Local Government and Firm Innovation in China:
The Case of the Clean Energy Sector
Margaret Pearson, University of Maryland, Department of Government and Politics
mpearson@umd.edu
Paper presented at the China Initiative Research Seminar, Watson Institute, Brown
University, November 12, 2015.
Note to readers: while any feedback on this draft paper is welcome, I am particularly
interested in the utility and formulation of the taxonomy suggested in the conclusion.
Also, please do not cite or quote without explicit permission.
I. Introduction1
How do local governments contribute to innovation and, by extension,
development in China? While scholars disagree as to whether local governments are
helpful or harmful, there is a consensus that they are relevant. 2 The link between local
governments and growth is well-considered in scholarship. Similarly, literature on
innovation by Chinese firms is extensive, 3 as is the question of how the PRC central
government policy may foster innovation. (Contributions to these literatures are cited
throughout this paper). Yet the influence of local government on firm innovation is
curiously underexamined in studies of innovation and industrial upgrading in China. A
major study of China’s innovation capacity by the OECD, for example, largely fails to
mention the role of local government (OECD 2007).4 The role played by local
government might be addressed in several ways. One approach would be to look at the
efficiency and innovation outcomes of funds spent by local governments, in other words,
to “follow the (local state) money” and track pro-innovation outcomes such as increase in
patents or measures tied to market success. While this approach would have many
advantages, the lack of a clear (or transparent) trail and other design and measurement
1
Thanks to representatives of a number of the local governments and firms discussed here for information
and perspective, to Liu Wei for research assistance and to Tom Rawski, Loren Brandt, Eric Thun, Jennifer
Hadden, Joanna Lewis, Yixin Dai, Ciqi Mei, and Zhilin Liu for comments on earlier drafts of this paper.
2
In the political science literature alone, for example, see Oi (1992, 1999); Yasheng Huang (2002);
Heilmann (2008); Heilmann et al (2014); Gallagher (2014); Xu (2011); Chen Ling (2012, 2013).
3
As is referenced below, this literature tends to focus on market factors, including global value chains,
have led to expanded innovative capacity in China. See, for example: Nahm and Steinfeld 2014; Brandt
and Thun 2010.
4
Often industry studies fail to highlight the role of local governments except in passing, e.g., Bär (2013).
Exceptions are OECD 2008 (ch. 7), Dai 2015, and Liu and Chen 2012.
1
issues at the local level would pose substantial difficulties. Alternatively, one might
examine variation in innovative outcomes among in-country regions to try to assess what
local political factors (among others) lead to greater or lesser innovation in a sector (e.g.,
Chen 2013, 2015; Breznitz and Murphree 2011; see Rithmire 2014). This paper takes a
complementary approach. It considers how local governments in China typically do or
do not foster an innovative ecosystem for firms. Under what circumstances do local
governments create an environment that can enable firm-level upgrading or industry
success, thereby contributing to the center’s goal of an innovative economy? In what
ways might the ecosystem presented by local governments be a hindrance to firm
innovation? Thus, rather than directly assessing whether innovation has occurred (a
project that itself is subject to substantial debate about how “innovation” should be
valued and defined), I examine how the local government ecosystem affects industries
subject to industrial policy in areas Beijing hopes will be innovative.5 I draw on
scholarship on PRC central-local relations and local officials’ behavior, as well as
scholarship on “innovation systems,” to show patterns of behavior that affect industry
structures and other firm outcomes in a given locality.
The empirical focus is local government influence on the development of clean
energy industries, specifically solar cells (PVs) and electric vehicles (EVs).
Development of the clean energy sector has been a key theme of discussions on China’s
response to environmental degradation and climate change. Yet clean energy has been
not just an environmental policy; it is also, and perhaps foremost, an industrial policy.
Despite high-level emphasis on sustainable development, the implementation of China’s
clean energy industry – as a part of China’s push for innovation as well as sustainable
development - has followed in the well-trod footsteps of Chinese industrial policies. It
has been designated as one of the PRC’s “Strategic Emerging Industries” (SEIs) and fully
incorporated into the Five-Year Plan process.6 While this is a natural and expected
5
As discussed below, both EV and PV panel industries have been designated Strategic Emerging
Industries. Government policy has explicit goals for these “strategic” industries to be “innovative.” This is
especially true of the EV industry, where foreign technology barriers to entry (particularly for hybrid
vehicles) have been high.
6
“Strategic emerging industries” were introduced in 2006, but only gained momentum with the 2008
financial crisis. Beijing emphasized domestic self-reliance in order to: avoid royalty payments to foreign
firms; avoid overdependence upon foreign sources including global value chains. (Kennedy, Suttmeier and
Su, 2008)
2
process in the Chinese policy context, the envelopment of the sectors by industrial policy
processes leaves a distinctive – and, I conclude, often deleterious - mark on the trajectory
of China’s clean energy industry.
More optimistically, it is clear that new energy industries in China have
successfully upgraded, both in terms of cost and process, and perhaps product.7 Many
Chinese manufacturing firms, including in new energy, have shown strong ability to
upgrade, especially at the lower price and quality end of the market.8 Yet there is also
quite a bit of variation in innovation by new energy firms. In electric vehicle sedans, for
example, Chinese firms has been very slow to convert the country’s strong auto industry
to be able to supply a nascent EV market. (Bernstein 2013) Consistent with this
variation, we can imagine that local governments create both helpful and harmful
impacts. Drawing on analysis of these varying outcomes in the empirical cases of solar
cell and electric vehicles industries, I conclude by suggesting a simple taxonomy of how
local governments treat industries in sectors in which China’s central government hopes
to foster innovation.
Background note on innovation literatures
Parameters of the relationship between governments and firm innovation are set
squarely in broad debates (in economics, business and policy literatures) characterized by
two dominant strands, roughly categorized as market-based and state-supported. Marketbased theories on successful innovation depict the process primarily as a bottom-up one,
originating with entrepreneurs, and often pivoting off firms’ access to and position in the
global or regional value chain.9 While recognizing that it is desirable for states to provide
a positive environment for technology development (through proper policy guarantees of,
e.g., protection of physical and intellectual property, regulation, etc.), this model
emphasizes that the main locus of innovation rests in society and particularly among non7
Scholars identify several basic categories of innovation, often distinguishing between product and process
innovation. Many observers argue that China has made major strides in second generation, incremental
process innovation, i.e., the incremental mixing of established technologies to come up with new solutions,
often at lower cost. A primer on innovation policy is Fagerberg, Mowery and Nelson (2005).
8
Relevant studies include Nahm and Steinfeld 2013; Lewis 2013; Abrami and Brandt, ms.; and for other
industries Brandt and Thun 2010, Dinh et al 2013.
9
A classic work on disruptive innovation based on Schumpeterian notions of creative destruction is
Christensen (1997).
3
state economic actors. Private capital markets including venture capital, moreover,
provide the most efficient means of allocating resources to inherently risky ventures.
The dominant competing theoretical approach to the market-based model of
innovation is, of course, a statist approach that places government policy at the center.
One strand of the statist approach, the developmental state literature, draws its inspiration
from Gershenkron’s (1962) argument with regard to late 19th century industrial
development that state institutions can usefully aid industries in their efforts to acquire
capital and technology.10 A highly capable bureaucracy at the nation’s administrative
center works with major industrial firms to formulate a policy to leapfrog developmental
stages that typically had been followed in Western advanced countries. A second strand
of the statist approach focuses on the state’s role in ameliorating market failure, i.e., when
market mechanisms do not adequately incentivize the funneling of resources into
knowledge creation and innovation.11 Governments can therefore play a positive role not
just in establishing institutions (rights to intellectual property, etc.) but also in directing
public financing to firms, reducing the risk they face from failed innovation efforts. (Hall
and van Reenen 2000) Similarly, governments may help produce demand for products,
largely through demand-side subsidies or purchases. A third strand, the literature on
national innovation systems, goes even further to suggest the benefit of more extensive
government contributions, such as funding public research and development institutions,
and expansive funding for public education. The statist literature pays less attention to
the problem of political failure, when political concerns of government officials produce
other incentives that may hinder innovation. (I find such political failure important in the
cases analyzed below.)
Each of these literatures suggests clear policy prescriptions, most of which are not
mutually-exclusive. In turn, China’s own innovation-related policies over the past three
decades represents each of these sets of policy prescriptions; indeed, innovationpromotion policy in China actually is quite diverse, combining efforts to foster some
combination of top-down industrial policy and bottom-up market driven factors. The
Gershenkron’s argument underpins the East Asian developmental state literature. See Johnson, 1982,
Amsden, 1989, and Wade 1990. See also Wong 2011.
11
Arrow (1962) identifies how the market fails to invest when innovative knowledge is imperfectly
excludable. Hall (2005) theorizes that funding for new untried ideas cannot ex ante identify successful
ideas from failures.
10
4
emphasis of the past decade on “commercialization” and the core role of technology
firms in innovation recognizes that market-based sources will be key, including firms
already deeply engaged in global value chains. At the same time, the Chinese
government clearly sees a role for the state in innovation.12 As in the developmental state
model, the party has taken pains to develop – and has been largely successful (despite
tendencies for corruption) at developing - a highly capable bureaucracy at both the
central and local levels.13 Beijing pays massive attention to industrial development, using
instruments consistent with the developmental state, market failure, and national
innovation system strands of statist policy literature. Such attention is at the core of the
Strategic Emerging Industries initiative.
