Paper Tigers, Hidden Dragons - Chapter-7 (Fuller)

China’s Global Hybrid Model for Development under Globalization
Paper Tigers, Hidden Dragons: Firms and the

Political Economy of China's Technological
Development
Douglas B. Fuller
Print publication date: 2016

Print ISBN-13: 9780198777205
Published to Oxford Scholarship Online: August 2016
DOI: 10.1093/acprof:oso/9780198777205.001.0001
China’s Global Hybrid Model for Development

under Globalization
Douglas B. Fuller
DOI:10.1093/acprof:oso/9780198777205.003.0008
Abstract and Keywords

China’s experience in technology-intensive industries suggests a new model of
development: the global hybrid model. The global hybrid model relies on hybrid
firms combining foreign finance and shared ethnic ties with the host economy to
drive technological development. This model offers ways to overcome market
failure and government without relying on a highly effective state, the type of
state notably absent from most of the developing world. The global hybrid model
offers an important corrective to the current approaches to the political
economy of development: the augmented Washington Consensus approach, the
statist revisionist (developmental state) approach, and the transnational network
approach. However, the global hybrid view is limited to those sectors with high
clockspeeds, fragmented or disaggregated value chains (high modularization),
and high technology intensity.
Keywords: China, global hybrid model, Washington Consensus, modularity, transnational networks,
political economy, state-led development, market failure, government failure, globalization
7.1 Introduction
Does China’s hybrid-led technological development documented in the preceding
chapters have wider implications for developing countries? This chapter argues
that China has stumbled upon a new model for development under globalization,
the global hybrid model, that confounds the rather stale debate over
development policy between market fundamentalists and revisionist political
economists who draw on a long tradition advocating greater/more effective state
intervention.1 With neither the well-functioning markets prescribed by
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neoliberal2 economists nor the effective state policymaking apparatus and state–
societal developmental alliances prescribed by revisionist political economists,
China has managed to develop some of the technological capabilities that it will
need to overcome the middle-income trap. Moreover, China has developed
technologically by leveraging two features of the international economy that
have only grown more prominent as economic globalization has increased:
international finance and transnational networks of production and innovation.
Thus, even as the current neoliberal version of globalization may make it more
difficult to pursue previous successful paths to development (Evans 1997),
China’s development suggests that certain features of neoliberal globalization
may open up new paths to development.
China’s global hybrid development works through two features of the current
era of economic globalization, “global” finance and transnational technology (p.
190) networks, in the following manner. First, by drawing on foreign financial
institutions of the advanced capitalist economies, hybrid firms avoid the
problems of financial misallocation that plague many developing countries.
These firms are given adequate finance to pursue their activities, but are not so
flush that incentives to pursue those activities efficiently are undermined.
Second, hybrid firms, due to their ethnic ties to the host economy via the
transnational technology communities, exhibit a strong preference for placing
core activities in the host economy. This pro-host bias spurs these hybrid firms to
undertake the learning and knowledge transfer activities that MNCs routinely
avoid. In effect, these “foreign” firms act like indigenous ones in terms of their
orientation towards the domestic economy and their efforts to embed their
activities locally by drawing upon and improving local human resources. The
main constraint on the global hybrid model is a sectoral one. The model works
best in industries characterized by feasible modularity of the value chain, fast
clockspeeds, and relatively high technological intensity.3
The pre-globalization developmental debate concerned whether markets or

state-run/state–societal developmental alliances were the critical sine qua non of
development. With the advent of globalization, the debate became more
fragmented. The pro-market neoliberal side welcomed globalization because
they viewed it as the extension of functioning markets to larger and larger
swaths of the globe (Dollar and Kraay 2000; Wolf 20044). The revisionists in
favor of state or state–societal alliances were split between those who were
optimistic that such social and political forces could still foster development
(Weiss 1998; Amsden 2000, 2003; Gilpin 2000) and pessimists who felt
globalization in its current relatively neoliberal form would overwhelm state–
societal developmental efforts (Evans 1997;5 Strange 1996; Milanovic 2003;
Wade 20036). With globalization, a new view on development emphasizing the
key importance of transnational networks in fostering development arose
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precisely as these networks became more prominent and widespread (Gereffi

1996a, 1996b; Borrus et al. 2000; Ernst 2004a, 2004b; Saxenian 2006).
The global hybrid model marks a significant departure from previous thinking
about development, particularly in the context of globalization. First, the (p.
191) global hybrid model opens up the possibility of freeing development from
the domestic constraints that both the neoliberals and revisionists assume are
paramount. Whereas neoliberals assume that only by allowing domestic markets
to function well can a country achieve development and revisionist statists
assume that a capable interventionist state is necessary for development, the
global hybrid model allows for the possibility of development even in the context
of domestic market failure and an ineffective state because global hybrid firms
draw much of their institutional support from abroad. With the global hybrid
model, the destinies of firms and the wider economy are not necessarily forever
bound to whatever inefficient financial and incapable political institutions are
available domestically.
The global hybrid model also offers a corrective to the transnational networks
approach by grounding these networks in other institutions, namely the
institutions of finance. The transnational networks approach assumes that they
simply need to be lured to a given locale or that ethnic ties alone will foster the
linkages.7 As much as the transnational networks approach has invigorated the
development debates of the past decade, this approach has neglected the
problems of domestic institutions and underspecified how institutions may
differentiate successful development-fostering linkages from unsuccessful ones.
The chapter will first consider each of the three approaches on development and
globalization and compare them to the global hybrid model in terms of the
problems and solutions of development. Section 7.3 will discuss the very
significant sectoral limitations of the global hybrid model. Section 7.4 will
consider the particulars of China’s case in order to assess the politics of
openness needed for the global hybrid model to operate. Eschewing accounts of
critical junctures on the way to greater liberalization or a grand strategic vision
guiding where the Chinese state does or does not allow openness, the account
here will argue that the politics of openness are one of continual contestation.
7.2 Four Perspectives on Development under Globalization

