My thanks to Stephan Haggard, Byung-Kook Kim, Xiaobo Lü, Andrew MacIntyre, Ito Peng, Victor Shih, Joe Wong, and the other participants in the After the Developmental State workshop for their valuable comments and assistance. Thanks also to Mary Gallagher and Scott Kennedy for comments on an earlier draft.Google Scholar

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15. Vice Premier Wu Banguo offered one version of this view in 1998: “In reality, international economic confrontations show that if a country has large companies or groups it will be assured of maintaining a certain market share and a position in the international economic order. America, for example, relies on General Motors, Boeing, Dupont and a batch of other multinational companies. Japan relies on six large enterprise groups and Korea relies on ten commercial groupings. In the same way now and in the next century our nation's position in the international economic order will be to a large extent determined by the position of our nation's large enterprises and groups.” Cited in Nolan, Peter, China and the Global Economy: National Champions, Industrial Policy, and the Big Business Revolution (New York: Palgrave, 2001), p. 17.Google Scholar

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31. Shirk, Susan L., The Political Logic of Economic Reform in China (Berkeley: University of California Press, 1993), p. 149. See also Oksenberg, Michel and Tong, James, “The Evolution of Central-Provincial Fiscal Relations in China, 1971–1984: The Formal System,” China Quarterly 125 (March 1991); and Tong, James, “Fiscal Reform, Elite Turnover and Central-Provincial Relations in Post-Mao China,” Australian Journal of Chinese Affairs 22 (July 1989).CrossRefGoogle Scholar

32. Oi, , Rural China Takes Off, p. 103. The degree of autonomy varied both regionally (some cities had more autonomy than others) and over time (the central government would periodically reassert control). On varying degrees of autonomy, see Kleinberg, Robert, China's “Opening” to the Outside World: The Experiment with Foreign Capitalism (Boulder: Westview, 1990), p. 183; for the cyclical nature of the Beijing's policy, see Howell, Jude, China Opens Its Doors: The Politics of Economic Transition (Boulder: Lynne Rienner, 1993).Google Scholar

33. This situation was exacerbated by the tax reforms of 1994—the objective of which was to solidify the central government revenue—because the share of official budgetary revenue retained by the localities declined, but local expenditures did not. Zhang, Le-Yin, “Chinese Central-Provincial Fiscal Relationships, Budgetary Decline, and the Impact of the 1994 Fiscal Reform: An Evaluation,” The China Quarterly 157 (March 1999): 134–135.Google Scholar

34. This idealized version is described in the concept of market-preserving federalism. Gabriella Montinola, Yingyi Qian, and Barry R. Weingast, “Federalism, Chinese Style: The Political Basis for Economic Successes in China,” World Politics 48 (October 1995): 50–81.Google Scholar

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39. Huang, , Selling China , p. 115. Typically it is believed that 250,000 units is the minimum economy of scale for an auto plant. The average production volume for the industry as whole in China was about 14,165 units.Google Scholar

40. Between 1986 and 1992, the savings rate was approximately 36 percent, and between 1994 and 1997 it increased to 42 percent; Huang, , Selling China , p. 45. As Huang notes, only Singapore had a higher savings rate. Savings rate is defined as the difference between GDP and final consumption divided by GDP and Huang's data is from the Chinese State Statistical Bureau.Google Scholar

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47. This is particularly true in the case of FAW but far from unusual elsewhere. In 1997, for instance, SAIC took over two local television manufacturers in Shanghai. At the time “analysts said the decision to bring [SAIC] into the picture was part of a radical play by the municipal government to get powerful unlisted state-owned enterprises to rescue badly-run companies from bankruptcy.” Peng, Foo Choy, “SAIC Joins Bailout Group,” South China Morning Post , March 14, 1997, p. 5.Google Scholar

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50. An effective system is complex and multifaceted: an independent board of directors monitors and supervises managers; managerial labor markets align the interests of management and shareholders through the use of bonuses and/or stock options; capital markets force management to be concerned with the terms on which capital will be provided to the firm; high levels of transparency and auditing standards provide the information necessary to evaluate firm performance; and competitive markets serve as the ultimate constraint on poor performance. Prowse, Stephen, “Corporate Governance in International Perspective: A Survey of Corporate Control Mechanisms Among Large Firms in the U.S., U.K., Japan, and Germany,” Financial Markets, Institutions, and Instruments 4, no. 1 (February 1995): 6.Google Scholar