Local governments play a key role in China’s SEI policies. Local state
involvement revolves around local governments’ efforts to use the institutional
infrastructure of industrial policy, and to respond to the center’s signals to use industrial
policy instruments. At the same time, local officials attempt to respond to conditions
they face on the ground. These may include “market conforming” efforts directed at
helping firms build on existing capabilities found within enterprises. Alternatively, their
efforts may be directed at the political benefits local officials stand to gain from showing
a loyal response to the center’s signals to produce “innovation,” especially enhancing the
prospects for cadre promotion. Still further, local officials are keen to have development
of these industries serve other economic needs, particularly employment and taxes.14
While the consequence of local officials’ desire to meet their political and development
goals need not always be negative, this dynamic can provide a breeding ground for
political failure in industries Beijing hopes will be innovative.
The local government - new energy industry nexus: the key roles of industry
characteristics and Beijing’s signals
12
Beijing also has increased its emphasis on providing support for innovation with domestic origins, socalled “indigenous innovation.” The implicit innovation policy of Deng Xiaoping’s “opening to the outside
world” incorporated foreign technology; a mix of foreign investment and purchasing technology on
international markets using export earnings served as a key force for industrial upgrading. (Ernst 2009).
See also OECD (2008), ch. 10.
13
The PRC’s comparative advantage in this area is emphasized in Bardhan and Mukherjee eds. (2006).
14
Dai’s (2015) interviews in the solar and wind sectors illustrate clearly that employment and tax concerns
were paramount in local officials’ attitudes toward creating an ecosystem for firms in these sectors.
5
The two sectors examined here, solar cells and electric vehicles, are subject to
Chinese industrial policy, but they differ in industry-level outcomes. In brief, the low
end of the EV sector (low speed vehicles) has been quite dynamic, despite Beijing’s
efforts to discourage it, whereas the high end of the EV sector (passenger sedans and
buses) has been relatively moribund. The solar panel sector has seen substantial cost
innovation, but also tremendous waste. Exploring these differences is instructive for
analysis of the local government role. I focus on two clusters of variables, both of which
set the context for local officials, and that appear in sync with different outcomes:
industry characteristics (inter-related qualities of barriers to entry, fragmentation of the
market and presence of strong incumbents) and strength of signals sent by Beijing. In
terms of industry characteristics, the solar panel industry in its developing years was
characterized by relatively low technological barriers to entry, and despite the presence of
some large firms (such as Suntech, Trina and Yingli), also contained many small and
very local firms. This sector also has been characterized by deep ties to the global value
chain. Given extensive market competition, the main type of innovation has been in
terms of cost and pace of production (Nahm and Steinfeld 2013). The electric vehicle
sector is divided into large vehicles (sedans and buses) and small low-speed vehicles.
The former have depended heavily on large incumbent auto companies in China,
including joint ventures. In this part of the EV market, technological and sometimes
protectionist barriers to entry are high; for example, many of the main technologies are
foreign (especially Japanese and Korean, involving high IP costs), and in general the cost
of a key component – lithium-based batteries – is high. These cost and market entry
barriers have not successfully been reduced. (Bernstein 2013) The low-speed and ebicycle segment of the EV market are quite different, and have more in common with the
solar cell market although from the start they have produced mainly for the domestic
market. Firms (such as Kandi and Shifeng, as discussed below) have built on
manufacturing and cost advantages in their regions, and lack of foreign competition, to
supply the low end of the market. This has allowed consumers who cannot afford sedans
to upgrade from bicycles and motorcycles to small vehicles. It has led in some cities to
new business models, such as promoting a rental and battery switching model. (These in
6
turn are being tried for EV sedans.) Neither technology nor cost barriers to entry are as
high as in the sedan sector.
The second dimension, the strength and nature of industrial policy signals –
meaning primarily the level of priority in Beijing’s strategic hierarchy - also varies across
these sectors.15 The central government has pressed a “green energy” agenda that
includes both solar and EVs as new energy strategic industries. As noted, this agenda is
implemented primarily through the channels of China’s industrial policy, and also have
been seen as venues for possible “indigenous innovation” (especially in the case of EV
sedans). Local officials can benefit from showing responsiveness to Beijing’s SEI
agenda. Despite these similarities, in practice Beijing has been much less supportive of
low-speed EVs and bikes than EV sedans. The central government’s treatment of the
solar industry has been more supportive than for low-end EVs, and for example has made
limited subsidies for solar available, but in some respects has signaled its displeasure with
this industry over runaway investment, particularly after export markets collapsed.16 But,
as is well known, local governments have been more keen than the center to subsidize the
establishment of new solar panel firms for purposes of local industrial development than
for innovation. Similarly, despite electric vehicles’ place as a specified SEI industry, the
NDRC actively tried to squelch the development of the low-speed segment. For solar
panels and low-speed EVs, local governments had more leeway to respond in ways that
were market-conforming. In contrast, signals for higher-end electric sedans and public
vehicles were strong, including extensive subsidies to consumers and encouragement of
local governments to provide demand and infrastructure; in other words, Beijing was
much more active in addressing market failure in this arena. Local governments were
quite keen to respond to Beijing’s signal, and to help create the market, even as they also
wished to leverage the opportunities new auto manufacturing locations would have for
local growth and employment. But while needing to respond to Beijing’s signals,
producers of EV sedans and buses had less opportunity to be market conforming, as there
15
This dimension draws in particular on the literature by scholars of Chinese politics on central-local
relations and local government behavior.
16
In particular, with the collapse of international export markets as a result of the 2012 international trade
dispute over solar panels, NDRC officials were not supportive of bail outs for ailing Chinese solar panel
firms.
7
was not a market! As a result of these varying dynamics, at least in part, key differences
in the local ecosystems emerge.
The remainder of this paper is organized as follows. The second section discusses
the ways in which Chinese local governments might ideally provide an environment that
fosters innovation, including being well positioned to play positive roles in overcoming
market failure. The third section dives into what are essentially mini-case studies in the
solar and electric vehicles industries that illustrate how local governments have in fact
served to enable firms in innovation-related industries. It then considers examples of
problematic local behavior, notably problems of wasted local investment of land and
funds, extensive local protectionism and fragmentation of efforts, and problematic firm
responses to subsidies and lack of adequate private financing. The final section
concludes with suggesting a simple taxonomy as to how local governments may provide
(or not) an innovative ecosystem.
II. Intersection Points for Local Governments in Promoting Innovative Industries
What role might local governments ideally play in fostering new and innovative
industries? How might pro-innovation incentives set by the center be channeled down to
local governments to produce industrial innovation and upgrading? Scholars of
innovation have identified a clear role for local governments. The “regional innovation
systems” approach (a subset of Nelson’s classic concept of “national innovation
systems”) emphasizes that innovation – as a collective enterprise – is frequently best
served when collaboration is promoted between governments, firms, and research
organizations such as universities and institutes. Much as occurs with industrial
production clusters, the co-location of these actors may create synergies. (Asheim and
Gertler 2005; Sagar and Zwaan 2006) In theory, regional proximity can open the door
for local governments to help coordinate the circulation of knowledge as well as in the
promotion of strong systemic relationships between firms and a given region’s
knowledge infrastructure. Moreover, to the extent that different regions contain
8
distinctive “regional cultures,” it may be crucial for local institutions (including
governments) to help coordinate central policy.17
Local governments also often channel economic resources from the national
government to the cluster or firm. (Asheim and Gertler 2005) Yet the vision of localgovernment-as-coordinator is not limited to implementing policy from the national level.
Local coordination can help overcome lack of trust that may be inherent between actors –
actors in competing firms, institutes, and funding organizations. (Powell and Grodal
2005) Coordination can direct resources to where they are most effectively used, and
prevent wasteful duplication. Local governments also are crucial for setting a proper
local policy environment, particularly for market entrance and exit of firms, but also in
tax policy (e.g., tax incentives related to technology zones), promotion of effective
allocation schemes for funds (including public and private lending) and land, among
other standard policy instruments.18
Local governments in China often play these facilitating roles, consistent with the
regional innovation system perspective. First, as part of China’s unitary system of
government, local governments are expected - and have authority - to carry out central
policy, including industrial policy. Particularly when central and local government
incentives align, or can be made to align, local governments are well-positioned to carry
out central policy. (Dai 2015; Kostka and Hobbs 2012) Second, also due to the unitary
system, local governments contain institutionalized pockets of expertise (a remnant of
China’s central planning system) that might help facilitate the support of innovative
enterprises. For example, local offices of provincial and municipal-level institutes of the
Chinese Academy of Sciences, local Science and Technology bureaus of MOST, local
offices of the Development Research Center (DRC), and even SASAC (with its recently
acquired mandate to help achieve an innovative society) are available to provide
appropriate knowledge-input. Indeed, many of these sub-national bureaus have provided
input into the formulation of innovation policies at the national level, such as the SEIs.
17
Chen Ling (2012) traces the differences in regional business cultures in China to innovation outcomes in
Sunan and Guangdong.
18
On sub-national governments’ roles in provision of these public goods in Europe, see OECD (2007), p.
48. With regard to China, Breznitz and Murphree (2011) compare the different models employed in three
Chinese regions – Beijing, Shanghai and the Pearl River Delta – and how each succeeded in promoting
second order (primarily process) innovation. Earlier works on regional differences in a single sector
include, for IT, Segal (2003) and for the automobile industry (Thun 2006).
9
(Interviews; and OECD 2008: 363) Locally funded research institutes (or branches of
national institutes) since the mid-1990s have been instructed to contribute to the
technology and social and human capital needed for commercialization of innovation.
