Government s Roleand Regional Industrial Upgrading in China The Case of Guangdong

Transcription

1 ICPA 2014 International Conference on Public Administration (ICPA 10 th ) Government s Roleand Regional Industrial Upgrading in China The Case of Guangdong 1. LI Ning 2. ZHOU Huadong 1.Associate Professor, Department of Planning and Public Administration, Eastern Washington University, Spokane, WA Research Associate, Institute of Science and Technology Systems and Management 2.Chinese Academy of Science and Technology for Development, Beijing, P.R. China, Abstract As a pilot region of China s open-door policy since 1978, Guangdong s economic growth has benefited greatly from its export-led strategy associated with large volumes of FDI and a high-skilled and low-wage labor force. There has been a consensus that Guangdong needs to go through a regional industrial upgrading to gain technological advantages through introduction of higher value added products. However, although recent development in Guangdong has shown some successful moves towards the direction that fosters innovation, the industrial upgrading in this region is far from complete. This paper reviews the industrial upgrading that has happened in Guangdong since the 1990s. Instead of trying to provide a comprehensive explanation of the major contributing factors to Guangdong s performance in the upgrading of manufacturing industries, this paper primarily focuses on the crucial role played by regional and local governments in promoting the industrial upgrading. The aim is to provide an overview and evaluation of existing public policies for industrial upgrading in the region. The role of regional government in promoting Guangdong s industrial upgrading is elaborated. Particularly, this paper argues that a reasonable balance must be kept between market mechanism and government intervention, as excessive government powers may result in deficiency in resource allocation in the market and corruptions in government agencies. Key words Guangdong, Industrial upgrading, Market, Government, Corruption 1 Introduction A province on the South China Sea coast, Guangdong has been a pilot region of China s open-door policy since Its economic growth has benefited greatly from its export-led strategy associated with large volumes of FDI and a high-skilled and low-wage labor force. During the past four decades, Guangdong enjoyed an average double digit rate of the growth of its regional GDP. However, there have been concerns on whether Guangdong will be able to keep its fast pace of economic growth. Krugman (1994) 1 asserts that the Asian growth miracle actually depends on heavy investment rather than on technical change and this growth pattern is not sustainable according to the law of diminishing returns. If this assertion applies to Guangdong, then this region is expected to eventually slow down its pace in economic growth. In addition, macro-economic environment has not been favorable to Guangdong s export oriented development strategy for the past several years. The financial crisis originated in the United State in 2008 triggered a deep downturn in global market. The rising cost of labor weakened the comparative advantages this region has enjoyed for several decades. To address the above concerns about Guangdong s sustainability in economic growth, there has been a consensus that Guangdong needs to go through a regional industrial upgrading to gain technological advantages through introduction of higher value added products and through enhancement of efficiency and productivity in existing industrial sectors. Manufacturing high-end products often involves developing knowledge-intensive, non-polluting industries with high value-added and high-technology components. Productivity enhancement requires process innovation that implements a new or significantly improved production method, i.e., changes in procedures, techniques, software, and equipment. In short, industrial upgrading calls for product and/or process innovation. Recent development in Guangdong has shown some successful moves towards the direction that 1 Krugman, Paul. (1994) The Myth of Asia s Miracle, Foreign Affairs, 73(6), Edited by ZHU Xiaoning and ZHAO Shurong

