China's high-tech success story is pure fiction?

Financial Times (subsc. needed)

Is China the next technology capital of the world? One might think so, given the hype that has accompanied China's recent emergence as a big producer of consumer electronics.

Thanks to its combination of manufacturing muscle and prestige projects, China seems close to becoming a combination of the best of Japan and the US - a super-efficient, low-cost manufacturing power and a global leader in cutting-edge technology.

Or is it? Scratch the surface and China's technological prowess looks a lot less daunting. Today China is mainly a low-cost manufacturing base for foreign companies.

First, China's high-tech manufacturing is neither very high-tech nor very Chinese. In 2002, $68bn, or just over 20 per cent, of China's exports were classified as "high-tech".

Research by Daniel Rosen of the Institute for International Economics shows that most of these exports are components or low-margin commodity consumer electronics, such as laser printers and DVD players. More important, nearly 85 per cent of China's high-tech exports are produced by enterprises backed by foreign money. And 61 per cent of high-tech exports come from wholly foreign-owned enterprises, which means there is no transfer of technology to a domestic partner.

China has been reforming its economy for 25 years. At a similar point in its development, 25 years after the end of the second world war, Japan had dozens of companies poised to take dominant global positions across a range of high-tech industries.

China today has no such companies. It has many promising small to medium-sized enterprises, whose main competitive edge is China's unique combination of third-world labour costs and first-world infrastructure. Because of China's vast labour pool, this edge will last for a long time