They have, often for a licensing fee, provided key technology to firms.. Moreover, local
offices of industrial, commerce and trade bureaus have proved valuable in connecting
local firms with international market actors - linking local firms with global value
chains.19
Finally, despite the possibility of direct central intervention, local discretion in
implementation of – and experimentation with – policy has long been an integral part of
the Chinese political system. A well-established tradition of local policy experimentation
in China lends itself to the promotion of innovation by local political actors, or to their
support of firm innovation efforts that could to benefit the local jurisdiction. (Oi 1992;
Heilmann 2008; Xu 2011) Thus, local governments, as experimenters, are expected to
put their own stamp on central policies, making them appropriate to local conditions.20
Reform-era decentralization measures have enhanced local autonomy in implementation,
as well as sub-national discretion over some aspects of spending and promotion of
growth and development measures. Despite much waste and corruption, local
governments are widely seen to have been a key factor in the promotion of local
entrepreneurship and, more generally, in promoting China’s remarkable post-Mao
growth. (Bardhan 2010; Montinola et al 1995).
Scholars have found ample evidence that local governments around China have
played roles highlighted in the regional innovation systems literature.21 In particular,
local governments have played a coordination role, as evident in the proliferation of high
technology development zones (HTDZs), science parks, and other “incubators.” The
rapid development of small, technology firms in China in the past decade is in part a
reflection of the huge investment made by local governments in science parks, often in
conjunction with local universities and research institutes. (Zhou 2008; OECD 2008 p.
19
On the importance of global value chains in innovation, see Humphrey and Schmitz 2002; Gereffi,
Humphrey and Sturgeon 2005; Baldwin and Clark 1997; Berger 2006.
20
On how provincial and province-level municipalities have modified Beijing’s call for SEIs to support
their own local conditions, see USCBC 2013.
21
These roles are discussed only briefly in this paper, as they are well covered elsewhere (e.g., Breznitz and
Murphree 2011, ch. 2).
10
369f). These parks were to be developed under the auspices of MOST’s overarching
Torch program, and yet control over their establishment and management (as well as
funding) were given to local governments, which also have donated the land and other
resources.22 In other words, a local government may be able to spur an anchor firm that
can then attract complementary industries to the region to create an “innovation cluster.”
For example, in the solar sector, Yingli Solar (a private firm) was given a prominent
anchor location in the HTDZ in Baoding.
Linked closely to the coordination function is the provision of significant local
funding for potentially innovative firms. Indeed, it is difficult to overstate how important
local funding has been for innovation programs in China. According to OECD (2007,
56), “For programmes to support the commercialization of research, such as Torch and
Spark, the [central] government accounts for no more than 2 to 5% of total funding, while
local governments and enterprises typically provide large shares of funding for programs
related to innovation and dissemination of technologies.” Liu and Chen (2012) report
that the total amount of R & D investment by regional governments is larger than that of
the central government. The bulk of this local investment is in wealthy provinces such as
Jiangsu, Shanghai, Guangdong, Shandong and Zhejiang.23 Supports have come in the
form of direct grants, low interest bank loans, and state-backed venture capital.
Chinese local governments also commonly provide subsidies, on both the producer
and the demand sides (see examples below), but especially on the former.24 Direct
subsidies, such as those channeled through government-run “incubators,” are a means to
respond to the central government’s guidance to direct resources to innovative industries.
HTDZs – and the Torch program projects - were not intended to support basic research but, rather,
innovation that could rapidly be commercialized and therefore produce jobs. In this sense, though
promoted as directed at “high-technology” goods, attention went to already mature technologies for which
business plans could be quickly rolled out. Breznitz and Murphree (2011, p. 81) point to the Shenzhen
HTDZ as a successful example of local (provincial in this case) governmental coordination by streamlining
procedures and ensuring access for firms to a complete value chain. Heilmann et al (2013) have argued
that the Torch program for high technology zones has had a very positive feedback effect in central policy.
23
On significant regional disparities in R & D expenditures (from all sources, including local governments)
and R & D intensity (expenditures as a percentage of GDP) see OECD 2008, p. 43. Chapter 7 of this report
examines the differences in the regional systems of Shanghai, Liaoning, and Sichuan. Each region has its
own plan for how to meet innovation goals, with each plan to some degree reflecting the local context and
comparative advantage. A similar study is Sigurdson (2004).
24
National subsidies, such as – for clean energy – feed in tariffs, stimulate demand. Incentives geared
toward producers tend to be more the purview of local governments and hence tend to favor particular
firms.
22
11
In recent years, local governments, particularly in wealthy regions, have not only given
direct grants, but also have coordinated private local venture capital (VC) to invest in
tech start-ups. Although some VC may come from international firms, the further away
from Beijing and Shanghai the more the funding has come from localized sources.25 Liu
and Chen (2012) point to the emergence of government-coordinated VC firms in Jiangsu
in which officials do not directly manage the capital but instead hire a professional
commercial organization to run it. Wuxi in particular, in the mid-2000s, began a high
risk-high return government venture capital fund (无锡市创业投资基金) to help fund
innovative firms. (He[a] 2006) This may be a creative way to mobilize local funds
where private institutional capital is not readily available.
III. A Balance Sheet of Local Government Involvement in the Solar and Electric
Vehicles Sectors
Local governments in China endeavor to carry out the policies as mandated or
signaled by the central government in Beijing, often using some degree of discretion to
tailor their response to their own situation. In doing so, they may succeed at ameliorating
market failures. But the Chinese political system also creates situations of political
failure – i.e., officials take actions that could in principle create net benefits but fail to
deliver in reality because political concerns push implementation in unfortunate
directions.26 The sections that follow discuss cases from solar panel and electric vehicle
industries to illustrate the positive and negative elements of the local ecosystem for green
energy firms. While the positive benefits are largely consistent with mechanisms
specified in the national/regional innovations systems literature, the negative elements are
better explained by literature on central-local relations in China.
Helpful Local Government Participation
25
Based on network analysis by the Stanford Program on Regions of Innovation and
Entrepreneurship/China 2.0 project, Stanford University School of Business.
26
Actions of Chinese local governments are clearly not unique in this regard. The US government, for
example, has dozens of overlapping conflicting, duplicative programs to encourage policy goals, including
for green energy.
12
The PRC government has provided resources and government signals to help
encourage innovative firms in the clean energy sector. It is not difficult to find evidence
of local government initiatives that have helped create a positive ecosystem for
innovative firms in solar and electric vehicles, and in turn appear to have bolstered firm
success. As we shall see, such efforts do not exclude the fact that in some of these same
cases the local government role simultaneously was – or became - problematic.
Moreover, local officials have particular goals in mind, to which local firm actions should
align themselves. Primary among these goals are the provision of jobs, revenues, and a
positive reputation for both the locale and the official(s) involved.27 When such positive
political payoffs are at stake, we can expect local officials to become active advocates for
and negotiators on behalf of local firms – for better (illustrated in this section) or for
worse (in the next).
In the solar industry, the photovoltaic solar cell producer Suntech, in part due to
support by the Wuxi government, has often been pointed to as a model of business and
innovation success. (He 2006) (These successes –including in innovation28 - were most
notable before 2006, i.e., prior to the firm’s financial problems and the 2012 embroilment
of the whole Chinese solar panel industry in international trade disputes.) As is wellknown, the Wuxi municipal and Jiangsu provincial governments helped lure the firm and
its entrepreneurial founder, Shi Zhengrong, an overseas Chinese engineer living in
Australia. The Wuxi government provided sizable initial start-up grants and subsidies,
taking a major equity stake in the firm by providing US$ 6 million in return for a 75%
equity stake. The city later helped Suntech search for additional funding from national
and local sources, for example, from the provincial Science and Technology department.
Some of these loans did not need to be repaid. Wuxi officials further helped organize a
sizable package of loans from banks and local venture capital groups; notably, former
official turned board chair Li Yanren helped arrange for 5 billion yuan in low-interest
loans. Subsequently, and in anticipation of Suntech’s 2006 listing on the NY Stock
Exchange, the Wuxi government offloaded its shares to other investors – including local
Dai’s (2015) interviews show this clearly in the wind and solar cell industries.
Suntech made efficiency improvements in low-cost solar cells, improved wafer technology, and obtained
55 patents. (He 2006; Ahrens 2013) More recently it has moved into thin-film technology, that will allow
further diversification of its business to higher margin areas. Suntech also made some favorable strategic
moves, including the securing of long term upstream contracts for silicon supplies.
27
28
13
state backed “venture capital.” (Ahrens 2013, 2) In addition, the government was
instrumental in setting up a regional cluster for the PVC industry in Jiangsu, completing a
relatively full value chain in a few years. It also set up an R&D center that has led to
manufacturing and efficiency improvements – though the commoditization of solar cells
in recent years have rendered it more price and quality-driven than innovation driven.
Nevertheless, at least in part as a result of these activities, higher-tech silicon slicing
technology could be developed and commercialized in the region. (Liu and Chen 2012)
Wuxi government officials also sought to help on the demand side, finding projects that
Suntech could supply. In short, the “Wuxi Model” of financial support from the city
government has been touted as a major reason for Suntech’s success, with the implication
that Suntech was an innovative firm. Suntech was, furthermore, the prototype for Wuxi’s
2006 “530 Plan,” designed to supply between 1 and 3 million RMB per approved project,
the major criterion for approval being that the project is technologically promising. The
number of registered companies under this program has reached 876, with a total
registered capital of 2.5 billion RMB.29
The role of the Baoding municipal officials (Hebei Province) was similarly
important for the emergence of the private Yingli Solar (英利太阳能). Key supports are
in the provision of land, tax reductions, and aid in obtaining building permits. Local
officials also have supported the firm in its applications for central government funding.
(Local government contributions are generally required to be awarded central funds.)
