Local Government and Firm Innovation in China: The Case of the Clean Energy Sector

Margaret Pearson, University of Maryland, Department of Government and Politicsmpearson@umd.edu

Paper presented at the China Initiative Research Seminar, Watson Institute, Brown University, November 12, 2015.

Note to readers: while any feedback on this draft paper is welcome, I am particularly interested in the utility and formulation of the taxonomy suggested in the conclusion. Also, please do not cite or quote without explicit permission.

I. Introduction 1

How do local governments contribute to innovation and, by extension,

development in China? While scholars disagree as to whether local governments are

helpful or harmful, there is a consensus that they are relevant.

2 The link between local

governments and growth is well-considered in scholarship. Similarly, literature on

innovation by Chinese firms is extensive, 3 as is the question of how the PRC central

government policy may foster innovation. (Contributions to these literatures are cited

throughout this paper). Yet the influence of local government on firm innovation is

curiously underexamined in studies of innovation and industrial upgrading in China. A

major study of China’s innovation capacity by the OECD, for example, largely fails to

mention the role of local government (OECD 2007).4 The role played by local

government might be addressed in several ways. One approach would be to look at the

efficiency and innovation outcomes of funds spent by local governments, in other words,

to “follow the (local state) money” and track pro-innovation outcomes such as increase in

patents or measures tied to market success. While this approach would have many

advantages, the lack of a clear (or transparent) trail and other design and measurement

1 Thanks to representatives of a number of the local governments and firms discussed here for information and perspective, to Liu Wei for research assistance and to Tom Rawski, Loren Brandt, Eric Thun, Jennifer Hadden, Joanna Lewis, Yixin Dai, Ciqi Mei, and Zhilin Liu for comments on earlier drafts of this paper.2 In the political science literature alone, for example, see Oi (1992, 1999); Yasheng Huang (2002); Heilmann (2008); Heilmann et al (2014); Gallagher (2014); Xu (2011); Chen Ling (2012, 2013).3 As is referenced below, this literature tends to focus on market factors, including global value chains, have led to expanded innovative capacity in China. See, for example: Nahm and Steinfeld 2014; Brandt and Thun 2010. 4 Often industry studies fail to highlight the role of local governments except in passing, e.g., Bär (2013). Exceptions are OECD 2008 (ch. 7), Dai 2015, and Liu and Chen 2012.

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issues at the local level would pose substantial difficulties. Alternatively, one might

examine variation in innovative outcomes among in-country regions to try to assess what

local political factors (among others) lead to greater or lesser innovation in a sector (e.g.,

Chen 2013, 2015; Breznitz and Murphree 2011; see Rithmire 2014). This paper takes a

complementary approach. It considers how local governments in China typically do or

do not foster an innovative ecosystem for firms. Under what circumstances do local

governments create an environment that can enable firm-level upgrading or industry

success, thereby contributing to the center’s goal of an innovative economy? In what

ways might the ecosystem presented by local governments be a hindrance to firm

innovation? Thus, rather than directly assessing whether innovation has occurred (a

project that itself is subject to substantial debate about how “innovation” should be

valued and defined), I examine how the local government ecosystem affects industries

subject to industrial policy in areas Beijing hopes will be innovative.5 I draw on

scholarship on PRC central-local relations and local officials’ behavior, as well as

scholarship on “innovation systems,” to show patterns of behavior that affect industry

structures and other firm outcomes in a given locality.

The empirical focus is local government influence on the development of clean

energy industries, specifically solar cells (PVs) and electric vehicles (EVs).

Development of the clean energy sector has been a key theme of discussions on China’s

response to environmental degradation and climate change. Yet clean energy has been

not just an environmental policy; it is also, and perhaps foremost, an industrial policy.

Despite high-level emphasis on sustainable development, the implementation of China’s

clean energy industry – as a part of China’s push for innovation as well as sustainable

development - has followed in the well-trod footsteps of Chinese industrial policies. It

has been designated as one of the PRC’s “Strategic Emerging Industries” (SEIs) and fully

incorporated into the Five-Year Plan process.6 While this is a natural and expected

5 As discussed below, both EV and PV panel industries have been designated Strategic Emerging Industries. Government policy has explicit goals for these “strategic” industries to be “innovative.” This is especially true of the EV industry, where foreign technology barriers to entry (particularly for hybrid vehicles) have been high.6 “Strategic emerging industries” were introduced in 2006, but only gained momentum with the 2008 financial crisis. Beijing emphasized domestic self-reliance in order to: avoid royalty payments to foreign firms; avoid overdependence upon foreign sources including global value chains. (Kennedy, Suttmeier and Su, 2008)

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process in the Chinese policy context, the envelopment of the sectors by industrial policy

processes leaves a distinctive – and, I conclude, often deleterious - mark on the trajectory

of China’s clean energy industry.

More optimistically, it is clear that new energy industries in China have

successfully upgraded, both in terms of cost and process, and perhaps product.7 Many

Chinese manufacturing firms, including in new energy, have shown strong ability to

upgrade, especially at the lower price and quality end of the market.8 Yet there is also

quite a bit of variation in innovation by new energy firms. In electric vehicle sedans, for

example, Chinese firms has been very slow to convert the country’s strong auto industry

to be able to supply a nascent EV market. (Bernstein 2013) Consistent with this

variation, we can imagine that local governments create both helpful and harmful

impacts. Drawing on analysis of these varying outcomes in the empirical cases of solar

cell and electric vehicles industries, I conclude by suggesting a simple taxonomy of how

local governments treat industries in sectors in which China’s central government hopes

to foster innovation.

Background note on innovation literatures

Parameters of the relationship between governments and firm innovation are set

squarely in broad debates (in economics, business and policy literatures) characterized by

two dominant strands, roughly categorized as market-based and state-supported. Market-

based theories on successful innovation depict the process primarily as a bottom-up one,

originating with entrepreneurs, and often pivoting off firms’ access to and position in the

global or regional value chain.9 While recognizing that it is desirable for states to provide

a positive environment for technology development (through proper policy guarantees of,

e.g., protection of physical and intellectual property, regulation, etc.), this model

emphasizes that the main locus of innovation rests in society and particularly among non-

7 Scholars identify several basic categories of innovation, often distinguishing between product and process innovation. Many observers argue that China has made major strides in second generation, incremental process innovation, i.e., the incremental mixing of established technologies to come up with new solutions, often at lower cost. A primer on innovation policy is Fagerberg, Mowery and Nelson (2005). 8 Relevant studies include Nahm and Steinfeld 2013; Lewis 2013; Abrami and Brandt, ms.; and for other industries Brandt and Thun 2010, Dinh et al 2013.9 A classic work on disruptive innovation based on Schumpeterian notions of creative destruction is Christensen (1997).

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state economic actors. Private capital markets including venture capital, moreover,

provide the most efficient means of allocating resources to inherently risky ventures.

The dominant competing theoretical approach to the market-based model of

innovation is, of course, a statist approach that places government policy at the center.

One strand of the statist approach, the developmental state literature, draws its inspiration

from Gershenkron’s (1962) argument with regard to late 19th century industrial

development that state institutions can usefully aid industries in their efforts to acquire

capital and technology.10 A highly capable bureaucracy at the nation’s administrative

center works with major industrial firms to formulate a policy to leapfrog developmental

stages that typically had been followed in Western advanced countries. A second strand

of the statist approach focuses on the state’s role in ameliorating market failure, i.e., when

market mechanisms do not adequately incentivize the funneling of resources into

knowledge creation and innovation.11 Governments can therefore play a positive role not

just in establishing institutions (rights to intellectual property, etc.) but also in directing

public financing to firms, reducing the risk they face from failed innovation efforts. (Hall

and van Reenen 2000) Similarly, governments may help produce demand for products,

largely through demand-side subsidies or purchases. A third strand, the literature on

national innovation systems, goes even further to suggest the benefit of more extensive

government contributions, such as funding public research and development institutions,

and expansive funding for public education. The statist literature pays less attention to

the problem of political failure, when political concerns of government officials produce

other incentives that may hinder innovation. (I find such political failure important in the

cases analyzed below.)

Each of these literatures suggests clear policy prescriptions, most of which are not

mutually-exclusive. In turn, China’s own innovation-related policies over the past three

decades represents each of these sets of policy prescriptions; indeed, innovation-

promotion policy in China actually is quite diverse, combining efforts to foster some

combination of top-down industrial policy and bottom-up market driven factors. The

10 Gershenkron’s argument underpins the East Asian developmental state literature. See Johnson, 1982, Amsden, 1989, and Wade 1990. See also Wong 2011. 11 Arrow (1962) identifies how the market fails to invest when innovative knowledge is imperfectly excludable. Hall (2005) theorizes that funding for new untried ideas cannot ex ante identify successful ideas from failures.

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emphasis of the past decade on “commercialization” and the core role of technology

firms in innovation recognizes that market-based sources will be key, including firms

already deeply engaged in global value chains. At the same time, the Chinese

government clearly sees a role for the state in innovation.

12 As in the developmental state

model, the party has taken pains to develop – and has been largely successful (despite

tendencies for corruption) at developing - a highly capable bureaucracy at both the

central and local levels.13 Beijing pays massive attention to industrial development, using

instruments consistent with the developmental state, market failure, and national

innovation system strands of statist policy literature. Such attention is at the core of the

Strategic Emerging Industries initiative.

