This article examines the creation of industrial enterprises and the basic models of firm level technological learning behaviour of the last twenty years in China. Six case studies of technological learning and links to external sources of know-how from the South of China in the Pearl River Delta are examined. It is shown that the learning process that has been experienced in these enterprises is similar to that of other East Asian fast growing economies. Until now enterprises have acquired technology through external linkages with foreign clients which become their main providers of technology. A detailed account of the enterprises allows a typology of the external technological learning. It is claimed that the growth of the South of China lies in this “external” interactive technological learning, as in other East-Asian economies.
1. Introduction : The “secret” of China’s recent economic growth
China has known an impressive 8% annual growth in recent years and its GDP has been mul-tiplied by seven in the last 23 years. Still, the size of the country blurs the extraordinary diver-sity of situations. Recent growth began after the reform period, at the beginning of the eighties. It relied in an important growth of the non-planned sector, that is productive systems that were not planned by the government authorities. Three waves of investment were responsible for this new emerging economy (Arvanitis et al., 2003). The first one, in the early eighties, saw the appearance of township and village entreprises, mainly in rural settings. This first and sur-prisingly rapid growth was impulsed at the lowest levels, by personal initiatives. It went on from 1983 to 1988. This surprise was followed by a second wave of investments mainly by foreign Chinese, from Taiwan and Hong Kong that introduced productive systems which were formerly situated in Hong Kong and Taiwan. These foreign investments represented 18% of investment in China in 2001 (around 20 billion dollars), and 47.5% of Guangdong Province foreign investment (around 6.9 billon dollars). This wave of investment was to be durable wouldn’t there have been the 1997 Asian crisis that hit Asian investment. It was relayed by a third wave of investment mainly coming from the USA and Europe, and Japan. This last wave is still going on.
Much of China’s economic development is due to its industrial growth. The Chinese economy is still export-driven and relies heavily on foreign investment. But the growth process has been shown to be largely due to a combination of various factors, of which an important part relies on the entrepreneurial growth in China. This emerging economic sector composed mainly by Chinese-owned and Chinese-managed companies, is the engine of growth of China (Gregory et al., 2000).
There are today more than 220,000 foreign entreprises (by Joint-venture or totally owned), a figure which compares to the impressive growth of the private sector which represented in 1998, 1.8 million “private entreprises” (seyin qiye). This does not count for individual entre-prises (getihu) which were, since 1981 and until 1988, the only entreprises allowed legally, defined as entreprises of less than seven employees (31.6 million units). The overwhelming majority of private entreprises has been created after the “tour in the South” of Deng Xiaoping, in January 1992. Today there is still a substantial collective sector, neither state-owned nor totally private, which is managed as a private enterprise (3.2 million entreprises), and should be included in the new emerging private sector. State owned entreprises represent more than 1.6 million (Guiheux, 2002 : 30). Some state-owned entreprises can be “privately managed” (mingying), which concerns mainly high-tech entreprises (Segal, 2003, Zhou and Xin, 2003).
Nowadays a lot of discussion is taking place on the reasons and sustainability of the growth process. Is this growth possible in other countries in Asia or elsewhere -for example Latin America ? How exceptional is this growth, that is, how much of it can be understood as being specific to the political conditions of China (a former communist country, a “transition economy”, a very large economy dominated by the state or any other qualification) and the specific “advantages” of this country (low labour cost, easy and rapid administrative process for the registration of a new business, sizable markets) ?
2. The South of China as a case-study for learning
In this article, instead of looking at the macroeconomic conditions, as is usual in these discus-sions, we will try to present in an articulate way only one of the essential aspects of this growth process : the relations of Chinese companies with the economies of the rest of the world. Our cases are all located in Guangdong province in the South of China, which is responsible for more than 36% of China’s exports and 14% of China’s production and has been “one step ahead” in the modernization process of China (Vogel, 1989). Today Guangdong is still the largest receiver of foreign capital and is still the largest exporter (Cheng, 2003), concentrates most of the private sector in China.
The “miracle” of South China industrialization that we briefly described in the precedent sec-tion, is based on the creation of industrial private or privately-managed enterprises, and mainly of small and medium sized enterprises. It should be noted that very few new large enterprises have been created after the opening up of the economy in the eighties ; most of these are still state-owned, didn’t transform into chaebols Korean-style (Huchet, 1999, Huchet and Richet, 2004) and were not responsible of China’s economic miracle. It is the emerging productive system (privately or collectively owned) on top of, or around, the state-owned industrial system that explain success. This feature by itself is intriguing.
