Sustainable growth in China and the EU: Competition or Cooperation? An analysis stemming from the globalization of the value chain

Defraigne, Jean-Christophe;et.al.
(2017) Deepening the EU-China partnership. Bridging institutional and ideational differences — ISBN: [978-1-138-04236-0], p. 139-152, published

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The 1990s witnessed the globalisation of the production process as multinational enterprises (MNEs) began to relocate production of labour-intensive activities to the developing world economies. This became possible as developing economies opened in the 1980s and 1990s after the debt crisis which highlighted the nonsustainability of import substitutions industrialisation schemes in closed economies, both in ‘socialist’ state-led economies (Council for Mutual Economic Assistance (COMECON), China) and in capitalist (Latin America, Africa, pro-Western Middle East and North Africa (MENA)) countries (Oman 1994; Adda 2012). Industrialising economies from the developing world began to compete to attract foreign direct investment (FDI) as it became one of the main vehicles to create export platforms for manufactured products and generate technology and management know-how spill over. MNEs built international networks through their overseas subsidiaries or through outsourcing to local firms in the developing world. This generated a complex global value chain (Thun 2008; Dicken 2015). At the top of the chain are the research and development (R&D), marketing and strategic management activities. Below is a spectrum of activities that goes from the design and production of advanced components, to the production of simple components and to the assembly lines. Governments are well aware that controlling the top of the global value chain generates the capacity to control international production networks and to capture most of the added value in the production of goods and services, while the countries that can only host activities at the bottom will remain stuck in the group of low- or middle-income economies. The experiences of the East Asian tigers in the 1980s, and to a lesser extent the Celtic tiger (Ireland) in the 1990s, have shown that a country can, under specific conditions, move up the value chain and experience a stronger growth with a more advanced and diversified economy (Murphy 2012; Studwell 2014; Dicken 2015). Many governments from developing countries are adopting industrial, R&D and education policies to follow these examples. The Chinese leadership was clearly among those inspired by the tigers’ success. China has tremendous possibilities given its huge domestic market (that enables economies of scale and learning-by-doing effects), a large pool of qualified workers, a relatively good transport and energy infrastructure (compared to other emerging economies like Brazil, India or Mexico) and a government that possesses the will to generate Chinese global champions that could eventually reach the top of the value chain and develop their own technological standards. The Chinese government is fully aware of the non-sustainability of the extensive growth model pursued since the 1980s. The demography (an ageing population, the reaching of the Lewis point at the beginning of this decade resulting in an upward pressure on wages), the pollution of low-tech industrial activities and the technological dependency on foreign-based MNEs are all factors that demonstrate the need to move up the value chain. This is necessary to avoid being stuck in the middle-income development trap and being riddled with social and environmental problems (Lemoine 2012; Aglietta & Bai 2012; Defraigne 2012; Gaulard 2014). The European Union, or at least its north-western powerful member states, is almost in a symmetrical position. The member states’ global MNEs are among the most advanced in the world (except in some industries like information and communications technologies (ICT), nanotechnologies and defence, where their US counterparts clearly dominate) and are still at the top the global value chain in many key industries (notably chemistry, cosmetics, aerospace, vehicles, luxury goods, telecoms, banking, distribution, agribusiness, transport, utilities and media) but not in some strategic industries (such as ICT and nanotechnologies).
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Defraigne, J.-C., & et al. (2017). Sustainable growth in China and the EU: Competition or Cooperation? An analysis stemming from the globalization of the value chain. In Telo, Mario, Chun Ding, & Zhan Xiaotong (Eds) (ed.), Deepening the EU-China partnership. Bridging institutional and ideational differences (p. p. 139-152). Routledge. https://hdl.handle.net/2078.5/226625