2 2014 International Conference on Public Administration (ICPA 10 th ) ICPA fosters innovation. Since 2008, GDP growth rate in Guangdong has been 8% or above. R&D expenditure in Guangdong has an annual growth rate of 20% or above. Overall labor productivity (measured by GDP per person employed) has increased from $17 thousand in 2008 to $25 thousand in 2013, with an average annual growth rate of 8.25%. Guangdong ranks the first in terms of the size of economy at the provincial level in China. In 2013, Guangdong s regional GDP was 1 trillion, about 80% of the size of economy of South Korea. The total value of international trade in Guangdong reached $1.1 trillion, reflecting the fact that the export-led growth strategy continues to be highly effective. To explain Guangdong s seemingly successful move towards industrial upgrading, a variety of contributing factors could be identified. Guangdong is the home of diverse manufacturing sectors with more than 100 industrial clusters, laying a solid base and a great potential for industrial innovation. This region has China s most mature market system thanks to its being a pioneering region of the open-door policy and this region has a culture that fosters entrepreneurship and risk-taking activities that are conducive to innovation. China s higher education system has provided adequate qualified human resources for research and development in Guangdong. National, regional and local governments have maintained a stable and dynamic legal framework for economic development and have used policy tools to promote innovation. It is not this paper s intent to provide a comprehensive explanation of the major contributing factors to Guangdong s performance in the upgrading of manufacturing industries. Rather, this paper primarily focuses on the crucial role played by regional and local governments in promoting the upgrading of manufacturing industries. The aim is to provide an overview and evaluation of existing public policies for industrial upgrading in the region. It should be noted that the authors do not think the role of government is predominant in the upgrading process where market mechanism should have played the primary role. However, the role of government in the market place is indispensable even in some western markets that are characterized as laissez-faire. Given China s long history of a planned economic system, government intervention in the market is deeper than in most (if not all) of other major economies in the world. This makes it meaningful and imperative to investigate and review public policies that have been implemented topromote industrial upgrading in Guangdong. Note that the impact of government intervention in market may be positive or negative. 2 Research Methods Analysis of the government s role in this paper is primarily at the regional level. A big picture derived from a thorough analysis of industrial policy at all levels (local, regional, national, and international) is absolutely necessary, but a deeper investigation that focuses on one particular level is equally important. Analysis in this paper regarding the role of regional government in the process of industrial upgrading is based on information from various sources. First, government documents, particularly Statistics Yearbooks published by the central government and Guangdong province government, provide macroeconomics data for basic quantitative analysis. Second, existing academic literature helps understand the background, on-going projects, and status quo of Guangdong s industrial upgrading. Third, one of the authors of this paper participated in about one hundred elite interviews in Guangdong from 2011 to 2012 and these interviews brought in abundant individual sights, first-hand accounts and rich depth of industrial upgrading in the region. Among the elite interviewees, 50 percent are government officials, including branch or division heads and members of various advisory councils; 30 percent are enterprise midlevel or high level managers and R&D staffs; and 20 percent are managers and researchers form government-funded R&D institutes. Interview questions are associated to major opportunities and challenges in the overall industry or in a particular business sector and their views of public policies currently in effect to enhance competitiveness and productivity of the business. 3 Industrial Upgrading in Guangdong Guangdong has ranked the first in terms of GDP among all provincial-level regions in China since Edited by ZHU Xiaoning and ZHAO Shurong 43

3 ICPA 2014 International Conference on Public Administration (ICPA 10 th ) In 1992, during his famous Southern Tour, Deng Xiaoping expressed his hope that Guangdong should continue its leadership position and act as a role model for other regions. Deng s plan was that Guangdong s GDP should be able to catch up with all of the four tigers (Hong Kong P.R. China, Singapore, South Korea, and Taiwan P.R. China) within twenty years. In 1992, Guangdong had a GDP of $44.4 billion, about 85% of that of Singapore which has the smallest size of economy among the Four Asian Tigers. From 1993 to 2012, Guangdong enjoyed an average GDP growth rate of 13.0%, while during the same period growth rate of the Four Asian Tigers ranged between 3.7% and 6.0%. Over the years, measured by GDP, Guangdong has eventually surpassed Singapore in 1998, Hong Kong P.R. China in 2003, and Taiwan P.R. China in In 1992, Guangdong s GDP was 13% of South Korea s. The gap between Guangdong and South Korea has been greatly narrowed down. In 2012Guangdong s GDP was 80% of South Korea s. Table 1 shows the evolution of GDP of Guangdong and the Four Asian Tigers over the 20 year period from 1992 to A more current profile of Guangdong is provided in Figure 1. Table GDP of Guangdong and the Four Asian Tigers ($Billion) Guangdong Hong Kong P.R. China Singapore South Korea Taiwan P.R. China Data Source: 20 Years of Guangdong s Catching-up with the Four Asian Tigers ( Note: The primary sector includes agriculture, forestry, fishing, etc. The secondary sector includes manufacturing, construction, energy, etc. The tertiary sector comprises all other industries not included in the primary or secondary sectors, represented by service sectors. Figure 1 Profile of Guangdong, China Evolution of sectoral composition of Guangdong s GDP shows this region has transformed itself form an agriculture and manufacturing based economy to a dynamic economic system that relies primarily on manufacturing and service sectors (see Table 2). The transformation itself is a process of 44 Edited by ZHU Xiaoning and ZHAO Shurong