Local governments play a key role in China’s SEI policies. Local state

involvement revolves around local governments’ efforts to use the institutional

infrastructure of industrial policy, and to respond to the center’s signals to use industrial

policy instruments. At the same time, local officials attempt to respond to conditions

they face on the ground. These may include “market conforming” efforts directed at

helping firms build on existing capabilities found within enterprises. Alternatively, their

efforts may be directed at the political benefits local officials stand to gain from showing

a loyal response to the center’s signals to produce “innovation,” especially enhancing the

prospects for cadre promotion. Still further, local officials are keen to have development

of these industries serve other economic needs, particularly employment and taxes.14

While the consequence of local officials’ desire to meet their political and development

goals need not always be negative, this dynamic can provide a breeding ground for

political failure in industries Beijing hopes will be innovative.

The local government - new energy industry nexus: the key roles of industry characteristics and Beijing’s signals

12 Beijing also has increased its emphasis on providing support for innovation with domestic origins, so-called “indigenous innovation.” The implicit innovation policy of Deng Xiaoping’s “opening to the outside world” incorporated foreign technology; a mix of foreign investment and purchasing technology on international markets using export earnings served as a key force for industrial upgrading. (Ernst 2009). See also OECD (2008), ch. 10.13 The PRC’s comparative advantage in this area is emphasized in Bardhan and Mukherjee eds. (2006).14 Dai’s (2015) interviews in the solar and wind sectors illustrate clearly that employment and tax concerns were paramount in local officials’ attitudes toward creating an ecosystem for firms in these sectors.

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The two sectors examined here, solar cells and electric vehicles, are subject to

Chinese industrial policy, but they differ in industry-level outcomes. In brief, the low

end of the EV sector (low speed vehicles) has been quite dynamic, despite Beijing’s

efforts to discourage it, whereas the high end of the EV sector (passenger sedans and

buses) has been relatively moribund. The solar panel sector has seen substantial cost

innovation, but also tremendous waste. Exploring these differences is instructive for

analysis of the local government role. I focus on two clusters of variables, both of which

set the context for local officials, and that appear in sync with different outcomes:

industry characteristics (inter-related qualities of barriers to entry, fragmentation of the

market and presence of strong incumbents) and strength of signals sent by Beijing. In

terms of industry characteristics, the solar panel industry in its developing years was

characterized by relatively low technological barriers to entry, and despite the presence of

some large firms (such as Suntech, Trina and Yingli), also contained many small and

very local firms. This sector also has been characterized by deep ties to the global value

chain. Given extensive market competition, the main type of innovation has been in

terms of cost and pace of production (Nahm and Steinfeld 2013). The electric vehicle

sector is divided into large vehicles (sedans and buses) and small low-speed vehicles.

The former have depended heavily on large incumbent auto companies in China,

including joint ventures. In this part of the EV market, technological and sometimes

protectionist barriers to entry are high; for example, many of the main technologies are

foreign (especially Japanese and Korean, involving high IP costs), and in general the cost

of a key component – lithium-based batteries – is high. These cost and market entry

barriers have not successfully been reduced. (Bernstein 2013) The low-speed and e-

bicycle segment of the EV market are quite different, and have more in common with the

solar cell market although from the start they have produced mainly for the domestic

market. Firms (such as Kandi and Shifeng, as discussed below) have built on

manufacturing and cost advantages in their regions, and lack of foreign competition, to

supply the low end of the market. This has allowed consumers who cannot afford sedans

to upgrade from bicycles and motorcycles to small vehicles. It has led in some cities to

new business models, such as promoting a rental and battery switching model. (These in

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turn are being tried for EV sedans.) Neither technology nor cost barriers to entry are as

high as in the sedan sector.

The second dimension, the strength and nature of industrial policy signals –

meaning primarily the level of priority in Beijing’s strategic hierarchy - also varies across

these sectors.15 The central government has pressed a “green energy” agenda that

includes both solar and EVs as new energy strategic industries. As noted, this agenda is

implemented primarily through the channels of China’s industrial policy, and also have

been seen as venues for possible “indigenous innovation” (especially in the case of EV

sedans). Local officials can benefit from showing responsiveness to Beijing’s SEI

agenda. Despite these similarities, in practice Beijing has been much less supportive of

low-speed EVs and bikes than EV sedans. The central government’s treatment of the

solar industry has been more supportive than for low-end EVs, and for example has made

limited subsidies for solar available, but in some respects has signaled its displeasure with

this industry over runaway investment, particularly after export markets collapsed.16 But,

as is well known, local governments have been more keen than the center to subsidize the

establishment of new solar panel firms for purposes of local industrial development than

for innovation. Similarly, despite electric vehicles’ place as a specified SEI industry, the

NDRC actively tried to squelch the development of the low-speed segment. For solar

panels and low-speed EVs, local governments had more leeway to respond in ways that

were market-conforming. In contrast, signals for higher-end electric sedans and public

vehicles were strong, including extensive subsidies to consumers and encouragement of

local governments to provide demand and infrastructure; in other words, Beijing was

much more active in addressing market failure in this arena. Local governments were

quite keen to respond to Beijing’s signal, and to help create the market, even as they also

wished to leverage the opportunities new auto manufacturing locations would have for

local growth and employment. But while needing to respond to Beijing’s signals,

producers of EV sedans and buses had less opportunity to be market conforming, as there

15 This dimension draws in particular on the literature by scholars of Chinese politics on central-local relations and local government behavior.16 In particular, with the collapse of international export markets as a result of the 2012 international trade dispute over solar panels, NDRC officials were not supportive of bail outs for ailing Chinese solar panel firms.

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was not a market! As a result of these varying dynamics, at least in part, key differences

in the local ecosystems emerge.

The remainder of this paper is organized as follows. The second section discusses

the ways in which Chinese local governments might ideally provide an environment that

fosters innovation, including being well positioned to play positive roles in overcoming

market failure. The third section dives into what are essentially mini-case studies in the

solar and electric vehicles industries that illustrate how local governments have in fact

served to enable firms in innovation-related industries. It then considers examples of

problematic local behavior, notably problems of wasted local investment of land and

funds, extensive local protectionism and fragmentation of efforts, and problematic firm

responses to subsidies and lack of adequate private financing. The final section

concludes with suggesting a simple taxonomy as to how local governments may provide

(or not) an innovative ecosystem.

II. Intersection Points for Local Governments in Promoting Innovative Industries

What role might local governments ideally play in fostering new and innovative

industries? How might pro-innovation incentives set by the center be channeled down to

local governments to produce industrial innovation and upgrading? Scholars of

innovation have identified a clear role for local governments. The “regional innovation

systems” approach (a subset of Nelson’s classic concept of “national innovation

systems”) emphasizes that innovation – as a collective enterprise – is frequently best

served when collaboration is promoted between governments, firms, and research

organizations such as universities and institutes. Much as occurs with industrial

production clusters, the co-location of these actors may create synergies. (Asheim and

Gertler 2005; Sagar and Zwaan 2006) In theory, regional proximity can open the door

for local governments to help coordinate the circulation of knowledge as well as in the

promotion of strong systemic relationships between firms and a given region’s

knowledge infrastructure. Moreover, to the extent that different regions contain

distinctive “regional cultures,” it may be crucial for local institutions (including

governments) to help coordinate central policy.17 17 Chen Ling (2012) traces the differences in regional business cultures in China to innovation outcomes in Sunan and Guangdong.

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Local governments also often channel economic resources from the national

government to the cluster or firm. (Asheim and Gertler 2005) Yet the vision of local-

government-as-coordinator is not limited to implementing policy from the national level.

Local coordination can help overcome lack of trust that may be inherent between actors –

actors in competing firms, institutes, and funding organizations. (Powell and Grodal

2005) Coordination can direct resources to where they are most effectively used, and

prevent wasteful duplication. Local governments also are crucial for setting a proper

local policy environment, particularly for market entrance and exit of firms, but also in

tax policy (e.g., tax incentives related to technology zones), promotion of effective

allocation schemes for funds (including public and private lending) and land, among

other standard policy instruments.18

Local governments in China often play these facilitating roles, consistent with the

regional innovation system perspective. First, as part of China’s unitary system of

government, local governments are expected - and have authority - to carry out central

policy, including industrial policy. Particularly when central and local government

incentives align, or can be made to align, local governments are well-positioned to carry

out central policy. (Dai 2015; Kostka and Hobbs 2012) Second, also due to the unitary

system, local governments contain institutionalized pockets of expertise (a remnant of

China’s central planning system) that might help facilitate the support of innovative

enterprises. For example, local offices of provincial and municipal-level institutes of the

Chinese Academy of Sciences, local Science and Technology bureaus of MOST, local

offices of the Development Research Center (DRC), and even SASAC (with its recently

acquired mandate to help achieve an innovative society) are available to provide

appropriate knowledge-input. Indeed, many of these sub-national bureaus have provided

input into the formulation of innovation policies at the national level, such as the SEIs.

(Interviews; and OECD 2008: 363) Locally funded research institutes (or branches of

national institutes) since the mid-1990s have been instructed to contribute to the

technology and social and human capital needed for commercialization of innovation.

18 On sub-national governments’ roles in provision of these public goods in Europe, see OECD (2007), p. 48. With regard to China, Breznitz and Murphree (2011) compare the different models employed in three Chinese regions – Beijing, Shanghai and the Pearl River Delta – and how each succeeded in promoting second order (primarily process) innovation. Earlier works on regional differences in a single sector include, for IT, Segal (2003) and for the automobile industry (Thun 2006).