Guangdong’s initial development relied on the combination of two types of enterprises : pro-ductive units employing unskilled, mainly immigrant from the hinterland, labour force funded by foreign capital, mainly from Hong Kong, and afterwards from Taiwan ; and, small industrial units created by local entrepreneurs using the same labour force under even more stringent and difficult working conditions (Chan, 2003). This combination of local and foreign-owned (overseas Chinese) enterprises created an impressive web of industrial companies, making of Guangdong and more specifically the Pearl River delta, the region with has grown more rapidly in the World (Yeung and Chu, 1998).
Comparisons at the macro-economic level were not able to detect the formidable entrepreneu-rial force behind growth. Comparing Indonesia, Vietnam or Cambodia -where salaries are lower than China -will convince the readers that low salaries are not a suitable explanation. Other often cited explanations like the cultural and geographic proximity of Hong Kong, the specific labour culture of China, the relatively high educational level of its population, the business-minded networks of friendship and guangxi (Hendrischke, 2004, Peng and Luo, 2000), may also have their part in the explanation (Cheng, 2000, 2003, Lan, 1997). But, if these were sufficient explanations, then Guangdong’s development would have been easily foreseen. This was not the case : 25 years ago nobody thought Guangdong would become “the factory of the world” (Ruffier, 2001).
Our observations show that what happens inside the emerging industrial enterprises is a better clue to understanding the South China miracle and. the way businesses acquire and adopt technologies is a large part of the explanation. We therefore will focus on the technological behaviour of the companies, not on the entrepreneurial behaviour as a whole (Krug, 2004, Guiheux, 2002, 2003, 2004a, 2004b).
3. Technological learning of late-comer companies
Since the seminal work on technological learning in the developing world of Katz (1976) and Amsden (1989), a lot of the work has focussed on South Korea and Taiwan as examples in order to explain or reject some aspects of the theory on late industrialization, the role of the state, the creation of international value-chains. A theory of the necessary steps to attain a certain level of technological development, and up-grade from the acquisition of a basic pro-ductive capability to a more complex technological capability has emerged (Kim, 1997, Hob-day, 1995). Observing the Taiwanese electronics industry, Hobday predicted a continual up-grading from simple suppliers, to Own Equipment Manufacturer (OEM) suppliers, to Own Brand Manufacturers. Dutrénit (2000), after doing an extensive review of the literature, pro-posed for late-industrializing firms to focus attention on the transitional conditions of the up-grading process in large firms. Technological learning has been at the centre of these dis-cussions on late industrialization, so much so that some authors propose to replace the concept of National System of Innovation by that of National System of Technological Learning (Mathews, 1999). Learning (and achievement) in general have been seen as an underlying feature of Asian societies (Rowen, 1998). Technological learning is seen as a structural feature that goes hand-in-hand with some special institutional arrangements that permit to promote learning (Kim, 1997).
It is remarquable how quickly the debate centered on the national level, the innovation system, the institutions, and the overall environmental, social and economic conditions of industriali-zation (Lall, 1998, Kim, 1997, Mathews, 1999, Chen and Sewell, 1996, Chaponnière, 1985, Shin, 1998, Shin, 1996), instead of digging more in-depth on how specific companies were getting involved in the international business and how commercial arrangements made by firms, say in Taiwan or South Korea, affected profoundly the way up-grading was done. In fact, some rare authors such as Gereffi (1999) or Ernst and Kim (2002) have been seeking to un-derstand the subcontracting process which has been formed in East Asian economies, and the creation of global chains of supply. In one such analysis of the Taiwanese electronics industry, Ernst emphasizes the diversity of linkages between sub-contractors, foreign clients and pro-viders of technology (Ernst and Kim, 2002, p.3) : “International linkages include a variety of ties with sales, manufacturing, and engineering support affiliates of foreign firms ; they also include different forms and trajectories of integration into global production networks of American and Japanese electronics firms. Taiwanese firms typically have relied on concurrent knowledge outsourcing : they have pursued different approaches in parallel, rather than con-centrating exclusively on one particular linkage.”