4 2014 International Conference on Public Administration (ICPA 10 th ) ICPA upgrading into a modern society. The rapid development of the secondary and tertiary sectors in Guangdong since early the 1980s benefited largely from its pilot position granted by thechinese central government as an important component of the Open Door policy. Massive inflows of foreign direct investment (FDI) significantly contributed to extensive export earnings and new employment opportunities. Following the four tigers, Guangdong also adopted export-oriented development strategy. During the early years of the Open Door policy, main sources of FDI are Chinese who lived in Hong Kong P.R. China, Taiwan P.R. China, and other countries. Guangdong is adjacent to Hong Kong P.R. China, and not far from Taiwan P.R. China. The geographic location, coupled with cultural similarity, gives the province advantages in attracting investments from overseas Chinese. Investments were primarily in low value-added industrial sectors, such as garment, toys, shoes, and tools. The biggest competitive advantage in Guangdong was its low-cost labor force. Starting in later 1990s, more FDIs from other developed nations such as Japan and USA poured in this region. Investments turned to high value added manufacturing sectors, such as telecommunication, office equipment, and computers. In 2013, high-technology products exports in Guangdong reached $256.4billion, 15 times of the value in Figure 2 shows the growth of exports of high-technology products from 2001 to 2013 in Guangdong. Sectors Table 2 GDP Structures in Guangdong and the Four Asian Tigers Guangdong South Korea Singapore Hong Kong P.R. China Taiwan P.R. China Primary Sector Secondary Sector Tertiary Sector Data Source: Authors calculation. Data Source: Guangdong Statistical Yearbook 2013 Figure 2 Exports of High-tech Products in Guangdong It seems that Guangdong has successfully finished its industrial upgrading. Guangdong s GDP reached $1 trillion in 2013, close to the size of economy of South Korea s and Mexico s. The latter two countries ranked the 14 th and 15 th in the world, respectively. Guangdong s exports of high technology products reached $256.4 billion in 2013, roughly equal to the GDP of Finland. More than one third of Guangdong s manufacturing exports are high technology products. However, the above numbers are misleading to a large extent. Table 3 shows overall labor productivity of high technology industries in Guangdong and selected countries for the latest available years. China is still far behind the advanced nations in terms of both overall labor productivities for total manufacturing industries and for high-tech industries. Guangdong has the lowest labor Edited by ZHU Xiaoning and ZHAO Shurong 45

5 ICPA 2014 International Conference on Public Administration (ICPA 10 th ) productivity in high-tech industries in Table 3, even below the figure in China. Note that, ironically, China has a lower productivity in high-tech industries than in total manufacturing sectors. Both in China and in Guangdong, the growth of production and exports in high technology sectors has been largely based on activities of manufacturing and assembling products without possessing core technologies. In this case, products are high-tech, but the manufacturing and assembling processes are low value added. YU (2014) 1 argues that Guangdong s desire to achieve industrial upgrading has not come true since this region s industrial development is still mainly driven by the low-end and low value-added manufacturing industry. Table 3 Overall labor productivity of high-tech industries in Guangdong and selected countries ($Thousand) Guangdong 2013 China 2012 USA 2009 Japan 2008 Germany 2007 France 2007 Italy 2007 Total Manufacturing High-tech industries Data Source: China High-Tech Industry Data Book 2013 & Authors calculation. Note: Revenue from principal business per capita for China. Gross output value per capita for other countries Although evidence does not support the assertion that Guangdong has successfully updated its manufacturing industries from low value added to high value added, it does not mean that Guangdong has failed the upgrading process. No doubt that Guangdong has been trying very hard to move its regional economy towards more reliance on high end and high value added products. But this transition is no easy job and it may take decades to be fully realized. Despite of its spectacular pace of economic growth, industrial upgrading in Guangdong has been incremental and a major transformation of its primary products from low value-added to high value-added has not yet happened. Review of existing literature and government documents and analysis of elite interviews indicate that three major factors combined lay a solid background for the transition: First, R&D in business sectors, especially in manufacturing enterprises, has gained dominant position in the regional innovation systems of Guangdong. Under the planned economy, R&D activities were primarily the duties of government funded research institutes and universities. Evidence shows that Guangdong has accomplished the transition of R&D activities from government-centered to enterprise-centered. In 2012, total R&D expenditure in Guangdong was $20.4 billion, about 2.2% of its GDP. 86% of the total R&D spending was made in enterprises. 2 With very little spending on basic and applied research, enterprise R&D in Guangdong primarily concentrate on development of new products and improvement of existing processes. Second, Guangdong s manufacturing sector has been diversified, ranging from low-end to high-end production activities. Guangdong has about 1million small and medium sized enterprises. Under the slogan of one town one product, with the help of the regional government, 342 specialized industrial towns have been identified (see Figure 3 for distribution of the specialized industrial towns). Products of these specialized towns cover a variety of industrial sectors, including garment, shoes, toys, chemicals, pharmaceuticals, telecommunication, computers, electronic equipment, home appliances, etc. The rationale for having specialized industrial town lies in that: first,this helps relocate some low value added industries from developed places to lagging areas to give room for the former for industrial upgrading and to encourage the development of the latter (Barbieri, Di Tommaso, and Bonnini, 2012) 3 ; and second, this will allow Guangdong to implement a strategy of promoting specialization at the local level and achieving diversification at the regional level. 1 YU Hong (2014). Industrial Upgrading in Guangdong: How Well is it Performing?, China: An International Journal, 12(1), Guangdong Statistical Yearbook Elisa Barbieri, Marco R. Di Tommaso, Stefano Bonnini (2012). Industrial development policies and performances in Southern China: Beyond the specialised industrial cluster program, China Economic Review, 23(2), Edited by ZHU Xiaoning and ZHAO Shurong