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They have, often for a licensing fee, provided key technology to firms.. Moreover, local

offices of industrial, commerce and trade bureaus have proved valuable in connecting

local firms with international market actors - linking local firms with global value

chains.19

Finally, despite the possibility of direct central intervention, local discretion in

implementation of – and experimentation with – policy has long been an integral part of

the Chinese political system. A well-established tradition of local policy experimentation

in China lends itself to the promotion of innovation by local political actors, or to their

support of firm innovation efforts that could to benefit the local jurisdiction. (Oi 1992;

Heilmann 2008; Xu 2011) Thus, local governments, as experimenters, are expected to

put their own stamp on central policies, making them appropriate to local conditions.20

Reform-era decentralization measures have enhanced local autonomy in implementation,

as well as sub-national discretion over some aspects of spending and promotion of

growth and development measures. Despite much waste and corruption, local

governments are widely seen to have been a key factor in the promotion of local

entrepreneurship and, more generally, in promoting China’s remarkable post-Mao

growth. (Bardhan 2010; Montinola et al 1995).

Scholars have found ample evidence that local governments around China have

played roles highlighted in the regional innovation systems literature.21 In particular,

local governments have played a coordination role, as evident in the proliferation of high

technology development zones (HTDZs), science parks, and other “incubators.” The

rapid development of small, technology firms in China in the past decade is in part a

reflection of the huge investment made by local governments in science parks, often in

conjunction with local universities and research institutes. (Zhou 2008; OECD 2008 p.

369f). These parks were to be developed under the auspices of MOST’s overarching

Torch program, and yet control over their establishment and management (as well as

funding) were given to local governments, which also have donated the land and other

19 On the importance of global value chains in innovation, see Humphrey and Schmitz 2002; Gereffi, Humphrey and Sturgeon 2005; Baldwin and Clark 1997; Berger 2006. 20 On how provincial and province-level municipalities have modified Beijing’s call for SEIs to support their own local conditions, see USCBC 2013.21 These roles are discussed only briefly in this paper, as they are well covered elsewhere (e.g., Breznitz and Murphree 2011, ch. 2).

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resources.22 In other words, a local government may be able to spur an anchor firm that

can then attract complementary industries to the region to create an “innovation cluster.”

For example, in the solar sector, Yingli Solar (a private firm) was given a prominent

anchor location in the HTDZ in Baoding.

Linked closely to the coordination function is the provision of significant local

funding for potentially innovative firms. Indeed, it is difficult to overstate how important

local funding has been for innovation programs in China. According to OECD (2007,

56), “For programmes to support the commercialization of research, such as Torch and

Spark, the [central] government accounts for no more than 2 to 5% of total funding, while

local governments and enterprises typically provide large shares of funding for programs

related to innovation and dissemination of technologies.” Liu and Chen (2012) report

that the total amount of R & D investment by regional governments is larger than that of

the central government. The bulk of this local investment is in wealthy provinces such as

Jiangsu, Shanghai, Guangdong, Shandong and Zhejiang.23 Supports have come in the

form of direct grants, low interest bank loans, and state-backed venture capital.

Chinese local governments also commonly provide subsidies, on both the producer

and the demand sides (see examples below), but especially on the former.24 Direct

subsidies, such as those channeled through government-run “incubators,” are a means to

respond to the central government’s guidance to direct resources to innovative industries.

In recent years, local governments, particularly in wealthy regions, have not only given

direct grants, but also have coordinated private local venture capital (VC) to invest in

tech start-ups. Although some VC may come from international firms, the further away

22 HTDZs – and the Torch program projects - were not intended to support basic research but, rather, innovation that could rapidly be commercialized and therefore produce jobs. In this sense, though promoted as directed at “high-technology” goods, attention went to already mature technologies for which business plans could be quickly rolled out. Breznitz and Murphree (2011, p. 81) point to the Shenzhen HTDZ as a successful example of local (provincial in this case) governmental coordination by streamlining procedures and ensuring access for firms to a complete value chain. Heilmann et al (2013) have argued that the Torch program for high technology zones has had a very positive feedback effect in central policy. 23 On significant regional disparities in R & D expenditures (from all sources, including local governments) and R & D intensity (expenditures as a percentage of GDP) see OECD 2008, p. 43. Chapter 7 of this report examines the differences in the regional systems of Shanghai, Liaoning, and Sichuan. Each region has its own plan for how to meet innovation goals, with each plan to some degree reflecting the local context and comparative advantage. A similar study is Sigurdson (2004).24 National subsidies, such as – for clean energy – feed in tariffs, stimulate demand. Incentives geared toward producers tend to be more the purview of local governments and hence tend to favor particular firms.

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from Beijing and Shanghai the more the funding has come from localized sources.25 Liu

and Chen (2012) point to the emergence of government-coordinated VC firms in Jiangsu

in which officials do not directly manage the capital but instead hire a professional

commercial organization to run it. Wuxi in particular, in the mid-2000s, began a high

risk-high return government venture capital fund (无锡市创业投资基金) to help fund

innovative firms. (He[a] 2006) This may be a creative way to mobilize local funds

where private institutional capital is not readily available.

III. A Balance Sheet of Local Government Involvement in the Solar and Electric Vehicles Sectors

Local governments in China endeavor to carry out the policies as mandated or

signaled by the central government in Beijing, often using some degree of discretion to

tailor their response to their own situation. In doing so, they may succeed at ameliorating

market failures. But the Chinese political system also creates situations of political

failure – i.e., officials take actions that could in principle create net benefits but fail to

deliver in reality because political concerns push implementation in unfortunate

directions.26 The sections that follow discuss cases from solar panel and electric vehicle

industries to illustrate the positive and negative elements of the local ecosystem for green

energy firms. While the positive benefits are largely consistent with mechanisms

specified in the national/regional innovations systems literature, the negative elements are

better explained by literature on central-local relations in China.

Helpful Local Government Participation

The PRC government has provided resources and government signals to help

encourage innovative firms in the clean energy sector. It is not difficult to find evidence

of local government initiatives that have helped create a positive ecosystem for

innovative firms in solar and electric vehicles, and in turn appear to have bolstered firm 25 Based on network analysis by the Stanford Program on Regions of Innovation and Entrepreneurship/China 2.0 project, Stanford University School of Business.26 Actions of Chinese local governments are clearly not unique in this regard. The US government, for example, has dozens of overlapping conflicting, duplicative programs to encourage policy goals, including for green energy.

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success. As we shall see, such efforts do not exclude the fact that in some of these same

cases the local government role simultaneously was – or became - problematic.

Moreover, local officials have particular goals in mind, to which local firm actions should

align themselves. Primary among these goals are the provision of jobs, revenues, and a

positive reputation for both the locale and the official(s) involved.27 When such positive

political payoffs are at stake, we can expect local officials to become active advocates for

and negotiators on behalf of local firms – for better (illustrated in this section) or for

worse (in the next).

In the solar industry, the photovoltaic solar cell producer Suntech, in part due to

support by the Wuxi government, has often been pointed to as a model of business and

innovation success. (He 2006) (These successes –including in innovation28 - were most

notable before 2006, i.e., prior to the firm’s financial problems and the 2012 embroilment

of the whole Chinese solar panel industry in international trade disputes.) As is well-

known, the Wuxi municipal and Jiangsu provincial governments helped lure the firm and

its entrepreneurial founder, Shi Zhengrong, an overseas Chinese engineer living in

Australia. The Wuxi government provided sizable initial start-up grants and subsidies,

taking a major equity stake in the firm by providing US$ 6 million in return for a 75%

equity stake. The city later helped Suntech search for additional funding from national

and local sources, for example, from the provincial Science and Technology department.

Some of these loans did not need to be repaid. Wuxi officials further helped organize a

sizable package of loans from banks and local venture capital groups; notably, former

official turned board chair Li Yanren helped arrange for 5 billion yuan in low-interest

loans. Subsequently, and in anticipation of Suntech’s 2006 listing on the NY Stock

Exchange, the Wuxi government offloaded its shares to other investors – including local

state backed “venture capital.” (Ahrens 2013, 2) In addition, the government was

instrumental in setting up a regional cluster for the PVC industry in Jiangsu, completing a

relatively full value chain in a few years. It also set up an R&D center that has led to

manufacturing and efficiency improvements – though the commoditization of solar cells

27 Dai’s (2015) interviews show this clearly in the wind and solar cell industries.28 Suntech made efficiency improvements in low-cost solar cells, improved wafer technology, and obtained 55 patents. (He 2006; Ahrens 2013) More recently it has moved into thin-film technology, that will allow further diversification of its business to higher margin areas. Suntech also made some favorable strategic moves, including the securing of long term upstream contracts for silicon supplies.

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in recent years have rendered it more price and quality-driven than innovation driven.

Nevertheless, at least in part as a result of these activities, higher-tech silicon slicing

technology could be developed and commercialized in the region. (Liu and Chen 2012)

Wuxi government officials also sought to help on the demand side, finding projects that

Suntech could supply. In short, the “Wuxi Model” of financial support from the city

government has been touted as a major reason for Suntech’s success, with the implication

that Suntech was an innovative firm. Suntech was, furthermore, the prototype for Wuxi’s

2006 “530 Plan,” designed to supply between 1 and 3 million RMB per approved project,

the major criterion for approval being that the project is technologically promising. The

number of registered companies under this program has reached 876, with a total

registered capital of 2.5 billion RMB.29

The role of the Baoding municipal officials (Hebei Province) was similarly

important for the emergence of the private Yingli Solar (英利太阳能). Key supports are

in the provision of land, tax reductions, and aid in obtaining building permits. Local

officials also have supported the firm in its applications for central government funding.

(Local government contributions are generally required to be awarded central funds.)

