Indigenous innovation vs. teng-long huan-niao: policy conflicts in the development of China’s flat panel industry

In this article, we discuss the conflicts between two of China’s recent policies: indigenous innovation (IIN) and teng-long huan-niao (TLHN), using the flat panel industry as an example. IIN was a policy pursued by the central government that was aimed at creating locally owned technologies. TLHN was a policy pursued by some local governments that focused on restructuring local industries. Both policies sought to cultivate a viable local industry in flat panel production, but because of the conflicts, the efforts tended to offset rather than reinforce each other. IIN is a top-down policy based on import substitution which entails market entry restrictions and trade protection, whereas TLHN is a bottom-up policy of an export-promotion nature which encourages multiple entries and market competition. When the TLHN initiative is superseded by the IIN policy implemented at the central-government level, local governments are forced to make a detour from their traditional paths of industrial development. However, the objective of IIN is hard to come by because of the misaligned incentives between the upstream and downstream industries, and between the regions that host these industries. This study suggests that a top-down policy like IIN, which embraces an ambitious goal of technology leapfrogging, may undermine the efforts of local governments that take a gradual and incremental approach to industrial upgrading.