This section first compares the three main approaches toward development—the
Washington Consensus, the statist, and the transnational network approaches—
in terms of market and government failure and their views of globalization.
Then, the section discusses the strengths and weaknesses of each approach.
Finally, the global hybrid approach is compared to the three established ones.
Page 3 of 24
(p.192) 7.2.1 Market and Government Failures in the Three Established Perspectives
Building on previous academic work, the neoliberal Washington Consensus arose
in the 1980s as part of the wider rise of neoliberalism and as a critique of a set
of import-substitution industrialization (ISI) policies adopted by a large part of
the developing world in the post-war period (Escobar 1995). Neoclassical
economists pointed out that ISI policies actually exacerbated the very terms of
trade problems that had spurred developing countries to adopt ISI in the first
place (Fishlow 1985).
At the same time, rejecting both the pessimism of dependency theory and the
free market prescriptions of neoliberalism, a revisionist statist approach arose
that advocated state involvement in guiding economic development. A third
approach to development began to emerge during the 1990s. This transnational
network approach emphasizes the role of transnational systems of production in
the rise of East Asia and elsewhere (cf. Gereffi 1996a, 1996b).
In considering economic globalization, the Washington Consensus has welcomed

the reduced barriers to the flow of goods and capital as a boon to developing
countries (Dollar and Kraay 2000). Most of the statists have become pessimists
because they view globalization as spelling an end to local state or state–societal
efforts for development. The transnational network scholars see globalization as
conducive for development because it enhances the space in which transnational
networks can operate.
What fundamentally differentiates the three worldviews on development are the

perceived scope of market and government failures and the solutions to such
failures. The Washington Consensus views market failures as limited in scope
whereas the statists and transnational network theorists view market failures as
widespread. In contrast, the Washington Consensus deems government failure
as widespread whereas the statists and transnational network theorists view it
as limited.
There are two broad types of market failures: failure to achieve static efficiency
and failure to achieve dynamic efficiency. Conventional neoclassical thinking
focuses on the failure to achieve statically efficient outcomes. Static efficiency is
the state of market clearance, i.e. the marginal cost of producing the last unit is
exactly equal to its price. In this equilibrium state, the net social benefit (the
profits and positive externalities over the costs and negative externalities) is
maximized.8 Thus, market failure in the static context is when this market
clearance is not achieved. Dynamic market efficiency is the maximization of net
social benefit over time. In other words, dynamic (p.193) market efficiency
recognizes that some activities judged in the short term may not maximize net
social benefit. Over a longer period of time, these activities can maximize net
social benefit because these activities create additional value not realized at the
initial investment stage or shortly thereafter. Failure of dynamic market
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efficiency is simply the failure to realize this additional value. This failure could
be due to the pursuit of static market efficiency because dynamic efficient
activities often entail more short-term social costs than benefits, i.e. they are
often statically inefficient.9
7.2.2 The Washington Consensus

The Washington Consensus believes that developing countries can achieve
development by adhering to sound fiscal and monetary policies coupled with
free markets. A critical component of these free markets is free trade with other
nations.
The Washington Consensus encapsulates cogent arguments for the negative

effects of government intervention in the economy, the government failure
argument. These arguments against state intervention center on the tremendous
costs of these policies even if they actually create gains through increased scale
economies or positive externalities. Essentially, these economists, such as Stigler
(1975), Buchanan (1980), and Krueger (1990), point to the fact that interference
in markets creates rents and concomitant opportunities for rent-seeking, which
are welfare reducing. This welfare-reducing state intervention is dubbed
government failure. There is enough evidence of government failure in the
developing world to lend credence to these ideas (Krueger 1974; Balassa 1981;
Ahluwalia 1985; Bhagwati 1993). Other economists who are less ready to
assume rampant government failure are still skeptical that industrial policy
would do anything more than substitute for competition policy (see Lin’s
contribution in Lin et al. 2011).
The main problem with the Washington Consensus prescriptions is that their
assumption that market failures are not widespread appears untenable in the
light of evidence from the very countries, principally Latin American ones, which
have implemented their prescriptions (Sanchez 2003). The most damning
critique is that the embrace of economic globalization entailed in the
Washington Consensus actually undermines the very market institutions and
supposedly superior market-driven economic performance that the Washington
Consensus envisions.
(p.194) What the Washington Consensus has missed is that development

involves not just efficient usage of inputs of labor and capital but active
institution-building to solve market failure. Thus, the Washington Consensus
provides good warnings about the possible dangers of non-market solutions and
a cogent defense of market mechanisms, but it falls far short of offering a good
blueprint for development where such institutions do not already exist. Another
difficulty is that developing countries face many constraints on their growth and
countries need to address the most pressing ones they face first. Thus, they
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cannot follow one-size-fits-all blueprints based on the market-governing

institutions of already developed economies (Rodrik 2006a, 2011).10
What about the Washington Consensus in light of globalization? The

performance of countries that adopted Washington Consensus neoliberal policies
has not been encouraging, to put it mildly (Stiglitz 2002; Sanchez 2003; Rodrik
2011). Consequently, there have been certain retreats from the classic
Washington Consensus agenda by the primary international financial institutions
(IFIs). For example, after a period of internal debate following a number of
developing world financial crises, in 2010 the International Monetary Fund
(IMF) finally backed away from recommending open capital accounts for
developing countries. Nevertheless, the Washington Consensus’ market
fundamentalism has not been rejected although it has been leavened by a dose
of institutionalism (Rodrik 2006a, 2011).11
In line with new empirical work claiming a connection between institutions and
development (Acemoglu et al. 2001; Easterley and Levine 2003), a major
adjustment by some within the Washington Consensus camp has been advocacy
for getting institutions right in order to get markets right instead of simply
insisting on the state getting out of the way to let markets flourish (Burki and
Perry 1998; Meier 2001). While these recommendations are to be (p.195)
commended for moving away from the naïve view of markets as self-emergent
and self-governing, the recommendations that institutions matter coming from
the more institutionally oriented neoliberal scholars have tended to underspecify
or prescribe the wrong types of institutions needed to solve particular
development issues by using the current institutions of wealthy countries as the
model (Pritchett and Woolcock 2004; Doner 2009).
There are also empirical challenges to the “institutions fundamentalism” behind

this new “Augmented Washington Consensus” that combines the original
Washington Consensus’ market fundamentalism with institutions (Rodrik 2006a).
One challenge is the argument that human capital, not institutions, explains the
current income differentials across countries (Glaeser et al. 2004). Another is
the inconvenient fact that the institutional argument accounts for very long-term
economic performance but provides little evidence that institutional change
leads to changes in growth (Hausmann et al. 2005a; Jones and Olken 2005).
Furthermore, these approaches once again assume that the solutions have to be
purely domestic and thus radically narrow the options available. The recent and
arguably long overdue institutional turn in neoliberal thinking about effective
development policy simply reinforces the focus on domestic solutions to
development.
Page 6 of 24
7.2.3 The Statist Revisionists