Very much in line with this work, we stress that technological up-grading in China has followed a diversified pattern, and entrepreneurs have always kept a variety of technology sources, not so much because of some strategy, but rather out of an immediate and pragmatic need to be re-solved : the access to technology. In the absence of previous experiences, local firms relied on their foreign clients, rather than some public knowledge provider, or other external sources of technical advice. This may not appear new to the Asian literature ; it nonetheless is the actual industrialization process in China : technological learning is taking place in a large variety of medium sized companies, not so much through technology transfers from foreign firms that invest in China (inward FDI) or through some other providers such as Universities, technical centres or consultants, but through their foreign clients.
4. Understanding technological learning in firms
We did our fieldwork in a great variety of enterprises, representative of the different types of the emerging productive system described in section 1, guided by the following basic ideas. Technological learning is a cumulative process over time, very specific to each firm, and col-lective in the sense that it involves more than one person inside the company (Villavicencio and Arvanitis, 1994, Arvanitis and Vonortas, 2000, Arvanitis and Villavicencio, 1998, Figueiredo, 2002). What is learned and how it is learned are very much related issues. Economists of in-novation have used the notions of “productive capabilities” and “technological capabilities” in order to differentiate two resulting paths of technological learning, particularly in the devel-oping countries (Bell and Pavitt, 1995). These terms encapsulate the notion of “absorptive capacity” introduced by Cohen and Levinthal (1990), in that an enterprise needs to develop sufficient capabilities that permit to absorb the new -for her- technologies. Nevertheless, it should be reminded that these authors had only discussed the case of rather large and sophis-ticated economies, and gave a particular importance to R&D. As the literature showed, learning cannot be reduced to R&D, even if it is an essential component. Moreover, R&D is not linked to production or the market in a linear and simple way (Rosenberg et al., 1992). The existence of an R&D unit is not limited to some large R&D facility with specific research projects ; R&D’s functions can be much wider, supporting the whole productive process, particularly in small and medium entreprises where it is frequently undercounted (see Arvanitis, 1996, Arvanitis and Vonortas, 2000, Acs and Audretsch, 1991, Kleinknecht et al., 1991, Kleinknecht and Reijnen, 1991). R&D, in fact, affects the strategic capability and thus we try in the interviews to un-derstand what is called an R&D unit in each company.
An empirical description of technological learning would identify two types of activities : those that permit to enhance products and processes inside the enterprise (internal learning) and ac-tivities with the same purpose but in relation to clients, suppliers, and external sources of knowledge (external or interactive learning) (Pirela et al., 1993, Arvanitis, 2000). Internal learning includes such activities as : seeking technological information on alternative techno-logical routes, adaptation of technology, development of better and new products and adapta-tion and design of processes. Product and process innovations, strictly speaking, are part of this learning experience as well as R&D, design, engineering, maintenance, and quality manage-ment. External or interactive learning activities can take a very wide variety of forms. Table 1 summarizes those external relations that are related to a foreign provider of technology, and their impact on the creation of technological capabilities.
Companies that up-grade from productive capabilities to technological capabilities combine their internal and interactive learning and, as their experience evolves, they enter a more com-plex organizational learning (see for a similar statement Figueiredo, 2002). The integration of technological learning with the market and organization is of paramount importance in the further development of the company. It is based on the management of the interactive learning, as well as straightforward management, a “soft” skill that the literature on business manage-ment of joint-ventures has focussed upon heavily (Wang et al., 2001), but less so in the case of Chinese enterprises in mainland China. There is a substantial management literature that fo-cuses on joint ventures or foreign companies in China, mostly on management issues (Peng and Luo, 2000), investment decisions (Shi, 2001) and, in some cases on technology transfers (Wang et al., 2001, Martinsons and Tseng, 1999, Walsh, 2003). The same issues are less commonly studied in Chinese-owned companies (with some exceptions like : White and Liu, 1998, Zhao, 2000, Xie, 2003, Xie and Wu, 2003).
An often mentioned aspect, the role of local government in China, as elsewehere in Asia is subject to much controversy (Guiheux, 2002, Gu 1999, Wade, 1990, Lin, 1998, Lowe and Kenney, 1998). We will not deal directly with this issue, neither will we deal with the policies that have been devised by local, provincial and national governments in China in order to promote technological development, innovation, industrial clusters and entrepreneurial growth (Arvanitis, 2004, Sigurdson, 2002, Xu, 2004, Suttmeier and Cao, 1999, Liu and White, 2001, Gregory et al., 2000, Huang et al., 2004, Chang and Shih, 2003, Gu, 1999, 2001).
