Large Countries’ Development Path: Experience and Theory 9811656940, 9789811656941

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Yao Ouyang

Large Countries’ Development Path: Experience and Theory

Large Countries’ Development Path: Experience and Theory

Yao Ouyang

Large Countries’ Development Path: Experience and Theory Translated by Fu Liping

Yao Ouyang Large Country Economy Research Center Hunan Normal University Changsha, Hunan, China

The work was supported by The Chinese Fund for the Humanities and Social Sciences ISBN 978-981-16-5694-1 ISBN 978-981-16-5695-8 (eBook) https://doi.org/10.1007/978-981-16-5695-8 Jointly published with Peking University Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Peking University Press. © Peking University Press 2022, corrected publication 2022 This work is subject to copyright. All rights are reserved by the Publishers, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

Development economics is the study of the transition from poverty to wealth in developing countries. The study of development economics is not considered successful unless the major developing countries that make up the vast majority of the world’s population develop properly. Thus, Zhang Peigang, the Founder of Development Economics, proposed that large developing countries should be listed as important objects of development economics research. The international status of these countries has undergone significant change, and in today’s world, they play an increasing role in economic growth, regional development, international governance, and so forth. These countries have begun to gradually step out of the passive and subject position in the international economic structure they once occupied. In this context, it is more necessary than ever to study the economic rise of these emerging powers, explore their path of economic development, and reveal the characteristics and laws behind their progress to prepare for the establishment of development economics of large countries. Therefore, “Research on the Economic Development Path of Large Developing Countries” was put forth. In addition, a research team including Hunan Normal University, Harvard University, and other institutes published a series of papers with extensive insight on the collection of domestic and foreign research literature and economic data. Finally, the research results were organized into this comprehensive academic work—“Large Countries Development Path: Experience and Theories”. It has been more than 10 years since the research group on the economics of major powers was established in 2006. Based on long-term research results, this academic monograph draws from the economic development experience of developed countries; analyzes the development advantages, patterns, transformation paths, and innovation strategies of large developing countries, after properly defining and selecting large developing countries; and then develops a relatively complete theoretical system. In conducting this collective research, Professor Ouyang Yao serves as the chief expert, responsible for the overall design and revision of the draft. The main contributors are Prof. Dwight H. Perkins from Harvard University; Tang Lingxiao, Yuan Dongmei, Cao Hongjian, Associate Professor Liu Xiong, Dr. Yuan

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Preface

Li, Dr. Luo Fuzheng, and Dr. Tang Ling from Hunan Normal University; Associate Professor Yi Xianzhong from Nanjing Audit University; Associate Professor Li Junhua from the Hubei University of Economics; Profs. Chen Qi, Sheng Yanchao, and Dr. Zhang Yang from Hunan Business School; Dr. Li Yushuang from Jiaxing University; and Dr. Zhang Xun from Beijing Normal University. Additional participants in the research and discussion were Prof. Fu Yuanhai from Guangzhou University; Associate Professor Li Jianfei from Hunan Business School; and Associate Professor Cai Xing, Dr. Zheng Xinying, and Dr. Dai Jiawu from Hunan Normal University. Finally, Dr. Fuzheng Luo and Dr. Xiaofang Sheng assisted in manuscript collation and translation. This work was listed as a major bidding project of the National Social Science Fund in 2015, No.15ZDB032. We would like to extend our sincere gratitude to National Philosophy and Social Science Planning Office and Hunan Provincial Social Science Planning Office; Researcher Pei Changhong, Researcher Wang Limin, Researcher Liu Xiahui, Researcher Zheng Hongliang, and Associate Researcher Jin Chengwu of the Chinese Academy of Social Sciences; Prof. Chen Zhengping of Tsinghua University; Profs. Fang Fuqian of Renmin University of China, Xu Changsheng of Huazhong University of Science and Technology, Sheng Bin and Deng Hongtu of Nankai University, Tao Cha of Emory University, USA, Wan Guanghua of the Asian Development Bank, and other experts; and Hunan Normal University Business School, Harvard University Center for Asian Studies, Stanford University Center for International Development, Oxford University Center for Chinese Studies, and the Peking University Press. Yuelu Mountain, Changsha, China In the autumn of 2017

Yao Ouyang

The original version of this book was revised: The funder information has been added. The correction to this book can be found at https://doi.org/10.1007/978-981-16-5695-8_7

Contents

1 Research Objects and Basic Ideas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Definition and Selection of Large Developing Countries . . . . . . . . . . . 2 Evolution of International Status of Large Developing Countries . . . . 3 Review of Research Literature and Logical Thinking . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 10 17 31

2 Economic Development Experience of Large Developed Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Development Path of Large European Countries . . . . . . . . . . . . . . . . . . 2 American Industrialization and Its Characteristics . . . . . . . . . . . . . . . . . 3 Industrial Policy of the Rise of Large Countries . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35 36 58 68 80

3 Development Advantage of Large Developing Countries . . . . . . . . . . . 83 1 Perspective of Endowment: Comparative Advantage . . . . . . . . . . . . . . 83 2 Perspective of Development: Latecomer Advantage . . . . . . . . . . . . . . . 108 3 Perspective of Scale: Advantage of Large Countries . . . . . . . . . . . . . . . 123 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 4 Development Pattern of Large Developing Countries . . . . . . . . . . . . . . 1 Growth Pattern Based on Domestic Demand . . . . . . . . . . . . . . . . . . . . . 2 Domestic Demand-Driven Export Pattern . . . . . . . . . . . . . . . . . . . . . . . . 3 Patterns of Infrastructure Construction . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Patterns of Public Goods Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

141 141 167 203 214 223

5 Economic Transformation of Developing Countries . . . . . . . . . . . . . . . . 1 Agricultural Industrialization and Scale Operation . . . . . . . . . . . . . . . . 2 Urbanization and Industrial Structure Upgrading . . . . . . . . . . . . . . . . . . 3 Labor Division Mode and Globalization Dividend . . . . . . . . . . . . . . . . 4 Crossing the “Middle Income Trap” . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

227 227 243 268 284 293

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6 Innovation Strategy of Large Developing Countries . . . . . . . . . . . . . . . 1 Market Scale and Technology Innovation Advantages . . . . . . . . . . . . . 2 From Imitating Innovation to Indigenous Innovation . . . . . . . . . . . . . . 3 Measurement of the BRICS Countries’ Innovation Capability . . . . . . 4 Innovation Path for Large Countries: Chinese Experience . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

295 295 310 322 337 352

Correction to: Large Countries’ Development Path: Experience and Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

C1

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367

About the Author

Yao Ouyang Ph.D. in economics is a Professor in Business School of Hunan Normal University and Director of Large Country Economy Research Center. He has been a Senior Researcher at Harvard University, Oxford University, and Stanford University, and was elected as Chairman of the 19th International Schumpeter Society. He has studied development economics, international economics, and Chinese economic history, and has made pioneering contributions in the field of economic development of large countries. Representatives of his work include A Theory of Economic Development of Large Countries (China Renmin University Press), Comprehensive Advantages of Large Countries (Springer), Growth and Transformation of Emerging Powers (Macmillan Publishing Company), Development of Economics of Large Countries (Peter Lang Publishing Inc.), and Large Countries’ Development Path: Experience and Theory (Springer).

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Chapter 1

Research Objects and Basic Ideas

Abstract Large developing countries refer to those with the characteristics of a large country with a low level of economic development but are trying to catch up with developed countries. With their contribution rate and comprehensive influence to the world economy, Large developing countries have become increasingly important in the world economic structure. Since the mid-20th century, economists have studied industrialization and structural transformation in developing countries, and launched the exploration of the economic impact of national scale, all of which have provided a theoretical source for development economics of large countries.

In his book New Development Economics, Peigang (1992) proposed a new and innovative approach to the study of development economics, emphasizing the study of large developing countries, these being defined as developing countries with large populations, vast geographical areas, abundant resources, a long history, and low average income per capita. However, in the years since the publication of his book, economists have largely ignored his suggestion and, furthermore, have neglected to further develop and extend the meaning of “large developing countries”. This chapter attempts to rationally define “large developing countries” and identify these countries based on a set of evaluation indicators. Additionally, this chapter elaborates upon the international status and evolution of large developing countries from various perspectives so as to identify a set of specific research objectives for “development economics for large countries”. Lastly, the chapter provides a brief review of academic circles at home and abroad and suggests areas for further research.

1 Definition and Selection of Large Developing Countries 1

Large Developing Countries: both “Development” and “Scale” are implied.

Large developing countries are both “developing countries” and “large countries”. Consequently, it should imply the dual meanings of “developing” and “scale” and be the combination of both. As such, it is necessary to define “developing countries” © Peking University Press 2022 Y. Ouyang, Large Countries’ Development Path: Experience and Theory, https://doi.org/10.1007/978-981-16-5695-8_1

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1 Research Objects and Basic Ideas

and “large countries” separately and “large developing countries” shall be defined on such basis. (1)

Implication 1: developing country

The conceptualization of “developing countries” has undergone an evolution from “backward countries” to “underdeveloped countries” and then, most recently, to “developing countries.” The division between rich countries and poor countries has existed since ancient times. Nevertheless, much similarity still existed since all countries then were predominantly agricultural societies. With the advent of the industrial revolution in the mid-eighteenth century, western countries began to enter the stage of modern economic growth, with agricultural civilization being replaced by industrial civilization. At this point, countries in the world were divided into industrial countries and agricultural countries because of the huge difference in terms of labor productivity and national income. The former came to be identified as “developed countries” and the latter “backward countries”. After the Second World War, some countries which broke away from colonial domination and gained political independence embarked on the path of promoting and accelerating development. Considering that these countries are economically backward but have a potential and potential capacity, they were renamed as “Less Developed Countries” and abbreviated as “LDCs” in the economic literature. Beginning in the 1960s, most of the world’s newly independent countries developed a particularly strong sense of development and began to implement economic take-off and economic development strategies. Some achieved industrialization and developed-country status, giving hope to other countries still on the path toward development. Therefore, “taking into account the process of continuous change, countries came to be divided into developed and developing countries” (Gillis et al. 1998). In the late 1960s, the concept of “developing countries” became officially used in the documents and development literature of UN organizations. At roughly the same time, two similar concepts in international relations also came into use: the “third world countries” and the “southern countries.” In the early 1950s, French scholar Alfred Sower proposed the concept of “Three Worlds.” During the Cold War, the members of the North Atlantic Treaty Organization were known as the “First World” and the members of the Warsaw Pact, the “Second World,” while other, non-aligned countries were designated as the “Third World.” In the late 1970s, another distinction was introduced: the world was divided between the “North and South,” with the former representing rich, industrialized countries and the latter denoting poor(er) developing countries. However, the “Third World” is just a political concept, some of whose members have become high-income countries. Furthermore, and “Southern countries” is only a geographical concept since some countries are rich oil-exporting countries. Thus, these designations cannot accurately show the conditions of developing countries. Therefore, the concept of “developing countries” is more scientific and normative in the sense of economics. Regarding the implications of developing countries, textbooks authored under the auspices of Harvard University asserted that “all traditional societies have two common characteristics: low income per capita and no modern economic growth.”

1 Definition and Selection of Large Developing Countries

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Given these simple common features, there remains a great deal of difference in the historical process between these countries, making it difficult to generalize the development process (Gillis et al. 1998). Based on this understanding, in previous domestic textbooks of development economics, some authors defined the “developing countries” as “former colonial, semi-colonial and affiliated countries that are now emerging independent nations with political independence.” (Wenda 1992). Some people came to view the “Third World” as a synonym for “developing countries” (Chunwen 2010), but this is not scientific or accurate in a real sense. Shucheng (2005), editor-in-chief of the “Dictionary of Modern Economics,” takes a more scientific and reasonable approach, defining “developing countries” generally as “countries still in poverty and backwardness and underdevelopment but seeking to accelerate economic development.” (2)

Implication 2: large country

The so-called “large countries” are countries on a large-scale. According to different given standards, a series of concepts of large countries such as “huge population countries,” “strong economic powers,” “huge industrial countries,” and “huge agricultural countries” can be deduced. The large countries we study should be large countries comprehensively and meet two basic criteria, namely, the size of the population and the size of the country, from which we can infer market size and economic scale. If these two basic criteria are not given, the objects we study will become uncertain and some will become major powers with the expansion of their economic aggregates and then become small countries when their economic aggregate shrinks. In the history of economics, the study of country size and economic growth began in the late 1950s. In 1957, the International Economics Association held an academic conference in Hague on the theme of “Impact of Country Scale on Economy”, which specifically studied the strengths of huge and small countries. Some economists put forward the assumption that large countries have steady advantages and innovative advantages. Later, Kuznets (1971) and Chenari (1975) conducted more research on the economic issues of large countries and defined large countries mainly based on the standard of population size. Over time, countries with more than 10 million people, 15 million people, 20 million people, and 50 million people were listed as large countries. Perkins and Serquin (1989) defined large countries by both the population size and territory size. They believe that some structural differences are attributable to different population sizes because of the different geographical areas of a country. Distinguishing the influence of population and geography is particularly difficult as these two variables are related to each other. Indeed, the vast territory is also an important reason for the regional differences between large countries. We believe we can increase the number of the characteristics of the market scale directly derived from the two basic criteria and define a large country as a country with a large population, a vast territory and a huge market potential. Countries such as China, India, Russia, and Brazil currently have populations of more than 150 million people, lands of more than 3 million square kilometers and economic aggregates of more than US$1.0 trillion. Therefore, they are large countries. Characteristics of Development and Scale of Large Developing Countries

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1 Research Objects and Basic Ideas

From an understanding of “developing countries” and “large countries”, we can see the characteristics of development and scale of large developing countries. The characteristics of large developing countries are the combination of the characteristics of developing countries and those of large countries. We can integrate the characteristics of the two to form a synthesis of developing countries and large countries based on the analysis of the two characteristics so as to better show the characteristics of large developing countries. If we seek commonalities about developing countries, we can summarize them into the following three aspects. The first is low national income level. The most obvious feature of developing countries is the low level of national income and the corresponding low living standard of the people. With progress in our society and economy, the specific standards set by the World Bank are dynamically adjusted. Based on data of The World Bank, all countries are classified into low-income countries, medium-income countries, and high-income countries according to GNI per capita. The former two are developing countries and the last is developed countries. In 2001, the GNI per capita was less than 745 U.S. dollars for low-income countries. Countries above 745 but below 2,975 USD were medium-income countries. In 2008, countries with GNI per capita below 975 USD were low-income countries and countries above 975 but below 11,906 USD are medium-income countries. In 2013, countries with GNI per capita lower than 1,045 USD were low-income countries and countries higher than 1,045 but lower than 12,746 USD were medium-income countries. The second summary aspect is low labor productivity. Higher labor productivity is the basic feature of modern economic growth, and the level of labor productivity directly determines the level of national income. Therefore, GDP per capita resulting from insufficient technology, management, and capital investment is an important measure of labor productivity for a country. According to the indexes of 1992, in the developed countries such as the United States, Germany, and Japan, GNI per capita were respectively 23,240, 23,030 and 28,190 USD, whereas, in developing countries such as Mexico, Indonesia and India, the GNI per capita were respectively 3,470, 1,905 and 310 USD. The difference is obvious. In 2012, the GDP per capita of the labor force in developing countries was between 1,870 and 20,526 USD, while the average GDP per capita of the labor force in developed countries was 56,710 USD. The gap was still wide. The third summary aspect is the dual nature of the economic structure. Developing countries are in the stage of transition from traditional society to modern society and the processes of industrialization and urbanization have not been completed. In this period of transition, the dual structure of urban and rural areas and the corresponding dual structure of the economy and technology are present. The distribution of population and industries in rural areas is extremely uneven. The economic and technological levels vary from region to region and the differences in the degree of market development and infrastructure construction exists. In 2004, highest GDP per capita was 5.6 times higher than the lowest in various regions of India. In 2005, the gap between the GDP per capita of Shanghai in the east of China and Guizhou in the west was as high as 11 times. The China Family Development Report released

1 Definition and Selection of Large Developing Countries

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in 2015 showed that the highest income quintile of households was 19 times greater than that of the lowest income quintile. As the developing countries evolve toward the developed status, their dual economic structures will shift to a new economic structures. If we seek common universal features among large countries, we can also summarize them into three main aspects. The first is the population size. A country is the collection of human beings. The population is the most basic feature of a large country. In New Development Economics, Mr. Zhang Pegang noted that of the 10 countries with a population greater than 100 million people in 1988, were developing countries, namely China, India, Indonesia, Brazil, Nigeria, Bangladesh, and Pakistan. The huge population base, coupled with the rapid population growth rate, makes the characteristics of large developing countries more obvious (Peigang 1992). By 2013, the population of the above-mentioned countries reached 1.357 billion, 1.252 billion, 249 million, 200 million, 173 million, 156 million, and 182 million respectively. The size of the population can directly determine the scale of human resources and the size of the market and has a very important impact on economic growth. The second aspect is the territory size. In general, countries with vast land are relatively abundant in natural resource reserves. At the same time, the size of the country can also affect the spatial layout and overall structure of economic development, which leads to differences in natural resources and regional economic differences. There are some developing countries in the world with large land areas, such as China (95.63 million square kilometers), Russia (1.709 million square kilometers), Brazil (85.61 million square kilometers) and some other developing countries with small land areas, such as Swaziland (17,000 km2 ), Timor-Leste (15,000 km2 ) and Kosovo (11,000 km2 ). The land area of these large countries is hundreds or thousands of times of those of small countries. Their reserves and types of natural resources and other aspects should be strikingly different from region to region. Moreover; the ratio of population to land is also an issue. Maintaining a suitable population density is also an important condition for promoting economic growth. The third aspect is market size. From a large population and land mass, it is possible to deduce a huge market size or a huge potential market. The so-called market scale includes the potential and the actual market size. If a country has a large population, following the law that demands determine market, there should be a large potential market size. If a country’s per capita of gross national product is high, there is a significant market size. If a country has a large land area, according to Smith’s “market scope” hypothesis, there should also be a large potential market size. If the country has convenient transportation and a unified domestic market, there should be a significant market scale. Although developing countries such as China, Brazil, and India have not reached the level of developed countries in terms of GNP per capita, they have a large market size because of their large populations. According to data from the International Statistical Yearbook, the final consumption of households in the three countries in 2016 was 4404.565 billion USD, 1149.757 billion USD and 1330.959 billion USD respectively, accounting for the 2nd, 8th, and 7th places in the world. Above is an analysis of the basic characteristics of developing countries and large countries. The development of large countries implies the dual meanings of

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1 Research Objects and Basic Ideas

Table 1 Main features of large developing countries Large developing countries Development features Low income per capita

Low productivity

Scale features Dual economic structure

Huge population

Vast Territory

Huge market

Try their best to catch up with the major developed countries

“development” and “huge”. It is necessary to integrate the characteristics of the two to make a comprehensive and accurate definition of large developing countries (see Table 1). Jiadong (2005) once explained the concept of “major developing country”: “usually refers to those countries that have the market size needed to start the industrialization process and can develop independently to a certain extent”. We hold that the “large developing countries” can be defined as countries with a huge population, vast land area, enormous market potential, low labor productivity and per capita income, with an obvious dual economic structure and still catching up to the developed countries. In short, it is a country with the characteristics of a large country but a low level of economic development, and seeking to develop and catch up with the developed countries. 3 (1)

Evaluation Indicators and Identification Schemes for Large Developing Countries Evaluation indicators of large developing countries

In order to identify a major developing country, we should first establish a specific indicator system so that it can better reflect the meaning of “major country” and “development.” To construct an evaluation indicator system for huge and mediumsized developing countries, it is necessary to consider their basic implications and characteristics and consider factors such as the availability of data and classification calculation. We set out from the actual situation of large developing countries to construct an indicator system that includes the target level, criteria level, and indicator level (see Table 2). Among them, higher level indicators are synthesis of lower level indicators, and lower level indicators are the performance of higher level ones. Basic Indicator I: Population size. This indicator reflects the demographic characteristics of the population, including population, labor quality and labor quantity, etc. It is mainly measured by the population index. We conducted descriptive statistical analysis (see Table 3) for the 214 countries or regions on the basis of the Indicators Database of the World Bank’s World Development Report. The average population of each country is about 33 million. The population of large countries should be greater than the average. According to octet, the percentile of 75% means 22.4 million and 49.3 million at the percentile of 87.5%. Therefore, the population of large countries should be more than 50 million. The population of small countries should be below 10 million and the population of medium countries should be between 20 and 50 million.

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Table 2 Indicator system for comprehensive evaluation of large developing countries Target level

Criteria level

Basic indicator

Developing large countries

Basic indicator

Population size Number of people

> 50 million

Land size

Land area

> 1 million square kilometers

National income

National income per capita

< 12,746 USD

Human development

Human development indicator

< 0.85

Development indicator

Specific indicator

Specific decisive standard

Table 3 Descriptive statistics of population, land of countries and regions Indicators

N

Minimum

Maximum

Average value

75th percentile

87.5th percentile

Population size

214

0.99

135,738.00

3318.32

2,240.19

4,937.39

Land area

214

2.00

17,098,240.00

627,354.80

465,990.00

1,099,295.00

Note The total population is individual, and the unit of land area is square kilometers

Basic Indicator II: Country’s land size. The indicator shows the statistical characteristics of the country scale, including the land area and the abundance of natural resources. It is mainly measured by the national land area index. We conducted descriptive statistical analysis (see Table 3) of 214 countries and regions provided by the Indicators Database of the World Bank’s World Development Report. The average land area of each country is 627,000 square kilometers. The land area of large countries should be greater than the average. According to octet, the percentile of 75% is 466,000 square kilometers and the percentile of 87.5% means 1,099,000 square kilometers. So if the percentile of 87.5% is the standard for large countries, the land area of large countries should be over 1 million square kilometers. Development Indicator I: National income. This indicator demonstrates the characteristics of national income, mainly GNI per capita. The World Development Indicators formulated by the World Bank is the current authoritative indicator, with gross national income per capita (GNI) as the main criterion. The economies are divided into low-income economies, medium-level income economies and highincome economies. The low-income and medium-level income economies are developing countries. According to the 2013 data, high-income economies refer to those economies with GNI per capita of 12,746 USD and above. As such, developing countries should be countries with GNI per capita below 12,746 USD. Development Indicator II: Human Development. This indicator shows the comprehensive characteristics of the country’s economic and social development, including

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Table 4 Result of selection on the basis of total population according to k-means cluster analysis Countries

Range of population total (Million)

Type 1

India, China

1,276.27–1,374.96

Type 2

Pakistan, Brazil, Bangladesh, Nigeria, Indonesia

159.86–255.08

Type 3

Egypt, Ethiopia, Russia, Philippines, Congo 54.86–143,70 (DRC), Mexico, South Africa, Thailand, Turkey, Iran, Vietnam

Type 4

131 developing countries including Burma, Tanzania, and Columbia

0.01–51.85

the level of national income, education, and health status. The human development index set by the United Nations Development Programme is the current authoritative index. The closer this indicator is to 1.00, the higher is the level of economic and social development. According to the 2013 Human Development Index released in 2014, the human development index of developed countries should be above 0.85. Therefore, countries with a human development index below 0.85 are developing countries. (2)

Scheme for identification of large developing countries

By adopting the development indicators of national income per capita and human development index, 149 developing countries were identified.1 Since the development indicators have clear criteria for division, we mainly follow the basic indicators (population and land scale) to identify large developing countries from developing countries. Selection based on total population on the basis of k-means cluster analysis. In order to conduct selection based on population size and also to further verify the objectivity of the judgment standard of 50 million population, SPSS has been applied to perform k-means cluster analysis on the basis of the population data of 149 developing countries. The results of the analysis are as shown in Table 4. The total population of the top three types of developing countries in Table 4 ranges from 54.86 million to 1,374.96 million, which is basically consistent with the judgment standard of 50 million people as mentioned above. In the first three types, India and China are super-populous countries and Pakistan, Brazil, Bangladesh, Nigeria and Indonesia are the second largest in terms of population, followed by a total of 11 countries: Egypt, Ethiopia, Russia, the Philippines, Congo (DRC), Mexico, South Africa, Thailand, Turkey, Iran, and Vietnam. In the following part of the article, we will carry out further selections on the basis of three indicators of land size, national income per capita and human development index from developing countries with a population of over 50 million. 1

According to 2013 data, Russia’s GNI per capita is $13,850, and it is listed as a high-income country by the World Bank; However, Russia’s human development index is 0.778, which does not reach the level of developed countries.

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Identification and selection based on comprehensive consideration of territory size. According to our judgment criteria that the land area of large country should be larger than one million square kilometers, we removed 5 countries including Bangladesh (147,600 km2 ), the Philippines (300,000 km2 ), Thailand (513,000 km2 ), Turkey (78,060 km2 ) and Vietnam (329,600 km2 ). It is noteworthy that some countries have a particularly large population size but a small land area. For example, the population of Nigeria is 173.6 million, which is twice the standard, and the land area is 924,000 km2 . The population of Pakistan is 182 million, which is nearly 3 times the standard, but the land area is 796,000 km2 . After comprehensive consideration, Pakistan and Nigeria are listed as large developing countries. After comprehensive consideration, considering that Russia is in its period of economic transition, there is still a gap between it and developed countries in terms of infrastructure construction, resource allocation efficiency, labor productivity level and so on. Russia is thus still listed as a large developing country. Taking everything together, 13 countries have been identified and selected as large developing countries: China, India, Russia, Brazil, Mexico, Indonesia, Pakistan, Nigeria, Egypt, Ethiopia, Iran, Congo (DRC) and South Africa (Table 5). (3)

Level classification of large developing countries

The above-mentioned large developing countries also vary and can be divided into three levels according to their scale of population and territory. Similarly, they can also be divided into three levels based on indicators including national income Table 5 Major economic indicators of the developing countries in 2013 Index

Population (M)

China

1357.4

India

Land area (10 k square KM) 956.3

GNI (USD)

Human development index

GDP (100 M USD)

6560

0.719

9420

GDP growth rate (%) 7.7

1252.1

328.7

1570

0.586

1875

6.9

Russia

143.5

1709.8

17,850

0.778

2097

1.3

Brazil

200.4

851.6

11,690

0.744

2246

2.5

Mexico

122.3

196.4

9940

0.756

1261

1.1

Indonesia

249.9

191.1

3580

0.684

868

5.8

Parkistan

182.1

79.6

1360

0.537

232

4.4

Nigeria

173.6

92.4

2710

0.504

522

5.4

Egypt

82.1

100.1

3140

0.682

272

2.1

Ethiopia

94.1

110.4

470

0.435

47.5

10.5

Iran

77.4

174.5

5780

0.749

369

−5.8

Congo(DRC)

67.5

234.5

430

0.338

32.7

8.5

South Africa

53.2

121.9

7410

0.658

366

2.2

Note Owing to the availability of data, the data in this table are for 2013

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Table 6 Level classification of large developing countries Level

Population size

Land area

National income per capita

1St Level

More than 1 billion: China, India

Larger than 3 million square kilometers: Russia, China, Brazil, India

More than $10,000: 0.7 or Higher: Russia, Brazil Russia, China, Brazil, Mexico, Iran

2nd Level Between 100 million and 1.0 billion: Brazil, Pakistan, Indonesia, Nigeria, Russia, Mexico

Between 1 and 3 million square kilometers: Congo (DRC), Mexico, Indonesia, Iran, South Africa, Ethiopia, Egypt

Between $0.3 and $1.0 million Mexico, South Africa, China, Iran, Indonesia, Egypt

Between 0.5 and 0.7 HDI: Indonesia, Egypt, South Africa, India, Pakistan, Nigeria

3rd Level

Smaller than 1 million square kilometers: Nigeria, Pakistan

Less than $3 million: Nigeria, India, Pakistan, Congo (DRC), Ethiopia

Below 0.5: Ethiopia, Congo(DRC)

Between 50 and 100 million: Egypt, Iran, Congo (Kinshasa), South Africa, Ethiopia

Human development indicator

per capita and human development (Please refer to Table 6). It can be seen that the large developing countries are diverse in terms of “scale” and “development” and is a complex group in itself. In terms of scale, countries of different sizes are different in status in the world structure. China, India, Russia, and Brazil are super large countries and enjoy particularly important influence in the world. Other countries are relatively smaller in scale and hence their influence in the world structure is relatively weaker. From a development point of view, the economic development tasks faced by countries at different stages of development are somewhat different. Russia, Brazil, China, Mexico, and Iran are at higher levels of development with higher per capita national income and are among the first echelons to advance into developed economies. Their task now is to strive to leapfrog the “middle-income trap” whereas Nigeria, Pakistan, Ethiopia and Congo (DRC) are low-income countries whose task is to get out of poverty as soon as possible at this stage.

2 Evolution of International Status of Large Developing Countries The economic powers of rich and poor countries are unequal and developing countries are economically dominated by developed countries. In the 1950s, Raul Prebish, a development economist, proposed the “central-periphery” theory that the developed countries are among the central countries in the global economy whereas the large developing countries are peripheral countries and most of the benefits in international

2 Evolution of International Status of Large Developing Countries

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trade are taken by developed countries, which resulted in loss of opportunities for developing countries to develop their industries. Since the beginning of the twentyfirst century, the economies of some developing countries have developed rapidly. In particular, the contribution rate of some large developing countries to the world economy has increased significantly. By relying on their natural influence, economic influence, industrial influence, regional influence, and governance influence, they occupy an increasingly important position in the international economic structure. 1 2

Evaluation of the Influence of Large Developing Countries Construction of evaluation index system

In order to evaluate the influence of large developing countries, a specific indicator system should first be established. To construct an evaluation index system for the influence of large developing countries, it is necessary to consider both characteristics of influence in all aspects and the availability of data as well as the methodology of classification. From the five aspects including natural influence, economic influence, industrial influence, regional influence, and governance influence, we have constructed an index system that includes the target level, criterion level, and indicator level, as shown in Table 7. (2)

Standardized processing of data and weight calculation of index evaluation

To compare the large developing countries with other developing countries in terms of influence, the developing countries whose land area is larger than the average have been chosen for evaluation and analysis. Owing to the different order of magnitudes and dimensions of each evaluation indicator, it is necessary to standardize the data before evaluation and here follows the method of data processing: Let xmn be the mth variable value under the nth indicator, the indicator data is processed as follows. For indicators that have a positive relationship between the numerical value and evaluation: vxmn =

xmn − min xmn max xmn − min xmn

For indicators that have a negative relationship between numerical value and evaluation: vxmn =

max xmn − xmn max xmn − min xmn

where, min xmn and max xmn are the minimum and maximum values of xmn respectively, and vxmn is the normalized data value. The Analytic Hierarchy Process (AHP) has been applied to calculate the weight of indicator evaluation. AHP is a comprehensive evaluation method proposed by Saaty (1977) to model and quantify the decision-making of complex systems of decision-makers. Its basic idea is mainly to decompose a complex problem into different components and group these factors

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Table 7 Assesment index system of developing countries’ influences Target level

Criterion level

Indicator level

Indicator design

Comprehensive influence

Natural influence

Population total

Total population of each country (million)

Land Size

National land area (10 k square kilometers)

Economic development level

GDP of each country Per capita (US$)

Potential for economic development

Proportion of foreign investment in GDP (%)

Economic influence

Industrial influence

Industry optimization and Percentage of value upgrading added to service industry in GDP (%)

Regional influence

Economic proportion

The proportion of national GDP in total world GDP (%)

Level of opening to the outside world

The proportion of goods and services exports to GDP (%)

Market intervention ability

The proportion of national fiscal expenditure to GDP (%)

Effect of governing

National human development index (HDI)

Governing influence

Note HDI data source comes from United Nations Development Programme and other data comes from the EPS data platform (www.epsnet.com.cn)

according to the dominance so as to form an orderly hierarchical structure and hence the relative importance of each factor through the comparison between the two can be determined. Finally, in combination of human judgment, the overall order of relative importance of each factor is identified. The software YAAHP has been applied to calculate the weight of each indicator and the following weights have been found: total population (0.4240), land size (0.2393), economic development level (0.0842), economic development potential (0.0379), industrial optimization and upgrading (0.0297), share of regional economy (0.0842), degree of opening to the outside world (0.0336), market intervention ability (0.0336) and government governance effect (0.0336). Based on the above indicators and methods, the comprehensive influence, natural influence, economic influence, industrial influence, regional influence and governance influence of 33 developing countries in the world from 2001 to 2014 have been measured. Spatial–Temporal Analysis of the Influence of Large Developing Countries

2 Evolution of International Status of Large Developing Countries

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Fig. 1 Trend of comprehensive influence of developing countries between 2001 and 2014

To facilitate analysis of time series, the average of evaluation values of the comprehensive influence of 33 developing countries each year from 2001 to 2014 have been measured. Figure 1 shows the trend of the average influence of developing countries. From Fig. 1 we can see that since the beginning of the twenty-first century, the comprehensive influence of developing countries has been rising from 0.1449 in 2001 to 0.1813 in 2014, an increase of 25.12%. As a result of the economic crisis in 2008, the rising trend of the comprehensive influence of developing countries during 2007–2009 had been affected. At the same time, it is also found that the standard error of comprehensive influence rose from 0.1257 in 2001 to 0.1486 in 2014, which shows that the difference in the overall influence of developing countries from 2001 to 2014 is also continuously expanding. The influence of some large developing countries is continuously increasing, whereas the influence of some small countries is increasingly being ignored in the international community. In order to conduct spatial and structural analysis, the average value of each developing country’s comprehensive influence, natural influence, economic influence, industrial influence, regional influence, and governance influence evaluation value over the period of 2001–2014 has been measured. The results of the calculation are as shown in Table 8. (1)

The comprehensive influence of large developing countries is relatively higher than that of other developing countries. The calculation shows that the average comprehensive influence of large developing countries is 0.2403, which is significantly higher than the average comprehensive influence (0.1639). The five countries with top comprehensive influence are all large developing countries, such as China (0.7047), India (0.4907), Russia (0.4349), Brazil (0.3182) and Mexico (0.1977). Of course, this is on an average level. It is not that the comprehensive power of a developing major country is greater than that of other developing countries because the large countries are mainly examined by two major features: the country size and the population, together with more comprehensive influential factors such as economic factors, industrial factors, administrative factors and so on. Argentina is not a major developing country, but its comprehensive influence has reached 0.1787, which is significantly higher than that of Iran, South Africa, and other developing major countries.

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Table 8 Evaluation results of the influence of large developing countries and other developing countries Countries

Comprehensive influence

Natural influence

Economic influence

Industrial influence

Regional influence

Governance influence

China

0.7047

0.5408

0.0435

0.0185

0.0652

0.0367

India

0.4907

0.3948

0.0236

0.0223

0.0175

0.0325

Russia

0.4349

0.2833

0.0566

0.0243

0.0220

0.0487

Brazil

0.3182

0.1722

0.0515

0.0283

0.0168

0.0493

Mexico

0.1977

0.0517

0.0591

0.0261

0.0190

0.0418

Indonesia

0.1780

0.0876

0.0287

0.0167

0.0139

0.0311

Iran

0.1469

0.0348

0.0448

0.0195

0.0123

0.0355

South Africa 0.1389

0.0215

0.0402

0.0283

0.0117

0.0372

Egypt

0.1172

0.0264

0.0201

0.0206

0.0076

0.0426

Nigeria

0.1139

0.0475

0.0183

0.0142

0.0124

0.0215

Pakistan

0.1133

0.0506

0.0126

0.0225

0.0034

0.0243

Congo (DRC)

0.0875

0.0432

0.0076

0.0190

0.0085

0.0092

Ethiopia

0.0824

0.0294

0.0151

0.0183

0.0015

0.0181

Argentina

0.1787

0.0411

0.0589

0.0257

0.0077

0.0454

Sudan

0.1060

0.0362

0.0170

0.0217

0.0104

0.0207

Algeria

0.1494

0.0340

0.0410

0.0147

0.0144

0.0452

Kazakhstan

0.1623

0.0333

0.0530

0.0203

0.0170

0.0387

Turkey

0.1610

0.0218

0.0528

0.0265

0.0122

0.0476

Columbia

0.1284

0.0188

0.0379

0.0247

0.0053

0.0417

Peru

0.1183

0.0161

0.0331

0.0247

0.0075

0.0369

Tanzania

0.0744

0.0148

0.0163

0.0195

0.0041

0.0197

Angola

0.1094

0.0130

0.0220

0.0122

0.0262

0.0360

Mongolia

0.1274

0.0122

0.0357

0.0198

0.0192

0.0406

Niger

0.0681

0.0113

0.0167

0.0211

0.0039

0.0151

Mali

0.0712

0.0106

0.0177

0.0161

0.0080

0.0187

Venezuela

0.1375

0.0103

0.0505

0.0183

0.0108

0.0476

Chad

0.0728

0.0102

0.0208

0.0149

0.0112

0.0157

Bolivia

0.1005

0.0076

0.0166

0.0218

0.0120

0.0426

Mozambic

0.0771

0.0071

0.0191

0.0209

0.0088

0.0211

Chile

0.1515

0.0047

0.0659

0.0250

0.0134

0.0425

Mauritania

0.0942

0.0045

0.0271

0.0184

0.0167

0.0275

Zambia

0.0822

0.0033

0.0225

0.0232

0.0104

0.0228

Namibia

0.1145

0.0011

0.0352

0.0250

0.0157

0.0375

2 Evolution of International Status of Large Developing Countries

(2)

(3)

(4)

15

The initial conditions of large developing countries for development enjoy an important natural influence in the international setup. Population and territory are the initial conditions for the country’s economic development and also the initial conditions for the division of major and minor countries. According to the 2013 data released by the World Bank, the total population of the 13 large developing countries we have identified and selected is 4.1 billion, accounting for 57.7% of the global population and the total land area is 51.47 million square kilometers, accounting for 38.3% of the global land area. With such a large population and vast area, their natural influence in the international structure cannot be ignored. In particular, large developing countries have strong aspirations for economic development and obvious advantages for later development. With the economic growth of these countries, the world’s pattern will gradually shift towards balance. Based on our calculations, the mean value of the natural influence of developing major countries has reaches 0.1372, which is significantly higher than the average value of total influence of all samples (0.0635). The economic contributions of large developing countries have given them an important economic influence on the world. At the start of the twenty-first century, large developing countries have experienced rapid economic growth, which has also increased their contribution to the development of the world economy. According to the data of 2013, the gross national product of the 13 developing major countries identified is 19,428.2 billion U.S. dollars, or 25.67% of the world’s GNP. The growth rate of these large developing countries is generally higher than that of the developed countries. The growth rate of the gross national product of each country in the world is 2.3%, while the growth rate of 8 of the 13 large developing countries has exceeded the average of international economic growth. The growth rate of China, India, Indonesia, Pakistan, Nigeria, Ethiopia and Congo (DRC) was more than double the world’s economic growth rate. “BRIC” countries including China, Russia, India, Brazil, and South Africa have contributed more than 50% to the growth of world economy. China, India, Brazil, South Africa, Mexico, and Indonesia have become members of the G20. The collective rise of the economies of large developing countries has made them the main driving force for the development of the world economy. The industrial level of large developing countries has given them an important industrial influence on the world structure. With the development of the economies of the large developing countries, not only the quantity of growth has been achieved, but also the quality of that has been improved. In recent years, important breakthroughs in science and technology are no longer unique and exclusive to developed economies. In information science, life sciences, environmental science, bio-engineering, ocean engineering, aerospace engineering, resource engineering, communications technology, and manufacturing technology for major equipment, the large developing countries have distinguished themselves. In terms of R&D expenditures, China ranked second in the world in 2012, and India, Russia, and Brazil are among the top 10. Many emerging

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(5)

(6)

1 Research Objects and Basic Ideas

powers have targeted high-tech industries such as new energy technologies, new materials technologies, environmental technologies and aerospace technologies into strategic emerging industries for investment boosts, and have made good progress. The situation in which Western countries have dominated the world of industrialization and modernization over the centuries is changing and the industrial influence of developing countries is rapidly increasing. Together with major developed economies, they are pushing global changes in productivity, methods, and means of production. The economic strength of large developing countries has given them an important regional influence on the world. With the changes in the speed and quality of the economic growth of large developing countries, their status in the development of various regions of the international economy has rapidly risen and has been playing an extremely important role. Some countries have even become the engines or leaders of economic development. According to the regional division of the World Bank, China and Indonesia occupy an important position in East Asia and the Pacific Region, Brazil and Mexico in Latin America and the Caribbean region, Egypt and Iran in the Middle East and North Africa, India and Pakistan in South Asia, Ethiopia, Nigeria, South Africa, and Congo (DRC) in sub-Saharan Africa and Russia in central south area of Europe. It can be seen that the large developing countries have acquired extremely important regional influence and now play a leading role in international regional development. The large developing countries actively promote the transformation of the international economic order giving them important governance influence in the world. The development of large developing countries and the changes in their economic capabilities will inevitably lead to their demand to play a role in the central stage of international economic affairs so as to be the representatives of the interests of developing countries. With their vigorous promotion of large developing countries, the international economic order has changed from one pole to many poles. In particular, the large developing countries have undergone new adjustments in mutual relationships. The categories of traditional large countries and Western powers have been renewed. The relationships between “new emerging large countries” (China, India, Russia, Brazil, South Africa, etc.,) and traditional large countries, the relationships between large developing countries and Western huge powers have gradually been recognized as an important part of relationships among modern large countries. In the world economy, emerging large countries not only fulfill the responsibility of “ballasting stones,” they also promote the stability of the world economy through the stability of their own economies. Additionally, they are also committed to the establishment of a fair and just international economic order. By consultations with the developed countries and improving global economic governance, the mechanism has become an active builder of international economic relations.

3 Review of Research Literature and Logical Thinking

17

3 Review of Research Literature and Logical Thinking 1 2

Review of Literature at Home and Abroad Research on the economic development of developing countries

Foreign research on the economic development of developing countries began in the middle of the twentieth century and the theme of research was how developing countries evolved to developed countries through industrialization and structural transformation. Chongtai (1999) divided the development of the theory of economic development into three stages. The first stage embodies the structuralist approach, represented by Arthur Lewis, Nax, Jorgenson, et al. These writers emphasized the “dual economic structure” existing in developing countries and the role of capital accumulation in the economic development of developing countries and advocated the role of planning management or planning guidance. The second stage is the neoclassical approach, represented by Theodore W. Schultz, Anne O. Krueger, et al. This approach emphasized the role of the market mechanism in economic development and the applicability of a market economy in developing countries and believed that excessive government intervention would lead to distortions of market price and inefficient allocation of resources. The last stage is represented by Walter Nicholson, Malcolm Gillis, et al. The idea of neoclassical political economics emphasized the role of institutional factors in economic development as well as their impact on technological innovation and economic structure. They advocated a new development concept that aimed at social equity and sustainable development. After the 1980s, foreign researchers mainly discussed how to use the market economy to promote economic development in backward countries. “Frontier Issues in Development Economics,” edited by Subramanyam and Lal (2000), argued that the development economics after the 1980s mainly discussed the special issues of developing countries in marketization, including how to promote market-oriented reforms, how to make use of comparative strengths, how to develop an open economy, and how to eliminate poverty and resolve debt problems in developing countries. Ying (2013), editor-inchief of Frontier Theory of Development Economics, thinks that since the 1980s, development economics has entered its boom period. He mainly explored market efficiency of developing countries, economic development under imperfect market conditions and the influence of family, system and social capital on economic development. He also explored the new growth theory, financial development theory, new trade theory, new economic geography, population mobility theory, and sustainable development theory. In research on the economic development of developing countries, foreign researchers have proposed several specific industrialization models: ➀ The “great promotion” model. Rosenstein and Rodin proposed that due to the “optimal scale” of industrialization and the “complementarity” of various industries, it is required to realize “fast advancement” strategies in industrialization by means of wide range and large-scale investment. The developing countries such as the former Soviet Union and China adopted this model in the early stages of economic development and quickly established a relatively complete industrial system. ➁ “Growth pole”model. Peru

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believed that growth should first appear at the growth point or “growth pole” and then spread through different channels to affect the entire economy. Developing countries such as China and India adopted this model in preparation for the economic take-off period and regional growth has led to economy development of the entire country. ➂ “Import substitution” model., Based on the “central-periphery theory” of the world economic system, Xibao (1998) advocated that developing countries should take advantage of domestic resources to develop industrialization that meets the demands of domestic consumers and support domestic industries by development of trade protectionism policies. This strategy became the leading strategy for the industrialization of the third world countries in the 1960s. Mexico, Brazil and other large developing countries accepted this model. The empirical models of economic development in the above-mentioned developing countries have played an active role in the early stages of economic development in some countries. But with the economic development of these countries entering a higher stage, especially with the emergence of economic globalization, the economic development strategy of developing countries has been transformed. In terms of economic development stage, Rostow (1961) proposed the classical theory of economic growth. In his theory, he divided social development into five historical stages. The first is the traditional social stage, owing to the inefficient use of resources and the lack of modern science and technology as well as the lack of economic growth in the social economy. The next is the stage to prepare the preconditions to take off and establish an efficient centralized state so as to form a prerequisite to meet the modern economic activities, such as expanding the scope for domestic and foreign goods, infrastructure investment and the emergence of new entrepreneurs. The third is the take-off stage. Growth has become normal. The ratio of investment and saving rate to national income has risen from about 5% to more than 10%. Emerging industries are also spreading within agriculture. The fourth stage is the maturity stage. When the economy has surpassed the initial industries that helped it to take off, and to absorb and effectively adopt the latest achievements of modern technology in a very wide range of fields. Changes have occurred in the economic structure and social structure. The fifth stage is the high consumption stage of the public. The leading sectors have switched to durable consumer goods and the service industry; income per capita increases, change occurs in the labor force structure, and more resources are devoted to social welfare and social security.14 In terms of development mechanisms, early development economists emphasized the role of the government and the plan, saying that “planned government commitments are greater than in developed countries.” With the emergence of neoclassical thinking, it is generally believed that the market economy is also applicable to developing countries. Excessive government intervention will lead to low efficiency in resource allocation. In the late twentieth century while assessing and understanding the financial crisis, economists gradually accepted that while perfecting the market system, the government should also play its reasonable role in the “market failure” areas.