Statist revisionists see the state or state–society partnerships as the most
effective12 political force to achieve economic development. There are two basic
perspectives on this claim of widespread market failure. One perspective sees
market failure as rife so a state or state–societal alliance to rectify this failure is
necessary to realize growth (Amsden 2000, 2003; Khan 2000a, 2000b; Stiglitz
2002). The other view sees market failure as a long-term problem. According to
this view, markets alone will achieve short-term static efficiency but fall short of
achieving long-term dynamic efficiencies (Chang 1994; Rodrik 1996; Ferris and
Gawande 2003; Sauer et al. 2003; Murphy et al. 1989).
What the statists have contributed to the debate on development are empirical
examples of (Johnson 1982; Gold 1986; Amsden 1989, 2000; Wade 1990;
Haggard 1990; Evans 1995; Chibber 2003; Chang 2007; Kohli 2004; Woo-
Cumings 1991, 1999; Rodrik 2003) and theoretical justification (Murphy et al.
1989; Chang 1994; Rodrik 1996; Khan 2000a, 2000b; Ferris and Gawande 2003;
Sauer et al. 2003) for state or state–societal involvement in development (p.
196) to correct the widespread problem of market failure. The revisionists also
offer a trenchant critique of FDI-driven development. In their view, foreign firms
only contribute to development when they are forced to do so by effective state
intervention (Fosfuri and Motta 1999; Jomo and Felker 1999; Mani 2004).
There are several flaws and limitations in the statist view of development. The
most critical limitation is the amount of state capacity necessary for
coordinating, monitoring, and disciplining economic agents to intervene
successfully to rectify market failures and capture dynamic efficiencies. The
bare minimal requirements for conducting such policies are government control
of the conditionality of rents (i.e. the government can credibly take away policy
benefits from firms) through the government’s ability to monitor firm
performance and reward firms accordingly (Amsden 1989; Wade 1990; World
Bank 1993; Chang 1994; Fields 1997; Schneider 1998; Khan 2000a, 2000b;
Moore 2002; Haggard 2004). Others require internal bureaucratic coherence
based on meritocratic recruitment and advancement (Johnson 1982; Rauch and
Evans 2000; Kohli 2004), a coherent shared developmentalist ideology within the
governing elite (Johnson 1982; Woo-Cumings 1999), and various mechanisms for
state–business coordination through broad representation of business through
peak or sector-based business organizations (Chibber 2003) and other forms of
“dense public–private ties” (Evans 1995). Most recently, there has been a turn
towards looking at the growth coalitions behind these developmental states
(Khan 2000b; Doner et al. 2005; Doner 2009).
Leaving aside the additional requirements, few countries appear to be able to

monitor and reward firms according to their performance. Even those who
recognize the virtue of state intervention in some cases recognize these limits
(Khan 2000a, 2000b; Haggard 2004). The statist model also overestimates the
Page 7 of 24
scope of static market failure just as the Washington Consensus underestimates

the scope of market failure. Using cases in South and Southeast Asia, Khan
argues countries that forgo some dynamic efficiency gains from learning rents,
such as Thailand, are better off than countries that pursue a strategy of
development via learning rents without appropriate levels of state capacity to
realize dynamic efficiencies (Khan 2000b).
A final problem in the statist view is the lack of consideration of alternatives to

state or state–societal intervention in the economy. Even under conditions of
domestic market failure, there plausibly could be an international alternative to
state intervention to correct market failure. This chapter offers such an
alternative, accessing better functioning foreign market institutions via FDI
while embedding the FDI in the local economy through ethnic ties.
(p.197) 7.2.4 Transnational Networks for Development: Globalization Optimists

Networks of production provide information, market opportunities, and capital
that can facilitate development. While the network theorists do not talk in terms
of resolving market failures, transnational networks provide the information and
knowledge to solve many of the market malfunctions discussed in the
development literature. Networks lower the knowledge barriers to entry for
firms from the developing world because much knowledge is available within the
networks. Ensconced in international networks, firms can draw on the
international industrial infrastructure and markets instead of relying on those in
their home economy. Engaging in networks allows firms and countries from the
developing world to move from the static efficiency equilibrium to the high
growth dynamic efficiency equilibrium.
There are two main streams of thought regarding transnational networks. Global
production network (GPN) theorists argue that MNC-organized networks of
production offer opportunities for learning and growth for the developing world.
Scholars (Kao 1993; Saxenian and Hsu 2000, 2001; Bresnahan et al. 2001;
Saxenian 2002, 2006; Saxenian and Li 2003) of transnational technology
communities (TTCs) view co-ethnic transnational networks of technologists as
driving much of the learning and technological development in the developing
world.
The TTC scholarship conceives of returnees to the developing world as tapping

into transnational co-ethnic networks that ease the flow of information.
Countries should attract a critical mass of returnees back from global centers of
innovation while at the same time encouraging these returnees to maintain
contacts with those advanced global centers in order to spur development. What
brings the returnees home are business opportunities fostered by state policies.
GPN scholars (Borrus et al. 2000; Rugman and D’Cruz 2000; Ernst and Kim
2002; Ernst 2004a, 2004b; Coe and Yeung 2015) argue that GPNs have grown to
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displace individual firms as the way to organize industry and have served to
diffuse international knowledge to the developing world by bringing local
suppliers from disparate parts of the developing world into their networks.
Given their heavy focus on networks of production in relatively technologically

intensive goods, GPN theorists emphasize the old problem of underinvestment in
R&D that Arrow (1962) delineated. Essentially, since R&D creates positive
externalities, firms on their own will underinvest in R&D. This problem is
magnified in the developing world (Mani 2004; Ernst 2004b). In addition, the
developing world does not have the S&T infrastructure necessary to create
cognitively and organizationally complex knowledge. GPNs provide the
knowledge and markets to allow developing countries to grasp the dynamic
efficiencies of innovation (Ernst 2004b).
(p.198) The key contribution made by the GPN and TTC optimists is to
demonstrate the continued role of transnational informal institutions in shaping
the global economic landscape.
The main problem with the network optimists is that they do not go far enough
in recognizing the domestic environment’s importance in its interaction with
transnational structures in determining the possibilities for development. Their
analysis contains the post hoc ergo propter hoc fallacy of assuming that any
good outcome with policy support is a result of that policy support. What follows
from this uncritical examination of local policies is a lack of recognition of how
the contours of domestic political economy shape developmental outcomes.
State policies either facilitate networks through luring returnees (TTCs) and
aiding firms to engage GPNs effectively (GPN theorists) or they fail. Network
theorists fail to anticipate that state policies could be relatively ineffective or
even constrain development for some firms (e.g. China’s domestic firms), while
at the same time another set of firms (e.g. hybrids) in the same country and far
removed from the state could succeed.
7.2.5 The New Perspective: The Global Hybrid Model