5. Sample selection and methods
Hereafter we present briefly the experience of six different enterprises (table 2). We selected them among a total of 46 interviews. The selection is based on our qualitative appreciation of the “typical” character of the cases representing what we have called “the emerging industrial sector” of South China : a large sport shoemaker Taiwanese Joint-Venture (hereafter named TL) inserted in a global value-chain, a medium-sized packaging Joint-Venture with an industrial-ized country partner (CB), a small private Chinese enterprise oriented toward export (CZ), a small private Chinese company oriented mainly toward the national market (HY), a slightly larger collective-owned company in a traditional sector (WG), and a middle-sized collective company in electro-domestics (JL). Their histories and strategic orientations illustrate the wide range of strategies that we found on the ground. No large company was included, neither high-tech companies, which are rare, although we conducted three interviews in such compa-nies and they indeed deserve a separate treatment as we have reported it elsewhere (Arvanitis, 2004 ; see also case studies in Huchet and Richet, 2004). The interview guide tries to catch the history of the enterprise, the linkages with providers of technology and clients, the insertion into the local policy and economy, internal management of manpower and quality, and the general strategy of the firm. Each interview lasted between one hour and one hour and a half, sometimes more ; it was often followed by a visit of the workshop. Interviews were also made in eight innovation centres among 38 in Guangdong on the management of innovation, man-agement issues of the centres and relations between companies in industrial clusters (reported in Arvanitis and Qiu, 2004).
6. Findings on six empirical cases
TL : a Taiwanese shoe producer in China
TL is a typical company created by “overseas Chinese”, mainly from Taiwan and Hong Kong. It was established in Nanhai, an industrial city near Guangzhou, where the shoe industry has been favoured by the local government. TL is a shoe producing company quite strong in Tai-wan which has some 15 factories in mainland China, all geared in producing sport shoes for foreign clients. TL, which employs about 3000 workers, produces sport shoes for an Italian brand and two North-American brands. It should be noted that no foreign client has exclusive use of this factory. The factory is fit for the international market and is export-oriented ; it can produce for any large brand of sport shoes in the world, at any quantity in very short periods of time. Containers are loaded inside the factory and shipped to the port of Nanhai. TL does not deliver to the local market. In some cases, the foreign clients ask them not to sell on the local market because of fear of copy, as well as because of marketing policy.
TL has OEM arrangements with its principal clients, and very stable contracts over time. It has no difficulty in satisfying these criteria ; the clients have permanent representatives located in-side the factory for quality checks and production procedures supervision. These representa-tives also assist the producer in design activities. The firm has a testing and experimental unit, so-called “R&D” unit. This unit designs new shoes and proposes new models to the client, mostly simple variations of the previously produced models. The client can accept or reject these designs. In fact, the multinational brands rely more and more on these OEM providers for low-end changes in design. The cost of design is low costs because designers have low wages. The factory has a good competence in testing quality, an essential feature in this trade. Feasi-bility of the new designs is part of the package for technological learning.
The local firm publicizes its regular and strong contacts with the international brand. In every office the “ethical rules” of the multinational are shown, in particular as to how labour and human resources are managed by the multinational group. The factory seems to work as a subsidiary of a multinational company. But this is a false impression since the management of labour and local resources is not controlled by the foreign partner. Clients only check quality and timing. Nonetheless, TL has developed knowledge on how to manage faulty products and quality, a crucial technical and commercial knowledge.
This factory is a typical example of the “triangle manufacturing” depicted by Gereffi (1999) in the apparel and textile industry where “the US buyers place their orders with the NIE [Taiwan or Honk Kong] manufacturers they have sourced from in the past, who in turn shift some or all of the requested production to affiliated offshore factories in low-wage countries (e.g., China, Indonesia or Vietnam).” (p. 60) It is managed as a Taiwanese company, exploits cheap local labour, provides exactly what the foreign client wants and has acquired a substantial know-how on quality and technology.
CB : successful JV of a multinational with a city authority
We can contrast the case of FDI made by TL, the Taiwanese-owned company, with this French multinational. CB is one of the largest packaging producers in the world. It went early to China, because as “a world-class company we couldn’t miss the Chinese market”. The multinational set-up a Joint-Venture with a company owned by a local government, the only legal form for foreign investment at that time.