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The study of economic development in developing countries has become a popular topic for domestic researchers since the 1980s. Peigang’s (2002) doctoral dissertation “Agricultural State and Industrialization” explored the road to industrialization in agricultural countries for the first time. Chongtai (1989) edited Development Economics, which is the earliest introduction of western researchers’ study of the theory of economic development in developing countries. After the reform and opening up in China, in response to the urgent desire and requirements for accelerating development, domestic researchers started to study systematically the issues about economic development in developing countries, involving the theory and empirical model of economic development, the definition and basic characteristics of developing countries, domestic factors, and international conditions of economic development, industrialization, urbanization, and sustainable development, market mechanisms and government role and other issues. In the research of domestic researchers, some representative theoretical results and ideological views have been developed: ➀ Peigang (1989) proposed the idea of establishing a “new development economics” and advocated the research into developing country employing capitalist system as well as employing socialist system. Research of both the economic development of small and medium-sized developing countries and the economic development of large developing countries should be carried out, especially the research on the road to economic development based on the characteristics of the dual structure and regional differences. ➁ Yifu (1994) proposed the theory of “comparative advantages” and advocated that developing countries develop the economy to apply the comparative strength strategy and actively develop their labor intensive industries to promote industrial upgrading along with the accumulation of capital and the changes in the endowment of resources. On this basis, Yifu (2010) put forward the framework of “New Structural Economics,” believing that economic structure is endogenously determined by the factor endowment structure. Lin advocated the application of neo-classical economic methods to the study of economic structure and its evolution, as well as to the role of government and the market. In addition, a catch-up strategy based on “advantages of latecomers” could be implemented to draw on technologies and experience of the developed countries to catch up with developed countries. Hanchang and Xibao (2002) believed that the rapid growth of China’s economy is mainly due to “advantages of backwardness” and proposed the framework of late advantages including capital, technology, manpower, institutions, and structures; Rudai and Yang (2008) advocated the implementation of a “limited catch-up” strategy by arguing that the export surpassing other countries of developing countries should be a limited and gradual process. ➂ Chongtai (2008) proposed a method known as “cross-period comparison” which compares the initial stage of development of developed countries with the economic development of developing countries today to provide experience for the economic development of developing countries by reflecting on the course of early economic development of developed countries. On the basis of the principal line of industrialization and marketization process, the comparison and analysis of and between the characteristics, modes, and policies of economic development in the UK, France, Germany, the United States, Japan and the developing countries today has been conducted. ➃ Some researchers are

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committed to conducting comparative research over the same period on two typical developing countries, China and India. Dianqing et al. (2009) focused on analyzing the development strategies and performance of China and India. Guanghua, et al. (2005) emphasized on analyzing the experience and prospects of development in China and India. ➄ On the ground of stylized facts of rapid economic growth in China, some researchers specifically studied the Chinese road and the Chinese mode. Yifu (1994) studied China’s gradual reforms and Ming et al. (2008) studied China’s economic road to becoming a great power. Yu (2008) systematically analyzed the mode of economic reform, the relationship between central and local government, industrialization and urbanization and opening to the outside world and regional economic development in China. Yang (2011) analyzed the significance of China’s road to the world, and considered that the neutral government and meritocracy are important features of the Chinese road and have universal significance for developing countries. (2)

Research on the economic impact of country size

The research conducted by Western researchers on a country’s size and the economic issues of large countries can be traced back to Adam Smith, the originator of economics. In the 1st chapter of his book, The Wealth of Nations, published in 1776, he analyzed the causes of the division of labor and determined that the degree of division of labor was controlled by the narrow market restrictions. Hence the issue of market size was presented, i.e., the Extent of the Market Hypothesis. Since then, the research done by Western scholars has mainly centered around two lines: ➀ in the former approach analyze role of scale of market, production and country to promote division of labor and specialization by following Smith’s idea that the degree of labor division is limited by the size of the market. Marshall (1964) believed that large-scale production is applicable to highly specialized technologies and that “the scope of work should be reduced to the degree that proficiency and excellence could be acquired as a result of continuous practice.” Kuznets (1989) believed that large countries enjoy advantages of specialization and their domestic markets allow the development of a specialized economy. Xiaokai (2003) specifically analyzed the endogenous relationship between market size, transaction efficiency and evolution of labor division. ➁ in the latter approach by following the idea of saving costs and increasing returns by scale economy, the mechanism of production scale and market size which affect economic efficiency and production efficiency is analyzed. Marshall (1890) analyzed the benefits and efficiency of large-scale production and considered it to be the mainly technical economy, mechanical economy and raw material economy. Chandler (1990) conducted a special study on the scale and scope and believed that the cost advantages that manufacturers and distributors obtained by expansion of scale and scope lies in scale benefits. Porter (1990) studied the scale benefits from the perspective of industrial agglomeration and clustering and believed that clusters can reduce transaction costs, increase efficiency, create social capital and accelerate productivity growth. Romer (1986), human capital accumulation, increasing returns market size improving productivity.

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The special study of the impact of the country’s scale on economy began in the late 1950s. In September 1957, the International Economic Association held a conference on the theme of “Impact of Country Scale on Economy” in The Hague. Among other things, it discussed issues including how small, developed and open countries could overcome the “punishment brought about by smallness” due to globalization, whereas large countries could rely on its scale of economy to develop internal growth. Among the assumptions made by Kuznets (1989) was that the economy of a large country is more stable than that of a small country because a large country is less dependent on international trade than a small country and that the research and development of a large country may achieve greater success because it can provide opportunities for market expansion and allow specialization (Robinson 1960). Subsequently, research about the impact of the country’s scale on the economy has yielded important results. Kuznets (1971) specially analyzed the relationship between the country’s size and foreign trade, production structure, and economic size. Chenery and Syrquin (1975) analyzed the economic development patterns of large countries and small countries as well as the government’s policy preferences in particular. Syrquin (1989) dealt with the size and impact of large countries, including the impact of population and country size on the economy. Barro (1995) studied the economy of small countries and proposed the “exogenous” path of the economy for small countries. Such research implies the “endogenous” path of the big country’s economy and provides a direction for building the economic model of large countries with the endogenous growth model. After literature searches at the Oxford University and Stanford University libraries, only five classic articles on the relationship between country scale and economic growth from outside China have been found: the Economic Consequences of Country Size, edited by Robinson (1960) and published by St Martin’s Press (1960), which mainly elaborated advantages of stability, scale economy and technological innovation of major powers; Patterns of Development (1950–1970) written by Chenery et al. and published by Oxford University Press (Chenery 1975), which mainly elaborated on the development patterns of different countries, including the scale effect of development pattern large countries; Large countries: The influence of Size written by Perkins and Syrquin, which mainly elaborated on the influence of the population and the size of large countries on economic development, especially the impact on the type of trade development; Trade, Growth and Size of Countries written by Alesina and Wacziarg and published by Elsevier (2005), mainly deals with the impact of the country’s size on economic structure and foreign trade, in particular, the proportion of foreign trade in the economic structure; County size, Growth and the Economic and Currency Union (2012) written by Alouini (2012), which mainly analyzes the impact of country size on currency unions, especially the role of large economies. A search through the Chinese Academic Journals Full-Text Database for the period 1985–2016 shows that domestic researchers published 485 articles containing “Great Power Economy” in their titles and 193 have “country scale” in their names and their subjects can be summarized in four aspects:

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Analysis of the natural features and economic characteristics of large countries and the corresponding advantages for development following the ideas of the characteristics of large countries and their advantages. Lijie (2007) refers to a country with a land area of more than 1 million square kilometers and a population of more than 100 million as a large country but Jie (2007) proposed the definition of a large country based on the principle of pricing. Youhao (1999) analyzed the characteristics of the large area, the abundant resources, large population, big domestic market, large scale of economy and complete industrial system, etc. Yao and Huihua (2010) defined large countries according to the land area, population and economic volume of large countries and selected 24 countries in this category, followed by dividing them into three levels and two types. Yao et al. (2012a, b, c, d) summarized the typical characteristics from the stylized facts of the large-scale economy, including the characteristics of scale, endogenous and pluralism. Scale comes first and other characteristics are just derived from scale. Lijie (2007) made an analysis of the advantages in resources, labor division, labor, market, technological development and scale economies of large countries. Yao (2009) and Yao and Huihua (2010) suggested the comprehensive advantage of large countries and argued that it originated from the advantages in scale and labor division, diversity and complementarity, heterogeneity and adaptability, independence and stability resulting from a large scale. The characteristics and roles of resource endowments, capital accumulation, industrial structure and market size of large countries are analyzed following the thinking of country scale and economic growth. You (2000) preliminarily analyzed the mechanism of economic growth promoted by country scale via accumulation of capital and scale. Jiuli et al. (2006, 2008) empirically analyzed the impact of regional market size and export liberalization on the growth of income per capita and industry in various provinces and regions in China. Xuefeng and Qi (2007) analyzed the mechanism of realizing scale effect by market opening and agglomeration. Jun (2008) considered that the country size itself is an important variable and has the positive external effect of scale economy and could promote labor division, transactions, and specialization. Some researchers analyzed the mechanism of economic growth of large countries from different aspects. Fang (2010) analyzed the formation and mechanism of the heterogeneity of resource endowments, industrial structure, and development level of large countries. Xianzhong and Yao (2009) studied the large country effect through China’s trade growth and the transfer payment effect of foreign trade growth of large developing countries. Pingxuan (2007) demonstrated the scale advantage of the country in economic growth by means of an endogenous economic growth model and constructed a theoretical analysis framework for the country model. Hongzhong (2007) studied the relationship between the effective demand scale hypothesis, R&D investment and the country’s capacity in independent innovation. Xibao and Yuanyuan (2010) discussed the impact of country size on economic growth in terms of scale economy, market size, country governance and development strategies.

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Along the thoughts of country size and development strategy, the path of large countries’ economic growth and the strategic choice of foreign trade, foreign investment, and industrial development have been analyzed. Dewei (1999) carried out an analysis of closed models of large countries in the case of China and proposed the path of economic growth of large countries. Rudai and Yang (2008) analyzed the limited catch-up strategy of economic development for large countries. Feng (2008) analyzed China’s ideas in developing foreign trade. Min (2009) carried out research on the strategic choices of later-developed large-scale industries from the perspective of scale effect and boundary effect. Bin (2006) analyzed the influence of country size and openness on welfare in different foreign exchange rate systems and put forward to the idea of the exchange rate system of large countries. Ping and Zhijun (2007) presented the policy choices in the transformation of the growth mode by analyzing the path for technological progress in large countries. Xiaoqiu (2010) believes that the sustainable development of major economies requires a corresponding financial model, i.e. a financial system with a powerful facility to allocate resources and spread risks effectively. Zhijun and Zengjing (2009) established a general equilibrium model including real exchange rates, economic growth rates and real interest rates for large countries according to the characteristics of the major economies. Since the large-scale market is a feature of large countries, the relationship between domestic demand and foreign demand has become the focus of research. Xueqing (2000) explored the economic cycle according to the characteristics of large countries and proposed the strategy of focusing on domestic demand and relying mainly on the expansion of domestic demand. Hao (2001) and Xiaojuan (2012) believed that the main support for the economic growth of large countries lies in the demand from the domestic market and the largest contribution comes from consumers’ demand. A conclusion of Zhang and Jiang is that China should choose a dual-engine growth model driven by domestic and external demand. The governance model of a large country’s government management system and economic decentralization is analyzed along with the thoughts of from country scale to the management system. You (2000) studied government management under the constraint of the country scale and put forward the idea about reform of the management system of large countries. Because of the difficulties such as an insufficient collection of information owing to the high cost and maximization of local government goal resulting in possible deviation from social optimality, some researchers proposed the governance model of economic decentralization. Yean (2003) believed that competition between local governments with an M-tier hierarchy can help local governments conduct property rights reforms and institutional innovations for growth. Yongqin et al. (2007) studied the road of development of large countries in the case of China from the perspective of decentralization reforms and believed that the economic decentralization under political centralized power has provided local governments with the driving force for economic development. Ming et al. (2008) believed that economic decentralization and political centralization are

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political structures suitable for the governance of large countries. China should adjust its structure by implementation a system suitable for higher development stages. Jun (2008) applied unbalanced polar data and Probit models to verify the hypothesis that China’s decentralized governance model could lead to the expansion of fiscal policy due to a lack of effective institutional constraints. In summary, researchers at home and abroad have conducted preliminary studies on the economic development of large and medium-sized developing countries. Some ideas and opinions have been put forward in terms of the economic development model, economic development stage and government role as well as the function of the market. Especially in recent years, some domestic researchers studied the “comparative advantage” strategy, “advanced advantage” strategy and “limited catch-up” strategy specifically and the research in this field has reached the international frontier level. Meanwhile, foreign researchers have conducted preliminary explorations in the economic impact of the country’s scale and a consensus has been reached regarding the degree of foreign trade dependence on country size. Domestic researchers have reasonably defined the concept of large countries and analyzed the basic characteristics of economies of large countries. In some aspects, their researches are close to the international advanced level. However, on the whole, both at home and abroad, the mature theories about the economic development of developing countries and large countries are still insufficient Foreign researchers failed to pay enough attention to the two areas and have not been included them into mainstream economic research. Especially after the 1980s, the focus of research in economic development in developing countries has shifted to the micro field and policy research and hence no mature theories have been developed. Theories such as the study of Kubinets’s economic structure of large countries, the research on the development of large countries by Chenariet and the research on the influence of Perkins on the scale of large countries have not been systematically studied. There is still a gap between domestic and foreign researchers as far as research methodology is concerned. Generally, more people presented opinions or carried out explorations about key issues but made limited efforts in systematic empirical research and basic theoretical discussions. Zhang Peigang’s research on the empirical characteristics of the economic development of large countries, Li You’s study of large country economic development and government management characteristics, Lu Ming’s research on big country economic development like China, and Ouyang Yao’s research on the comprehensive advantages of large countries are all lacking systematic empirical evidence. The data used for empirical analysis in some areas is often fragmented and incomplete, that is, the data is not a general conclusion drawn from the systematic data analysis. As such the reliability of data conclusion is difficult to be convincing. In addition, there are some papers and books, which were merely studying the development issues of certain specific large countries and have not revealed the features and laws of the great powers that have a universal significance in terms of content, and thus differ from the economic research of large countries in the strict sense.

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As such, academic research in the economic development of developing countries and the economic development of large countries is yet to be deepened. It is especially important to integrate the research in two aspects organically, and explore systematically the economic development of large developing countries. First of all, with the rise of emerging powers, the status of large developing countries in the world economic pattern has become increasingly important. Since the beginning of the twenty-first century, the BRICS countries have become the engine of the global economy and made significant contributions to world economic growth. In 2012, the GDP of BRICS countries accounted for 20% of the world’s total. If coupled with large developing countries such as Mexico, Indonesia, Egypt, and Pakistan, it could be about 25%. According to the World Bank data, in 2012, the contribution of emerging markets contributed75% to global economic growth and China alone contributed one third. With the development of economy, the economic total amount and growth contribution of large developing countries will continue to increase. Secondly, the large developing countries have been faced with the arduous tasks of economic transformation and need to urgently formulate a set of appropriate strategies and policies. Rapid economic growth has been achieved in emerging economies, although there is still a large gap between them and the developed countries as far as the quality of growth is concerned, together with some problems and difficulties. For example, the domestic demand does not play a good role and incentive for technological innovation is still insufficient. In addition, the structural upgrade is not smooth and the transformation of the development mode is slow. To realize sustainable economic development and avoid falling into the “middle-income trap”, it is imperative to adopt strategic transformation to promote economic restructuring. Thirdly, China is a typical large developing country characterized by large economic aggregates and low income per capita. How to give full play to the advantages of developing countries and large countries and promote high-speed, sustainable and high-quality economic growth requires a scientific and rational strategy for economic development suitable for large countries. To this end, it is necessary to formulate strategies and policies fit for the economic development of large countries based on laws for the economic development of large countries keen on scientific research. Obviously, the defects in theoretical research and the practice of economic development require us to deeply study the path of economic development for large developing countries so as to provide useful theory and strategies for them during their economic development and transformation. In the previous literature, there were many issues involving developing countries, but few researchers specifically studied the economic development of large and medium-sized countries, especially the path of economic development for large developing countries in a general sense. This book mainly deals with the development path of large countries based on comparative advantage, late-comer advantage and huge advantage of large developing countries’ economies. As per the previous studies, this research has combined the economic development of the developing countries with an exploration of the economic impact of the country size and drawn on the historical experience of the developed countries’ economic development to analyze the stylized facts and special mechanisms of the economic development in the developing countries. Consequently, the development

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of typical models of large countries’ development is outlined and the ways to achieve economic transformation are explored, together with the framework put forward for the corresponding strategies and policies. Overall Framework and Ideas for Research The major subject of this study is the path of economic development for large developing countries. This subject has two characteristics: firstly, it is a road for economic development in a general sense instead of a specific model for industrialization or urbanization; secondly, it is a path for the economic development of large countries rather than the road for the economic development of the general developing countries. By integrating the implications of developing countries and large countries, the concept of large developing countries is rationally defined to identify the current large developing countries in the world and describe their typical characteristics. From the object of research, the following questions must be answered: ➀ The road toward development is complicated, so what analytical framework shall we select for the study of the path for economic development for large developing countries? ➁ As the economies of large developing countries and that of developed countries share some common features and advantages, how should we obtain useful experience from the economic development of developed countries? ➂ Large developing countries enjoy comparative advantages, late-coming advantages and large-scale advantages. How shall we build a typical model for the economic development of large developing countries based on the coupling of these three advantages? ➃ the economic development of large developing countries is faced with endogenous impotence and low growth quality. How can we promote economic transformation and upgrading by the transformation of development strategies? ➄ China and India are typical large developing countries. How shall we sum up the experiences of China and India to provide empirical models for the development of large developing countries? The analytical framework of the book has been developed on the basis of these topics. The first step is to identify the research object and define the concept of “large developing country” reasonably by applying scientific evaluation index system to identify, and search for typical facts and generalize the typical features of the economic development of large developing countries by scientific abstraction. The second step is to propose an analytical framework for analyzing the path of economic development for large developing countries by a comprehensive analysis of the influencing factors. The third step is to study the main content of the subject. By analyzing and learning from the successful experiences of the developed countries’ economic development and summarizing and generalizing the typical models for the economic development of large developing countries, the exploration of the transformation path and innovation strategy shall be studied and the characteristics of the economic development path for large developing countries shall be described. The final step is to analyze the empirical facts about the economic development of two typical large developing countries of China and India, summarize and generalize the road of economic development of China. Then it is to study the typical characteristics of China’s experience or China’s road and its significance to the world.

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In the late 1980s, Peigang (1989) advanced the proposition that “large developing countries should be an important research object of development economics” and analyzed the empirical characteristics of the economic development of large developing countries. Since the beginning of the twenty-first century, the economics team of Hunan Normal University (2011) proposed the idea of constructing the development economics of large countries and gradually analyzed the paradigm for the research of concepts, characteristics, industrialization and urbanization and economic development theory for large countries. In order to construct the logic system of the development economics of large countries, the basic issues of the major economies shall be thoroughly studied, namely, the issues about scale and structure, so as to define the logical starting point of theoretical deduction. (1)

Scale category: The key to understanding the economic advantages of large countries.

The size of a country means the scale of the country. The so-called large country is a country of large scale. A big economy is the economy of a very large country. The so-called “scale” mainly refers to the scope and scene. What Adam Smith called “market scope” is actually the market scale. The scale of the economy is an indicator that shows the total economic output of a country or region and may be expressed in terms of time, space, industry and product. It may also be expressed in the size of the market, size of the industry and size of the enterprise. Scale has an important impact on economic growth and may lead to “scale economy”, which is mainly demonstrated in the increase of returns from scale. That is to say, after the expansion of the scale of production and sale, the income increase is larger than the scale of expansion. Scale economy consists of an “internal scale economy” and an “external scale economy”. The former refers to the economic phenomenon that the average cost decreases but the yield increases when the production scale expands. The latter refers to the decrease in the average cost and the increase in the economic earnings when the industry scale expands. In fact, if the country is taken as a unit, the “external scale economy” phenomenon may also exist and the marginal revenue may also increase throughout the entire country. The study of economic scale in the history of economic thought began with the “The Wealth of Nations”. Adam Smith believed that “growth of labor productivity seems to be the result of labor division” and “the labor division originated from the ability to exchange Therefore, the degree of labor division is always limited by the size of the exchange capacity In other words, it is restricted by the size of the market. “Cities with broad markets can provide conditions for labor division and industrial agglomeration. The “market-based hypothesis” hereby proposed by him is actually a matter of market size and its economic impact. Afterward, Alfred Marshall analyzed the scale of production and its influence in his “Principles of Economics,” and considered that “the main benefit of large-scale production comes from the economy of technology, the economy of machinery and the economy of raw materials”. Actually, it means that the expansion of the production scale could lead to the saving of resources.

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In his Scale and Scope, the Motives of Industrial Capitalism, Alfred Chandler analyzed the scale economy from two aspects. He believed that the scale economy of production mainly manifests itself as “lower unit cost”. The scale economy of distribution mainly manifests itself as the “cost advantage of middlemen.” Michael Porter analyzed the advantages of scale from the point of view of industrial agglomeration in his Competitive Advantage of a Country. He believed that the agglomeration both reduces transaction costs and improves efficiency, “not only incentive of methods is improved but also collective wealth such as information, specialized systems and reputation are created” and the conditions for innovation and accelerating the growth of productivity have been improved. It can be seen that since Adam Smith put forward the “market range hypothesis”, economists have been interpreting and proving this hypothesis along the road he opened up and the theory of scale economy has thereby been gradually improved and developed. Scale is the key to understanding the economic advantages of large countries. The so-called “power economy” is actually an economy with the advantages of the country’s scale. The advantage of scale is the core advantage of a large country’s economy. First of all, judging from the initial conditions of the economy, the large population and vast territory actually mean huge population and territorial size, from which we can deduce the huge demand for consumption, human resources, and natural resources which may lead to huge market size, industry scale, and enterprise scale. Secondly, from the perspective of the country’s economic scale, certain advantages in terms of production, trade, growth, and innovation may develop. Specifically, ultra-large-scale countries often have large-scale industries and intra-industry scale effects can, therefore, be available. Its large-scale trade could help gain monopoly benefits in international trade. Owing to the super-large-scale input of factors, the advantage of promoting rapid economic growth could be available. With the huge demand for technology, cost advantages in research and development are obtained. Obviously, only by understanding the significance and role of the country’s scale can we truly understand the advantages of the power economy. (2)

Category Structure: The key to understanding the economic transformation in large countries.

The so-called “structure” refers to the collocation of the various elements that make up the whole, or the way in which various elements are related to each other and interact with each other. The economic structure means the composition and structure of the national economy, including the industrial structure, regional structure, and elements structure and so on. Each economic system has a structure composed of different elements. However, compared with small systems, the organizational structure of a giant system is more complex and the structural features are more apparent. In the same way, countries of different sizes also have different structures. Ultralarge-scale countries are more complex than in small countries and more structural. Compared with small countries, the industrial structure, regional structure and factor structure of large countries are more complicated. Obviously, the issue of scale is closely linked with structural issues. Generally speaking, larger country’s economic structure is more complex. The smaller a country’s economic structure is, the simpler

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it is. The structure is also closely related to the degree of economic development. Generally, the economic structures of countries which are at lower levels of development are more complex, and the economic structures of more developed countries are simpler. Generally, countries at lower levels of development have a more complex economic structure, and more developed countries have a simpler one. In the development of economic theory, Arthur Lewis first studied the economic structure from the perspective of economic development. The “binary structure” model proposed in his Dual Economic Theory regarded developing countries’ economies as having a structure composed of a traditional production department and a modern production department. He analyzed economic development under the condition of an unlimited supply of labor, followed by studies of the economic growth during the transition from a dual economy to a one-way economy. This model has become a basic theoretical framework to analyze the economic structure and transition of developing countries. Simon Kuznets has systematically studied the production structure of modern economic growth in his Economic Growth of Nations and believed that the economic production of a country can be divided into different sectors which produce different products through different production processes as far as technology and organization is concerned. “If you do not understand and measure changes in the production structure, it is difficult to understand economic growth.” Hollis Chenery studied the structural transformation in the process of economic development in his Type of Development. He argued that the structural transformation involves a series of changes in the economic and institutional structure inevitably caused by the continuous growth of GNP, and specifically analyzed the pattern of structural changes in large and small countries. He stated that “the major effect of large-scale and low-level exports on the allocation of resources is to require these countries to change their economic structure at an earlier stage of development.” Lin Yifu’s New Structural Economics emphasizes the link between the industrial structure of the developing countries and the factor endowment structure and believes that “the industrial upgrading should be adapted to the changes in the factor endowment structure” and also advocated that the government should gradually minimize the gap between developing countries and developed countries. It can be seen that since Arthur Lewis proposed the “dual structure” model, development economists have studied the production structure, trade structure, industrial structure and factor endowment structure along this line and promoted the improvement and development of the economic structure theory. The power economy is just the economy of an ultra-large-scale country. Along with the increase of a country’s economic size, a complex economic structure will inevitably develop; especially for large developing countries featured by varied and diverse economic structures. From a dynamic point of view, the process of economic development in large developing countries is the process of structural change and transformation and upgrading. Structural transformation is not the growth of quantity but the improvement of quality. Judging from the urban and rural structure, narrowing the gap between urban and rural areas in large developing countries can promote economic and social progress; from the perspective of regional structure, narrowing

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regional economic development gaps can achieve regional economic integration; from the perspective of industrial structure, it can promote the transformation and upgrading of industrial structure so as to achieve advanced and rationalized industrial structure. Obviously, economic structural transformation is actually a process of economic development from a low level to a high level. Understanding the role and significance of the structure can truly help understand the economic transformation and development of large countries. People understand things by following the path from “concrete to abstract,” whereas the construction of a theoretical system follows the path from “abstract to concrete.” In the middle of these two paths, “category” has a special important position. It is both a node that sums up the achievements of understanding and a starting point of the theoretical system of deduction. The so-called “category” is the most general concept which reflects the basic nature and regularity of reality. As the highly generalized concept in the high-level forms of human thinking, categories are the knots of network in the history of human understanding and are built for people as a bridge to understand the truth and construct scientific theories. As mentioned earlier, the categories “scale” and “structure” are highly generalized concepts for understanding the economies of large countries and also the core concepts for understanding the theories of the development of great economies. Consequently, they become the logical starting point for the construction of theoretical systems for the development of major economies. Starting from the category of “scale”, the logical chain of the theoretical system of economic development of large countries can be interpreted. The economic scale is a highly generalized concept that demonstrates the economic characteristics of large countries. From this point of view, it can reveal the rich implications in the theory of economic development of large countries. Large economies have large scales that are characterized by large scales of markets and industries. It is the feature of large countries’ economies. The huge market size of large countries can support the fast development of their industries, deepen the labor division and specialization and increase labor productivity. Thus, they form the advantage for the economic development of large countries and this is the operating mechanism of a large country’s economy. The economic development strategy of large countries is to establish an independent and complete industrial system and cultivate large industries and large enterprises to enhance economic competitiveness by relying on the advantages of large countries. It can be seen that proceeding from the category of “scale”, by gradually developing to be featured by scale economy, economic operating mechanisms and economic development strategies of large countries, the first logical chain of economic theories of large countries is hence formed. Starting from the category of “structure”, the logical chain of the theoretical system of economic development of large countries can be interpreted. The economic structure is a highly generalized concept that reflects the economic development of large countries. From this point of view, the diversity and richness of the economic development theory of large countries can be exhibited. The diversified economic structure of large countries is manifested by the diversity of technological structure, industrial structure and the multiple urban–rural structures which are the structural feature of the

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large countries’ economy. Such diversified technical structure, industrial structure, and urban–rural structure can be compatible with multiple elemental endowments to promote the rapid economic growth of large countries, which is a mechanism for the economic development of large countries. The strategy for the development of large countries’ economies is, based on the characteristics and mechanisms of the large countries’ economies, to push the upgrading of technological structures, industrial structures, and urban–rural structural transitions, and gradually move towards the high-end and rationalized goal. Obviously, proceeding from the category of “structure”, by evolving into the pluralistic characteristics of major economies and coordinating development mechanisms and transformation and upgrading strategies, the second logical chain of theoretical systems for the development of large countries’ economies was formed. The aforementioned first route is the classical economics route starting from Adam Smith. Alfred Marshall put forward the classic principle of “increasing returns to scale”, which is mainly to study economic growth by deepening the labor division and economies of scale; the second route is the route of development economics starting from Arthur Lewis. Simon Kuznets analyzed the structural transformation as a whole, mainly to study economic development from the multiple economic and structural transformations. By combining the two routes, we can obtain a comprehensive analysis paradigm to systematically explore the issues involving the economy and development of large countries.

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Tan Chongtai, A Comparative Study of Early development of developed countries and economic development in developing countries today, Wuhan: Wuhan University Press, 2008. Tao Wenda, Development Economics, Chengdu: Sichuan People’s Publishing House, 1992. The Stages of Economic Growth:A Non-Communist Manifesto by W.W.Rostow published by Cambridge University Press 1961. Tong Jiadong, Trade Liberalization in Large Developing Countries and China, Tianjin: Tianjin Education Press, 2005. Tong Youhao, A Brief Discussion on Big Powers’ Economy and Chinese Economic Development Strategy, Reform of Economic System, 6, 1999. Wan Guanghua, Lu Ming, Chen Zhao, Globalization and Interregional Income Gap: Evidence from China, Social Sciences China Press, 3, 2005. Wang Yongqin, Zhang Yan, Zhang Yuan, etc, China’s Development Pattern as a Great Power — the Gains and Losses of Decentralized Reform, Economic Research Journal, 1, 2007. Wu Xiaoqiu, Sustainability of Big Power Economy and Their Financial Mode, Journal of Renmin University of China, 3, 2010. Xu Dianqing, Ke Ruisi, Li Xin, The Road to End Poverty: Comparison of Development Strategies between China and India, Beijing: China Machine Industry, 2009. Yang Rudai, Yao Yang, Limited catch-up and economic growth, Economic Research Journal, 8, 2008. Yang Xiaokai, Development Economics: Inframarginal and Marginal Analysis, Beijing: Social Sciences Academics Press (China), 2003. Yao Bin, Quantity Economics Technology, Economic Research Journal, 9, 2006. Yao Yang, The World Significance of China’s Road, Beijing: Peking University Press, 2011. Yi Xianzhong, Ouyang Yao, The Great Power Effect and Synthesis Fallacy of China’s Trade Growth, China Industrial Economies, 10, 2009. Zhang Hao, The Great Power Mode and China’s Economic Growth, Economic Theory and Business Management, 9, 2001. Zhang Jun,China’s economic transformation: what has 30 years of experience contributed? 21st Century Business Herald, September 10, 2008. Zhang Lijie, The Advantages of Big Powers and China’s Economic Growth Potential, Modern Economics, 6, 2007. Zhang Peigang, Agriculture and Industrialization, Wuhan: Huazhong University of Science & Technology Press, 2002. Zhang Peigang, The Direction of Development Economics —the Establishment of New Development Economics, Economic Research Journal, 6, 1989. Zhang Peigang, New Development Economics, Zhengzhou: Henan People’s Publishing House, 1992. Zhang Ping, Zhao Zhijun, China’s economic growth path, great power effect and model transformation, Finance & Trade Economics, 1, 2007. Zhang Yu, Chinese pattern: China’s economy in the past 30 years of reform and opening-up, Beijing: Economic Press China, 2008. Zhao Zhijun, Chen Zengjing, The Great Power Model and the Evaluation of the Exchange Rate of RMB to US Dollar, Economic Research Journal, 3, 2009. Zheng Jie, How to define a “big country”, Statistical Research , 10, 2007. Zhou Yean, Local government competition and economic growth, Journal of Renmin University of China, 1, 2003.

Chapter 2

Economic Development Experience of Large Developed Countries

Abstract The rise of European powers came forth from their utilization of their population size and the amount of avaliable resources to drive technological revolution and economic structural transformation. The United States relied on abundant natural and human resources to establish a unified domestic market and relatively complete industrial sectors, resulting in an industrialization path with typical characteristics of a great power. The industrial policies of major countries such as the United Kingdom, Germany and the United States during the industrialization, mainly used governmental power to create a sound environment for industrial development. They have created fair and orderly market competition through legislative means, promoted industrial revitalization and upgrades through scientific and technological changes, provided abundant high-quality workforce for economic growth, and improved financial mechanisms to open financing channels for industrial development.

The economic development path of large developing countries is still in the process of exploration. The overall goal of the large developing countries is to gradually enter the ranks of large developed countries. Both large developed and developing countries have commonalities of large countries and need to take advantage of these shared characteristics in the process of their development. Hence, in this process, there must be some overlapping areas where both the development experience of large developed countries and the forward direction of large developing countries exist. This chapter focuses on the development experience of large developed countries, starting with a theoretical analysis of the development experience of European countries, followed by a study of US industrialization and its characteristics. The chapter concludes with an exploration of the reasons behind the rise of large developed countries from an industrial policy perspective.

© Peking University Press 2022 Y. Ouyang, Large Countries’ Development Path: Experience and Theory, https://doi.org/10.1007/978-981-16-5695-8_2

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1 Development Path of Large European Countries A populous country can turn its large size population into its national competitive advantage. However, any country, no matter the population size, can strengthen its economy through international trade. European countries as a whole suddenly surpassed their Asian counterparts around the fifteenth century partially because they adopted an open trade policy. The industrial revolution did not occur in the richest countries at that time such as Portugal, Spain, and the Netherlands, but in the countries with relatively large populations, i.e., first in Britain, then in France and Germany. This is potentially due to the fact that these three countries not only integrated their colonies into the countries’ divisions of labor systems, but also because they established better market conditions, efficient law traditions, and human capital cultivation systems. As a consequence, these countries were better able to support large-scale civil and technological innovation as well as absorb excess capital and agricultural surplus labor, which further promoted the transformation of their economic structure from traditional agriculture to modern industry. 1

Several Explanations of European Economic Development

Compared with large countries such as China, India, and the United States, the scale of European countries is unremarkable. At present, the populations of Britain, Germany, and France are 60.77 million, 82.53 million, and 60.628 million respectively. The land areas of the three countries are 242,900, 357,000, and 551,600 km2 , respectively. Furthermore, none of these countries have a population of more than 100 million. However, if we take 50 million as the population standard of a large country (Yao et al. 2014), or compare them with other European countries, Britain, Germany and France can be classified as “large countries”. Looking at it from another angle, we find that there has always been a very close trade relationships between countries within Europe. People in different European countries tend to share very similar cultural backgrounds and they often migrate from one country to another, which results in strong population mobility. Therefore, to some extent, we may treat European countries as one whole country. During the time period of the Ancient Greece and early Ancient Roman Empires, Europe was slightly ahead of the East. However, beginning in the second century, China gradually caught up with the West and eventually surpassed Europe, maintaining this lead for the next thousand years. Overall, though, there was no large economic gap between Europe and the Eastern world during the Middle Ages. However, around the fifteenth century, Europe accelerated the speed of its economic development and left China and India far behind. For centuries after the seventeenth century, Europe was economically far ahead of the East. Why did some European economies exceed that of China and India? Another issue which is worth noting is that while most European countries continued to develop after the industrial revolution, large countries such as Britain, Germany, and France continued to play leading roles in economic development. More specifically, the economic developments of

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these three countries were more stable than other small and medium-sized countries. Many scholars have sought to explain this stability, and the current influential opinions are mainly as follows: First, geography and climate determinism. Understanding of the influence of geographical environment on human and economic development can be seen as far back as the time of Ancient Greece. In the sixteenth century, French Enlightenment philosopher Montesquieu claimed that geographical environment had a large influence on national physiology, national temperament, and the political system. American geographer Ellsworth Huntington believed that the differences in the natural environment and climate of each country determined the different development paths of these countries. These thoughts are right to a certain extent, but it is inappropriate to treat this idea as the most significant or the only decisive factor. On the map of the world economy, most of the developed countries are located in temperate and coastal areas, while most of the under-developed countries are located in tropical, subtropical, and remote areas. Populations in tropical areas deal with high heat and humidity that can expediate workforce exhaustion and is a perfect condition for wide-spread pests and diseases, which can further affect people’s health. Additionally, regions with harsh tropical climates commonly deal with abundant amounts of precipitation that have no regularity. While the rain provides moisture for crop growth, the high temperatures easily cause this moisture to evaporate. To further compound this, nutrients in the soil can also be washed out by heavy rain. In addition, floods and droughts occur frequently in tropical and subtropical areas, which has extremely unfavorable effects on the natural growth of plants and makes farming more difficult. Europe, on the other hand, has a temperate climate. The winters in Europe are relatively cold, which prevents the breeding of pests and the spread of diseases. Precipitation in European countries is generally abundant and the water holding capacity of the soil is strong. These natural conditions are beneficial to the cultivation of food crops and animal breeding. Because of the moderate temperature, European populations are more energetic and productive than those in tropical and subtropical regions. In addition, land productivity in Europe is significantly higher (Landes 1998). In total, Europe has better conditions for development compared to other regions. Diamond (1999) believed that the indented coastlines, numerous isles, and the calm harbors were very convenient for shipping by sea. Since Ancient Greece, ships have been used by countries along the Mediterranean coast as means to frequently travel between countries and cities. On the other hand, the inland countries in Europe were marked off by natural features such as mountain ranges, numerous plains, and many small rivers. These natural features acted as natural boundaries for countries within Europe. Competition between neighboring countries promoted developmental growth as countries learned from each other. Second, the property rights and institutional constraints hypothesis. The respect for private property may be the most obvious difference between the Western world and other countries. North and Thomas (2009) argued that an efficient arrangement of property rights can play a significant role in economic growth. They claim that property rights have two basic functions; the first in to generate an incentive mechanism for individuals and the second is to create more efficient resource allocation.

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Although North and Thomas did not explain how an efficient property right system came into being, it was obvious that both the nature of the state and the prevailing ideology have had large influences on the definition of property rights. Regarding the functions of property rights, Aristotle, an ancient Greek philosopher, also had his own understandings. He believed that compared with public property rights, private property rights can result in higher productivity. Aristotle’s idea was confirmed in the form of law in the ancient Roman code. During the late Middle Ages, the formation of a private property-centered ownership arrangement led to the appearance of capitalism. This property right arrangement had been discussed and theorized by the British philosopher John Locke and a large number of classical economists, and was then widely accepted by most common people. The industrial revolution first occurred in Britain, largely because Britain had a comprehensive system of property rights protection that encouraged individuals to invent and create. The implementation of this system stimulated folk innovation and brought Britain to the road of prosperity. In contrast, Spain and France were at a disadvantageous position because their autocratic state system made private property rights unprotected. It was not until later, when the autocratic regime in France was replaced by a democratic regime, that the economy in France gradually started to catch up with the British economy. Third, the trade opening hypothesis. Economic development significantly depends on the size of a market. Smith (1972) opined that the market economy and free trade can benefit all countries participating in international trade. Ricard’s (2009) contribution to the theory of trade links the advantages of free trade to the productivity difference of the production factors and builds the theory of comparative advantage. The theory of comparative advantage states that even if a country does not have an absolute advantage in the production of any product, as long as it has a comparative advantage in the production of one or several products, this country can benefit from international trade. The trade opening hypothesis has been endorsed by many economists today. Since the second half of the fifteenth century, Europe began the era of Atlantic shipping and geographical discoveries. Although the history of shipping is bloody and predatory to a great extent, we must also see that marine trade had indeed expanded the market size of various countries, created conditions for professional divisions in European countries, and brought Europe on the road to industrialization. The above opinions, which take the geographical environment, institutional constraints, and free trade hypothesis as explanations for modern European economic development have some validity. However, it is not enough to explain the economic development simply based on the above three previously discussed factors. Why do many countries with similar geographical environments have very different levels of development? Before World War I, the protection of private property rights and trade openness in Britain was significantly better than that in Germany, yet how could Germany surpass Britain at that time? Therefore, we believe that the ultimate reason for determining a country’s level of development may be some other vital factors. In this book, we apply Junhua and Yao’s (2016) large country effect model, taking the studies of scholars at home and abroad into consideration. We then study and explain the experience of the economic development of European countries from the perspective of two dimensions which are country scale and factor structure.

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Theoretical Analysis of the Economic Development of Large Countries

Kremer (1993) suggested that population growth is a key driving force of economic prosperity, because a larger population has a greater probability to produce scientists and engineers. Therefore, when the population of a country is relatively large, the economy of this country will inevitably grow at a fast rate. The evidence that Kremer provided were five isolated economies in 10,000 BC: Afro-Eurasia, the Americas, Australia, Tasmania, and Flinders Island. Before the five economies came in contact with each other, the “Old World Civilization” of Eurasia developed most successfully. Prior to the industrial revolution, well-developed manufacturing and commercial civilizations appeared in Europe, Asia, and North Africa in a very early period. Prior to the arrival of the Spaniards, the Mayan, Inca, and Aztec agricultural civilizations in North and South America also developed to a high degree. Before its contact with other economies, Australia was still in the period of hunting and primitive settlements which is far away from its entrance into the old agricultural civilization. Technology in Tasmania developed in an extremely slow way and people there were still in a primitive era. After more than 10,000 years since then, they were only able to make the simplest stone tools, which period can be regarded as the early days of the Paleolithic Age. Humans on Flinders Island had almost no technology at that time and they were almost extinct 5,000 years ago. Kremer’s research proved that, under the condition of a completely closed economy, larger economies can achieve better economic development, and population size is positively correlated with technological progress and economic growth. Obviously, a prerequisite for the establishment of the Kremer model is that the economies are isolated from each other and there is no communication at all. Junhua and Yao (2016) constructed a model of large country effect under the general equilibrium framework in asymmetric space. In this model, the authors introduced multiple sets of asymmetric conditions, most notably an unequal population size and a land area of large and small countries. The research results of the model showed that population size has a positive correlation with the country’s economic development level, even if there is commercial intercourse among countries. However, if the limitations of the size of land area and the quantity of natural resources are taken into account, this positive correlation between population size and economic development level may no longer hold when the size of the population is extremely large and the size of the country’s per capita land is drastically reduced. Therefore, when the population size is moderately large but not particularly large, even if the countries are linked to each other due to the implementation of open trade policies, the larger countries can still gain an economic advantage from the large population size. The model of the large country effect significantly developed Kremer’s model. However, as mentioned by Junhua and Yao (2016), although the model supports the existence of the large country effect, whether or not the large countries can gain an advantage in economic development is still subject to many factors and conditions. There are still a few questions that need to be clarified and analyzed. First, why does the population size affect the per capita income of large countries? Second, under

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the limitation of land resources, why does the actual per capita income decrease when the population size exceeds a certain threshold? Third, what are the factors that curb the effects of the large countries? When referring to the positive correlation between the population size and the level of economic development, people may first think that a larger population size represents a larger market size. As early as the era of classical economics, Smith (1972) had realized that economic development would be limited by the broadness and narrowness of the market and market capacity. Harris (1954) advocated the use of the market potential index to describe the impact of the size of the local market on the potential for economic growth. The index is weighted by the reciprocal distance. Under the influence of weights, if the ratio of a country’s domestic demand to export demand is greater than that of other countries, then this country has a local market effect, which is beneficial to the country’s economic development. Given that the market demand mainly comes from consumer demand, countries with large populations usually have the larger market capacity and potential. Therefore, we believe that Smith’s market capacity theory and Harris’s market potential theory have suggested that the population size may have a positive impact on economic growth. The second source of the positive impact that population size has on the level of economic development is the division of labor. Smith (1972) proposed that the division of labor is limited by market capacity and it is the only source of economic growth. This is the understanding of the labor division economy from the perspective of demand. It shows that a larger market can accommodate more product categories and a higher degree of labor division. If we analyze from the supply side, the larger the population of a country, the finer the division of labor will be, because a larger number of people will be able to produce more types of products. Various products in a country can generate synergy and complementary effects. In a closed economy, if a country has a small population, the country may fall into poverty, because a small population size cannot support the horizontal and vertical development of the labor division and the country can only have a simple division of labor. In an open economy, a country with a small population can participate in the international division of labor and obtain the benefits from it. However, the level of precision of the domestic labor division in the country is still subject to the size of its own population. A small population can only support the production of only a few goods in the country. Additionally, due to insufficient manpower, its domestic division of labor cannot fully develop and cannot support the extension of the industrial chain. However, if the country’s population is large, its own population is sufficient to support the horizontal and vertical development of the country’s division of labor. The third source of the positive impact that population size has on the level of economic development is the effects of specialized economies and industrial chains. In the perspective of demand the market demand caused by the large population will inevitably support the country’s industries with a large economic scale to achieve massive sales. This, of course, supports the development of these industries in their home countries. But this is not a sufficient condition for the development of industries in a country. What is more important is on the supply side. A large population

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size means that the country has a sufficient labor force to work in the country’s industries. Countries with a small population may not be able to support these large industries on their own. Next, let us move on to the industry chain. According to Böhm-Bawerk (1959), the longer and more circuitous an industry’s production chain is, the higher the technological level of the industry. As a result, the productivity of this industry will be higher. However, the extension of the industrial chain needs to be based on a large population. Generally speaking, countries with a small population cannot support industries with long industrial chains. Due to the small population of a country, the number of people engaged in a certain industry is inevitably small. There is not enough labor force to support the entire industrial chain and it is almost impossible to gain an advantage in every link of the industrial chain. Some people theorized that smaller countries can cooperate with other countries to carry out the divisions of labor on the industrial chain, and thus only work on a part of the industrial chain. While this theoretically makes sense, it is not easily made into a reality, because the markets in various countries may not be compatible. There are differences in cultures, geographical features, policies, and facilities. Besides, market transaction costs between countries are usually higher than domestic ones. If an entire industry chain is localized in one country, the country can gain a very strong advantage in the production of the industry. Hence, compared to small countries, large countries usually have the advantage of developing a complete industrial chain. Furthermore, considering that most industries have input–output linkages, large countries can even support themselves and establish a very complete industrial ecosystem as well as accommodate the various related industries in their countries. This significantly enhances the competitive force of their economies. The fourth source of the positive impact of population size on the level of economic development is the knowledge spillover effect. Romer (1986) and Grossman and Helpman (1991) believed that knowledge has the characteristic of global spillover. Therefore, once new knowledge is gained in one country, it will inevitably promote a sustainable growth of the global economy. Martin and Ottaviano (1999) considered that knowledge spillover has the characteristic of locality and its impact on economic growth can only be limited to the local area that knowledge spillover can cover. Taking the distance attenuation effect of knowledge spillovers into consideration (Hägerstrand 1953), we think that Martin and Ottaviano’s view may be closer to the reality. Due to the large population size and large number of enterprises in large countries, peoples’ and enterprises’ knowledge stocks and knowledge differences may also be large. Therefore, they have more opportunities for communication. This high frequency of communication can significantly increase their overall knowledge. This process is known as the knowledge spillover. Some may say that people in one country can easily communicate with people from other countries. Considering the information capacity and transmission speed of the internet, cross-border knowledge exchanges may also have a knowledge spillover effect. In this book, we do not deny the existence of cross-border knowledge spillovers. However, we believe that some factors can have disadvantageous impacts on the cross-border knowledge spillover. These factors include the similarity of cultural environment, language customs and industrial backgrounds in a country, the influence of national borders, and the tacit