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53. The primary assembly plant in Shanghai, a JV between SAIC and Volkswagen, dominated the domestic marketplace—often its market share for sedans hovered around 50 percent—and the business group as a whole was immensely profitable. For additional indicators of Shanghai's success during this period, see Thun, , Changing Lanes in China. Google Scholar

54. Interview, no. S16, May 27, 1997. In 1995, as part of an effort to make SAIC appear to be independent of government influence, this linkage was eliminated.Google Scholar

55. The career path of the current chairman of the SAIC group, Chen Xianglin, is a good example of how the leaders of the industry were shuffled through high-level positions in the municipal government. He was president of SAIC from 1983 to 1986; director of the Shanghai Planning Commission from 1987 to 1993, vice secretary of the Shanghai branch of the Chinese Communist Party from 1993 to 1994; and finally director of the Shanghai foreign trade office from 1994 to 1995. In 1995, Chen again became SAIC president (replacing Lu Jian, who in turn, returned to the Shanghai Municipal Economic Committee as vice director) and then chairman of the board in 1999. Interview, no. S16, May 27, 1997, and Interview S26, June 11, 1998.Google Scholar

56. Firms within the group inevitably had excess labor; and in stark contrast to Western firms that are trying to cut costs, they did everything possible to avoid downsizing. In some cases, expansion efforts were driven by the need to soak up excess labor.Google Scholar

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62. The number of different vehicle models offered for sale in the United States alone doubled between 1980 and 1999, a period in which demand was essentially flat. Veloso, , “The Automotive Supply Chain Organization,” p. 5.Google Scholar

63. Although outsourcing in the auto industry is perhaps not as dramatic as in the computer industry, it is not out of the question that the larger of these global suppliers could some day serve as contract manufacturers, producing whole vehicles that are then sold under a particular brand. In some locations, this extreme of contract manufacturing has almost been achieved. VW, for instance, has been using a modular consortium approach in its Resende, Brazil, plant. It plays a strategic role in design and commercialization, but all of the actual manufacturing and assembly is done by suppliers. See Lung, Yannick, “Flexibility Through Modularity: Experimentation with Fractal Production in Brazil and in Europe.” In Lung, Yannick, Chanaron, Jean-Jacques, Fujimoto, Takahiro, and Raff, Daniel, eds., Coping with Variety: Flexible Productive Systems for Product Variety in the Auto Industry (Aldershot, U.K.: Ashgate, 1999).Google Scholar

64. Ford owns Jaguar, Volvo, Land Rover, and Aston Martin; General Motors owns Saab and significant chunks of Suzuki, Isuzu, Subaru, Fiat, and Daewoo; Toyota controls Daihatsu; Renault controls Nissan. Kenney, Martin, “Merger Activity in the Global Economy: Implications for Korea.” Paper prepared for the conference “Industrial Globalization: East Asia's Strategic Importance and the Role of Korea,” Honolulu, Hawaii, August 1999.Google Scholar

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67. The dominant car in the domestic market during the 1990s—SVW's Santana—was based on technology that was three decades old. A 1996 report on the overall competitiveness of the Chinese auto industry, commissioned by the Development Research Center of China's State Council, concluded that the technology of domestically manufactured cars was a minimum of five to fifteen years behind international standards, and this was undoubtedly a generous assessment. Long, Guoqiang, “Zhongguo Jiaoche Gongye Guoji Jingzhengli Fenxi” [Analysis of the international competitiveness of the Chinese auto sedan industry]. Development Research Centre of the State Council, PRC, Research Report no. 92, August 9, 1996. Long, Guoqiang, “Jinkou Guanshui Dui Zhongguo Jiaoche Gongye De Yingxiang” [The impact of import tariffs on the Chinese auto sedan industry]. Development Research Centre of the State Council, PRC, Research Report no. 93, August 9, 1996.Google Scholar