6 2014 International Conference on Public Administration (ICPA 10 th ) ICPA Source: OECD (2010). OECD Territorial Reviews: Guangdong, China Figure 3 Distribution of Specialized Industrial Towns in Guangdong Third, Guangdong possesses abundant R&D staff and high quality labor force. Guangdong ranks the first in R&D manpower at the provincial level in China. In 2013, R&D staffs in Guangdong reached 490 thousand, about 15.2% of the national total. There is a huge supply of college students to Guangdong s talent pool. China now graduates about 7 million college students each year, among them 42% major in STEM (science, technology, engineering, and mathematics) fields. Guangdong has a tradition of welcoming immigrants. Of its total population of 106 million, 70% have permanent residency and 30% are immigrants. Overarching the three factors elaborated above are two institutional factors: regional culture that is conducive to entrepreneur and innovation and government regulations that have been implemented in promoting industrial upgrading. As to the cultural element, people in Guangdong are unique in China in having business mindset and in willing to take risks. Located very far away from the national power center in Beijing and relatively close to capitalist economies in Hong Kong P.R. China and Taiwan P.R. China, compared with those who live in the Northern and Western China, people in Guangdong are less interested in national politics and more interested in doing business and making money. The role of government will be elaborated and discussed in detailed in the next section. 4 The Role of Government Overall, government plays a role in industrial upgrading from the following aspects: Government as a regulator to create and stabilize a legal framework and a social environment conducive to innovation, such as protection of intellectual property and anti-trust; Government as a sponsor to provide loans, grants, and subsidies in supporting enterprise R&D activities; Government as a partner to play an active role in a growing triadic relationship between university-industry-government; Government as a consumer to spend substantial portions of its budgets in purchasing goods and services produced in enterprises and use government procurement as a tool to promote selected manufacturing sectors, i.e., electric vehicle; and Government as a facilitator to provide quality infrastructures in such areas as telecommunication and public transportation, resulting in significant reduction of transaction cost and building of social capital. Discussions of the role of regional government will focus on three functions mentioned above: government as a sponsor, government as a partner, and government as a consumer. The other two Edited by ZHU Xiaoning and ZHAO Shurong 47