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characteristic of technological knowledge. We believe that face-to-face communication between local people may be more conducive to knowledge spillovers. The knowledge spillover between domestic economic entities that are close in geographic space and similar in knowledge background and industry background can be stronger than the cross-border knowledge spillover, leading to a greater impact on economic growth coming from domestic knowledge spillover. Hence, large countries have more advantages in achieving benefits from knowledge spillover. The fifth source of the positive impact of population size on the level of economic development is the savings in transportation costs. Junhua and Yao (2016) showed that when the domestic transportation cost coefficient of a large country is lower than the international transportation cost coefficient, said country gains savings in transportation costs. Large countries typically have large populations allowing them to produce more types of goods. Additionally, people in a large country can buy various products in their own country. People may disagree with the hypothesis that the domestic transportation cost coefficient is lower than the international transportation cost coefficient. However, if we consider the political significance of national borders, cultural and linguistic differences, the incompatibility of logistics infrastructure and payment systems, various customs and procedures, the hypothesis is quite reasonable. If the transportation cost of each country’s domestic market is lower than that of international trade, large countries are more likely to gain benefits from domestic trade and local markets. Now, we will discuss why there is an inverted “U” correlation between the advantage of large countries’ population size and the advantage of the real per capita income under the condition of a limited number of land resources. Based on the above analysis, we have already known that if we do not consider the limited amount of land resources, the population size has a positive impact on the level of economic development. However, if we consider the limited amount of land resources, as we continue to invest labor into given amount of land, the increase of output per additional unit decreases. This is called the Law of Diminishing Marginal Returns. When the marginal product caused by the new labor force is zero, it is impossible for the population increase to lead to an output increase because the total output is already maximized. If we calculate based on per capita value, as the size of the population expands, the amount of land per capita will decrease. As the total output can only increase at a decreasing rate, then the per capita output will decrease as the population increases. When the marginal output is equal to zero, the total output will stop increasing. From this perspective, we believe that the expansion of the population will cause per capita output to increase at a decreasing rate. When reaching a critical point, the per capita output can only continue to decrease. This phenomenon is called the “Malthusian Trap” (Malthus 1951). We combine the aforementioned effect caused by the expansion of the population in large countries with the decreasing effect of the “Malthusian trap” caused by the decrease in per capita land, then the inverted “U” correlation between the advantage of large countries’ population size and the advantage of the real per capita income appears. International trade benefits all participating countries. Smith (1972) demonstrated this idea from the perspective of endogenous division of labor. Ricardo (1817)

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employed the theory of comparative cost to prove that any country can obtain benefits from international trade through the division of labor by comparative advantage. Junhua’s and Yao’s (2016) large country effect model showed that international trade benefits all participating countries, but small countries benefit from it more. The reasons are as followed: ➀ the international division of labor makes all participating countries focus on industries with their local advantages. ➁ International trade expands the total size of the population participating in the market, improves the level of labor division globally, and increases the variety of products. Therefore, all countries can benefit from the expansion of the global total population. ➂ In a closed economy, small countries have a lower degree of labor division. Once becoming parts of the global market, they can benefit from the global division of labor. This is as if the small countries are merging their economies into an economy of a country with a larger population. In this way, small countries obtain benefits from the overall large-scale economy of international trade, which is certainly profitable for small countries. If multiple small countries unite by reducing trade costs (including tariffs and customs clearance) and implementing open trade policies, they will gain the advantage of a nation cluster. When these united small countries compete with a large isolated country, they are not necessarily at a disadvantage. This can be one of the reasons why Europe’s economy was able to rise. The level of market development and the market transaction costs in each country have a significant impact on their competitive advantages. When the market in a country develops well and its institutional market transaction costs and transportation costs decrease, the industry and commerce in this country can develop better. Then the level of its domestic industrial division will be higher. At this time, economic activities in other countries may began gathering or transferring to this country, which substantially increases the country’s competitiveness and its per capita income. Conversely, if the market transaction costs of other countries are reduced and the domestic market transaction costs are unchanged, the competitiveness of domestic economic activities can be weakened if the domestic market costs are still relatively higher than other countries. Many large countries are subject to this condition. In the past, some large countries (such as the Mughal dynasty in India), which regarded themselves as very powerful countries, were unwilling to make progress and refused to reform. As a result, the domestic market transaction costs of these large countries were much higher than those of Western countries, causing their markets to develop extremely poorly resulting in their collapse. If a country has internal division, the national market will also be segmented into many independent, self-sufficient smaller units. This results in either no trade or high trade costs between units, causing the country’s economic development to lag behind. This was the primary reason why Europe fell behind in medieval times. On the contrary, if a country/region is unified, its domestic market transaction costs will inevitably be reduced, thus creating an environment conducive for the country’s economic development. For example, at the end of the nineteenth century, the unification of Germany brought a new round of the industrial revolution. A country’s economic structure has a significant effect on its competitiveness. Since the amount of land and natural resources in a country is limited, if the

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economic structure of a country is dominated by land-intensive agriculture, the level of economic development in this country is restricted by access to land and natural resources. However, if this country gradually abandons the economic structure with agriculture as its leading industry, and instead, turns to labor-intensive handicrafts, capital-intensive modern industries, and knowledge-intensive modern service industries as its leading industries, the economy of this country can develop significantly, because these new industries break the country’s dependence on the economic activities on land. After this economic structural transformation, more economic activities can be accommodated on the same area of land. However, economic structural transformation does not happen automatically. There are three main elements that determine economic structural transformation in a country: the first is the change in the structure of factors; the second is the country’s creativity of new products and technologies; the third is the degree of a country’s participation in the international division of labor and whether a country adopts an open trade policy. Factor structure refers to the proportions of land resources, labor force, capital stock and other production factors in a country. Factor structure and economic industry structure determine the relative price of factors. If the factor structure changes, it will reflect on the factor price, which may cause a change of factor relative price. The change of factor relative price may induce producers to adjust their economic structure and input proportion. If the supply of the labor force increases more than the increase of land, land rents prices rise. The country can replace landintensive industries (agriculture) with labor-intensive industries (handicrafts) to save cost in land rents. From this, we can see that changes in the factor structure can bring the changes to the factor relative prices, which prompts the adjustments in economic structure. This economic structural transformation can be called adaptive transformation. Another type of economic structural transformation is active transformation. When a country’s innovation ability is strong, many innovative technologies and new products are invented in this country, and these new technologies will be put into the production process. If this new technology is a land-saving technology, the economic structure in this country may transform from land-intensive industries to labor-intensive industries. However, the above process can only happen if the products from these new capacity investments are able to be sold at reasonable prices. If the new capacity is an excess capacity, then the economic structure cannot be transformed smoothly. Additionally, people cannot sell excess products at current prices. Therefore, a new capacity must either be invested in a new type of industry, or help producing traditional products in a new and low-cost way. In this process of structural transformation, the factor structure plays a guiding role. If a country’s population increases, land rents prices may rise, and labor force can become relatively cheap. Under this condition, the country will try its best to develop labor-intensive industries, and technological innovation in this country will also aim at saving land resources. Conversely, if the country’s population and labor force are insufficient, the salaries will be high. At this time, technological innovation will aim to be labor-saving. With an abundant capital stock, labor shortages may even lead to an industrial revolution (such as Britain in the First Industrial Revolution). But the key to this revolution is a

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country’s capacity to create and discover new technologies, which is the prerequisite for economic structural transformation. Although this innovation-driven structural transformation also needs to adapt to the factor structure changes, the most important feature of this transformation is that it changes the form of the production function, through which it reduces costs and even creates a new type of industry. The products which come from the investment caused by the new technology can be cleared in the market. Investors can obtain excess profits because the production costs of these products are lower than that of traditional technologies, or the new technology creates a new market, so that investors can obtain excess profits. As long as the new production method, new product and new technology can be accepted by the market, this innovation-driven economic structural transformation will definitely occur. New investment will necessarily absorb excess savings and labor transferred from traditional industries, so the country’s economy will develop rapidly in this structural transformation. Whether the economic structural transformation takes place also depends on the extent of the country’s participation in the international division of labor and whether the country adopts an open trade policy. In a closed economy, it is very difficult for the economic structure transformation to occur. Why? Countries with a closed economy must produce all the products they need. Considering that agricultural products such as food are necessary for people to live and survive, these countries must have enough labor to engage in agricultural production in order to support its population. As a result, the country’s economic structure is bound to be dominated by agriculture. Only when the agricultural industry is supplying sufficient food and surplus labor can be transferred from agriculture to other industries, can the transition from agriculture to industry and commerce occur. However, for a closed country, the possibility of such structural transformation caused by agricultural labor surplus is not great unless the country’s population is large enough. Even if the country has a particularly large population, it still can only have low-level structural transformations in some areas. However, if the country adopts an open trade policy, the country can outsource some agricultural activities or purchase agricultural products from other countries, thereby transferring a large amount of labor into commerce and industry to support its nonagricultural development. Obviously, this kind of economic structural transformation occurs because the country abandons some agricultural activities in order to have surplus labor engage in industry and commerce. In the rest of this section, we will summarize the following theoretical hypotheses based on the above analysis and the large country effect model, which will form the theoretical basis for our analysis about the economic development of large European countries. Hypothesis 1 In a moderately large population scale, there is a positive correlation between the population size and the real per capita income advantage of a large country. However, if the population size of a country is particularly large, but its land area is limited, the “Malthusian trap” may occur. This may lead to the low per capita land occupation and the land of the country is unable to support such a large

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population scale. At this time, the real per capita income of large countries may fall below that of small countries, and large countries will lose their advantages. Hypothesis 2 International trade benefits all countries participating in it, but small countries benefit more. Therefore, international trade tends to narrow the income gap between two countries. A corollary of this hypothesis is that if a large country implements a closed economic policy, while smaller countries frequently conduct trades between themselves, then an isolated large country may lag behind the trade union of small countries. Hypothesis 3 Domestic transaction cost has an important impact on a country’s advantage. Lower transaction costs represent better market conditions in a country, thus creating cost reduction in the country. This may prompt other countries to transfer and gather economic activities to this country. As a result, the country is significantly more competitive than other countries. Hypothesis 4 Economic structural transformation has an important impact on the level of economic development. If a country’s factor structure changes, it will first be reflected in the relative price of the factors, and then will promote the structural transformation of the real economy, which will affect the income gap among countries. If a country’s population increases and its per capita land occupation is small, the country’s rent will be significantly higher than that of the other countries. At this time, if the country is still dominated by land-intensive industries, the country’s per capita income will drop significantly. In order to save product costs, the country will have a strong incentive to transform its economy structure from land-intensive industries into labor-intensive, capital-intensive and technology-intensive industries. 3

Empirical Explanations of Economic Development in Large European Countries

In viewing ancient times, the Eurasian continent can be divided into three parts from a cultural sense, which corresponded to three large civilizations: ancient Indian civilization, Chinese civilization and Mediterranean civilization. These three civilizations were independent of each other due to terrain and traffic barriers. However, Mediterranean civilization had its peculiarities. To the south of the Mediterranean was the North African civilization and to the east was the Mesopotamia civilization. The North African and Mesopotamia civilizations were much older than the ancient Greek civilization, and the ancient Greek civilization inherited knowledge from these two civilizations at that time. These civilizations were close to each other and had exchanges and contacts from the beginning of their history. Although separated by the Mediterranean and Red Seas, they were not entirely isolated. This fact shows that the Mediterranean civilization was a cluster of civilizations. In terms of population size, ancient Greek civilization did not have any advantages compared to ancient India and China. However, considering the close communication between the Mediterranean coast and the other civilizations nearby, the Mediterranean civilization had a total population no less than that of China and Ancient India.

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Ancient Greek civilization created an extraordinary culture but was subsequently replaced by the Roman Empire. Compared with Greece, the Roman Empire should be regarded as a large country and a great power. After the Roman Empire, Europe entered a long period called the Middle Ages. In the sixth century, several large European countries in the traditional sense were founded. The Frankish kingdom, which Charlemagne established, was split into West Francia, Middle Francia, and East Francia under Verdun’s Treaty. The three countries were the rudiments of France, Italy and Germany. In the first half of the ninth century, England was unified. At this point, the four large European countries formed. The form of economic organization in medieval Europe was the manorial economy. This feudal manor system was very different from the ancient Chinese economic system. Although there were two large classes of landowners and peasants in China, most of the peasants owned land at the beginning of each dynasty. Even with a large number of land annexations at the end of each dynasty, the Chinese peasants’ identity was still as freemen. Usually, it was not very difficult for these peasants to leave the land and engage in industry or commerce. However, in Europe, every manor was a self-sufficient economic entity and serfs working the estates were bound to the land. The manorial economy provided the necessary protection for serfs, but it also limited their freedom and creativity. The serfs only needed to do their work properly. Each manor produced various goods for their daily use, and they behaved like independent kingdoms (Principalities). There was no division of labor and no trade between them, which was not conducive to industry and commerce development. So, Europe lagged behind the Eastern civilization at that time. But why did Europe suddenly change in the late Middle Ages and embraced a romantic Renaissance and a vibrant industrial revolution? Some scholars believed that the industrial revolution in Europe was related to its democratic gene, which was also associated with the geographical features of Europe (Guanzhong 2005). The ancient European civilization originated from the ancient Greek civilization, which was the earliest civilization in the world that gave birth to the spirit of democracy. Ancient Greece was surrounded by civilizations on the Mediterranean coast and many mountains, which was a suitable environment for the development of a city-state civilization. The competing city-state forces induced Greece to embrace democratic republic ideals very early. As a result, Ancient Greece was known for its openness and diversity. This democratic tradition was passed on for more than two thousand years and rebirthed in the Renaissance. Landes (1998) believed that the European Middle Ages was a very creative era in human history. Many small countries in Europe competed, allowing their citizens to choose freely where they lived. Hence, the governmental power of every country was restricted. Also, the church and the secular power had a mutually restrictive relationship. Feudal lords and the royal families needed to balance their interests with each other and the rising citizen class. Considering all the situations above, Europe had to protect private properties and adopted a modern democratic system early. These views, as mentioned above, are valid to some extent, but it is obviously not comprehensive to attribute European economic development to the pure geographic and democratic factors. In the next part, we will take the perspective of national size and economic structure,

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apply the four theoretical hypotheses that we have proposed in the second part of this section, and combine other factors to comprehensively explain modern large European countries’ economic development. In the middle and late period of the European Middle Ages, the thirteenth and fourteenth centuries, the European population was close to 100 million. During this period, France had a population of 20 million and Britain had 7 million. Italy and Germany had not yet achieved unity in the sense of modern countries. Obviously, at that time, Britain and France were no longer small countries in Europe. More importantly, although there were many countries in Europe, there was a high frequency of factor and commodity trade among these countries. Considering that both North Africa and West Asia were in the vicinity of the Mediterranean coast and there was also a lot of trade between them, the scale of trade and division of labor in Europe was even larger. From the end of the fourteenth century to the beginning of the fifteenth century, the outbreak of Black Death in Europe reduced its population by about 30–50%. The Black Death hit the European economy hard at that time. From the perspective of factor structure, the Black Death significantly reduced the available labor force, changed the structure of factor endowments and the relative prices of factors, significantly reduced landowners’ income, and increased workers’ wages. More importantly, the Black Death shook the institution of serfdom in Europe. Because neither the clergy members nor the feudal lords could avoid the impact of the Black Death, and the amount of available land surprisingly increased, the freed serfs took over many of the deserted lands. The food problem in Europe was solved due to the population decline and land surplus, but business and industry were hit hard. People had to find new labor-saving technologies to make up for the labor shortage. As a result, Europe achieved a slow transition in its economic structure in a tragic way. From the second half of the fifteenth century, the European population began to recover slowly, and the surplus agricultural population was separated from agriculture and engaged in industry and commerce. The first European country to prosper was Italy because it linked West Asia and North Africa through Mediterranean routes. Due to this advantage in transportation, Italy’s workshops and commerce were highly prosperous. When the Atlantic route was opened, Portugal, Spain, and the Netherlands achieved high amounts of success on the sea because of their superior nautical and shipbuilding skills. It replaced Italy’s position in the Mediterranean trade. Then there were industrial and technological competitions among Britain, France and Germany. It was not until World War I that the world’s number one throne was usurped from the Eurasian continent and given to the United States, which was located on the other side of the Atlantic. Around the fifteenth century, Europe was on the eve of a great transformation. The food problems that had long plagued countries were solved, and a large amount of surplus labor had been separated from agricultural work. Portuguese and Spanish navigators opened several routes to the Americas and Asia. These routes had no property rights. All countries could sail on these routes. The main obstacle was the comparison of the sea power of each country. Portugal and Spain defeated the Native Americans and occupied the Americas. Then they came to India, Southeast Asia, and

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China. In the beginning, these conquerors searched for gold and jewelry. Later, they brought the cultivation techniques of sugar cane and African slaves. The sugar cane plantation and the sugar industry, based on the slave trade, offered endless wealth to the suzerains. Later, Britons, Dutch and French economies also began participating in these trades. The development of the Americas and Asia expanded the market, and people in the “New World” needed manufactured goods, so the machinery industry in Britain was developed. However, the relevant data showed that the Americas and Asia’s export markets (mainly in Asia) were still smaller than domestic markets and European intercontinental markets. This reveals that even from the perspective of demand, the domestic market’s size plays an important role in the development of a country’s economy. In Asia, the Portuguese benefited from the peppers, spices and piracy businesses. Still, soon their maritime benefits in the Indian Ocean were taken away by the Netherlands and Britain, two more powerful countries than Portugal. In the absence of refrigeration technology at the time, peppers and spices solved the storage and marinating problems of European winter meat products, which in turn could save a portion of the grain raised in winter for livestock. This further alleviated Europe’s food problems and freed up some excess labor. After their conquest of the Atlantic and before their entrance into the Indian Ocean, the Portuguese were far ahead of people in other countries in terms of navigation and technology. But there was one factor that contributed to Portugal’s decline: it could not tolerate pagans and dissidents. Initially, the religious environment in Portugal was relatively relaxed. Still, in the mid-sixteenth century, due to pressure from the Holy See and Spain, Portugal established a religious court to persecute and slaughter pagans and scientists. Many merchants and scientists fled from Spain (Spain performed similar religious persecution), which caused its population to decrease. The talented, strong-minded and thoughtful scientists could not live in Portugal and Spain anymore. As a result, most of the remaining population in these countries were neither educated or motivated and thus unable to create technological innovation. As a consequence, Portugal and Spain started to fall. The fleeing businessmen and scientists migrated to the Netherlands, Britain, and other countries which were more tolerant of religious beliefs. Britain and the Netherlands accepted Portugal’s human resources and took away its supremacy at sea. However, the Netherlands was still a small country. Britain would soon come out on top in the maritime and domestic manufacturing competitions. In Asia, the Dutch pursued their Indonesian monopoly, while the British shifted their primary focus to India. The British people found that India owned high-quality cotton yarns and cloths and contained a large number of hard-working and skilled workers. In the past, Europeans wore wool yarn products, but Indian cotton products changed this situation and also changed British industry. A whole new industry was opened up and British people made a great fortune from it. India was a country with fertile land and a well-developed agriculture system because its food supply far exceeded its demand at that time. As a result, India could free up a lot of land and labor for cotton planting. Before this, India’s cotton yarn industry was well developed, but India’s wealth surplus was not owned by labor. India did not protect private property rights then, so local bureaucrats could deprive Indian civilians at will. When the

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British came to India, they quickly took over the cotton yarn industry. The British mechanized the cotton textile industry and significantly increased the output and production efficiency of cotton yarn. In particular, they brought to India the integrity and the spirit of the contract required by the Indian market mechanism. Indians were willing to work in British companies and deposit their money in British banks because British companies provided local Indians with private property rights. The local bureaucrats dared not offend the British. Therefore, they did not dare to offend the Indians who worked in British companies. The rise of European countries was closely related to the amount of their population and natural resources. Although Britain’s population was less than ten million until the eve of its first industrial revolution, we must never forget that European countries entered this stage of history as one combined economy. For a long time, Britain and the other European countries had maintained very close trade links and factor flows. This allowed Britain to integrate into the labor divisions of the other European countries. As previously mentioned in Hypothesis 2, international trade is beneficial for all the participating countries. Britain gained a multitude of benefits in its labor division through cooperating with other countries in Europe. Britain was not the wealthiest country in Europe before the sixteenth century. Portugal, Spain, and the Netherlands, which were closer to the Atlantic Ocean, were far more developed than Britain. However, by trading with these countries, Britain benefited economically and technologically in a significant way through learning industrial and nautical techniques. This was especially the case during the periods of religious persecution in Spain and Portugal that saw many educated persons leaving these countries. Hence, when considering the size of Brian’s population, we should consider the European population’s size because Europe represents a cluster of countries. From the perspective of land and resources, European countries’ resources can also be complemented and shared through international trade. Compared with other European countries, the amount of land resources in Britain is too small relative to its population size. However, Britain can exchange industrial products for food to overcome its problem of insufficient land resources. During Napoleon’s dictatorship, the ports that connected Europe to Britain were blocked, inhibiting the import of food from the mainland of Europe to Britain. This resulted in a sharp rise in Britain’s food prices, which led to the British people needing to cultivate barren land. This block also strongly damaged industry in Britain. These examples demonstrate Britain’s dependence on the European countries. After Napoleon’s defeat, Britain resumed trade with other European countries, enabling the British economy to recover. Also, the population of Britain should include the population of all of its colonies. As mentioned earlier, the relationship between Britain and India helped Britain overcome the shortcomings of people and resources to a great extent. The British colonies’ open management allowed the colonies to be integrated into the British division of labor. In this way, Britain focused on industrial and technological improvements and outsourced or imported other industries, which it did not have advantages for at that time. Whether it is a large or a small country, maintaining openness is an essential prerequisite for a country to gain competitiveness. Isolation has never been

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the way for a country to develop. As a medium-sized country, Britain embarked on industrialization and structural transformation through open trade policies. In the second half of the eighteenth century, human beings’ living conditions had undergone extensive changes. Potatoes, corn, and sweet potatoes were introduced into Europe and Asia. Cereals, cattle, sheep, and sugar cane were moved to the Americas. The dietary structure of humans was greatly improved and the total amount of food increased. As a result, the world population grew rapidly, further stimulating demand. Therefore, there was a large surplus of the agricultural population, which provided labor conditions for the transition of the economic structure from agricultural to non-agricultural industries. However, the question remains, why did the Industrial Revolution happen in Britain initially and not in any other countries?According to our Hypothesis 1 in the second subsection, a modestly large population size is an important factor that causes one country’s economy to be stronger than other countries. A larger population size can support a more profound division of labor and stronger knowledge spillover. Britain increased its competitiveness by admitting European migrants and skilled artisans to expand its population. However, population size is not a sufficient condition for economic development and technological leadership. When it came to the population’s size, Britain was not ranked first during that period; even in Europe, the populations in Germany, Russia, and France were significantly larger than in Britain. Although an open trade policy more or less made up for the competitive disadvantage of Britain’s population, it still does not explain why the Industrial Revolution took place in Britain first. Our view is that a relatively large population can support large countries to have a higher economic development level. However, whether large countries’ effects can be achieved depends on several other conditions (Junhua and Yao 2016), meaning that some other factors may limit the large countries’ impact. The degree of market development, transaction costs, the type of economic structure, and the difficulties in structural transformation mentioned in Hypothesis 3 and 4 can all be the factors that influence the large countries’ effect. Overseas plunder and international trade significantly increased the wealth of European sovereigns. This wealth far exceeded their needs, resulting in these countries accumulating huge savings. If these savings can be invested into the industrial sector, Spain, Portugal and the Netherlands may have developed their economies further. In terms of wealth surpluses, Britain had no advantage at this time. However, the problem is that this conversion from savings to investing occurred only in Britain and later France and Germany. On the other hand, Spain and Portugal did not seem to have enough motivation to make a similar conversion. However, turning savings into investing opportunities is an important condition for economic development because capital is a production factor. The entrance of capital into the production process often means the extension of the industrial chain and improved production technology. So, under what conditions can savings convert smoothly into investments? The process of turning savings into investments is how the surplus population is absorbed into the industrial sector. Whether the large country effect can play a role lies in this process. In this book, we consider that at least three conditions must be met for this process to happen. First, new technology and new industries must absorb excess capital and

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labor because supply creates its demand. The introduction of new technology into the production process will be accompanied by large-scale investment. Second, there must be a better market environment and lower transaction costs. Third, the size of the population and market participating in the division of labor must be large enough because the division of labor can generate a labor division economy and a larger market size can support the sales of new products in the country. Compared with other countries, Britain did have some advantages in these three aspects, which we will discuss in further detail in the following part. To begin with, Britain had an investment environment that supported technological innovation. The essence of an industrial revolution is that new technologies promote economic structural transformation. Without new technologies and new products being produced continuously, entrepreneurs will not have the incentive to invest, and excess capital and labor will not be absorbed into the production process. If people invest on a large scale under no technological progress, there will only be overcapacity, and economic structural transformation will not occur. Britain, Portugal, Spain, and the Netherlands were not short of capital at that time. Overseas gold rushed in during earlier times helped to accumulate a significant amount of wealth for these sovereign countries. Portugal and Spain lacked new technologies and new products to absorb excess investment, and only used this accumulated wealth for extravagant lifestyles. Britain, on the other hand, invested in an environment that supported technological innovation: ➀ In the sixteenth century, after the Reformation, Britain’s national religion became Protestantism, which had significantly fewer restrictions and control compared to Catholicism that was still the national religion in Spain and Portugal. While Spain and Portugal conducted multitudes of executions of thinkers and scientists that went against Catholicism, Britain instead accepted these thinkers and scientists fleeing from religious persecution. ➁ Additionally, compared to other countries in Europe, British citizens had a higher level of education in that period. Protestantism encouraged literacy, business, and hard work, and Britain developed an excellent primary education system to enable the poor to go to school. Therefore, the literacy rate and overall cultural quality of the British people were very high. Britain’s higher education was also significantly developed during this historical period. Oxford, Cambridge, the University of Edinburgh and the University of Glasgow were all famous universities during these times. These comprehensive universities cultivated many talents that helped push the industrial revolution forward. ➂ Modern science employs mathematics and experimentation as tools, but Catholicism and Protestantism had an opposite attitude towards these tools. On one side, Catholicism believed that the understanding of Scripture by scholasticism is absolutely authoritative. Anyone who had views that did not conform to scholasticism was religiously persecuted. On the other side, Protestantism obtained conclusions through re-observation and precise measurement. Therefore, Protestantism provided safety and protection for thinkers in the industrial revolution, individuals who would have been considered as heretics in Catholicism. ➃ Britain had an efficient legal system and administrative management mechanism at this time. This system protected citizens’ property rights and intellectual property rights, and it effectively guaranteed the execution of contracts and the market’s operation. The land, mines and roads in

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Britain were all privately owned and they were sacred and inviolable. This provided a driving force for more efficient use of technological innovation in explorations of resources and it also offered legal protection against short-term development. Additionally, the recognition of intellectual property rights and their priority enhanced scientific researchers’ motivation to engage in scientific research through the reputation mechanism and the property rights distribution mechanism. Scientists attached great importance to the honor of intellectual property rights because they could also obtain profit from their property rights. They would certainly like their profession. The conditions mentioned above jointly promoted British technological research and invention, which further provided technical support for the industrial revolution. When new enterprises used these new technologies, they could hire more labor and absorb more capital. Therefore, the economic structural transformation led by the industrial revolution occurred. Without these supply-side technological creations, neither the industrial revolution nor an economic structural change can occur. Furthermore, free trade policy and open colonial management methods made up for the British population’s weakness. While Britain only had a moderately large population, they governed a large number of colonies. In addition, it maintained a close relationship with Europe that was both competitive and cooperative. Britain’s style of colonial management was utterly different from that of Spain and Portugal. The foreign trade and colonial policies of Spain and Portugal were predatory mercantilist models. They did not participate in the division of labor in the colonial countries and kept wages and material costs in the colonies as low as possible. When their maritime powers were insufficient to support this unequal trade status, their trading system collapsed. In contrast, Britain implemented a free trade policy that maintained open trade relations with the other European countries. Even during the Napoleonic trade blockade, Britain broke the French blockade through the port trade with Tsarist Russia. Although early Britain also engaged in some piracy activities, it had good relationships with its colonies. Indians were very happy to deposit their money in British banks and to work in British companies. Indians who worked in British companies could even avoid exploitation by local Indian bureaucrats and protect their personal properties. This relationship between the British and Indian lower-class people expanded the division of labor in Britain. India had a large amount of arable land that was able to create a surplus of food while also supporting cotton plantations, the cotton textile industry, as well as an excess of labor. This covered the shortage of insufficient population and resources in Britain. An effective mode of the industrial division of labor emerged; Britain focused on textiles, machinery manufacturing, technological research and development. India mainly engaged in agriculture and the primary processing of agricultural products. Coupled with the support of the British coal and iron industry, Britain was able to go through an industrial revolution based on British manufacturing. The British management of the colonies allowed India’s lower class to be more closely integrated into the British division of labor, thereby making up for the British population’s weakness, allowing Britain to specialize in technology development. This is an essential condition for the industrial revolution to take place in Britain.

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Last but not least, Britain had an excellent market environment and low market transaction costs. The decline in transaction costs in the domestic market in one country can attract the transfer and agglomeration of other countries’ economic activities to this country, making the per capita income in this country higher than that in other countries. This is a view drawn from the large country effect model by Junhua and Yao (2016). Britain is a long and narrow island country and no area within its territory is more than 120 km from the coastline. Additionally, water features are found across the land. Britain’s curved coastline is perfect for building deep-sea harbors that enabled the development of marine transportation of goods and people. It can be seen that the development of water transportation had a significant impact on the reduction of transaction costs in the British domestic market. Around the eighteenth and nineteenth centuries, the introduction of steam-powered trains in Britain greatly reduced the cost of freight transportation. More importantly, Britain was the only country in the world that completely implemented private land ownership at that time. As a result, all road construction facilities in Britain were built by private investments. Businessmen cared more for commercial gains and never built roads for political or military purposes. This eliminated redundant investment in highway facilities, reduced resource waste, and minimized the cost of cargo space transactions. The above reasons, coupled with the British tradition to encourage honest business, the efficient rule of law to protect private property rights, and ensure the efficient implementation of contracts made the market environment in Britain very suitable for entrepreneurs’ survival and development, which further attracted more entrepreneurs to invest in Britain and to set up factories. These are the basic market conditions for the industrial revolution in Britain. The British Industrial Revolution changed the world and led many European countries to begin chasing Britain’s success. France, Germany, and Tsarist Russia were also large countries in Europe at that time. France and Germany had larger populations than Britain. France and Britain were constantly at war, and thus there had been fierce competition between the two countries, not just militarily but also economically. In the thirteenth century, France introduced the “Estates General” government. Still, it was not until Napoleon’s defeat in Waterloo and the dictatorship of Jacobin that the modern democratic system was established. Germany achieved reunification during the Bismarck era, which turned Germany into a veritable European power, but it was still not a democratic country until the end of World War II. In the late Middle Ages, serfdom in Europe began to disintegrate. With Britain being the first to abolish serfdom, France followed suit by abolishing serfdom during the Great Revolution. Germany liberated its serfs in the early nineteenth century, while Tsarist Russia was the slowest in disintegrating serfdom. The disintegration of serfdom meant that the number of free people increased. France and Germany were undoubtedly a step slower than Britain, but they at least took this step. The disintegration of serfdom provided more labor for modern industry, created an environment conducive to the rise of the civic class, and increased the potential of the appearance of research staff. Because the free minds were more open, their business spirit and entrepreneurial spirit were more vital. It can be seen that the increase in the number of free people was a prerequisite for the industrial revolution. Both France and Germany were

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Protestant countries and were less influenced by Catholic control of thought, which was also a favorable condition. Except for the suitable situations, some systems may harm economic development, such as various road tolls and roadblocks that were set up in these European countries. The system increased the transaction costs and market operating costs of a country’s internal market, creating a situation that was extremely unfavorable to the division of labor and economic development. Britain suspended this toll system in the fifteenth century, but countries such as France and Germany did not clear these road barriers until the seventeenth century. Systems like roadblocks made the industrial development in France and Germany appear later than that in Britain, but at least the industries began to develop slowly. Although France and Germany’s population size and institutional reforms provided them some possibilities to catch up with Britain, two factors played more important roles in accelerating the pace of technological progress of France and Germany. First, France and Germany absorbed a large number of technical experts and skilled workers who migrated from Britain. Although British law prohibited skilled craftsmen from going abroad, there were still many people attracted by high wages to migrate to other European countries in various ways. In economics, we can call this phenomenon International Knowledge Spillover. These British technical experts took their funds and brought the knowledge and technology to the European continent. Additionally, the export of machinery from Britain brought the tacit knowledge contained in the machinery to other European countries. Although Britain restricted the export of machinery, it could not stop businessmen’s pursuit of profits. This is another form of the knowledge spillover effect. Secondly, France also had a pioneering initiative that vigorously established and built engineering universities. This engineering tradition in France cultivated the growth of engineers for the country, illuminating the university systems of other European countries (especially Germany). The technological development path of Britain was a typical “learn from work” (spontaneous evolution) approach. At the same time, France and Germany shared scientific ideas and systematic engineering knowledge through formal education (actively support innovation). Finally, more than a hundred years after the British Industrial Revolution, France and Germany surpassed Britain in many key areas. When the second industrial revolution wave came, Britain was no longer a leader, and France and Germany had become the industrial locomotives at the end of the nineteenth century and the beginning of the twentieth century. But not long after, this status of European countries’ industrial leadership was lost to a country with a larger population in North America, that is, the United States. Under the large country effect model, we study European countries’ economic development path by taking the national scale and the factor structure as the entry points. We first analyze the initial development conditions of the large European countries, then describe various factors that strengthen or limit the initial developments in these countries. On this basis, we sort out the development experience of large European countries. (1)

The population size has a significant positive impact on a country’s economic development.

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This should be understood from three aspects: since modern times, European countries have entered the industrial stage of history as a whole. Although individual European countries are much smaller than China and India, Europe, as a single unit of small and medium countries, has the advantages of a national cluster. Secondly, many countries in Europe developed and occupied many colonies during the Atlantic trade era. These colonies were directly subordinate to the suzerain and directly participated in the suzerain’s domestic division of labor. So, although the suzerains’ population sizes were not large, if the colonies’ population was totaled together, the population sizes of these suzerains were not small. Finally, except for the above factors, if we only look at the suzerains’ population sizes, we can find that the first few small European countries (Spain, Portugal, and the Netherlands) that developed at an earlier time had no chance to participate in the industrial revolution. Those countries that guided the Industrial Revolution were mainly large European countries (Britain, France, and Germany). In contrast, the feudal manor system of medieval Europe made each country’s interior full of principalities. The markets of various countries were divided by these principalities and formed self-sufficient manor economies. Europe thus fell far behind Asia economically. In modern Europe, the disintegration of serfdom and introduction of democratic policies overcame separatist forces, and the European countries achieved de facto unification. This is obvious in Britain, France, and Germany, which led to their rapid development both technologically and economically. This tells us that both the national scale and national unity play a vital role in technological progress and economic development. (2)

Changes in factor structure guide economic structural transformation through factor prices.

The outbreak of the Black Death in Europe hit the European economy hard. Tragically, it solved the food problems that had long plagued Europe because of the sudden increase in the ratio of land to population. Since the possession of the land was no longer profitable, the collapse of serfdom accelerated. As the European population slowly increased, a large number of surplus laborers appeared in the rural areas. These laborers began to find a way out to a new world. The discovery of a new continent, cross-ocean trade, and the introduction of new kinds of crops further solved Europe’s food problems. Europe no longer needed to worry about food issues, which accelerated the suzerains’ economic structural transformation. Britain and later developed France and Germany took advantage of this internal driving force of economic structural transformation. Simultaneously, Spain and Portugal indulged in the wealth of gold and silver sent back from the colonies to their home countries and lost this transformation opportunity. Therefore, the industrial revolution happened in Britain first, and then in France and Germany, while Spain and Portugal lost their chance to develop. At present, China’s environmental resource protection is under tremendous pressure, and the aging trend of the population has also led to insufficient labor resources. In the long run, this factor structure’s characteristics will inevitably lead to decreased environmental carrying capacity and the increase of environmental costs. Labor wages may rise, and capital may be surplus under this situation. Hence, China’s economic structure has an internal driving force

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to transform from environment-intensive and labor-intensive industries to capitalintensive industries, which means that China needs to develop new industries which can save labor and reduce pollution. High-tech industries are usually accompanied by large-scale intermediate goods investment (capital investment), which means that the breadth of production scale and the length of the industrial chain increase, and this process depends on technological innovation. If China can take advantage of this opportunity, the economy will surely rejuvenate. (3)

The improvement of domestic market conditions and the reduction of transaction costs are conducive to developing the domestic economy.

Although the existence of the large country effect has been proven, whether the large country effect can be exerted still depends on whether the country’s market is well developed. Relatively low market transaction costs in a domestic country can significantly promote the domestic division of labor and attract the transfer and aggregation of other countries’ economic activities. Since the fifteenth century, Britain’s domestic market environment had improved significantly, and the cost of land and water transportation had been considerably reduced. Additionally, the habit of honest business in British society through the spirit of contract and an efficient legal system were all conducive to lower transaction costs. These factors promoted the development of Britain’s economy. At present, although China’s transportation costs have been greatly reduced due to improved transportation facilities, commercial integrity has always been a weakness. Problems such as food safety, counterfeit and shoddy products, unfair competition, and the distortion of information disclosure have significantly increased the cost of information search and transaction costs. They have eroded the basis of the operation of the market mechanism. All of which will inevitably have a negative impact on the division of labor and economic development. (4)

The key to realizing economic structural transformation lies in whether there are emerging industries and new technologies that absorb excess capital and labor.

Without technological innovation, new capital can only be invested in traditional industries, which can only create new overcapacity, and does not create the possibility of economic structural transformation. Due to British cotton textile technology’s improvement, Britain transitioned from agriculture to the textile industry. Just as the world’s growing demand for power machinery appeared, Britain invented and improved steam engines causing the British power machinery industry to boom. The transformation of the British economic structure was related to the above new technological inventions. For any country to promote technological innovation, there must first be a system that protects private property rights and intellectual property rights. They also need to release ideological control so that scholars and inventors have the right to think freely and develop inventions and creations that can further drive the economy forward. Other countries, especially France and Germany, imitated the above practices of Britain. Additionally, these countries vigorously established and built many engineering universities and used the power of national finance to start the second industrial revolution. The Chinese economy is currently facing pressures from

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structural transformation, but China should not hope that environmental and resource pressures will push the structural transformation backward. Instead, it should further improve its protection of intellectual properties and increase support for comprehensive universities and engineering universities, then allow technological innovation to take the initiative to guide the economic structural transformation.

2 American Industrialization and Its Characteristics Industrialization refers to the process of increasing the proportion of industry in the national economy to the point that industry gradually occupies the dominant position. With enough industrialization, a country can transform from a backward agricultural country to an advanced industrial country. At the end of the eighteenth century, people in the North American colonies established the United States of America through the Revolutionary War. The country’s economic development had begun to industrialize. From the 1870s to the late 1890s, the industrial production and technological level of the United States increased sharply, and the total industrial output ranked No. 1 in the world. From the 1980s, when the United States entered a new economic period, the rapid development of science and technology promoted its industry’s transformation and upgrading. In more than a hundred years, the United States developed from a British colony to a leading industrial country globally. In the history of world economic development, American industrialization is a successful model, and its industrial strategy is also a classic strategy of a large country. The industrialization process and experience of the United States have important values for large developing countries in the formulation of appropriate economic development strategies, the acceleration of industrialization, and improved industrialization quality. 1

An Analysis of the Initial Conditions of American Industrialization

The formulation of a country’s economic development strategy must be adapted to its basic national conditions, which are the initial economic development conditions. Generally speaking, the essentials of industrialization mainly include human resources, natural resources, and financial capital. Judging from large countries’ characteristics, when the United States became a major power, it already had the initial conditions of abundant human resources, a vast territory, and abundant natural resources. How did the United States create these superior economic development conditions after it freed itself from British colonial rule and became an independent country? (1)

Obtain natural resources needed for development through land expansion.

The United States developed from the North American colonies of Britain. From 1607 to 1733, Britain established 13 colonies in North America: Virginia, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Delaware, New Hampshire, Pennsylvania, Maryland, North Carolina, South Carolina, and Georgia.

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From these 13 colonies, three different economic types were formed in the south, north, and middle regions of these colonies. Specifically speaking, the northern region had a cold climate, barren land, and backward agricultural production. Residents in the northern region were more engaged in household sideline and handicraft industries, which lead to the development of industry and commerce. The central region had vast plains and fertile lands that were perfect for developing agriculture and animal husbandry. This region was known as the “bread colony.” Companies chartered by British noble landlords or wealthy merchants who established a slave plantation economy ran the southern region. After the United States’ independence, the U.S. began a large-scale territorial expansion and gradually expanded the economic area westward. In 1789, the American government forced the Indians to sign a treaty to cede the land of Ohio, Indiana, Illinois and other states to the United States and then compelled the Indians to move to west of the Mississippi River. At the same time, the United States also annexed the colonies of Britain, Spain, and France in North America and parts of Mexico’s territory through forced purchases and wars. In 1803, the United States bought Louisiana from France for 15 million U.S. dollars; in 1810, it seized the western part of Florida which belonged to Spain; in 1819, it purchased the eastern part of Florida from Spain; in 1846, Britain was shut out from Oregon and in 1848 the United States captured part of the territory of Mexico. This part of Mexico is now Texas, California, Arizona, Nevada, Utah, New Mexico, Colorado and Wyoming. By the middle of the nineteenth century, the United States expanded its borders to the Pacific coast, and its land area expanded from 369,000 square kilometers in 1776 to 3.027 million square kilometers in 1853. With the gradual expansion of the territory, the United States’ economic region expanded rapidly, forming a vast domestic market. Simultaneously, the vast land contained rich natural resources and provided space for the development of the west, thus becoming an important condition for the United States’ industrialization. (2)

Obtain human resources required for development through foreign immigrants

The United States is an immigrant country, and the early immigrants who moved to North America mainly came from Britain. Starting from the eighteenth century, with the North American colonies’ economic development, the number of immigrants in these areas gradually increased, including some black slaves. After the United States achieved its independence, its fast economic and territorial development attracted more immigrants. In the 1830s, due to better traffic conditions and a government’s relaxed land policy, a wave of immigrants gradually appeared. From 1831 to 1835, 252,000 immigrants came to the United States. From 1846 to 1850, the number reached 1,283,000. A mass of European immigrants poured into the United States, including Irish, German, Italian, Slavic and Jewish people. After 1880, laborers in southern Italy, Eastern Europe, and Russia also flowed to the United States in large numbers. From 1881 to 1914, more than six million Slavs moved to the United States. From 1901 to 1910, more than two million Italians immigrated to the United States. The total number of immigrants who arrived in the United States between 1860 and 1915 was more than 28.5 million. According to statistics, in 1920, half of the US miners and one-third of the machine-building industrial workers were

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foreign-born. From the eighteenth century to the nineteenth century, the United States adopted an open immigration policy to ensure the workforce required for industrialization. There are three characteristics of American immigrants during this period that drove economic development. First, the increase in population promoted population density. From 1790 to 1810, the United States population density increased from 0.6 to 1.6 per square kilometer. In 1900, the United States’ total population reached 76 million, and the population density increased to 9.9 per square kilometer. Second, the makeup of immigrants included both technical and manual labor. Immigrants from Britain and Germany tended to have high cultural literacy and could master a particular industrial technology. Some immigrants from Germany even had a small amount of funds and became skilled workers. Immigrants from Ireland, Italy and Asia usually lacked technical skills, so they were suitable for manual labor, such as building railways, digging canals and mining mountains. Third, the immigrants in this period mainly paid attention to the development of the west and urban agglomeration. They moved westward to obtain land there. From 1790 to 1850, the proportion of the population in the west increased from 6 to 45% of the total population of the United States. More and more people moved to cities. Between 1780 and 1860, the number of cities in the U.S. with more than 8000 people increased from 5 to 141, and the proportion of people in cities increased from 2.7% to 16.99% of the total population of the United States. Most of this large number of American immigrants were young men, primarily immigrants from advanced European countries. They also brought to the industrial sector knowledge and technology, which prepared the human resources for industrialization in the United States. 2

The Large Country Characteristics Of American Industrialization

Britain is the birthplace of industrialization. The United States not only successfully imitated the industrialization of Britain but also quickly surpassed it. As the new overseas “testing ground” for Western Europe’s new capitalism, North America leaped past the conventional historical stages and became a new industrial center. This industrialization created the most developed and powerful country in the world, known as the “American miracle.” The United States’ success is its advantages of natural resources and human resources and the guiding role of the economic development strategies and its industrial development policies. In terms of overall characteristics, the formulation of economic development strategies based on a large country’s basic national conditions and the implementation of related industrial development policies are of great importance in guiding industrialization’s smooth progress. First, the United States relied on abundant natural and human resources to promote its industrialization. Natural resources and human resources are the basic requirements for economic development and industrialization. Specifically, natural resources played an important role in the early stage of industrial development. As American scholar (Isabel 1983, p. 45) pointed out, “An important factor in the United States’ economic growth is its unique natural condition. The United States owns a wealth of natural resources, which is a great fortune. From the Civil War to 1910, its resource base expanded dramatically.” The United States expanded its land through war and purchase, from which it gained a plethora of natural resources. However, it

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needed to face the contradiction between the rich natural resources and the shortage of human resources. North America owned land with various natural resources ranging from vast and fertile land in its south, western, and central regions to mineral, forest, and water-rich lands in its northern regions. However, in the initial period of industrialization, the United States faced a severe human resource shortage condition. By adopting an open immigration policy, the United States introduced labor and technical talents from Europe and Asia, providing better human resources conditions for industrialization. Immigrants from the middle and lower classes of various countries were young, strong, entrepreneurial, and adventurous, bringing new vitality into the western region’s development in the United States. In the nineteenth century, the United States experienced a large-scale immigration movement rare in world history. In 1830–1840, the proportion of net immigrants in the total population growth was 11.7%, 23.3% in 1840–1850, and 31.1% in 1850–1860. The rapid increase of population alleviated the difficulty of human resource shortage in industrialization process of the U.S. With the continuous expansion of human resources, abundant natural resources were effectively developed and utilized, which significantly promoted U.S. industrialization and economic growth (Yao, 2017). Marx and Engels (1978, p. 5) spoke highly of the important role of immigrants in the United States’ industrialization. They believed that “European immigrants enabled the United States to develop its huge industrial resources with such a power and on a great scale. This power and scale will inevitably break the industrial monopoly of Western Europe, especially the monopoly of Britain.” Second, the United States kept a long-term sustainable growth of the industrial economy through a unified domestic market. Domestic market expansion is an important condition for sustained economic growth, and establishing a unified domestic market is a significant prerequisite for economic growth in large countries. In industrialization, the United States formed a massive market through population increase, development of the western region, improved transportation, increased income of residents, and the expansion of overseas markets. However, in the early stage of industrialization, it mainly relied on the domestic market. As Faulkner (1964) pointed out, American manufacturers could not expect foreign countries to offer a large market but instead needed to create a domestic market where the domestic products can compete with foreign products. First, the growth of the U.S. population promoted the expansion of the domestic market. The market was partly provided by a growing population, especially by populations in the large agricultural areas of the west and south. Second, the increase in national income enlarged the scale of demand. Because of the vast collective wealth of the United States, people there had a greater consumption power than any other country at that time. Fite (1981, pp. 84–85) also believed that the key to the growing U.S. market scale lies in the continuous increase in actual consumer income. From 1859 to 1914, the total private income of the United States increased nearly seven times, and per capita income increased more than two times under the condition of rapid population growth. According to Clarence, the real wages of American industrial workers, that is, purchasing power, increased by 49% in the 30 years after 1860. Third, the prosperity of the regional market and trade promoted the expansion of the domestic market. Brian considered that it was

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because of the employment of both the free trade policy and tariffs protection policy that the unprecedented development and amazing prosperity of the United States can be achieved. The United States significantly invested in improving infrastructure by expanding old canals, the construction of railroads, highways, and the invention of automobiles, allowing for much more convenient transportation. Based on this condition, coupled with free trade policies, the United States built a unified domestic market. In the 1860s, British industrial products had an absolute advantage in the world market, and American products could not compete with them. In this situation, the government implemented a high-tariff protection policy to support the development of its domestic industry, which played a positive role in supporting the domestic industry (Chongtai 2008). Third, the United States quickly transitioned from imitating developed countries’ technology to discovering its technology innovations. Compared with Britain, industrialization in the U.S. was initiated relatively late. But the United States was the most successful country in imitating British industrialization. The industrial revolution in the United States had a characteristic of transplantation. “The New World used tools and equipment from Britain to produce commodities at the beginning. This is indeed an important factor in promoting colonial economic growth” (Fett 1981, p. 54). The machines, technology, and organizational management methods needed in the United States were mainly obtained from Britain through immigration and technology introduction. When the United States began its industrialization in the nineteenth century, it embarked on a path that Britain had already laid out. The introduction of equipment to the textile industry’s rise seemed to be a replica of British industrialization. The United States started learning and transplanting British industrial technology and constantly innovated based on these technologies. However, the United States quickly became an innovator (Chengshuang 2011). The United States entered the second industrial revolution before its first industrial revolution was completed. However, this situation did not affect the progress of the second industrial revolution in the U.S. and it quickly replaced Britain’s position. The U.S. became a pioneer of the new industrial revolution. The American manufacturing industry’ breakthrough was developing the first batch of cotton weaving enterprises established in Lowell in the early nineteenth century. From British technology to establishing a complex water transmission system, the pace of technological improvement in the U.S. accelerated. In the early days of industrialization, investments in innovative activities were determined by the demand model. These investments brought a wide range of technical development in the industrial field, especially the internal combustion engine-driven cars, trucks and tractors, which solved the transportation problem and provided conveniences for other jobs. The establishment of the U.S. patent system played a positive role in industrial technological progress (Engelman 2008). From 1798 to 1800, the US government issued 276 patent rights; from 1850 to 1860, the number of patent rights increased to 25,200; from 1890 to 1900, it grew to 234,956. The application of these technical inventions in the industrial field promoted industrial technology and enhanced production efficiency. These technological innovations became important technical support to promote industrialization in the United States.