On entering the market, they also were looking for immediate profitability, which arose from fully exploiting the market of the already existing company with which it formed the JV, and a strong and growing market of local clients. A totally new investment was done to serve ex-clusively a US multinational, leader of cosmetics, soaps and detergents, by installing high-end equipment, exclusive design for the moulds, and close relationships with the equipment pro-ducers. This new production line coexisted with two older lines, serving different markets.
The existing Chinese company, says the French director, needed little re-organization. The company is not very large, around 280 workers, pays rather better salaries than other factories around, and has always been earning money. All management is Chinese with two or three exceptions (the financial department director, the sales agent for exports and the director gen-eral). Technological reordering and financial clean-up were the two priorities of the new management.
Competition with Chinese companies is quite strong. To be a famous French brand is not suf-ficient in order to get new clients. The only market that is stable is the US transnational client. The JV has benefited from the management experience of the French owners, but on the whole, production management and personnel have been in the hands of the Chinese managers with long-time experience. Some technical personnel in highly technical areas (moulds) have benefited from long stays in factories located in France. The French company has offered many times to buy the Chinese partnership, but the city authorities don’t want to lose a company that is earning money.
WG : A collective enterprise in the faucets and plumbing sector
WG is a collective entreprise, that is, a company that formally belongs partly to a collective body (the municipality). Most collective enterprises have been at the forefront of the Chinese industrialization, becoming famous brands in China (Konka, Meidi or Changhong) or the world (Haier, or LeNovo). The particular ownership status does not seem to deter their dynamism.
Before the reform, WG was once the only company in the city of Shuikou. It was dedicated to producing simple faucets of the kind you find in gardens, made from iron cast and quite rude. For more than forty years this enterprise worked out its way through the vicissitudes of Chinese economic and political life. With the reform policy in the eighties the company was challenged : some of its workers, who had been working there for more than twenty years, created private enterprises. Faucets and plumbing in general is a good business when there is a construction boom, as is still the case in China. Soon many more companies were created by former workers of WG. WG is called the “mother of all companies” in Shuikou, but still is the largest company in town. Among other things, it is the only one that has a metal-plating facility, a highly pol-luting activity that is nonetheless an obligatory passage point of any unit producing faucets. Moreover it has benefited from a certain inertia on the side the government -at the very least, even though we have not heard of a special treatment of this company. Collectively-owned, in fact, does not mean “state-owned”, and here the local authorities do not consider it is “their” company. Productive processes, models, and deals are made very much in the same way by WG as in other successful companies in Shuikou. The technology is not so much better in WG than in other companies. The role of “mother” can be held in part responsible for this state of affairs : the best among the workers went away creating their own businesses. Smaller companies were created abundantly around WG by the very best people that had learned the basic technology inside WG.
Its two main foreign clients are outside China, in Europe and Latin America. The Latin American company chose WG as its provider among other things because of its size. The two clients have another common interesting characteristic : they were once producers but became essentially a brand-name ; they do not operate anymore a local production facility in their own country. China is a good provider for middle-quality products, as they say, and these companies themselves are middle-range quality distributors. They offer the standards to WG but have no strict control on the process of production.
Another striking feature is the large variety of models. The company produces along the standards that are offered by the foreign clients. But for the local market, the company provides the models to the merchants. When interviewing the manager, WG seemed like a company under siege. Nobody would be allowed to come and see the fabrication secrets of the factory. The competition is quite fierce and it appears that for some time, WG had the impression of loosing the battle. It is more likely that the company had to adapt from a non-competitive en-vironment to a newly competitive one. In the aftermath of the reform period, demand was suf-ficiently large as to absorb all the new offer of faucets and plumbing, but as competition became fiercer, WG had to adapt.
Foreign clients have been essential in the design of new models. At the beginning, it seems the proximity of the company to local authorities permitted to reach foreign clients. But, the company has not benefited from any other favourable status on the side of the local authorities. Its ability to survive can best be explained by a larger quantitative output, and quick scaling-up.
HY and CZ : Two private SMEs in the faucets and plumbing business
HY and CZ are both private companies created by former workers of WG in the township of Shuikou. HY is a young company (8 years), now strong with 300 workers, all immigrants from other regions of China, like all workers in the other factories around. HY is quite well ordered, managed as a family business, the woman looking at the accounts, her husband managing the production and the public relations. Interestingly it is considered as among the best companies in the city, if not the best one, although the owner does not seem willing to shareanyfriendship toward the authorities ; “public authorities means taxes”, we are told.
