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Rival Partners: How Taiwanese Entrepreneurs and Guangdong Officials Forged the China Development Model
Taiwan has been depicted as an island facing the incessant threat of forcible unification with the People's Republic of China. Why, then, has Taiwan spent more than three decades pouring capital and talent into China?
In award-winning Rival Partners, Wu Jieh-min follows the development of Taiwanese enterprises in China over twenty-five years and provides fresh insights. The geopolitical shift in Asia beginning in the 1970s and the global restructuring of value chains since the 1980s created strong incentives for Taiwanese entrepreneurs to rush into China despite high political risks and insecure property rights. Taiwanese investment, in conjunction with Hong Kong capital, laid the foundation for the world’s factory to flourish in the southern province of Guangdong, but official Chinese narratives play down Taiwan’s vital contribution. It is hard to imagine the Guangdong model without Taiwanese investment, and, without the Guangdong model, China’s rise could not have occurred. Going beyond the received wisdom of the “China miracle” and “Taiwan factor,” Wu delineates how Taiwanese businesspeople, with the cooperation of local officials, ushered global capitalism into China. By partnering with its political archrival, Taiwan has benefited enormously, while helping to cultivate an economic superpower that increasingly exerts its influence around the world.
In award-winning Rival Partners, Wu Jieh-min follows the development of Taiwanese enterprises in China over twenty-five years and provides fresh insights. The geopolitical shift in Asia beginning in the 1970s and the global restructuring of value chains since the 1980s created strong incentives for Taiwanese entrepreneurs to rush into China despite high political risks and insecure property rights. Taiwanese investment, in conjunction with Hong Kong capital, laid the foundation for the world’s factory to flourish in the southern province of Guangdong, but official Chinese narratives play down Taiwan’s vital contribution. It is hard to imagine the Guangdong model without Taiwanese investment, and, without the Guangdong model, China’s rise could not have occurred. Going beyond the received wisdom of the “China miracle” and “Taiwan factor,” Wu delineates how Taiwanese businesspeople, with the cooperation of local officials, ushered global capitalism into China. By partnering with its political archrival, Taiwan has benefited enormously, while helping to cultivate an economic superpower that increasingly exerts its influence around the world.
532 pages, Hardcover
Published December 6, 2022
56 people want to read
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May 26, 2024
An interesting book that provides a theoretical and empirical framework for China’s industrialization, focused mostly on Guangdong. It ostensibly speaks to Taiwan’s role in fostering industrial development along China’s southern coast, but that really serves as a conduit for exploring rent-seeking, how that rent-seeking was purposeful and made said development possible, and how rent-seeking evolved and narrowed along with the strengthening of the central Chinese state.
Related and in parallel to discussions on rent-seeking, the book speaks to the hokou system of local citizenship and how this has been leveraged to create almost a caste system of citizenship. The nature of this system varies by region and is dependent on the city’s administration.
Chinese industrialization was fueled by the migration of Chinese peoples from the countryside to the city. These migrant workers have citizenship rights with their places of origin, not the cities they migrated to. As a result, for decades (and to varying extents to this day) migrant workers were denied the social welfare privileges of urban citizens. Because these migrant workers were less expensive for the city, the urban administration used a system of rents and corruption to suppress the cost of migrant labor by allowing firms to pay less taxes and lower wages. The urban government claimed some of the resulting producers’ surplus through various rents and kickbacks.
The exact shape of these rents depended on central policy. In the 80s, when China had a dual exchange rate (official and internal), local administrations required foreign firms — on paper, owned and managed in tandem with the local cadre (thus not capitalist, wink) — to buy inputs from (essentially) them at the official rate, earning the difference by then exchanging foreign currency at the internal rate. This system was purposeful, as it incentivized local cadres to foster industrialization despite the only recent end to the Mao regime and the ongoing ambiguity and hostility to capitalism.
When this dual exchange rate ended in the 90s, the rent-seeking regime changed. Foreign firms could buy their own inputs and instead paid certain taxes and fees for the employment of migrant labor. The true fees paid could be negotiated through guanxi, the social greasing of palms, to suppress labor costs.
In the 2000s, China’s industry was becoming increasingly Chinese — not just in terms of the firms, but the management of firms — and the central government began to centralize the collection of these taxes. It also began to side with strikers, demanding increases in pay and the backpay of social welfare taxes that these firms had avoided. As such, foreign firms either left, moved further inland (where wages were lower), or tried to increase the sophistication of their output (to sell at higher prices). They also began to see stiffened competition from mainland-owned manufacturers, who had access to the rent seeking mechanisms that suppress labor costs whereas foreign firms had started losing this access.
An interesting observation made is that the rent-seeking landscape changed rapidly with Xi Jinping’s anticorruption campaign, as the cadre that foreign firms had once dealt with were now out of favor within the party. Xi’s father governed Guangdong in his day, so Xi likely knew exactly what his policy would do. Anyway, it shows how precarious these informal institutions are and how quickly the incentives can change.