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Fourth, the United States established a relatively complete industrial sector to support its national economic development. Like the first batch of industrialized countries, industrialization in the United States also experienced a process in which the industry’s proportion gradually exceeded agriculture. The ratio of heavy industry gradually exceeded that of light industry within the industrial field. However, as a large country, the United States established a relatively complete industrial system in the early stage of industrialization, and upgrades to the industrial structure were also carried out based on a coordinated development by various industries (Lili 2012). First of all, the historical period of industrialization in the United States was also when American agriculture developed rapidly. The abundant agricultural resources of the United States, the improvement of agricultural mechanization, the formation of agricultural specialization regions, and the establishment of enterprise farms promoted agriculture’s industrialization. The joint development of animal husbandry and agriculture met people’s need for food and provided sufficient raw materials for industrial development. Furthermore, the large industrial sectors achieved collaborative development and established a complete industrial system. The food industry and the food processing industry became the largest industrial sectors. In 1914, the United States food industry’s total value reached $4.8 billion, of which meat processing, flour processing, and canning processing possessed the largest proportion. The cotton textile industry was the industrial sector that adopted a large-scale organization system of factory production in the U.S. Labor productivity was significantly improved with the inventions of ring spinning machines and automatic spinning machines, and steam and electronics implementation. The iron and steel industry played an essential role in the growth of American industry. In 1880, thirty-six states in the U.S. developed the iron making industry. With the invention and application of the converter steelmaking method, the open-hearth steelmaking method, and hotblast method, steel production rapidly increased. The production of pig iron increased from one million tons in 1860 to 33 million tons in 1915. In 1899, American steel production accounted for 43% of world steel production. At the same time, the United States also developed steel pipe manufacturing, metal appliance manufacturing, boiler manufacturing, and machine manufacturing. Starting from the 1860s, the shipbuilding industry in the United States developed fast. In the mid-1870s, fifteen shipyards were distributed along the Atlantic coast, Delaware, the Great Lakes, Ohio, and along the Mississippi River. After the 1980s, cities along the Pacific coast became new bases for shipbuilding. The automobile manufacturing industry belonged to a new industrial sector. At the end of the nineteenth century, the United States began to develop and make automobiles, and it was during the fierce automotive competition that the “automobile king” Henry Ford emerged. Through technological improvement and design optimization, automobile production costs and sales prices were reduced. In 1921, Ford had become a large company with an annual output of one million cars. Finally, the transportation industry played a leading role in the American industrial revolution. The United States began building toll roads in the late eighteenth century, and by the early nineteenth century, established a relatively complete infrastructure of free roads and toll roads. In addition, canalization helped to improve the U.S. waterway transportation network. And later, the construction of railways

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enabled trains to replace the canals gradually. The development of the U.S. transportation industry played a key role in promoting the development of the west and industry. Fifth, the United States achieved a balanced development of the national economy through regional economic developments. Collaborative regional economic growth was an important issue in the entire process of industrialization in the U.S. The American industrial revolution began in its resource-rich northeast region along the Atlantic coast. As early as the colonial period, the northeast region was the development center of factory handicrafts. After the American War of Independence, the northern region shifted from commercial capitalism to industrial capitalism and became the core region of American industrialization (Yi 2007). In the mid-nineteenth century, the northeastern region became the economic center of the United States. In 1860, the U.S. GDP was $1.885 billion, of which the northeast region accounted for $1.27 billion, while the GDP of the western region and southern regions accounted for only $384 million, and $155 million, respectively. From this, we can see that the economic developments in different regions of the country at that time were extremely uneven. After the 1860s, the United States built a transcontinental railway transportation network. In 1914, the railways’ mileage in the western region accounted for about 50% of the total national railway mileage. By the late 1880s, railways in the United States’ southern region were fully developed and connected with the national railway transportation network. The improved transportation infrastructure and the speed of economic developments of regions outside the northeast were greatly accelerated. In particular, the industrialization of the central and western regions advanced rapidly. The labor force and the number of the means of production increased mainly in the central and western regions. The scale of enterprises and industries quickly was expanding during that period. By the second half of the nineteenth century, a relatively complete manufacturing economic system formed based on the central and western regions’ urban system. The United States’ industrialization followed the route of “east to west” and experienced the development of stepped or spatial relay transmission. In that way, an increasingly reasonable and balanced layout structure was formed. 3

Lessons Learned From the United States Industrialization

The industrialization in the United States went on for one hundred years. By 1889, the total industrial output value of the U.S. accounted for 77.5% of its total industrial and agricultural output value. Industrial production dominated the national economy, which showed through the United States’ historical transformation from an agricultural country to an industrial nation. At the end of the nineteenth century, the total industrial output value of the U.S. accounted for about 30% of the world’s total industrial output value, which genuinely reflected that the U.S. had become the number one industrial power in the world. The United States’ industrialization path is a path suitable for the economic development of large countries and embodies a strategy of industrialization of large countries. The practice of industrialization in the United States has shown the world the successful experience of industrialization

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of large countries. The U.S. is a successful industrialization model for large developed countries and provides valuable industrialization lessons in large developing countries. First, the labor force is the most crucial factor in productivity. In the process of industrialization in large countries, an adequate workforce is a necessity. Access to a large population is an advantage of large countries’ economic development and must be sustained for proper industrial development. In the early days when the United States was founded, the contradiction between abundant natural resources and insufficient human resources was huge. For this reason, the US implemented an open immigration policy and attracted many laborers and technical talent from Europe and Asia, thereby maintaining sufficient human resources (Yi 2007). For a long time, the U.S. smartly implemented an open immigration policy that allowed it to attract talent conducive to its economic and social development. With the development of the economy, immigrants’ requirements gradually increased, especially for their scientific knowledge. To some extent, such an immigration policy can be said to rely on the cultivation of talent in countries worldwide, which greatly saved the cost of talent cultivation domestically. China’s national conditions are different from that of the United States. In the early days of the People’s Republic of China, the population rapidly grew and created a large labor force, while their education level was not high. This created considerable pressure for economic and cultural construction. After the reform and opening up, China implemented a one-child policy which effectively controlled the population growth. However, due to the failure to adjust the one-child policy in a timely manner, China suffered from problems such as the shortage of labor force and the arrival of an aging society. The original advantage of a large population gradually disappeared. Under such circumstances, our tasks are to maintain the population, focus on improving the population’s education level, cultivate the professional quality of the labor force, and strive to change from a country with a large population to a country with high-quality human resources. In this way, we can obtain the advantage of a large and competent population and promote sustainable economic development. Second, the economic development of large countries mainly depends on domestic demand. Therefore, a unified domestic market needs to be established in the process of industrialization. The industrialization of the United States was driven primarily by its domestic market, and the United States took effective measures to build a unified domestic market. Specifically, the first measure was the improvement of transportation infrastructure, primarily through the construction of a railway network, which closely connected the markets in various regions, promoted the professional division of labor in the industry, and provided the basic conditions for forming a unified domestic market. The second measure was the development and expansion of enterprises and their horizontal and vertical integration. This did not weaken the market competition but broadened the scope of enterprise competition, which enabled some giant industrial and commercial enterprises to break the local monopoly market and promoted the entry of regional non-competitive markets into the domestic market. In this way, the microeconomic entities were well-prepared for the establishment of a

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unified domestic market. Thirdly, the United States focused on developing an inwardlooking industrial sector to support its industries’ development during the industrialization period. The U.S. protected and supported pillar industries and quality industries through differential tariffs, thereby promoting a unified domestic market (Genliang 2010). Judging from the situation in China, the traditional economic system was not conducive to invigorating the economy. It inhibited the vitality of enterprises. This situation became a driving force that pushed the economy towards an outward development in the process of reform and opening up. The export-oriented economy promoted economic prosperity. However, in the process mentioned above, different regions in China contacted the international market. They neglected the construction of a unified domestic market, which led to regional market segmentation and serious competition between local governments. In this situation, the exportoriented industry developed fast, and the inward-oriented industry developed slowly, resulting in a domestic economic imbalance, and an international economic imbalance appeared. The experience of industrialization of the United States tells us that large countries have substantial domestic demand and a large domestic market. They should focus on promoting economic development by enlarging domestic demand, optimizing the professional division of industry through the domestic market, and following a large country’s economic development with domestic demand as the mainstay. In this way, the driving force for sustained and coordinated development can be kept (Yao 2015). Third, industrialization and urbanization of large countries are closely related, and urbanization needs to be actively promoted in the process of industrialization. In the early and middle stages of industrialization in the United States, the speed of urbanization accelerated. From 1790 to 1920, the proportion of the American urban population increased from 5% to about 51% (Hughes 2011). On the one hand, industrialization has promoted population agglomeration through enterprises and industries’ agglomeration, promoting industrialization. On the other hand, urbanization also promoted industrialization in the above-mentioned process. Both industrialization and urbanization are phenomena of population agglomeration, enterprise agglomeration, and industrial agglomeration in economic development. The industrialization and urbanization of the United States developed synchronously. They followed the same development direction and advanced from the northeast to the mid-west. As the manufacturing industry center moved west, people and cities also gradually moved westward (Xiaoxia 1999). If we look at industrialization in the west, we will find that it first started with building the railways, then towns, and finally farms and factories. This is the process of industrialization driven by urbanization. Now let us look at the situation in China in the 1980s. Industrialization and urbanization in China were lagging at that time, showing that industrialization and urbanization are inseparable. For a long time, China was in a dilemma about whether industry or agriculture was more important and whether cities or rural areas were more important. In fear of food crises and maintaining rural stability, people did not want to leave their villages but also did not dare to let go of urban economic development, which formed the phenomenon of “leaving the land without leaving the village” (this means that people work in the factories instead of farming on the

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land, but they still live in the villages). Urbanization in China fell behind because of this situation. In the same historical period, people tried to develop rural township enterprises during the reform. However, these rural township enterprises were rooted in villages and lacked the support of cities where resources were concentrated. Therefore, it was difficult for them to grow and develop into modern enterprises. In the end, they evolved into extensive industries. China’s economic transformation needs to get out of this dilemma, abandon the traditional way of thinking, strengthen the concept of industrialization and urbanization, and actively and boldly promote industrialization and urbanization, to realize the transformation of economic growth mode through the interaction of industrialization and urbanization. Fourth, innovation is a significant source of economic growth in large countries, and it is necessary to foster national innovation capabilities in the process of industrialization. Generally speaking, large countries cannot rely on the introduction of foreign technology to promote economic development for an extended period of time. Instead, they must establish a complete national innovation system to cultivate the innovation capabilities of their own enterprises. Since the end of the eighteenth century, the US government emphasized the importance of education and science development and encouraged technological and institutional innovation. This was an important factor that accelerated industrialization in the United States and was why its two industrial revolutions happened consecutively. The long-term labor shortage prompted the U.S. government to implement an open immigration policy and adopt more capital-intensive production technologies in industrialization. The U.S. introduced a large number of advanced technologies from Western Europe and paid great attention to domestic technological inventions and innovations. In 1863, the federal government established the National Academy of Sciences. In the 1880s, American states established the Institute of Industrial Science and Agricultural Experiment Station. As Fette (1981) said: “The development of the method in industry comes from the creativity of the Chinese people. They are not bound by traditional forces or conservative habits. They love machines and are particularly keen to find the best and simplest way in mechanization production.” At the same time, the United States combined technological innovation and institutional innovation to form an industrialization road with American characteristics. Two systems, in particular, effectively promoted industrialization in the United States. The first one is the patent system. The United States promulgated the world’s first modern patent system, intentionally designed to promote technological progress and economic growth. The patent system protected inventors’ exclusive rights of their inventions to promote science and practical technology in a certain period of time. This system stimulated the enthusiasm and creativity of inventors through profit. Patent applications for inventions grew rapidly, and there were obvious technological advances in almost all industries. The second one is the standard system. The standardization of machines and parts deepened the industry’s professional division of labor and promoted large-scale production. Consequently, production costs and market prices were reduced. Massive output at the lowest cost, standardization of machine parts through standard materials, and replacement of machine parts were all realized. The Chinese government attaches great importance to education, science and technology, but promoting technological

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innovation and transformation from innovation to application is not yet perfect. In general, the enthusiasm of scientific and technical personnel has not been entirely motivated. The key core technologies of important industries have not been wholly mastered, and the application conversion rate of scientific and technological achievements is not high. To achieve economic transformation and upgrade, China needs to effectively solve the innovation enthusiasm shortage and the problem of innovation transformation through institutional innovation, thereby transforming the economic growth mode and moving from the low-end to the high-end of the international value chain.

3 Industrial Policy of the Rise of Large Countries It is generally believed that industrialization is a major factor in the rise of the West in modern times. In this process, the endless pursuit of economic interests by capitalists is the most important driving force. At that time, most people believed in a policy of laissez-faire. In terms of promoting industrialization and achieving balanced development among industries, large Western countries did not formulate systematic industrial policies. However, judging from the actual historical process, the governments played a specific role on the road to industrialization in these countries. So, under what circumstances did the policies of large Western countries have a positive impact on the industrialization process? This is a very enlightening question and has not yet been fully noticed by the academic community.1 This book will take Britain, the United States, and Germany as examples to illustrate the particular supporting policies adopted by their governments in the process of industrialization and the rise of these countries. It then summarizes the common experience shared by these countries. This is beneficial to the economic development of other countries, especially to developing countries. Regarding the concept of industrial policy, domestic and foreign academic scholars have offered different definitions. Some suggest that industrial policy in the sense of strict economics refers to the sum of policy objectives and policy measures related to industrial development, especially the evolution of industrial structure designed by the state (government) system. From the perspective of historical development, although the sprout and factors of industrial policy can be traced back a long time, industrial policy, in its full sense, appeared only after the Second World War 1

The book “Research on Foreign Industrial Policy” edited by Zhou Shulian and others is the first monograph on a systematic introduction and research on foreign industrial policy in China. The book introduces industrial policies in 12 countries and regions, including Japan, France, Germany, the United Kingdom, and the United States, then discusses their experience, and finally makes a systematic comparison of these industrial policies. However, the time frame studied in this book is mainly after World War II and does not involve the relevant policies of Western countries during the industrialization period. Some other works have paid attention to some specific policies and measures of the Western countries in promoting industrial development during the industrialization period. Still, they are relatively fragmented and lack a macroscopic vision.

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(Shulian et al. 2007). Other scholars have explained industrial policy in a broader sense. As the British scholar A. M. Agra said, industrial policy is the sum of all the laws and policies carried out by the governments and are related to industry. Two other scholars Gerald Adams and Lawrence Klein, held similar views. They believed that industrial policies are all policy tools used to improve the economy’s supply potential, that is, to promote economic growth, increase labor productivity, and enhance competitiveness (Zhibiao 1996). Considering that the industrializations of a few large Western countries are involved here, the author observes and discusses industrial policies in a broader sense. 1

“Pilot” Industrialization in Britain

Britain is the first country where an industrial revolution happened. This revolution turned Britain from an agricultural society to an industrial society and laid a solid material and technical foundation for the development of capitalism. Encouraged and promoted by the British industrial revolution, other countries also completed the industrialization process one by one. From the perspective of the origin, the industrial revolution in Britain was initiated by individuals, and the enterprise innovation spirit and production technology were its main driving forces (Peigang 2009). In the process of this industrial revolution, the British government’s main policy was “laissez-faire.” But this did not mean pure freedom or “let it go” of the economy. In different periods, some intervention measures implemented by the British government in internal and foreign affairs played a significant role in initiating the country’s industrial revolution and ensuring the successful completion of the industrialization process. First, the British government reformed the land system and promoted the upgrading of agricultural production technology. The Physiocratic school of thought believes that the development of all capital is based on agricultural productivity. Agricultural productivity that exceeds individual needs is the foundation of all societies and, above all, the foundation of capitalist production (Marx 1975). This is the internal connection between agricultural modernization and industrialization. The increase in agricultural productivity plays a prominent role in expanding the domestic market and providing food, raw materials, and capital to industry. In this process, the British government played a positive role. One of the outstanding performances of the British government is to promote the reform of the land system. After entering the eighteenth century, with the progress of the British land revolution, the open field system in Britain hindered agriculture development. This system turned the vast rural land into a wild region for a long time, which was not conducive to promoting agricultural technology. This is the background of the large-scale enclosure movement in Britain in the eighteenth century. But unlike the early enclosure movement in the sixteenth-seventeenth centuries, this movement received strong support from the government. The British Parliament carried out several acts to simplify the complicated enclosing procedures (Han 2005). This enclosure movement produced a large number of free labor forces and effectively improved the economic efficiency and output value of agriculture. Mantu (1983, p. 143) pointed

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out: “The enclosure movement and the arrival of big industry are closely related to each other.” In addition, the government also protected agricultural development through legislative means, of which the “Corn Law” is a typical example. Due to population growth in the late eighteenth century, Britain gradually changed from a grain exporter to a grain importer. After the Napoleonic Wars, international food prices sharply decreased, and British agriculture fell into a crisis. In 1815, Britain promulgated the “Cereals Act,” which stipulated that wheat should not be imported when the price of wheat was below 80 shillings per quart. Although all classes except the landlord opposed this act, it was not revoked until 1846 after two adjustments. Moreover, while revoking this decree, the government provided a lot of compensation for agriculture, because of which, the privileged status of the British landlord class was maintained after the repealing of the Cereals Act (Moore 1965). The roles of agricultural development in promoting British industrialization are manifold. The internal market formed by the improvement of agricultural production technology is the most significant one. According to Braudel (2002), the British countryside was included in the domestic market network, and until the nineteenth century, it successfully fed urban and industrial citizens. During this period, the British countryside became the main body of the domestic market, and the domestic market was the first place for the British industry to sell its products. Second, Britain employed state power to protect industrial and commercial enterprises and expand to overseas markets and raw material production areas. In the initial stage of British capitalism, the government was mainly guided by mercantilism and adopted a tariff protection system to promote domestic industrial and commercial development. This system’s core was to support the development of the domestic manufacturing industry through import and export bans or protective tariffs and to help domestic businessmen obtain a larger share of international trade. In the Elizabethan period, the so-called “infant industry theory” appeared in Britain, which advocated that the government should provide support to industries at their beginning stage. During Edward VI’s reign, the British industrial protection policy had taken shape, and its main content was to prohibit the export of raw materials and other production methods. In terms of tariffs, Britain used it as a tool to regulate trade very early. By the time of William and Anne, Britain’s tariff barriers were already very high. The tax rate for imported goods was at least 15%, and that of most goods reached 20–25% (Xinkuan 2013). Simultaneously, to encourage the development of Britain’s nautical career and overseas trade, the British Parliament also formulated a series of laws on maritime trade, known as the “Navigation Acts.” These acts mainly stipulated that the transports of goods to Britain and its colonies could only be on British ships and by a British crew. Britain’s trade policy was advancing with the times. When the British Industrial Revolution was near completion, and its industrial and commercial enterprises already had strong international competitiveness, Britain began to change its policy into trade liberalization. The conquest and plunder of overseas colonies was also important for the smooth progress of British industrialization. From the mid-16th to eighteenth centuries, Britain defeated competitors such as Spain, the Netherlands, and France through

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a series of commercial colonial wars, seized control of the sea, and claimed several overseas colonies. The great achievements of colonial expansion promoted the development of Britain’s industrial revolution. It accumulated capital, opened a broad overseas market, and developed raw material production regions to grow domestic industry and commerce. Third, Britain encouraged and protected the competitive vitality of small businesses. In the industrialization process in Britain, the government believed that the uninhibited individual initiative was the root of economic growth, and intervention in the private economy could damage the potential of economic growth. But this did not mean that the government was not involved in capitalists’ economic activities at all. In fact, over time, the meaning of British laissez-faire also changed. By the late nineteenth century, an essential part of British industrial policy was to protect small businesses in various ways. In the eyes of the British people, small businesses were a source of economic initiative and vital to the growth of the entire national economy. The logic of this protection policy is when a large number of small entrepreneurs can compete freely without interference from political forces or large-scale dominant companies, rationality could be promoted. A typical manifestation of this policy was to encourage the cartelization of enterprises to protect them from predatory price competition. Thus, a large number of small-scale economic actors were saved. This explanation was not to depreciate the importance of free competition for economic growth but emphasize how excessive price competition was a potential threat to corporate vitality (Dobbin 1994). Fourth, Britain passed laws to protect the fundamental rights of workers. As we know, the industrialization process brought tremendous changes to British society. It caused many social problems, such as the wide gap between the rich and the poor, children and apprentice abuse, environmental pollution, and epidemics. These problems resulted in the resistance of the working people and social unrest that threatened the fundamental interests of the bourgeoisie. In the long run, this was not conducive to the smooth progress of the industrial revolution and social civilization’s continued progress. Promoted by people of insight, the British Parliament successively passed laws on a social level. For example, the British Parliament passed the Apprentice Health and Moral Act in 1802. During this time, the apprenticeship system prevailed in British factories, and the capitalist owners tried every means to exploit these apprentices in order to make excess profits. Apprentices worked overtime in tightly confined factories all year round, which not only deteriorated their health, but also deprived them of the opportunity to receive education. This law made very specific provisions on apprentices’ hygienic conditions, working hours, and education. Although the actual results were not satisfactory, it created a fundamental principle: the country’s supervision of factories. This principle played a vital role in the British industrialization process and was followed by other capitalist countries (Mantu 1983). On this basis, the British Parliament issued several factory laws in the early nineteenth century. The Factory Act of 1833 was particularly significant because it was the first genuinely effective factory act in Britain. This act stipulated that factories could not employ under the

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age of nine and shortened the working hours of child labor of other ages. At the same time, four inspectors with considerable power were appointed to ensure the act’s implementation (Hussey 1971). These acts greatly improved child labor and apprentices’ situation and eased the increasingly sharp social tensions between workers and owners. 2

“Catch-Up” Industrialization in Germany

The industrialization of Germany started in the 1830s. Germany’s initial condition for industrialization was not as good as Britain’s and was worse than that in France. When the industries of Britain and France flourished, Germany was still in a state of fragmentation. However, as soon as German industrialization started, it quickly caught up and surpassed Britain and France. The Franco-Prussian War (1870–1871) played an important role as an external factor that strongly encouraged industrialization in Germany. After achieving victory in this war, the German industrialization process drastically accelerated, and Germany surpassed France and caught up with Britain in a short time. Additionally, Germany exceeded in promoting industrialization. First, the German government unified the internal market and laid a solid foundation for the start of industrialization. Since the Middle Ages, Germany had remained in a state of fragmentation, which resulted in numerous checkpoints along its roads. These checkpoints greatly hindered the circulation of goods within Germany. However, the Napoleonic Wars broke the long-term fragmentation in Germany and played a positive role in promoting the region’s economic unification. During this time, the number of German states decreased from the previous hundreds to about thirty. This unification was undoubtedly beneficial for overcoming commercial and trade barriers within Germany and for implementing unified weights and measures and currency systems throughout the country (Laishun 2003). Immediately after the catastrophic cereal crisis in 1816, the fierce tariff war between Austria and other states made people more aware of the importance of a unified internal market (Kitchen 2012). On January 1, 1834, a Deutsche customs union, including 18 states with a population of 23.5 million, was finally formed. As many scholars pointed out, this union had a profound impact on the historical development of Germany. It opened a new era of the German nation-states and was an important step towards unification. At the same time, the customs union also brought the German national economy’s development into a new era (Laishun 2003). The collapse of intra-German tariff barriers brought about by this union was extremely important for German industrialization. Some scholars observed that the customs union had shown apparent flexibility and pragmatism in promoting German industrialization. In different periods, according to changes in situations, the union implemented different policies. Sometimes these policies focused on freedom, and other times they paid more attention to protection. But no matter how the guiding ideology of these policies evolved, Germany gave preferential policies to the raw materials, machines, and semi-finished products required for industrial production. This flexibility ensured the smooth progress of

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the German industrial revolution and encouraged the continuous expansion of industrial production to a certain extent. It can be said that the union laid the foundation for the rapid rise of Germany as an industrial power by providing a more powerful impetus and the most fundamental guarantee for the German industrial revolution and promoted the transformation of Germany from a backward agricultural country to a modern industrial country (Ying and Shiguo 2001). Second, the German government vigorously developed the transportation industry, which was led by railway construction. Transportation and energy power are the “pioneers” of industrialization. The German industrial revolution first occurred in the transportation industry, and railway construction played the role of “vanguard.” The start of German industrialization began in 1835 when the first German railway was built between Nuremberg and Fürth. Unlike other countries, the government’s promotion was a key factor in the rapid development of the German railway industry. The government had valued this brand-new transportation industry from the beginning. In 1838, at the opening ceremony of the railway from Berlin to Potsdam, King William IV of Prussia announced loudly: “Human arms can no longer stop this kind of car that is slowly moving around the world.” The famous economist Friedrich List also vigorously promoted Germany’s national economy through railway transportation and had long conceived of a unified German railway network (Martin 2008). In the early days of German railway construction, many lines were directly sponsored by the government. Later, there was also a wave of private investment in railways throughout Germany. However, the unification of the country posed new challenges to the continued development of the German railway industry. Before unification, the German states had followed different policies, and the calculation methods of railway freight were complex and diverse. After Bismarck took office, he began to vigorously promote the nationalization of the railways. However, under the prevailing situation of “laissez-faire” ideology, there was great resistance to nationalization. In 1873, Germany created the Imperial Railway Bureau, but its functions were limited to coordinating various railway systems’ construction, equipment, and operation. The economic depression of the late 1870s was a push for the nationalization of railways because many people criticized private railways for their poor management and inefficiency. Since then, Germany began purchasing private railways. In 1879, the Prussian government purchased 5,000 km private railways, and in 1884 it acquired 4,000 km railways from ten companies. Subsequently, the government decided to stop offering private companies new concessions to build essential railways. By 1909, Germany had a total railway length of more than 60,000 km, while privately owned standard railways were only 3,600 km in length (Clapan 1965). It was through the national ownership and management of railways that the German transportation industry embraced tremendous development in a short time. Third, the German government focused on training scientific and technological talents and actively sponsored scientific and technological innovation activities. Along with the industrialization process, the specialization of labor division and the emergence of new industries had higher requirements for workers’ quality and professional skills. Therefore, the education system needed to be adjusted to meet

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human resources’ needs in the industrial era. The development and changes of German universities in this period can well illustrate this point. The founding of the University of Berlin in 1810 was the beginning of a new era. This university truly implemented the principle of “the unity of teaching and research” (Qilong 2000). Led by this university, scientific research in other German universities developed rapidly. By the late nineteenth century, in the structure of higher education in Germany, business schools, technical colleges, and universities quickly emerged. There were apparent differences between these schools and comprehensive universities. For example, they usually set up corresponding departments for the social needs of German industrialization, such as architecture, machinery, chemistry, metallurgy, and mathematics (Laishun 2002). On the other hand, the large number of specialized talents they trained extensively promoted Germany’s technological innovation and industrialization process. The German government had always positively supported the development of science and technology. With the support of the government, many high-level scientific research institutions sprung up in Germany. In addition to the former Berlin Academy of Sciences, in the late nineteenth century, the National Institute of Physics, the National Institute of Chemical Engineering, and the Institute of Machinery were also established. The German government also tried its best to help solve the scientific and technological problems in industrial production. For example, after the Franco-Prussian War, the Bessemer process was unable to smelt the phosphosiderite of Lorraine. To improve iron smelting technology, German scholars went to Britain, France, Belgium, and other countries to study and concentrated on technological research about this problem. When the British invented the new technology of Thomas converter steelmaking, Germany immediately introduced it and made the low-quality phosphosiderite into an industrial fortune. In addition to steelmaking, Germany also imported shipbuilding technology from Britain and used electric welding in the shipbuilding process through its transformation. In terms of chemical technology, Germany originally learned from Britain, France, Belgium, and other countries but soon surpassed them to become a leading chemical technology country (Jilian 1988). 3

“Harmonized” Industrialization in the United States

The United States was a late-rising capitalist country. But by the early 1890s, its industrial production had broken the monopoly of Britain and became number one in the world. A distinctive feature of American industrialization was the coordinated development of various industries. For example, although the status of light industry in the entire industry showed a gradual decline, until the completion of industrialization in the United States, the proportion of light industry in the United States was still more significant than that of heavy industry. A similar situation existed in agricultural production. Although the proportion of agriculture in the U.S. economic structure was declining, the speed and modernization of its agriculture attracted worldwide

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attention.2 This joint development resulted mainly from some positive measures taken by the US government in terms of resource allocation and market operation. First, the US assisted in developing backward areas in the west by providing sufficient raw materials and a broad market for industrial development. In the history of the United States, the westward movement almost existed during the entire process of industrialization. This movement provided sufficient raw materials and a vast market for industrial production in the eastern region and greatly promoted the revolution of the transportation industry in the United States. It can be said that the westward movement was the internal driving force for the United States to achieve high-speed industrialization in the second half of the nineteenth century. In this movement, the U.S. federal government’s role was mainly to continuously improve the land distribution system in the west until the democratic distribution of the land in the west was finally finished. This is the prerequisite for the rapid development of the westward movement. At the beginning of the United States’ independence, the opinions of the government on the development of the west were divided. In 1785, the U.S. Congress passed the “Western Land Sale Act,” which stipulated 640 acres as a unit for sale and the price of land should be no less than $1 per acre. Although this act had a certain effect on the development of the western region, it deprived ordinary farmers of the opportunity to purchase land, and instead encouraged land speculation. Since then, the American people waged continuous struggles to lower sales limits, land prices and improve payment conditions (Youlun 2005). This struggle won final victory during the Civil War. In 1862, the Lincoln Government formally promulgated the Homestead Act to free land allocation in the west. This act severely cracked down on slavery and further promoted the course of the American Westward Movement. The impact of the westward movement on industrial production in the United States was mainly manifested in the following aspects. First, the rich mineral deposits in the western region provided inexhaustible raw materials for industrial production in the eastern region. In synchronization with the immigration to the west, the West’s mining industry was also in full swing at that time. Additionally, the development of the western region provided grain and other agricultural products for the eastern region’s residents. It became a sales market for industrial products from the eastern region. By 1860, the old northwestern region had already become a production center for wheat, corn, beef, and pork. But farmers’ tools and machinery there relied on manufacturers in the eastern region. In addition, the development of the western region also provided a direct impetus for the revolution of the U.S. transportation industry and the great development of the transportation industry, which became a powerful booster for American industrialization. Second, the United States government restricted the formation of monopolies and maintained a freely competitive market environment. Free competition is significant to promote the rational distribution of social resources. But the ideal state of free competition is unlikely to form spontaneously, 2

Refer to the research report of State Council Development Research Center “The Characteristics of American Industrialization and its Significance for China,” June 2003.

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and uncontrolled competition will inevitably lead to monopolies. Generally speaking, American industrial policy is also based on laissez-faire and non-interference. However, unlike the laissez-faire of Britain, which focuses on protecting individual enterprises, the United States shows rational power and promoting the healthy development of the economy through the cultivation and protection of market mechanisms (Dobbin 1994). In the late nineteenth century, the large industrial enterprise began to appear during the wave of industrialization in the United States. These enterprises took advantage of the increasingly developed rail and telegraph networks in the United States to fully play to economies of scale. But what followed was merger activity among companies. After Mobil Oil Company formed a trust in 1882, a series of trust organizations appeared in other industries. They abused monopoly privileges and conspired to control market supply and product prices, which caused the masses of middle- and lower-class people to suffer greatly. The traditional principle of free competition among enterprises was seriously challenged. Against this background, a massive antitrust movement emerged in American society. In 1890, the U.S. Congress formally passed the Sherman Antitrust Act. This is the first antitrust law in the United States as well as the world’s first such law. However, for various reasons, this law’s actual impact on corporate mergers was negligible (Bensell 2008). In 1901, President Theodore Roosevelt established an antitrust bureau within the Department of Justice to implement antitrust policies. His successor, President William Howard Taft, opened fire on monopolies. In 1912 alone, the government filed 45 cases against Grand Trust, including the United States Steel Corporation that no one dared to touch before (Yuling 2007). By 1914, with the passage of the Clayton Act and the Federal Trade Commission’s establishment, plus the previous Sherman Antitrust Act, the United States finally established a basic framework for antitrust policy. It perfected this framework through numerous judicial decisions (Yuling 2007). Third, the U.S. government strengthened supervision and management of the financial market and established a reasonable structure for its financial system. Some scholars pointed out that when analyzing the reasons for a country’s economic growth, the role of financial supervision has not been given due attention for a long time. However, some research results in recent years have begun to demonstrate the role of financial development in promoting a country’s economic growth (Gang 2003). Throughout the recent economic history of the United States, the continuous development of financial supervision systems and policies provided good monetary order and efficient financing channels for industrial and commercial activities, which played a huge role in American industrialization’s smooth progress. After the end of the Second World War, the reason why the United States was able to establish an international currency system centered on the U.S. dollar was undoubtedly related to the expansion of U.S. economic power after the war. Also contributing to the dollar’s dominance was the strong financial management capability brought by the improvement of the U.S. financial system and the upgrade of its financial structure.

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The supervision of financial activities by the U.S. federal government has gone through a process of gradual development. At the beginning of American independence, the federal government had few measures for financial activities. In 1791, the First Bank of the United States was established. This was the first attempt of the United States to establish a central bank. In 1817, the Second Bank of the United States was established, but the American people’s dislike of the concept of a centralized bank made both of the two banks fail. In 1864, the US Congress formally passed the National Bank Act. The passage of this act restored the federal government’s responsibility to unify the national currency and supervise financial institutions to some extent. However, the national banking system established by this act did not become a unified system covering all banks in the country. As far as the entire financial sector was concerned, there was still a lack of a centralized national currency bank management agency (Ming 2003). After the 1870s, the United States experienced a financial panic almost every ten years, mainly because of an overly decentralized banking system. However, due to the American people’s concerns about a central monetary authority, any proposal regarding the banking system that involved the creation of such an authority would inevitably fail. The repeated panics led to the passing of the Federal Reserve Act of 1913. The Federal Reserve System established under this act solved the problem of fragmentation of the banking system, but also confirmed the independent status of countless unitary commercial banks. History has proven that only this form of financial institutional arrangement is acceptable to the American people (Ming 2003). In general, although the path of US financial development was not smooth, and various problems and drawbacks emerged from time to time (as Gang et al. 2003 pointed out), from the mid-nineteenth century to the first world war, the type and number of US financial institutions showed a trend of rapid growth. This was conducive to creating a wide range of capital circulation channels, which helped attract a large number of funds from home and abroad. These funds flowed through the intermediation of financial institutions, in the form of various financial instruments, into the production and operation enterprises and other capital demanders. In other words, the United States’ financial development during this period was compatible with the advancement of its industrialization, and it played a very active role in supporting and promoting the industrialization of the United States. 4

Common Characteristics of Industrial Policies in Various Countries

The above examples partially reveal some policy measures adopted by the respective governments to support industrial development during the industrialization period in Britain, Germany, and the United States. Each country had policies suitable to the different situations and challenges faced by each at different historical stages. Simultaneously, as far as the overall industrial policies of these countries are concerned, we can also sum up many common characteristics. These characteristics constitute the historical experience of Western industrialization. Although the environment today has undergone tremendous changes and historical evolution cannot be simply repeated, these experiences can still provide some inspiration and reference for developing countries’ current industrialization road.

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First, the three countries used state power to create a favorable external environment for industrial development. In the rise of the modern Western countries, the governments generally adhered to the “laissez-faire” approach for domestic trade but were more interventionist in international trade and foreign relations. In the industrialization process of Britain, Germany, and the United States, their respective governments adopted aggressive policies on external affairs. As mentioned earlier, Britain had implemented tariff protection to protect their industries in their infancy for a long time. Its plunder of the underdeveloped overseas countries was another important means by which Britain promoted the development of its industry. The United States and Germany also implemented similar policies as Britain. For example, an important reason why the United States declared war on Britain in 1812 was that Britain infringed on the United States’ rights to maritime trade as a neutral country. In regards to tariffs, the United States had been implementing protectionist policies since its independence. In 1890, the United States passed the McKinley Tariff Act, which raised the average import tariff from 38 to 50%. This high tax rate was rare in U.S. history (Jianxin 2014). The situation in Germany was quite similar. After establishing the German Empire, Bismarck resolutely pursued trade protection policies despite the prevalence of free trade in the surrounding countries. In 1880, the tariff imposed on imported grain and industrial products was very high, while raw materials were tax-free. The aim was obviously to support the development of domestic industries. Second, the three countries promoted fair and orderly market competition through legislative means. In this regard, the American antitrust movement and antitrust acts are the best examples. Although they had different historical backgrounds in Britain and Germany, they also faced monopoly issues to varying degrees and chose to restrict monopolies through legislative means and protect competition. According to the research by Xinkuan (2012), anti-monopoly activities appeared in the early modern times in Britain. Eventually, they promoted the adoption of antitrust laws, which helped expand economic freedom and paved the way for developing the British market economy. Another example of promoting fair competition through legislative means is patent protection. Undoubtedly, patent protection has a fundamental impact on stimulating technological innovation and is an important condition for the smooth progress of Western industrialization. As early as 1624, Britain promulgated the “Monopoly Regulations,” which made provisions on the duration of inventions and the scope of legal protection. Article 1, paragraph 8, of the 1787 Constitution of the United States of America also clearly states, “Protect the exclusive rights of authors and inventors for their works and inventions within a limited period to promote the advancement of science and technology.” (Xi 2000). In 1790, the United States Congress passed the first patent law. After completing its unification, Germany introduced its first patent law in 1877 and established the Imperial Patent Office in Berlin to receive patent applications and related litigation. Third, the three countries promoted industrial revitalization and development with scientific and technological changes.

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The importance of science and technology to modern Western industrialization cannot be overemphasized. The process of industrialization is the process of continuous scientific achievements and continuous breakthroughs in production technology, which drive the revolution of the entire industry. As mentioned earlier, Germany’s policies in this regard were the most effective. The United States’ attitude towards technological innovation was also quite positive. As early as the beginning of American independence, many states and local governments offered rewards to encourage technological inventions. After the civil war, the federal government’s support for science and technology significantly increased. This is also why the United States seized the second scientific and technological revolution in the late nineteenth century. During this period, the United States greatly increased its funding for scientific research, formed the government’s scientific and technological functions, and promoted the initial establishment of a nationwide scientific and technological system including universities and industry (Bikang 1998). In contrast, Britain provided less support for science and technology related to its traditional laissez-faire ideology. Nevertheless, in the process of industrialization, Britain also took some measures to encourage the development of science and technology in the country. For example, it recognized and protected patent rights and banned the export of technology, talent, and machinery for a long time. Fourth, the three countries maintained abundant human resources through multiple methods. In the process of modern Western industrialization, it was necessary to maintain a large and high-quality labor force. In this regard, the policies of Britain, Germany, and the United States had their own merits. For example, in the process of British industrialization, the government formulated a series of social laws aiming at protecting the basic rights of workers. It should be said that this policy was not entirely based on humanitarian considerations, but indeed had a positive function in a practical sense. From the perspective of human resources cultivation, it was desirable. The extent of child labor was reduced through mandatory restraints, the salaries of workers were increased, and the factory environment was also improved. This is very important for promoting national education and protecting the physical and mental health of workers. And in turn, through the implementation of these laws, British industrialized production gained a steady stream of high-quality laborers. At the same time, tension between workers and employers was eased, in which way the harmonious work environment required for economic development was guaranteed. In the process of German industrialization, the popularization of elementary education and the reformation of the higher education and research system were both impressive. The characteristics of the United States in managing human resources were highlighted in its immigration policy. For most of the nineteenth century, the United States’ immigration policy adhered to the standpoint of “the immigrants will not be refused, and the more, the better.” This was extremely beneficial to solving the shortage of American labor, introducing advanced overseas technology, and attracting foreign capital. Fifth, the three countries established and improved their financial systems to provide financing channels for industrial development.

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Financial development is the core element of economic growth, and the birth and improvement of modern financial mechanisms is also a key factor in the process of Western industrialization. After the glorious revolution, Britain soon set off on a financial revolution. This revolution not only supported Britain’s increasingly frequent external battles but also laid the foundation of its financial system for its early industrialization. During this period, there were various financial breakthroughs, such as the new joint-stock company, the British Bank, the national debt system, and the stock exchange market, which were the marks of Britain’s transition from a traditional royal financial country to a modern financial country. Simultaneously, the British financial revolution had a profound impact on the development of the entire modern Western economy. It opened an era of replacing precious metal currencies such as gold and silver with symbolic currencies such as banknotes. The centralized banking system formed during the financial revolution was also followed by other countries (Guang 2007). Later, the birth and development of the U.S. financial regulatory system was deeply influenced by the British financial revolution. The maturity of the German financial system came after the unification of Germany. In 1874, Germany officially promulgated the Banking Law, and two years later, it reorganized the Bank of Prussia into the Imperial Bank. The bank unified the use of the gold standard mark across the country, thus assuming the German Central Bank’s responsibility. In 1896, Germany promulgated the Exchange Law and Bank Management Securities Law to further regulate securities transactions and securities businesses operated by commercial banks (Guangwen 2000).

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Ouyang Yao, Yin Xiangfei, Yi Xianzhong, A Great Power Economic Model Realizing the Balanced Supply and Demand of Factors, Economic Perspectives, 11, 2014. Paul Mantu, The Industrial Revolution in the 18th Century: an Outline of the Beginnings of the Modern Factory System in England, Beijing: The Commercial Press, 1983. Romer, P.M., “Increasing Returns and Long-Run Growth”, Journal of Political Economy, 1986, 94(5): 1002-1037. Shen Han, History of the British Land System, Shanghai: Xuelin Verlag, 2005. Stanley L·Engelman, etc, The Cambridge Economic History of the United States, Gao Debu, etc, Trans, Beijing, China Renming University Press, 2008. Sun Gang, The Connection between Financial Development and Economic Growth, Research on Financial and Economic Issues, 11, 2003. Tan Chongtai, A Comparative Study of Early development of developed countries and economic development in developing countries today, Wuhan: Wuhan University Press, 2008. Wang Xi, Principles and Compromise: The Spirit and Practice of the U.S. Constitution, Beijing: Peking University Press, 2000. Wang Xiaoxia, U.S. Urbanization during the Industrialization Period, Journal of Liaoning University (Philosophy and Social Science), 1, 1999. Wen Guanzhong, China’s territorial changes and the impulse to step out of the agriculture-based society: Analysis of Needham’s Mystery from Economic Geography, China Economic Quarterly, 2, 2005. Wu Bikang, Power and Knowledge: A History of British and American Science and Technology Policy, Fuzhou: Fujian People’s Publishing House, 1998. Wu Yuling, Controlling the Market’s negativeness——Interpretation of U.S. Antitrust Policy, Nanjing: Nanjing University Press, 2007. Xing Laishun, Educational Development in the Industrialization Process of Modern German, Journal of Huazhong Normal University, 6, 2002. Xing Laishun, German Industrialized Economy—Social History, Wuhan: Hubei People’s Publishing House, 2003. Xu Jilian, Science and Technology and the Economic Prosperity of Modern Germany, Journal of Shaanxi Normal University(Philosophy and Social Sciences Edition, No. 1, 1988. Zhang Guang, British financial revolution and its historical influence, Nankai Political Review, Tianjin: Tianjin People’s Publishing House, 2007. Zhang Peigang, Zhang Jianhua, Development Economics, Peking University Press, 2009. Zhang Jianxin, U.S. Trade Politics, Shanghai: Shanghai People’s Publishing House, 2014 Zhang Youlun, A Probe into the American Westward Movement, Beijing: People’s Publishing House, 2005. Zhou Shulian, Pei Shuping, Chen Shuxun, China Industrial Policy Research, Beijing: Economic & Management Publishing House, 2007.

Chapter 3

Development Advantage of Large Developing Countries

We have analyzed the development experience of large developed countries in the first two chapters. So large developing countries should learn from the success of large developed countries and facilitate more rapid economic growth, based on their characteristics and advantages. Large developing countries contain three implications: general countries, developing countries, and large-scale countries. Correspondingly, the development of general countries follows the strategy of comparative advantage, the development of developing countries abides by the strategy of latecomer advantage, and the development of large-scale countries complies with the strategy of superior powers. This chapter studies the development advantage of large developing countries, including comparative advantage, latecomer advantage, and large country advantage, which reflects the organic unity of these three advantages.