HY seems to have had a better and stronger learning process than many other companies we visited in the area. Nonetheless, the whole productive process is mainly manual process like most other companies we have visited. What makes the difference here is a stronger quality control, a better division of productive tasks, and a more efficient layout of the factory.
The company has benefited from one big contract from a Spanish client. At some point, after two years, the client, who was introduced to the company by the local government, proposed a joint-venture with the company. The entrepreneur refused, not wishing to loose control of his business. Pressure has been very strong from the authorities, and finally, a joint-venture has been set-up, but the foreign client is minority shareholder (only 20%), a rare situation here since most JVs are set-up in a manner that benefits more openly the foreign partner.
This entrepreneur never wished to loose the diversity of clients and so no exclusive contract has been signed with this client. The company uses the learning acquired in producing the models for his foreign partner in the production sold to the local market. Visits of technical foreign personnel are quite frequent, but the quality control is not resident, as in TL in the shoe industry with OEM agreements.
Even with specific exclusive models, even with a participation in the capital of the company, the foreign client cannot maintain an exclusive control on the production and marketing of the Chinese company. Frequently, clients ask that no external marks in the packaging or the product permits to detect its Chinese origin. In such conditions, the Chinese producers have no difficulty in maintaining a large array of clients.
The case of CZ, created 9 years ago, in this town of Shuikou, is quite different because this company, which is neither a JV, nor a partnership with a foreign entreprise, is producing exclusively for the export market. A little smaller in size than HY with its 200 to 250 employees, CZ exports 90% of its production. It is a “real” ISO 9000 company in town, and the process of making the process ISO-compliant has been very arduous. It has invested strongly in the ISO process and the owner and general manager has used the ISO system as a lever to maintain high quality. At least one of the older supervisors that were in charge of production management was obliged to quit because of the reporting system needed in order to be ISO compliant. The company has been oriented towards the German market since many years and still wants to keep a strong export orientation. This company has been innovating, introducing many new products and making considerable adaptations to the processes. The owner has gone many times in Germany in professional fairs and has brought with him faucets which have been “reversed-engineered”. Technicians coming from client-entreprises have also inspected the company.
The owner thinks he has attained a certain high limit in terms of quality. In Europe, its pro-duction is considered middle range quality. In order to produce higher quality, investments would be important in machinery. In fact in maintaining the semi-manual technical process, quality can never be as high as in Europe, but costs are much lower.
JL : local state-owned entreprise with strategic alliance in the washing machines
JL is a local government-owned entreprise -a collective enterprise like WG- created in 1979 that produces washing machines. It produced a mere 200 machines per year and now reaches a production above one million. Today, it produces among the highest quality washing machines in China, but that was not the case at the beginning. It announces sales of two billions Yuans per year (around 250 million USD), and has exported last year for 8 million USD. Today, it is the fifth producer in China, the third exporter of washing machines. Recently it entered in a JV with Mitsubishi for the production of air-conditioners, and is considering a partnership with General Electric in the washing-machines business.
The production of washing machines is an interesting sector because it exemplifies the evolu-tion of the Chinese market. As many others companies, it began with the first years of the re-form process. The sector has been dominated rapidly by companies that today either disap-peared or have lost their rank. This is the case of companies in Guangdong Province in cities of Guangzhou, Foshan, Zhaoqing and Zhongshan. For many years, Weili, a company based in the city of Zhongshan and also a local government-owned enterprise, has been the biggest and most famous brand in China. Today Weili produces less than 20.000 units per year, cheap and ob-solete models. In the Province of Guangdong, JL represents nearly 90% of the provincial ex-ports in washing machines.
The managers of the company explain their success, apart from the hard work, by the fact that they were a relatively small company, that did not attract the envy and greed of provincial authorities. Apart from this political aspect, which is certainly important for a collective en-treprise, a constant strategy based on technological learning is maybe a better explanation. JL has developed good production processes, high quality production, created an R&D unit, and kept a continuous training for its personnel. It should also be mentioned that workers here are mainly local people, not immigrants from other regions, and they are quite well paid as com-pared to mean salaries in the industry of this region. It looks actively to create a production unit outside China, and Brazil will probably be its next destination. JL is also OEM producer for many large firms in China like Konka and TCL. These brands are well known but produce other types of equipment like televisions, computers, or telephones. Washing machines under their brands are produced by JL.