Local government approval of bank loans remains necessary, and also is considered a de
facto government guarantee for the repayment of loans. Local government help has not
been limited to that supplied by Baoding. Yingli Solar began to diversify away from PV
production toward downstream power generation, and has developed a provincial
government-based organizational strategy.30 Yingli planned to substantially decentralize
operations away from its Baoding headquarters, to build independent generating stations
29
http://www.1000plan.org/qrjh/channel/11
30
This strategy was pursued vigorously in part by the collapse of international markets for solar panels and
the US-China trade war in this area, and the PRC central government’s subsequent efforts to limit bank
loans for the production of solar panels. On this strategy, see
http://guangfu.bjx.com.cn/news/20140220/492008.shtml. On CDB loans, see
http://www.china5e.com/news/news-336467-1.html.
14
for solar power, especially in western and southwestern provinces (e.g., Xinjiang,
Yunnan, Guangxi, and Shaanxi). Building new branches in other provinces meant
courting close ties with those provincial governments, as Yingli needed substantial funds
for these generating stations come from local governments. The firm also wished for
these governments to contribute land and facilitate loans from other sources including
provincial branches of the China Development Bank and Bank of Transportation. Yingli
also expanded to Hainan, where it was necessary to work with local government as well.
Representatives attribute the ability to build the production facility within three months to
positive coordination between the firm’s CEO and the Hainan provincial government.
In similar fashion, the founder of LDK Solar (江西赛维 Jiangxi saiwei), Peng
Xiaofeng, shopped around to find the most favorable city government, one that would
provide financial support and generally mobilize around the industry. Peng found his
answer in the small city of Xinyu (Jiangxi Province). (Wang 2007) yet although LDK
gained the support of the Xinyu government, and despite LDK’s ability claim itself part
of a strategic emerging industry, there is little apparent innovation involved in the
company – a problem discussed below.
Turning to the second case, note that China’s auto industry structure has been
characterized by the emergence of a few national firms (many a mix of SOE and privateforeign joint ventures. Beijing’s EV policy seems to have assumed these large firms
would lead the foray into EV sedans. At the same time, many provinces have homegrown local auto industries, many of which have been beneficiaries of barriers to entry
via local (provincial) protectionism. These local firms often produce lower quality and
price vehicles This dual structure illustrates keenly how the two core variables – industry
structure and policy signals from Beijing – play out.
In the EV sector, Shenzhen’s BYD Auto (比亚迪), has been at the forefront of
China’s electric vehicles industry. BYD exemplifies how local government behavior has
intersected the emergence of this sector. Subsidies on the supply and demand sides alike
have been important.31 BYD’s income statements show government grants of 400-500
Central subsidies to consumers for EV passenger vehicles on the MIIT’s approved list have been
between 35,000 and 60,000 yuan, though these were scaled back starting in 2014. In addition, substantial
reductions or exemptions from purchase taxes are also applied to EVs. Local subsidies in some places as
31
15
million RMB. BYD also enjoys large revolving lines of bank credit, for example, a 10 bil
RMB line of credit from the China Development Bank. The 2011 interim financial report
by the Shenzhen Development and Reform Commission shows total subsidies of 1 bil.
RMB.32
The Shenzhen municipal government also provided coordination between the
firm, banks and other SOEs, while the Guangdong provincial government issued official
documents showing clear support for BYD electric car projects. (Chen Zhijie 2008)
Perhaps most important, the Shenzhen municipal government agreed to purchase BYD
electric vehicles for its municipal taxi and public security bureau fleets. So did other
governments where BYD agreed to invest, including Tianjin, Xian, Kunming, and
Chengdu. This “demand pull” support became a central pillar of BYD’s business plan.
Shenzhen municipality also subsidized the purchase of BYD electric vehicles for
individual consumers,33 and facilitated the establishment of a number of charging stations
for electric cars, though as we shall see these have been insufficient. (A similar story can
be told for Xiangfan New Energy Vehicles in Xiangfan, Hubei. Li 2010.)
Discretion by local governments – to tailor policies to local characteristics or
opportunities – is often characterized as “experimentation,” and as noted is typically
viewed as a positive, flexible aspect of Chinese policy-making. In the EV arena, Beijing
has authorized local experimentation as well through the 2009 “10 Cities, 1000 Vehicles”
program.34 Cities such as Guangzhou, Shanghai and Hangzhou were granted leeway to
decide how to best promote the expansion of electric vehicle usage in their cities, and
tended to develop strategies that centered on their ‘local’ industry (for example, BYD in
much as double this one-time purchase subsidy. See Mock and Yang (2014) and “China Offers Billions to
Subsidize Electric Cars on Gas,” Bloomberg News, December 10, 2014.
32
For these figures, see: http://business.sohu.com/20111024/n323217435.shtml, and
http://money.163.com/11/1025/16/7H7P6V4T00253G87.html.
33
“BYD Leverages the “Power” of the Shenzhen Government” [“Jiè lì shēnzhèn zhèngfǔ bǐyǎdí lái
“diàn”le Jiè lì Lái “diàn”] Auto World [Qìchē dà shìjiè] January 4, 2010
http://news.mycar168.com/2010/01/151898.html
34
The June 2009 plan for the industry was to have 500,000 electric vehicles deployed by 2015, and 5
million by 2020. (The number of cities was subsequently expanded from 10 in 2009 to 25 in 2011.) A
recent report notes that “by the end of 2012, only about 17,400 EVs were deployed nationwide. Official
figures put the number of Energy Saving and New Energy Vehicles (which include but are not limited to
EVs) combined at 27,400; only 16% were sold to private buyers, underscoring public sector dominance in
this developing market. (China Greentech Report 2013) See also Gallagher (2014).
16
Shenzhen).35 Hangzhou, for example, built on its past positive experiences with bicycle
rentals to build electric battery rental and mini-bus rental models, and to promote “battery
switching” as a remedy for the lack of a charging infrastructure. Kandi Automotive (康
迪汽车), traditionally a manufacturer of small vehicles such as ATVs, go-karts, and golf
carts, was at the forefront of these efforts. Kandi worked closely with the Hangzhou and
Zhejiang Province governments36 and, subsequently, Shanghai governments. These
major municipal governments have participated extensively by providing land for rental
locations and charging stations operated by a Kandi JV, ZZY (左中右)37. Kandi also was
greatly benefited by forming a joint venture with the large private Shanghai firm Geely.
This JV was important for Kandi to be able to switch from the use of lead acid batteries
to lithium iron phosphate batteries. Geely also facilitated Kandi’s attempts in 2013 to
gain approval from the central NDRC of its low-speed models, resulting in these models
being listed in the MIIT directory as approved and qualifying for consumer EV subsidies
from the national government, not just from provinces. The combination of business
model innovation, cooperation with other major market actors, and positive support from
local governments allowed Kandi to lead sales of all EVs in China in the 2012-14 period,
and facilitated the firm’s entrance to major markets outside of Zhejiang Province, such as
Shanghai and Nanjing.38 These sorts of experiments, when aligned with Beijing’s
intentions, are therefore seen as a relatively positive and unique part of China’s policy
process. (Marquis et al, 2013).39 As will be discussed below, however, there is a
significant downside to these local experiments insofar as they can promote
35
Guangzhou municipality has advocated the adoption of electric vehicles for taxis, providing charging
locations for taxicabs.
36
Jinhua, Zhejiang, the home city of Kandi, was named a provincial pilot city for new energy by the
Zhejiang government.
37
Rentals are not yet profitable; as of late 2014 the company is only renting half of the 6 hours per day
needed to break even. Huátài zhèngquàn yán jiù bàogào [Huatai Securities research report], “Xīn néngyuán
qìchē chǎnyè liàn diàoyán zhī kāng dí chē yè: Wēi gōngjiāo móshì diǎnrán shìchǎng” [“New energy
automotive industry survey of Condi Auto: Micro-bus mode ignites the market."
http://finance.qq.com/a/20140827/054110.htm.
38
Kandi’s success at topping sales is reported in http://cleantechnica.com/2014/10/27/china-electric-carsales-reach-record-high-charts/.
39
When Beijing approves of the outcomes of local discretion the practice is seen as positive
experimentation. When the outcomes are negative, Beijing often deems the behavior “defiance.” How to
encourage positive discretion and avoid the negative is a major issue for China’s central government. See
Mei and Pearson (2014).
17
protectionism and hinder the adoption of nationwide standards that might better facilitate
EV adoption.
Beijing views other local experimentation to meet local conditions as more
problematic, although the impact may be better for innovation in the sector and,
ultimately, EV adoption in the local market. The promotion of low-speed electric
vehicles in Shandong Province is a case in point. Local economic development agents
and auto firms in Shandong - notably Shifeng Automotive Group (山东时风汽车集团),
traditionally a producer of trucks and tractors - lobbied hard beginning in 2009 for the
provincial government to approve a pilot for producing low-speed, light weight vehicles
particularly suited for rural areas.40 Local (county and municipal) support included not
only lobbying but also provision of investment funds and land for industrial parks. These
vehicles would be upgrades from bicycles, electric scooters, and three wheel motorcycles,
and could be offered affordably to rural businesses and families.41 Part of the low cost
was due to use of lead acid batteries as opposed to the lithium batteries preferred by
Beijing. Low-speed EVs were even more affordable because, as until recently the
vehicles were not classified as “automobiles,” consumers required no license and
therefore could avoid licensing fees. However, as the vehicles are very lightweight, and
because their low speed capacity could disrupt regular traffic, safety concerns persisted.