1 Perspective of Endowment: Comparative Advantage 1

Review of Comparative Advantage Theory

Due to the high degree of isomorphism of economic development modes and economic structure, as well as the imbalanced feature of natural resources and endowments, whether different types of large developing countries could form comparative advantages would be the key to economic synergy and the realization of a shared trade pattern (Linxiao et al. 2014). In fact, different types of large developing countries have different parts with comparative advantages and different transfer patterns between different industries. For example, the comparative advantages of the large developing countries represented by China and India are embodied in the labor-intensive and resource-intensive industries; the comparative advantages of large developing countries represented by Brazil and Russia are reflected in the capital-intensive industries. (Yao et al. 2012). At the same time, as opposed to independent innovation, developing countries have more advantages in technology introduction and imitative innovation © Peking University Press 2022 Y. Ouyang, Large Countries’ Development Path: Experience and Theory, https://doi.org/10.1007/978-981-16-5695-8_3

83

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(Wei and Miaojie 2014). But comparative advantages depending on factor endowments and natural resources may lead to unsustainable development represented by high energy consumption, high investment, and a dense labor force (Krugman 1994; Young 2003; Xiaolu et al. 2009). Large developing countries such as China are in a lower position of the global value chain, especially the low-cost advantage formed by factor endowment comparative advantages, which is limited by fluctuations in exchange rates, resource prices, and environmental protection costs (Linqing et al. 2009). Increasing endowment costs results in the loss of the comparative advantage held by labor-intensive industries. If productivity has not been increased through technology innovation, under the new background of comparative advantages of capital and technology-intensive industries, it is difficult for large developing countries to realize the shift and updating of comparative advantage, and a vacuum of comparative advantage will appear and they will fall into a comparative advantage trap (Olofin 2002; Fang 2011; World Bank 2012). Continuous technology innovation is an important driving force which helps developing countries shift from labor-intensive industries to capital and technology-intensive industries and avoid falling into the “comparative advantage trap” (Gaoju and Xianhai 2014). From the perspective of technological progress bias, this chapter discusses whether the technological progress of large developing countries follows the comparative advantages of factor endowment and the effect of their interaction on the enhancement of total factor productivity (TFP). Comparative advantage theory can be traced back to exogenous technology comparative advantage represented by Ricardo, while Heckscher and Olin put forward comparative advantage theory based on factor endowment. Samuelson then included factor endowment into the general equilibrium framework and systematically explored the connotation of comparative advantage theory. The resulting H–O theorem, S–S theorem, FPE (factor prize equalization) theorem, and Lu theorem are the basis of comparative advantage theory (Xiaokai and Yongsheng 2001; Rudai and Yang 2008). These emphasize that comparative advantage is decided by two core variables–-factor endowment and factor intensity, and assuming that factor endowment reversal is difficult to happen, that comparative advantage has relative stability (Xiaodong and Ronglin 2007). Focusing on the disadvantages of static analysis, product life cycle theory represented by Vernon (1966) makes factor intensity dynamic, and Grossman and Helpman (1990) transfer the static comparative advantage based on national factor endowment into dynamic comparative advantage formed by technology advancement, human capital accumulation, and scale advantage. Heterogeneous enterprise trade theory and base enterprise endogenous boundary theory provide new directions for the development of comparative advantage theory (Melitz 2003; Antràs 2003). To assess the stability of comparative advantage, the dominant comparative advantage index first put forward by Balassa (1965) is widely adopted in empirical analysis, but this index only considers takes exports and neglects the influence of imports, so estimation bias may exist. Follow-up research has made improvements and designed a net export NEX index, G & R index, MIC index, and the New RCA index to calculate and compare the trends of comparative advantage of different countries (Zhi et al. 2015). However, it is difficult to

1 Perspective of Endowment: Comparative Advantage

85

use these indexes to explain the formation mechanism. In recent years, combined with Ricardo theory and H–O theory, RHO theory has explained the influence of productivity and factor endowment, making empirical experiments and providing a theoretical basis and quantitative analysis for the research on comparative advantage (Eaton and Kortum 2002; Morrow 2010; Levchenko and Zhang 2016). In this frame of comparative advantage theory, the comparative advantage of developing countries in international trade are labor-intensive industries, which can’t improve the disadvantageous position, and is not beneficial to the improvement of total factor productivity, and even results in a comparative advantage trap. So scholars began to explore the law for the developing countries to overcome a “comparative advantage trap” from the perspective of technological progress bias and suitability technology. Technology advancement is related to endowment structure, such as local capital and labor, showing the feature of factor bias. The adaptability of technical progress bias and element structure is the key to technology efficiency and total factor productivity. Atkinson and Stiglitz (1969) first interpret suitability technological progress as “learning by practicing in localization”, and the key to the efficiency of technology is the proportion of capital and labor (Basu and Weil 1998). Acemoglu and Zilibotti (2001) introduce the theory of technological progress bias (Hicks 1963; Acemoglu 2002) and give a deep exploration of the endogenous mechanism of technology advancement, element endowment, and quality compatibility from R&D. Based on local abundant skilled labor, developed countries conduct advanced technology innovation. But for developing countries the introduced advanced technology may not be matched with local unskilled labor, thus limiting the enhancement of total factor productivity. Caselli and Coleman (2006) believe that a country prefers to select the intensive use of technology with its own abundance, but a technology gap would lead to technological absorption barriers and loss of efficiency. The technological advancement path of a country depends on the technological gap and technology suitability. If a developing country can choose suitable technology at its discretion, the country’s economic growth can be faster than that of a developed country, and the country may also achieve technological catch-up (Yifu and Pengfei 2006); once there is a error in technology selection, it may be possible to enlarge the technological gap with developed countries (Chaoyang and Yifu 2010). The ongoing technological gaps make the advancement of adaptability technology more important for total factor productivity across countries (Jerzmanowski 2007), whether the technological advancement of the economy can match the structure of factor endowment and be suitable for the local resources, culture, and system environment is an important factor for the gap in total factor productivity across countries (Acemoglu 2007; Acemoglu and Dell 2010). Most studies of China’s empirical are focused on the national, regional, and industrial levels using three-equation, supply-side, standardized systems proposed by Klump et al (2007) to estimate element replacement elasticity and measure the bias of technological progress (Tianshi and Xianxiang 2010; Xiaoling and Yujun 2013; Ming 2014; Xueqin and Shangfeng 2013; Yuchun et al. 2014). These systems are also used to examine the suitability of technological progress and the structure of factor endowment and the static effect on total factor productivity (Qinli and Jiachun 2015;

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Yongze and Xianzhen 2015; Linhui and Zhiqing 2012; Xianli et al. 2015; Yueling et al. 2015). According to our research, there are a lot of studies on the comparative advantage of developing countries. Some scholars have explored the influence of technological progress bias and factor endowment structure on total factor productivity, but neglect that technical progress will also cause the factor endowment structure to change, which interact with each other and affects total factor productivity in a dynamic and interactive process. So starting from the definition of developing countries by Ouyang Yao et al. (2016), choosing thirteen countries, China, India, Russia, Brazil, Mexico, Indonesia, Pakistan, Nigeria, Egypt, Ethiopia, Iran, Congo (DRC), South Africa, as examples, this chapter explores the laws of factor endowment comparative advantage of different industries in different countries. To measure technology progress bias under a standard system of CES production functions combined with the American factor endowment structure, this chapter will investigate the adaptability of technical progress and judge whether it is beneficial to develop a comparative advantage. Also included will be an empirical analysis of the interactive influence of comparative advantage and technological progress on total factor productivity. The structure of the following sections is as follows: the second section is on the endowment comparative advantage of developing countries, the third section treats the bias measurement and adaptability evaluation of technological progress of large developing countries, and the fourth section looks at the effect test of comparative advantage and technological progress on total factor productivity. 2 3

Endowment Comparative Advantage of Large Developing Countries Index design of endowment comparative advantage

Resource endowment, also called factor endowment, includes labor, capital, land, and natural resources, as well as technology, management, culture, and system. But from the perspective of factor endowment, comparative advantage means the level of comparative abundance and scarcity. So this section uses the capital-labor ratio to evaluate the endowment comparative advantage of developing countries from the perspective of country and industry. First, using America as a benchmark, through the observation of the comparative abundance of capital and labor of large developing countries and the comparative advantage difference between developing countries and America, the capital-labor ratio of developing countries is divided by that of America, getting the index of endowment comparative advantage. F Ij =

Kj Lj



KA LA

(1)

Among them, j represents a large developing country, Kj /Lj the capital-labor ratio of the large developing country, KA /LA the capital-labor ratio of the US. If FIj is closer to 1, its factor endowment structure and comparative advantage of the developing country are closer to that of the developed countries. If FIj is closer to 0, the gap of the factor endowment structure gets wider between this large developing country and developed countries, and its comparative advantage is largely complementary

1 Perspective of Endowment: Comparative Advantage

87

to that of the developed countries. The capital and labor data of these countries are from Penn World Table 9.0 (PWT9.0). In order to avoid the endogenesis of data about the capital-labor ratio, learning from Lixing and Guangjun (2015), we make use of the NBER-CES Manufacturing Industry Database to measure the data on the capital-labor ratio in various American manufacturing industries and then divide the capital-labor ratio in developing countries by that in the American industries. Using the classification criteria set by Dongwei et al. (2009) for reference, we divide selected American manufacturing industries into labor-intensive industries, capital-intensive industries, and capitaland-technology-intensive industries (see Table 1), and then design an industrial Table 1 Industry classification standard Industry type

SIC Code

Industry

Labor-intensive industries

20

Food and related 24 products industry

Timber and processing bamboo, rattan, palm and grass products industry

21

Tobacco products industry

25

Furniture and decoration industry

22

Textile industry

31

Leather and leather products industry

23

Clothing and other textile industry

39

Other manufacturing

26

Paper and Paper 30 Products Industry

Rubber and other plastic products industry

27

Printing and Publishing Industry

32

Stone, clay, glass products industry

28

Chemical industry

33

Basic Metal Industry

29

Petroleum and coal products industry

34

Metal products industry

35

Industrial machinery and equipment industry

37

Transportation equipment industry

36

Electronics and other electrical equipment industry

38

Instrument and related products industry

Capital-intensive industries

Capital and technology-intensive industries

SIC Code

Industry

88

3 Development Advantage of Large Developing Countries

endowment comparative advantage index and investigate the comparative advantage of developing countries from the perspective of selected industries (see formula (2)). F Ii j =

Ki j Li j



Ki A Li A

(2)

Among them, KiA /LiA represents the capital-labor ratio of industry i in the US, FIij represents the comparative advantage of large developing country j in industry i. For labor-intensive industries, if FIij is smaller, the comparative advantage in production is stronger; yet for capital-intensive and capital-and-technology-intensive industries, smaller FIij means that this country may have violated comparative advantage in the production of this industry. (2)

The evaluation of endowment comparative advantage of large developing countries

Table 2 shows the endowment comparative advantage of thirteen developing countries compared with America as measured by formula 1, with Japan and Korea serving as a contrast to them. According to the different means of endowment comparative advantage, these thirteen countries are divided into two groups: the mean of endowment comparative advantage of one group is less than 0.2; this group of eight countries includes China, India, Egypt, Ethiopia, Indonesia, Congo, Nigeria, and Pakistan. Table 2 Evaluation of comparative advantages of capital and labor factor endowments of the economy from 1990 to 2014 Country

1990

1995

2000

2005

2010

2014

Mean

Brazil

0.1590

0.2063

0.2162

0.1894

0.2832

0.3622

0 0.2308

China

0.0323

0.0437

0.0619

0.0889

0.1563

0.2441

0.0938

Congo

0.0403

0.0481

0.0508

0.0560

0.1013

0.1629

0.0695

Egypt

0.0295

0.0581

0.0807

0.0964

0.1144

0.1282

0.0841

Ethiopia

0.0073

0.0077

0.0092

0.0153

0.0158

0.0238

0.0122

India

0.0335

0.0374

0.0439

0.0517

0.0911

0.1238

0.0589

Indonesia

0.0484

0.0570

0.0746

0.0975

0.2163

0.3345

0.1238

Iran

0.2611

0.3606

0.3801

0.3599

0.4321

0.4461

0.3755

Mexico

0.3232

0.3209

0.2690

0.2717

0.3027

0.3649

0.2971

Nigeria

0.0100

0.0058

0.0092

0.0631

0.0716

0.0968

0.0360

Pakistan

0.0461

0.0593

0.0622

0.0625

0.0744

0.0770

0.0633

Russia

0.5671

0.6446

0.2978

0.2401

0.2783

0.3011

0.3780

South Africa

0.2654

0.2286

0.2143

0.2043

0.3151

0.3423

0.2510

Japan

0.5259

0.7129

0.7344

0.7371

0.7712

0.7883

0.7217

Korea

0.2691

0.4390

0.5318

0.6825

0.7277

0.7350

0.5700

Source Penn World Watch 9.0

1 Perspective of Endowment: Comparative Advantage

89

These countries are called large labor-abundant developing countries. The reason is that compared with Korea and Japan, their mean of endowment comparative advantage is smaller, approaching 0, showing abundant labor and scarce capital in these developing countries, with a complementary relationship between factor endowment structure and developed countries. The mean of endowment comparative advantage of the other group is over 0.2, represented by Russia, Brazil, Mexico, South Africa, and Iran. These five countries are called large capital-abundant developing countries. The endowment comparative advantage of these countries is close to that of Korea and Japan, indicating there is a similarity in factor endowment structure between this type of developing country and developed countries, namely abundant capital and scarce labor. In addition, the change trends of the endowment comparative advantage value of these two groups are different. The changes in the endowment comparative advantage mean of the developing countries represented by China and India show an upward trend, but different countries increase at different speeds, indicating the endowment comparative advantage of the large developing countries in this group develops in the same direction as developed countries. Among all these countries, the endowment comparative advantage values of China and Indonesia developed fastest, with the former increasing from 0.0323 in 1990 to 0.2441 in 2014, while the latter rose from 0.0484 in 1990 to 0.3345 in 2014. But regrettably, the endowment comparative advantage values of these two countries in 2014 were only close to or exceeded that of Korea in 1990, and the mean of endowment comparative advantage from 1994 to 2014 was still very low, showing great potentiality for the developing countries to upgrade the structure of factor endowment. For the developing countries having an endowment comparative advantage similar to that of developed countries, the endowment comparative advantage values of Mexico, South Africa, Iran, and Brazil showed limited increases at different speeds. The endowment comparative advantage value of Russia decreased from 0.5671 in 1990 to 0.3011 in 2014, showing obstacles arise in the process of upgrading the endowment structure of this kind of large developing country, and also that it is hard to promote capital deepening continuously. So there are differences in the values and trends of different types of large developing countries, but on the whole, the endowment comparative advantage value is relatively low, which increases fast at the early stage, then slows down, even decreases, and then comes the threshold for the upgrading of factor endowment structure. (3)

Evaluation of endowment comparative advantage of industries in large developing countries

According to formula (2), we have calculated the endowment comparative advantage of different industries of 13 large developing countries from 1990 to 2011. Owing to space constraints, only the average value of the endowment comparative advantage of the industries during this period is listed, compared with that of Japanese and South Korean industries, shown in Tables 3 and 4. Table 3 shows the endowment comparative advantage (FIij ) of the development of labor-intensive industries in different economies. For the eight large developing countries with abundant labor, China, India, Egypt, Ethiopia, Indonesia, Congo, Nigeria, and Pakistan, the endowment comparative advantage value in terms of labor-intensive

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3 Development Advantage of Large Developing Countries

Table 3 Evaluation of comparative advantages of endowments of economies in labor-intensive industries Country

20

21

22

23

24

25

31

39

Mean

Brazil

0.607

0.207

0.736

2.513

1.455

1.779

1.689

1.367

1.294

China

0.219

0.071

0239

0.753

0.511

0.602

0.551

0.461

0.426

Congo

0.167

0.056

0.193

0.641

0.393

0.474

0.446

0.364

0.342

Egypt

0.224

0.074

0.257

0.831

0.538

0.638

0.584

0.490

0.454

Ethiopia

0.031

0.010

0.036

0.118

0.075

0.089

0.083

0.068

0.064

India

0.145

0.048

0.165

0.543

0.340

0.408

0.382

0.313

0.293

Indonesia

0.280

0.090

0.306

0.969

0.644

0.765

0.708

0.585

0.543

Iran

1.033

0.354

1.260

4.315

2.498

3.047

2.884

2.343

2.217

Mexico

0.810

0.283

1.021

3.610

1.956

2.428

2.356

2.871

1.792

Nigeria

0.084

0.026

0.082

0.238

0.192

0.217

0.192

0.165

0.150

Pakistan

0.173

0.059

0.211

0.720

0.418

0.509

0.482

0.392

0.371

Russia

1.077

0.382

1.460

5.479

2.620

3.367

3.391

2.599

2.548

South Africa

0.671

0.232

0.824

2.871

1.600

1.977

1.907

1.521

1.450

Japan

2.012

0.692

2.465

8.465

4.883

5.954

5.639

4.582

4.336

Korea

1.563

0.524

1.819

5.988

3.766

4.491

4.152

3.448

3.219

Source Penn World Table 9.0 (PWT9.0) and US Manufacturing Database (NBER-CES Manufacturing Industry Database)

industries is relatively small, indicating that this type of country has a comparative advantage in the production of this kind of industries, in line with the conclusion discussed above that their factor endowment structure has a complementary relationship with the developed countries. But for the five capital-abundant developing countries, Russia, Brazil, Mexico, South Africa, and Iran, the comparative advantage value of endowment in terms of labor-intensive industries is relatively large, with the average level exceeding 1, closer to South Korea and Japan, implying that in developing labor-intensive industries this type of country violates endowment comparative advantage, coinciding with the earlier conclusion that their factor endowment structure is similar to that of developed countries. Table 4 shows the endowment comparative advantage (FIij ) of capital-intensive industries and capital and technology-intensive industries in different economies. For the eight large developing countries with abundant labor, China, India, Egypt, Ethiopia, Indonesia, Congo, Nigeria, and Pakistan, the endowment comparative advantage value in terms of capital-intensive and capital and technology-intensive industries are relatively small, indicating the production of these industries in such countries has violated the endowment comparative advantages. For the five large developing countries with abundant capital, Russia, Brazil, Mexico, South Africa, and Iran, the endowment comparative advantage value in terms of capital-intensive and capital and technology-intensive industries is relatively big, especially for Russia, and is close to South Korea and Japan, which is in line with the earlier conclusion that

1.138

0.884

Japan

Korea

2.745

3.665

1.226

2.117

0.314

0.132

1.508

1.875

0.469

0.251

0.055

0.388

0.292

0.367

1.096

0.591

0.774

0.260

0.433

0.067

0.031

0.316

0.397

0.105

0.055

0.012

0.084

0.063

0.082

0.233

0.205

0.268

0.089

0.149

0.023

0.011

0.109

0.137

0.036

0.019

0.004

0.029

0.022

0.028

0.080

2.223

2.918

0.970

1.621

0.250

0.112

1.185

1.495

0.386

0.204

0.044

0.317

0.236

0.303

0.875

30

1.532

1.999

0.659

1.091

0.171

0.077

0.806

1.024

0.263

0.139

0.030

0.218

0.161

0.208

0.598

32

0.840

1.080

0.358

0.575

0.093

0.045

0.434

0.555

0.149

0.078

0.017

0.120

0.089

0.117

0.326

33

2.288

2.959

0.982

1.595

0.254

0.120

1.191

1.518

0.403

0.210

0.046

0.327

0.243

0.317

0.889

34

1.632

2.148

0.717

1.207

0.184

0.082

0.876

1.102

0.284

0.150

0.032

0.232

0.174

0.222

0.646

1.196

1.649

0.558

1.021

0.141

0.052

0.694

0.843

0.200

0.109

0.024

0.167

0.128

0.155

0.492

36

Source Penn World Table 9.0 (PWT9.0) and US Manufacturing Database (NBER-CES Manufacturing Industry Database)

0.612

0.098

Pakistan

0.381

0.048

Nigeria

South Africa

0.460

Mexico

Russia

0.584

Iran

0.018

Ethiopia

0.082

0.126

Egypt

0.159

0.095

Congo

Indonesia

0.124

India

0.344

China

29

1.402

1.834

0.615

1.022

0.158

0.073

0.749

0.940

0.247

0.130

0.028

0.199

0.150

0.193

0.551

37

35

28

26

27

Capital and technology-intensive industries

Capital-intensive industries

Brazil

Country

1.749

2.337

0.790

1.365

0.201

0.086

0.968

1.197

0.305

0.162

0.035

0.247

0.188

0.237

0.702

38

1.441

1.898

0.634

1.067

0.163

0.072

0.775

0.972

0.250

0.132

0.029

0.205

0.153

0.196

0.569

Mean

Table 4 Evaluation of the comparative advantage of endowments of economies in capital-intensive industries and capital and technology-intensive industries

1 Perspective of Endowment: Comparative Advantage 91

92

3 Development Advantage of Large Developing Countries

their factor endowment structure is similar to that of developed countries. Overall, our judgment on the comparative advantage of the large developing countries is consistent with the conclusions of Yang and Yao (2016) and has a certain credibility. 3

Technological Progress Bias Measurement and Suitability Evaluation of Large Developing Countries

To evaluate the suitability between technological progress bias of different types of developing countries and the structure of their factor endowment, this section first explains the indicators and methods of the measurement of technological progress bias, calculates the technological advancement of large developing countries, and uses the United States as a benchmark to test the suitability between technological progress bias of each country and its comparative advantage. (1)

The design of the measurement index of technological progress bias

The production function of the developing country i is set as a CES-type production function that includes capital K and labor L: Yit = [(1 − αi )(A Lit L it )

εi −1 εi

+ αi (A K it K it )

εi −1 εi

εi

)] εi −1

(3)

Among them, Y it represents the total output of the large developing country i at time t, while L it and K it are the input of labor and capital in production. A Lit and A K it represent labor-enhancing and capital-enhancing technological progress during the same period, also called the technical efficiency of labor factor and the technical efficiency of capital factor, and εi represents the elasticity of substitution of the two production factors of the country. If εi = 0, there is no substitution relationship between capital and labor in the country, and the production function is transformed into Leontief’s production function; if 0 < εi < 1, the two factors are complementary in production; if εi = 1, the production function degenerates to type C-D; if εi > 1, the two factors have a mutual substitution relationship in the production process; if εi = + ∞, the production factors are completely replaced and the production function becomes linear. From the first-order condition for profit maximization, it can be seen that the relative marginal output of capital and labor is equal to the factor price, jointly determined by factor augmentation technological progress and factor structure: MPKit rit = = MPLit ωit



αi 1 − αi



 ×

AKit ALit

 εiε−1  i

K it L it

− ε1

i

(4)

In order to analyze whether the technological progress of large developing countries matches the comparative advantage formed by its factor endowment structure, this section explores the influence of technological progress bias on the relative marginal output of factors and its preference for factor use, and defines the relative increase pattern of technological progress and technological progress bias Index TB, combining Acemoglu’s (2002) definition of the connotation of technical progress

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bias. ∂(MP Kit /MP Lit ) d(A K it /A Lit ) × ∂(A K it /A Lit ) dt       1  1 αi εi − 1 AKit − εi K it − εi d(A K it /A Lit ) = × × × 1 − αi εi ALit L it dt     εiε−1  − ε1   εiε−1   1 i i i AKit αi K it−1 K it−1 − εi AKit−1 . = × − 1 − αi ALit L it−1 ALit−1 L it−1 (5)

T Bit =

In this formula, the technical efficiency of labor factor ALit increases relative to technical efficiency of capital factor AKit , that is, when d(AKit /ALit )/ dt < 0, technological progress is in the form of relative labor improvement; conversely, when the technical efficiency of labor factor ALit decreases compared with the technical efficiency of capital factor AKit , that is, when d(A Kit /A Lit )/ dt > 0, technological progress is in a form of relative capital increase. In essence, the relative increase form of technological progress is the change rate of capital relative to technical efficiency of labor factor to compare the speed of technical efficiency of these two production factors, capital, and labor, and identify which production factor has improved their technical efficiency faster, and at which production factor large developing countries are better. The technological progress bias index T B is to further determine whether technological progress is towards making more use of abundant factors, saving scarce factors, and bringing  full play to comparative advantage. Under the premise that the factor structure K i L i of a country remains unchanged, the change of relative marginal output  of factors MPKit /MPLit is caused by that of relative factor improvement form AKit ALit . When T Bit > 0, the increase of marginal output of capital caused by the country’s factor-enhancing technological progress is greater than that of labor. Technological progress tends to use more of the capital factor and save the labor factor; when T Bit < 0, the increase of marginal output of capital caused by the country’s factor-enhancing technological progress is less than that of labor, and technological progress tends to use more of the labor factor to save the capital factor; when T Bit = 0, the country’s technological progress has the same effect on the relative marginal output of labor and capital factors, showing unbiased and neutral characteristics. The essence of the technological progress bias index T B is to measure the asymmetric impact of technological progress in major countries on the relative marginal output of labor and capital factors, and whether the preference for different factors conforms to comparative advantages formed by the factor endowment structure. According to formula 5, the relationship between the relative increase form of technological progress and the bias index can be determined: when εi > 1 , labor and capital replace each other, and relatively enhanced technological advancement is also biased towards this production factor. If technological progress is in the form of a relative capital increase, then the relative marginal output of capital tends to be

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increased, and if technological progress is in the form of relative labor increase, then labor. When 0 < εi < 1, capital and labor factors are complementary, and the relatively enhanced technology progress is not biased towards this factor. If technological progress is in the form of a relative capital increase, the improvement of capital technology efficiency will increase the demand for labor because of their complementary relationship. Since the improvement of capital technology efficiency is higher than that of labor, the excess demand on labor exceeds capital, the labor remuneration relatively increases, and technological progress is biased toward labor; conversely, if technological progress is in the form of relative labor growth, technological progress is biased toward capital. When εi = 1, the production function becomes unbiased and is a neutral Cobb Douglas (C–D) production function. Combining formulas 3 and 4, capital factor technology efficiency A K it and labor factor technology efficiency A Lit of large country i can be calculated:  A K it =

s K it αi

i   ε ε−1 i

 Yit , K it

 A Lit =

1 − s K it 1 − αi

i   ε ε−1 i

Yit L it

 (6)

1 − s K it and s K it respectively represent the labor and capital income of large countries, which can be calculated based on actual data, only taking into consideration factor substitution elasticity εi and parameter αi that characterizes factor input shares. According to the analysis of Klump et al. (2007), this section first standardizes the production function of big country i and its first-order conditions, constructs a three-equation standardized system on the supply side, and uses the seemingly uncorrelated regression model (SUR) to estimate the factor substitution elasticity and input parameters in the production function. The growth rate of factor technical efficiency is set as a BOX-COX type variable growth rate, where r A K i and r A Li represent capital factor technical efficiency parameters and labor factor technical efficiency parameters respectively, and Obs and λ A Li represent the curvature of labor factor technical efficiency and capital factor technical efficiency. A K it = A K it0 × e g A K it , g A K it =

A Lit = A Lit0 × e g A Lit

γ A K i t0 ((t/t0 )λ A K i −1 ) γ A t0 ((t/t0 )λ A Li −1 ) , g A Lit = Li λ AK i λ A Li

Assuming that the base period data satisfies wit0 L it0 /rit0 K it0 = (1 − αi )/αi , it can be proved that the base period capital factor technical efficiency and labor element factor technical efficiency are A K it0 = Yit0 /K it0 , A Lit0 = Yit0 /L it0 respectively. Then it is to standardize the above different indicators, using their sample value as reference values: Yit0 = ξi Yi , K it0 = K i , L it0 = L i , t0 = τ , then bring in the production function and its first-order conditions to get a three-equation standardized system:

1 Perspective of Endowment: Comparative Advantage



95



  t λAK i γ AK i τ log −1 = log(ξi ) + λ AK i τ K it /ki ⎧

  εiε−1

   λ A Li ⎨ i εi −1 L it /L i εi t γ τ A Li + log (1 − αi ) e εi −1 ⎩ εi − 1 λ A Li τ K it /ki 

   t λAK i γ AK i τ − −1 + αi λ AK i τ 

   ωit L it Yit /Yi εi − 1 log log = log(1 − αi ) − Yit εi L it /L i 

  t λ A Bi γ A Li τ −1 (7) − log ξi − λ A Li τ Yit /Yi





γit K it log Yit



 



  γ AK i τ Yit /Yi εi − 1 t λAK i = log αi − −1 log − log ξi − εi λ AK i τ K it /K i

Using the total output data Yit of different types of large developing countries, the capital factor input K it and the labor factor input L it data, and the capital factor income share γit K it and the labor factor income share ωit L it , the factor substitution elasticity εi , and the parameter αi that characterizes factor input share can be estimated by combining the three-equation supply-side standardized system. (2)

Measurement of technological progress bias of large developing countries

Using the feasible generalized nonlinear least squares method (FGNLS), combined with the time series data of different types of large developing countries from 1950 to 2014, the parameters ξi , λ A Li , λ A K i , γ A Li , γ A K i , αi , εi in three-equation standardized system formula (7) can be calculated and the selection of the initial value of the variables follows the idea of Ledesma et al. (2010). The total output value Yit is the total output of different countries that have been adjusted via purchasing power parity over the years, denominated in US dollars in 2005. The capital factor input K it is also the country’s capital stock adjusted via purchasing power parity, and the labor factor input L it refers to the country’s total employment, the labor factor income ωit L it is the product of the share of labor compensation in GDP and the total output; similarly, the capital factor income γit K it is the product of capital income share and total output. All the above data are from the Penn World Table 9.0 (Penn World Table 9.0). Due to data length constraints, this section excludes data from countries with a continuous sample period of fewer than 30 years, only choosing Brazil, China, Egypt, India, Indonesia, Iran, Mexico, Nigeria, and South Africa, the nine large developing countries as samples, and the United States, Japan, and South Korea as control groups. The parameter estimation results of the three-equation standardized system of 12 economies are shown in Table 5: First, most of the parameter estimation results of the large developing countries and the three developed countries (the United States,

ξi

1.105*** (0.000)

0.795*** (0.000)

1.259*** (0.000)

0.727*** (0.000)

1.279*** (0.000)

0.721*** (0.000)

1.133*** (0.000)

1.231*** (0.000)

1.090*** (0.000)

0.950*** (0.000)

1.050*** (0.000)

Parameter

Brazil

China

Egypt

India

Indonesia

Iran

Mexico

Nigeria

South Africa

America

Japan

λK i

1.690*** (0.000)

3.867*** (0.000)

1.221 (0.629)

3.131*** (0.000)

3.131*** (0.000)

4.375*** (0.000)

2.511*** (0.000)

2.792*** (0.000)

2.307*** (0.000)

1.379*** (0.000)

2.405*** (0.000)

γK i

−1.690*** (0.000)

−0.079*** (0.000)

−0.239 (0.960)

−0.040*** (0.000)

−0.025*** (0.005)

−0.403*** (0.000)

−0.021*** (0.007)

−0.181*** (0.000)

−0.031*** (0.000)

−0.060*** (0.000)

−0.60*** (0.000) 0.920*** (0.000)

0.886*** (0.000)

0.848*** (0.000)

1.026*** (0.000)

0.831*** (0.000)

0.998*** (0.000)

1.107*** (0.000)

0.833*** (0.000)

0.999*** (0.000)

0.965*** (0.000)

1.001*** (0.000)

εi

0.319*** (0.000)

0.365*** (0.000)

0.379*** (0.000)

0.730*** (0.000)

0.507*** (0.000)

0.664*** (0.000)

0.561*** (0.000)

0.288*** (0.000)

0.608*** (0.000)

0.341*** (0.000)

0.478*** (0.000)

αi

0.066*** (0.000)

0.026*** (0.000)

0.031*** (0.000)

0.360*** (0.001)

0.026*** (0.002)

0.719*** (0.000)

0.043*** (0.000)

0.039*** (0.000)

0.385 (0.958)

0.053*** (0.000)

1.545*** (0.000)

γ Li

0.903*** (0.000)

1.025*** (0.000)

0.990*** (0.000)

2.545*** (0.000)

0.819*** (0.000)

4.951*** (0.000)

1.101*** (0.000)

3.317*** (0.000)

1.022 (0.516)

4.232*** (0.000)

1.495*** (0.000)

λ Li

Table 5 Parameter estimation results of the three-equation standardization system of 12 economies AD FY

−2.288

−2.066

−2.502

−2.923

−2.197

−2.778

−2.22

−1.782

−1.922

−4.492

−2.959

AD FK

−2.826

−2.976

−2.401

−4.277

−2.631

−2.957

−1.903

−1.671

−3.084

−2.908

−4.343

AD FL

−2.620

−2.939

−2.347

−4.331

−2.631

−3.252

−1.959

−1.604

−3.232

−2.731

−4.332

−73.309

−71.425

−71.399

−61,099

−62.413

−66.714

−57.998

−66.516

−59.117

−67.338

Obs

65

65

65

65

65

60

55

65

65

63

65

(continued)

Log − Det −77.735

96 3 Development Advantage of Large Developing Countries

0.835*** (0.000)

Korea

λK i

1.057*** (0.000)

γK i

−0.292** (0.043) 0.962*** (0.000)

εi 0.366*** (0.000)

αi 0.232* (0.092)

γ Li 1.245*** (0.006)

λ Li AD FY −3.019

AD FK −1.313

AD FL −1.000

Log − Det −72.844

Obs 62

Source calculated and compiled, the original data comes from Penn World Table 9.0 (PWT 9.0). * 、** 、*** are significant at the significance level of 10%, 5%, and 1% respectively

ξi

Parameter

Table 5 (continued)

1 Perspective of Endowment: Comparative Advantage 97

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Japan, and South Korea) have reached a significance level of 1%, the Log Determinant value of the seemingly uncorrelated model and the ADF test results of the residuals of the three equations basically meet the requirements of statistical testing. Second, different types of economies have different factor substitution elasticities. Most of the economies in Table 5 have capital and labor factor substitution elasticities less than 1, specifically including labor-abundant developing countries (China and India), capital-abundant developing countries (Mexico and South Africa), and developed countries (the United States, Japan, and South Korea), indicating the complementary relationship between capital and labor used in the production process of these seven countries and the existence of technological progress bias. However, there are also some large developing countries, such as Brazil, Egypt, Iran, and Nigeria, whose factor substitution elasticity is very close to 1, indicating that their production function degenerates to a C–D production function. Indonesia’s factor substitution elasticity is greater than 1, implying a strong substitution relationship between labor and capital in the production process. Third, combining the distribution of factor elasticity substitution in various countries, the labor factor technical efficiency parameter γLi and the capital factor technical efficiency parameter γ K i the technological progress patterns of these 12 countries can be judged. The first is that the technological progress is unbiased and neutral in Brazil, Egypt, Iran, and Nigeria, with factor substitution elasticity close to 1. The second is that for the seven countries with factor substitution elasticity greater than 1, the labor factor technical efficiency parameter γLi is greater than the capital factor technical efficiency parameter γ K i , indicating that the average growth rate of labor factor technical efficiency A Li of these seven large developing countries and developed countries is greater than that of capital factor technical efficiency A K i , and technological progress as a whole presents a pattern of relative labor growth. Combined with the empirical fact that the substitution elasticity of capital and labor factors is less than 1, it can be seen that the technological progress of this type of country is generally biased towards the capital factor, developing in the direction of using capital to save labor. This is consistent with the factor endowment structure of the developed countries, like the United States, Japan, and South Korea, and the capital-abundant developing countries like Mexico and South Africa, which have abundant capital and relatively scarce labor, but it is not consistent with such countries as China and India, which has factor endowment structure of abundant labor. Third, Indonesia’s labor factor technical efficiency parameter γLi is greater than its capital factor technical efficiency parameter γ K i . Combined with the result that the factor substitution elasticity is greater than 1, it indicates that the country’s technological progress is biased towards labor and develops in the direction of using more labor to save capital, which is compatible with its factor endowment structure where labor is abundant and capital is relatively scarce. Generally speaking, not all large developing countries choose the path of technological progress based on the comparative advantage formed by the factor endowment structure. To further accurately examine the changing trend of the technological progress bias index of different economies, this section calculates year by year the technological progress bias index of labor-abundant developing countries, such as China,

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99

India, and Indonesia, the capital-abundant developing countries including Mexico and South Africa, and the developed countries like the United States, Japan, and South Korea according to formula (5) and shown in Fig. 1. At the same time, the descriptive statistical characteristics of the technical progress bias index of each economy are shown in Table 6. The dynamic changing regularity of the technical progress bias index of various economies is consistent with the conclusions of static parameters estimated in Table 5. To begin with, for the three large labor-abundant developing countries including China, India, and Indonesia, whether from the average value of 0.44% or the number of years with an index greater than 0, China’s technological progress bias index from 1953 to 2014 is greater than 0 on the whole, and the fluctuation range of the bias index has expanded since the late 1990s but has gradually narrowed since 2005, indicating that overall technological progress is biased toward capital and the degree of bias has first increased, then gradually weakened in recent years. The change trend of India’s technological progress bias index is similar to that of China, the average value of its technological progress bias index from 1951 to 2014 is 0.0137, and it is greater than 0 in 49 years with an overall increasing trend of fluctuations. The volatility of the index has narrowed in the past few years, indicating that India’s technological progress is biased towards capital rather than labor. However, Indonesia’s technological advancement is different from that of China and India. Whether judged from the number of years with an index greater than 0 or the average level, its technological progress is biased towards labor. It can be seen that for the three large labor-abundant developing countries, neither China nor India has achieved technological progress in accordance with their factor endowment structures, thus violating the comparative advantage of labor-intensive industries, and technological progress shows the characteristics of capital bias, that is, the direction of using more capital and saving labor. Only Indonesia’s technological progress is biased toward labor, which is consistent with the comparative advantage constituted by its factor endowment structure. Next, for the capital-rich developing countries, such as South Africa and Mexico, whether judging from the mean value of the technological progress bias index or the number of years with more than 0, the technological progress of these two countries as a whole is biased towards capital. That is, technology has been developed in the direction of using more capital and saving labor in most years, which is in line with the comparative advantage in capital-intensive industries due to the relatively abundant capital in this type of large developing country. Finally, by comparing the changes in the technological progress bias index of the two types of large developing countries and developed countries, it has been found that the technological progress of China, India, Mexico, and South Africa is not only biased towards capital as a whole, but also the degree of bias toward capital exceeds that of the United States, Japan, and South Korea, whether from the average level or in terms of years with an index greater than 0. In particular, the technological progress of China and India is marked by the characteristics of inverse factor endowment and comparative advantage of capital bias. The degree of bias is much higher than that of developed countries and large capital-rich developing countries such as Mexico

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Fig. 1 Economies technological progress bias index

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101

Table 6 Descriptive statistical characteristics of the economic technological progress bias index Country type

Labor abundant type of large Capital-rich developing countries developing countries

Developed country

China

India

Indonesia Mexico

South Africa

American Japan

Korea

Mean

0.0044 0.0137

−0.0030

0.0019

0.0017

0.0001

0.0009

0.0030

Standard deviation

0.0144 0.0270

0.0134

0.0079

0.0047

0.0010

0.0013

0.0098

Minimum 0.0235 −0.0570 −0.0621

−0.0222 −0.0230 −0.0029

−0.0015 −0.0218

Maximum 0.0704 0.1156 Number of years greater than 0

0.0510

0.0351

0.0217

0.0024

0.0039

0.0415

53

49

17

43

53

37

51

42

Total 62 number of years in the sample

64

54

64

64

64

64

61

and South Africa. What are the reasons behind it? China and India, as large developing countries, often achieve technological progress and technological upgrading through the introduction of cutting-edge technologies from the United States and Japan, which in turn shows the capital-biased characteristics just like the developed countries, but has deviated from the resources and industries with comparative advantage in their own countries. Moreover, the factor endowment structure of the two countries with scarce capital and relatively abundant labor will deepen the degree of capital-biased technological advancement. This is because capital-biased technological progress will induce excess demand for capital. Meanwhile, the capital supply of labor-abundant countries cannot meet this excess demand. Instead, the marginal output of capital is further increased, and technological progress is more biased toward capital, which intensifies the incompatibility of technological progress bias and comparative advantage of factor endowment. This also explains why the capital bias of China and India, as large labor-abundant developing countries, exceeds that of developed countries and capital-abundant developing countries. For this reason, this section further examines whether the suitability of technological progress bias and comparative advantage formed by factor endowment of large developing countries is consistent with the above conclusions. (3)

Suitability test of technological progress bias in developing countries

As mentioned, combined with factor substitution elasticity the technological progress bias index of various large developing countries is measured. The initial conclusion is that the technological progress of China and India is generally biased towards capital and they are inconsistent with the endowment comparative advantage of

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abundant labor, while the technological progress bias of Indonesia, Mexico, and South Africa basically coincides with the comparative advantage formed by the factor endowment structure. On this basis, this section further examines the match between technological progress bias and comparative advantage, especially in the process of achieving economic catch-up in large developing countries, when technological progress bias shifts, and whether factor endowment structure is adjusted accordingly. Also explored is whether the non-adaptability between technological progress bias and comparative advantage is deteriorating further, whether technological progress is deviating from factor endowment structure, or gets improved gradually, and whether the degree of compatibility between the two is constantly increasing. So this section continues the previous way of distinguishing capital-abundant countries from labor-abundant countries, uses 0.2 times the U.S. capital-labor ratio as the test benchmark, calculates the average value of the U.S. capital-labor ratio from 1950 to 2014, and multiplies it by 0.2, to obtain the value of the capital-labor ratio as 4.114. If the capital-labor ratio of an economy in a certain year exceeds this value, it is deemed to be in a state of capital abundance at this time. If technological progress is biased towards capital, then technological progress bias is in line with comparative advantage at this point. If technological progress is biased towards labor, then technological progress does not follow the development of comparative advantage at this point; if it is less than this value, it is considered to be in a state of labor abundance at this time; if technological progress is biased towards capital, technological progress bias and comparative advantage aren’t matched. If technological progress is biased towards labor, technological progress bias matches the comparative advantage at this time. So we drew a suitability test chart for technological progress bias and comparative advantage of five different types of large developing countries, including China, India, Indonesia, Mexico, and South Africa, and conducted a comparative analysis with the suitability test chart for the technological progress bias of South Korea, as is shown in Figs. 2, 3, 4, 5, 6 and 7. The horizontal axis in the figure represents the capitallabor ratio of the economy K/L, and the vertical line K/L = 4.1184 is marked. If the scattered points fall on the left side of the vertical line, the labor factor at this time Fig. 2 Suitability test chart of technological progress bias in china

1 Perspective of Endowment: Comparative Advantage Fig. 3 Suitability test chart of technological progress bias in India

Fig. 4 Suitability test chart of technological progress bias in Indonesia

Fig. 5 Suitability test chart of technological progress bias in Mexico

103

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Fig. 6 Suitability test chart of technological progress bias in South Africa

Fig. 7 Suitability test chart of technological progress bias in Korea

is relatively abundant; if the points fall on the right side of the vertical line, capital is relatively abundant; the vertical axis in the figure represents the technological progress bias index TB, and the horizontal line TB = 0 is marked. If the scattered points fall above the horizontal line, technological progress is biased toward capital; if they fall below the horizontal line, technological progress is biased toward labor. Therefore, the horizontal and vertical lines in the figure divide each test chart into 4 regions. Only when the scattered points fall in regions (1) and (3) is the technological progress bias of the economy matched with comparative advantage. If they fall in regions (2) and (4), the technological advancement bias of the economy has deviated from comparative advantages formed by the factor endowment structure and they don’t match with each other. It can be seen from Figs. 2, 3, 4, 5, 6 and 7 that the suitability test chart of technological progress bias is basically consistent with the previous judgment: in the test charts of China and India, most scattered points are in region (2), indicating that the two countries have chosen capital-biased technological progress in the case of abundant labor and relatively scarce capital, which deviates from comparative advantage

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105

of developing labor-intensive industries formed by their factor endowment structure. However, it is gratifying that because China’s technological progress has long been biased towards capital and has advanced capital deepening in the production process, especially in recent years, the continuous increase of China’s capital-labor ratio has made corresponding adjustments to its comparative advantage. The adaptability of China’s technological progress bias has changed, as shown in Fig. 2, where most of the scattered points of the year fall in region (1), that is, the factor structure continues to upgrade and adaptation between technological advancement and comparative advantage has been improving. In the suitability test chart of Indonesia’s technological progress bias, most of the scattered points fall in region (3), that is, the selected technological progress path matches the factor endowment structure with relatively abundant labor. However, with the deepening of Indonesia’s capital accumulation, its technological progress bias has not been adjusted accordingly. In recent years, most of the scattered points have fallen in region (4), indicating that although the country’s capital-labor ratio has increased, it has failed to achieve the transformation from labor-oriented technological progress into capital-biased one, falling into a “comparative advantage trap”. South Africa and Mexico, as large capital-abundant developing countries, are basically similar to South Korea in terms of suitability between technological progress bias and comparative advantage. Most of the scattered points fall within region (1), indicating that technological progress bias selected by these three countries conforms to the comparative advantage of their factor endowment structures. 4

Impact Test of Comparative Advantage and Technological Progress Bias on Total Factor Productivity

The above has verified that technological progress bias of different types of large developing countries is not consistent, but how will the inconsistent technological progress bias affect their total factor productivity? Generally speaking, the improvement in total factor productivity comes from technological progress and the improvement of resource allocation efficiency. On one hand, technological progress bias is manifested in the technological improvement of the labor and capital elements, which will directly affect the rate of technological progress. On the other hand, comparative advantage formed by the factor endowment structure is the main constraint faced by technological progress bias, while technological progress bias will change the path of the upgrading of the factor endowment structure, whose adaptation and dynamic interaction will inevitably affect changes in the efficiency of resource allocation. To analyze whether the influence directions of these two factors are consistent and explore which one leads to changes in total factor productivity, by following Klumpetal’s ideas (2007), we separate and obtain total factor productivity (TFP) in logarithmic form: 

Yit L it



= log ξi

Yi Li



⎡

⎤  εiε−1 i K /K εi it i log ⎣αi + (1 − αi )⎦ + εi − 1 L it /L i

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3 Development Advantage of Large Developing Countries

+αi g A K it + (1 − αi )g A Lit + 

  εi − 1 αi (1 − αi ) (g A K it − g A Lit )2 εi 2  

(8)

total factor productivity (logarithmic form)

Based on its definition, total factor productivity usually refers to the increase of output caused by technological advances after excluding the input of the elements, and it is the difference between the increase in actual output and that in element input. Therefore, total factor productivity in the logarithmic form can be obtained by the decomposition of Formula (8). Among them, the first and second items represent the contribution of capital and labor factor technological progress efficiency to total factor productivity with their respective factor income shares as the weight, which are respectively recorded as capital-enhancing technological progress effect AKC and labor-enhancing technological progress effect ALC, both manifested as an impact on technological progress. The third item represents the impact of the interactive effect of technological progress bias and comparative advantage on total factor productivity. It is defined as the technological progress suitability effect (TBC), which is essentially the impact of the suitability between the comparative advantage formed by the factor endowment structure and technological progress bias on the efficiency of resource allocation. When 0 < ε < 1, capital and labor in the production process of big countries complement each other, and the suitability effect of technological progress is negative. If the rate of increase in the efficiency of technological progress of capital factor is lower than that of the labor factor, technological progress will be capital-biased, because capital and labor exhibit a complementary relationship in the production process, which generates excess demand for capital. However capital supply and demand cannot be adjusted in time, leading to an imbalance in the ratio of essential factors, which will reduce total factor productivity, and the effect on the production rate should be negative. The simultaneous improvement of the technological advancement efficiency of capital and labor factors will help eliminate the negative impact of the technological progress suitability effect on total factor productivity. Acemoglu (2002) believes that if technological progress is too biased towards a certain factor, it may cause a slowdown in the growth rate of total factor productivity. Only when resources are evenly allocated to the research and development of skilled and non-skilled technologies can the production efficiency of the economy reach the maximum and total factor productivity will grow fastest, which is consistent with our view. When ε > 1, capital and labor are in a substitution relationship, the technological progress suitability effect is positive, and the technological progress suitability effect has a positive impact on total factor productivity. At this time, any increase in technological progress efficiency of factors will benefit the growth of total factor productivity. Figure 8 gives the results of the decomposition of total factor productivity of China, India, Indonesia, Mexico, and South Africa according to Formula (8), showing that the changes in total factor productivity of the five large developing countries are all dominated by the capital-enhancing technological progress effect AKC and the

1 Perspective of Endowment: Comparative Advantage

Fig. 8 Decomposition of total factor productivity of large developing countries

107

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3 Development Advantage of Large Developing Countries

labor-enhancing technological progress effect ALC. That is, the influence of technological progress bias on total factor productivity mainly depends on the impact of the technological progress rate; and the interactive influence of technological progress bias and comparative advantage on total factor productivity, that is, the technological progress suitability effect is not the main reason for changes in total factor productivity. At the same time, for the four countries, China, India, Mexico, and South Africa, where the production factors are in a complementary relationship, technological progress is excessively biased towards the capital factor, which will generate excess demand for capital. However, the capital supply of large developing countries is limited and cannot be adjusted in time, leading to the imbalance of factor structure, which will reduce total factor productivity. The non-adaptability between capitalbiased technological progress and factor endowment structure means that technological progress has not developed towards resources with comparative advantage. All these will inhibit the increase in total factor productivity of major countries. As comparative advantages formed by the factor endowment structure of different types of large developing countries are different, the intensity of the negative impact of the technological progress suitability effect on total factor productivity varies. For the labor-abundant large developing countries, such as China and India, the ability of capital supply and adjustment is weaker, and the imbalance between technological progress bias and comparative advantage has a stronger negative impact on total factor productivity. For the capital-abundant large developing countries like Mexico and South Africa, the ability of capital supply and allocation is stronger, and the imbalance between technological progress bias and comparative advantage has a weaker negative impact on total factor productivity. For Indonesia, because of the substitution relationship between capital and labor, the appropriate effect of technological progress has a positive impact on total factor productivity; unfortunately, its technological progress is overly biased towards the labor factor, and there has been a decline in the efficiency of the technological progress instead, and the overall total factor productivity drops, falling into "comparative advantage trap."