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69. These figures are for realized FDI. Cassidy, John F., Japanese Direct Investment in China: Locational Determinants and Characteristics (New York and London: Routledge, 2002), p. 42.Google Scholar

70. Yang, Dali and Su, Fubing, “China and the Forces of Globalization.” In Prakash, Aseem and Hart, Jeffrey A., eds., Responding to Globalization (London and New York: Routledge, 2000), p. 35. Since 1997, foreign-invested firms have continued to generate approximately half of Chinese exports.Google Scholar

71. China attracted U.S.$52.7 billion in FDI in 2002. Cartledge, Simon, “The Other Side of China's Success,” Financial Times , January 20, 2003, p. 11.Google Scholar

72. Between 1990 and 1997, for example, 53.1 percent of FDI in China was from Hong Kong and 8.5 percent was from Taiwan. Cassidy, John F., Japanese Direct Investment , p. 53.Google Scholar

73. Yang calls this “competitive liberalization.” Yang, Dali, Calamity and Reform in China (Stanford, Calif.: Stanford University Press, 1996).Google Scholar

74. On the different phases of the FDI regime, see Sun, Haishun, Foreign Investment and Economic Development in China: 1979–1996 (Aldershot, U.K.: Ashgate, 1998), pp. 13–17.Google Scholar

75. As Joe Studwell argues, the sales pitch for companies such as these has been the same for centuries: “The prospect of adding one quarter of the world's population to a corporation's list of potential clients in a single move, the prospect of a market with the statistical potential to become the biggest in the world.” Studwell, Joe, The China Dream: The Elusive Quest for the Greatest Untapped Market on Earth (London: Profile Books, 2002), p. xi.Google Scholar

76. Although Bennett and Sharpe argue that market size and growth was a source of host country bargaining leverage in Latin America, Doner did not find a correlation between market size and the intensity of inter-MNC competition in Southeast Asia. Doner, Richard F., Driving a Bargain: Automobile Industrialization and Japanese Firms in Southeast Asia (Berkeley: University of California Press, 1991), p. 92. As Studwell argues, however, the potential of the China market has tended to blur the vision of MNC executives, and in many cases this clearly translated into bargaining leverage. Studwell, The China Dream. Google Scholar

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80. The most recent example of utilizing standards to impose what critics called a nontariff barrier was the wireless standard that the Chinese government announced but then abandoned in April 2003.Google Scholar

81. First Auto is partnered with VW and Toyota (in Tianjin); Dongfeng is partnered with Citroen and Nissan (in Guangdong); Shanghai is partnered with VW and GM.Google Scholar

82. On the Chinese side, the chief negotiating party was SAIC, but it had to get multiple approvals at the central level. Often, according to negotiators on the GM side, the local government would play “good cop” to the central government's “bad cop.” Even after they were engaged in exclusive negotiations, the GM side spoke of the “Ford shadow,” a reference to the fear that if GM did not give the Chinese what they wanted, the Chinese would renew negotiations with Ford. Interview, no. S11, May 31, 1997.Google Scholar

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85. One manager used blueprints as an example of the technical shortcomings of local firms. VW did all of its design work in Germany, then simplified the blueprints before giving them to Chinese supply firms. When GM came to Shanghai they found that supply firms were simply not capable of handling the complexity of the designs that they were given. Interview, no. S34, June 30, 2000.Google Scholar

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87. Like many SAIC suppliers, the firm had large cash reserves from a decade of highly profitable SVW business and could have financed this upgrading internally. Because the nature of the investment qualified as high-tech, the JV was able to receive no-interest loans from the national government. The JV took the loans, banked its own money, and paid off the loans as soon as they were due.Google Scholar

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98. This account of SGM purchasing is based primarily on Interview, no. S43, August 6, 2002; and Interview, no. S53, August 14, 2002. It was corroborated at supply firms throughout the SAIC group.Google Scholar

99. Firms closely guard the purchasing prices for components but in interviews would speak generally about relative prices. This assessment is based on interviews with four purchasing managers at the Shanghai assembly plants and interviews at nine Shanghai supply firms between 2000 and 2003.Google Scholar

