Abstract
The rapid rise of an innovative private manufacturing economy in China challenges standard economic explanations of growth, which typically assume the existence of well-defined formal institutions such as property rights and company laws safeguarding investor and creditor interests. We highlight the social structure of cooperation that enables innovative activity in private manufacturing firms when formal property rights protection remains weak. We show how network effects linked to inter-firm cooperation in industrial clusters allowed private entrepreneurs to quickly develop reliable business norms to reduce the inherent risk of malfeasance and contract breach in formal and informal collaborative efforts. Survey data from a sample of 700 manufacturing firms located in China’s Yangzi Delta region confirms that both formal and informal types of inter-firm collaboration are effective, though in different areas of innovative activity.
Highlights
The size and competitiveness of China’s private-firm economy is a puzzle that challenges standard economic explanations of entrepreneurial development and economic growth
What explains private-firm R&D productivity closing the innovation gap with larger state-owned firms and public corporations? We argue that the ‘bottom-up’ construction of economic institutions in geographically concentrated industrial clusters has enabled private companies to circumvent formidable barriers to market entry, weak legal enforcement of contracts, and discriminatory state policies to move up the technological ladder through network effects of cooperative strategies in the diffusion of innovative activity
How do innovation networks operate in the absence of the institutional conditions present in high-income economies such as the United States, Japan and Sweden? What happens when innovation partners have an interest in securing key technologies without contributing equal effort or sharing gains from commercialization, but cannot rely on sophisticated contractual agreements enforced by unbiased local courts? How can entrepreneurs gain assurance that the risks of opportunism and expropriation of intellectual property are outweighed by the gains from cooperation? As one entrepreneur we interviewed reasoned: ‘If we were in the USA, we would not need to work so hard to protect ourselves, because you can rely on intellectual property rights
Summary
The size and competitiveness of China’s private-firm economy is a puzzle that challenges standard economic explanations of entrepreneurial development and economic growth. State-owned enterprises and state-controlled public corporations, many listed on the Shanghai and Shenzhen stock exchanges, have enjoyed mostfavored treatment since the start of economic reforms in 1978. Their dominant position in the economy reinforces the global perception of state capitalism as the form of economy that has evolved in China. Private companies registered 34 per cent of new products brought to market in 2012, whereas stateowned enterprises and state-controlled companies were responsible for 44 per cent
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