7 ICPA 2014 International Conference on Public Administration (ICPA 10 th ) government functions are left outside the scope of this paper because government behaves as a regulator in stabilizing a legal framework is largely a function at the national level and government as a facilitator to a large extent has its impact on industrial upgrading in an indirect way. Government as a sponsor Government as a sponsor in supporting enterprise R&D activities is functioned through offering tax incentives at the national and regional levels. This tool has been used to encourage commercial strategies to raise revenue by reducing tax burdens or granting tax benefits. Hoffmann (2013) summarizes available R&D tax incentives at the national level 1 : Reduced Corporate Income Tax (CIT) rate of 15% for high and new technology enterprises (HNTE) Super deduction - 150% deduction for eligible expenditure Tax concession for advanced technology service enterprises Customs Duty and VAT exemption/refund for the purchase of R&D equipment Tax concessions on technology transfers At the regional level, Guangdong government offers significant subsidies for multi-national companies that establish headquarters or R&D facilities in its territory. The provincial government offers several tax concessions for the certain investment activities, including establishment of location in designated Special Economic Zones (SEZs) or provincial development areas, technology intensive projects, Joint-Venture projects engaged in harbor/port construction and expansion, establishment of financial institutions, projects engaged in agriculture, forestry or animal husbandry, export-oriented enterprises and transportation-oriented projects exceeding USD 30 million 2. In addition, the Guangdong government has a crucial role in identifying and sponsoring the specialized industrial towns. Although the agglomeration of firms or the formation of industrial clusters is a spontaneous process, the Guangdong government has taken efforts to accelerate and guide this process. The government takes the responsibility to evaluate and granted the label of specialized town to those who meet the criteria set by the government. Once a place is certified by the government as a specialized town, it will immediately enjoy a number of financial and preferential policies to encourage agglomeration and specialization. The purpose is that through government recognition and policy advantages, those specialized towns will maintain their competitiveness in the market. Government as a consumer The Guangdong government exercises its function as a consumer to promote industrial upgrading through public procurement to support local business. Government procurement has put great impact on the development of the LED industry in Guangdong. Beside a large number of government subsidies in LED manufacturing, the regional government of Guangdong has decide to support LED streetlights through an official procurement project, which is expected to benefit local companies. Another example is the government procurement in electric vehicle (EV), which includes hybrid, pure electric and fuel battery-powered electric vehicles. According to a news report (Liu, 2011) 3, electric cars has been set as one of the priorities on Guangdong s development plan. The government has a goal of establishing assembly lines with combined annual production capacity of more than 200,000 EVs by In order to help EV manufacturers to benefit from economies of scales, the government intends to use such policy tools as pricing incentives, government procurement, and technological standards. The government is expecting that in three to five year, Guangdong will see a fleet of 30,000 EVs on the road. Substantial funds is planned to be allocated to support the purchase of EVs by the various administrative business 1 Richard Hoffmann (2013). China s new trend towards R&D and the tax incentives it has implemented, ECOVIS, August 5th. ( 2 Guangdong Investment Promotion Authorities and Incentives. ( guangdong-investment-incentives/) 3 LIU Yuanyuan (2011). China s Guangdong Province Pulls Out All the Stops in EV Initiative ( renewableenergyworld.com/rea/news/article/2011/04/chinas-guangdong-province-pulls-out-all-the-stops-in-ev-init iative) 48 Edited by ZHU Xiaoning and ZHAO Shurong

8 2014 International Conference on Public Administration (ICPA 10 th ) ICPA units. For example, Guangzhou, the capital city of Guangdong, was planning to allot $118 million on EVs through government procurement. Government as a partner The regional government of Guangdong utilizes policy tools to help enterprises to attract talent people to start new business or to relocate themselves to join a business. For example, to promote establishment of Contractual Joint Ventures, Guangdong offers the convenient customs regulations, inspection exemption and quarantine expedited processes, and simplified entrance procedures for foreigners. The Government also offers fund-raising assistance, preferential land and real estate administration, subsidized utilities rate, public security assistance, and other forms of assistance for enterprises seeking to establish cultural facilities. In addition, as an incentive to encourage companies to hire recent graduates from Guangdong s universities, the provincial government offers subsidized social insurance policies and training programs for new hires, as well as merit subsidies for referral of recent graduates. Another area that the Guangdong government has exercised its function as a facilitator is through the establishment of the so-called new R&D centers and virtual universities. Although being a super economic power in China, Guangdong does not have as many top universities as Beijing, Shanghai, and Jiangsu. The government has help universities outside Guangdong to set up R&D centers or virtual universities in the province in places that are accessible to local enterprises. The government acts as a broker between universities and local businesses. A good example is the R&D Center in partnership with Central China University of Science and Technology, which has its main campus in Wuhan, Hubei province. Discussions: Is the government intervention too much in Guangdong? Common characteristics of a successful economy possesses a cluster of institutions, including: (1) a strong private business sector; (2) decentralized power system; (3) freedom of exchange; (4) protection of private property; and (5)primary reliance on competition and decision making in the market place to allocate resources. On the other hand, market failures associated with externalities, information asymmetries, non-competitive markets, and public goods calls for government intervention in the market. In developing economies, government intervention is often used to protect domestic industries that are premature. This leads to a fundamental political dilemma of an economic system. As Welngast (1995, pg.1) 1 puts it: A government strong enough to protect property rights and enforce contracts is also strong enough to confiscate the wealth of its citizens. Thriving markets require not only the appropriate system of property right and a law of contracts, but a secure political foundation that limits the ability of the state to confiscate wealth. Thus, there is always a tension between market mechanism and government intervention in the market. Keeping an appropriate balance between the two forces is in need for a healthy economic system but it is never easy. Figure 4 proposes a conceptual framework of the relationship between the extent of government intervention and its economic impacts. As is shown in the figure, government intervention in the market brings benefits to enterprises but often comes with costs put on consumers. Government regulation on business is worth trying only if the total benefits exceed total costs. Keeping a balance between the market mechanism and government intervention also depends on other factors such as culture and tradition. The economic system of the United States is characterized as laissez-faire where in which business transactions are free from intrusive government restrictions and people are always skeptical and cautious about government intervention. While in Japan, effective industrial policies are often desired by people. For example, MITI (The Ministry of International Trade and Industry) in Japan used to be one of the most powerful government agencies. It was credited for the successful economic growth in Japan after WWII since for decades MITI effectively ran much of Japanese industrial policy, funding research and directing investment. 1 Barry R. Weingast (1995). The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development, Journal of Law, Economics, and Organization, 11(1), 1-31 Edited by ZHU Xiaoning and ZHAO Shurong 49