NDRC officials in Beijing publicly called such vehicles “junk technology” (垃圾技术),
saying they failed to meet national standards.42 Despite the absence of central approval,
and with the backing of the provincial government, this local pilot has been relatively
successful at putting affordable electric vehicles on the roads, especially in rural areas;
40
Shandong Provincial government development officials viewed low-speed vehicles as part of
development of a new industry in electric vehicles, hoping that by 2014 the province’s EV industry sales
would reach 100 billion yuan, with 300,000 vehicles. NetEase Auto 网易汽车,
http://auto.163.com/13/1024/16/9BVE5VFD00084TV1.html (Oct. 24, 2013).
41
As Brandt and Thun (2010) argue, domestic firms that cannot compete with large SOEs or foreign firms
often innovate by targeting low quality, low price-points segments. Thus, these EV firms’ success may be
due more to market position and strategy than their special treatment by the provincial government.
42
NDRC Department of Industry Director Li Gang’s declaration that EVs are “junk technology” is at: 耿慧
丽: “低速电动车争议再起 发改委官员公开否定, 2011 年 07 月 29 日，经济观察网。[Geng Huili: "Controversy
Over Low-Speed Electric Vehicles has Arisen Again, as NDRC Officials Publicly Reject,” July 29, 2011,
Economic Observer Online.] http://auto.qq.com/a/20110729/000199.htm. Protectionism for major
incumbent auto-makers was also likely involved in the efforts of both NDRC (responsible for setting SETI
policy) and MIIT (responsible for setting standards in the EV sector) to squelch low-speed EV
manufacturing.
18
whereas China has underperformed its target for putting 500,000 hybrids and EVs in use
by the end of 2015, in 2012 Shifeng delivered about 30,000 low speed vehicles to
dealers.43 Beijing eventually relented in its opposition, and in the fall of 2014 allowed
subsidies to be applied to these vehicles, suggesting such innovation is no longer
“illegal.”44
Distortive Influences of Local Government
Local governments clearly have substantial opportunities to take on coordination
roles in support of the development of clean energy technology as a public good. Beyond
the cases discussed briefly in the previous section, there are myriad examples where, on
the surface, local governments have pursued coordination and financing mechanisms to
support prospective innovators. Yet local government participation often has failed to
create a positive ecosystem for new energy firms. This section lays out several patterns of
local government behavior that hinder and at times even overshadow what otherwise
might be their positive catalytic function.
The Interplay between Central “Signals” and Tangible Local Results
Local governments in China must be conduits of central government policy.
Despite the shift from directive planning to “guidance” planning in which central
statements serve more as a guide, localities are still expected to respond to the center,
including to both broad five-year plans and sector-specific policies. First and foremost,
the central guidance, such as in the SEI initiative in general, and new energy industry
promotion specifically, are signals of the center’s policy preferences, to which local
officials must show some degree of responsiveness, as if they comply. Not only is this to
be expected as a function of the unitary political system, but also the promotion system
for local officials is tied to responsiveness to signals. The top-down cadre management
system produces career incentives for local officials to show responsiveness. This occurs
“Rural Chinese Flock to Tiny Electric Cars,” New York Times, April 19, 2012. In 2013, only 17,000
hybrid and EVs (cars and buses) were sold across the country.
44
In 2014 Guangdong and Hebei provinces followed suit, with provincial pilot programs to support lowspeed lead acid battery vehicles.
43
19
through the regular performance evaluation, rotation, and turnover.45 Furthermore, the
cadre management system – in addition to and supportive of a norm of local
“experimentation” – helps protect local cadres’ promotion ambitions as they creatively
experiment with how to align their concrete governance interests with the signals of the
center. Officials’ creativity was aided by 1984 reforms according to which the central
party organization only manages the careers of officials of the immediate lower
(provincial) level. This change helped insulate local leaders if their experiments come to
be deemed contrary to central directives.46
If we accept, as most of the literature on Chinese local governance does, that local
cadres are much concerned with how their performance affects their prospects for
promotion, and understand the local flexibility to develop specific plans for innovation,
then it becomes clear how well-known cracks in the alignment between central guidance
and local interests might affect local governments’ innovation incentives. Local officials
in the state’s nomenklatura system typically have quite short time horizons.47 As their
terms in office often are shorter than the official 5 years, their promotion prospects – the
ability to show results from their leadership –are quite short. The incentive to make an
impression on immediate superiors in the short-term (2 or 3 years) is strong. This short
time horizon in and of itself is a problem when technological innovations may require a
longer term to come to fruition, especially when commitments to innovation projects are
being used by a particular leader to demonstrate political results.48
On the relationship between cadres’ performance and the criteria for career advancement, see Mei
(2009), Landry (2008) and Li and Zhou (2005).
46
The implication is that local officials can feel more emboldened in carrying out localized interests as long
as they can plausibly be argued to be aligned with central interests. Not all local officials are subject to
promotion, and some remain in the same locale for long periods. In this situation, two other,
complementary, views of how local officials work to align interests with the center are useful: Kostka and
Hobbs (2012) on “interest bundling”; and Ahlers and Schubert (2009) on “strategic groups.” Similarly,
Chen Jinjin (2011, 5082) argues that “some local governments believe that only through deviations from
the central directives can economic growth be achieved. . .”
47
Chinese local officials are not the only local officials with short time horizons. Two year election cycles
for the US Congress shorten representatives’ time horizons as well. However, Chinese style industrial
policy, a mainstay of the PRC’s policy instruments for investment in key policies, is intended to work over
a much longer time horizon than is practical for most local officials.
48
According to Landry (2008), while the formal term of mayors is five years, the average duration of
Chinese mayors’ terms in 2000 was 2.2 years, even though the formal term is 5 years. It is also the case
that heads of SOEs, themselves subject to the nomenklatura system, also have a short time horizon that may
be contrary to investment in innovation activities.
45
20
How might local officials demonstrate short-term “innovation results” to
superiors? The establishment of a HDTZ or the launch (and early success) of an
innovative industry – particularly one that is the focus of national level policy, such as an
SEI – can bring positive attention to officials who can claim responsibility. For example,
snagging one of the 54 “national” label high-tech zones (as of 2011) would be a coup. A
second marker is the ability for local firms to snag the designation of “National Key
Lab,” suggesting that this firm has been singled out by the center for its innovation.
Third, the potential to create jobs and local growth through the attraction of industries
that can be labeled “innovative” also is a powerful incentive for local officials. (Dai
2015)
Local government officials are well trained to jump onto this bandwagon, and
even be seen as “ahead of the curve.” Jiangsu Province attempted to get a head start on
the competition in terms of its reputation as an innovative region. Whereas the central
government set the goal that China should be an “innovative country” by 2020, Jiangsu
set the provincial goal at 2015. Similarly, in response to the central government’s
emphasis in 2009 on SEIs, governments from some cities proposed they would carry out
“100 major projects” related to SEIs during each year of the 12th FYP. (Liu and Chen
2012). Such goal-setting compels governments to meet the numeric goal regardless of
the quality of projects.
These dynamics were evident in Wuxi, where the ability of entrepreneurial officials
to attract and support Suntech, and create a local value chain, led it to promote the
“Wuxi” model. The multiplier effect of a solar industry value chain centered around
Suntech held tremendous value not only for Wuxi but for Jiangsu province as a whole.
According to Suntech’s founder Shi Zhengrong, the Jiangsu PV industry can be valued at
200 billion RMB, and employs 170,000 local workers. Such enticements would be
attractive to any local leader in any country.49 In addition, the Wuxi mayor, prior to the
collapse of the PV export market, was able to leverage this and other “pro-innovation”
activities into a promotion to Jiangsu party secretary. Even if not achieving the notoriety
49
In the US, the Obama administration has often pointed to the desirability of developing green technology
as a jobs stimulus. However, green technology has created relatively few jobs. Indeed, although statistical
categories are rather fuzzy, it would appear that the post-2008 emphasis on green technology, while
producing payoffs in energy conversion, have created virtually no new jobs. (Johnson 2013)
21
of Wuxi, this dynamic is repeated in localities across China. By showing support for an
innovation project, a local government increases its prospects of gaining coveted central
governmental “support” – as in the case of Shenzhen’s (BYD) and Hangzhou (Kandi),
noted above – or gaining attention as an experimental site (shidian). This dynamic may
be even more accentuated outside of major cities, where officials strive to compete with
more developed locales. In pursuit of a chunk of the low-speed EV industry, officials in
small cities with access to rural markets have set up many “new energy automotive
industry parks,” and contributed millions of yuan in funds to support investment, and
many acres of land.50
Being designated a model city by the center is itself a signal that may encourage other
firms to invest in its jurisdiction – it helps the city to create an innovation “brand.”
Baoding City (Hebei) leveraged early successes in promoting solar technology firms into
its label as a “Green City,” despite having horrendous air quality. Indeed, these green
energy successes were likely a result of earlier efforts by key leaders in Baoding,
including the mayor, in leveraging central funds as well as local human capital to build
“Baoding Electronics Valley.”51 And Baoding has in fact been home to successful
“green” industries, notably Yingli Solar.
Model status can allow local leaders to gain access to additional central
government resources (such as from NDRC and the Ministry of Finance, or for low
interest loans from the China Development Bank), as well as foreign investment. At the
same time, to the extent that leaders need quick payoffs from an industry or firm they
support, that can lead them to construct financing mechanisms that require quick pay-outs
– something also potentially distortive of a firm’s rational growth. This criticism has
been made of the implementation of the Torch program and establishment of HTDZs by
local governments; funding went to mature technologies that could be rolled out to
50
As recently as May, 2014, Linfen government in Shanxi agreed with Mei Year Group to invest 14.8
billion yuan (US$2.3 billion) to build a new energy automotive industrial park. (Linfen has the informal
designation of China’s most polluted city.) Similar investments in such parks also were planned in Inner
Mongolia, Luoyang, Ningbo, Changde, and Guizhou. “Dīsù diàndòng chē jù zī háodǔ xīn néngyuán qìchē
chǎnyè yuán” [“Low-speed electric vehicles heavily gamble new energy automotive industry park."] 21
Shìjì jīngjì bàodào [21st Century Business Herald] October 15,
2014.,http://auto.cnr.cn/qczcjj/201410/t20141015_516598395.shtml .
