From Industrial Policy to Upgrading Strategy: Dilemma of Local Developmental State in China's Pearl River Delta

Using the example of China's region of Pearl River Delta (PRD), this paper reveals the nature and characteristics of current industrial upgrading (IU) across the country's economy. After a brief review of the main approaches of IU, especially the global network/value chain approach, it differentiates the meaning and delineations of IU to firms and governments in the specific context of China. Taking the goals of IU as example, if, to most of the Chinese firms, it means manufacturing higher added-value products with better learnt technologies; to Chinese governments it is a clear long-run intention to produce more competitive Chinese firms in the global market. Based on quantitative data from a 1,200-firm survey and qualitative data from more than 40 firm case interviews in PRD during the year 2012–2013, the whole current situation of IU in PRD can be identified as a mixed economy, composed of one sector driven by State upgrading policy measures and another transformed through market mechanism and firm strategic choices. This dual economic structure under IU has significant implications to Chinese government. Because China's IU is now encountering a mismatch between the policy measures and firms' business behavior, the tough challenge for the Chinese government to achieve its strategic intention is not only how to create strategic high-tech sectors through strong State intervention, but also what new policy measures to design in order to eventually transform the large amount of local firms in manufacturing sectors whose advantage is traditionally based on cheap labor force and scale economy.