The challenge for Chinese leaders during the first two decades of reform and development – much like in Japan in the 1960s or Korea in the 1970s – was to choose a development path that would lead to the creation of competitive industries. Like its neighbors in previous decades, China faced the classic problems of late development. Rather than accept the division of labor dictated by comparative advantage, China sought to develop industrial sectors that would create a “multidimensional conspiracy” in favor of development: sectors and firms that would foster entrepreneurial activity and create positive spillovers in the economy as a whole. For reasons that had as much to do with national security and pride as economics, China's leaders were not content to build yet another workshop for the developed world, manufacturing whatever products required cheap labor and low skill levels. They wanted to fly airplanes made in Shanghai, use computers built in Beijing, and drive automobiles manufactured in Guangzhou. China was a poor country at the beginning of the reform era, but it was not lacking in ambition.

Although the ability of China to realize these ambitions rested on many factors, none was more important than its capacity to effectively utilize foreign direct investment (FDI) as a means of developing its own industrial base. By definition, a “late” developing nation confronts the challenge of creating strong and independent firms in a context of intense competition from the industrialized world.