Is an Industrial Policy Possible in China?: The Case of the Automobile Industry

Abstract

This paper first defines industrial policy as entry control and capacity reorganization, and then evaluates the effectiveness of industrial policy in the automobile sector in China. It argues that the industrial policies declared in 87 and 94 in China were not implemented successfully enough to control new entries nor to reorganize capacity among the incumbent companies. Consequently, the industrial organization of the automobile sector was highly fragmented. Concerning the cause of entry control failure, this paper examines the incentive structure of Chinese local governments that exercised de facto property rights over the companies in their jurisdiction throughout the reform period. It shows that local governments have strong incentives to ward off the central governments entry control, and that local governments were strong enough to resist the centers order, backed up by their fiscal and administrative capacity. To explain the causes of capacity reorganization failure, this paper looks at the cases of the First Auto Works groups M&As, and argues that these M&As did not lead to effective capacity reorganization within the group. The paper concludes that industrial policy has failed in China, and that the central government finds it difficult to conduct effective industrial policy given the strength of local governments. The recent and future development of the Chinese automobile industry seems to be driven by market forces rather than by discretionary industrial policy.