9 ICPA 2014 International Conference on Public Administration (ICPA 10 th ) Figure 4 Costs and Benefits of Government Intervention in the Market With China s long history of totalitarianism and its centrally planned economic system, there is little doubt that a strong government must in place to regulate business activities. However, lessons have been learned that excessive government power in the market may result in negative or even detrimental impacts on the economy. One form of the negative impact is rent-seeking. According to public choice theory, rent-seeking is somebody spending money on political lobbying to increase one s share of existing wealth without creating wealth. Excessive government power in the market place induces rent-seeking activities that lead to reduced economic efficiency and poor allocation of resources. In the case of certifying and sponsoring Guangdong s specialized industrial towns, the regional government has the power to determine whether a town meets the required criteria and how much are to be budgeted to fund the town. It seems like the government is exercising excessive power, which gives room for rent-seeking and bribery. Since 2013, former director of the Guangzhou Municipal Science and Technology and Information Bureau, Xiexue Ning, former director of Guangdong Provincial Science and Technology Department LI Xinghua, deputy director Wang Ke Wei, deputy party secretary Zhang and other IT systems officials has been arrested for investigation of serious bribery cases 1. Another form of the negative impact is government picking winners and losers in the market place. This happens when government subsidies are in favor of certain enterprises. It is argued that picking winners and losers by the government distorts the market mechanism and results in deficiency of the economic system. Winners and losers should be picked by buyers and sellers in the market, not by government officials. In fact, during the elite interviews that one of the authors participated in, interviewees from the government say highly about government intervention in Guangdong s market, while interviewees from enterprises expressed their hope that the government should set constraints and limit its activities in market intervention. To illustrate, Guangdong has set the LED sector as an important strategic industry but most of the industry s development is based on large government subsidies, sometime with overlapping subsidies from national and regional governments. Market mechanism is not playing the fundamental role in allocating resources. Once government subsidies discontinue, many subsidy receivers will be driven out of business. 5 Conclusions As a pilot region of China s open-door policy since 1978, Guangdong s economic growth has 1 Guangdong Science and Technology corruption cases exceeded the agency in charge of 50 people involved in corruption draw ( 50 Edited by ZHU Xiaoning and ZHAO Shurong

10 2014 International Conference on Public Administration (ICPA 10 th ) ICPA benefited greatly from its export-led strategy associated with large volumes of FDI and a high-skilled and low-wage labor force.guangdong s industry and export growth still largely rely on the expansion of manufacturing based on imported components, equipment and technology. In high technology industry, many enterprises do not possess core technologies and remain assemblers of products with low added value. In order to attain sustainability in economic development, Guangdong has strived for upgrading its manufacturing industries through a transition from low value-added to high value-added products. Statistics show that Guangdong has successfully moved towards the direction of industrial upgrading. But evidence also shows that the transition hasn t been finished and the whole upgrading process may take decades. In the process of industrial upgrading, the regional government of Guangdong has played an active role in many aspects. The government has acted as a sponsor to fund business R&D activities, to allow enterprises tax concessions, and to subsidize business costs. The government also has acted as a consumer to purchase products in the market to create economies of scales that can benefit premature business. In addition, the government has acted as a partner to help business recruit talents and to help establish industry-university-government relationship. However, there is always a tension between market mechanism and government intervention. Failing to keep a reasonable balance between the two may result in deficiency in allocating resources. Further, excessive government power in the marketplace may provide room for rent-seeking and picking winners and losers, which are detrimental to a healthy economic system. Edited by ZHU Xiaoning and ZHAO Shurong 51