51
Similarly, Baoding government responded quickly to the central government’s signals to promote rapid
expansion of wind power firms.
22
market quickly, but were not often very “high-tech” or very “innovative.” (Breznitz and
Murphree 2011, 77-8) Jiangxi’s LDK Solar faced this issue with the financial support it
got from the local (city) government: if the firm did not pay out profits and reimburse the
government within a short period of time, then the cost of the capital would be
increased.52
While these behaviors have led to some positive results, in other cases they have
created political failures, including wasted and duplicative investment (with attendant
opportunity costs of capital), shady land deals, corruption, and other ills. The desirability
of being seen as responsive to central signals and help build the local brand often leads to
a shallow or even a “false” response. And the competition to gain the “doorplate” label
of, e.g., “Green City,” has often led local officials to act with great alacrity. This is
especially true with the contributions of land, which in capital-short areas in particular
have been a major form of contribution by local governments to industrial innovation. In
the wake of the 2008 financial crisis, funds flowed quickly from the central government
to localities. Indeed, such funds created the first real push in favor of SEIs since the
program was announced in 2006. Localities that suddenly had reason to hope for a flood
of central funds had to find where to quickly spend them, and too often the use of SEI
categories such as the “internet of things” was the excuse to set up new development
parks that supposedly focused on such high-tech industries. Instead, however, the result
was simply new, often empty, office parks and other industrial real estate projects. This
problem was frequently observed in Wuxi; one example is the “Internet of Things Office
Park,” a real estate development project, sponsored by Wuxi government.53
BYD provides a related example of wasted effort. Local governments in which BYD
invested outside Shenzhen attempted to create additional favorable conditions for electric
car sales in the form of setting up charging stations. However, once a few stations had
been set up – enough to demonstrate political support of electric vehicles but not enough
to spur consumer demand in any meaningful way – local leaders are said to have lost
“PV Impulse.” Jiangxi’s interest in LDK was in part because it is an SEI, but not so much due to its
innovation potential.
53
The son of a high ranking official who runs an RFID consortium was likely instrumental in bringing
these funds to Wuxi.
52
23
their interest and moved on to line up behind other projects.54 The provision of charging
stations is a major hurdle for EV firms, especially in space-deprived first-tier cities (a
problem not just in China). A contribution by government is to convert city-controlled
land to charging stations.55 The point is not that local governments have created the
charging hurdle but, rather, that they have been unable – despite major efforts – to
ameliorate it. A similar dynamic surrounds “National Key Labs.” In firm visits,
managers touted they had received the designation, but there was not evidence of
significant activity going on in the lab. This was the case, for example, in the wind
turbine sector, at Guodian Wind Turbine (Baoding). A tour of the key lab – welladvertised on plates but kept behind locked doors - revealed broken equipment, and
virtually to no activity. Similarly, Yingli Solar in Baoding showed that it had
designations for a “State Key Lab of Photovoltaic Materials and Technology” (2010) and
“State Key Lab of National Energy Photovoltaic Technology” (2011), yet little obvious
evidence of outputs ongoing from these labs.56
Two issues should be emphasized. First, the dynamic in which local officials are
incentivized to respond to central signals and the resulting effort to create a “brand” for a
locality – in order to bring in other cognate industries – has not always served to create a
negative environment for firms in industries picked by the center for growth and
innovation. Baoding is often pointed to as a positive example. However, that local
government involvement is dominated by these incentives, and evidence of wasted efforts
and establishment of firms that are not successful, much less innovative, is problematic.
Hence, the longstanding criticism (within China) that the Chinese system’s propensity to
incentivize wasteful investment is repeated in the clean energy sector. Second, it is clear
that local governments are keen for market entry of new firms, as symbols of and perhaps
Compounding the likelihood that the establishment of charging stations would be a “political task” was
the fact that there was no clear business model for them, such that the business sector was unlikely to take
on the problem. (“BYD Leverages” 2010)
55
Consumers are reluctant to buy EV sedans if they do not have convenient mechanisms for charging
them. Provision of charging stations has been taken on as a public good in other economies, including in
the US, as market actors have been unsure of the economics of this service beyond at-home plug in
connection. Without out-of-home stations, consumers are often reluctant to invest in pure EVs, especially
given the price premium, and government efforts to prop up demand have not worked well as of yet. This
dynamic is one reason e-taxis have been an obvious industry for local governments to support (despite its
own problems surrounding the need for daytime charging).
56
This does not mean Yingli has not shown innovative capacity; rather, the point is that the key labs
designation may not be very relevant, hence “wasteful.”
54
24
the reality of growth. Yet, as examples below will further illustrate, local governments
are not keen to allow market exit of local firms, especially those that they have supported
with funds in the past.
Protectionism, Fragmentation, and Stovepiping
While we can observe successful examples of local government generated
coordination (e.g., Suntech in its heyday), local politics in China is often characterized by
three interrelated factors that run counter to coordination: protectionism, fragmentation
and stovepiping.57 Competition between regions to attract firms for local development
has been intense through the reform era, and continues to result in efforts to gain
advantages.58 Indeed, China’s nascent post-Mao market economy was marked by
significant local protectionism (Wedeman 2003; Cai 2004; Bai et al 2004). To this day,
local government officials remain willing and able to try to sustain local advantage.
Despite much progress in the development of national markets, and central government
efforts to rein in local protectionism, local officials often continue to erect internal market
barriers. Firms are often complicit.
BYD’s reliance on local government jurisdictions to purchase electric vehicles
provides a good illustration of the impact of local protectionism. Local governments can
often be relied upon to provide a demand pull for new technologies. To this end, several
subnational governments, including Shenzhen (the BYD headquarters), Tianjin, Xian,
Yunnan, Changsha, and Chengdu, agreed to buy BYD vehicles for their municipal fleets.
But these local officials would only purchase if from a “local” company. BYD therefore
had to invest in local outlets in order to make these sales as a political rather than a
business strategy decision. Local officials could then claim these investments as their
own “pro-innovation” industries, demonstrating their responsiveness to Beijing’s signal.
More broadly, governments in the “Ten Cities” EV pilot often have endeavored to
protect their own local auto companies. Most of these cities allowed just two auto
57
These factors are not unique to China. But I argue they are more severe, and are overcome with greater
difficulty, in the Chinese context.
58
Many scholars attribute this competition, and efforts to gain local notoriety through protectionism, as a
function (at least in part) of the aforementioned cadre promotion system. On inter-jurisdictional
competition, see Lü and Landry (2014).
25
companies to sell EVs, with one of these firms being a local company.59 Even when the
NDRC directed that these cities needed to allow 30% of sales from other provinces, the
province seeking protection would make a deal with another province that the whole of
that outside 30% would come only from that other locality. Local governments often
subsidize more generously purchases of EVs from local auto firms.
Fragmentation between actors within a jurisdiction also can have deleterious
effects on coordination. Multiple funding sources at the central and provincial levels may
be used for local innovation projects – such as from NDRC, Ministry of Finance, Chinese
Academy of Sciences, and MOST and their local branches – yet these sources often are
poorly coordinated. Thus, local efforts to snag resources and then show results from the
investment often mean not just competition between local projects, but also wasteful
duplicative investment sponsored by different agencies within a location. Particularly in
an environment where market exit is discouraged by local governments as a sign of
political failure, duplicative investment can be presumed to be especially harmful. Recent
efforts to criticize and eliminate overexpansion of technology parks, particularly those
related to the SEI industry of cloud computing, reflect recognition of this problem by the
center.60 Yet as long as local bureaus of national ministries are more likely to serve
horizontal interests than their vertical masters, the problem will remain. (OECD 2008, p.
363-4)
Related to the stovepiping of the local bureaucracy is that each bureaucracy
within a local jurisdiction may feel compelled to respond to the center’s signal,
exacerbating wasteful duplication. Indeed, even SASAC has taken on the mantle of
promoting S & T at the local level. (Naughton 2012) Duplication of efforts is not the
only problem to grow out of fragmentation and stovepiping; such a structure creates
barriers to diffusion of technology that is seen as crucial to creating effective innovative
“clusters.” (OECD 2007, 41) Also detrimental is the stifling of development of national
The cities with existing strong auto firms – such Shenzhen and Shanghai – often were chosen by MOST
as pilot cities. This choice has the obvious advantage of placing resources where infrastructure already
exists (a hallmark of China’s experimentation policy). But local firms, especially when owned by the local
government, also may be better equipped to benefit from local protectionism.
60
There have been multiple campaigns to avoid wasteful investment by local governments and firms, such
as in iron and steel, and real estate development. Yet these campaigns often are in a “macro-retrenchment”
environment, whereas it seems projects tied to the “innovation” silo may be protected from such
campaigns.
59
26
standards for new industries. As local governments focus on developing standards that
benefit their own specific location, and local companies, rather than working toward
national (or even international) standards. Similarly, while the development of locallyoriented technologies is rational from one perspective, it can hinder the development of a
more robust national market.61 Chongqing municipality’s deployment of a fast-charging
battery model - the only pilot city to do so – is a prime example. This model was based
on the unique characteristics of proximity to the Three Gorges dam and relatively reliable
power grid. A battery-swapping model a la Hangzhou and Shenzhen relies on relatively
flat geography, and hence is not feasible in hilly Chongqing, whereas the energy supply
intensity and reliability needed to make a fast-charge model succeed is not available
elsewhere. (Marquis et al 2013)
Local Governments as a Source of Sustainable Demand?