Local government approval of bank loans remains necessary, and also is considered a de

facto government guarantee for the repayment of loans. Local government help has not

been limited to that supplied by Baoding. Yingli Solar began to diversify away from PV

production toward downstream power generation, and has developed a provincial

government-based organizational strategy.30 Yingli planned to substantially decentralize

operations away from its Baoding headquarters, to build independent generating stations

for solar power, especially in western and southwestern provinces (e.g., Xinjiang,

Yunnan, Guangxi, and Shaanxi). Building new branches in other provinces meant

courting close ties with those provincial governments, as Yingli needed substantial funds

for these generating stations come from local governments. The firm also wished for

29 http://www.1000plan.org/qrjh/channel/11

30 This strategy was pursued vigorously in part by the collapse of international markets for solar panels and the US-China trade war in this area, and the PRC central government’s subsequent efforts to limit bank loans for the production of solar panels. On this strategy, see http://guangfu.bjx.com.cn/news/20140220/492008.shtml. On CDB loans, see http://www.china5e.com/news/news-336467-1.html.

14

these governments to contribute land and facilitate loans from other sources including

provincial branches of the China Development Bank and Bank of Transportation. Yingli

also expanded to Hainan, where it was necessary to work with local government as well.

Representatives attribute the ability to build the production facility within three months to

positive coordination between the firm’s CEO and the Hainan provincial government.

In similar fashion, the founder of LDK Solar (江西赛维 Jiangxi saiwei), Peng

Xiaofeng, shopped around to find the most favorable city government, one that would

provide financial support and generally mobilize around the industry. Peng found his

answer in the small city of Xinyu (Jiangxi Province). (Wang 2007) yet although LDK

gained the support of the Xinyu government, and despite LDK’s ability claim itself part

of a strategic emerging industry, there is little apparent innovation involved in the

company – a problem discussed below.

Turning to the second case, note that China’s auto industry structure has been

characterized by the emergence of a few national firms (many a mix of SOE and private-

foreign joint ventures. Beijing’s EV policy seems to have assumed these large firms

would lead the foray into EV sedans. At the same time, many provinces have home-

grown local auto industries, many of which have been beneficiaries of barriers to entry

via local (provincial) protectionism. These local firms often produce lower quality and

price vehicles This dual structure illustrates keenly how the two core variables – industry

structure and policy signals from Beijing – play out.

In the EV sector, Shenzhen’s BYD Auto (比亚迪), has been at the forefront of

China’s electric vehicles industry. BYD exemplifies how local government behavior has

intersected the emergence of this sector. Subsidies on the supply and demand sides alike

have been important.31 BYD’s income statements show government grants of 400-500

million RMB. BYD also enjoys large revolving lines of bank credit, for example, a 10 bil

RMB line of credit from the China Development Bank. The 2011 interim financial report

31 Central subsidies to consumers for EV passenger vehicles on the MIIT’s approved list have been between 35,000 and 60,000 yuan, though these were scaled back starting in 2014. In addition, substantial reductions or exemptions from purchase taxes are also applied to EVs. Local subsidies in some places as much as double this one-time purchase subsidy. See Mock and Yang (2014) and “China Offers Billions to Subsidize Electric Cars on Gas,” Bloomberg News, December 10, 2014.

15

by the Shenzhen Development and Reform Commission shows total subsidies of 1 bil.

RMB.32

The Shenzhen municipal government also provided coordination between the

firm, banks and other SOEs, while the Guangdong provincial government issued official

documents showing clear support for BYD electric car projects. (Chen Zhijie 2008)

Perhaps most important, the Shenzhen municipal government agreed to purchase BYD

electric vehicles for its municipal taxi and public security bureau fleets. So did other

governments where BYD agreed to invest, including Tianjin, Xian, Kunming, and

Chengdu. This “demand pull” support became a central pillar of BYD’s business plan.

Shenzhen municipality also subsidized the purchase of BYD electric vehicles for

individual consumers,33 and facilitated the establishment of a number of charging stations

for electric cars, though as we shall see these have been insufficient. (A similar story can

be told for Xiangfan New Energy Vehicles in Xiangfan, Hubei. Li 2010.)

Discretion by local governments – to tailor policies to local characteristics or

opportunities – is often characterized as “experimentation,” and as noted is typically

viewed as a positive, flexible aspect of Chinese policy-making. In the EV arena, Beijing

has authorized local experimentation as well through the 2009 “10 Cities, 1000 Vehicles”

program.34 Cities such as Guangzhou, Shanghai and Hangzhou were granted leeway to

decide how to best promote the expansion of electric vehicle usage in their cities, and

tended to develop strategies that centered on their ‘local’ industry (for example, BYD in

Shenzhen).35 Hangzhou, for example, built on its past positive experiences with bicycle

rentals to build electric battery rental and mini-bus rental models, and to promote “battery

switching” as a remedy for the lack of a charging infrastructure. Kandi Automotive (康

32 For these figures, see: http://business.sohu.com/20111024/n323217435.shtml, and http://money.163.com/11/1025/16/7H7P6V4T00253G87.html.33 “BYD Leverages the “Power” of the Shenzhen Government” [“Jiè lì shēnzhèn zhèngfǔ bǐyǎdí lái “diàn”le Jiè lì Lái “diàn”] Auto World [Qìchē dà shìjiè] January 4, 2010 http://news.mycar168.com/2010/01/151898.html 34 The June 2009 plan for the industry was to have 500,000 electric vehicles deployed by 2015, and 5 million by 2020. (The number of cities was subsequently expanded from 10 in 2009 to 25 in 2011.) A recent report notes that “by the end of 2012, only about 17,400 EVs were deployed nationwide. Official figures put the number of Energy Saving and New Energy Vehicles (which include but are not limited to EVs) combined at 27,400; only 16% were sold to private buyers, underscoring public sector dominance in this developing market. (China Greentech Report 2013) See also Gallagher (2014).35 Guangzhou municipality has advocated the adoption of electric vehicles for taxis, providing charging locations for taxicabs.

16

迪汽车), traditionally a manufacturer of small vehicles such as ATVs, go-karts, and golf

carts, was at the forefront of these efforts. Kandi worked closely with the Hangzhou and

Zhejiang Province governments36 and, subsequently, Shanghai governments. These

major municipal governments have participated extensively by providing land for rental

locations and charging stations operated by a Kandi JV, ZZY (左中右)37. Kandi also was

greatly benefited by forming a joint venture with the large private Shanghai firm Geely.

This JV was important for Kandi to be able to switch from the use of lead acid batteries

to lithium iron phosphate batteries. Geely also facilitated Kandi’s attempts in 2013 to

gain approval from the central NDRC of its low-speed models, resulting in these models

being listed in the MIIT directory as approved and qualifying for consumer EV subsidies

from the national government, not just from provinces. The combination of business

model innovation, cooperation with other major market actors, and positive support from

local governments allowed Kandi to lead sales of all EVs in China in the 2012-14 period,

and facilitated the firm’s entrance to major markets outside of Zhejiang Province, such as

Shanghai and Nanjing.38 These sorts of experiments, when aligned with Beijing’s

intentions, are therefore seen as a relatively positive and unique part of China’s policy

process. (Marquis et al, 2013).39 As will be discussed below, however, there is a

significant downside to these local experiments insofar as they can promote

protectionism and hinder the adoption of nationwide standards that might better facilitate

EV adoption.

Beijing views other local experimentation to meet local conditions as more

problematic, although the impact may be better for innovation in the sector and,

ultimately, EV adoption in the local market. The promotion of low-speed electric

vehicles in Shandong Province is a case in point. Local economic development agents 36 Jinhua, Zhejiang, the home city of Kandi, was named a provincial pilot city for new energy by the Zhejiang government.37 Rentals are not yet profitable; as of late 2014 the company is only renting half of the 6 hours per day needed to break even. Huátài zhèngquàn yán jiù bàogào [Huatai Securities research report], “Xīn néngyuán qìchē chǎnyè liàn diàoyán zhī kāng dí chē yè: Wēi gōngjiāo móshì diǎnrán shìchǎng” [“New energy automotive industry survey of Condi Auto: Micro-bus mode ignites the market." http://finance.qq.com/a/20140827/054110.htm.38 Kandi’s success at topping sales is reported in http://cleantechnica.com/2014/10/27/china-electric-car-sales-reach-record-high-charts/. 39 When Beijing approves of the outcomes of local discretion the practice is seen as positive experimentation. When the outcomes are negative, Beijing often deems the behavior “defiance.” How to encourage positive discretion and avoid the negative is a major issue for China’s central government. See Mei and Pearson (2014).

17

and auto firms in Shandong - notably Shifeng Automotive Group (山东时风汽车集团),

traditionally a producer of trucks and tractors - lobbied hard beginning in 2009 for the

provincial government to approve a pilot for producing low-speed, light weight vehicles

particularly suited for rural areas.40 Local (county and municipal) support included not

only lobbying but also provision of investment funds and land for industrial parks. These

vehicles would be upgrades from bicycles, electric scooters, and three wheel motorcycles,

and could be offered affordably to rural businesses and families.41 Part of the low cost

was due to use of lead acid batteries as opposed to the lithium batteries preferred by

Beijing. Low-speed EVs were even more affordable because, as until recently the

vehicles were not classified as “automobiles,” consumers required no license and

therefore could avoid licensing fees. However, as the vehicles are very lightweight, and

because their low speed capacity could disrupt regular traffic, safety concerns persisted.

