This book is a collection of essays that focus on the evolution and development of indigenous Chinese electronics firms against the backdrop of China's increasing integration with the global economy.
After an overview of the structure and content of his book, Koichi Kimura conducts a review of the related literature in chapter one. A key insight from the review is that technology diffusion from developed countries is the main mechanism through which developing countries benefit from globalization. International trade and foreign direct investment are two main conduits for international technology diffusion. Another insight from economics literature is that technology diffusion is not automatic; instead it requires an ability to absorb the technology on the receiving end. As a result, when the technology gap between the source of international technology diffusion and its presumed destination is too wide, diffusion may not take place.
When technology diffusion does not materialize and developing country firms remain technologically backward, how do they benefit from globalization? This is where Kimura's key argument comes in – basically, through what he calls a “diversification” strategy:
Chinese firms have not been completely homogenized with foreign firms through technology acquisition. They have been growing by outsourcing technologically difficult production stages and by focusing on the sales stage, as has already been discussed. This characteristic is shared with other manufacturing industries, especially the machinery industry, such as the automotive industry, the motor cycle industry, and so on (p. 27).
In other words, the rapid growth of China's electronics industry has not been so much driven by technology diffusion – which the author attempts to demonstrate through an econometric study in chapters two and three using a firm-level data for the industry for the years of 2003 to 2007 – but by specializing in a part of the value chain that allows Chinese firms to exploit their comparative advantage. This is not new.
What the author argues is new here is the “diversification in organization.” In competing with their foreign multinational competitors in the domestic Chinese market, Chinese electronics firms have leveraged their strength in establishing a more extensive and effective sales network. Kimura argues that this is a result of the Chinese firms outsourcing the technology-intensive part of the production process and focusing on what they are good at, which in this case is domestic marketing.
The author demonstrates this in chapter four using a case study of China's mobile phone industry. Chinese handset makers initially outsourced the design of handsets, focused on the less technology-demanding part of the manufacturing process and established their own distribution channels. In contrast, foreign handset makers outsourced product distribution. This is perhaps the most interesting part of the book and richly informative about the development of China's handset industry.
In chapter five, Kimura adopts a theoretical model where both developing country (South) and developed country (North) firms make the buy-or-make decision with respect to the whole value chain of a product. The main insight from this theorizing is that firms in the South can enter an industry and grow if they outsource the parts where they are weak, such as headquarter and technology services, and concentrate on aspects where they have an advantage.
Another interesting case study is described in chapter six. Here Kimura examines the experience of Chinese home appliances makers’ entry and expansion in South Africa in the 1990s. The roles of the Chinese firms were here reversed: they were the foreign multinationals, without intimate knowledge of the local market. This, along with the lack of a technology advantage, created challenges for Chinese firms competing with South African local firms. In the end, the Chinese firms had to resort to the OEM (original equipment manufacturing) model in order to survive in that market.
In the concluding chapter, the author for the first time attempts to clarify the notion of “diversification strategy.” Essentially the idea is that when the technology gap is too large between foreign multinationals and developing-country firms, the latter should focus on their strength in “local knowledge,” which the former do not possess.
Kimura's main thesis, that developing-country firms need to focus on where their comparative advantage lies, is not new. The phrase diversification strategy could be misinterpreted, as the theory and evidence does not imply developing country firms should occupy a wide range of the value chain activities.
I also find Kimura too quick to conclude that there has been no technology diffusion from foreign multinationals to indigenous Chinese firms on the basis of the econometric study in chapter three. Besides issues one could raise about measurement and methodology, the results, taken at their face value, can also support the conjecture that there has been technology diffusion, but its effect has been dominated by the negative competitive effect of FDI on domestic firms.
What I would find useful would be a dynamic perspective on China's electronics industry. The technology has been fast evolving, as has been the organization of the industry. To complete my wish list, I think it would be immensely interesting to compare the experience of China's electronics industry with that of other East Asian nations.
I read the book with interest, and like the fact that the author adopted an eclectic approach to the research. The case studies are interesting and novel. Readers from a wide range of disciplines will find Kimura's book useful in understanding the growth and development of China's electronics industry.
