Chapter 5 Shanghai’s Economic Composition, Resources and Potential for Innovation

I. The Industrial Economy

Source: Beijing, Shanghai and China Statistical Yearbooks, various years; Tokyo: Statistical Department, TMG (http://www.toukei.metro.tokyo.jp/keizaik/kk05pa0100.xls); Hong Kong: National Income Section (1)1, Census and Statistics Department, August 2008 Revision; Japan: World Development Indicators (WDI) 2008.

In comparison, printing and publishing now dominate the substantially hollowed out manufacturing activities of Tokyo (and in New York), both in terms of establishments and the number of employees.¹⁰⁴ Vestiges of Tokyo’s past industrial strength can be seen in the continued presence of plants producing chemicals, food processing, electric machinery, telecommunication hardware, and metal products. But with the relocation of the bulk of manufacturing activity to other places, Tokyo has been transformed into a cultural and business center. If industry flees, this is what Shanghai could become. And if it does, the city will have to settle for rates of GDP growth in the 1 – 4 per cent per annum range.

Source: Beijing, Shanghai and China Statistical Yearbooks, various years; Tokyo: TMG (http://www.toukei.metro.tokyo.jp/keizaik/kk05pa1000.xls); Hong Kong: National Income Section (2)1, Census and Statistics Department, May 2008 Revision; Japan World Development Indicators (WDI) 2008.

Source: Shanghai Statistical Yearbook 1995.

(%)

Subsectors	Share of establishments	Share of Employees	Share of GVIO
Communications Equipment, Computer and Other Electronic Equipment	4.7	13.5	23.2
Transportation Equipment	5.3	7.9	11.0
General Equipment	11.7	9.5	8.8
Raw Chemical Materials and Chemical Products	7.1	4.1	7.6
Smelting and Pressing of Ferrous Metals	1.1	1.6	7.5
Electric Machinery Equipments	8.3	9.0	7.3
Oil Processing, Coking and Nuclear Fuel Processing	0.3	0.8	4.5
Metal Products	9.0	6.1	3.9
Special Purpose Equipment	6.1	4.7	2.8
Plastic Products	6.5	4.5	2.2
Garments, Shoes and Accessories	6.9	7.9	2.0
Smelting and Pressing of Nonferrous Metals	1.7	1.5	2.0
Nonmetal Mineral Products	4.1	2.9	2.0
Textile	6.1	5.1	1.7
Instruments, Meters, Culture and Office Equipments	2.2	2.3	1.5
Food	1.7	2.0	1.3
Tobacco	0.0	0.1	1.3
Medicine	1.5	2.0	1.3
Farm and Sideline Products Processing	1.1	0.9	1.0
Furniture	1.7	2.0	0.9
Paper-making and Paper Products	2.2	1.3	0.9
Rubber Products	1.6	1.6	0.8
Printing and Record Duplicating	2.5	1.7	0.8
Stationary, Education and Sports Goods	1.9	2.3	0.8
Beverage	0.4	0.4	0.6
Leather, Fur, and Wool Products	1.5	2.0	0.6
Artworks and Other	1.1	0.9	0.5
Chemical Fiber	0.3	0.3	0.5
Timber Processing and Timber, Bamboo, Rattan, Coir and Straw Products	1.1	0.8	0.4
Waste Resources and Materials Recycling and Processing	0.3	0.1	0.2

Note: Ranked by Gross Value Industrial Output (GVIO).

Source: Shanghai Statistical Yearbook 2008

The changing shape of industry in Shanghai is mirrored in the shares of large firms as against small and medium sized ones, and in the increasing salience of private and multinational firms.¹⁰⁵ Large firms accounted for 41 percent of the output in 2007 as against 50 percent in 1994. Private and foreign invested firms produced 64 percent of the GVIO in 2007, and they have increased Shanghai’s integration with the global economy (see Figure 5 .14).¹⁰⁶ Key industries such as electronics and engineering, export 70 and 22 percent of their output respectively and in the aggregate, more than 60 percent of Shanghai’s GDP was traded in 2007. As is the case throughout China, a disproportionate share of Shanghai’s exports – almost 77 percent – come from foreign invested enterprises in 2007.¹⁰⁷ This mirrors the experience in other countries. The larger the share of foreign ownership, the more likely is the firm to export. In addition, the bulk of the exports are done by few high-performing firms.¹⁰⁸ While this broadly describes the current situation in Shanghai, the increasing share of smaller, private and foreign invested firms in the export sector and the concomitant decline in the share of SOEs, are welcome developments. SOEs tend to be on balance less productive, profitable and innovative.¹⁰⁹ But there are some important exceptions which have benefited from enterprise reform and corporatization. Firms such as SAIC, Baosteel, SMIC, and Zhenhua Port Cranes¹¹⁰ are among the most dynamic firms in China today, and could become the driving force behind incremental innovation in Shanghai, the role that large firms perform elsewhere.¹¹¹ Once they are able to, a rising percentage of Shanghai’s exports will be sourced from Chinese owned firms as should be the case.

Source: Shanghai Statistical Yearbooks, various years

The Role of Large SOEs

Research shows larger firms account for the bulk of private spending on technology development and on innovation. They are the ones with the resources to devote to R&D activities and to promote routinized innovation as a conscious strategy. In the context of China, and to a degree in Shanghai, the state-owned enterprises and state-holding firms are of the requisite size to actively pursue the innovation agenda.

Nationally, the state-owned enterprises and state-holding firms account for one third of industrial output and value-added. They account for 45 percent of fixed assets, making them more capital-intensive and also larger than the average firm. In some industrial sectors such as chemicals, automotive, iron and steel, and non-ferrous metal, SOEs produce between 50 to 80 percent of the output. Only in electronics, the presence of the state sector is small. And it is responsible for close to half of the new products introduced in China. The state sector accounts for 54 percent of R&D (FTE) personnel and 48 percent of domestic R&D spending. However, only one quarter of these new products are exported, a much lower ratio compared to other types of firms. This suggests that many of the new products are aimed at the domestic market instead of the export market. In addition, invention patent applications by the state sector are only 24 percent of the total, suggesting that it is less efficient in utilizing R&D inputs. Nonetheless, several state sector firms such as China International Marine Containers (CIMC)¹¹² have emerged as highly successful innovators through domestic consolidation and by leveraging the domestic market and have firmly established themselves in the global market. The expanding domestic market has been an asset for Chinese companies both new and old, state-owned and private to acquire valuable experience, use their local knowledge to build their domestic operations, before venturing abroad to export as well as to conduct a focused search for new technologies and intellectual property (Zhou 2008). As Khanna and Palepu (2006, p.64) point out, “Many emerging market companies have become world class businesses by capitalizing on their knowledge of local product markets”. They note in particular, Haier’s success in customizing its products to suit local needs first in China and now overseas, and in building an effective distribution and service network.

Chinese SOEs wanting to build innovation capacity have more to learn from large bureaucratic top-down management style companies such as Canon, Toyota, Samsung, and Hyundai than from Western companies with very different managerial structures. Toyota has generated new knowledge and a steady stream of incremental innovations by carefully defining problems and systematically working to solve them; by diffusing the learning through the company; and by infusing this problem-solving through innovation mentality across all levels of management (Spear 2008).

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