beijing, by Type of Activity, 2002–07 . 104 5.12 R&D Expenditure in Shanghai, by Type of Institution, 2001–06. 105 5.13 Locations of R&D Investments by MNCs, 2004 . 107 5.14 Prospective R&D Locations Considered Most Attractive, 2005–09 . 108 5.15 Number of Papers Published in International Journals, 1998–2005 . 124 5.16 Number of Scientific Papers Published in International Journals According to Science Citation Index, 1998–2005 . 124 5.17 Changes in Share of New Product Output in Shanghai, 1994–2006 . 126 Contents vii 5.18 FDI Inflow to Shanghai, 1990–2007 . 129 5.19 FDI Used in Beijing, 1987–2007 . 130 6.1 Product Space for China, 2000–04 . 148 6.2 Components of the Boston Life Sciences Cluster . 170 Tables 2.1 Productivity Growth in China, 1978–2005. 16 2.2 Gross Enrollment Rates in China, 1991, 2001, and 2006. 17 2.3 Major National Science and Technology Programs in China . 19 2.4 China’s Exports as a Share of World Exports, 2006 . 21 3.1 Share of Intermediate Input Use in the United States, 2002 . 30 3.2 Share of Intermediate Input Use in China, 2002 . 31 3.3 RCA in Engineering and Electronics Goods, 2006. 33 3.4 Selected Japanese Exports with High RCA, 2006 . 33 3.5 Selected German Exports with High RCA, 2006 . 34 3.6 Selected Korean Exports with High RCA, 2006 . 34 3.7 Germany’s Top 10 Exports, 2006 . 34 3.8 Share of Engineering and Electronics Exports in Germany, Japan, and the United States, 1978 and 2006 . 35 3.9 Patents Granted to Service-Oriented Firms . 38 3.10 Major Innovations by Small U.S. Firms in the 20th Century . 46 4.1 Share of National Income, 2005 . 50 4.2 Subsectoral Breakdown for Tokyo by Establishments and Employees, 2006 . 59 4.3 Fixed-Shares Growth Rate for TFP for Different Periods in the United States. 64 4.4 Characteristics of Different Services . 64 4.5 Gini Coefficients in Selected Cities . 66 5.1 Share of National Population, 1995–2007 . 70 5.2 Share of National GDP, 1995–2007 . 70 5.3 Subsectoral Composition of Manufacturing Activities.