Machinery and Chinas Trade-Growth Nexus 745 struggling hard to climb up the value-added and technology ladder of exports, as is reflected in the movement of the terms of trade after 1988 which while being above the general trend of developing countries was in severe fluctuations, it offers the oppor tunity for the country to put itself in a better position in the international division of labour. It has also become increasingly crucial in sustaining overall export, and hence industrial growth. This is evident by the fact that the ratio of incremental exports value of mechanical and electronic products to total merchandise exports increased from 28 per cent in 1988 to 190 per cent in 1996. Finally, the correspondence between the exports expanding and output growing sector in the 1990s enables China to capture the static and dynamic efficiency gains that foreign trade impacts upon growth But what explains this exports expansion? As we have examined in Section 2, this is unlikely to have been an outcome of China's endowment-determined comparative advantage. The same logic applies to domestic production of industrial inputs and machinery, where, despite contradicting the regulation of the market, significant progress has been made in the 1990s. In the case of the electronics industry, one phenomenal development is the massive rebound of the output shares of industrial quipment and components between 1988 and 1995(see Figure 1). Thus, the trade- rowth nexus is not reducible to the working of a market-centred trade regime. le need to examine the institutional and structural factors that have fostered the formation of the competitiveness 4 DISCUSSION, WITH REFERENCE TO THE CASE OF THE ELECTRONICS INDUSTRY Looking more closely at the case of the electronics industry, our analysis of the formation of competitiveness focuses on three aspects: the indigenization of imported technology, the creation of economies of scale and the formation of the incentive for good performance on the part of enterprises. To appreciate the significance of these three aspects, it is noted that the formation of competitiveness -of the machinery sector in general and the electronics industry in particular-has been hindered by not only the logic of comparative advantage but also the specific form of China's market-oriented reform .5 The main symptom is that, over the 1980s, the consumer durables industries were seriously fragmented and their plant scales were too small to reach the minimum efficient scales by international standards. The 110 colour TV production lines were distributed to roughly the same number of enterprises. Similarly, at their peaks, the number of enterprises producing washing machines reached 300, that of refrigerators reached 140 and that of air conditioners reached 100. All these stem from the fact that ne economic agents responsible for building up the production capacity were local authorities and enterprises which, under the reform, focused on short-term profit rather than long-term development. Moreover, being in the backward sector of Chinas technologically dualistic industry, they lacked the necessary r&d capability and skilled labour to assimilate and improve upon the imported technology. That the imported turn-key plants and production lines were sourced from a wide spectrum of s The discussion here is necessarily suggestive because of the limitation of space. Lo(1997, ch 6)provides a detailed analysis of the development of China's electronics industry, which supports our main propositions in this section 01998 John Wiley Sons, Ltd J.mnt.Dev.10,733-749(1998)struggling hard to climb up the value-added and technology ladder of exports, as is re¯ected in the movement of the terms of trade after 1988 which while being above the general trend of developing countries was in severe ¯uctuations, it o€ers the oppor￾tunity for the country to put itself in a better position in the international division of labour. It has also become increasingly crucial in sustaining overall export, and hence industrial growth. This is evident by the fact that the ratio of incremental exports value of mechanical and electronic products to total merchandise exports increased from 28 per cent in 1988 to 190 per cent in 1996. Finally, the correspondence between the exports expanding and output growing sector in the 1990s enables China to capture the static and dynamic eciency gains that foreign trade impacts upon growth. But what explains this exports expansion? As we have examined in Section 2, this is unlikely to have been an outcome of China's endowment-determined comparative advantage. The same logic applies to domestic production of industrial inputs and machinery, where, despite contradicting the regulation of the market, signi®cant progress has been made in the 1990s. In the case of the electronics industry, one phenomenal development is the massive rebound of the output shares of industrial equipment and components between 1988 and 1995 (see Figure 1). Thus, the trade￾growth nexus is not reducible to the working of a market-centred trade regime. We need to examine the institutional and structural factors that have fostered the formation of the competitiveness. 4 DISCUSSION, WITH REFERENCE TO THE CASE OF THE ELECTRONICS INDUSTRY Looking more closely at the case of the electronics industry, our analysis of the formation of competitiveness focuses on three aspects: the indigenization of imported technology, the creation of economies of scale and the formation of the incentive for good performance on the part of enterprises. To appreciate the signi®cance of these three aspects, it is noted that the formation of competitiveness Ð of the machinery sector in general and the electronics industry in particular Ð has been hindered by not only the logic of comparative advantage but also the speci®c form of China's market-oriented reform.5 The main symptom is that, over the 1980s, the consumer durables industries were seriously fragmented and their plant scales were too small to reach the minimum ecient scales by international standards. The 110 colour TV production lines were distributed to roughly the same number of enterprises. Similarly, at their peaks, the number of enterprises producing washing machines reached 300, that of refrigerators reached 140 and that of air conditioners reached 100. All these stem from the fact that the economic agents responsible for building up the production capacity were local authorities and enterprises which, under the reform, focused on short-term pro®ts rather than long-term development. Moreover, being in the backward sector of China's technologically dualistic industry, they lacked the necessary R&D capability and skilled labour to assimilate and improve upon the imported technology. That the imported turn-key plants and production lines were sourced from a wide spectrum of 5 The discussion here is necessarily suggestive because of the limitation of space. Lo (1997, ch. 6) provides a detailed analysis of the development of China's electronics industry, which supports our main propositions in this section. #1998 John Wiley & Sons, Ltd. J. Int. Dev. 10, 733±749 (1998) Machinery and China's Trade±Growth Nexus 745