What does the global hybrid model borrow from the Washington Consensus, the
statists, and the transnational network theorists? From the Washington
Consensus, the hybrid model borrows a respect for market efficiency and
recognition that government failure may be as common in the developing world
as dynamic market failure. The global hybrid model makes explicit what the
Washington Consensus leaves implicit. Openness to foreign trade and capital is
not simply a mechanism to access goods and finance more cheaply, but a means
to import the governance provided by foreign institutions to enhance market
efficiency. In the case of China, openness to FDI has given certain China-based
firms the opportunity to access better functioning financial institutions than the
domestic economy offers. The global hybrid model differs from the Washington
Consensus by recognizing that markets alone, particularly reliance on accessing
Page 9 of 24
market discipline through economic openness (the prime Washington Consensus

prescription), can lead to at best statically efficient outcomes and often lead to
much worse.
The global hybrid model builds on the statist revisionists’ ideas concerning the
wide scope of market failure in the developing world and the lack of
commitment of MNCs to host countries. The global hybrid model diverges from
the statists by recognizing that there are other ways to solve market failures and
lack of MNC commitment other than state or state–societal intervention. From
the transnational networks literature, the hybrid model takes the concepts that
these transnational networks help to diffuse knowledge and that this diffusion
can help overcome barriers to realizing dynamic (p.199) efficiency. However,
the hybrid model takes issue with their institutionally impoverished view that
these transnational networks operate with relatively similar efficacy across
different firms and nations as long as the host nation involved is able to engage
with these networks.
In the place of the three existing perspectives, the global hybrid model offers
solutions to both government failure and market failure. The reliance on foreign
finance solves static market failure and government failure in the form of
China’s dysfunctional state financial system. The strategic commitment to China,
engendered by the hybrids’ ethnic ties to China, solves the problem of dynamic
market failure. Hybrid firms embark on more technology activities in China than
what the near-term returns on such activities would justify. Finally, the fact that
this approach solves such market failures without reliance on the state helps to
avoid many potential future government failures that unsuccessful state
intervention to rectify market failure would engender. Table 7.1 summarizes the
differences across the four paths of development.
To broaden the scope beyond the Chinese case, while at the same time
highlighting limitations of the global hybrid model, it is useful to frame the
problem of development as Hausmann et al. (2005b) have done in terms of two
fundamental constraints: either the cost of finance is too high or the private
return on investment is too low because of low social returns or low
appropriability. Low social returns are mainly due to domestic issues, such as
bad infrastructure and poor human capital formation, that the transnational
linkages discussed in this book can only partially resolve. In the case of China,
the human capital generation spurred by the transnational linkages was only
possible due to the already large-scale generation of human capital within China
(Simon and Cao 2009).
The global hybrid model can address the problems of low appropriability and the
high cost of finance. Low appropriability is a problem often associated with
government risks at the micro-level (e.g. property rights protection) and various
market failures. The global hybrid model in the Chinese case helped to overcome
Page 10 of 24
some of these low appropriability problems through access to institutions

outside of China. With financing, hybrid firms in China also access legal means
to protect the intellectual property they generate. While such legal institutions
may not help to protect them much in the Chinese marketplace, they do help to
ensure higher appropriability vis-à-vis their investments overall. The
international venture capitalists that fund many of the hybrid firms can also help
them overcome various market failure problems. For example, the issue of
pioneers not being able to capture sufficient returns for their high-risk
investments is partially offset by investment from venture capitalists. Moreover
venture capitalists can offer these pioneers access to customers and partners
abroad that arguably provide a leg up on copy-cat competition so that the
pioneers can capture a sufficiently large portion of the (p.200)
Page 11 of 24
Table 7.1 The four paths of development
Paths of development Problems of development Solutions Opportunities for

development under
globalization
Washington Consensus • Government failure • Government failure MANY due to:

looms large solved by keeping
• lower barriers to trade
government’s role in the
• Market failures are not and capital flows
economy to a minimum
widespread
• expansion of free
• Free markets flourish
market space in
without much help from
developing world
the state
Statist revisionist • Static market failure is State or state-societal FEW due to globalization
a problem alliances create the weakening the
institutions to align capabilities of states and
• Dynamic market failure
incentives properly in the societal forces to create
is rampant
face of failed markets these institutions to solve
• Government failure is market failure
less costly and less likely
than market failure
Page 12 of 24
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development under
globalization
Transnational networks Dynamic market failure is • Transnational networks MANY due to:
rampant because: solve the problem of
globalization broadening
dynamic market failure by
• Developing countries the scope for the
providing the
do not have the operation of these
technological resources
institutional networks in the
upon which local firms
infrastructure to create developing world
can build their own
technology
technical capabilities
• The standard Arrow
• States can play a
problem of private
limited role in
underinvestment in
encouraging local firms to
technology due to
engage transnational
inability of complete rent
networks
capture
Global hybrid • Government failure can • Importing foreign SOME due to:
be a problem (serious institutions of finance
• Expansion of
problem in China) solves static market
opportunity because
failure
countries lacking BOTH
• Both types of market • The host-based state capacity to correct
failure can be a problem operational strategy of market failure AND
the hybrids solves strong market institutions
dynamic market failure can still develop
but CONTINGENT on:
Page 13 of 24

development under
globalization
• Solving market failures

• countries having
through importing
potential for transnational
capable foreign
technology communities.
institutions avoids the
problems of government • sectoral characteristics
failure
Page 14 of 24
(p.201) social benefits of their entrepreneurship to pursue it. The obstacle of

the high cost of finance (low access to the formal financial system) faced by non-
state entrepreneurs in China is solved through accessing international finance.
Moreover, international finance is more willing to lend to these Chinese
entrepreneurs because of the interplay of the transnational technology
communities that lower the information barriers between international finance
and the entrepreneurs in China.
7.3 Sectoral Constraints