The company has tried to enter in the production of more and more sophisticated products. It has developed competencies in product design, training of human resources, process capabili-ties. It has benefited from help form the city office of science and technology for developing partnerships with the local engineering school by developing an R&D centre inside the com-pany. It has centered then its attention to Computer assisted design (CAD) -buying a CAD program and installing also a GIS for management of sales. It has conceived of a specific technological program for the design of highly automatized electronic commands of the washing machines. It has design specific moulds for its equipment. A cooperation with Tsinghua University department of engineering in Beijing (best known University of China) has been established, as well as with the Normal School of Beijing, the Industrial University of Harbin, and the Polytechnic School of South of China in Guangzhou. Some of these collabo-rations were supported by the National programmes for Science and Technology. Its invest-ment in R&D has always been quite high : 4,1% in 1998 and 5,9% of its sales in 2001.
The company has developed many quality control programs and various systems for the en-couragement of workers better practices. Management insists that the failure of Weili, once the best known company in China, has been a lesson : they now bring a lot of attention to the qualified personnel. Specific training programs have been devised with Wu Yi, the local en-gineering school. Today their strategy is to constantly produce new washing machines : new products represent now 30% of their sales. “We want to export and be famous because of the quality of our products and our technological innovation” says the general manager. JL has now a patent policy and an intellectual property office, a rather unusual feature. In 2001, the com-pany has acquired 20 patents and copyrights, of which 7 were technical patents. Some patents have been extended abroad. The company also learned how to manage efficiently a network of suppliers that has been extended progressively. The motors are produced outside the company and motors have now attained a 90% rate of acceptance.
Management has been a constant care of the company. Recently the company created an af-filiate JV with Mitsubishi for the production of air-conditioners. “For Mitsubishi, the air-conditioning is a small division ; for us it means a lot. They have among the best technology and we will learn a lot from their management. Our own development will benefit from this unit”. This JV is entirely Japanese managed. The objective is to see how the Japanese manages their company.
JL also entered in a partnership with General Electric. Although the company does not show this as being of paramount importance, it is in fact a decisive step. JL was a supplier of GE for middle range quality machines, for the Latin American market. The technical level of the machines produced by JL attracted the attention of General Electric. Since then, entirely automatized machines are produced as OEM for General Electric. By this way, the company acquires knowledge of the North American market and it is definitely trying to diversify its production by entering in technical collaborations with GE. The aim for JL is to have a strategic alliance with GE.
7. Analysis of cases in a learning perspective
We chose these six case-studies in order to highlight the relations of the companies with their foreign clients, because they are typical of the industrial world of Guangdong (Guangdong of-fice of Science and Technology, 2002). Table 3 summarizes four models of learning that we could identify through these cases. The main sources of knowledge in all cases, except the joint-ventures, come from the support the client gives to the company as it inspects its proc-esses, gives the blueprints and pushes the company for higher quality. Here the client is the provider of technology and the providers of products are the users of the technology : the user-provider relation is inverse from that one would understand by the expression “user-provider”.
1. The OEM model, is what made Taiwan famous and is well fit for a globalized industry, where the international brand puts the orders. The local factory deals with the local advantages and exploits the low cost of labour as well as its high quality control. Taiwan producers, already used to these OEM arrangements, understood the full advantage they could get from coming to mainland China. Somehow differently, Hong Kong capitalists also came to Mainland China for the same reasons, transforming Hong Kong in an industrial desert. Local Chinese entreprises cannot access foreign clients with the same facility.
2. Contracted provider. The second case is very well illustrated by the Shuikou industrial cluster (Sun and Xu 2001). It is of interest because this industry with SMEs in mature industrial sectors is the main part of China’s industrial growth (Lemoine and Unal-Kesenci, 2004). The local companies are aching at having foreign clients. “Our clients are our teachers” said one manager. All the quality producer are linked one way or another to international clients from whom they could get access to new blueprints and to improvements in quality. Companies become contracted providers for foreign clients because they have to. They also know that the local market will be unable to sustain such a large quantity of producers and sooner or later the best ones will survive in a market becoming more and more competitive (see the domestic consumer electronics sector in Cao, 2004).
