If China is going to build on its growth, it's will need an industrial policy that doesn't hold it back - By Alexandra Harney | Foreign Policy BY ALEXANDRA HARNEY | DECEMBER 8, 2009 The common perception of China relying on industrial policies to make its economy successful is just an illusion," says Fan He, assistant director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. "If industrial policy works, it's mainly at the local level." Industrial policy is sometimes shorthanded by its critics as "picking winners" -- essentially, it's government intervention to build certain industries by offering incentives and shielding them from foreign competition. Japan's industrial policy of the 1970s and 1980s, which was later copied by South Korea and Taiwan, is among the most studied recent examples. But if the goal of traditional industrial policy is to invest in companies and turn them into global dynamos, China has a long way to go. More than half of Chinese exports are made by companies with significant foreign investment. Although Lenovo and Haier have made laudable strides overseas, Beijing has yet to produce a truly international brand along the lines of Japan's Sony or Toyota. And it has struggled to consolidate its automotive, steel, aluminum, and coal-mining industries. Take cars, for instance. Although the government has been guiding the development of the automotive sector for at least two decades, more than 80 percent of industry revenues still come from joint ventures where the management expertise and technology is provided by foreign companies such as Shanghai Volkswagen, FAW-Volkswagen, and Shanghai GM, according to Arthur Kroeber, managing director of the consultancy Dragonomics. Despite government support for state-owned enterprises, the most-aggressive, fastest-growing automotive companies in China are the independents -- companies with entrepreneurial leaders like Chery, Geely, Great Wall, and BYD, says Bill Russo, senior advisor at Booz & Co. It's not that Beijing has done everything wrong. For one, its tight management of the currency has enhanced its global competitiveness, to put it mildly. The government has also managed to keep costs down for manufacturers by offering cheap capital through the banks and allowing state-run companies to dominate key sectors such as telecommunications and electrical-power generation. But currency control and cheap capital do not a winning industrial policy make. Since the 1980s, the overarching goal of Chinese industrial policy has been rapid economic growth through industrialization -- a strategy that mirrors those of South Korea and Japan in earlier years. Like its neighbors once did, China singles out strategic industries, including the automotive, semiconductor, aerospace, oil, and petrochemicals sectors, sets goals for their development, encourages banks to provide financing, and introduces policies to encourage their growth, including those on foreign investment. These policies essentially send a message to industry: Here's what we want to promote. "China's industrial policies are mainly trying to balance between different sectors," explains He of the Chinese Academy of Social Sciences. But what sets China apart is the way it has implemented this policy. Where South Korea and Japan ruled from the top, in China, industrial policy is decentralized and sometimes even chaotic.