NDRC officials in Beijing publicly called such vehicles “junk technology” (垃圾技术),

saying they failed to meet national standards.42 Despite the absence of central approval,

and with the backing of the provincial government, this local pilot has been relatively

successful at putting affordable electric vehicles on the roads, especially in rural areas;

whereas China has underperformed its target for putting 500,000 hybrids and EVs in use

by the end of 2015, in 2012 Shifeng delivered about 30,000 low speed vehicles to

dealers.43 Beijing eventually relented in its opposition, and in the fall of 2014 allowed

40 Shandong Provincial government development officials viewed low-speed vehicles as part of

development of a new industry in electric vehicles, hoping that by 2014 the province’s EV industry sales would reach 100 billion yuan, with 300,000 vehicles. NetEase Auto网易汽车, http://auto.163.com/13/1024/16/9BVE5VFD00084TV1.html (Oct. 24, 2013).41 As Brandt and Thun (2010) argue, domestic firms that cannot compete with large SOEs or foreign firms often innovate by targeting low quality, low price-points segments. Thus, these EV firms’ success may be due more to market position and strategy than their special treatment by the provincial government. 42 NDRC Department of Industry Director Li Gang’s declaration that EVs are “junk technology” is at: 耿慧丽: “低速电动车争议 再起 发改委官员公开否定, 2011年 07月 29日，经济观察网。[Geng Huili: "Controversy Over Low-Speed Electric Vehicles has Arisen Again, as NDRC Officials Publicly Reject,” July 29, 2011, Economic Observer Online.] http://auto.qq.com/a/20110729/000199.htm. Protectionism for major incumbent auto-makers was also likely involved in the efforts of both NDRC (responsible for setting SETI policy) and MIIT (responsible for setting standards in the EV sector) to squelch low-speed EV manufacturing.43 “Rural Chinese Flock to Tiny Electric Cars,” New York Times, April 19, 2012. In 2013, only 17,000 hybrid and EVs (cars and buses) were sold across the country.

18

subsidies to be applied to these vehicles, suggesting such innovation is no longer

“illegal.”44

Distortive Influences of Local Government

Local governments clearly have substantial opportunities to take on coordination

roles in support of the development of clean energy technology as a public good. Beyond

the cases discussed briefly in the previous section, there are myriad examples where, on

the surface, local governments have pursued coordination and financing mechanisms to

support prospective innovators. Yet local government participation often has failed to

create a positive ecosystem for new energy firms. This section lays out several patterns of

local government behavior that hinder and at times even overshadow what otherwise

might be their positive catalytic function.

The Interplay between Central “Signals” and Tangible Local Results

Local governments in China must be conduits of central government policy.

Despite the shift from directive planning to “guidance” planning in which central

statements serve more as a guide, localities are still expected to respond to the center,

including to both broad five-year plans and sector-specific policies. First and foremost,

the central guidance, such as in the SEI initiative in general, and new energy industry

promotion specifically, are signals of the center’s policy preferences, to which local

officials must show some degree of responsiveness, as if they comply. Not only is this to

be expected as a function of the unitary political system, but also the promotion system

for local officials is tied to responsiveness to signals. The top-down cadre management

system produces career incentives for local officials to show responsiveness. This occurs

through the regular performance evaluation, rotation, and turnover.45 Furthermore, the

cadre management system – in addition to and supportive of a norm of local

“experimentation” – helps protect local cadres’ promotion ambitions as they creatively

experiment with how to align their concrete governance interests with the signals of the

center. Officials’ creativity was aided by 1984 reforms according to which the central 44 In 2014 Guangdong and Hebei provinces followed suit, with provincial pilot programs to support low-speed lead acid battery vehicles.45 On the relationship between cadres’ performance and the criteria for career advancement, see Mei (2009), Landry (2008) and Li and Zhou (2005).

19

party organization only manages the careers of officials of the immediate lower

(provincial) level. This change helped insulate local leaders if their experiments come to

be deemed contrary to central directives.46

If we accept, as most of the literature on Chinese local governance does, that local

cadres are much concerned with how their performance affects their prospects for

promotion, and understand the local flexibility to develop specific plans for innovation,

then it becomes clear how well-known cracks in the alignment between central guidance

and local interests might affect local governments’ innovation incentives. Local officials

in the state’s nomenklatura system typically have quite short time horizons.47 As their

terms in office often are shorter than the official 5 years, their promotion prospects – the

ability to show results from their leadership –are quite short. The incentive to make an

impression on immediate superiors in the short-term (2 or 3 years) is strong. This short

time horizon in and of itself is a problem when technological innovations may require a

longer term to come to fruition, especially when commitments to innovation projects are

being used by a particular leader to demonstrate political results.

48

How might local officials demonstrate short-term “innovation results” to

superiors? The establishment of a HDTZ or the launch (and early success) of an

innovative industry – particularly one that is the focus of national level policy, such as an

SEI – can bring positive attention to officials who can claim responsibility. For example,

snagging one of the 54 “national” label high-tech zones (as of 2011) would be a coup. A

second marker is the ability for local firms to snag the designation of “National Key

Lab,” suggesting that this firm has been singled out by the center for its innovation.

46 The implication is that local officials can feel more emboldened in carrying out localized interests as long as they can plausibly be argued to be aligned with central interests. Not all local officials are subject to promotion, and some remain in the same locale for long periods. In this situation, two other, complementary, views of how local officials work to align interests with the center are useful: Kostka and Hobbs (2012) on “interest bundling”; and Ahlers and Schubert (2009) on “strategic groups.” Similarly, Chen Jinjin (2011, 5082) argues that “some local governments believe that only through deviations from the central directives can economic growth be achieved. . .” 47 Chinese local officials are not the only local officials with short time horizons. Two year election cycles for the US Congress shorten representatives’ time horizons as well. However, Chinese style industrial policy, a mainstay of the PRC’s policy instruments for investment in key policies, is intended to work over a much longer time horizon than is practical for most local officials.48 According to Landry (2008), while the formal term of mayors is five years, the average duration of Chinese mayors’ terms in 2000 was 2.2 years, even though the formal term is 5 years. It is also the case that heads of SOEs, themselves subject to the nomenklatura system, also have a short time horizon that may be contrary to investment in innovation activities.

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Third, the potential to create jobs and local growth through the attraction of industries

that can be labeled “innovative” also is a powerful incentive for local officials. (Dai

2015)

Local government officials are well trained to jump onto this bandwagon, and

even be seen as “ahead of the curve.” Jiangsu Province attempted to get a head start on

the competition in terms of its reputation as an innovative region. Whereas the central

government set the goal that China should be an “innovative country” by 2020, Jiangsu

set the provincial goal at 2015. Similarly, in response to the central government’s

emphasis in 2009 on SEIs, governments from some cities proposed they would carry out

“100 major projects” related to SEIs during each year of the 12th FYP. (Liu and Chen

2012). Such goal-setting compels governments to meet the numeric goal regardless of

the quality of projects.

These dynamics were evident in Wuxi, where the ability of entrepreneurial officials

to attract and support Suntech, and create a local value chain, led it to promote the

“Wuxi” model. The multiplier effect of a solar industry value chain centered around

Suntech held tremendous value not only for Wuxi but for Jiangsu province as a whole.

According to Suntech’s founder Shi Zhengrong, the Jiangsu PV industry can be valued at

200 billion RMB, and employs 170,000 local workers. Such enticements would be

attractive to any local leader in any country.49 In addition, the Wuxi mayor, prior to the

collapse of the PV export market, was able to leverage this and other “pro-innovation”

activities into a promotion to Jiangsu party secretary. Even if not achieving the notoriety

of Wuxi, this dynamic is repeated in localities across China. By showing support for an

innovation project, a local government increases its prospects of gaining coveted central

governmental “support” – as in the case of Shenzhen’s (BYD) and Hangzhou (Kandi),

noted above – or gaining attention as an experimental site (shidian). This dynamic may

be even more accentuated outside of major cities, where officials strive to compete with

more developed locales. In pursuit of a chunk of the low-speed EV industry, officials in

small cities with access to rural markets have set up many “new energy automotive

49 In the US, the Obama administration has often pointed to the desirability of developing green technology as a jobs stimulus. However, green technology has created relatively few jobs. Indeed, although statistical categories are rather fuzzy, it would appear that the post-2008 emphasis on green technology, while producing payoffs in energy conversion, have created virtually no new jobs. (Johnson 2013)

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industry parks,” and contributed millions of yuan in funds to support investment, and

many acres of land.50

Being designated a model city by the center is itself a signal that may encourage other

firms to invest in its jurisdiction – it helps the city to create an innovation “brand.”

Baoding City (Hebei) leveraged early successes in promoting solar technology firms into

its label as a “Green City,” despite having horrendous air quality. Indeed, these green

energy successes were likely a result of earlier efforts by key leaders in Baoding,

including the mayor, in leveraging central funds as well as local human capital to build

“Baoding Electronics Valley.”51 And Baoding has in fact been home to successful

“green” industries, notably Yingli Solar.

Model status can allow local leaders to gain access to additional central

government resources (such as from NDRC and the Ministry of Finance, or for low

interest loans from the China Development Bank), as well as foreign investment. At the

same time, to the extent that leaders need quick payoffs from an industry or firm they

support, that can lead them to construct financing mechanisms that require quick pay-outs

– something also potentially distortive of a firm’s rational growth. This criticism has

been made of the implementation of the Torch program and establishment of HTDZs by

local governments; funding went to mature technologies that could be rolled out to

market quickly, but were not often very “high-tech” or very “innovative.” (Breznitz and

Murphree 2011, 77-8) Jiangxi’s LDK Solar faced this issue with the financial support it

got from the local (city) government: if the firm did not pay out profits and reimburse the

government within a short period of time, then the cost of the capital would be

increased.52

50 As recently as May, 2014, Linfen government in Shanxi agreed with Mei Year Group to invest 14.8 billion yuan (US$2.3 billion) to build a new energy automotive industrial park. (Linfen has the informal designation of China’s most polluted city.) Similar investments in such parks also were planned in Inner Mongolia, Luoyang, Ningbo, Changde, and Guizhou. “Dīsù diàndòng chē jù zī háodǔ xīn néngyuán qìchē chǎnyè yuán” [“Low-speed electric vehicles heavily gamble new energy automotive industry park."] 21 Shìjì jīngjì bàodào [21st Century Business Herald] October 15, 2014.,http://auto.cnr.cn/qczcjj/201410/t20141015_516598395.shtml. 51 Similarly, Baoding government responded quickly to the central government’s signals to promote rapid expansion of wind power firms.52 “PV Impulse.” Jiangxi’s interest in LDK was in part because it is an SEI, but not so much due to its innovation potential.