2 Perspective of Development: Latecomer Advantage In the process of economic catch-up, developing countries possess latecomer advantage, which was first put forward by Kron (1962). The concept of latecomer advantage refers to the special benefits which latecomer countries possess in the process of industrialization, resulting from their relatively backward economic position, instead of their efforts, coexisting with the relative backwardness of their economy. The theory of latecomer advantage is developed based on the connotation of this concept. Different scholars have improved and conducted research on this theory from different perspectives. Levy (1966) illustrated the specific latecomer advantage and disadvantage faced by latecomer countries in the process of realizing modernization. Abramovitz (1986) claims that the technology gap and social capability are important elements limiting latecomer countries from achieving technology

2 Perspective of Development: Latecomer Advantage

109

catching-up by preventing the best use of latecomer advantage. When latecomer countries possess the ability of technology innovation, based on the wage gap with the first developed countries they can leap over the established technology development stages, directly adopt the new technology, achieve technology catching-up and develop a leapfrog mechanism in some specific industries (Brezis et al. 1993). Elkan (1996) deduced the path of latecomer countries to realize technology convergence through technology introduction, imitation, and independent innovation under the framework of an open economy, while technology gap and learning-by-doing ability are the keys to the efficiency of technology imitation and innovation respectively. Chinese scholars have carried out a lot of research on latecomer advantage in recent years (Xinhua and Hui 2002; Yifu 2003; Yifu and Pengfei 2005; Xibao and Zhi 2007; Zhixing 2010; Xibao and Mingming 2012). Some researchers explain the imbalance of regional economic increases in China (Deming and Wei 2001; Deming and Bida 2002; Lichen and Guoping 2004; Liping 2010). The deep discussion on the implication of latecomer advantage is of vital importance for the economic development of large developing countries. It is of theoretical and practical significance to evaluate and explore the implementation path of latecomer advantage of large developing countries from different perspectives. Yao et al. (2016) argue that large developing countries should have the implications of both developing countries and large-scale countries. Thirteen countries, China, India, Russia, Brazil, Mexico, Indonesia, Pakistan, Nigeria, Egypt, Ethiopia, Iran, Congo (DRC), and South Africa, are chosen through cluster analysis as large developing countries, and their comprehensive effect has been evaluated, which shows that their influence on the international economic structure is gradually growing, but with great differences among developing countries at different levels. So why has their impact on the world economy been growing? Because large developing countries have a comparative advantage of natural resources and a more prominent advantage of scale, especially latecomer advantage resulting from their relatively backward economic status (Xinhua 2012). For large developing countries, fast enhancement of technology and per capita income converging toward developed countries can be realized through the purchase of patented technology and capital equipment, and through the introduction and imitation of developed countries’ technology at a lower cost (Yifu and Pengfei 2005). Lucas (2004) believes technology diffusion can promote the mobility of production knowledge and the convergence of economic development in developed and developing countries. Under the present open economic condition, if technology introduction, transfer, and imitation can be realized by large developing countries, the comprehensive influence of developing countries of different levels will be supposedly enhanced. However research on experience shows that large developing countries represented by the BRICS will become the engine of the world economy, but there is stagnant economic growth in some developing countries and the salary gap with developed countries has been enlarged (Zhixing 2010). So whether large developing countries can fully play latecomer advantage is a significant cause for economic growth. To play latecomer advantage, the key is to enhance the match between providing structure and effective demand, develop dynamic competitive advantages, and fully exploit the potential advantages

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at different stages of development according to the technology gap with developed countries (Junkuo et al. 2014). For developing countries, the implementation of the limited catch-up strategy is beneficial to economic improvement (Rudai and Yang 2008). So this section reinterprets the implication of latecomer advantage from perspectives of technology gap, factor endowment, and market demand structure, constructs an index system, evaluates latecomer advantage of large developing countries by way of factor analysis, and explores the function and implementation path of latecomer advantage by taking thirteen countries as examples, including China, India, Russia, Brazil, Mexico, Indonesia, Pakistan, Nigeria, Egypt, Ethiopia, Iran, Congo (DRC) and South Africa. 1

The Implication of Latecomer Advantage and Index Evaluation System Design of Large Developing Countries

Latecomer advantage is one of the important reasons for large developing countries to rapidly acquire economic catching-up. Its essence is the potential advantages of economic development formed by undeveloped backward conditions of large developing countries. It is marked by the introduction and learning of technology, management and system, relatively low factor costs, and broad consumer demand. Based on this, the implication of the latecomer advantage of large developing countries is elaborated on and an index evaluation system is designed (see Table 7).

Table 7 Design of an index evaluation system for large developing countries First level indicator

Second level indicators

Indicators meaning

Technology gap

GDP per capita

The ratio of GDP per capita between the United States and large developing countries

full factors production rate

The ratio of total factor productivity between the United States and large developing countries

Marginal return on capital

Share of capital gains in GDP of large developing countries

Human capital stock per labor

Human capital stock/employed number of large developing countries

Consumer demand

Resident consumption/GDP in large developing countries

Infrastructure construction demand

Government purchase expenditure/GDP of large developing countries

Import demand

Total commodity imports/GDP of large developing countries

Factor endowment

Market demand structure

2 Perspective of Development: Latecomer Advantage

(1)

111

Technological latecomer advantage

Generally, according to their factor endowments, developed countries invest lots of research resources to realize cutting-edge technology innovation, while developing countries achieve technology innovation and technology catching up with fewer research resources and less time through technology introduction and imitation. Technological latecomer advantage is that for large developing countries with backward technology, the greater the technology gap, the stronger the technology spillover effect. They can introduce technology and imitate the cutting-edge technology of developed countries, achieve technical progress at a speed higher than that of developed countries and narrow the income gap; this is latecomer advantage in a narrow sense. But the salary gap between some large developing countries and developed countries is generally widening, and this is not as predicted by technological latecomer advantage. Under the strengthening of Intellectual Property Protection, how can latecomer countries effectively absorb the technology of the first developed countries to obtain technological latecomer advantage? Researchers find that the technology gap is the key to technology introduction efficiency and the full play of technological latecomer advantage. The bigger the technology gap between large developing countries and developed ones, the greater the space of technology imitation, the faster the technology improves, and the easier to achieve technology catching up. But some researchers hold the view that an excessive technology gap may become an obstacle for technology absorption, hindering enhancement of technology introduction efficiency of large developing countries, leading to a threshold effect in technology introduction efficiency. As a result, we choose the technology gap to represent the technological latecomer advantage of large developing countries. The specific index of measurement technology gap includes the per capita capital stock ratio and the capital intensity gap of domestic and foreign enterprises, total factor productivity in China and the US, the labor productivity gap, per capita GDP, and the ratio of research funding in GDP. We use America to represent the world’s cutting-edge technology, evaluating technological latecomer advantage according to the ratio of per capita GDP of to that of large developing countries and reciprocal of total factor productivity of large developing countries based on America. If it shows a downtrend, it means the gap between the technology of large developing countries and the world’s cutting-edge technologies becomes gradually narrower, and technological latecomer advantage of large developing countries has been fully played; if it shows an uptrend, it implies the gap between the technology of large developing countries and the world’s cutting-edge technologies becomes bigger, and technological latecomer advantage has not been fully played. Table 8 shows the technological latecomer advantage of large developing countries in some years between 1990 and 2014. First of all, according to the comparison of per capita GDP between the US and large developing countries, except Russia, most large developing countries have improved technology through technology introduction, imitation, and innovation, at a speed exceeding that of developed countries, narrowing the gap with the US per capita GDP, which also indicates that their technological latecomer advantage has been gradually unleashed. For example, the per

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Table 8 The technological latecomer advantages of large developing countries Country Brazil

GDP per capita gap 1990

1995

2000

6.19

4.66

5.37

Total factor productivity gap 2005 5.0.69

2014

1990 1995 2000 2005 2010 2014

3.66

3.51 1.94

5.24

4.15 3.41

China

15.61 11.79 11.45

Congo (DRC)

16.98 26.28 20.88 14.64

Egypt

16.83

Ethiopia

40.45 58.96 82.89 67.67

47.36 34.54 –

India

27.77 24.81 22.77 17.87

11.22

9.96

9.25

7.89

2010

8.72

1.64

1.9

2.11

1.89

2.09

3.01

3.36

2.6

2.31

2.31

9.57 11.06 –

–

–

–

–

–

5.23

0.86

1.1

1.09

0.91

0.93

–

–

–

–

–

4.81 0.96 9.53 1.8

1.56

2.73

2.84

2.8

2.58

Indonesia 11.54

9.12 13.15 12.13

6.66

5.3

3.98

3.56

3.75

3.14

2.62

2.56

Iran

11.67

7.78

6.15

3.56

2.87

3.33 1.72

1.49

1.35

0.96

0.9

1.11

3.54

4.12

3.94

3.73

3.45

3.35 1.29

1.54

1.48

1.44

1.57

1.66

86.39 47.21 14.66

9.57

9.32 1.19

2.37

1.5

1.48

1.4

1.53 –

Mexico Nigeria

35.1

Pakistan

14.23 14.83 16.79 15.4

–

–

–

–

Russia

1.83

3.32

5.2

3.68

11.77 10.81 – 2.41

2.16 1.44

2.36

3.16

2.25

1.72

1.52

South Africa

4.32

4.84

5.28

4.75

4.34

4.31 1.29

1.37

1.45

1.35

1.59

1.88

Source Penn World Watch 9.0 (PWT 9.0)

capita GDP gap between the US and South Africa and Mexico changed less than 5%, the per capita GDP gap between the US and Brazil, Congo (DRC), Ethiopia and Pakistan decreased slightly, and the per capita GDP gap between the US and China, Egypt, India, Indonesia, India, Iran, and Nigeria is narrowing at the speed of more than 50%. Based on the overview of the comparison of per capita GDP between the US and the 13 developing countries, the large developing countries whose initial technology lags fairly behind the developed countries possess stronger technological latecomer advantage, bigger technology space for imitation, lower cost for technology import, and lower difficulty, which helps to fully display the potential technological latecomer advantage. Then, as for technological backward advantage represented by the total factor productivity between the US and developing countries, its evolvement and distribution law are slightly different from the technological latecomer advantage represented by the per capita GDP gap. As developing countries of the first level, China and India have an obvious technological latecomer advantage, and the initial total factor productivity gap from the US is relatively wider, 3.41 and 3.98 respectively. But after twenty years’ development, the technological latecomer advantage of these two countries is fully played, the gap of total factor productivity has reduced to 2.31 and 2.56 respectively. However, the total factor productivity gap between America and other developing countries remained at the interval of 0.9 and 2.0. The technological latecomer advantage of Brazil, Egypt, and Russia stayed stable, while the total factor productivity gap between America and some developing countries such as Indonesia, South Africa, Mexico, and Nigeria increased rather than

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113

decreased, which implies that with the narrowing of the total factor productivity gap between most large developing countries and developed countries, it is difficult to improve productivity through technology introduction. The initial technological latecomer advantage and its release intensity vary markedly among different levels of countries, showing different types of developing countries are at different stages of the technology catch-up period. (2)

Factor latecomer advantage

There are two main aspects in inspecting latecomer advantage of large developing countries from the perspective of production factors: one is to explore latecomer advantage of material capital in large developing countries according to the law of diminishing marginal returns of capital; the other is to investigate latecomer advantage of human capital in large developing countries in view of labor factor based on the heterogeneity of labor input. Generally speaking, for developed countries, there are abundant capital and scarce labor factors, while for developing countries the factor endowment structure is just the opposite, with the features of large populations and insufficient material capital. According to the law of diminishing marginal returns of capital, the marginal rate of return of developed countries should be lower than that of developing countries. If the cross-border flow of capital can be realized, material capital of developed countries will flow to developing countries, so that the economies of developing countries grow faster than that of developed countries and the income gap will be reduced. So, first of all, the latecomer advantage of large developing countries will be evaluated by the index of the marginal return on capital. Now there are three different methods to measure the marginal return on capital: first, the interest rates of different countries are compared to analyze capital latecomer advantages by making use of return on capital in perfectly competitive markets; second, multinational panel data is adopted, with total output as the explained variable and labor, capital and technology advancement as the explanatory variables. The capital accumulation coefficient, the implied marginal return on capital, means the increase of total output caused by the increase of capital investment. Third, with capital and total output as an implicit functional relationship, the marginal return on capital is measured accordingly. But unfortunately, these three methods have respective advantages and disadvantages. Based on data availability, we evaluate the marginal return on capital by Xibao and Zhi’s method (2007). In the perfectly competitive market, with a production function having constant returns to scale, the product of the marginal return on capital (M Pk ) and capital investment (K) is the total return on capital, so the marginal return on capital is M Pk = αY/K , in which the numerator is the total return on capital, that is, the product of capital income share α and total output Y , and the denominator is the amount of capital investment K . The evaluation results of the marginal return on capital of large developing countries are shown in Table 9: the initial capital accumulation of different levels of large developing countries is different, which results in different initial marginal returns on capital. For example, in both Ethiopia and Nigeria, where capital is scarce, the marginal return on capital is high, being 1.28 in the former and 1.07in the latter. And in the Congo, Egypt, and Pakistan, the marginal return on capital is over 0.5.

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Table 9 Material and human capital late-comer advantages of large developing countries Country

Marginal return on capital

Human capital stock per labor

1990 1995 2000 2005 2010 2014 1990

1995

2000

2005

2010

2014

Brazil

0.17

0.16

0.16

0.14

0.12

0.1

0.024 0.025 0.026 0.025 0.025 0.026

China

0.22

0.21

0.18

0.17

0.14

0.1

0.003 0.003 0.003 0.003 0.003 0.003

Congo(DRC) 0.74

0.38

0.51

0.56

0.39

0.21

2.218 1.996 1.744 1.538 1.326 1.214

Egypt

0.75

0.53

0.46

0.5

0.47

0.134 0.124 0.112 0.114 0.094 0.009

0.92

Ethiopia

1.28

0.89

0.55

0.36

0.43

0.38

0.051 0.047 0.043 0.038 0.033 0.003

India

0.18

0.2

0.2

0.21

0.18

0.16

0.005 0.004 0.004 0.004 0.004 0.004

Indonesia

0.42

0.44

0.24

0.19

0.12

0.1

0.026 0.025 0.024 0.024 0.022 0.021

Iran

0.17

0.17

0.2

0.29

0.27

0.24

0.113 0.114 0.103 0.088 0.098 0.098

Mexico

0.22

0.2

0.24

0.24

0.2

0.18

0.076 0.07

Nigeria

1.07

0.71

0.98

0.37

0.31

0.25

0.04

Pakistan

0.95

0.76

0.66

0.62

0.56

0.58

0.047 0.047 0.044 0.044 0.036 0.032

Russia

0.09

0.05

0.07

0.1

0.12

0.15

0.039 0.047 0.049 0.047 0.047 0.047

South Africa

0.19

0.21

0.22

0.25

0.16

0.13

0.178 0.164 0.157 0.16

0.063 0.061 0.054 0.052

0.039 0.037 0.036 0.034 0.033

0.163 0.147

Source Penn World Watch 9.0 (PWT 9.0)

The marginal return on capital of other large developing countries is between 0 and 0.5. With the increase of capital accumulation of different levels of large developing countries, the marginal return on capital of most countries decreased, and only that of Russia and Iran rose slightly. With a higher marginal return on initial capital, the marginal return on capital dropped greatly, which shows large developing countries with scarce initial capital could obtain higher returns through infrastructure and equipment investment. While with more capital accumulation, capital latecomer advantage is further inspired and released, infrastructure and equipment investment increases and the marginal return on capital drops continuously. As large developing countries typically have a very large population, their factor endowment structure is characterized by abundant unskilled labor and scarce skilled labor. We thus make use of the ratio of human capital and the number of   stock employees–that is, human capital stock per laborer H L to investigate the latecomer advantage of labor factor endowments of large developing countries. As a rule, human capital stock per laborer of large developing countries is relatively low, human capital is insufficient, but simple labor availability is great and labor cost is low, so they have comparative advantages in the production of unskilled laborintensive products. The human capital per laborer indicator presents the latecomer advantage of the labor factor of large developing countries, and its distribution law is similar to the latecomer advantage of the capital factor. The initial labor capital stock per laborer of different countries varies. In Russia, labor capital stock per laborer increased slightly. In China and Brazil, labor capital stock per laborer remained stable. Except for these three countries, labor capital stock per laborer of the rest of large developing countries decreased. This fact shows that in most large developing

2 Perspective of Development: Latecomer Advantage

115

countries human capital develops more slowly than simple labor because there are abundant simple labor and relatively scarce human capital, which implies the factor reward gap between skilled labor and simple labor is continuously widening. So latecomer advantage of labor in large developing countries can be fully played through the use of simple labor and the accumulation of skilled labor. (3)

Structure latecomer advantage

Structure latecomer advantage in large developing countries is shown not only by the simultaneous enhancement of labor productivity during the gradual realization of industrialization and service industries but by the great and exploratory potential market demand that large developing countries possess. This research evaluates the structure latecomer advantage of large developing countries from the perspective of market demand structure, using the proportion of consumption and import expenditure (see Table 10): first the proportion of initial consumption expenditure of large developing countries is basically between 0.3 and 0.85. The consumption expenditure proportion of Nigeria, Pakistan, and Russia is on the rise, that of India remains stable, and that of the rest of large developing countries decreases. It means most large developing countries have great consumption demand and residents’ consumption can be further upgraded. At the same time, the change trend of import expenditure proportion of large developing countries confirms this conclusion from another perspective. Although developing countries of different levels had different initial import and export expenditure ratios in 1990, except Iran and Nigeria, the import expenditure of the remaining countries have a steady upward tendency, which reflects the present Table 10 The structure late-comer advantages of large developing countries Country

Percentage of consumption expenditure

Percentage of import expenditure

1990 1995 2000 2005 2010 2014 1990 1995 2000 2005 2010 2014 Brazil

0.67

0.59

0.59

0.61

0.58

0.6

0.07

0.09

0.1

0.11

0.14

China

0.57

0.53

0.47

0.39

0.36

0.37

0.04

0.06

0.08

0.13

0.15

0.15 0.15

Congo(DRC) 0.46

0.55

0.23

0.28

0.24

0.32

0.2

0.24

0.13

0.23

0.33

0.35

Egypt

0.83

0.82

0.73

0.69

0.71

0.74

0.08

0.09

0.09

0.08

0.11

0.11

Ethiopia

0.76

0.86

0.77

0.71

0.76

0.59

0.05

0.05

0.07

0.13

0.14

0.21

India

0.71

0.68

0.66

0.6

0.58

0.61

0.03

0.04

0.05

0.07

0.09

0.09

Indonesia

0.54

0.52

0.68

0.67

0.56

0.54

0.07

0.08

0.09

0.11

0.11

0.1

Iran

0.68

0.51

0.49

0.46

0.46

0.52

0.23

0.09

0.09

0.1

0.11

0.09

Mexico

0.69

0.65

0.67

0.69

0.63

0.64

0.07

0.15

0.29

0.26

0.27

0.29

Nigeria

0.43

0.67

0.43

0.75

0.68

0.71

0.08

0.05

0.09

0.07

0.08

0.07

Pakistan

0.7

0.67

0.73

0.79

0.79

0.81

0.06

0.06

0.06

0.08

0.08

0.08

Russia

0.33

0.49

0.45

0.51

0.53

0.57

0.07

0.08

0.05

0.09

0.11

0.11

South Africa

0.68

0.7

0.69

0.66

0.61

0.62

0.1

0.14

0.13

0.18

0.21

0.22

Source Penn World Watch 9.0 (PWT 9.0)

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product supply structure’s inability to adapt to the demand structure of consumers. It is to satisfy the high-quality and high-level demand of consumers through the import of products. The demand market of consumers is far from saturation. 2

Evaluation and Comparison of Latecomer Advantages of Large Developing Countries

As the latecomer advantage of large developing countries is formed based on its relative backward position, their potential advantages in technology introduction, factor input, and market structure involve many basic indexes which are closely related to each other without a set weight on the indexes. Meanwhile, for the large developing countries of different levels, latecomer advantage of technology, factor and structure vary in distribution and change trends. It is hard to evaluate the latecomer advantage of thirteen developing countries by using the former index system. For this reason, adopting a way of dimensionality reduction we use factor analysis to transform multiple related basic indicators into a few independent factors with most of the information of the original basic indicators. The advantage of factor analysis is that the weight of the factor is set according to the inner structural relationship of the basic indicators instead of subjectively. The factors and corresponding weights determined by this method are not only the recombination of the basic indicator information but also the simplification of the data by reducing the information repetition which is more rational, objective, and scientific. (1)

The suitability measuring of factor analysis

After the dimensionless processing of original data, we first adopt KMO Statistics and Bartlett’s sphere to test whether it is appropriate to use factor analysis. At first, for the KMO Statistics, if it is closer to 1, the basic indexes are more correlated to each other and more adaptive to factor analysis. In this research, the KMO statistic is 0.57. The factor analysis can be used to evaluate the latecomer advantage of large developing countries. Then the original assumption of Bartlett’s spherical test is that the variable is independent, and the factor cannot be extracted. In this research the value of Bartlett’s spherical test statistic is 625.79, the value of P is 0.0000, assuming the basic indexes are not independent of each other, and the factor analysis can be used. (2)

The extraction of factors

The eigenvalues inferred through the correlation coefficient matrix and the corresponding variances and cumulative variances are shown in Table 11. The number of factors is established by adopting the Eigenvalue principle and factor variance cumulative contribution rate criterion. The factor variables (Factor 1 and Factor 2), of which Eigenvalues are over 1, are chosen. At the same time after orthogonal rotation, the cumulative variance contribution rate of these two factors is 95.24%, which is over 70%. It shows Factor 1 and Factor 2 cover most of the information of the basic variables, including latecomer advantages of technology, factor, and structure. To investigate the quantitative relationship between basic variables and common factors, we set the load of public factors on the basic variables through a factor loading

2 Perspective of Development: Latecomer Advantage

117

Table 11 Total variance decomposition Main ingredient

Initial characteristic root Eigenvalues

variance

Cumulative variance

After orthogonal rotation Eigenvalues

Factor 1

1.9029

0.6949

0.6949

1.387

0.5065

0.5065

Factor 2

1.0695

0.3906

1.0855

1.2212

0.4459

0.9524

Factor 3

0.3024

0.1104

1.1959

0.6673

0.2435

1.1959

variance

Cumulative variance

Table 12 Factor loading matrix after rotation Indicator code

Indicator name

pgdp

GDP per capita

return hl cshc

Consumer demand

Factor1

Factor2

Factor3

0.0367

0.6095

−0.1968

Marginal return on capital

−0.0114

0.7265

−0.1713

Human capital stock per labor

−0.78

0.1445

0.2226

0.5087

0.3958

−0.4083

−0.1146

−0.3339

0.6014

0.7107

0.1811

0.1438

cshg

Infrastructure construction needs

cshim

Import demand

matrix after orthogonal rotation of variance maximization (see Table 12) and then name the public factor. The first public factor, Factor 1, has a higher weight in two basic variables, residents’ consumer demand and import demand, 0.5087 and 0.7107 respectively. Factor 1, called the potential factor of market demand, represents the market demand of its own country. The weights of Factor 2 in the two basic variables, per capita GDP (pgdp) and marginal return on capital (return), are 0.6095 and 0.7265. Factor 2, called the dynamic competitive advantageous factor, shows whether large developing countries can fully play a technology catch-up strategy of comparative advantages based on their factor endowment structure. Factor 1 and Factor 2 reflect 95.42% of the basic indexes. (3)

Factor analysis and evaluation

By making use of regression analysis, two public factors, Factor 1 (market demand potential factor) and Factor 2 (dynamic competitive advantageous factor) are set. The weight of the public factors is calculated by the proportion of factor variance after orthogonal rotation in cumulative variance and the score of the integrative factor of latecomer advantage comes into being. F(Comprehensive) = (0.5065 × F1 + 0.4459 × F2/0.9524

(9)

Scores of the integrative factor of latecomer advantage of thirteen developing countries in 1990 and 2014 estimated according to formula 9 are shown in Table 13. The gap of latecomer advantages among the thirteen developing countries in 1990 is relatively broad. The score of the integrative factor of latecomer advantage of Ethiopia

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Table 13 Scores of the integrative factor of late-comer advantages of large developing countries Country

The late-mover advantage of large developing countries in 1990 Factor1

Factor2

The late-mover advantage of large developing countries in 2014

Comprehensive Rank Factor1 factor

Factor2

Comprehensive Rank factor

Brazil

0.4931 −0.2929

0.1251

9

0.1122 −0.7956 −0.3128

9

China

0.5965 −0.2332

0.208

6

−0.1949 −0.9723 −0.5589

11

1.5215 −0.747

13

−2.494

13

Congo (DRC)

−2.7441

−0.4225 −1.5241

Egypt

0.4814

1.3751

0.8998

2

0.3518

Ethiopia

0.5246

2.3548

1.3815

1

−0.3035

India

0.3341 −0.0119

0.1721

7

0.1905 −0.6477 −0.202

8

Indonesia

0.7294

0.4193

5

0.3338 −0.3914 −0.0058

4

−0.2444 −0.5392 −0.3821

11

Iran Mexico

0.0672

0.4549 −0.1927

0.1517

8

0.2158

0.2881

0.1159 −0.1071

0.1959 −0.4859 −0.1233 −0.4766 −0.89

−0.6701

2 5

6 12

−0.1162

1.5311

0.655

4

0.4794 −0.016

0.2475

3

Pakistan

0.5339

1.2042

0.8477

3

0.5712

0.6067

1

Russia

0.1483 −1.0337 −0.4051

12

0.2659 −0.6971 −0.185

7

South Africa

0.2451 −0.2748

10

−0.2976 −0.7794 −0.5231

10

Nigeria

0.0017

0.6469

ranks first, which is 1.3815, mainly due to the higher score of its dynamic competitive advantageous factor. Because of the higher score of their dynamic competitive advantageous factors, India, Pakistan, and Nigeria have rather high scores of integrative factors of latecomer advantage, which are in the second, third and fourth place respectively. India and China with similar factor endowment structures rank the fifth and sixth, different from the first four large developing countries whose latecomer advantage mainly benefits from a high dynamic competitive advantage. In India and China, the market demand potential factor plays an important role in the score of the integrative factor of latecomer advantage, in accordance with their super large population and landmass. Indonesia, Mexico, Brazil, and South Africa rank the seventh, eighth, ninth, and tenth. Among them, except Indonesia, the latecomer advantage of the other three mainly come from the market demand potential factor. Iran, Russia, and Congo (DRC) are in the last three places. The market demand potential factor and the dynamic competitive advantageous factor of Iran and Russia haven’t performed well, and Congo (DRC) ranks last because its market demand potential factor scores too low, which shows there is little room for expansion of consumer demand and it is difficult to form effective latecomer advantage. After investigating scores of the integrative factor of latecomer advantage of thirteen countries in 2014, except Russia and Iran, scores of the other eleven countries in 2014 are lower than that in 1990, which indicates that most large developing countries have surpassed the initial stage of catching up. Also, they have changed the position of relative backwardness, which results in weaker latecomer advantage and stronger

2 Perspective of Development: Latecomer Advantage

119

the right of speech in the global economic. On this basis, the score ranking of the integrative factor of latecomer advantage of thirteen countries in 2014 is compared with that in 1990, with the following results. First, there are four countries whose score ranking remains unchanged, including Brazil, Congo (DRC), Egypt, and South Africa. Second, the score ranking of five large developing countries declines, and the ranking of China falls by 5. On one hand, the downward domestic market and decreased growth rate of consumer demand caused a sharp decline in the score of the market demand potential factor; on the other hand, China has adopted a technology catch-up strategy in accordance with its national comparative advantage, provided matching ability of factor supply and technology demand and fully consumed latecomer advantage of technology and factor, thus influencing the factor scores of dynamic competitive advantage. As a result, China becomes the country in which the latecomer advantage declines the most. At the same time, the score ranking of Mexico and Ethiopia fall by 4 places, and that of Indonesia by 1 place. Third, the score rankings of India, Iran, Pakistan, and Russia increase. And that of India changes little, only increasing by 1 place, that of Pakistan increases by 2 places, that of Russia and Iran increase by 5 places and the numerical level of the factor score of these two countries also improves, because the dynamic competitive advantage factor and the market demand potentiality factor also rise, which implies that the economy in these two countries grows more slowly than that of the other large developing countries. So there is a different changing tendency in latecomer advantage among large developing countries of different levels, which indicates that the economic position of large developing countries change, and different large developing countries have different release strengths of latecomer advantage and different speeds of technological and economic catch-up. 3

Function and Realization Path of Latecomer Advantage of Large Developing Countries

Adopting the integrative factor of latecomer advantage, dynamic competitive advantageous factors, and the market demand potential factors estimated above, and using panel data of thirteen large developing countries from 1990 to 2014, this section explores the function and realization path of latecomer advantage for the economic growth of large developing countries. Also, this section constructs the influence model of latecomer advantage on output growth, with control variables such as labor input, capital input, human capital stock, and total factor productivity introduced into the model. yit = α + β1 E M Pit + β2 P O Pit + β3 AV Hit + β4 H Cit + β5 C K it + β6 T F Pit + β7 Fit + u it

(10)

The explained variable yit means the total output of i large developing countries after purchasing power parity adjustment in the year t. Explanatory variables include the integrated factor Fit of latecomer advantage calculated above by factor analysis and its two components (market demand potential factor F1it and dynamic competitive advantageous factor F2it ); the labor input of large developing countries

120

3 Development Advantage of Large Developing Countries

consisting of total population (P O Pit ) and total employment (E M Pit ), average annual working hours (AV Hit ), physical capital investment (C K it ), human capital stock (H Cit ), and total factor productivity (T F Pit ). All the above data come from Penn World Table 9.0. Table 14 is the result of the effect and the ways of realization of latecomer advantage on the economic growth of large developing countries by using Formula 10. Equation ➀ is the regression results of panel data based on random effects. The impact of labor input, physical capital input, human capital input, and total factor productivity on total output are all positive, and the significance level is up to 1%. However, the impact of personal average annual working hours on output is negative. This is because the prolonged working hours of workers are at the cost of sacrificing leisure time to reduce personal utility, which will inevitably affect the input efficiency of labor. Therefore, prolonged labor hours are not conducive to the improvement of output. The influence coefficient of the comprehensive factor of latecomer advantage on output is also positive, and the significance level is as high as 1%, which verifies the effect of latecomer advantage on the output growth of the large developing countries. The difference between Equation ➁ and Equation ➀ is only that total employment, the indicator reflecting labor input, is replaced by total population, and the influence coefficient and significance level of explanatory variables on output are relatively stable. Furthermore, to deeply analyze the realization path of large developing countries’ latecomer advantage, we test and compare the impact of market demand potential and dynamic competitive advantage on output growth. The random effect model is still used to decompose the comprehensive factors of latecomer advantage in equations ➀ and ➁ into market demand potential factor and dynamic competitive advantageous factor. Under the condition that labor input, physical capital input, human capital input, and total factor productivity have a stable impact on the output of large developing countries, the market demand potential factor and the dynamic competitive advantageous factor have different impacts on the output of each country. Although the former has a positive impact on output, it has not reached a significant level, while the latter has the coefficient signs in Equation ➂ and Equation ➃ which are both positive, and the significance levels are 5% and 1% respectively, indicating that the key to realizing the latecomer advantage lies in improving the matching ability of factor supply and effective demand and implementing a dynamic technology catch-up strategy that can give full play to comparative advantage based on the country’s factor endowment structure and technological gap. The explained variables and explanatory variables of Equation ➄-Equation ➇ are consistent with Equations ➂ and ➃, the only difference is that Equations ➄ and ➅ are the regression results based on fixed effects, while Equations ➆ and ➇ are the regression results based on the panel-corrected standard error model, and the sign and significance of the coefficients of each explanatory variable remain basically stable. Synthesizing the above equations from ➀ to ➇, we come to the following conclusions: the latecomer advantage has a significant positive effect on the output growth of large developing countries, and the key to releasing the latecomer advantage is not

6167.23*** (0.00)

EMP

361,786.7*** (0.01)

F

334,262.7*** (0.01)

3.136061*** (0.00)

3,042,513*** (0.00)

0.1856*** (0.00)

−1151.42*** (0.00)

2475.13*** (0.00)

➆ PCSE

0.9706

0.9978

0.9709

0.9971

0.8091

0.5255

0.8023

0.659

0.9742

0.9709

–

–

(continued)

0.9706

–

–

0.9704

0.9667

0.9958

0.9702

0.9531

R-sq overrall

0.9522

R-sq between 0.9971

270,820.7** (0.02)

119,098.04 (0.17)

3,042,513*** (0.00)

0.1856*** (0.00)

0.9532

337,322*** (0.00)

4424.788 (0.61)

305,177*** (0.00)

0.1888*** (0.00)

813,517.3*** (0.00)

−822.39*** (0.00)

6155.03*** (0.00)

➇ PCSE

0.9522

303,805.6 (0.11)

−235,232.1* (0.10)

339,446*** (0.00)

0.1614*** (0.00)

1,052,985.5*** 877,004.1*** (0.00) (0.00)

1522.93*** (0.00

3670.40*** (0.00)

➅ FE

R-sq within

375,109.1* (0.09)

−229,758.62 (0.16)

3,376,617*** (0.00)

0.1828*** (0.00)

981,939.7*** (0.00)

1635.33*** (0.00)

4930.03*** (0.00)

➄ FE

−1,828,518*** −1,416,867*** −1,647,664*** −1,086,581*** −6,936,784*** −7,335,938*** −1,086,581*** −1,647,664*** (0.00) (0.00) (0.00) (0.01) (0.00) (0.00) (0.03) (0.00)

337,322*** (0.01)

44,244.788 (0.70)

3,051,778*** (0.00)

0.1888*** (0.00)

877,004.1*** (0.00)

−1151.42*** (0.00)

2475.13*** (0.00)

➃ RE

Cons

270,821** (0.05)

3,091,480*** (0.00)

TFP

0.1869*** (0.00)

813,517.3*** (0.00)

F2

0.1844*** (0.00)

CK

820,224.9*** (0.00)

−822.39*** (0.00)

6155.03*** (0.00)

➂ RE

119,098.04 (0.30)

782,734.2*** (0.00)

HC

−977.21*** (0.00)

2476.72*** (0.00)

➁ RE

F1

−739.69** (0.00)

AVH

POP

➀ RE

Variable

Table 14 Role and realization path of the late-comer advantage of the big developing countries

2 Perspective of Development: Latecomer Advantage 121

137

obs

137

➁ RE 137

➂ RE 137

➃ RE 137

➄ FE 137

➅ FE

Source Penn World Watch (PWT 9.0). The significance levels of *, **, and *** are 10%, 5%, and 1%, respectively

➀ RE

Variable

Table 14 (continued)

137

➆ PCSE 137

➇ PCSE

122 3 Development Advantage of Large Developing Countries

2 Perspective of Development: Latecomer Advantage

123

to expand the domestic demand market but to rely on the domestic factors endowment structure and technology gaps, improve the matching ability of factor supply and effective demand, and implement a dynamic technology catch-up strategy that gives full play to comparative advantage. In summary, there are significant differences in the latecomer advantage of developing countries, which is mainly due to the heterogeneity of market demand potential and dynamic competitive advantages of different countries. As most large developing countries have already crossed the early stages of the catch-up process, their relatively backward positions have changed, and their latecomer advantages have weakened.

3 Perspective of Scale: Advantage of Large Countries 1

Theoretical Exploration of Scholars at Home and Abroad

Economic growth and economic development are social practices that have been experienced and are still being experienced all over the world. The construction of a long-term economic development advantage has become the basis and key to a country’s sustained and sound economic development and has naturally become the focus of many scholars in economics. Especially in the twenty-first century, with the rapid rise of the BRICs, the economies of emerging powers have become an important force in world economic development, and research on their economic development advantage has gradually become the focus of economics. Is there an endogenous or exogenous correlation between the characteristics of national scale and economic growth and the formation of economic advantage? What are the similarities and differences between the development of large countries and small countries in the process of economic development? Do large countries have special characteristics? All these have naturally become some of the key issues to explain the development momentum of the BRICs and the development characteristics of emerging powers. The theory of national economic advantage originated from the classical trade theory of the sixteenth century and the neoclassical trade theory of the twentieth century. It is believed that in the process of national economic development, each country must have its own different advantage due to the heterogeneity of the development foundation and capacity. Many economic representatives of the classical trade theory school have conducted intense discussions and debates on this issue, such as absolute advantage theory, comparative advantage theory, factor endowment theory (H–O model), national economic theory system, and backward advantage principle, etc. Representatives of the emerging neoclassical trade theory school and development economics school have held heated discussions from perspectives of economic growth and latecomer advantage, such as the theory of latecomer advantage, economic take-off theory, dual economic theory of economic growth of latecomer countries, and convergence hypothesis formed by economic growth and advantages of latecomer countries. Domestic scholars have made further exploration and study on the economic development advantage of latecomer countries represented

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3 Development Advantage of Large Developing Countries

by China from the perspective of development economics, institutional economics, political economics, and technical economics. In recent years, many economists have begun to pay attention to the differences between the economic development of large and small countries and the economic advantage of large countries on the foundation of previous studies on national economic growth and competitive advantage. Chenery (1988) and other scholars have conducted comparative analysis of the domestic production structure and economic growth of different countries based on the size of the country’s population. The domestic scholars’ research on national scale and economic development mainly focuses on issues related to the economic development of large countries represented by China. The well-known development economics scholar Peigang (1992) does a preliminary discussion of the problems in the development of large countries, the characteristics of large countries, the difficulties in large countries’ development, and the special roads of large countries. Wenke (1994) conducts a relatively systematic study of the main contradictions and problems in the development of large developing countries represented by China and provides a summary and classification of the ten major contradictions in the inherent development logic of large developing countries. Yao (2009) puts forward the concept of the advantage of a large country, expounding its connotation and characteristics clearly and systematically, and proposes that the biggest feature of a large country’s economy is diversity and adaptability. Diversity leads to differences in development levels. It is also pointed out that the advantage of a large country’s economy is a comprehensive one, that is, the comprehensive advantage of a large country. The advantage theory of national economic development and the basic theory of the large country economy and comprehensive advantage have made significant progress after years of exploration by scholars and experts at home and abroad, but as far as a complete theoretical system is concerned, there is still a lot for further research and exploration. At present, the research on the comprehensive advantage of large countries is mainly about theoretical hypotheses and model path research. There is not much empirical and comparative research literature, and relatively few empirical studies have introduced country scale variables. The empirical literature mainly focuses on national economic competitiveness evaluation, such as the National Competitiveness Evaluation System of WEF (World Economic Forum), the National Competitiveness Evaluation of IMD (International Institute for Management Development based in Lausanne, Switzerland), Michael Porter’s National Competitive Advantage Diamond Model, etc. However, currently, the evaluation research of national competitiveness focuses more on the research from the perspective of the cultivation of certain industry or enterprise capability. Most research focuses on the competitiveness of the country at a certain time, rather than studying the sustainability of the country’s economic development and stable development capabilities. In the current research process of evaluation, there is a lack of control over national characteristic variables. From the relationship between economic growth and economic development, and based on the theory of the comprehensive advantage of large countries proposed by Yao (2009), we analyze and elaborate on the formation mechanism

3 Perspective of Scale: Advantage of Large Countries

125

of the economic development advantage of large countries, and the economic development data of China from 1979 to 2012 are selected to test and demonstrate the formation of China’s economic development advantage. It has verified whether there are significant differences between the scale of the country and the formation of a comprehensive advantage in countries’ economic development in terms of history and economic development efficiency. 2

Theoretical Analysis of the Superiority of Big Country

The economic development advantage of a country is not only the economic growth advantage affected by capital and labor under the classical economic framework, but also a systematic project, a manifestation of comprehensive capabilities, and a comprehensive development advantage accumulated in the long historical development process, which is affected by national population, resource endowment, national territory, and market demand. There are significant differences in the economic growth patterns of countries of different sizes. The economic growth patterns of large countries rely more on the comparative advantage in international trade formed by the large countries’ own resource endowment and the competitive advantage formed by its use of corporate resources, as well as the complementary advantage caused by a fundamental heterogeneity accumulated in economic growth and adaptability advantage formed by diversified structure. The economic growth of a small country depends more on the country’s comparative advantage in the international division of labor. For example, Japan relies more on the advantages of national trade caused by its special position and environment in international trade. The economic growth of a major country is based on its rich domestic resource endowment, diversified economic structure, complementary resource levels, and continuously adapted environmental needs. Its economic growth advantage is a comprehensive one based on the resource endowment of a large country. The economic growth model of a small country is more often an economic growth of the comparative advantage based on a particular domestic resource endowment. The differences between these two models are distinct. Also, in light of short-term economic development, the evaluation of a national economic development advantage focuses more on the comparative advantage based on the competitive advantage of a certain technology or economic development factor of the country. However, the competitive advantage based on short-term limited resources is difficult to maintain and sustain. From the perspective of long-term sustainable development, the advantage of national economic development should come more from the competitive advantage formed by the diversified economic structure brought about by the scale of the country. The diversified economic structure is shown in the diversification of advantages, motivations, subjects, industry, and region caused by regional diversification, economic diversification, and technology diversification. Yao (2009) proposes a model describing the comprehensive advantage of large countries, namely the New Magic Gourd model, which states that large countries generally have abundant natural resources, a vast land area, a large population, and great market potential, as well as the scale, difference, diversity, and integrity of a national economy. Therefore the advantage of the economic development of large

126

3 Development Advantage of Large Developing Countries

countries comes into being, which is reflected in the advantage of the division of labor, complement advantages, adaptability advantages and stability advantages. (1)

Advantage of division of labor in the economic development of large countries based on economic scale

The size of a country defined in traditional economics focuses more on the scale of the economic resources a country has. Economic resources often include population resources, natural resources, land resources, and energy resources. The economic growth of any country is subject to its scale. Resource endowment is the foundation of national economic development. The investment of rich and large-scale resource elements is bound to deepen the division of labor in the national economic structure, form specialized production entities and lines, and improve industrial development efficiency and product quality; in the meantime, it will reduce the cost of economic development of the country as a whole and shape the advantage of pillar industries by the use of economic scale. For a large country, economic scale is its most important feature, and it is also the essential difference between a large country and a small country. The economic scale of a large country is mainly reflected in the fact that the scale of resources introduced is higher than that of small and medium-sized countries in the development of the national economy. The introduction of scaled resources of different dimensions will inevitably accelerate the division of labor in society, thereby increasing the degree of social specialization, and promoting the reduction of industrial economic development cost. In domestic and foreign competition it also uses relative social productivity to form the industry’s market competitive advantage, and finally builds the country’s pillar industry. (2)

Complementary advantage in the economic development of large countries based on economic difference

With a vast area, large countries have different resource advantages and industrial advantages as there are great differences among land resources, environmental climates, or market demands of different regions. Unlike the economic development of small countries, large countries can make use of superior resources across resources, regions, and industries to complement each other in economic development and realize coordinated development. There are resource consumption gradients, industrial development gradients, and consumer demand gradients in large countries. The gradient differences and development dislocation heterogeneity in the economic development process meet the market supply and demand of different regions, different levels, and different preferences, which has brought a complementary effect to the economy of large countries, and in turn, has produced a strong economic complementary advantage of large countries. So the situation of factor complementation, industry complementation, and economic complementation is the complementary advantage of large countries’ economic development based on economic differences.