The global hybrid model works best in those industries characterized by the
following features: feasible modularity of the value chain, fast clockspeeds, and
relatively high technological intensity.13 The combination of feasible modularity
and high clockspeeds generally leads to modularity of the value chain and thus
lowers the barriers to entry for smaller firms bereft of internal or external scale
and scope economies. Higher technology intensity leads to more segments along
the value chain generating relatively high value so there are opportunities along
the chain for firms to capture significant value. This section will explore each of
these features in turn.
Many scholars have documented the radical changes in the organization of

industrial value chains over the last several decades (Arndt and Kierzkowski
2001; Sturgeon 2002; Langlois 2003; Berger 2005; Gereffi et al. 2005; Thun
2007). In particular, these scholars have noted that many value chains have
become modularized. The basic idea of modularization14 of the value chain is
that value chains can be broken down into parts (modules) with clearly defined
(a) functions and (b) interfaces between the different functions. These clearly
defined interfaces allow for relatively frictionless/low-cost transfer of
information from one function (module) to the next. These interfaces ease the
flow of information, lowering the transaction and coordination costs between
modules. They thus allow firms to concentrate on just a few modules of the value
chain without requiring co-location with other firms up- and downstream along
the value chain. Thus, the modularization/ fragmentation of the value chain
allows for firms to de-verticalize while freeing them to disperse geographically
(Arndt and Kierzkowski 2001; Berger 2005; Thun 2007).
For industries where such fragmentation has taken place, the implications for
states and firms in the developing world have been profound. Past (p.202)
successful developers concentrated on building capabilities within industrial
behemoths featuring substantial vertical and horizontal integration, such as the
Japanese keiretsu and Korean chaebol, or fostering clusters of same-sector firms,
such as Taiwan’s IT cluster in Hsinchu. Industrial policy focused on building up
the necessary internal and external scale and scope economies in these
behemoths and clusters. Prospects for smaller individual firms outside of
clusters anywhere, but especially in the developing world, appeared bleak prior
to the fragmentation of these value chains (Arndt and Kierzkowski 2001). In
Page 15 of 24
developing countries without effective industrial policies to help build the

internal or external scale and scope economies, such firms faced nearly
insurmountable obstacle to compete. With the fragmentation of value chains,
small firms in the developing world could engage suppliers and customers
globally while concentrating on a narrow band of activity in order to lower the
cost of entry into an industry.15 As discussed later, fast technical change goes
hand-in-hand with modularized value chains in terms of the type of industries
that offer the best prospects for new entry by developing world firms. Thus,
disaggregation of the value chain can help lower barriers to entry in precisely
those industries where state industrial policy is likely to be less effective.
How does modularity vary across industries in terms of providing wider

opportunities for industry entry into the higher value-added segments of a given
industrial value chain? The critical factor is a combination of the feasibility of
modularity and the technical clockspeed (Fine 1998, 2000) of the industry.
Feasibility of modularity is the basic capability to modularize the value chain
through developing interfaces where information can be codified and
transferred across the segments. The industrial clockspeed is the pace of
technical change controlling for product complexity (Fine 1998).16 As Fine
(1998) and Steil and his colleagues (2002) among others have pointed out,
industries with faster paces of technological change are more likely to be de-
verticalized both due to lower, even negative, returns to scale (Utterback and
Suárez 1993; Christensen 1997), and fewer opportunities to add much value by
operating across segments in the value chain. A number of authors have noted
the propensity of slow clockspeed industries to be more (p.203) vertically-
integrated, but fast clockspeed industries are not necessarily modularized either
if there are not ways to enhance the standardization and digitization of the
production chain as the pre-digital era IT industry demonstrates (Thun 2007;
Fuller et al. 2013). Christensen (1997) also argues forcefully for the necessity of
vertical integration of non-standardized segments of the value chain.
The greatest opportunities for those developing world firms bereft of the support
of effective state industrial policy are in sectors where feasible modularization
and clockspeed are both high. If one or the other is not high, the scale and scope
barriers present difficulties for these firms. Indeed, these barriers to entry are
the main justification for protecting and promoting infant industries until they
grow large enough to compete. What the combination of high feasible
modularity and high clockspeed creates is a highly modularized production
chain that allows small firms without the internal or external (cluster-provided)
economies of scope and scale to enter the industry more easily.
What further differentiates these industries is the value they generate.

Therefore, the most promising industries in developmental terms are those
industries where modularization is high, technical change is fast, and
technology-intensity (and correspondingly, the economic value created) is high.
Page 16 of 24
The garment industry is an at least moderately high clockspeed sector (product

generations are relatively short although process technology changes slowly),
but the economic value generated in this low-technology sector is relatively
small and mainly captured by firms from the advanced world in the modules of
design and distribution (Gereffi 1996b; Arnold 2010). Many developing world
firms have easily entered this sector without much state support, but most of
them have simply relied on labor arbitrage. Historically, successful developers
have had to move into other higher technology-intensive sectors in order to
become wealthy.
Sectors such as IT and bio-pharmaceuticals are modularized with high

clockspeed and high technology-intensity (Rezaie 2012)17 so they offer the most
promising routes for development for small firms without state backing—like the
hybrids—to build scale and scope economies. While the sectoral constraints for
the global hybrid model are somewhat restrictive, some argue that more and
more value chains are becoming fragmented, which suggests more value chains
meet at least the first two of three criteria (Langlois 2003). Thus, the sectoral
scope of the global hybrid development path is probably widening over time.
(p.204) 7.4 Contested Openness