Local firms have relied heavily on governments at all levels to help create or
stimulate demand for new energy industries. Local governments often have been
channels to promote central tax breaks and subsidies for consumer purchases in the solar,
wind, and electric vehicle sectors.62 Local governments also have responded to Beijing’s
directive to promote EVs in government procurement; in 2014, Beijing set a target for
new government vehicle procurement (sedans and buses) to reach at least 30%.
(Economy 2014) Beyond this promotion of national level policy, local governments have
made supplemental efforts to develop local markets. A weak consumer market has led
the central government to promote public demand by local governments as a major
stimulus for EV sales. BYD’s aforementioned experience with various local government
deals to purchase their electric vehicles illustrates local protectionism, but also
exemplifies how new firms often rely on local governments to create a demand pull.
Shenzhen municipality offered further support to BYD to overcome the huge marketdiffusion hurdle posed by the establishment of charging stations (discussed above), and
this has become a core program of support for all major municipalities. In China,
moreover, local government efforts to promote charging stations have run up against not
Hangzhou’s battery switching model is more transferable.
On tax supports in wind, see Lewis (2013, 56-7) and Gallagher (2014, ch. 4). Many central subsidies to
consumers for the purchase of electric vehicles were eliminated in 2011.
61
62
27
only price and consumer anxiety but also against the power of electric grid monopolies.
The provision of plug in electric stations is decided primarily by provincial offices of
State Grid, and the grid company has been reluctant to make this investment.63
While government supports for the EV industry have led some companies to jump
on the bandwagon, others have assessed the fact that the industry is extremely reliant on
government support rather than market demand as reason to wait to enter the sector.
Representatives of the private firm Chang Cheng (长城) Motor (Baoding) indicated that
while they had explored entering the market (including with a failed cooperation scheme
with a California battery company), they at least temporarily decided to hold back. They
indicate that the market is not mature, that the push is completely led by the government,
but with insufficient and unreliable financial supports. They reiterated the common
complaint that there is poor interconnection with the grid and that there are insufficient
charging stations. Chang Cheng has a stronger interest in hybrid technology, and its 200person “new energy team” has participated in studies with the central Ministry of Finance
(though the firm ultimately withdrew).
Problems with interconnection also have hindered China’s solar industry. Solar
cell manufacturers large and small have been frustrated by efforts to sell electricity on the
domestic grid. Local governments have contributed land and housing to huge but solar
farms projects, many of which sit idle for reasons already discussed. But in addition,
local governments have been unable to guarantee connectivity to the grid. Consumers
have faced similar frustrations. Some consumers have invested in solar cells, partly
spurred by the national “Golden Sun” and “Golden Rooftop” program subsides for
installation of solar cells, and partly spurred by prospects of not only providing a source
of power for their own use but also of selling the electricity they generate at home to the
grid. Yet state power grid monopolies have been unwilling, despite directives from the
regulator (China Electricity Regulatory Commission), to facilitate interconnection for
The three main aspects of the provision of electric power – generation, dispatch, and grid
interconnection – are all controlled in significant ways at the local level in China. For example, there are
myriad local independent power producers (IPPs) that generate electricity, and dispatch is heavily
localized. The 2002 breakup of State Power Corporation’s monopoly led to the regionalization of the grid.
These features of the industry create an extra local dynamic to national efforts to develop clean electric
power sources, as local business actors have an incentive to do what is in their interest with regard to the
industry. Local governments must compete with these local business actors. See Huang and Taplin (2012).
63
28
households or solar farms without burdensome forecasts of generation and at a reasonable
price.64
Local Governments as Financiers
Successful entrepreneurs in solar and EV industries often cite the importance of
local government financing. Yet two main problems with China’s model of local
government support can be identified: the questionable ability of local governments to
make wise investments in the absence of market based mechanisms, and the creation of
firms dependent on government funding. Criticism of local governments’ failures to
effectively “pick winners” is common in the Chinese press. Local government is on the
front line of choosing which firms to reward, and yet there often is a structural expertise
gap. Or where expertise does exist, such as in local S & T bureaus, these expert opinions
must compete with other considerations, such as the need for quick returns by local
officials who are seeking ways to respond to the center’s signals, as discussed previously.
Political decisions often must substitute for market-based decisions as to worthy funding
recipients. Well-functioning venture capital would act as a funnel, withdrawing funding
from ventures that have failed to show promise (or live up to promise), while continuing
funding for viable ventures.
But there remains a gap in such market-based institutions in China. As noted, there
has been a push to establish locally-capitalized venture capital firms to (help) fund
innovative ideas. More market-based VC firms are generally uninterested in clean
energy because there is not enough money to be made. Local VCs that have invested in
clean energy have come under increased scrutiny for making poor decisions, being too
closely tied to the government, and even helping to create too much government risk
when they gain implicit government guarantees. Wuxi Venture Capital Fund, an integral
part of the Wuxi “Model” has met criticism for failing to assemble a “professional team
to carry out project selection, due diligence, post-monitoring, intellectual property
investigations, business partner surveys, communications platform, and other
procedures.” (He[a] 2006) Other “risk-reward” loan systems also exist, as in the case of
64
Beijing has largely ended subsidies for solar installation, in part in response to such waste. (Interview 612-2014, Beijing.)
29
the “gamble” (duì dǔ, 赌) agreement between solar firm Jiangxi LDK and “statebackground” lenders, in which the loans had to be repaid very quickly or else face
extremely high interest rates. (“PV Impulse” 201265) At the same time, when local
governments are faced with the prospect of a failure by a firm around which they have
tried to create a “brand,” particularly when huge amounts of resources have been poured
into not just the firm but also supportive supply industries, they may be tempted to throw
good money after bad. Such is the case with Xinyu government in Jiangxi Province, the
backer of LDK Solar. As with Wuxi’s Suntech adventure (though for different reasons),
local officials have felt compelled to use government funds and help ensure the
availability of funds from elsewhere (such as local banks) in order to bail out the firms.66
Thus, in light of this gap in expertise and market institutions to pick worthy
“winners,” it is not surprising that local officials’ choices might then be made based on
other considerations, such as political connections. Altogether, there remain a host of
moral hazard problems. And, as w/ Xinyu LDK and Suntech, local governments have
been compelled to bail out firms so as not to shoulder a black mark to its brand.
A second problem with the model of financial support is its impact on industry.
Rather than spurring innovative industries such support seems to promote waste. The
solar panel industry is perhaps the most well-known example. Many local governments
saw export of solar panels as a lucrative business, and so – responding to international
market demand and drawing on national policy incentives – too many localities invested
in solar cell production, creating a glut on the international market, and helping
precipitate a collapse of that market.67 Yet extensive government supports also have
created a tendency for firms to depend on government supports, and to use this support to
go in business directions they might better have avoided. LDK Solar, given extensive
support from the entrepreneurial Xinyu government, made aggressive forays into
ancillary businesses, though as a family-run company it lacked expertise to do so.
Similarly, BYD Auto expanded into the solar industry largely based on government
supports. In the EV industry, two of the “10 Cities” pilot cities with little existing
65
See also http://money.163.com/12/0723/15/874080K500254O2B.html.
Ibid.
67
As is well-known, other problems have beset the Chinese PV industry, including the global financial
crisis and declines in PV prices, collapse of key international markets (notably Spain), and the international
trade dispute surrounding allegations of “dumping” of Chinese solar cells in Western markets.
66
30
infrastructure in the auto industry (Xiangfan and Nantong) have been accused of
strategies that focus on “receiving preferential policies and financial resources, as
opposed to developing their EV adoption capability.” (Marquis et al, 2013) Reports of
similar dynamics have appeared for clean energy sectors of wind, LEDs, and bioimass.
(“PV Industry Incubators”) Interviewees have also suggested there is a class of smaller
firms that have been established and remain in existence due solely to government
IV. Conclusion
The broad literature on innovation suggests that local governments in China have
a potentially positive role to play in creating a favorable ecosystem for innovative firms
through mechanisms such as coordination and funding. The influential position of local
governments in the Chinese political system, including as a conduit for central “proinnovation” policy, reinforces that expectation. This role could be expected especially in
clean energy industries, which have been given a high profile role in China’s planning
process.
It is evident from the previous discussion that innovation by firms does occur.
Cost and process innovation results from deep competition among solar panel producers,
many of whom survived the export industry shake-out. When firms have been able to
draw on existing infrastructure and expertise in their location, they have moved forward,
as has been the case with EV manufacturers Kandi in Zhejiang, Shifeng in Shandong, and
to a lesser extent BYD in Guangdong. It also can be argued that local governments have
contributed to some successes, at least initially, through use of traditional industrial
policy tools. Subsidies (direct funds, tax breaks, preferential access to loans from state
banks, contributions of land, etc.) appear to have helped some solar producers, such as
Suntech and Yingli, get off the ground. More interestingly, local governments have
protected firms that have chosen to innovate in ways to which Beijing has been
unfriendly. Shifeng low speed autos benefited massively from the advocacy of the
Shandong provincial government. As a result, innovation occurred at the low end of the
market, and this segment is the most successful portion of China’s entire EV market.
31
Kandi (also benefiting from its partnership with Geely) sells more EVs in China than any
other manufacturer. Perhaps one reason for the slow takeoff of new energy sedans was
the focus on pure electric vehicles, and the desire to avoid hybrids (due to the need to
purchase foreign IP). This choice was made by the central government, but local
governments followed. (Tillemann 2014) In 2014, however, some EV firms have gone
their own way on this issue as well; similar to the situation with low-speed vehicles, local
governments have supported the development and sale of hybrids, particularly in
Shanghai. (Wang Tao 2015) Moreover, local governments have continued to encourage
firms continue to engage deeply with the global value chain as a consumer of foreign
technology, instead of making serious attempts to reinvent an “indigenous” wheel.