22

While these behaviors have led to some positive results, in other cases they have

created political failures, including wasted and duplicative investment (with attendant

opportunity costs of capital), shady land deals, corruption, and other ills. The desirability

of being seen as responsive to central signals and help build the local brand often leads to

a shallow or even a “false” response. And the competition to gain the “doorplate” label

of, e.g., “Green City,” has often led local officials to act with great alacrity. This is

especially true with the contributions of land, which in capital-short areas in particular

have been a major form of contribution by local governments to industrial innovation. In

the wake of the 2008 financial crisis, funds flowed quickly from the central government

to localities. Indeed, such funds created the first real push in favor of SEIs since the

program was announced in 2006. Localities that suddenly had reason to hope for a flood

of central funds had to find where to quickly spend them, and too often the use of SEI

categories such as the “internet of things” was the excuse to set up new development

parks that supposedly focused on such high-tech industries. Instead, however, the result

was simply new, often empty, office parks and other industrial real estate projects. This

problem was frequently observed in Wuxi; one example is the “Internet of Things Office

Park,” a real estate development project, sponsored by Wuxi government.53

BYD provides a related example of wasted effort. Local governments in which BYD

invested outside Shenzhen attempted to create additional favorable conditions for electric

car sales in the form of setting up charging stations. However, once a few stations had

been set up – enough to demonstrate political support of electric vehicles but not enough

to spur consumer demand in any meaningful way – local leaders are said to have lost

their interest and moved on to line up behind other projects.54 The provision of charging

stations is a major hurdle for EV firms, especially in space-deprived first-tier cities (a

problem not just in China). A contribution by government is to convert city-controlled

land to charging stations.55 The point is not that local governments have created the

53 The son of a high ranking official who runs an RFID consortium was likely instrumental in bringing these funds to Wuxi. 54 Compounding the likelihood that the establishment of charging stations would be a “political task” was the fact that there was no clear business model for them, such that the business sector was unlikely to take on the problem. (“BYD Leverages” 2010)55 Consumers are reluctant to buy EV sedans if they do not have convenient mechanisms for charging them. Provision of charging stations has been taken on as a public good in other economies, including in the US, as market actors have been unsure of the economics of this service beyond at-home plug in connection. Without out-of-home stations, consumers are often reluctant to invest in pure EVs, especially

23

charging hurdle but, rather, that they have been unable – despite major efforts – to

ameliorate it. A similar dynamic surrounds “National Key Labs.” In firm visits,

managers touted they had received the designation, but there was not evidence of

significant activity going on in the lab. This was the case, for example, in the wind

turbine sector, at Guodian Wind Turbine (Baoding). A tour of the key lab – well-

advertised on plates but kept behind locked doors - revealed broken equipment, and

virtually to no activity. Similarly, Yingli Solar in Baoding showed that it had

designations for a “State Key Lab of Photovoltaic Materials and Technology” (2010) and

“State Key Lab of National Energy Photovoltaic Technology” (2011), yet little obvious

evidence of outputs ongoing from these labs.56

Two issues should be emphasized. First, the dynamic in which local officials are

incentivized to respond to central signals and the resulting effort to create a “brand” for a

locality – in order to bring in other cognate industries – has not always served to create a

negative environment for firms in industries picked by the center for growth and

innovation. Baoding is often pointed to as a positive example. However, that local

government involvement is dominated by these incentives, and evidence of wasted efforts

and establishment of firms that are not successful, much less innovative, is problematic.

Hence, the longstanding criticism (within China) that the Chinese system’s propensity to

incentivize wasteful investment is repeated in the clean energy sector. Second, it is clear

that local governments are keen for market entry of new firms, as symbols of and perhaps

the reality of growth. Yet, as examples below will further illustrate, local governments

are not keen to allow market exit of local firms, especially those that they have supported

with funds in the past.

Protectionism, Fragmentation, and Stovepiping

While we can observe successful examples of local government generated

coordination (e.g., Suntech in its heyday), local politics in China is often characterized by

three interrelated factors that run counter to coordination: protectionism, fragmentation

given the price premium, and government efforts to prop up demand have not worked well as of yet. This dynamic is one reason e-taxis have been an obvious industry for local governments to support (despite its own problems surrounding the need for daytime charging). 56 This does not mean Yingli has not shown innovative capacity; rather, the point is that the key labs designation may not be very relevant, hence “wasteful.”

24

and stovepiping.57 Competition between regions to attract firms for local development

has been intense through the reform era, and continues to result in efforts to gain

advantages.58 Indeed, China’s nascent post-Mao market economy was marked by

significant local protectionism (Wedeman 2003; Cai 2004; Bai et al 2004). To this day,

local government officials remain willing and able to try to sustain local advantage.

Despite much progress in the development of national markets, and central government

efforts to rein in local protectionism, local officials often continue to erect internal market

barriers. Firms are often complicit.

BYD’s reliance on local government jurisdictions to purchase electric vehicles

provides a good illustration of the impact of local protectionism. Local governments can

often be relied upon to provide a demand pull for new technologies. To this end, several

subnational governments, including Shenzhen (the BYD headquarters), Tianjin, Xian,

Yunnan, Changsha, and Chengdu, agreed to buy BYD vehicles for their municipal fleets.

But these local officials would only purchase if from a “local” company. BYD therefore

had to invest in local outlets in order to make these sales as a political rather than a

business strategy decision. Local officials could then claim these investments as their

own “pro-innovation” industries, demonstrating their responsiveness to Beijing’s signal.

More broadly, governments in the “Ten Cities” EV pilot often have endeavored to

protect their own local auto companies. Most of these cities allowed just two auto

companies to sell EVs, with one of these firms being a local company.59 Even when the

NDRC directed that these cities needed to allow 30% of sales from other provinces, the

province seeking protection would make a deal with another province that the whole of

that outside 30% would come only from that other locality. Local governments often

subsidize more generously purchases of EVs from local auto firms.

Fragmentation between actors within a jurisdiction also can have deleterious

effects on coordination. Multiple funding sources at the central and provincial levels may

57 These factors are not unique to China. But I argue they are more severe, and are overcome with greater difficulty, in the Chinese context.58 Many scholars attribute this competition, and efforts to gain local notoriety through protectionism, as a function (at least in part) of the aforementioned cadre promotion system. On inter-jurisdictional competition, see Lü and Landry (2014). 59 The cities with existing strong auto firms – such Shenzhen and Shanghai – often were chosen by MOST as pilot cities. This choice has the obvious advantage of placing resources where infrastructure already exists (a hallmark of China’s experimentation policy). But local firms, especially when owned by the local government, also may be better equipped to benefit from local protectionism.

25

be used for local innovation projects – such as from NDRC, Ministry of Finance, Chinese

Academy of Sciences, and MOST and their local branches – yet these sources often are

poorly coordinated. Thus, local efforts to snag resources and then show results from the

investment often mean not just competition between local projects, but also wasteful

duplicative investment sponsored by different agencies within a location. Particularly in

an environment where market exit is discouraged by local governments as a sign of

political failure, duplicative investment can be presumed to be especially harmful. Recent

efforts to criticize and eliminate overexpansion of technology parks, particularly those

related to the SEI industry of cloud computing, reflect recognition of this problem by the

center.60 Yet as long as local bureaus of national ministries are more likely to serve

horizontal interests than their vertical masters, the problem will remain. (OECD 2008, p.

363-4)

Related to the stovepiping of the local bureaucracy is that each bureaucracy

within a local jurisdiction may feel compelled to respond to the center’s signal,

exacerbating wasteful duplication. Indeed, even SASAC has taken on the mantle of

promoting S & T at the local level. (Naughton 2012) Duplication of efforts is not the

only problem to grow out of fragmentation and stovepiping; such a structure creates

barriers to diffusion of technology that is seen as crucial to creating effective innovative

“clusters.” (OECD 2007, 41) Also detrimental is the stifling of development of national

standards for new industries. As local governments focus on developing standards that

benefit their own specific location, and local companies, rather than working toward

national (or even international) standards. Similarly, while the development of locally-

oriented technologies is rational from one perspective, it can hinder the development of a

more robust national market.61 Chongqing municipality’s deployment of a fast-charging

battery model - the only pilot city to do so – is a prime example. This model was based

on the unique characteristics of proximity to the Three Gorges dam and relatively reliable

power grid. A battery-swapping model a la Hangzhou and Shenzhen relies on relatively

flat geography, and hence is not feasible in hilly Chongqing, whereas the energy supply

60 There have been multiple campaigns to avoid wasteful investment by local governments and firms, such as in iron and steel, and real estate development. Yet these campaigns often are in a “macro-retrenchment” environment, whereas it seems projects tied to the “innovation” silo may be protected from such campaigns.61 Hangzhou’s battery switching model is more transferable.

