Rents, technology acquisition and the development of enterprise groups in China

Enterprise groups are common to many countries and tend to dominate the economies in which they are found. Most of the pertinent scholarly work on enterprise groups has focused primarily on the successful cases. However, not all enterprise groups are successful. Thus, the factors that impact on performance become important research concerns. This study argues that performance is determined largely by the efforts undertaken by these business clusters to upgrade their technological capabilities. For late developing countries most technology originates in already industrialized countries, and success requires the active participation of firms in learning the technologies they acquire. Given the risks involved, however, the owners of these business clusters may not make the necessary investments in acquiring and learning new technologies. Consequently, state assistance in the form of rents for learning is often necessary to spur investment in technological upgrading. A necessary condition for successful state intervention is that state assistance must be conditional on performance. Whether a state can successfully discipline business depends on the political context within which the rents are created and dispensed, and on the scale of the technology being transferred. A centralized distribution of political power and centralized institutions tend to correlate with successful state intervention to create learning rents if the scale of the technology transferred is large and complementary investments are required. By contrast, enterprise groups developed around small-scale technologies will likely benefit from a more decentralized structure of rent distribution. This model is tested primarily through an analysis of the development of enterprise groups in China. Since both the distribution of political power over economic affairs and the institutions that distribute rents are dispersed in China we expect that enterprise groups in small-scale industries would tend to be successful, while business groups in scale intensive sectors would not. These propositions are tested through an analysis of case studies in the computer and automobile industries, where we find that the model fits quite well. The strength of this line of argument is further demonstrated through a brief analysis of the development of business groups in South Korea, India, Malaysia and Mexico.