The book ends with the direction China is moving in and whether it will succeed in creating a cutting edge tech sector. In some ways, it has succeeded — high-end mobile technology and software engineering. In some areas, like in semiconductor manufacturing, it remains to be seen. The author is pessimistic, but China has proven such pessimism wrong in the past.
More interesting is the discussion on China’s objective of bypassing the corporate leaders of the global value chain — the Nikes, AMDs, and Apples of the world — by leveraging its massive internal market. Through economies of scale, Chinese brands can surpass western brands, especially American. China protected this internal market during the years of foreign industrialization by separating it from the export-focused output of foreign-owned manufacturers. Although suppressed wages has also suppressed domestic consumption — thus China’s high savings rate —, wages have nevertheless increased significantly and undoubtedly China will accomplish this objective. And per New Trade Theory, greater economies of scale will lead to higher wages by virtue of lower average costs (and lower prices).
What’s interesting to me is despite China’s success story and how this has translated to the degrading relevance of foreign firms in China, Taiwanese and Western firms continue to cooperate with China on things like semiconductor manufacturing. This includes the movement of talent to Chinese firms. Firms like TSMC seem sure that China will not bridge the technological gap — but we’ve heard that before, haven’t we?
The book was originally written in Chinese and is translated by Stacy Mosher, whose translations I seek out. The author adds footnotes where the translations might lose some of the original meaning.
Related and in parallel to discussions on rent-seeking, the book speaks to the hokou system of local citizenship and how this has been leveraged to create almost a caste system of citizenship. The nature of this system varies by region and is dependent on the city’s administration.
Chinese industrialization was fueled by the migration of Chinese peoples from the countryside to the city. These migrant workers have citizenship rights with their places of origin, not the cities they migrated to. As a result, for decades (and to varying extents to this day) migrant workers were denied the social welfare privileges of urban citizens. Because these migrant workers were less expensive for the city, the urban administration used a system of rents and corruption to suppress the cost of migrant labor by allowing firms to pay less taxes and lower wages. The urban government claimed some of the resulting producers’ surplus through various rents and kickbacks.
The exact shape of these rents depended on central policy. In the 80s, when China had a dual exchange rate (official and internal), local administrations required foreign firms — on paper, owned and managed in tandem with the local cadre (thus not capitalist, wink) — to buy inputs from (essentially) them at the official rate, earning the difference by then exchanging foreign currency at the internal rate. This system was purposeful, as it incentivized local cadres to foster industrialization despite the only recent end to the Mao regime and the ongoing ambiguity and hostility to capitalism.
When this dual exchange rate ended in the 90s, the rent-seeking regime changed. Foreign firms could buy their own inputs and instead paid certain taxes and fees for the employment of migrant labor. The true fees paid could be negotiated through guanxi, the social greasing of palms, to suppress labor costs.
In the 2000s, China’s industry was becoming increasingly Chinese — not just in terms of the firms, but the management of firms — and the central government began to centralize the collection of these taxes. It also began to side with strikers, demanding increases in pay and the backpay of social welfare taxes that these firms had avoided. As such, foreign firms either left, moved further inland (where wages were lower), or tried to increase the sophistication of their output (to sell at higher prices). They also began to see stiffened competition from mainland-owned manufacturers, who had access to the rent seeking mechanisms that suppress labor costs whereas foreign firms had started losing this access.
An interesting observation made is that the rent-seeking landscape changed rapidly with Xi Jinping’s anticorruption campaign, as the cadre that foreign firms had once dealt with were now out of favor within the party. Xi’s father governed Guangdong in his day, so Xi likely knew exactly what his policy would do. Anyway, it shows how precarious these informal institutions are and how quickly the incentives can change.
The book ends with the direction China is moving in and whether it will succeed in creating a cutting edge tech sector. In some ways, it has succeeded — high-end mobile technology and software engineering. In some areas, like in semiconductor manufacturing, it remains to be seen. The author is pessimistic, but China has proven such pessimism wrong in the past.
More interesting is the discussion on China’s objective of bypassing the corporate leaders of the global value chain — the Nikes, AMDs, and Apples of the world — by leveraging its massive internal market. Through economies of scale, Chinese brands can surpass western brands, especially American. China protected this internal market during the years of foreign industrialization by separating it from the export-focused output of foreign-owned manufacturers. Although suppressed wages has also suppressed domestic consumption — thus China’s high savings rate —, wages have nevertheless increased significantly and undoubtedly China will accomplish this objective. And per New Trade Theory, greater economies of scale will lead to higher wages by virtue of lower average costs (and lower prices).
What’s interesting to me is despite China’s success story and how this has translated to the degrading relevance of foreign firms in China, Taiwanese and Western firms continue to cooperate with China on things like semiconductor manufacturing. This includes the movement of talent to Chinese firms. Firms like TSMC seem sure that China will not bridge the technological gap — but we’ve heard that before, haven’t we?
The book was originally written in Chinese and is translated by Stacy Mosher, whose translations I seek out. The author adds footnotes where the translations might lose some of the original meaning.
This entire review has been hidden because of spoilers.
Displaying 1 of 1 review