The Role of the State

SCO103 New Empires: The Reach and

Frontiers of the Tech Sector
 The State and the Tech
Sector (China)
Why Does the Chinese State Intervene in
the Chinese Tech Sector?
Chinese State Intervention in the Chinese Tech Sector: Methods
► Establishment of Communist Party committees in tech firms 1
► Direct investment in the tech sector: e.g. government-owned venture capital
firms and ‘guiding funds’2
► Blocking major American tech firms from operating in China 3
► Direct financial support – ‘state funding, low interest loans, tax breaks, and
other subsidies’.4

(This list is not exhaustive)

1
Christopher Balding, ‘In China, tech is now all but state-owned’, The Business Times (This article originally appeared on Bloomberg), 12 April 2018.
Available online at https://www.businesstimes.com.sg/technology/in-china-tech-is-now-all-but-state-owned (Last accessed on 29 June 2019).
2
Ibid.; and Lee Kai-Fu, AI Superpowers: China, Silicon Valley, and the New World Order (New York, 2018), pp. 63- 65.
3
Louise Lucas, ‘The Chinese Communist Party entangles big tech’, The Financial Times, 19 July 2019. Available online at
https://www.ft.com/content/5d0af3c4-846c-11e8-a29d-73e3d454535d (Last accessed on 26 June 2019).
4
James McBride and Andrew Chatzky, ‘Is “Made in China 2025” a threat to global trade?’, Council on Foreign Relations, 13 May 2019. Available online at
https://www.cfr.org/backgrounder/made-china-2025-threat-global-trade (Last accessed on 11 July 2019).
Chinese State Intervention in the Chinese Tech Sector: Motivations
► Longstanding goal of maintaining control of and influence over strategic
industries5
► Policy shift in favour of centralised economic planning/control in the past
decade (Impact of the Global Financial Crisis of 2007-2008 and the rise of Xi
Jinping)6
► Lessons of the past: the current rich/developed nations relied on state
intervention to boost economic/industrial growth when they were
poor/under-developed7
► Accelerate the shift from ‘manufacturing-led growth’ to ‘innovation-led
growth’8

5
Pei Minxin, China’s Trapped Transition: The Limits of Developmental Autocracy (Harvard, 2006), p. 124.
6
Louise Lucas, ‘The Chinese Communist Party entangles big tech’, The Financial Times, 19 July 2019 [Available online at https://www.ft.com/content/5d0af3c4-846c-
11e8-a29d-73e3d454535d (Last accessed on 26 June 2019)]; Centre for International Private Enterprise (CIPE), ‘A stimulus package with Chinese characteristics: “the state
advances as the private sector recedes”’, Centre for International Private Enterprise (Blog post on the CIPE’s website), 9 September 2009 [Available online at
https://www.cipe.org/blog/2009/09/09/a-stimulus-package-with-chinese-characteristics-the-state-advances-as-the-private-sector-recedes/ (Last accessed on 29 June
2019)]; and Nicholas R. Lardy, ‘Xi Jinping’s turn away from the market puts Chinese growth at risk’, Peterson Institute for International Economics (this article originally
appeared on The Financial Times), 15 January 2019 [Available online at https://www.piie.com/commentary/op-eds/xi-jinpings-turn-away-market-puts-chinese-growth-
risk (Last accessed on 29 June 2019)].
7
James McBride and Andrew Chatzky, ‘Is “Made in China 2025” a threat to global trade?’, Council on Foreign Relations, 13 May 2019. Available online at
https://www.cfr.org/backgrounder/made-china-2025-threat-global-trade (Last accessed on 11 July 2019).
8
Lee, AI Superpowers, p. 65.
 The State and the Tech
Sector (China)
The State and the Tech Sector Advance
Together
State Intervention and Tech Entrepreneurship are not always in
Conflict with each other
► China’s tech sector derives certain benefits from cooperation with the state:
e.g. preservation of monopoly power, state investment, ‘national champion’
status.9
► ‘mass innovation campaign’10
► The ‘guiding funds’ and the mobilisation of private venture capital. 11
► Made in China 2025

