All three company ownership categories have ridden an enormous wave of investment in China during the past fifteen years. The flow of foreign capital, which is approaching $1 trillion since the start of economic reforms, also brought with it new products and technologies, expertise, and practices. 3 But even this surge in foreign capital has been overshadowed by the volume of investment from Chinese sources— from the government at all levels, in spending on infrastructure, and from Chinese companies, both public and private, investing and reinvesting in productive capacity.
This domestic investment has been the most significant underreported factor in the growth of China’s manufacturing sector, particularly that spent on infrastructure. Its overall level of investment is unprecedented, not just in China, but anywhere. And it started well before the “stimulus” package of late 2008. Since the early 1990s, gross capital formation— the share of money invested in capital assets such as buildings, roads,
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machinery, and equipment—has been approximately 35 percent of gross domestic product, rising to 40 percent in the early to mid-2000s. Other countries, including Japan and South Korea, approached China’s investment rate, but in each case only for a handful of years. Not one of them maintained the same sustained level of spending for so many years.
The most spectacular results can be found in China’s industrial development zones. Many of these amount to satellite cities in their own right, with populations of several hundred thousand, their own universities, convention and exhibition centers, hotels, and leisure facilities such as golf courses, parks, and lakes. These zones cost billions of dollars to build, but, in turn, they have attracted tens of billions of dollars of capital from multinational companies.
China’s domestic companies, both publicly owned and private, have strong incentives to keep investing and reinvesting. Few companies see returning dividends to their shareholders as important, preferring to expand their productive capacity. Publicly owned companies, especially at a local level, invest to create jobs and boost their local economies. Pride also plays a part, with every province seeking a full range of industries, from automotive to information technology. This ambition has led to both a surge in capacity in just about every industry and the heated competition that has come to characterize the liberalized markets in the Chinese economy.
It has also led to charges of waste. China is often criticized for spending lots of money inefficiently: building unneeded commercial towers and government offices, bridges that have little traffic, and factories in industries that already have large amounts of excess capacity. But such criticisms overlook the overall effect of the investment boom: it created China’s industrial infrastructure, and it will drive the next phase of economic development.
To date, most investment has gone to establishing the basic requirements of industrial society: roads, ports, and power stations, telecommunications networks, factories, and equipment. This work is far from finished and is a major part of the government’s stimulus
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measures introduced to keep the economy growing strongly through the global economic slowdown. As such, much of the force behind China’s growth has been extensive—adding more infrastructure— rather than intensive—getting more out of existing facilities.
There are, of course, limits to just how long such expansion can continue. Ultimately, China will have to shift from an investment- driven model of growth to a demand-driven model in which private consumption plays the greater role. And along the way, companies, particularly domestic ones, will have to shift their emphasis from producing more in whatever way possible to increasing productivity: realizing more value from the same amount of inputs.
The strong demand created by China’s fast growth has allowed many companies to postpone this reckoning—until now. The weaker demand generated by the global economic slowdown, however, has forced many companies to look more closely at their productivity. Broadly speaking, Chinese and foreign companies are going about this in different ways. Foreign companies are looking at ways in which they can expand their activities in China by increasing the range of tasks they do in China through a process of value-chain migration. Chinese companies, for a variety of reasons, are largely focused on strengthening their existing operations, in particular by looking for innovative and more efficient means to produce goods.
The rest of this chapter explores these two responses and how they are creating the foundation for a shift from China’s expansive development to a more intensive kind of development: the search for new ways to enhance the value generated within China’s economy.