100. In one case, a supply firm was selling a component to SGM at a loss because it was forced to meet the GM worldwide purchasing price but was unable to achieve the economies of scale that would make it profitable to do so. It was willing to do this in the short term in order to secure the contract. Interview, no. S42, July 13, 2000.Google Scholar

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102. For more on the broader structural changes that have taken place, see Thun, , Changing Lanes in China. Shanghai has been a leading example of efforts to separate the commercial and governmental role of the state by placing firms under the control of independent asset management offices. The result is a three-tiered structure that varies slightly by region: at the top is an asset management office, in the middle are holding companies and enterprise groups (many of which were formerly line ministries), and at the bottom are the manufacturing firms. See World Bank, China's Management of Enterprise Assets: The State as Shareholder (Washington, D.C.: World Bank, 1997), chap. 3. In the case of SAIC, for instance, a board of directors was created in 1999 to link the first tier of asset management, the Shanghai Municipal Asset Management Office (Shanghai Shi Guoyou Zichan Guanli Bangongshi), with the second tier—the head office of the SAIC business group. Relations between the second tier and the third (the firms) are now completely characterized by the equity share that SAIC owns in any respective firm, much as if it is a holding company with a stake in different companies. The intent seems to be to create the structures of formal corporate governance, even if they are largely window dressing at this point, so as to create the possibility of a public listing and the eventual participation of more effective minority shareholders.Google Scholar

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104. Whereas in 1980 FDI inflows formed 11.7 percent of gross domestic capital formation in manufacturing in developing countries, this number had increased to 36.7 percent by 1998. United Nations Conference on Trade and Development, World Investment Report 2000: Cross-Border Mergers and Acquisitions and Development (New York: UN, 2000), p. 5.Google Scholar

105. As Steinfeld points out, the leading competitor for a Chinese computer company such as Legend is IBM, a business services and software company. Steinfeld, , “Chinese Enterprise Development,” p. 49.Google Scholar

106. For a similar argument with respect to FDI and labor, see Gallagher, Mary, “‘Reform and Openness’: Why China's Economic Reforms Have Delayed Democracy,” World Politics (April 2002).Google Scholar

107. Although JVs accounted for less than 6 percent of domestic automakers in China in 2001, they accounted for 60 percent of the profits. Chen Jianguo, an official at the State Development Planning Commission, hinted in 2001 that dozens of new JVs might be approved over the course of the next decade. Zhengzheng, Gong, “Auto Sector to Allow More Joint Ventures,” FT Asia Intelligence Wire , June 13, 2001.Google Scholar

108. This local variation is fully explained in Thun, , Changing Lanes in China. Google Scholar

109. Interview, no. B42, July 30, 2002.Google Scholar

110. Interview, no. B44, January 10, 2003. When Hyundai created a new JV in Beijing, it brought along its Korean suppliers.Google Scholar

111. Interview, no. S54, July 15, 2004.Google Scholar

112. Since the formation of the JV in 1994, the average annual return on the original investment has been 43 percent, and it has used the profits from the Santana business to expand and gain new capabilities. It generated RMB700 million in consolidated revenue in 2002. Beginning in 2000, despite rapid reinvestment of profits, the JV began to pay out dividends to its two shareholders (SAIC and the foreign firm). For the first two years each partner received RMB50 million, in 2002 the dividend was RMB150 million each, and it was expected be higher in 2003. In that the original investment of the foreign partner (U.S.$25 million) has been returned at this point, the firm is a pure profit center. Interview, no. S52, Janaury 21, 2003.Google Scholar

113. In 2001, the design center at the firm consisted of eleven people; this increased to forty-four the next year, seventy to seventy-five the next, and was expected to reach 150 by 2005. Interestingly, due to the subsidiary JVs that have been created, the Shanghai firm has a broader range of capabilities than the global supplier with which it is partnered.Google Scholar

114. The JV has skilled engineers, commented a foreign manager, but foreign participation is still necessary for any sophisticated design work. Interview, no. S45, August 8, 2002.Google Scholar