On the other side of the ledger, however, while local governments have created
experimental sites and pushed the development of industries along, there are myriad
examples in which local governments have failed to contribute to vibrant local innovative
ecosystems. This paper has pointed to a number categories of governance deficiencies.
The incentives for local officials to respond to central signals, but to do so “creatively” in
a way to support their political needs for quick payoffs in terms of branding and
employment, has been a major contributor to wasted, duplicative, and sometimes “false”
investment. The problem of waste is exacerbated by incentives for local governments to
prevent exit of unsuccessful firms if it means harm to employment. Moreover, local
governments in China face difficulty providing effective coordination due to
longstanding problems of protectionism, stovepiping and fragmentation. Protectionism
in turn harms efforts at standardization for a national market, such as when EV pilots
have been encouraged to suit local conditions.68 Reliance on government demand (for
EV sedans) has been unable to ameliorate the basic problem of market failure the efforts
were intended to address. From the financial side, reliance on local governments to make
sound investment decisions when private financing does not exist means officials have
often lacked adequate signals about the quality of projects. Thus, incentives for local
governments – a mixture of incentives to align with the center but also create their own
image as innovative locations – too often block the creation of an environment in which
68
This has not been a problem in the solar panel sector, where technology is relatively standardized.
32
state-supported innovation can happen. Waste and the intolerance of firm failure and the
consequences for market exit are particularly pernicious problems.
In this context, some firms, as in the solar panel sector, have simply never become
viable market actors apparently in part due to their expectations that government supports
will continue, a phenomenon that cannot help the center’s innovation visions. In the EV
sector, despite some obvious innovation at the low end of the market, and facing many of
the same technical barriers this industry confronts around the world, all the supports and
subsidies has not met the goals for sales set by Beijing’s industrial policy. Beijing
acknowledged that, as of September 2014, China had met only 12% of its target for
alternative-energy vehicles to be introduced by 2015.69 One study calculates that of all
the cars produced in 2013 (the world’s largest auto producer), only .008% were high-way
ready passenger vehicles. (Most of these were purchases by taxi and bus companies.)
(Altenberg et al, 2015) Outside of the low-speed category (such as produced by Kandi
and Shifeng), most sales were to local governments; 80% of new energy vehicles sales
are in the public fleet, indicating failure thus far in the transformation from state support
to a consumer market. (Howell et al, 2014) Although in the past few months the picture
on sales has appeared brighter due to greater toleran of hybrids (Wang 2015), in general
Chinese industrial policy on EVs has been unable to move the market for EVs forward on
a par achieved by, for example, many European countries and California. (Mock and
Yang, 2014)
What can we conclude about the role of local government in these sectors? First,
it is important to reiterate that it remains incumbent on local officials in China to play a
role in potential economic development schemes, such as SEI industries. Especially
when the signals from Beijing that industrial policy should be pursued, local officials
cannot sit idly by and allow markets to work things out (even if private firms such as
Chang Cheng Auto can). And yet the ability of local governments to respond to Beijing’s
signals in a positive and conforming way has been shown here to be largely a function of
industry and market conditions. In short, the interaction of the two categories of
variables denoted in the introduction – industry characteristics and the strength and nature
“China Offers Billions to Subsidize Electric Cars on Gas,” Bloomberg News, December 10, 2014. On
China facing the same barriers as those encountered worldwide, such as high battery costs and generally
high costs relative to combustion engines, see Bernstein 2013.
69
33
of Beijing’s signals - has affected the development of the two industries considered in
this paper. A simple taxonomy helps to illustrate this relationship.
Industry structure (high barriers to entry, strong
incumbents, large-scale cognate industries)
yes
no
strong
EV sedans (pure
electric)
Moderate
weak
EV hybrids (post 2015)
(locals
pursue
despite
signals)
Solar panels (lower
priority signaled than
EV sedans)
Low-speed EV,
electric bikes
Need to
respond
to central
signals
(high
priority
of center)
This taxonomy perhaps contains an (intuitive) endogeneity, namely, that large
incumbents (e.g., auto producers) are likely to be favored in Beijing’s policy signals – as
makes sense if we conceive of new energy policy as being largely about industrial policy.
Local governments are likely to be more creative, as in the case of low-speed EVs, or to
sponsor rapid market entry (as in EVs) where the signal from Beijing is not particularly
strong. This may be create a context in which cost-innovation, and serving the low-end
of the market, is most vibrant. On the other hand, we see a less innovative environment
where barriers to market access are high and Beijing’s signals are strong. We cannot say
this is the result primarily of local government; in the case of EV sedans, the problems
China faces are the same as elsewhere in the world. However, local government efforts,
particularly to create market demand through government purchases or to compete to
produce standards that will not become national standards, do not help overcome these
problems. Note that the taxonomy ignores (perhaps mistakenly) the role of firm and
industry ties to global markets.
In conclusion, then, when has local government involvement proven most helpful
in the specific cases considered in this paper? When local market infrastructure and
34
conditions are favorable, especially where existing technology and value chains permit
firms to serve the low end segment of the market, local governments have been
instrumental. With low barriers to entry and extant industrial infrastructure, provincial
and municipal officials have supported market entry by local firms, and presumably have
gained some political benefits – employment, growth – for themselves. This dynamic
was evident in the low-speed EV industry. Kandi, under the rubric of the 10 Cities pilot
program and the help of Zhejiang and Hangzhou (and eventually Shanghai), and Shifeng,
under the protection of Shandong government. Kandi in particular has engaged in
business process innovation, with battery switching and rental models that grew out of
Hangzhou’s previous experiences with bicycles. (Though not explored in this paper, the
story may be similar in EV bicycles.)
Early on in its development, China’s solar panel industry – also facing low
barriers to entry and the absence of massive incumbents – in some cases appears to have
benefited from local government help, especially in the form of subsidies, government
facilitation of financing schemes, and contributions of land. When government behavior
in the solar panel industry (as with low speed EVs) could support an existing market, i.e.,
be market conforming, local officials appeared helpful. Yet once the export market
collapsed, and NDRC supported an end to many supports of solar firms (by limiting bank
loans), local officials in some cases were reluctant to allow firms they had supported to
fail, i.e., to allow market exit.
In the higher end segment of the EV market, for sedans and buses, we have seen
strong signals from Beijing – as in the 10 Cities pilot program - and efforts by local
governments to respond. Yet efforts by local officials have been much less successful.
In this segment, the technological barriers to entry by firms are high, and the sector is
dominated by incumbents (such as BYD). Consumer demand is low, due to high costs
and relatively poor quality compared to combustion engine sedans. Governments have
not only provided supply side support through subsidies and contributions of land and
loans, but also have made extensive attempts to stimulate the market through industrial
policy tools on the demand side, in the form of major consumer subsidies from central
and local governments, government procurement, and government support of
infrastructure (in terms of charging stations). Despite these efforts to conform to
35
industrial policy signals – efforts that merely by virtue of being made can have political
payoffs for local officials - the market has remained moribund.70 Indeed, local
government behaviors have exacerbated problems long criticized by Beijing (even if
caused by some of its policies): duplication of investment and local protectionism that
hinders the growth of a more integrated national market. In the EV case, efforts by local
governments to create a market, and thereby ameliorate market failure, could not succeed
due to industry and market conditions (lack of access to technology, high cost relative to
where market demand lies) not found uniquely in China but perhaps more difficult to
overcome there.
Some observers point out that local entrepreneurs are complicit in these failures.
Local entrepreneurs, even if not parasites on government funding, often seek to exploit
the funds available only through local governments (available only through local
governments because that is how central support funding flows, and due to the absence of
private capital). Indeed, some critics of Suntech’s failure do not single out Wuxi’s
government as the problem but, rather, its founder Shi Zhengrong. Similarly there is
equal criticism handed out to LDK’s founder Peng Xiaofeng and the Xinyu government.
It is clear there is a symbiotic relationship between entrepreneurs and local governments.
Others have suggested that the quality of local leadership is extremely important;
Baoding possessed quite impressive leadership that created a better ecosystem, whereas
Xinyu (in its treatment of LDK) did not.
Moreover, many problems– such as the difficulty in generating consumer-driven
markets for new energy – are far from unique to China, though in some respects (e.g.,
problems related to grid interconnection and the existence or private financing to
substitute for local government financing) may be felt more intensively there. There are,
then, many fingers to be pointed when looking to problems in the local ecosystem for
innovation and upgrading (or even basic firm success) in clean technologies. Perhaps the
most pertinent issue is that some sectors remain dominated by industrial policy concerns
–seen especially in the EV sector – making Beijing just as complicit as the local
government officials who respond to its signals. The previous discussion indicates that
A comparison of problems in China’s EV market with more successful cases of Japan, and Korea is
Tillemann (2015).
70
36
China’s industrial policy approach to the promotion of new energy and sustainability, and
the intensive role played by local governments in this institutional structure, does not
solve the problems of market failure. Local government’s deep involvement has not been
able to correct for market failures in solar (in which failure is largely due to exogenous
demand forces that forced local producers to try to create domestic demand) and EVs
(where other barriers such as price and grid problems create little organic market
demand). At the same time, local governments have participated in the political failures
that have in turn have to tremendous waste (the pressure to create “false brands” and
difficulties tolerating market exit) and to problems of developing a national market (local
protectionism and an insufficient grid network).
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