9
Louise Lucas, ‘The Chinese Communist Party entangles big tech’, The Financial Times, 19 July 2019 [Available online at https://www.ft.com/content/5d0af3c4-846c-11e8-a29d-
73e3d454535d (Last accessed on 26 June 2019)]; and Meng Jing and Sarah Dai, ‘China recruits Baidu, Alibaba, and Tencent to AI “national team”’, South China Morning Post, 25
September 2018 [Available online at https://www.scmp.com/tech/china-tech/article/2120913/china-recruits-baidu-alibaba-and-tencent-ai-national-team (Last accessed on 29
June 2019)].
10
Lee, AI Superpowers, pp. 63-64.
11
Ibid., pp. 64-65.
China’s Response to Foreign Criticism

► China has made forced technology transfer illegal.12

► China has vowed to remove foreign ownership caps on certain types of
businesses: Financial services (2020)13; ‘fully electric and plug-in hybrid
vehicles’ (2018)14; ‘commercial vehicle makers’ (2020)15; ‘wider passenger
vehicle market’ (2022)16.

12
Issaku Harada, ‘China bans forced tech transfer in proposed investment bill’, Nikkei Asian Review, 9 March 2019. Available online at
https://asia.nikkei.com/Politics/China-People-s-Congress/China-bans-forced-tech-transfer-in-proposed-investment-bill (Last accessed on 11 July 2019).
13
Frank Tang, ‘China premier promises ‘faster’ financial opening up to foreign investors days after agreeing to US trade war truce’, South China Morning Post, 8 July
2019. Available online at https://www.scmp.com/economy/china-economy/article/3016985/china-premier-promises-faster-financial-opening-foreign (Last accessed
on 11 July 2019).
14
Amanda Lee and Daniel Ren, ‘China lays out plan for opening auto industry, clearing the way for Tesla’s wholly owned plant’, South China Morning Post, 3 July
2018. Available online at https://www.scmp.com/tech/enterprises/article/2142150/tesla-pole-position-china-pledges-remove-all-foreign-auto-ownership (Last
accessed on July 2019).
15
Ibid.
16
Ibid.
 Class Activity 1:
► Pro-free market American commentators have disapproved of the aggressive
nature of Chinese state intervention in the Chinese tech sector.
► What are the ways in which the free market is superior to state economic
planning? Should the state intervene in order to build a vibrant tech sector? Or
should this be left to the private sector? How would you make a decision, e.g.
based on ideological leanings, practical objectives, or a combination of both?
► Please note that there are no right or wrong answers. Get into your groups and
spend about 10-15 min reflecting on this question.
► You may wish to consult the resources on ‘The Role of the State’ that are
available on SCOPE before formulating your response.
Is free market competition still relevant in the
age of the tech giants?
► The Chinese state believes that Big Data has made centralised economic planning
feasible.18
► The concentration of data collection powers in the hands of a few Chinese tech
giants has effectively concentrated planning power in the hands of the Chinese
state.19
► Friedrich Hayek (1899-1992): It is impossible for the state to gather enough
information to plan the economy.20
► Is this still true in the age of Big Data?
Alex Moazed and Nicholas L. Johnson: ‘The ability to organize and make
sense of large amounts of data in real time has dissolved Hayek’s final
objections to centralization.’21

18
Sebastian Heilmann, ‘Big data reshapes China’s approach to governance’, The Financial Times, 29 September 2017. Available online at
https://www.ft.com/content/43170fd2-a46d-11e7-b797-b61809486fe2 (Last accessed on 24 June 2019).
19
Ibid.
20
Cited in Alex Moazed and Nicholas L. Johnson, Modern Monopolies: What it Takes to Dominate the 21st-Century Economy (New York, 2016), pp. 53-55.
21
Moazed and Johnson, Modern Monopolies, p. 71.
 Class Activity 2:

► Visit the official website of the National Science Foundation (NSF)

(https://www.nsf.gov/) (Students may also choose to examine the National
Natural Science Foundation of China
http://www.nsfc.gov.cn/english/site_1/index.html)
► Identify some of the NSF-funded projects that have contributed or will
contribute to the growth and development of the tech sector. (Tip: Click
on the ‘News’ section for short write-ups on NSF-funded projects.)
► Do you think the NSF’s activities are similar to certain parts of the ‘Made in
China 2025’ initiative?
► Get into your groups and spend about 10-15 min on this task.
Articles