3 Perspective of Scale: Advantage of Large Countries

(3)

127

Adaptive advantage in the economic development of large countries based on economic diversification

Large countries often have diversified economic structures, showing multiple characteristics in terms of human capital, technology, and products. Such multiple characteristics can adapt to different production and life needs, thereby forming an adaptive advantage. Its main manifestations are as follows: first, diversity leads to the adaptability of human capital. The human capital of large countries is rich, and there are professionals in different fields and at different levels so that these different fields can develop in a coordinated manner; secondly, diversity leads to the adaptability of technology, and professional skills are also at different levels. Big countries have both applicable and high technology. This diversified technological structure can better adapt to the needs of national economic development; thirdly, diversification leads to the adaptability of products, and consumer demand for products is diversified. The diversified industrial structure and product structure of the economic development of large countries can effectively meet the diverse and personalized needs of heterogeneous consumer subjects. Different technologies and human capital can adapt to the production of different industries and products. (4)

Stability advantage in the economic development of large countries based on economic completeness

Chenery (1975) believes that the economic growth of small and medium-sized countries mainly depends on the expansion of exports, and their economic independence is not enough, while for large countries it is on the contrary. Because large countries often have complete economic systems, complete industrial sectors, and great capability to withstand external risk, they can use the internal circulation system to maintain economic stability. It is mainly manifested in the following factors: First, completeness leads to industrial stability. The industrial sectors of large countries are complete, and economic development can be supported by domestic industries. Therefore, various industries will not suffer devastating impacts due to the influence of external factors, so that they can maintain long-term stability. Secondly, completeness leads to product stability, and various industrial departments can produce products in different fields, with different levels of human capital and professional technology. Products of different levels can be produced, so they can meet the needs of different consumers and maintain the long-term growth of the domestic market. Thirdly, completeness leads to employment stability. Multi-level market demand and product demand can maintain economic prosperity, generate jobs in all aspects, and keep the stability of social employment so that people can live and work in peace and contentment. 3

Construction and Calculation of the Preferred Indexes of Large Developing Countries

As mentioned above, the comprehensive economic advantage of large developing countries is not a simple indicator but has rich connotations and broad denotations. For this reason, the scale advantage indicators of large developing countries

128

3 Development Advantage of Large Developing Countries

constructed in this section cannot fully cover their comprehensive advantage and embody the advantage of large developing countries. Due to the limitation of data, we construct measure indexes of the scale advantage of large developing countries (see Table 15) to determine the trend of the comprehensive economic development advantage of the 13 large developing countries and explore their temporal and spatial laws according to the above evaluation of economic development advantage of large countries from four perspectives: the advantage of the division of labor based on economic scale, the complementary advantage based on economic difference, the Table 15 Index construction of large developing countries’ scale advantages Aspect index

Basic indicators

Indicator symbol

Unit of measurement

Indicator attributes

Weights

The advantages of division of labor in the economic development of big countries based on the scale of economy

Land resource area

X1

–

Positive

0.0499

Agricultural land area

X2

–

Positive

0.0527

Forest resource area

X3

–

Positive

0.047

Total population

X4

–

Positive

0.0494

full factors production rate

X5

%

Positive

0.0567

Based on complementary advantages of the economic development of big countries on economic differences

Industrialization rate

X6

%

Positive

0.0567

Binary contrast index

X7

–

Negative

0.3719

Based on economic diversification, the economic development of big countries adapts to advantages

HHI Index of Export Product Structure

X8

Negative

0.0246

Gini Coefficient X9 of Export Product Structure

Negative

0.0048

Theil index of export product structure

X10

Negative

0.0378

The proportion of exports in GDP

X11

%

Negative

0.0645

Imports as a share X12 of GDP

%

Positive

0.0504

Domestic market size

–

Positive

0.1307

The advantages of stable economic development of major countries based on economic integrity

X13

3 Perspective of Scale: Advantage of Large Countries

129

adaptive advantage based on economic diversification, and the stability advantage based on economic completeness. First of all, the index selection of the advantage of the division of labor in the economic development of large countries based on the scale of economy, on one hand, mainly shows that the population resources, land resources, and natural resources that can be used by big countries in the development process are relatively abundant, and the scale of resource investment is large; on the other hand, it should be reflected that the introduction of the scale of resources can speed up the division of labor, increase the degree of specialization and develop the efficiency of production. Therefore, in this section, two indicators, the area of land resources and the area of agricultural land, are selected to measure the scale of land resources in large countries. The area of forest resources is selected to measure the scale of natural resource in large countries, the total population is selected to measure the scale advantage formed by the population resources of large countries, and total factor productivity is selected to represent the social division of labor formed by the introduction of the scale of resources in large countries, which leads to an increase in the degree of specialization and overall production efficiency. At the same time, the above-mentioned five indicators to measure scale advantage are all positive ones. Secondly, indicators can be selected from the perspectives of crossing resources, crossing regions, and crossing industries to measure the complementary advantage of economic development of large countries based on economic differences, reflecting the gradient of resource consumption, industrial development, and consumer demand of large developing countries, and complementary advantage thus formed. However, due to data limitations of large developing countries, and taking into account the characteristics of the dual economic structure of large developing countries, this section only measures the main complementary advantage formed in the economic development process of large developing countries from the perspective of agriculture and non-agricultural industries. The indicators that can be selected to measure complementary advantage include the industrialization rate, the comparative labor productivity of agriculture, industry, and the service industry, a binary comparison index, and a binary contrast index. However, due to the poor continuity of employment data in various industries of large developing countries, this section can only choose to measure the industrialization rate by the ratio of industrial value-added to GDP. The higher the industrialization rate, the stronger the complementary advantage, so this indicator is a positive one. On this basis, a binary comparison index is measured according to the absolute value of the difference between the proportion of agricultural output value and the proportion of non-agricultural output value. The larger the value of this index, the weaker the complementary effect of agricultural and non-agricultural industries in the developing countries. Therefore, this index is a negative one. Thirdly, the adaptive advantage of large countries’ economic development based on economic diversification is mainly manifested in the adaptability of human capital, technology, and products due to diversification. Because of data limitations, this section only measures the adaptive advantage of large developing countries for the diversified product market. Drawing on the ideas of Xianzhong et al. (2014),

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3 Development Advantage of Large Developing Countries

the trade theory focusing on the domestic market believes that foreign trade can only be developed by basing itself on the domestic market, and the scale of the domestic market can promote the diversified structure of export products. Therefore, the diversification index of the export product structure also represents the diversification of the domestic market product structure to a certain extent. For this reason, this section selects the Herfindahl–Hirschman Index (HHI), the Gini coefficient, and the Theil index to measure the diversification of the export product structure and evaluate the adaptive advantage of large developing countries. HHI calculation j  formula: H H Ii = si2j , Si j represents the proportion of i country industry j export m  m  volume; Gini coefficient calculation formula: H H Ii = si2j ; Theil index calculaj

tion formula: Ti =

m 

(xi j /u i ) ln(xi j /u i )/m , where xi j represents the proportion of

j

export volume in i country industry j, where u i =

m 

xi j /m In fact, the HHI index,

j

Gini coefficient, and Theil index were originally used to measure the concentration of the export product market. The larger the index value, the stronger the concentration of the product market and the weaker the product diversification. Therefore, the above three indicators are negative ones. In addition, the indicators of adaptation advantage are measured by using three-digit international trade data of SITC (Standard International Trade Classification). Finally, to measure the stability advantage of the economic development of large countries and reflect their economic completeness, this section states that large countries often have complete economic systems, comprehensive industrial sectors, and a stronger capacity against external risks, and can use an internal circulation system to maintain economic stability. As a result, economic growth does not depend on exports, and the economy is more independent. According to the research of Perkins and Syrquin (2017), by comparing the scale of the international market and the domestic market, and depicting the characteristics of economic completeness, this section uses the proportion of exports in GDP, the proportion of imports in GDP, and the scale of the domestic market, that is, GDP plus imports and minus exports. These three indicators measure the economic development and stability advantage of large countries. Among the three indicators, the larger the proportion of exports in GDP, the stronger is the dependence of the country’s economic growth on foreign markets, so this indicator is a negative one; the remaining two indicators are positive ones. The larger the index, the stronger the stability of the country’s economy. Table 15 lists all the basic indicators for calculating the comprehensive economic advantage of large developing countries, that is the advantage of large countries in this subsection. To ensure data continuity, this subsection selects the above 13 basic indicators to measure the comprehensive economic advantage of large developing countries, adopting the principles of representativeness, importance, and comparability.

3 Perspective of Scale: Advantage of Large Countries

131

The data used are from the World Development Indicators Database of the World Bank, the commodity trade statistics of the United Nations, and the Penn World Table 9.0. To ensure the continuity of the data and the completeness of the indicators, among the 13 large developing countries defined by Yao et al (2016), we choose 10 countries, China, India, Russia, Brazil, Mexico, Indonesia, Nigeria, Egypt, Iran, and South Africa, as research samples, and the sample period was from 2000 to 2014. Then this section further weights 13 basic indicators. To avoid the shortcomings of subjective weighting methods such as AHP that lack objectivity, this section adopts the entropy method to determine the weights based on the amount of indicator information to assess the comprehensive economic advantage of various large developing countries. Due to the differences in the nature and dimensions of the original data of each indicator, it is difficult to directly compare and sum them. Therefore, the dimensions and standardization of each indicator are processed first. The formula is as shown in formula (11)  yi jt = xi jt xmax ,  Negative index yi jt = xmin xi jt Positive index

(11)

where xi jt represents the primary data of the jth index of the ith country in year t, xmax and xmin respectively represent the maximum and minimum, yi jt is the normalized index.   yi jt . So the The proportion of each index is further determined: Pi jt = yi jt t i  pi jt ln( pi jt ), where T and entropy value of each index is got: E j = −ln(T m) t

i

m respectively represent the total number of years and the number of countries. Then   the final weight of each indicator is recalculated, ω j = (1 − E j ) (1 − E j ) (see j

Table 15 for details). The larger the entropy value of the indicator, the higher the degree of disorder in the data; the less the amount of useful information, the lower the weight; alternatively, the smaller the entropy value of the indicator, the richer the amount of useful information provided, and the higher the weight. Finally, according to the above weights, the score of the comprehensive  economic advantage of large developing countries can be calculated from Hit = ω j yi jt , and j

the sub-index scores of the advantage of the division of labor H1, the complementary advantage H2, the adaptive advantage H3, and the stable advantage H4 also can be obtained.

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Table 16 Changes in the comprehensive economic advantages of large developing countries from 2000 to 2014 Year

Brazil China Egypt India

Iran

Indonesia Mexico Nigeria Russia South Africa

2000 0.191

0.186

0.303

0.402 0.236 0.235

0.219

0.176

0.293

0.343

2001 0.244

0.397

0.218

0.3

0.222

0.184

0.185

0.302

2002 0.535

0.209

0.415

0.298 0.24

0.288

0.205

0.315

0.226

0.202

2003 0.209

0.397

0.314

0.194 0.237 0.317

0.243

0.205

0.243

0.297

2004 0.242

0.195

0.317

0.187 0.212 0.237

0.302

0.407

0.195

0.327

2005 0.194

0.207

0.33

0.233 0.307 0.293

0.206

0.242

0.191

0.419

2006 0.419

0.19

0.31

0.305 0.243 0.211

0.201

0.193

0.322

0.242

2007 0.429

0.191

0.249

0.212 0.215 0.325

0.203

0.313

0.241

0.308

2008 0.204

0.218

0.252

0.302 0.314 0.24

0.443

0.194

0.327

0.213

2009 0.244

0.22

0.198

0.44

0.24

0.22

0.306

0.333

2010 0.241

0.455

0.219

0.179 0.215 0.311

0.328

0.193

0.304

0.244

2011 0.47

0.308

0.313

0.192 0.215 0.181

0.244

0.239

0.323

0.211

2012 0.477

0.314

0.167

0.218 0.192 0.245

0.247

0.314

0.224

0.326

2013 0.485

0.308

0.222

0.184 0.309 0.331

0.244

0.187

0.22

0.244

2014 0.328

0.225

0.244

0.191 0.49

0.23

0.312

0.248

0.307

4

0.233 0.325

0.212 0.31

0.158

Evaluation of Measurement Results of Advantage of Large developing countries

According to the above method, the comprehensive economic advantage scores and sub-index scores of 10 large developing countries from 2000 to 2014 can be calculated (see Table 16). Among the 10 large developing countries, the comprehensive economic advantage of Brazil, China, Iran, Mexico, and Nigeria have shown a fluctuating upward trend, among which the comprehensive economic advantage of Brazil, Iran, and Nigeria have risen rapidly in recent years; China reached a peak of 0.455 in 2010, and it has a relatively obvious comprehensive economic advantage for the year 2010 The comprehensive economic advantage of Mexico is on the rise, but there is little change on the whole. The comprehensive economic advantage of Egypt, India, Indonesia, Russia, and South Africa is on the decline, with the comprehensive economic advantage of India declining faster. In 2000, its comprehensive economic advantage was 0.402, then it showed a fluctuating downward trend. Although it reached a peak of 0.440 in 2009, it declined rapidly thereafter. Its comprehensive economic advantage has fallen to 0.191; while the overall economic advantage of the other four countries has fluctuated and declined slightly, but overall the variation is small. Further, Table 17 lists the ranking changes of 10 large developing countries in terms of the comprehensive economic advantage from 2000 to 2014, to compare different large developing countries horizontally and vertically. The top 5 countries in terms of comprehensive economic advantage in 2000 were India (1), South Africa

3 Perspective of Scale: Advantage of Large Countries

133

Table 17 Changes in the ranking of comprehensive economic advantages of large developing countries from 2000 to 2014 Year

Brazil China Egypt India Iran

Indonesia Mexico Nigeria Russia South Africa

2000 8

9

3

1

5

7

10

4

2

2001 5 (3)

1 (8)

8 (−5)

4 (−3)

6 2 (−1) (4)

6

7 (0)

10 (0)

9 (−5)

3 (−1)

2002 1 (4)

8 (0)

2 (6)

4 (0)

6 (0)

9 (−2)

3 (7)

7 (2)

10 (−7)

2003 10 (−9)

1 (7)

3 (−1)

9 (−5)

7 2 (−1) (3)

6 (3)

8 (−5)

5 (2)

4 (6)

2004 5 (5)

9 (−8)

3 (0)

10 (−1)

7 (0)

6 (−4)

4 (2)

1 (7)

8 (−3)

2 (2)

2005 9 (−4)

7 (2)

2 (1)

6 (4)

3 (4)

4 (2)

8 (−4)

5 (−4)

10 (−2)

1 (1)

2006 1 (8)

10 (−3)

3 (−1)

4 (2)

5 7 (−2) (−5)

8 (0)

9 (−4)

2 (8)

6 (−5)

2007 1 (0)

10 (−3)

5 (−2)

8 (−4)

7 2 (−2) (5)

9 (−1)

3 (6)

6 (−4)

4 (2)

2008 9 (−8)

7 (3)

5 (0)

4 (4)

3 (4)

1 (8)

10 (−7)

2 (4)

8 (−4)

2009 5 (4)

8 (−1)

10 (−5)

1 (3)

9 3 (−6) (3)

6 (−5)

7 (3)

4 (−2)

2 (6)

2010 6 (−1)

1 (7)

7 (3)

10 (−9)

8 (1)

3 (0)

2 (4)

9 (−2)

4 (0)

5 (−3)

2011 1 (5)

4 (−3)

3 (4)

9 (1)

7 (1)

10 (−7)

5 (−3)

6 (3)

2 (2)

8 (−3)

2012 1 (0)

4 (0)

10 (−7)

8 (1)

9 6 (−2) (4)

5 (0)

3 (3)

7 (−5)

2 (6)

2013 1 (0)

4 (4)

7 (3)

10 (−2)

3 (6)

2 (4)

5 (0)

9 (−6)

8 (−1)

6 (−4)

2014 2 (−1)

8 (−4)

6 (1)

9 (10)

1 (2)

10 (−8)

7 (−2)

3 (6)

5 (0)

4 (2)

5 (−3)

6 (−4)

Note The brackets represent the changes in the ranking of the comprehensive economic advantages of the major developing countries. A negative value represents a decline in the ranking, and both are the results of comparison with the previous year

(2), Egypt (3), Russia (4) and Iran (5), while the last five countries were Indonesia (6), Mexico (7), Brazil (8), China (9) and Nigeria (10). This indicator underwent great reversal in 2010. The top 5 countries were China (1), Mexico (2), Indonesia (3), Russia (4), and South Africa (5), and the bottom five countries were Brazil (6), Egypt (7), Iran (8), Nigeria (9) and India (10). The overall ranking of the comprehensive economic advantage of large developing countries from 2000 to 2010 changed greatly. India and Egypt, which originally ranked 1st and 3rd, dropped to 10th and 7th respectively in 2010. China, Mexico, and Indonesia, which ranked relatively low in 2000, rose to

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3 Development Advantage of Large Developing Countries

the top 3 respectively. From 2000 to 2014, the comprehensive economic advantage of Brazil ranked first 6 times, in 2002, 2006, 2007, 2011, 2012, and 2013, China three times, in 2001, 2003 and 2010, India twice, in 2000 and 2009, and Iran, Mexico, Nigeria, and South Africa ranked first in 2014, 2008, 2004 and 2005 respectively. In order to analyze the reasons behind the changes in the comprehensive economic advantage of large developing countries, this subsection conducts correlation tests on the comprehensive economic advantage and their sub-indices, namely the advantage of the division of labor of economic development, the complementary advantages of economic development, the adaptive advantage of economic development, and the stable advantage of economic development. As shown in Table 18, it is found that the sub-indices have a strong correlation with the comprehensive economic advantage, the correlations are all over 0.5, and the significance level is more than 1%. Especially strong is the correlation between the comprehensive economic advantage and the advantage of division of labor (0.8656) and between the comprehensive economic advantage and the stable economic development advantage (0.8064). These two indicators reflect the expansion of the market scale and the subdivision and improvement of the market structure, highlighting the importance of the market scale interests, which best reflects the connotation of the advantage of a big country. So this Table 18 Correlation test of comprehensive economic advantages of big countries and their subindices Advantage index

Comprehensive Advantages economic of division advantage of economic development

Complementary advantages in economic development

Economic development to adapt to advantages

Stable economic development advantage

Comprehensive 1 economic advantage Advantages of Division of Economic Development

0.8656*** (0.0000)

1

Complementary 0.2573*** advantages in (0.0015) economic development

−0.1032 (0.2087)

1

Economic development to adapt to advantages

0.5832*** (0.0000)

0.4245* (0.0000)

−0.1902** (0.0197)

1

Stable economic development Advantage

0.8064*** (0.0000)

0.6680*** (0.0000)

−0.1091 (0.1839)

0.6345*** (0.0000)

1

Note *, ** and *** indicate significance at the significance level of 10%, 5% and 1%, respectively

3 Perspective of Scale: Advantage of Large Countries

135

Table 19 Changes in the advantages of the economic development division of large developing countries from 2000 to 2014 Year

Brazil China Egypt India

Iran

Indonesia Mexico Nigeria Russia South Africa

2000 0.063

0.04

0.127

0.178 0.071 0.065

0.072

0.048

0.159

0.138

2001 0.071

0.173

0.072

0.164 0.07

0.131

0.071

0.04

0.051

0.121

2002 0.063

0.053

0.194

0.163 0.071 0.113

0.068

0.128

0.062

0.056

2003 0.053

0.178

0.18

0.055 0.072 0.132

0.078

0.056

0.055

0.121

2004 0.071

0.056

0.179

0.047 0.063 0.069

0.124

0.182

0.056

0.141

2005 0.053

0.058

0.145

0.067 0.171 0.116

0.069

0.069

0.058

0.19

2006 0.186

0.059

0.13

0.168 0.073 0.062

0.07

0.052

0.136

0.076

2007 0.188

0.06

0.078

0.062 0.067 0.135

0.06

0.17

0.073

0.126

2008 0.065

0.063

0.078

0.119 0.173 0.072

0.19

0.06

0.139

0.058

2009 0.074

0.055

0.065

0.185 0.065 0.171

0.075

0.064

0.121

0.139

2010 0.075

0.187

0.058

0.065 0.066 0.172

0.138

0.062

0.122

0.076

2011 0.188

0.123

0.174

0.062 0.056 0.065

0.074

0.075

0.139

0.065

2012 0.19

0.173

0.064

0.065 0.058 0.076

0.075

0.127

0.057

0.138

2013 0.19

0.128

0.054

0.067 0.166 0.142

0.074

0.061

0.066

0.073

2014 0.136

0.067

0.072

0.065 0.187 0.07

0.055

0.17

0.075

0.124

section further analyzes the changing trends of the advantage of the division of labor of economic development and the stability advantage of economic development. Tables 19 and 20 respectively show the changes in the advantage of division of labor of economic development and stability advantage of economic development of 10 large developing countries from 2000 to 2014. First of all, the laws of change between the advantage of division of labor, which reflect the scale of the economy, and the comprehensive economic advantage of large countries are basically consistent. Among 10 large developing countries, Brazil, China, Iran, and Nigeria, were on the rise in comprehensive economic advantage and showed a fluctuating and upward trend in their advantage of division of labor of economic development. For Indonesia, the advantage of division of labor rose from 0.065 in 2000 to 0.070 in 2014. The remaining four countries, Egypt, India, Russia, and South Africa, had a downward trend in the advantage of division of labor, especially India and Russia, where the former dropped from 0.178 in 2000 to 0.065 in 2014, while the latter dropped from 0.159 in 2000 to 0.075 in 2014. Both countries had a decrease of more than 50%. In general, the advantage of division of labor in the economic development of large countries explains the scale of resource input by large developing countries, as well as the social division of labor and specialization, which reflects the expansion of the market scale of large countries, and dominates the trend of changes in the comprehensive economic advantage of large countries. The difference of changes between the stability advantage that reflects economic completeness and comprehensive economic advantage of large countries is mainly

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3 Development Advantage of Large Developing Countries

Table 20 Changes in the advantages of the economic development stable of large developing countries from 2000 to 2014 Year

Brazil China Egypt India

Iran

Indonesia Mexico Nigeria Russia South Africa

2000 0.041

0.075

0.084

0.092 0.076 0.063

0.061

0.062

0.059

0.11

2001 0.065

0.095

0.061

0.064 0.076 0.1

0.065

0.071

0.068

0.086

2002 0.057

0.062

0.098

0.066 0.063 0.082

0.064

0.092

0.076

0.07

2003 0.066

0.102

0.067

0.067 0.06

0.076

0.062

0.066

0.081

2004 0.066

0.05

0.067

0.066 0.065 0.078

0.08

0.109

0.067

0.086

2005 0.068

0.066

0.088

0.078 0.065 0.082

0.05

0.068

0.06

0.112

2006 0.115

0.059

0.085

0.067 0.065 0.07

0.048

0.067

0.092

0.079

2007 0.122

0.058

0.066

0.07

0.071

0.073

0.081

0.088

2008 0.054

0.074

0.071

0.091 0.073 0.082

0.13

0.061

0.103

0.075

2009 0.067

0.072

0.065

0.14

0.066 0.074

0.079

0.068

0.093

0.112

2010 0.069

0.151

0.071

0.055 0.066 0.074

0.115

0.061

0.093

0.081

2011 0.162

0.099

0.075

0.055 0.069 0.056

0.082

0.07

0.113

0.067

2012 0.17

0.076

0.044

0.07

0.065 0.074

0.084

0.101

0.078

0.115

2013 0.179

0.096

0.075

0.062 0.079 0.118

0.084

0.057

0.072

0.075

2014 0.121

0.072

0.076

0.06

0.082

0.078

0.084

0.099

0.088

0.065 0.098

0.187 0.06

reflected in China and Russia. For China, the comprehensive economic advantage and the advantage of division of labor are both fluctuating and rising, but its stability advantage showed a volatile downward trend, from 0.075 in 2000 to 0.072 in 2014. Although the decline was modest, it still shows that China’s current products lack completeness and the supply structure is relatively simple, which makes it difficult to satisfy consumers. There is a serious mismatch in the supply and demand structure. It is thus urgent to improve the mismatch in the supply and demand structure through technological advancement and industrial structure upgrading so that high-quality and personalized high-and-mid-end consumer demand could become effective consumer demand, thereby fostering new momentum for China’s economic growth. For Russia, the comprehensive economic advantage and the advantage of division of labor are declining, but its economic development stability advantages have increased from 0.059 in 2000 to 0.084 in 2014, an increase of more than 40%, reflecting the relatively higher degree of completeness of its product market. In summary, the overall economic advantage of large developing countries is dominated by two sub-indices, namely, the advantage of division of labor, which reflects the scale of the economy, and the stability advantage, which reflects the completeness of the economy. They represent the expansion of the economic market scale and the detailed market structure of the large countries and depict the importance of market scale benefits. The advantage of division of labor, the stability advantage, and the comprehensive economic scale advantage of most large developing countries have changed simultaneously, but the changes of these three advantage indicators

3 Perspective of Scale: Advantage of Large Countries

137

for China, Russia, and Indonesia have deviated, In the case of China, the advantage of division of labor formed by the scale of China’s economy has promoted the improvement of the comprehensive economic advantage, but the stable advantage that reflects economic completeness has shown a downward trend, which indicates that China’s market scale benefits are mainly derived from market scale rather than the diversification of the market structure, and reveals a current mismatch of the supply and demand structure of Chinese products. This explains why China’s comprehensive economic advantage ranked first among the 10 large developing countries in only three years. Finally, this section analyzes the distribution of the comprehensive economic advantage of 10 large developing countries and calculates the coefficient of variation and coefficient σ of their comprehensive economic advantage from 2000 to 2014 (See Fig. 9 for details). Then this part investigates the change of the comprehensive economic advantage during the sample period. The larger the coefficient, the greater the degree of differentiation of the comprehensive economic advantage among large countries. In Fig. 9, the variation coefficient and the numerical level of coefficient σ of the comprehensive economic advantage of the 10 large developing countries are not the same, but the trend of change is somewhat synchronized, and the overall trend of fluctuations is rising. It reached a peak in 2002 and fell back in 2003. Basically, there is an upward trend, indicating that the gap in the comprehensive economic advantage of different types of large developing countries tends to be widening instead of converging.

Fig. 9 Distribution of Comprehensive Economic Advantages of Large Developing Countries

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3 Development Advantage of Large Developing Countries

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Ouyang Yao, Luo Fuzheng, Luo Huihua, The definition, selection and influence evaluation of large developing countries, Journal of Social Science of Hunan Normal University, 6, 2016. Ouyang Yao, Sheng Yanchao, Yi Xianzhong,Typical characteristics of the economic development of big countries, Economic Theory and Business Management, 5, 2012. Perkins, Syrquin, Great Powers: Scale Effect, Ouyang Yao, Sheng Xiaofang (compilation), Review of Economic Research, 40, 2017. Tang Lingxiao, Ouyang Yao, Huang Zexian, The BRICS Development Bank in the Perspective of International Financial Cooperation, Social Sciences China Press, 9, 2014. The World Bank, “China 2030: Building a Modern, Harmonious and Creative High-income Society”, The World Bank and Development Research Center of the State Council, The People’s Republic of China, 2012. Tian Wei, Yu Miaojie, Intermediate Trade Liberalization and Enterprise Research and Development: Empirical Analysis Based on Chinese Data, The Journal of World Economy, 6, 2014. Vernon, R., “International Investment and International Trade in the Product Cycle”, The Quarterly Journal of Economics, 1966, 80(2): 190-207. Wang Linhui, Dong Zhiqing, Capital-embodied technological progress, technological consensus structure and the source of Chinese productivity growth, The Journal of Quantitative & Technical Economics, 5, 2012. Wang Xiaolu, Fan Gang, Liu Peng, Transformation of China’s Economic Growth Mode and Growth Sustainability, Economic Research Journal, 1, 2009. Wang Zhi, Wei Shangjin, Zhu Kunfu, Total trade calculation: Official trade statistics and measurement of global value chains, Social Sciences in China Press, 9, 2015. Wen Dongwei, Xian Guoming, Ma Jing, FDI, Industrial Structure Changes and China’s Export Competitiveness, Management world, 4, 2009. Xiao Liping, Regional differences in late-developing advantage, absorptive capacity and catch-up growth, China Soft Science, 1, 2010. Xu Chaoyang, Lin Yifu, Development strategy and economic growth, Social Sciences in China Press, 3, 2010. Yang Gaoju, Huang Xianhai, Will China fall into a comparative advantage trap? Management World, 5, 2014. Yang Rudai, Yao Yang, Limited catch-up and economic growth, Economic Research Journal, 8, 2008. Yang Xiaokai, Zhang Yongsheng, New Trade Theory, Comparative Interest Theory and New Achievements of Empirical Research: A Literature Review, China Economic Quarterly, 1, 2001. Yao Yuchun, Yuan Li, Wang Linhui, The distribution pattern of factor income in China’s industrial sector -- an analysis based on the biased perspective of technological progress, China Industrial Economies, 8, 2014. Young, A., “Gold into Base Metals: Productivity Growth in the People’s Republic of China during the Reform Period”, Journal of political economy, 2003, 111(6): 1220-1261. Yi Xianzhong, Ouyang Yao, Fu Xiaolan, Domestic market scale and diversified export product structure in China: the threshold effect of the institutional environment, Economic Research Journal, 6, 2014. Yu Yongze, Zhang Xianzhen, Factor Endowment, Suitability Innovation Model Selection and Total Factor Productivity Improvement, Management World, 9, 2015. Zhang Junkuo, Yu Bin, Wu Zhenyu, Causes, challenges and strategies of the transition of the growth phase, Management World, 12, 2014. Zhang Peigang, New Development Economics, Zhengzhou: Henan People’s Publishing House, 1992. Zhang Yang, Ouyang Yao, Research on the Explicit Comparative Advantages of “BRIC Countries” from the Perspective of Global Value Chains, Journal of Chinese Academy of Governance, 3, 2016. Zhang Yueling, Ye Azhong, Chen Hong, Human Capital Structure, Appropriate Technology Selection, and Decomposition of Total Factor Productivity — An Empirical Analysis Based on Regional Heterogeneity Stochastic Frontier Production Function, Journal of Finance and Economics, 6, 2015.

Chapter 4

Development Pattern of Large Developing Countries

After analyzing the development advantages of large developing countries, we need to think about the development pattern to be adopted. American economists Syrquin and Chenery (1989) put forward the concept of development patterns. They consider them to be “systematic changes in any significant aspect of the economic or social structure”. By this definition, a development pattern is different from a development mode. The latter embodies the overall framework of the national economy and society while the former is the systematic change in certain areas of an economy and society rather than the overall change. Chenery also studied the pattern of large countries, namely the scale effect reflected in some areas, mainly the trade structure. This chapter will explore the pattern of large countries from a broader perspective, including the dynamic pattern of economic growth which reflects the scale effect of large countries, upgrading pattern of foreign trade, construction pattern of infrastructure, and supply pattern of public goods.

1 Growth Pattern Based on Domestic Demand 1 2

Contribution of Domestic Demand to Economic Growth Economists’ proposition about “domestic market supporting large countries’ industry development”

Adam Smith deserves to be the ancestor of modern economics, his book An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, foreshadowed various problems of modern economics. The work done by later generations is to constantly deepen and refine his economic thought, and to explain and verify those economic propositions proposed by him. It was in this work of economics that Smith proposed the proposition that the domestic market supported the industrial development of great powers. When talking about China’s economic policy, he points out that China is a large country with a large population, diverse climate, a wide variety of local products, and convenient waterway transportation between the provinces © Peking University Press 2022 Y. Ouyang, Large Countries’ Development Path: Experience and Theory, https://doi.org/10.1007/978-981-16-5695-8_4

141

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for the most part, so this vast domestic market alone is enough to support a great deal of manufacturing and to allow for a considerable degree of division of labor. Smith’s way of analyzing the problem is that the large country’s broad market can promote division of labor and specialization to support the development of manufacturing industry. The improvement of manufacturing depends entirely on the division of labor, and the degree of the division of labor that can be practiced by manufacturing is necessarily affected by the market (Smith 1972). In the book Modern Economic Growth, published in 1996, American economist Simon Kuznets makes a comparative analysis of the degree of dependence on international trade of different countries, holding that big and small countries differ in economic growth mechanisms and national production structures, and specialization and scale economy are two essential prerequisites for high economic growth. “For these large countries, domestic markets and resource conditions allow the development of specialization and economies of scale.” Hollis Chenery and Moises Syrquin point out in their book The Development Style: 1950–1970, published in 1975, that the development style of big countries reflects their attention to the domestic market and put forward the proposition that “big countries tend to be inward-looking. Summing up the thoughts of the four economists, the proposition that “the domestic market supports the development of large-country industries” has four meanings: First, the domestic market of large countries is vast, which can be equivalent to the markets of many small countries. China’s domestic market may not be smaller than the markets of all European countries combined (Smith 1972). Second, the vast domestic market provides conditions for the development of specialization and economies of scale and can support the industrial development of large countries. Manufacturing in countries whose territory is not as vast as that of China and where domestic trade is not as advantageous as in China often needs foreign trade to support it (Smith 1972). Third, large countries pay more attention to the domestic market and often adopt a set of inward policies. With few exceptions, large countries have adopted inward development policies, which have an impact on accumulation and other aspects of resource allocation (Smith 1972). Fourth, large countries also need to open to the outside world, and international trade can promote economic growth. Assuming that foreign markets in the rest of the world can be added to the domestic market, then wider foreign trade will inevitably greatly increase the output of Chinese manufactured goods and greatly improve the productivity of its manufacturing industry (Smith 1972). The above four points constitute the basic framework of the economic development pattern of large countries. (2)

Empirical analysis of the contribution rate of three major demands to economic growth in typical large countries

The contribution rate of economic growth refers to the contribution percentage of a certain demand factor to economic growth during a certain period of time. In general, there are two main methods of calculating contribution rates: one is to use econometric models for factor decomposition; the other is to calculate the ratio between the increment of the sub-items of the three major demands and the GDP increment.

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That is, the economic growth contribution rate of each sub-demand = the increment of a sub-demand/the GDP increment. If C is used to represent domestic final consumption demand and Y to represent GDP increments, then the contribution rate  of domestic final consumption demand to economic growth = C Y × 100%. Because the contribution rate of the three major demands to economic growth calculated by measurement method can only show the average contribution rate of the three demand factors in a given period, but cannot reflect the annual change, so we use the second method to measure the three major demand contribution rates of economic growth. To make the study’s conclusions typical, we choose the United States, China, Russia, India, and Brazil as typical big countries for empirical analysis, using data from 2000 to 2011, which are all from data published in the World Bank website database (in constant United States dollars in 2000). ➀

Analysis of the three major demand contribution rates in the United States to economic growth.

The results of the calculation of the contribution rate of the three major demands of the United States are shown in Table 1. The three major demand contribution rates to economic growth for the United States given in Table 1 are illustrated in Fig. 1. From 2000 to 2011, as a developed country, the economic growth of the US was basically driven by consumption demand and investment demand and the role of consumption demand in driving economic growth was greater than that of investment in most years (except in 2008 during the subprime crisis). However, the contribution rate of consumption demand basically showed a downward trend, while the investment demand contribution rate showed an upward trend year by year. The pull Table 1 Three major demand contribution rates of the United States from 2000 to 2011 unit:%

Year

Consumption contribution rate

Investment contribution rate

Net export contribution rate

2000

90.2

30.8

−21.0

2001

226.8

−107.8

−19.0

2002

144.1

−5.5

−38.6

2003

93.5

25.5

−19.0

2004

74.5

45.7

−20.2

2005

80.0

28.9

−8.9

2006

81.1

20.1

−1.2

2007

93.9

−28.1

34.2

2008

−19.9

471.7

−351.8

2009

26.6

103.0

−29.6

2010

66.5

49.5

−16.0

2011

68.5

25.1

6.4

Source calculations based on world bank raw data

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Fig. 1 Chart of the three major demand contribution rates in the United States from 2000 to 2011

Table 2 Three major demand contribution rates of China from 2000 to 2011 unit:%

Year

Consumption contribution rate

Investment contribution rate

Net export contribution rate

2000

58.0

22.6

19.4

2001

54.4

49.4

−3.8

2002

15.8

48.4

35.8

2003

32.1

63.0

4.9

2004

39.7

54.5

5.8

2005

22.4

38.0

39.6

2006

20.6

43.2

36.2

2007

27.7

42.1

30.2

2008

24.9

46.6

28.5

2009

79.5

88.1

−67.6

2010

3.0

52.9

44.1

2011

22.2

52.6

25.2

Source calculations based on world bank raw data

effect of net export demand on economic growth was basically flat, and in most years the contribution rate was negative. During the world economic crisis (e.g. the 2008 subprime crisis), the contribution to economic growth yielded a greater negative impact, resulting in a significant decline in the net export contribution rate. ➁

Analysis of the three major demand contribution rates of China to economic growth

The results of the calculation of the contribution rate of the three major demands of China are shown in Table 2. The three major demand contribution rates to economic growth for China given in Table 2 are illustrated in Fig. 2.

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Fig. 2 Chart of the three major demand contribution rates in China from 2000 to 2011

Figure 2 shows that China’s economic growth from 2000 to 2011 was basically driven by consumption demand and investment demand, and the role of consumption demand-driven economic growth was less than that of investment demand in most years. However, consumption demand has basically shown a downward trend and investment demand an upward trend year by year. The pull effect of net export demand on economic growth fluctuated basically around 0, especially during the world economic crisis (such as the 2008 subprime crisis), when the contribution to economic growth showed a greater negative impact, resulting in a significant decline in the net export contribution rate. ➂

Analysis of the three major demand contribution rates of Russia to economic growth

The results of the calculation of the three major demand contribution rates of Russia are shown in Table 3. The three major demand contribution rates to economic growth for Russia given in Table 3 are illustrated in Fig. 3. Figure 3 shows that from 2000 to 2011, the pull effect of Russian consumption demand on economic growth showed an upward trend year by year, and became the first demand force of economic growth; the contribution of investment demand was less than that of consumption demand, but it increased year by year and tended to be stable. The effect of net export demand on economic growth showed a decreasing trend year by year. ➃

Analysis of the three major demand contribution rates of India to economic growth.

The results of the calculation of the three major demand contribution rates of India are shown in Table 4. The three major demand contribution rates to economic growth for India given in Table 4 are illustrated in Fig. 4.

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Table 3 Three major demand contribution rates of Russia from 2000 to 2011 unit:%

Year 2000

Consumption contribution rate 34.3

Investment contribution rate

Net export contribution rate

88.3

−22.6

2001

90.4

61.5

−51.9

2002

100.2

−115.2

11.2

2003

53.2

37.8

9.0

2004

91.1

35.0

−26.1

2005

113.8

32.1

−45.9

2006

113.7

48.1

−61.8

2007

141.9

62.2

−104.1

2008

190.7

54.3

−145.0

2009

149.0

149.0

198.0

2010

162.5

120.9

−183.4

2011

235.8

107.9

−243.7

Source calculations based on world bank raw data

Fig. 3 Chart of the three major demand contribution rates in Russia from 2000 to 2011

Figure 4 shows that from 2000 to 2011, the pull effect of India’s three major demands on economic growth was similar to that of China, with consumption demand and investment demand dominating economic growth throughout the period. The pull effect of consumption demand on economic growth was greater than that of investment demand in most years and showed a downward trend, while investment demand showed an upward trend. The pull effect of net export demand on economic growth fluctuated around 0. ➄

Analysis of the three major demand contribution rates of Brazil to economic growth

The results of the calculation of the three major demand contribution rates of Brazil are shown in Table 5.

1 Growth Pattern Based on Domestic Demand Table 4 Three major demand contribution rates of India from 2000 to 2011 unit:%

147

Year

Consumption contribution rate

Investment contribution rate

Net export contribution rate

2000

110.2

−46.2

2001

42.5

54.4

3.1

2002

55.4

18.1

26.5

2003

71.7

35.3

−7.0

2004

−22.9

113.4

9.5

2005

57.1

53.2

−10.3

2006

49.7

53.9

−3.6

40.0

2007

48.1

62.4

−10.5

2008

163.0

−14.3

−48.7

2009

54.1

52.5

−6.6

2010

49.1

41.9

9.0

2011

61.4

55.0

−16.4

Source calculations based on world bank raw data

Fig. 4 Chart of the three major demand contribution rates in India from 2000 to 2011

The three major demand contribution rates to economic growth for Brazil given in Table 5 are illustrated in Fig. 5. Figure 5 shows that Brazil’s economic growth from 2000 to 2011 was largely driven by consumption demand and investment demand, with the former serving better than the latter in most years and continued to grow. Consumption demand slowly fueled the economy and the pull effect of net export demand on economic growth declined. After analyzing the major economies, the following conclusions can be drawn: first, in Rostow’s theory of economic growth stages, for large countries, in every stage of economic growth, consumption demand and investment demand have always

148 Table 5 Three major demand contribution rates of Brazil from 2000 to 2011 unit:%

4 Development Pattern of Large Developing Countries Year

Consumption contribution rate

Investment contribution rate

Net export contribution rate

2000

45.5

54.6

−0.1

2001

1420

−105.0

63.0

2002

50.2

−32.8

82.6

2003

44.4

−61.6

117.0

2004

66.6

23.1

10.2

2005

71.1

17.2

11.7

2006

96.3

37.1

−33.4

2007

90.3

36.1

−26.4

2008

96.1

44.7

−40.8

2009

−299.4

376.9

22.5

2010

100.9

48.8

−49.7

2011

110.3

33.5

−43.8

Source calculations based on world bank raw data

Fig. 5 Chart of the three major demand contribution rates in Brazil from 2000 to 2011

been the major driving forces of economic growth, and net export’s pull effect on economic growth fluctuates around 0. Second, according to Rostow, the pull effect of consumption demand on economic growth shows a downward trend in the third and fourth stages while investment demand shows an upward trend; in the fifth stage, the pull effect of consumption demand on economic growth increases and yet the pull effect of investment demand on economic growth represents a momentum of fluctuating to or around a stable value (e.g. the United States). Third, China and India currently lie in the fourth stage, so it is reasonable to let investment drive economic growth. However, they should make preparations in advance to transform the driving force, since it is worth noting that the economic growth of China and

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India is already in the middle and late fourth stage. Russia and Brazil are already in the fifth stage of economic growth. Consumption demand dominating and moderate investment demand driving economic growth will be a reasonable choice for the economic growth of the two countries in the future. 2

Domestic-Demand-Driven Pattern: Experiment Based on Consumption Scale Effect.

China’s economic growth has exhibited remarkable achievements, but over-reliance on investment and inadequate household consumption has become one of the main problems that will continue to trouble sustained economic growth in the future. In the “troika” that drives economic growth, consumption not only directly drives economic growth but affects economic growth through a structural effect. Among these, a reasonable ratio between investment and consumption and a suitable household consumption rate1 are important factors that affect the sustainable development of the economy. The reasons are as follows: First, an imbalance in demand structure leads to a decline in resource allocation efficiency, which may reduce the rate of economic growth. If the investment rate is low and the consumption rate is high, the long-term production capacity of the investment determined by forming the capital stock will not be high, so high consumption becomes unsustainable; if the investment rate is high and the consumption rate is low, long-term production capacity may be excessive, and high growth is not sustainable. Second, household consumption such as education and medical expenditures can affect the level of human capital and thus affect economic growth. Third, the domestic market of large countries is of special significance for the cultivation and formation of enterprise competitiveness. Because of the huge domestic market, enterprises can attain economies of scale and reduce operating costs and improve competitiveness. Therefore, maintaining an appropriate investment scale or consumption scale is not only conducive to enterprise development but also conducive to promoting macroeconomic growth. Fourth, household consumption directly reflects residents’ quality of life, especially the extent to which residents share in the fruits of development. There is much literature on consumption and economic growth at home and abroad. Empirical literature mainly uses linear models to examine the impact of demand structure or consumption scale on economic growth. Few research efforts discuss the non-linear effect of demand structure or consumption scale on economic growth. To make up for this defect, we use the threshold co-integration model to discuss the relative scale of household consumption—whether the effect of the household consumption rate on economic growth changes as the relative scale of household consumption exceeds a certain level, The aim is to judge whether there is a threshold effect of the relative scale of consumption on economic growth. (1)

Review of domestic and international research

Foreign research on economic growth theory has gone through a process of evolution from investment drive to demand-pull. Though classical and neoclassical trade 1

Household consumption as a percentage of GDP.

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theories believe that exports can promote economic growth, Western mainstream economics has not paid attention to the value of exports and other demand factors for economic growth. The prevalent economic growth theory mainly studies economic growth from an investment perspective, from Harrod-Domar’s classical model, Solow-Swan’s neo-classical growth model, Arrow’s “learning by doing” model, to Romer and Lucas’ new growth theory. After the Great Depression of 1929–1933, some scholars realized that demand may be the ultimate driving force of economic growth, and Keynes systematically elaborated the effect of effective demand on economic growth. But it can’t be denied that Keynes only emphasized the impact of domestic demand, especially investment demand, on short-term economic growth. The facts of modern economic development, especially in developing countries, indicate that growth is not only the growth of total output but also the process of demand expansion and structural transformation (Chenery 1960). Colm (1962) believes that demand affects economic growth by affecting supply, and focusing on economic growth solely from the perspective of supply, i.e. investment, may lead to wrong conclusions. Along this line of thinking, taking developing countries as the object of observation, many scholars regard the scale of demand and structural change as the main characteristics of economic development as well as the essential factors of an economic growth and development model (Garegnani and Trezzini 2010). Walker and Vatter (1999) hold that the demand factor should be introduced into the production function to explain the economic growth in the United States after the Second World War, but a production function that ignores the demand factor cannot explain the continuous decline in the economic growth rate of the US after the 1960s. Buera and Kaboski (2008) clearly state that demand and supply factors should be combined to understand the process of structural change and economic growth. On this basis, a series of studies specifically analyzes the relationship between changes in demand, including consumption, and the economic development stage of developing countries, as well as the impact of changes in demand on economic growth and the adverse effect of an unbalanced demand structure on the formation of long-term sustained and balanced economic growth (Garavaglia et al. 2012). Although some literature has found that the imbalance of the demand structure will inhibit economic growth, foreign studies rarely use nonlinear models to empirically test whether the effect of consumption on economic growth changes when the consumption scale exceeds a certain level. With China’s sustained economic growth, domestic scholars developed an interest in the impact of consumption factors on economic growth. Domestic scholars have combined foreign research with China’s reality to extensively discuss the impact of consumption factors on economic growth. In a nutshell, domestic research is mainly carried out along two lines. One is to study the impact of consumption on economic growth with consumption seen as a factor that affects economic growth, mainly to analyze the effect of changes in consumption on economic growth. Such research doesn’t investigate the existence of a consumption scale effect and the difference in its mechanism of action. The second line is to discuss the impact of consumption structure on economic growth from the perspective of structural analysis, with the

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empirical research mainly limited to linear models without reflecting the non-linear change of the effect of consumption structure on economic growth. Specific research results focus on two aspects. One is the impact of consumption on economic growth. Many scholars argue that consumption, the driving force of economic growth, has an increasing long-term pull effect to smooth the economic cycle, and insufficient domestic consumption has become a major contradiction restricting economic growth (Yinxing 2013). Some empirical studies examine the actual contribution of different needs to China’s economic growth. For example, Li Xuesong et al. (2005) analyze the dynamic factors of economic growth from the perspective of demand and prove that foreign demand, namely export and domestic demand, such as real estate investment, is an important factor driving economic growth. The biggest deficiency of the above research is that it does not reveal whether the effect of changes in demand structure on economic growth changes with the change of certain factors based on relevant data. The other aspect is the impact of changes in demand scale and structure on economic growth. The contribution of various types of demand to economic growth is shown as a direct pull using the expenditure method to calculate GDP. Changes in the demand structure cannot only affect economic growth through direct stimulus effects but also indirectly affect economic growth by influencing the investment structure and then changing the efficiency of resource allocation. Specific research mainly has the following characteristics. First, based on the “Chenery Standard Model”,2 using the consumption rate, investment rate, or investment-consumption ratio as a measure of demand structure to judge whether the demand structure is unbalanced and its impact on economic growth, the basic conclusion is that balanced economic growth is consistent with the balanced change of the demand structure, and the imbalance of the demand structure will do harm to long-term economic growth (Junbo 2008). Of course, other factors are needed to determine the right proportion of various needs conducive to economic growth. Ming (2010) holds that balanced economic growth is consistent with balanced changes in the demand structure, and excessive final consumption demand and excessive investment demand growth will cause economic growth to deviate from the equilibrium path and damage long-term economic growth. Some scholars try to use empirical research to examine the impact of changes in demand structure on economic growth. Jianwei (2003) proves that before the reform and opening up, the impact of changes in the investment-consumption ratio on economic growth was not significant, whereas, after that, the changes in the investmentconsumption ratio have promoted economic growth; Lisheng (2009) discovers with an input–output model that consumption has played a smaller role in stimulating economic growth when exports’ effect has stood out since 2002; Jie (2011) finds 2

“Chenery Standard Model” refers to the following facts demand structure change in the process of the industrialization of existing experience: in the initial stage of industrialization level of consumption and investment rates were 85% and 15% respectively, the mid-term stage of industrialization rate of consumption and investment rates were 80% and 20% respectively, in the late stage of industrialization level of consumption and investment rates were 77% and23%.

