Endnotes

¹ By the "missing middle" we mean the presence of some large enterprises at the top and many small enterprises at the bottom that unable to graduate into the medium-sized category.

² The economics of transition literature is varied in its policy suggestions concerning the best strategy for how such a transition should take place. We will not review the vast literature here, but merely point the interested reader to the excellent books by Blanchard (1997) and Roland (2000). Our approach here draws on the work of Porter (2004).

³ There is some parallel to the more classical factor proportions model of trade, where a country tends to produce and export the good for which it is relatively abundantly endowed. The distinction here is that, unlike the Heckscher-Ohlin model, production technologies differ between countries. Moreover, the underlying technological capability of a nation is conceived as endogenous-with resource allocation affecting the rate of technological development-not unlike models of endogenous growth (Romer 1986, 1990).

⁴ At its best, then, this mode seeks to combine an upstream, externally-available technology with internal, often proprietary, knowledge of a downstream application domain.

⁵ The primary insight of the model of international trade is the role that Dixit-Stiglitz style monopolistic competition plays in the determination of international trade patterns. With economies of scale in production and the ability to costlessly differentiate their products, trade allows for increasing returns that produce gains from trade even in economies with identical tastes, technology, and factor endowments. The model has served as the basis for understanding the phenomenon of intra-industry trade.

⁶ In equilibrium, however, the number of firms in the economy is likely to fall as ineffcient firms exit the industry in the presence of free trade. Overall welfare, however, remains higher with trade than in autarky (Melitz 2003).

⁷ This is a theme that is repeated in the New Economic Geography literature. See Fujita, Krugman & Venables (1999) for a detailed exposition of models in this class.

⁸ Note that such organized clusters involve non-equity-based linkages among firms. Collaboration occurs as a result of either firms possessing similar degrees of market power but holding complementary assets, or a dominant firm that acts as a coordinator by setting standards for other firms within the cluster.

⁹ Definition released by the State Economic and Trade Commission, State Developing Planning Commission, Ministry of Finance and National Bureau of Statistics of the PRC (Feb 2003).

¹⁰ Except, perhaps, for supplier-driven innovation, such as through improved inputs and the introduction of new machinery.

¹¹ However, the counterargument is that latecomers enjoy the possibility of leapfrogging due to the ability to pass over obsolete technology and not having to deal with an excess of legacy infrastructure. On balance, it appears that the costs of the PRC's relatively late entry into the world economy probably dominate the benefits of this late entry. The issue of legacy infrastructure is also discussed below.

¹² In more mature financial markets, venture capital financing may be available to make up for credit rationing problems associated with more traditional bank loans. We discuss the development of the venture capital industry in the PRC in Appendix A.1. For a fuller discussion of the development of the financial market in the PRC over the period 1990-2000, see Shi (2001).

¹³ These are discussed more fully in Appendix A.2. See also Wang (2004) for a detailed discussion.

¹⁴ New growth theory, or endogenous growth theory, was pioneered by Romer (1986). This subsequently enjoyed important contributions by himself (Romer 1990) and others (Aghion & Howitt 1997; Grossman 1991; Lucas 1990). The literature has attempted to deal with how increasing returns allow long-term growth to be self-sustaining, an issue that the neoclassical growth literature (Solow 1956) had treated as exogenous.

¹⁵ Linkage is an activity that is not the preordained domain of any particular type of actor; indeed, it may instead be the result of the effect of a particular institution on organizational actors, rather than a particular actor.

¹⁶ It is important to keep in mind that SME policy in the PRC is largely guided by the "Act on the Promotion of SMEs," which came into effect in 2003, and is the only such act dealing with SMEs. The Act includes policy measures such as financial support, support for start-up businesses, and support for technological innovation and market expansion. The Act also states that the PRC's government will be involved in information provision and training services for SMEs. However, the wording in the Act is very brief and ambiguous, and does not provide any specificity in terms of proposed measures. As such, one could argue that there currently remains no comprehensive SME policy in the PRC; perhaps the best characterization

¹⁷ Moreover, a joint benchmarking exercise may have a catalytic effect in terms of encouraging more intense exchanges between firms on technical issues, such as when employees from different firms are jointly trained in benchmarking techniques.

¹⁸ However, it is important to note that the specific mechanisms that should underlie a functioning system of intellectual property rights, as currently understood, remains highly debated (Boldrin & Levine 2002; Romer 2002).

¹⁹ A comparative analysis of the development of Japan vis-'a-vis the PRC's SME sector is beyond the scope of this article. However, we provide a parallel analysis of the evolution of Japan's SME sector and her experience with the industrial cluster strategy in Appendix A.3.

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1. Christian Louboutin
   (posted 09 June 2010 / 01:03:10 AM)
   
   Thanks for this useful article.