The Chinese state has placed a priority on economic development for several
decades and arranged incentives for local and central government officials
accordingly. This priority has opened space for private agents to appeal to state
agents to allow in FDI in an expanding set of sectors over time because a
plausible case has been made that FDI can provide the evidence of economic
development (e.g. increased capital investment) that earns state agents
administrative accomplishments (zhengji) in the Chinese state apparatus (Yang
1997; Zweig 2002). Rather than a functional argument that China needed to
bring in the foreign financial institutions to create an efficient market economy
so it did, what has transpired in China is that economic agents, foreign and
domestic, have been able to persuade local state agents to proceed with further
openness to FDI because it corresponds to the state agents’ narrow interest in
climbing up the state hierarchy to do so. However, this political system of
incentives for FDI and concomitant links to foreign financial institutions is
fragile. If the Chinese state truly dispenses with hard investment and economic
criteria as the criteria for evaluating local cadres, then the political support for
maintaining these foreign institution links via FDI could very well disappear.
As discussed in Chapter 2, these hard economic incentives have been very

beneficial in helping to create a geographic space in China open to foreign
investment and an environment in which wholly foreign-owned enterprises could
exist. There was co-evolutionary pattern or virtuous cycle between expanding
space for WFOEs and increasing FDI (Naughton 2007). As the WFOEs became
viable, the volume of FDI also increased substantially during the 1990s. Behind
this push for regulatory space for WFOEs to operate were the political incentives
Page 17 of 24
of local government cadres as they wanted to create the most favorable

environment for their investors.
The institutional space for hybrid FIEs’ technological entrepreneurship in China

depends on access to foreign finance, particularly foreign venture capital (see
Chapter 2). If the openness to this foreign capital is cut off or tolerance of
WFOEs in the technology sector ends, then hybrid FIEs’ ability to thrive in China
will wither dramatically. In contrast, MNCs are concerned about continued
tolerance for the operation of WFOEs in China, but not concerned about
preserving the channels for foreign venture capitalists unless they themselves
operate a captive VC because venture capital is not important for their Chinese
operations.
One example of how hybrids worked with state agents and other private actors
to try to maintain the institutional space for hybrids to function in China was the
problem with State Administration of Foreign Exchange (SAFE) Regulations No.
11 and No. 29 in 2005. These regulations threatened to end (p.205) the ability
of foreign VCs to invest in offshore entities that served as the holding companies
for hybrid firms because SAFE insisted on its right to approve movement of
assets between domestic entities and these offshore entities. Behind the scenes,
entrepreneurs, local government officials in major areas of foreign VC activity,
such as Shanghai, and foreign VCs tried to lobby central government officials to
create ways around the new regulations as it was assumed that SAFE would not
be willing to make an embarrassing about-face on these regulations. Months
were spent trying to figure out official means to circumvent the regulations
amidst a decline in the formation of new offshore vehicles due to the regulatory
uncertainty (Foo 2005). As one foreign VC put it in July 2005, “For the SAFE regs
something [i.e. a solution] will come up…China at the end of the day still wants
to allow foreign investment” (Interview 317). As the VC correctly predicted,
SAFE was forced to back down and reverse the regulations completely by
issuing Circular No. 75 in October even though this circular contained some
face-saving language that kept the door open for future SAFE regulation over
such offshore vehicles through requiring users of such vehicles to register with
SAFE (Foo 2005). The incentives for local governments involved in this
bureaucratic dispute were clear. They were judged on metrics, such as the level
of industrial investment, and foreign VC investments were useful for improving
the local governments’ investment performance.
While this incentive structure has worked to allow institutional borrowing to

overcome China’s problematic institutions, the SAFE case also demonstrates
how fragile the institutional space created is. New regulations can undermine
the routes of institutional importation. Given the large role of the state in many
developing economies (Amsden 2003) and the fact that now even the IMF
recognizes that capital controls are generally beneficial for developing
countries, many, perhaps most, emerging economies will be characterized by
Page 18 of 24
interventionist states with strong reasons to regulate the inflow and outflow of
capital. Thus, there is need for a stronger consideration of the politics behind
maintaining such openness to foreign institutions than the political economy
literature or the management literature on strategic responses to institutional
voids (Khanna and Palepu 2010) provide.
The politics are further problematized by the fact that the foreign institutions
Chinese hybrid firms draw upon do not operate free of their own socio-political
context. Indeed, the value of these institutions is that they are clustered with
other supporting institutions. Nevertheless, the political enforcement of these
institutions can lead to conflict with China’s own bureaucrats as they spot what
they deem to be intrusions onto their own turf.
A prime example of this type of conflict between Chinese bureaucrats and

foreign institutions is the battle over auditing of foreign-listed firms based in
China. Given ongoing concerns about accounting fraud of Chinese firms listed in
the United States, the Securities and Exchange Commission (SEC) (p.206) had
been demanding access to the documents of local accounting firms, which are
the local affiliates of the Big Four and one Chinese accounting firm, in order to
investigate nine Chinese firms for fraud. The five auditing firms were not eager
to turn over the documents given China’s stringent state secrets law and the fact
that China’s regulators are none too keen to allow this type of foreign intrusion
into what arguably is their domestic purview.18 However, the SEC needs to vet
firms listing or listed in the United States and not having access to the
documents of the firms jeopardizes this process. The two sides could not reach
an agreement for much of 2012 and 2013, and this regulatory uncertainty put a
kibosh on IPOs of Chinese firms in the United States for that period. In the end,
the two sides appeared to reach a compromise where such documents could be
accessed by the Public Company Accounting Oversight Board (PCAOB), which is
a private non-profit organization, upon request for special investigations but
cannot be used for routine inspections or “fishing expeditions.” At the time
some, such as Chinese accounting expert, Paul Gillis, expected the SEC to
receive the same rights soon.
Tellingly, the pressure behind the compromise was pushback against the
bureaucrats of China Securities Regulatory Commission (CSRC) and MOF from
the non-state-linked entrepreneurs who need access to foreign capital markets
and, more importantly, the local governments who are interested in the
continuation of these links. As Paul Gillis put it:
The real leverage the U.S. had over China was access to its capital
markets. With the shutdown of the IPO markets in both the U.S. and China,
private enterprise in China is being starved of capital, and that threatens
indigenous innovation and the future competitiveness of China. If a deal
Page 19 of 24
with the PCAOB and the SEC removes that threat and reopens the IPO
markets, I think it is unlikely that China goes any further.19
An optimist could take from this apparent compromise that openness is too
important for powerful interests in China for policies that ratchet it back to
remain in effect for long. A more realistic assessment would be that this (p.207)
incident is just one in a line of contestation around controversial levels of
openness (the levels necessary to maintain the global hybrid model) and the
champions of this controversial level of openness have not yet impinged in any
serious way the interests of those powerful state actors. Indeed, the SEC still
does not have the same access as the PCAOB and a Chinese government
directive requires that documents requested by the SEC be sent to the Chinese
regulators, which would then pass them on to the SEC. The auditing units of the
Big Four auditing firms were given a paltry USD 2 million fine for their lack of
cooperation with the SEC’s request for documents until they were sued. Even
then, the local units transferred the documents via the local regulators to the
SEC instead of turning them over directly for fear of violating Chinese
government’s directive.20
This continued contestation is hardly surprising. After all, CSRC and MOF were
willing to freeze foreign-listings in a skirmish over relatively minor turf. If such
openness does come to inflict significant harm on powerful state actors, it is not
obvious that this type of radical openness to foreign institutional influence will
be maintained. Furthermore, the continual encroachment of state actors into the
hybrids’ sphere of high-technology activity as documented in Chapters 5 and 6
suggests that the balance of forces might turn against the forces of openness.
This encroachment perhaps is a signal of a changing calculus where openness is
deemed to be less compelling as a means to promote local state interests,
particularly in light of the increasing absolute amount of resources wielded by
certain local governments in China.21
7.5 Conclusion
The global hybrid model suggests that development prospects can be promising
even for those developing countries with weak financial sectors and low state
policymaking capabilities. However, such a path to development is only feasible
in certain sectors and available to those nations that have or can create co-
ethnic transnational technology networks. At a bare minimum to foster the
transnational technology networks that play a key role in creating hybrids, a
nation needs a cohort of reasonably well-trained technical personnel. To its
credit, China’s state education has been able to train such cohorts and India has
educated the elite well (Freeman 2004; Bardhan 2010). Other countries that
have prevented their technologists from staying abroad after their (p.208)
studies, such as Thailand, should change course and abandon policies that
Page 20 of 24
require students to immediately return home upon graduation. The creation of