3. The JV model. JVs were once thought to be the panacea of technology transfers. They were supposed to bring money and technology to Asia, mainly China and Vietnam. Vietnam today is experiencing a considerable fall in the investments and China has provided legislative effort in order to promote FDI in different forms from JVs. Foreigners are usually uncomfortable with the figure of the JV and most foreign companies now want to become Wholly owned foreign enterprises (WOFE), since the law is authorizing this new possibility. In most JVs, the part-nership is a forced one, not a chosen one, and whatever the benefits, it is always seen with suspicion. But there are great variations of forms of JVs. Technologies flow usually well and there is an important flow of know-how, as would be the case of the subsidiary of a transna-tional firm. But in no case, have we seen an effort that will be genuinely local and independent from the “mother”-house. All decisions in fine depend on the internal structure and strategy of the transnational or the foreign partner.
4. The mixed model. This would look as the ideal model, as shown with the example of JL. Other large companies in China, mainly collective companies, like Haier, TCL, Konka, Legend or Fenghua would be similar in many aspects ; but these companies are not so numerous. Under this model, the company has a learning strategy, based on technological development and high standards in production. JL develops collaborative R&D with outside sources of knowledge. Nonetheless, one of its objectives, not so explicitly stated, is to become, at least partially, an OEM provider. This would allow for lower cost in entering the foreign markets. At the same time the company seeks to get a grip on the technology as well as marketing in foreign coun-tries. One of the ways it will try to do so is by setting up facilities in foreign countries, a growing tendency of Chinese enterprises (Tseng, 2003).
Companies in the South of China are quick learners in a usual catching-up strategy. They en-gage actively in looking abroad for sources of technology and seek actively to cooperate with foreign clients in order to have access to better technology. Their foreign cooperation is driven by this need for productive technology rather than a need to export. They seek these contacts through varied forms and channels, always maintaining the variety of foreign clients. This copy and fabrication strategy opens possibilities of wider production, wider knowledge, and wider markets. The association with a foreign client is thus strategic to practically all companies that want to go up the value chain, to approach the technological frontier and to access the more lucrative markets.
In Asia, the discussion centered on how companies up-grade from productive to technological capabilities. The South Korean experience shows the switch from basic productive capability to a more complex technological capability is linked, but not exclusively, to the introduction of R&D, to some organisational sophistication, and to the integration of technology and markets in the strategy of the firm (Kim, 2000). The models of learning that the Chinese enterprises are experiencing can trace their origins to this East Asian catching-up model (see for example the work of Michael Hobday, 1997). In fact, what our research found is that learning in Chinese enterprises has not created a new paradigm for the learning literature. On the contrary, the learning experience of the Chinese enterprises is an ordinary process and the industrialization of the South of China should be regarded as a normal catch-up case, even a follower of the Asian model. Even firms advancing more rapidly toward an innovation frontier are in this pragmatic, down-to-earth catching-up model, up-grading cumulatively productive and control knowledge. These firms introduce new models as long as their foreign clients provide them new blueprints. Firms that seem to enter in some transitional stage in up-grading from a basic pro-ductive learning to a more sophisticated technology learning maintain the same diversified types of contacts with their clients, aggregating more sources of knowledge and trying to keep a multiplicity of external sources. We propose to say these firms follow a sort of mixed model of interactive learning, maintaining a variety of sources of technology, keeping a large portofolio of clients and products, accepting to be both OEM providers for some products and autonomous brand for others, depending on the market.
From an economic point of view, what is surprising is how such an ordinary technological learning based on a catching-up strategy at the firm level could lead to such an extraordinary fast industrialization at the macro-level, which is sometimes called ‘China Miracle’ (Hsiao and Hsiao, 2003, Krugman, 1994, Yin et al., 2000) ? The answer might rely on the size of this common-type learning. When an ordinary learning behaviour spreads through thousands of all kinds of enterprises in an economy like the Chinese, the result would be like the consequences of a typical Chinese social movement, i.e., a “miracle” or a mass outcome. In this case, it is the quantity not the quality that counts. China, since the beginning of 1980s, has been carrying out such a mass technological learning movement throughout its industrial firms based on the ini-tiative of its new emerging companies.
This massive industrialization movement, supported by Chinese local authorities, has brought up old problems and new challenges to the China Miracle, such as the necessity to create an innovation system, to promote industrial clusters, to dampen the price competition, or to pro-mote cooperation rather than competition. That gives sociologists, economists and managers a good ground to study in detail learning and industrialization issues at the size of a country.
For a full version with references and tables, please ask me.