Why do mainland Chinese firms succeed in some sectors and fail in others? A critical view of the Chinese system of innovation

Domestically owned firms in mainland China have shown disappointing technological performance in higher-technology sectors. We argue that deficiencies in the systems of finance and corporate governance are largely to blame. Private firms have been starved of financial resources. The key weakness of Chinese State-Owned Enterprises (SOEs), lies in their corporate governance: the officials monitoring them have been 'disengaged', with the consequence that the investment of money and effort, which was low in visibility ('opaque') and/or slow in pay-off, has been discouraged. 'Disengagement' also discourages the development of close interfirm relationships and employee 'inclusion'. We examine a small number of sectors, notably telecoms and motor vehicles, in which Chinese firms appear to be doing well, showing that 'untypical' corporate governance produces untypically good results. We conclude by warning against relying on financial accounting measures in monitoring large SOEs, pointing to the UK example. China should find Chinese ways to achieve engagement and inclusion.