these networks takes time and experience not just formal education.
The other major constraint on the scope of the global hybrid model is its sectoral
limitations. For those industries where vertical integration of production is
critical and scale economies are expensive to achieve, it is very unlikely that
hybrids will be able to present a solution because they probably will not be able
to muster sufficient financial resources. Tellingly, transnational technology
networks have been most effective in the IT sector (Saxenian 2006). IT of course
fits the required sectoral characteristics of the global hybrid model quite well.
Evidence from China’s more mature, vertically integrated industries suggests
that domestic firms have captured the bottom of the market and are busily
fighting MNCs for the middle of the market, i.e. domestic firms have been
somewhat successful at upgrading in these mature sectors (Brandt and Thun
2010). Happily for those pursuing the global hybrid model, there is evidence that
the fragmentation of production is expanding across a wide swath of industrial
activity (Langlois 2003). Unhappily for entrepreneurs in the IT industry, there is
also evidence that much of the IT industry is rapidly maturing in ways that may
soon close off further easy entrance for developing world firms.
The heuristic lesson to be learned from China’s global hybrid path is to move
away from a narrow focus on the capabilities and institutions of domestic
environment and imagine development within the larger global context given the
rich web of formal and informal transnational links that characterize this global
age. While recognizing this process is politically contingent and that we could be
at the end of another belle époque swept away by a great reversal of
globalization, it is also important to scan the horizon for opportunities for
development rather than assume all solutions are domestic. China’s model is
neither a panacea nor first-best solution, but few developing countries have been
able to stumble upon one of those. Just as Rodrik (2006a, 2011) has wisely called
on developing countries to tailor their policies, resources, and institutions to
solve their most pressing problems rather than to overhaul their domestic
environments to fit the ideal blueprints of economists, practitioners and political
economists of development alike need to adopt greater flexibility in how we can
conceive of the available institutions and opportunities for development, looking
beyond the individual nation state for solutions while remaining sensitive to the
interaction of domestic and transnational institutions. Admittedly, this is hard to
do given the priors of many political economists. Chapter 8 takes one step
towards developing a new heuristic that may help. The chapter argues that
China’s importing of institutions via hybrid firms challenges some assumptions
concerning national political economies shared widely within the comparative
political economy literature.
Page 21 of 24
Notes:
(1) The tradition goes back to Hamilton (2010 [1791]) and List (2011 [1841]) and
their mercantilist predecessors. The post-World War II revival of this tradition
was led by Gerschenkron (1962).
(2) Neoliberal in this chapter refers to those who advocate free market solutions
in line with the Washington Consensus (Williamson 1990) or
revised/“augmented” Washington Consensus (Rodrik 2006a) discussed later in
the chapter.
(3) My argument has some similarities with Keun Lee’s (2013) argument
recommending that middle-income countries focus on short cycle time industries
although his emphasis is basically on how easily displaced incumbents are in
high clockspeed industries.
(4) Since the onset of the global financial crisis, Martin Wolf has become much
more critical of the neoliberal economic globalization he celebrated in his 2004
work. See his opinion pieces for the Financial Times and elsewhere.
(5) Evans (2008) has tried to imagine what could lead to a global social response
to overturn neoliberal globalization, but his critique of neoliberal globalization
makes clear he is still very pessimistic about the space for development under
the hegemony of neoliberal globalization.
(6) Wade (2011) has pointed out that despite the rise of the BRICS, especially
China, little has changed in political arrangements behind the international
financial institutions (IFIs) governing the global economy.
(7) Coe and Yeung (2015) is a partial corrective to the earlier transnational
network literature’s under-institutionalized approach assuming a simple mode of
engagement with transnational networks, but this work’s assumptions privilege
regions and downplay the influence of national institutional features.
(8) Net social benefit is only maximized if negative externalities do not outweigh
positive externalities.
(9) The discussion of static and dynamic efficiency draws heavily from the work
of Khan (2000a, 2000b) and Chang (1994) although the former moves farther
away from the neoclassical orthodoxy than the latter in his implicit rejection of
the possibility of any development with just static efficiency gains.
(10) Both Yasheng Huang (2008) and Chenggang Xu (2011) make similar
arguments to Rodrik about how China eschewed best market institutional
practice type reforms and instead addressed its most severe constraints first.
Huang argues that the 1980s was an era of high and equitable growth in China
because the constraints suppressing rural entrepreneurship were dramatically
relaxed even if the absolute movement towards a strong property rights regime
Page 22 of 24
was quite limited. Xu argues that China has made use of a system of regionally
decentralized authoritarianism (RDA) that loosened some bottlenecks to growth
without ever creating a strong set of market institutions. However, both Huang
and Xu in the end strike pessimistic notes. Huang sees state capture after the
1980s and Xu acknowledges that RDA creates distorted incentives and serious
resource misallocation, such as the problems surrounding land governance in
China.
(11) The World Bank’s 2008 Spence Report is another study signaling the partial
shift away from the Washington Consensus as this report approves of both
traditional Washington Consensus policy prescriptions and the efficacy of state
intervention (Wolf 2008). It acknowledges the importance of context while
eschewing one-size-fits-all policies (Rodrik 2008). The inconsistency and indeed
somewhat incoherent approach of supporting both some of the Washington
Consensus nostrums and state intervention is most likely the result of this being
a consensus report created by a large committee through a process of
negotiation.
(12) Some revisionists may have argued that the state’s involvement was merely
conducive to development in the case of particular countries. Other revisionists,
such as Robert Wade and Amsden, have been willing to make or at least imply
broader claims of the necessity of such political structures for economic
development.
(13) This section draws on Fuller (2013). Revised and reproduced with
permission from Journal of Development Studies (tandfonline.com).
(14) Also referred to as vertical specialization or disaggregation/fragmentation of