26

intensity and reliability needed to make a fast-charge model succeed is not available

elsewhere. (Marquis et al 2013)

Local Governments as a Source of Sustainable Demand?

Local firms have relied heavily on governments at all levels to help create or

stimulate demand for new energy industries. Local governments often have been

channels to promote central tax breaks and subsidies for consumer purchases in the solar,

wind, and electric vehicle sectors.62 Local governments also have responded to Beijing’s

directive to promote EVs in government procurement; in 2014, Beijing set a target for

new government vehicle procurement (sedans and buses) to reach at least 30%.

(Economy 2014) Beyond this promotion of national level policy, local governments have

made supplemental efforts to develop local markets. A weak consumer market has led

the central government to promote public demand by local governments as a major

stimulus for EV sales. BYD’s aforementioned experience with various local government

deals to purchase their electric vehicles illustrates local protectionism, but also

exemplifies how new firms often rely on local governments to create a demand pull.

Shenzhen municipality offered further support to BYD to overcome the huge market-

diffusion hurdle posed by the establishment of charging stations (discussed above), and

this has become a core program of support for all major municipalities. In China,

moreover, local government efforts to promote charging stations have run up against not

only price and consumer anxiety but also against the power of electric grid monopolies.

The provision of plug in electric stations is decided primarily by provincial offices of

State Grid, and the grid company has been reluctant to make this investment.63

While government supports for the EV industry have led some companies to jump

on the bandwagon, others have assessed the fact that the industry is extremely reliant on

government support rather than market demand as reason to wait to enter the sector.

62 On tax supports in wind, see Lewis (2013, 56-7) and Gallagher (2014, ch. 4). Many central subsidies to consumers for the purchase of electric vehicles were eliminated in 2011.63 The three main aspects of the provision of electric power – generation, dispatch, and grid interconnection – are all controlled in significant ways at the local level in China. For example, there are myriad local independent power producers (IPPs) that generate electricity, and dispatch is heavily localized. The 2002 breakup of State Power Corporation’s monopoly led to the regionalization of the grid. These features of the industry create an extra local dynamic to national efforts to develop clean electric power sources, as local business actors have an incentive to do what is in their interest with regard to the industry. Local governments must compete with these local business actors. See Huang and Taplin (2012).

27

Representatives of the private firm Chang Cheng (长城) Motor (Baoding) indicated that

while they had explored entering the market (including with a failed cooperation scheme

with a California battery company), they at least temporarily decided to hold back. They

indicate that the market is not mature, that the push is completely led by the government,

but with insufficient and unreliable financial supports. They reiterated the common

complaint that there is poor interconnection with the grid and that there are insufficient

charging stations. Chang Cheng has a stronger interest in hybrid technology, and its 200-

person “new energy team” has participated in studies with the central Ministry of Finance

(though the firm ultimately withdrew).

Problems with interconnection also have hindered China’s solar industry. Solar

cell manufacturers large and small have been frustrated by efforts to sell electricity on the

domestic grid. Local governments have contributed land and housing to huge but solar

farms projects, many of which sit idle for reasons already discussed. But in addition,

local governments have been unable to guarantee connectivity to the grid. Consumers

have faced similar frustrations. Some consumers have invested in solar cells, partly

spurred by the national “Golden Sun” and “Golden Rooftop” program subsides for

installation of solar cells, and partly spurred by prospects of not only providing a source

of power for their own use but also of selling the electricity they generate at home to the

grid. Yet state power grid monopolies have been unwilling, despite directives from the

regulator (China Electricity Regulatory Commission), to facilitate interconnection for

households or solar farms without burdensome forecasts of generation and at a reasonable

price.64

Local Governments as Financiers

Successful entrepreneurs in solar and EV industries often cite the importance of

local government financing. Yet two main problems with China’s model of local

government support can be identified: the questionable ability of local governments to

make wise investments in the absence of market based mechanisms, and the creation of

firms dependent on government funding. Criticism of local governments’ failures to

effectively “pick winners” is common in the Chinese press. Local government is on the 64 Beijing has largely ended subsidies for solar installation, in part in response to such waste. (Interview 6-12-2014, Beijing.)

28

front line of choosing which firms to reward, and yet there often is a structural expertise

gap. Or where expertise does exist, such as in local S & T bureaus, these expert opinions

must compete with other considerations, such as the need for quick returns by local

officials who are seeking ways to respond to the center’s signals, as discussed previously.

Political decisions often must substitute for market-based decisions as to worthy funding

recipients. Well-functioning venture capital would act as a funnel, withdrawing funding

from ventures that have failed to show promise (or live up to promise), while continuing

funding for viable ventures.

But there remains a gap in such market-based institutions in China. As noted, there

has been a push to establish locally-capitalized venture capital firms to (help) fund

innovative ideas. More market-based VC firms are generally uninterested in clean

energy because there is not enough money to be made. Local VCs that have invested in

clean energy have come under increased scrutiny for making poor decisions, being too

closely tied to the government, and even helping to create too much government risk

when they gain implicit government guarantees. Wuxi Venture Capital Fund, an integral

part of the Wuxi “Model” has met criticism for failing to assemble a “professional team

to carry out project selection, due diligence, post-monitoring, intellectual property

investigations, business partner surveys, communications platform, and other

procedures.” (He[a] 2006) Other “risk-reward” loan systems also exist, as in the case of

the “gamble” (duì dǔ, 赌) agreement between solar firm Jiangxi LDK and “state-

background” lenders, in which the loans had to be repaid very quickly or else face

extremely high interest rates. (“PV Impulse” 201265) At the same time, when local

governments are faced with the prospect of a failure by a firm around which they have

tried to create a “brand,” particularly when huge amounts of resources have been poured

into not just the firm but also supportive supply industries, they may be tempted to throw

good money after bad. Such is the case with Xinyu government in Jiangxi Province, the

backer of LDK Solar. As with Wuxi’s Suntech adventure (though for different reasons),

local officials have felt compelled to use government funds and help ensure the

availability of funds from elsewhere (such as local banks) in order to bail out the firms.66

65 See also http://money.163.com/12/0723/15/874080K500254O2B.html.66 Ibid.

29

Thus, in light of this gap in expertise and market institutions to pick worthy

“winners,” it is not surprising that local officials’ choices might then be made based on

other considerations, such as political connections. Altogether, there remain a host of

moral hazard problems. And, as w/ Xinyu LDK and Suntech, local governments have

been compelled to bail out firms so as not to shoulder a black mark to its brand.

A second problem with the model of financial support is its impact on industry.

Rather than spurring innovative industries such support seems to promote waste. The

solar panel industry is perhaps the most well-known example. Many local governments

saw export of solar panels as a lucrative business, and so – responding to international

market demand and drawing on national policy incentives – too many localities invested

in solar cell production, creating a glut on the international market, and helping

precipitate a collapse of that market.67 Yet extensive government supports also have

created a tendency for firms to depend on government supports, and to use this support to

go in business directions they might better have avoided. LDK Solar, given extensive

support from the entrepreneurial Xinyu government, made aggressive forays into

ancillary businesses, though as a family-run company it lacked expertise to do so.

Similarly, BYD Auto expanded into the solar industry largely based on government

supports. In the EV industry, two of the “10 Cities” pilot cities with little existing

infrastructure in the auto industry (Xiangfan and Nantong) have been accused of

strategies that focus on “receiving preferential policies and financial resources, as

opposed to developing their EV adoption capability.” (Marquis et al, 2013) Reports of

similar dynamics have appeared for clean energy sectors of wind, LEDs, and bioimass.

(“PV Industry Incubators”) Interviewees have also suggested there is a class of smaller

firms that have been established and remain in existence due solely to government

IV. Conclusion

67 As is well-known, other problems have beset the Chinese PV industry, including the global financial crisis and declines in PV prices, collapse of key international markets (notably Spain), and the international trade dispute surrounding allegations of “dumping” of Chinese solar cells in Western markets.

30

The broad literature on innovation suggests that local governments in China have

a potentially positive role to play in creating a favorable ecosystem for innovative firms

through mechanisms such as coordination and funding. The influential position of local

governments in the Chinese political system, including as a conduit for central “pro-

innovation” policy, reinforces that expectation. This role could be expected especially in

clean energy industries, which have been given a high profile role in China’s planning

process.

It is evident from the previous discussion that innovation by firms does occur.

Cost and process innovation results from deep competition among solar panel producers,

many of whom survived the export industry shake-out. When firms have been able to

draw on existing infrastructure and expertise in their location, they have moved forward,

as has been the case with EV manufacturers Kandi in Zhejiang, Shifeng in Shandong, and

to a lesser extent BYD in Guangdong. It also can be argued that local governments have

contributed to some successes, at least initially, through use of traditional industrial

policy tools. Subsidies (direct funds, tax breaks, preferential access to loans from state

banks, contributions of land, etc.) appear to have helped some solar producers, such as

Suntech and Yingli, get off the ground. More interestingly, local governments have

protected firms that have chosen to innovate in ways to which Beijing has been

unfriendly. Shifeng low speed autos benefited massively from the advocacy of the

Shandong provincial government. As a result, innovation occurred at the low end of the

market, and this segment is the most successful portion of China’s entire EV market.

Kandi (also benefiting from its partnership with Geely) sells more EVs in China than any

other manufacturer. Perhaps one reason for the slow takeoff of new energy sedans was

the focus on pure electric vehicles, and the desire to avoid hybrids (due to the need to

purchase foreign IP). This choice was made by the central government, but local

governments followed. (Tillemann 2014) In 2014, however, some EV firms have gone

their own way on this issue as well; similar to the situation with low-speed vehicles, local

governments have supported the development and sale of hybrids, particularly in

Shanghai. (Wang Tao 2015) Moreover, local governments have continued to encourage

firms continue to engage deeply with the global value chain as a consumer of foreign

technology, instead of making serious attempts to reinvent an “indigenous” wheel.