1) https://www.bruegel.org/2019/10/the-case-for-intelligent-industrial-policy
/
European cars?
 The State and the Tech
Sector (the United States)
US Industrial Policy
Background: 1990s
 Class Activity 3:

► As Study Unit 2 and Lecture Recording 2 show, the the American government also
intervenes in the economy to promote innovation and entrepreneurship. Are its
methods and motives similar to those of the Chinese government? You may need to
do a small amount of online research to answer this question.
► You may wish to watch/re-watch the following videos before formulating your
response:
1. 5 Everyday inventions you didn’t know came from DARPA
https://www.youtube.com/watch?v=ZiLrF46ypSg
2. NSF: Everywhere in your world https://www.youtube.com/watch?v=mYW0s8q8W8s
► You may also wish to take a look at the following infographic before formulating your
response:
1. The US military and iPhone technology
https://www.businessinsider.com.au/the-us-military-is-responsible-for-almost-
all-the-technology-in-your-iphone-2014-10
US Government Intervention
► In spite of the free market rhetoric of its politicians, the United States
government also intervenes in the economy to promote innovation and
entrepreneurship.
► Defense Advanced Research Projects Agency (DARPA)
► National Science Foundation (NSF)
► National Institutes of Health (NIH)
► Small Business Innovation Research (SBIR) programme
► Take note: US state intervention in the 19th century - High tariff barriers22

22
For a brief history of US protectionist policies, see Ha-Joon Chang, Bad Samaritans: The Guilty Secrets of the Rich Nations and the Threat to
Global Prosperity (London, 2007), pp. 48-56.
Mariana Mazzucato
► Private venture capital is risk-averse and unwilling to finance high-risk early
stage research.23
► Private capital is also impatient and is always searching for quick exits. 24
► ‘Real innovation can take decades.’25 The state therefore has to step in and
should aim to ‘lead … by creating markets.’26

23
Mariana Mazzucato, ‘The Innovative State: Governments should Make Markets, not just Fix them’, Foreign Affairs 94 (2015), pp. 61 and 66.
24
Ibid.
25
Ibid.
26
Ibid., p. 62-63.
The Rise of the Internet: Rapid Revolution or Slow March?
► Take a look at this article: Taylor Pearson, ‘Creative destruction: Move fast and
break things’, Entrepreneur (Asia Pacific), 29 November 2016. Available online at
https://www.entrepreneur.com/article/284609 (Last accessed on 15 July 2019).
► Take note: The ARPANET was created by ARPA in 1969.
► Ben Tarnoff: ‘Without ARPA, the internet wouldn’t exist.’27
► The rise of the internet was a slow march, the early stages of which were
financed by the state.

27
Ben Tarnoff, ‘How the internet was invented’, The Guardian, 15 July 2016. Available online at https://www.theguardian.com/technology/2016/jul/15/how-
the-internet-was-invented-1976-arpa-kahn-cerf (Last accessed on 11 July 2019).
Revision: Mariana Mazzucato’s iPhone Case Study28

► Internet
► GPS (Global Positioning System)
► iPhone’s touchscreen
► Siri
► What are the weaknesses of Mazzucato’s iPhone Case Study?

28
Mazzucato, ‘The Innovative State’, p. 64.
 Class Activity 4:

► Who made the iPhone?

► In Study Unit 2 and Lecture Recording 2, you were introduced to Mariana Mazzucato,
an economist who believes that the state should take the lead in promoting
innovation. Mazzucato is known for her famous iPhone case study. She shows how the
different components of the iPhone can be linked to state-funded research.
► But one could argue that Mazzucato underestimates the role of entrepreneurs and
private businesses. Take a look at the following article – ‘Some thoughts on the
Entrepreneurial State’ – and share your group's reflections on the crucial role played
by businesses in promoting innovation.
Stian Westlake, ‘Some thoughts on The Entrepreneurial State’, Nesta, 10 November 2014.
https://www.nesta.org.uk/blog/some-thoughts-on-the-entrepreneurial-state/
► In addition to ‘Some thoughts on The Entrepreneurial State’, you may also wish to
read the following article before formulating your response:
Alberto Mingardi, ‘Corbyn’s bad advisor’, Politico Europe, 5 November 2015.
https://www.politico.eu/article/corbyns-bad-adviser/