the value chain.
(15) Firms could invest smaller sums towards the production and technical skills
required within a given module rather than having to invest on a much larger
scale to build capabilities across a wider set of activities along the value chain.
Furthermore, in those sectors with a fast pace of technical change, state
industrial targeting is probably less effective as state policy has difficulty
keeping pace with changing requirements within the industry (Schmitz 2007).
(16) Fine focuses on several types of clockspeed in his work with the principal
ones being process and product technology clockspeeds. It is important to note
that clockspeed is not a measure of the technological intensity of the industry as
some industries with slow clockspeeds, such as commercial aircraft with its
product technology generations of ten to twenty years, are technologically
intensive (Fine 1998).
Page 23 of 24
(17) Lee (2013: 84) claims that biotechnology has a medium cycle-time, but in
fact his data shows biotech to be below average, i.e. above average in
clockspeed.
(18) This conflict over auditing is only one of several recent problems between
the SEC and Chinese firms. In 2012, the problem was over variable interest
entities (VIEs), which many Chinese companies have used to get around laws
that restrict foreign entry into certain sectors in China. The problem from the
US SEC’s perspective was an accounting issue of whether the firm could include
profits earned by a VIE (FT December 4, 2012). For these Chinese firms, VIEs
usually accounted for most of their profits. The Ministry of Commerce
announced in early 2015 that the VIEs were not legal as a way to circumvent
foreign participation in restricted sectors, but WFOEs would be tolerated if they
were Chinese-controlled (see Paul Gillis’ May 10, 2015 blog entry at <http://
www.chinaaccountingblog.com/weblog/vies-are-dead-long-live-the.html>,
downloaded on June 8, 2015). In other words, hybrids could still participate in
these sectors if they met the Chinese-controlled FIE requirements, but the
traditional MNCs could not even if they had already been doing so, such as
Amazon in China’s e-commerce market.
(19) “PCAOB deal announced,” China Accounting Blog (<http://

www.chinaaccountingblog.com/weblog/archives/05-2013.html>), downloaded on
May 30, 2013.
(20) See <http://www.chinaaccountingblog.com/weblog/archives/05-2013.html>,

downloaded on May 29, 2015, and FT (February 6, 2015).
(21) See for example Chen Zongshi (2015)’s work on the resurgence of the state
in formerly private enterprise-centric Wenzhou.
Page 24 of 24

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China’s Global Hybrid Model for Development under Globalization

Paper Tigers, Hidden Dragons: Firms and the

Print publication date: 2016

China’s Global Hybrid Model for Development

Abstract and Keywords

The pre-globalization developmental debate concerned whether markets or

precisely as these networks became more prominent and widespread (Gereffi

7.2 Four Perspectives on Development under Globalization

In considering economic globalization, the Washington Consensus has welcomed

What fundamentally differentiates the three worldviews on development are the

7.2.2 The Washington Consensus

The Washington Consensus encapsulates cogent arguments for the negative

(p.194) What the Washington Consensus has missed is that development

cannot follow one-size-fits-all blueprints based on the market-governing

What about the Washington Consensus in light of globalization? The

There are also empirical challenges to the “institutions fundamentalism” behind

7.2.3 The Statist Revisionists

Leaving aside the additional requirements, few countries appear to be able to

scope of static market failure just as the Washington Consensus underestimates

A final problem in the statist view is the lack of consideration of alternatives to

(p.197) 7.2.4 Transnational Networks for Development: Globalization Optimists

The TTC scholarship conceives of returnees to the developing world as tapping

Given their heavy focus on networks of production in relatively technologically

7.2.5 The New Perspective: The Global Hybrid Model

market discipline through economic openness (the prime Washington Consensus

some of these low appropriability problems through access to institutions

Table 7.1 The four paths of development

Paths of development Problems of development Solutions Opportunities for

Washington Consensus • Government failure • Government failure MANY due to:

Paths of development Problems of development Solutions Opportunities for

but CONTINGENT on:

Paths of development Problems of development Solutions Opportunities for

• Solving market failures

(p.201) social benefits of their entrepreneurship to pursue it. The obstacle of

7.3 Sectoral Constraints

Many scholars have documented the radical changes in the organization of

developing countries without effective industrial policies to help build the

How does modularity vary across industries in terms of providing wider

What further differentiates these industries is the value they generate.

The garment industry is an at least moderately high clockspeed sector (product

Sectors such as IT and bio-pharmaceuticals are modularized with high

(p.204) 7.4 Contested Openness

As discussed in Chapter 2, these hard economic incentives have been very

of local government cadres as they wanted to create the most favorable

The institutional space for hybrid FIEs’ technological entrepreneurship in China

While this incentive structure has worked to allow institutional borrowing to

A prime example of this type of conflict between Chinese bureaucrats and

require students to immediately return home upon graduation. The creation of

(14) Also referred to as vertical specialization or disaggregation/fragmentation of

(19) “PCAOB deal announced,” China Accounting Blog (<http://

(20) See <http://www.chinaaccountingblog.com/weblog/archives/05-2013.html>,

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