31

On the other side of the ledger, however, while local governments have created

experimental sites and pushed the development of industries along, there are myriad

examples in which local governments have failed to contribute to vibrant local innovative

ecosystems. This paper has pointed to a number categories of governance deficiencies.

The incentives for local officials to respond to central signals, but to do so “creatively” in

a way to support their political needs for quick payoffs in terms of branding and

employment, has been a major contributor to wasted, duplicative, and sometimes “false”

investment. The problem of waste is exacerbated by incentives for local governments to

prevent exit of unsuccessful firms if it means harm to employment. Moreover, local

governments in China face difficulty providing effective coordination due to

longstanding problems of protectionism, stovepiping and fragmentation. Protectionism

in turn harms efforts at standardization for a national market, such as when EV pilots

have been encouraged to suit local conditions.68 Reliance on government demand (for

EV sedans) has been unable to ameliorate the basic problem of market failure the efforts

were intended to address. From the financial side, reliance on local governments to make

sound investment decisions when private financing does not exist means officials have

often lacked adequate signals about the quality of projects. Thus, incentives for local

governments – a mixture of incentives to align with the center but also create their own

image as innovative locations – too often block the creation of an environment in which

state-supported innovation can happen. Waste and the intolerance of firm failure and the

consequences for market exit are particularly pernicious problems.

In this context, some firms, as in the solar panel sector, have simply never become

viable market actors apparently in part due to their expectations that government supports

will continue, a phenomenon that cannot help the center’s innovation visions. In the EV

sector, despite some obvious innovation at the low end of the market, and facing many of

the same technical barriers this industry confronts around the world, all the supports and

subsidies has not met the goals for sales set by Beijing’s industrial policy. Beijing

acknowledged that, as of September 2014, China had met only 12% of its target for

alternative-energy vehicles to be introduced by 2015.69 One study calculates that of all 68 This has not been a problem in the solar panel sector, where technology is relatively standardized.69 “China Offers Billions to Subsidize Electric Cars on Gas,” Bloomberg News, December 10, 2014. On China facing the same barriers as those encountered worldwide, such as high battery costs and generally high costs relative to combustion engines, see Bernstein 2013.

32

the cars produced in 2013 (the world’s largest auto producer), only .008% were high-way

ready passenger vehicles. (Most of these were purchases by taxi and bus companies.)

(Altenberg et al, 2015) Outside of the low-speed category (such as produced by Kandi

and Shifeng), most sales were to local governments; 80% of new energy vehicles sales

are in the public fleet, indicating failure thus far in the transformation from state support

to a consumer market. (Howell et al, 2014) Although in the past few months the picture

on sales has appeared brighter due to greater toleran of hybrids (Wang 2015), in general

Chinese industrial policy on EVs has been unable to move the market for EVs forward on

a par achieved by, for example, many European countries and California. (Mock and

Yang, 2014)

What can we conclude about the role of local government in these sectors? First,

it is important to reiterate that it remains incumbent on local officials in China to play a

role in potential economic development schemes, such as SEI industries. Especially

when the signals from Beijing that industrial policy should be pursued, local officials

cannot sit idly by and allow markets to work things out (even if private firms such as

Chang Cheng Auto can). And yet the ability of local governments to respond to Beijing’s

signals in a positive and conforming way has been shown here to be largely a function of

industry and market conditions. In short, the interaction of the two categories of

variables denoted in the introduction – industry characteristics and the strength and nature

of Beijing’s signals - has affected the development of the two industries considered in

this paper. A simple taxonomy helps to illustrate this relationship.

Industry structure (high barriers to entry, strong incumbents, large-scale cognate industries)

Need to respond to central signals (high priority

yes no

strong EV sedans (pure electric)

Moder-

ate

Solar panels (lower priority signaled than EV sedans)

weak (locals

EV hybrids (post 2015) Low-speed EV, electric bikes

33

pursue despite signals)

of center)

This taxonomy perhaps contains an (intuitive) endogeneity, namely, that large

incumbents (e.g., auto producers) are likely to be favored in Beijing’s policy signals – as

makes sense if we conceive of new energy policy as being largely about industrial policy.

Local governments are likely to be more creative, as in the case of low-speed EVs, or to

sponsor rapid market entry (as in EVs) where the signal from Beijing is not particularly

strong. This may be create a context in which cost-innovation, and serving the low-end

of the market, is most vibrant. On the other hand, we see a less innovative environment

where barriers to market access are high and Beijing’s signals are strong. We cannot say

this is the result primarily of local government; in the case of EV sedans, the problems

China faces are the same as elsewhere in the world. However, local government efforts,

particularly to create market demand through government purchases or to compete to

produce standards that will not become national standards, do not help overcome these

problems. Note that the taxonomy ignores (perhaps mistakenly) the role of firm and

industry ties to global markets.

In conclusion, then, when has local government involvement proven most helpful

in the specific cases considered in this paper? When local market infrastructure and

conditions are favorable, especially where existing technology and value chains permit

firms to serve the low end segment of the market, local governments have been

instrumental. With low barriers to entry and extant industrial infrastructure, provincial

and municipal officials have supported market entry by local firms, and presumably have

gained some political benefits – employment, growth – for themselves. This dynamic

was evident in the low-speed EV industry. Kandi, under the rubric of the 10 Cities pilot

program and the help of Zhejiang and Hangzhou (and eventually Shanghai), and Shifeng,

under the protection of Shandong government. Kandi in particular has engaged in

business process innovation, with battery switching and rental models that grew out of

Hangzhou’s previous experiences with bicycles. (Though not explored in this paper, the

story may be similar in EV bicycles.)

34

Early on in its development, China’s solar panel industry – also facing low

barriers to entry and the absence of massive incumbents – in some cases appears to have

benefited from local government help, especially in the form of subsidies, government

facilitation of financing schemes, and contributions of land. When government behavior

in the solar panel industry (as with low speed EVs) could support an existing market, i.e.,

be market conforming, local officials appeared helpful. Yet once the export market

collapsed, and NDRC supported an end to many supports of solar firms (by limiting bank

loans), local officials in some cases were reluctant to allow firms they had supported to

fail, i.e., to allow market exit.

In the higher end segment of the EV market, for sedans and buses, we have seen

strong signals from Beijing – as in the 10 Cities pilot program - and efforts by local

governments to respond. Yet efforts by local officials have been much less successful.

In this segment, the technological barriers to entry by firms are high, and the sector is

dominated by incumbents (such as BYD). Consumer demand is low, due to high costs

and relatively poor quality compared to combustion engine sedans. Governments have

not only provided supply side support through subsidies and contributions of land and

loans, but also have made extensive attempts to stimulate the market through industrial

policy tools on the demand side, in the form of major consumer subsidies from central

and local governments, government procurement, and government support of

infrastructure (in terms of charging stations). Despite these efforts to conform to

industrial policy signals – efforts that merely by virtue of being made can have political

payoffs for local officials - the market has remained moribund.70 Indeed, local

government behaviors have exacerbated problems long criticized by Beijing (even if

caused by some of its policies): duplication of investment and local protectionism that

hinders the growth of a more integrated national market. In the EV case, efforts by local

governments to create a market, and thereby ameliorate market failure, could not succeed

due to industry and market conditions (lack of access to technology, high cost relative to

where market demand lies) not found uniquely in China but perhaps more difficult to

overcome there.

70 A comparison of problems in China’s EV market with more successful cases of Japan, and Korea is Tillemann (2015).

35

Some observers point out that local entrepreneurs are complicit in these failures.

Local entrepreneurs, even if not parasites on government funding, often seek to exploit

the funds available only through local governments (available only through local

governments because that is how central support funding flows, and due to the absence of

private capital). Indeed, some critics of Suntech’s failure do not single out Wuxi’s

government as the problem but, rather, its founder Shi Zhengrong. Similarly there is

equal criticism handed out to LDK’s founder Peng Xiaofeng and the Xinyu government.

It is clear there is a symbiotic relationship between entrepreneurs and local governments.

Others have suggested that the quality of local leadership is extremely important;

Baoding possessed quite impressive leadership that created a better ecosystem, whereas

Xinyu (in its treatment of LDK) did not.

Moreover, many problems– such as the difficulty in generating consumer-driven

markets for new energy – are far from unique to China, though in some respects (e.g.,

problems related to grid interconnection and the existence or private financing to

substitute for local government financing) may be felt more intensively there. There are,

then, many fingers to be pointed when looking to problems in the local ecosystem for

innovation and upgrading (or even basic firm success) in clean technologies. Perhaps the

most pertinent issue is that some sectors remain dominated by industrial policy concerns

–seen especially in the EV sector – making Beijing just as complicit as the local

government officials who respond to its signals. The previous discussion indicates that

China’s industrial policy approach to the promotion of new energy and sustainability, and

the intensive role played by local governments in this institutional structure, does not

solve the problems of market failure. Local government’s deep involvement has not been

able to correct for market failures in solar (in which failure is largely due to exogenous

demand forces that forced local producers to try to create domestic demand) and EVs

(where other barriers such as price and grid problems create little organic market

demand). At the same time, local governments have participated in the political failures

that have in turn have to tremendous waste (the pressure to create “false brands” and

difficulties tolerating market exit) and to problems of developing a national market (local

protectionism and an insufficient grid network).

36

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