746 D. Lo and. h chan foreign suppliers, and hence were by and large technically incompatible with each other, only worsened the problem Thus, a joint study by Chinas Ministry of Electronics Industry and the World Bank in 1988 found that the need to import expensive components and serious dis- conomies of scale were precisely the two main factors which resulted in the pro- duction cost of Chinese colour TV manufacturers being 70-80 per cent higher than foreign firms producing similar products. It is of note that the production capacity of he largest manufacturer was just 0.5 million sets, whilst that of a world-class manufacturer typically reached three million. And, in contrast to the much lower labour costs, the materials cost of the Chinese firms were in general 110-130 per cent higher than their foreign counterparts(MEI-WB, 1991).6 Given this dismal picture, it seems surprising that, just a few years later, by the early 1990s, China exported around three million colour TV sets a year. The same phenomenon of rapid exports expansion was evident in other mechanical and electronic products ranging from consumer durables like washing machines and refrigerators to computer products. Moreover, the fact that the export momentum has been maintained after the foreign trade system reform of 1991, whereby the practice of state subsidies for exports was basically abolished, indicates the capability and incentive to export on the part of enterprises. To explain these remarkable develop- ments, we suggest that the following are major factors that have fostered the forma tion of the competitivenes 4.1 State Industrial Policy and the Indigenization of Imported Technology assembler of imported SKD/CKD(semi-or completely-knocked down) kits just a few years ago to one capable of usi acturing) technology in produ g CAD/CAM(computer-aided design and manu- duct and process development and of turning out products with more than 95 per cent local content. This has involved the development of upstream industries like automation technology and integrated circuits, and the production of high-tech components like picture tubes The transformation owes much to state promotion, through its industrial policy One measure of the policy is the state-enforced unified negotiation with transnational corporations for technology transfer. A second measure, aimed at curbing duplica tion and miniaturization, is the centralized bargaining among local authorities on the number, scale and spatial distribution of projects. Both of these have fostered the development of linked upstream industries that are capable of substituting for imported industrial inputs and machinery. These measures should be seen in the context of the state strategy of prioritizing the development of high-tech, capital-goods industries. For the electronics industry the priority is on integrated circuits, computers, computer software and programme- controlled telephone switching. For the broader machinery sector, the priority is on computer numerically controlled machine tools, automatic large scale measuring problems occurred in other electronics sub-sectors. In the case of computers, the joint MEl-WB und that the production cost was around 70 per cent higher than producers, while the cost ial of peripheries was even larger. These differentials, again, arose the need to import expensive components 01998 John Wiley Sons, Ltd J.mnt.Dev.10,733-74901998)foreign suppliers, and hence were by and large technically incompatible with each other, only worsened the problem. Thus, a joint study by China's Ministry of Electronics Industry and the World Bank in 1988 found that the need to import expensive components and serious dis￾economies of scale were precisely the two main factors which resulted in the pro￾duction cost of Chinese colour TV manufacturers being 70±80 per cent higher than foreign ®rms producing similar products. It is of note that the production capacity of the largest manufacturer was just 0.5 million sets, whilst that of a world-class manufacturer typically reached three million. And, in contrast to the much lower labour costs, the materials cost of the Chinese ®rms were in general 110±130 per cent higher than their foreign counterparts (MEI±WB, 1991).6 Given this dismal picture, it seems surprising that, just a few years later, by the early 1990s, China exported around three million colour TV sets a year. The same phenomenon of rapid exports expansion was evident in other mechanical and electronic products ranging from consumer durables like washing machines and refrigerators to computer products. Moreover, the fact that the export momentum has been maintained after the foreign trade system reform of 1991, whereby the practice of state subsidies for exports was basically abolished, indicates the capability and incentive to export on the part of enterprises. To explain these remarkable develop￾ments, we suggest that the following are major factors that have fostered the forma￾tion of the competitiveness. 4.1 State Industrial Policy and the Indigenization of Imported Technology By the early 1990s, the Chinese colour TV industry has been transformed from an assembler of imported SKD/CKD (semi- or completely-knocked down) kits just a few years ago to one capable of using CAD/CAM (computer-aided design and manu￾facturing) technology in product and process development and of turning out products with more than 95 per cent local content. This has involved the development of upstream industries like automation technology and integrated circuits, and the production of high-tech components like picture tubes. The transformation owes much to state promotion, through its industrial policy. One measure of the policy is the state-enforced uni®ed negotiation with transnational corporations for technology transfer. A second measure, aimed at curbing duplica￾tion and miniaturization, is the centralized bargaining among local authorities on the number, scale and spatial distribution of projects. Both of these have fostered the development of linked upstream industries that are capable of substituting for imported industrial inputs and machinery. These measures should be seen in the context of the state strategy of prioritizing the development of high-tech, capital-goods industries. For the electronics industry, the priority is on integrated circuits, computers, computer software and programme￾controlled telephone switching. For the broader machinery sector, the priority is on computer numerically controlled machine tools, automatic large scale measuring 6 Similar problems occurred in other electronics sub-sectors. In the case of computers, the joint MEI±WB study found that the production cost was around 70 per cent higher than foreign producers, while the cost di€erential of peripheries was even larger. These di€erentials, again, arose from diseconomies of scale and the need to import expensive components. #1998 John Wiley & Sons, Ltd. J. Int. Dev. 10, 733±749 (1998) 746 D. Lo and T. M. H. Chan