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through empirical research that the imbalance in the demand structure has significantly restricted economic growth. Although theoretical research and empirical research stress the positive effect of an appropriate demand ratio on economic growth and agree that the unbalanced demand structure will harm economic growth, they don’t point out the extent to which the various demand ratios have reached when the effect of demand structure changes on economic growth begins to change. Second, the relationship between demand structure and China’s economic growth is studied, based on the neoclassical “dynamic efficiency” theory and the AMSZ criterion proposed by Abel et al. (1989). For example, Feiming (2010) analyzes the data from 1985 to 2005 by using the net cash flow criteria of consumption and labor income and holds that lack of consumption is the deep-seated reason for the inefficiency of China’s economic dynamics, thus inhibiting economic growth; Kunrong et al. (2011) deem that China’s high investment rate has caused an excessive accumulation of capital and insufficient domestic demand, which formed a contradiction in the structure of total social demand, and led to the dynamic inefficiency of the economy, bringing a growing negative effect on economic growth. However, these studies have not calculated the value below which the effect of changes in the consumption rate or scale on economic growth begins to decrease or even changes in nature. Third, the optimal consumption rate and reasonable range in China’s economic growth are examined (Dihai and Liutang 2007), but the research conclusions are quite different. Weimin (2008) estimates that the optimal consumption rate is 66% for China from 1978 to 2006, and Linbo and Xuefeng (2011) assess that China’s optimal consumption rate from 1992 to 2008 is 57%. These studies measure the optimal consumption rate in China’s economic growth mainly based on the production function or the identity of the GDP expenditure method but don’t analyze whether the effect of the consumption rate or scale change on economic growth varies with the change of the consumption rate. Fourth, the scale and structure of consumption are combined to examine the pull effect of the change of the scale and structure of demand on economic growth. After investigating the trigger effect of final demand on China’s economy, Ruixiang and Tongliang (2011) find that with the rapid expansion of China’s economic aggregate, the pull effect of final demand on the economy has shown a diminishing phenomenon, and the power source structure of China’s economic growth has undergone important changes around 2002: before 2002, the importance of the “troika” to economic growth ranks as consumption, investment and export, and after 2002, export, investment, and consumption. This study uses the input–output model to decompose the causes of China’s economic growth, revealing the changes in consumption’s effect on economic growth. However, it only reveals the change in the driving force of economic growth and doesn’t reveal that the change in the effect of consumption on economic growth is due to the change in the scale of consumption and change in the mechanism of action. Jinwen et al. (2010) empirically analyze the growth effect of insurance consumption in China and the results show that the impact mechanism of insurance consumption on economic growth is relatively complex, with both phased and non-linear characteristics in time and huge differences in space. In

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addition, some scholars have theoretically explored the scale effect of consumption on the economic growth of large countries, and reveal that the effect mechanism of consumption on economic growth is constantly changing with changes in the scale of the domestic market. Xianzhong et al. (2014) find out through research that the effect of the scale of demand from large countries on economic growth changes with the institutional environment through the endogenous foreign trade development mechanism. However, these studies still have no empirical analysis on whether the effect of household consumption on economic growth changes with the change of the relative scale of household consumption. In summary, theoretical and empirical studies have confirmed the role of consumption in promoting economic growth, and many research results assume that the effect of different demands on economic growth may change with certain conditions. However, these studies have the following defects: first, very little literature systematically sorts out the mechanism that the effect of changes in demand structure on economic growth may change with changes in certain factors; second, no literature empirically measures that the size and nature of the effect of the demand structure’s changes on economic growth may change when a certain demand reaches a certain level, that is, without any work to measure the threshold effect of changes in the demand structure on economic growth. For this reason, when the current economic growth mode changes from investment-driven to demand-driven, in-depth discussion of this issue carries important theoretical and practical significance under the background that the contradiction of the demand structure has severely restricted sustained and stable economic growth. (2)

Theoretical analysis of the effect of household consumption scale on the threshold of economic growth

The ultimate goal of a country’s or region’s economic development is to improve the national living standard and quality, which is directly affected by household consumption, so investment demand is necessary for maintaining existing production capacity and forming expanded reproduction capacity. Theoretically, the household consumption rate and investment ratio are negatively correlated. The change in household consumption includes two aspects: one is the change in the total consumption of residents, i.e. the expansion or contraction of the scale of the total consumption of residents; the other is the change in the demand structure caused by the change in the household consumption rate. Furthermore, the effect of household consumption on economic growth is, directly and indirectly, related to the household consumption rate. The impact of household consumption on economic growth is mainly manifested in two parts: one is that consumption directly affects the economy, and there is no need for intermediate links3 ; the other is the indirect effect of resident consumption on economic growth, that is, resident consumption affects economic growth by affecting other factors, such as investment and the economic structure. The

3

The growth of consumer demand should not exceed the limit of production capacity, otherwise it will not result in real economic growth, but only nominal growth and economic growth Inflation.

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following is a specific analysis of the nonlinear mechanism of resident consumption on economic growth. First, the rise or fall of the household consumption rate directly leads to the acceleration or slowdown of economic growth, but the effect of investment changes caused by household consumption on economic growth may not be consistent with the effect of household consumption. In other words, the direct effect of resident consumption is that resident consumption is positively correlated with economic growth, while the indirect effect may promote or suppress economic growth. The two opposite effects may show that the effect of household consumption on economic growth varies with the relative scale of household consumption. To start with, the change in the scale of household consumption is directly reflected in the scale of investment in the consumer goods production sector, that is, the change in household consumption will be transmitted to investment demand, form induced investment,4 and indirectly affect economic growth, the role, and nature of which are inconsistent with household consumption. Then, changes in the scale of household consumption affect labor input. Household consumption has a positive incentive effect on labor input. This prompts an increase in labor input, improves labor efficiency, and induces companies to increase investment. Besides, the current expansion of consumption will make people work harder in the future to achieve a balanced household budget, the so-called “bill paying” effect, to increase long-term productivity and boost economic growth. Thirdly, a rise or fall in the household consumption rate means fluctuation in the investment rate, and the change in household consumption scale results in a change in the scale of investment demand, namely, the capital formation rate is negatively correlated with the change in the scale of household consumption, which may indirectly lead to a decline or acceleration in economic growth. Finally, the expansion of household consumption has reduced the scale of savings, and insufficient savings will inevitably lead to insufficient investment in the whole society, possibly hindering economic growth; on the contrary, the reduction in the scale of household consumption expands the scale of savings, possibly promoting economic growth. The first two indirect mechanisms of household consumption are reflected in the promotion of household consumption on economic growth, while the latter two are reflected in the impediment of household consumption on economic growth. If the positive effect of household consumption on economic growth is greater than the negative effect, then household consumption promotes economic growth; otherwise, it restrains economic growth. Of course, the positive or negative effect of household consumption on economic growth is a gradual process, closely related to the consumption rate. In other words, only by maintaining the coordination of the demand structure can various types of demand contribute to sustainable economic growth; if the demand structure is unbalanced, various types of demand may not be able to promote sustainable economic growth. Therefore, the effect of household 4

Investment includes independent investment and induced investment.The main motivation for independent investment is the invention of new products and production technologies, rather than income or growth in consumption. Induced investment is the investment induced by economic actions such as growth in consumption and independent investment.

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consumption on economic growth may change as the household consumption rate changes. Second, changes in the scale of household consumption affect economic growth by affecting factor utilization efficiency, which mainly includes affecting economies of scale and economic structure. Only when household consumption reaches a certain proportion can economies of scale be formed, the demand structure can arrive at a reasonable level, factor utilization efficiency can be improved and economy can be promoted. Specifically, the change of the resident consumption rate means the change of resident consumption scale. The expansion of the scale of household consumption may bring about economies of scale in the production sector of consumer goods, increase the input–output ratio and promote economic growth; the reduction of it may downsize the consumer goods production sector, cut down the input–output ratio, and suppress economic growth. The domestic market of large countries is particularly important for industries in the primary stage of development, for the market scale not only guarantees demand for production but also promotes the formation and betterment of industrial competitiveness through the effect of scale economy. Therefore, only when the scale of household consumption reaches a certain level can household consumption influence factor utilization efficiency and boost economic growth through scale economy; otherwise, household consumption plays little role in promoting economic growth. Moreover, the change in the scale of household consumption also means the change in the production structure, which alters the efficiency of resource allocation, affecting economic growth. If the change in the scale of household consumption triggers a change in the production structure, for example, the expansion of the scale of household consumption causes increased demand for new consumer products, then the new demand structure promotes the continuous optimization of the industrial structure, possibly improving the efficiency of resource allocation and thus boosting economic growth. Of course, the expansion of household consumption may also lead to an imbalance in the demand structure, which will adversely affect the industrial structure, harming the efficiency of resource allocation and economic growth. In addition, changes in the household consumption rate will cause changes in the income distribution structure. The reasonable income distribution structure will promote economic growth; otherwise, it will stunt economic growth. Therefore, household consumption will affect structural changes and income distribution, and its effect on economic growth may differ as the relative scale of household consumption changes. Third, changes in the scale of household consumption may affect technological innovation, thereby promoting or inhibiting economic growth. Increasing consumer demand may stimulate technological innovation: on one hand, the increase in household consumption is transferred into market demand, expanding the future market scale and encouraging enterprises to conduct process innovation or incremental product innovation. This mechanism is regarded as a “pure incentive mechanism”. On the other hand, the increase in household consumption ensures a company’s expected profit, lowering the uncertainty of the company’s expected profit and operating risk, which further stimulates technology innovation. When introducing new products or improving existing products, it is difficult to predict the level of market acceptance

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and demand, while the increase in household consumption can reduce the uncertainty and difficulty of forecasting, thereby promoting innovation. Therefore, only when household consumption reaches a certain scale can stable market demand be formed, and technological innovation can be induced to promote economic growth. If household consumption is below a certain scale, market demand cannot induce technological innovation, and the effect of household consumption on promoting economic growth is not obvious. In short, the effect of household consumption on economic growth is constrained by whether household consumption can induce technological innovation. It can be seen from the analysis that the effect of household consumption scale on economic growth may be either consistent or inconsistent with the direction of household consumption scale change. Under the influence of certain factors, the effect of changes in the scale of household consumption on economic growth may be diverse. For example, the effect of household consumption scale on economic growth may undergo nonlinear changes with the scale of household consumption reaching a certain level. With a small consumption scale and insufficient consumption, household consumption has little effect on economic growth. Because of a small consumption scale and insufficient consumption, there will be overcapacity, some resources are idle and the efficiency of resource allocation is reduced. This is not conducive to the formation of scale economies and the R&D investment of enterprises and produces a series of structural problems so that household consumption has little effect on economic growth. With a high consumption rate and a large consumption scale, household consumption plays an important role in economic growth. Because of a large consumption scale, consumer goods production departments and related departments can obtain economies of scale, improve the utilization efficiency of factors, and promote economic growth. Furthermore, scale economies can improve the competitiveness of consumer goods production departments and related departments, thus benefitting the expansion of exports. Also, the large scale of household consumption can directly promote technological innovation and economic growth, and the expansion of household consumption scale may induce structural changes that promote the optimization and upgrading of industrial structure and benefit economic growth. Moreover, the household consumption rate should be kept within a reasonable range. Whether the household consumption rate is too high or too low will directly lead to economic structure imbalance, causing the uneven development of the consumer goods production sector and capital goods production sector, thereby obstructing economic growth. A high household consumption rate means a low capital formation rate and a low savings rate. The capital goods production sector cannot provide the necessary machinery and equipment for consumer goods production and insufficient savings cannot meet the investment demand for the expansion of the scale of consumer goods production, so the expansion of consumer goods production cannot be realized and the household consumption inhibits economic growth. A low resident consumption rate means a high capital formation rate and a high savings rate. Household consumption and the machinery and equipment used to produce consumer goods are insufficient relative to output, which directly results in

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insufficient market demand for consumer goods production departments and related departments, causing excess capacity and idle resources. At the same time, insufficient savings cannot meet the investment needs of the expansion of the production of consumer goods, so the expansion of consumer goods production cannot be realized and household consumption inhibits economic growth. In short, the effect of changes in the scale of household consumption on economic growth may change non-linearly as the scale of household consumption reaches a certain level. (3) ➀

Threshold effect model of household consumption affecting economic growth Preliminary construction of threshold model

Theoretical analysis shows that the coordination of the three major demand ratios guarantees sustained and stable economic growth, and a high or low proportion of any of them would hinder that result. A high consumption rate and low investment rate will inhibit the expansion of reproduction, resulting in unsustainably high consumption and economic growth; a low consumption rate and high investment rate will cause insufficient consumption, and expanding reproduction will lead to overproduction and unsustainable economic growth. Therefore, in theory, the consumption rate, i.e. the long-term effect of the relative scale of consumption on economic growth, may change as the relative scale of consumption reaches a certain level. Demand structure mainly affects economic growth by affecting the efficiency of resource allocation, so some scholars have introduced demand structure into production functions to investigate the effect of demand structure on economic growth (Weimin 2008; Linbo and Xuefeng 2011). Based on the above analysis, the following threshold model is constructed: gt = c1 + α1 × cpt−1 + β1 × kt + ϕ1 × lt + θ1 × f isct + (c2 + α2 × cpt−1 + β2 × k2 + ϕ2 × lt + θ2 × f isct )G(cpt−d−1 , λ,  ) + u t

(1)

gt = c1 + α1 × cpt−1 + β1 × kt + ϕ1 × lt + θ1 × f ist + (c2 + α2 × cpt−1 + β2 × k2 + ϕ2 × lt + θ2 × f ist )G(cpt−d−1 , λ,  ) + u t (2) In this model t represents year t (t = 1954,…, 2013), g is the economic growth rate, and cp is the ratio of household consumption to GDP (statistics of expenditure method). This last term (cp) reflects the relative scale of household consumption, the key explanatory variable of the model, and also the threshold variable of the model. Because the change in demand structure affects the efficiency of resource allocation by affecting the production structure, and thus affects economic growth, the adjustment of the production structure often lags behind the demand structure, so the demand structure, namely the ratio of household consumption in GDP, lags by one period. Government intervention is an important factor that affects economic growth, which is generally measured by the ratio of fiscal expenditure to GDP. In fact, the government often directly guides industrial development and influences corporate behavior through preferential tax policies. Therefore, fiscal revenue can

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also measure the degree of government intervention, using the fiscal revenue to GDP ratio (denoted as fisc) and the fiscal expenditure to GDP ratio (denoted as fis) respectively. Using the two methods to measure the degree of government intervention, we can examine whether the model estimation results are robust. The growth rate of the capital stock is k. The capital stock from 1952 to 2006 is directly taken from the data calculated by Haojie (2008), and the capital stock from 2007 to 2013 is calculated according to his measurement method. l is the labor growth rate, and μ is the residual error. The data measured by the above variables, without mentioning the source, are from the China Statistical Yearbook and China Compendium of Statistics 1949–2008. G(·) is a mechanism transfer function, depicting the non-linear effect of the household consumption scale on economic growth; d is the time or location of the change in household consumption scale on economic growth effect; λ is the speed of mechanism transfer.  is the threshold parameter of the change of the household consumption rate. Generally speaking, when G(·) is close to 0, the effect of household consumption scale on economic growth is subject to the first mechanism, characterized by the parameter α 1 ; when G (·) is close to 1, the effect of household consumption scale on economic growth follows the second mechanism, characterized by the parameter α1 + α2 . When G(·) ∈ (0, 1), the effect transfers smoothly between the two mechanisms, characterized by α1 + G (·) × α2 . When all the variables of Eqs. (1) and (2) are I (1) series and the estimated residual μ is stationary, Eqs. (1) and (2) are threshold cointegration models, and there is a longterm threshold cointegration relationship between household consumption scale and economic growth. ➁

Collinearity test

Model (4–1) and model (4–2) are time series models. Macroeconomic variables of time series may have a high degree of collinearity; if the explanatory variables have severe collinearity, it will affect the accuracy of the estimation. Therefore, model (4–1) and model (4–2) need to be tested for collinearity. After solving the problem of collinearity of the explanatory variables of the model, to determine whether there is a threshold co-integration relationship between the explanatory variables of model (4–1) and model (4–2) and economic growth, a unit root test needs to be made, then the threshold variable lag order is to be determined, and then whether model (4–1) and model (4–2) are linear or nonlinear models is to be examined through the nonlinear test. If it is a non-linear model, the test determines the type of mechanism transfer function, and finally, the threshold cointegration test is carried out by using the estimated residual. Principal component analysis is carried out on the model’s explanatory variables to accurately determine the degree of collinearity of these variables, and the test results are shown in Table 6. From Table 6, it can be seen that the sum of the reciprocal of the characteristic root of the principal component analysis of the explanatory variables of model (4–1) and model (4–2) is 5.6323 and 5.5078, which is much less than 5 times the number of explanatory variables. Therefore, there is no strong collinearity in the explanatory variables of the two models, that is, the degree of collinearity will not seriously affect the estimation results.

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Table 6 Collinearity test Model

Feature root number

Sum of reciprocal characteristic roots

1

2

3

4

Model (4–1)

1.7253

1.0645

0.8733

0.3369

5.6323

Model (4–2)

1.6456

1.1527

0.8519

0.3498

5.5078

➂

Unit root test

Only if the model variable is a stationary sequence of the same order, and the estimated residual μ is an I (0) series, will the model be a threshold cointegration model. In other words, the long-term effects of explanatory variables such as the household consumption scale on economic growth may change as the household consumption scale reaches a certain threshold. The results of the unit root test for all variables of model (4–1) and model (4–2) are shown in Table 7; the ADF statistics for g, cp, fis, fisc, k, and l are all greater than the threshold at the 5% significance level, indicating that these variables all have unit roots; the first-order difference of all variables is further tested, and ADF statistics are less than the threshold at the 5% significance level, indicating that the first-order differences of these variables are stationary. Therefore, all variables are I (1) series. ➃

Determination of lag order

To determine whether the mechanism transfer function G(·) exists and the function type, it is necessary to determine the location of the G(·) transfer, that is to establish the lag order d of the threshold variables fisct-d-1 and fist-d-1 . There are two types of mechanism transfer functions: Logistic and Exponential. The transfer function of the two mechanisms is assumed to be a third-order Taylor expansion at the origin, as formula (3): 1 2 3 + τ2 cpt−d−1 + τ3 cpt−d−1 G(cpt−d−1 , λ,  ) = τ1 cpt−d−1

(3)

Table 7 Unit root test variable Inspection Statistics The critical variable Inspection Statistics type value (5%) type

The critical value (5%)

g

(0, 0, 3)

−1.3880

−1.9468

g

(c, 0, 1)

−1.5420

−2.9126

Δg

(c, 0, 0)

−7.8988

−2.9126

Δg

(c, 0, 1)

−6.4615

−2.9135

cp

(c, 0, 0)

−1.3340

−2.9117

cp

(c, t, 1)

−3.0629

−3.4892

Δcp

(c, 0, 0)

−5.6062

−2.9126

Δcp

(c, 0, 1)

−5.0110

−2.9135

fis

(c, 0, 0)

−1.7423

−2.9117

fis

(c, t, 4)

−3.2514

−3.4937

Δfis

(c, 0, 0)

−6.7264

−2.9126

Δfis

(c, 0, 1)

−12.8491 −2.9126

Note The first item in the bracket of the inspection type is c, indicating the intercept term, 0 means no intercept term; the second term is t, which means time trend, 0 means no time trend; the third term means lag order,  represents first-order difference

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Table 8 Determination of lag order of threshold variable Model (4–1)

Model (4–2)

AIC

R

d=1

−168.301

d=2 d=3

2

2

F statistic

AIC

R

0.4601

6.491

−170.357

0.4759

6.852

F statistic

−159.145

0.4067

5.341

−159.270

0.4079

2.364

−157.814

0.425

5.591

−157.850

0.4249

5.598

By Substituting Eq. (3) for model (4–1) and model (4–2) respectively, the OLS estimation results can be used to determine the mechanism transfer position d (Dijk et al. 2002) of model (4–1) and model (4–2). That is, the lag order of threshold variables is determined mainly based on the AIC information criterion while referring 2 to the model’s significance level and the adjusted R (Jinwen and Jitao 2007). To facilitate the analysis, the maximum value of d is equal to 3. From the test results in Table 8, we can see that when d = 1, the AIC of model (4–1) and model (4– 2) are the smallest, which are -168.601 and -170.357 respectively. The model’s 2 significance level and adjusted R both reached the maximum. Therefore, the lag order of threshold variables for both model (4–1) and model (4–2) is 1; accordingly, the sample period of model (4–1) and model (4–2) is adjusted as 1955–2013. ➄

Test of model type and mechanism transfer function form

Substitute d = 1 into formula (3), and then substitute formula (3) into model (4–1) and model (4–2) respectively to check whether the mechanism transfer function G(·) of model (4–1) and model (4–2) is 0. Specifically, the test rejects τ1 = τ2 = τ3 = 0, and model (4–1) and model (4–2) are nonlinear models. If the mechanism transfer function G(·) is not 0, then the specific form of the mechanism transfer function G(·)is further checked. In simple terms, when rejecting τ3 = 0 or τ1 = 0 |τ3 = 0, τ2 = 0, G(·) is a Logistic mechanism transfer function; when rejecting τ2 = 0τ3 = 0, G(·) is an Exponential mechanism transfer function. It can be seen from the test results of Table 9 that both model (4–1) and model (4–2) reject the Z0 hypothesis of τ1 = τ2 = τ3 = 0 at the significance level of 5%. In other words, the rejection model (4–1) and (4–2) are linear models. Model (4–1) and model (4–2) reject the Z01 Table 9 Test of mechanism transfer function G(·) form Hypothesis

Model (4–1) LM

Model (4–2) Critical value 5%

10%

LM

Critical value 5%

10%

Z0

78.4564

46.8509

37.1764

78.9825

29.8374

29.0876

Z 01

14.0921

8.6073

7.8489

17.5141

13.1090

10.0648

Z 02

14.8430

7.6631

5.6246

12.6692

14.2585

10.2895

Z 03

29.6521

13.2453

11.4806

11.2691

11.2691

8.7918

Note Bootstrap’s loop count is 1000

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hypothesis with λ3 = 0 at the 5% significance level, therefore, it can be concluded that G(·) in both model (4–1) and model (4–2) is a Logistic-type mechanism transfer function. ➅

Threshold cointegration test

It can be seen from the test that model (4–1) and model (4–2) are non-linear models, and variables, such as household consumption scale have a non-linear relationship with economic growth. However, whether the relationship between variables such as household consumption scale and economic growth is a threshold cointegration relationship depends on whether the residual error μ estimated by the nonlinear model (4–1) and (4–2) is stable. When μ is an I(0) sequence, there is a threshold co-integration relationship between variables such as household consumption scale and economic growth; when a unit root is present in μ, there is no threshold cointegration relationship between variables such as household consumption scale and economic growth. The μ of model (4–1) and model (4–2) is obtained respectively by substituting the mechanism conversion function G(·) into model (4–1) and model (4–2) and using dynamic nonlinear least squares (DNLS) estimation. Since the distribution of statistics depends on unknown parameters under nonlinear conditions, it is impossible to use all the residuals for cointegration tests, so the partial residual test method that does not depend on unknown parameters is used for threshold cointegration tests. In simple terms, a more accurate critical value is calculated through the Monte Carlo simulation test; when the statistic is less than the corresponding critical value, the null hypothesis that μ is a stationary sequence cannot be rejected. Otherwise, the null hypothesis that μ is a stationary sequence is rejected. The model (4–1) and model (4–2) threshold cointegration results show that the statistics are 1.566 and 1.565 respectively, which is significantly less than the critical value of 1% of the significance level. The adjoint probabilities are 0.993 and 0.996 respectively, which means that the estimated residuals μ of model (4–1) and model (4–2) are both stationary series, and there are threshold cointegration relationships between variables such as household consumption scale and economic growth. (4)

The estimation results of threshold model and their interpretation

The DNLS estimation method is used to estimate model (4–1) and model (4–2) respectively, and the estimation results formula (4) and formula (5) are obtained. It can be seen from the estimated results that in model (4–1) and model (4–2), the estimated value of θ 1 in formula (4) and formula (5) is not significant. The significance level of the estimated value of α2 in formula (1) in model (4–1) is 10%, and the significance level of the remaining coefficients reaches 1% or 5%. Except for the difference between the intercept term and the coefficient of cp in the second mechanism of Eqs. (4) and (5), there is no significant difference in other coefficient estimates, threshold, and mechanism transfer velocity. It can be said that the estimation results are basically consistent in different models which measure the degree of government intervention with different methods, and the model estimation results are robust. Therefore, the effect of household consumption scale on economic growth varies significantly with the change of household consumption scale.

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Fig. 6 Mechanism transfer diagram

➀

The empirical results

It can be seen from the estimated results formula (4) and formula (5) that when the mechanism transfer function G(·) approaches 0, the effect of household consumption scale on economic growth follows the first mechanism. The effect value is about 0.77, and the significance level is 1%, which means that the scale of household consumption has a significant positive effect on economic growth. In Fig. 6, the corresponding years where G(·) approaches 0 are 1961–1962, 1973, 1977, and 1979–2013. In the condition that other factors remain unchanged, the consumption scale of residents in year t–1 increases (or decreases) by 0.01, and the economic growth rate of year t increases (or decreases) by about 0.0077. The minimum partial effect of household consumption scale on economic growth from 1961 to 1962, 1973, 1977, and 1979 to 2013 is about 0.77. gt = − 0.555 + 0.775 ×cpt−1 + 2.497 ×kt + 0.414 ×lt + 0.034 × f isct (−39.30)

(24.47)

(22.22)

(5.75)

(1.95)

+ (− 0.745 + 0.511 ×cpt−1 − 2.494 ×kt + 0.855 ×lt (−11.56)

(5.78)

(−19.15)

(3.26)

+ 1.973 × f isct ){1 + exp[−306(cpt−2 − 0.5383)]}−1 (10.08)

(4)

gt = − 0.553 + 0.774 ×cpt−1 + 2.489 ×kt + 0.414 ×lt + 0.027 × f isct (−39.19)

(21.07)

(19.52)

(4.98)

(1.32)

+ (− 0.632 + 0.512 ×cpt−1 − 2.611 ×kt + 1.069 ×lt (−8.00)

(4.68)

(−16.22)

(3.24)

+ 1.574 × f ist ){1 + exp[−241(cpt−2 − 0.5396)]}−1 (7.27)

(5)

When the mechanism transfer function G(·) approaches 1, the effect of household consumption scale on economic growth follows the second mechanism, and the positive effect of household consumption scale on economic growth expands. In

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Fig. 7 Partial effect of household consumption on economic growth

Fig. 6, the corresponding years where G(·) approaches 1 are 1955–1960 and 1963– 1971. The effect value of formula (4) is α1 + α2 = 0.775 + 0.511 = 1.286 and the effect value of (5) is α1 + α2 = 0.774 + 0.512 = 1.286, indicating that under the second mechanism, the scale of household consumption has a significant positive effect on economic growth. In the condition that other factors remain unchanged, the consumption scale of residents in year t–1 increases (or decreases) by 0.01, and in formula (4) and formula (5), the economic growth rate increases (or decreases) by 0.0129 in year t. The partial effect of household consumption scale on economic growth is shown in Fig. 6. The corresponding years are 1955–1960 and 1963–1971.5 When the mechanism transfer function G(·) ∈ (0, 1), the effect of household consumption scale on economic growth is subject to a mixed mechanism. In formula (4) the effect of household consumption scale on economic growth is described by 0.775 + 0.511 × G(·). In formula (5), the effect of household consumption scale on economic growth is described by 0.774 + 0.512 × G(·). The corresponding years of G(·) ∈ (0, 1) are 1972, 1974–1976, and 1978. The partial effects of household consumption scale on economic growth are shown in Fig. 7. The partial effects of formula (4) in 1971, 1973–1975, and 1977 are 1.25, 1.2, 0.97, 0.93, 0.91 respectively. The partial effects of formula (5) in 1971, 1973–1975, and 1977 are 1.21, 1.15, 0.94, 0.92, and 0.91 respectively. The estimated threshold parameters of 0.539 indicate that when the household consumption scale is less than 0.539, the effect of household consumption scale on economic growth is subject to the first mechanism; when the household consumption scale is approximately equal to or higher than 0.539, the effect of household consumption scale on economic growth has shifted non-linearly, obeying the hybrid mechanism or the second mechanism; in formula (4), λ = 306, and in formula (5), λ = 241, indicating that the mechanism transfers fast.

5

The number in parentheses is the statistic value of t. The following are the same.

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Main conclusions and explanation

From the above analysis, it can be seen that when the household consumption scale is less than 0.539, the effect of the household consumption scale on economic growth is subject to the first mechanism, with the household consumption scale increasing by 0.01 and the economic growth rate by 0.008; when the household consumption scale is approximately equal to or higher than 0.539, the effect of household consumption scale on economic growth is subject to the hybrid mechanism or the second mechanism, and the effect of household consumption scale on economic growth is significantly expanded. In other words, the long-term effect of the scale of household consumption on economic growth increases significantly when the scale of household consumption is approximately equal to or higher than 0.539. The main reason is that the decline in household consumption means that consumption is insufficient, and the pull role of consumption in promoting economic growth will shrink. It can be seen from Fig. 8 that the proportion of residents’ consumption is consistent with the final consumption ratio—a downward trend in 1953–1959 and 1963–2013, and an upward one in 1960–1962, while the proportion of government consumption doesn’t change much. In other words, the proportion of residents’ consumption is the main reason for the change in final consumption, that is, the decline in the proportion of residents’ consumption not only directly leads to the decline in the final consumption ratio, but also leads to the decline of the contribution of the scale of residents’ consumption to economic growth. The evolution mechanism by which household consumption scale affects economic growth can be understood from five aspects: First, the reduction in the scale of household consumption will directly lead to overcapacity and scale shrinking of the consumer goods production sector, which will then unbalance the economic structure and possibly slow down economic growth.

Fig. 8 Changes in demand structure

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Second, the reduction in the scale of resident consumption will induce a corresponding change in the production structure: fluid production factors will flow from the resident consumer goods production sector to the non-resident consumer goods production sector, the marginal productivity of the production factors of the nonresident consumer goods production sector decreases, and the efficiency of resource allocation decreases. Due to the specificity of capital and the long-term formation of human capital, some factors of production in the consumer goods production sector cannot flow to the non-resident consumer goods production sector in a timely manner, resulting in excess capacity in the consumer goods production sector, idling some resources and lowering the efficiency of resource allocation. Furthermore, the reduction in the scale of household consumption reduces the efficiency of factor allocation and leads to the slowdown of economic growth. Third, the decline in the scale of household consumption not only directly narrows the scale of production of consumer goods but also further reduces or even invalidates the effect of economies of scale. In other words, under the condition of constant input, the output level of the resident consumer goods production sector drops, or under the condition of the constant output level, the input level of the resident consumer goods production sector rises. Under both conditions, the consumer goods production sector has reduced resource utilization efficiency due to the reduction in the size of residents ’consumption. Under the condition of limited resources, the contribution of residents’ consumption to economic growth has declined. Fourth, the reduction in the scale of household consumption is not conducive to the deepening of the specialization of labor in the consumer goods production sector, thus reducing the contribution of household consumption to economic growth. Specifically, the reduction in the scale of resident consumption is not conducive to the expansion of the scale of the resident consumption market, and enterprises have to choose to produce more intermediate inputs to produce the final product because the scale of market demand restricts the specialized production of intermediate inputs. Therefore, when the scale of household consumption is small, the effect of household consumption on economic growth shrinks. Fifth, the reduction in the scale of household consumption can easily lead to excessive dependence on investment drive and export pull for economic growth. According to data from 2000 to 2013 on the World Bank website, the consumption rate of Chinese residents fell from 47 to 36%, and the capital formation rate rose from 35 to 48%. Whereas the average consumption rate of residents around the world remained at 60%, and the capital formation rate dropped from 23 to 22%. The consumption rate of residents in low-income countries fell from 79 to 78%, and the rate of capital formation rose from 27 to 29%; the consumption rate of residents in middle-income countries fell from 59 to 55%, and the rate of capital formation rose from 25 to 32%; the consumption rate of residents in high-income countries rose from 60 to 61%, and the rate of capital formation fell from 23 to 20%. These data reveal that the contribution of household consumption to China’s GDP is relatively low, while the contribution of investment to China’s GDP is relatively high. That is to say, China’s economic growth is typically investment-driven. Although the investment-driven economic growth mode will lead to a decline in the marginal

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productivity of capital, the share of capital returns is high and the share of labor is low. For example, the proportion of China’s labor compensation in GDP has been declining continuously, from 70% in 1983 to 46% in 2013. The share of capital returns keeps rising, from 10.7% to 42%,6 which shows that the investment-driven economic growth mode caused by the reduction in the scale of household consumption will widen the income gap, thus leading to insufficient consumption and the decline of economic growth. Consumption, investment, and exports are the “troika” that drives economic growth. In theory, only by maintaining a reasonable ratio can the three promote sustainable and stable economic growth. If the consumption ratio is high, the investment ratio is low, then it is not conducive to expanding reproduction, high consumption is unsustainable, and long-term economic growth cannot be maintained; if the consumption ratio is low, the investment ratio is high, then consumption is insufficient, the expansion of reproduction is unsustainable and long-term economic growth cannot be maintained either. In short, maintaining a reasonable demand structure can ensure sustained and stable economic growth. After the empirical testing of the threshold cointegration model, using the data of China from 1955 to 2013, the results show that the long-term effect of Chinese household consumption scale on economic growth consequently varies with the change of the household consumption rate, proving the scale effect of Chinese household consumption, which has formed different action mechanisms under different relative scales of consumption, resulting in different impacts. The long-term effect of the scale of household consumption on economic growth changes when the scale of household consumption reaches approximately 0.539: When the household consumption scale is lower than 0.539, the effect of the scale of household consumption on economic growth is subject to the first mechanism, the scale of household consumption increases by one unit, and the economic growth rate rises less; When the scale of household consumption is approximately equal to or higher than 0.539, the effect of the scale of household consumption on economic growth is subject to the hybrid mechanism or the second mechanism. The scale of household consumption increases by one unit, and the economic growth rate rises significantly. Since China’s reform and opening up, the scale of household consumption has been shrinking, economic growth mainly depends on investment and exports, and the contribution of household consumption to economic growth has continued to decline which is consistent with the empirical research conclusions. The conclusions of the study have extremely important implications for the major developing countries to achieve economic transformation and take the domestic demand-oriented path. It clearly shows consumption scale is necessary for sustained and stable economic growth in major countries, especially the household consumption scale. To solve the problem of demand structure which inhibits China’s sustainable economic growth, one of the vital breakthroughs is to give full play to the advantage of a big country through the expansion of household consumption. There 6

It is calculated according to the method proposed by Lu Bingyang and Guo Qingwang (2012) in “Calculation of China’s Factor Income Distribution”.

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are obvious differences between large and small countries in seeking lasting impetus for economic growth when small ones can focus on producing certain internationally competitive products to maintain sustained and stable economic growth based on world market demand, but big countries can only rely on domestic demand to maintain sustained and stable economic growth. Therefore, the above theoretical and empirical research conclusions have important implications for the sustained and stable growth of China’s economy: domestic demand is the fundamental driving force for large countries’ economy and different types of domestic demand have different effects on the economic growth of big countries at different stages of development. With the expansion of the scale of residents’ consumption now, the endogenous driving force of economic growth has been strengthened, but in reality, the role of consumer demand is diminishing, and the imbalance of demand structure is the deep-seated reason. Under the background of residents’ income increasing, the imbalance in demand structure largely comes from the imbalance in supply structure. On the supply side, the structure and quality of consumer goods cannot meet residents’ needs to improve the quality of life and adjust the structure in time, resulting in an odd phenomenon that domestic consumers buy the bulk of goods abroad with domestic overcapacity. At present, China’s household consumption rate is on a low and small scale, which is not only reflected in the continuous downward trend of the household consumption rate but far below the world average. The low contribution of household consumption to economic growth is the root cause of the lack of impetus for China’s economic growth. Therefore, expanding the scale of household consumption is an important strategic policy for China now and for a long time to come, but the expansion of consumption scale should be combined with supply-side structural reforms. Specific measures include the following: first, efforts should be made to straighten out the income distribution relationship of Chinese residents, to prevent the income gap from becoming too large, to improve the residents’ purchasing power and the social security system, and change the expectations of residents’ consumption; second, we should actively promote the supply-side structural reform, optimize product quality and structure, make domestic supply better meet domestic demand and enhance the stimulating effect of household consumption on economic growth, to promote sustainable economic development.

2 Domestic Demand-Driven Export Pattern 1

Issue of the Transformation and Upgrading of Foreign Trade in Developing Countries

The global financial crisis in 2008 accelerated the shift of the global consumer terminal market from developed countries to large developing countries represented by China, India, and Brazil. This is bound to have a significant impact on the global trade pattern, and create an important opportunity for the repositioning of local

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companies in large developing countries in global production (Staritz et al. 2011). An important reason is that developed countries firmly grasp the leading position in the global division of labor and trade through their control of core technologies and demand terminals and the dynamic mechanism of endogenous innovation of local enterprises induced by the demand market. However, developing countries have difficulty forming high-level competitive advantages in technology, brand, and marketing channels due to their insufficient domestic demand and gap with cutting-edge technologies, so they can share global benefits only through low-level competitive advantages of factor endowments and the vertical division of labor with developed countries as export markets (Zhibiao and Jie 2007). In this way, an international trade division pattern is formed: high-income countries export high-quality products and low-income countries export low-quality products in inter-products; multinational companies in high-income countries control the high-end part of the value chain, such as research and development and sales, while local companies in low-income countries exploit the low end of the value chain in intra-products. Under this pattern, developed countries capture most trade benefits while developing countries perform poorly in export growth, thus a theoretical consensus that “what is exported is more important than how much is exported” is formed (Hausman et al. 2007). Therefore, to improve their export growth performance by fostering high-level competitive advantages to upgrade the trade structure has become the essential connotation of the transformation and upgrading of foreign trade in developing countries.7 The large shift in the global consumer terminal market and the improvement of domestic demand in large developing countries in the global market position make it possible for large developing countries to rely on domestic demand to cultivate high-level foreign trade competitive advantages, and break through the "structural blockade" implemented by developed countries through the control of core technologies and the demand terminal market (Staritz et al. 2011). Taking advantage of the local market and creating value based on consumer demand is the fundamental way for local companies to create sustainable competitive advantages through innovation, entrepreneurship, and strategic management (Priem et al.). The capacity building and technological progress of local enterprises rooted in the domestic market are the keys to the formation of new advantages and structural upgrading of developing countries (Poncet and Waldemar 2013). Turning this possibility into reality means that large developing countries need to shift from a traditional factor-driven export pattern oriented by external demand to a domestic demand-driven export pattern relying on a large domestic market. Then, a question is to be clarified: What are the main driving factors for the development of foreign trade of large countries and the specificity of export patterns determined thereby? To answer this question, in fact, is to explore the "road to a great power" to solve the dilemma of China’s foreign trade transformation in a broader analytical framework 7

The foothold of foreign trade transformation and upgrading is not export upgrading, but the improvement of export growth performance.As Poncet and Waldemar (2013) pointed out by empirical research, although processing trade and foreign direct investment can drive export upgrading, they cannot drive long-term economy growth, only the export upgrading of local enterprises rooted in the domestic market is the long-term growth driver.

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and multi-country experience. To grasp the levers that drive the transformation and upgrading of China’s foreign trade, it is necessary to recognize the existing and potential advantages of China’s foreign trade development, as well as the corresponding export pattern. In the previous stage of its development, China followed neoclassical trade theory, used the comparative advantage of factor endowment, participated in the international division, and created China’s “export miracle” (Hanson 2016), leading to a demand-oriented export pattern far away from domestic demand. But as Porter (1990) pointed out, the comparative advantage of factor endowments is poor in explaining industrial competitiveness. Under the factor-driven export pattern, China’s dissatisfying foreign trade performance is prominently manifested in the lack of core competitiveness of local foreign trade companies, being captured in the low-end links of the global value chain, low quality of export products, and frequent trade frictions. The transformation of the foreign trade development mode has been a consensus reached over the years: since 2005, the Chinese government has issued several policies and measures, particularly the Government Work Report in 2011, which put “effectively transforming foreign trade development mode” as its top priority in foreign economy and trade. However, the outcome is unsatisfactory. China’s foreign trade development has fallen into path dependence and transformation difficulties. Although a large number of studies have explored ways and methods to solve the dilemma of China’s foreign trade transformation and upgrading from the aspects of value chain climbing and governance, manufacturing servitization, intermediate goods trade, and factor upgrading, a key question remains: what is the source of new advantages which can promote the transformation and upgrading of China’s foreign trade? In a trade pattern where developed countries control the core technologies and implement a “structural blockade” in the demand terminal market, a high-level foreign trade competitive advantage is the foothold of China’s foreign trade transformation and upgrading. Considering this, Opinions of the State Council on Accelerating the Fostering of New Competitive Advantages in Foreign Trade issued by the State Council in 2015 stressed that “traditional competitive advantages have been significantly weakened and new competitive advantages have not yet been formed”. The "breakpoint" of new advantages in foreign trade competition has made the transformation and upgrading “water without a source” and “the fostering of new advantages in foreign trade competition should be accelerated”. Different from neoclassical trade theory, classical trade theory and new classical trade theory build on the “Smith theorem” and stress domestic demand as the fundamental source of new advantages in foreign trade competition. They argue that it is the basis for a country’s foreign trade and that international trade is formed by the endogenous evolution of domestic trade. New trade theory further clarifies that a country tends to export products with greater domestic demand (Crozet and Trionfetti 2008). Emerging trade theory holds that exporting companies sell more in the domestic market than non-exporting companies because the market "self-selection" mechanism allows only “better” companies to export (Melitz and Ottaviano 2008). Domestic demand has a profound influence on a country’s export capacity by scale effect (Weder 2003), learning from local consumers (Bhaumik et al. 2016), diversification of export products (Fernandes et al. 2015), and improvement of product

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quality and heterogeneous consumption preferences (Osharin and Verbus 2016). This means that the development of foreign trade is a process of gradually cultivating dynamic comparative advantages based on domestic demand. Weder (2003) referred to this foreign trade development model driven by domestic demand as a domestic demand-driven trade model (Demand-driven Trade Model). In stark contrast to the sluggish market demand in developed countries, China’s domestic market is expanding rapidly, ranking second in the world in 2015, and the demand structure is constantly upgrading. It is expected that by 2030, China’s domestic demand will be three times as much as that of the U.S. market. From a historical perspective, the linkage between China’s domestic demand and foreign trade has entered a two-stage transition period. In the first 30 years of reform and opening up, China achieved considerable development through the export model based on the comparative advantage of factor endowments, and its domestic market capacity expanded significantly. At present, China’s domestic market has become the world’s largest consumer market for many commodities, and as a result, China’s foreign trade development enters the strategic stage of relying on the domestic market to enhance export competitiveness. In recent years, this transitional feature has been reflected in a continuous decline in the proportion of “both-ends-abroad” processing trade exports and a continuous increase in the proportion of general trade exports.8 To cultivate new advantages in foreign trade competition while relying on domestic demand is expected to become a realistic choice to solve the “breakpoints” of China’s new advantages in foreign trade competition and the dilemma of foreign trade transformation. Considering the fundamental role of domestic demand in the development of foreign trade, a large number of studies have tested the existence of the local market effect from the view of region, industry, and corporation (such as Xuefeng and Yunhu 2013) to prove whether domestic demand has become a source of a new advantage to promote China’s exports. These necessary studies on the causal relationship between domestic demand and exports provide evidence for the implementation of a domestic demand-driven export pattern. Many studies have analyzed the mechanism of China’s foreign-demand-oriented export pattern in the light of market segmentation, factor distortion, and market environment (Ming and Zhao 2009; Jie et al. 2010; Bingzhan and Guoming 2012), deepening our understanding of the formation of China’s export pattern. However, since these studies are still stuck in the dilemma of China’s “special cases”, they cannot judge the extent and potential of China’s domestic demand for the development of foreign trade from the perspective of international experience. Nor can these studies conclude whether there are any differences in the main driving factor for foreign trade development and corresponding export patterns for countries of different sizes, which affects transformation, upgrading, and strategy change of China’s foreign trade. 8

In recent years, the proportion of China’s general trade exports in the overall export has continued to increase. In 2015, the proportion of China’s general trade exports rose to 53.4%. However, the proportion of processing trade exports with “both-ends-abroad” declined to 35.1%. To some extent, this reflects the shift from external demand-oriented exports to domestic-demand-driven exports has become inevitable.

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Given this, we stop considering China’s dilemma as “exceptional” and explore the “road to a great power” to solve the dilemma of China’s foreign trade transformation in a broader analysis framework and multi-country experience. The general law of export patterns of major countries is explored by constructing a domestic demand-driven export index for 51 economies from the perspective of international experience. On this basis, the consistency between China’s export pattern and the experience of major countries and its reasons are further analyzed, to provide new ideas for China’s foreign trade transformation and upgrading under the new normal in line with the general laws of major countries foreign trade development. Under a logically consistent analysis framework, it is found that domestic demand scale and multi-level demand structure of large countries are the footholds for local companies to cultivate high-level foreign trade competitive advantages and achieve trade structure upgrades. An export pattern relying on local demand can improve the growth performance of exports from large countries, so large countries are more inclined to adopt domestic demand-driven export patterns than small ones. However, China has clearly deviated from this basic international experience. The deep-seated reason is that domestic demand has caused the absence of export functions. This discovery has critical enlightening significance for reshaping the fundamental driving force of China’s foreign trade transformation and exploring the path of China’s foreign trade transformation with “great power characteristics” under the trend of global consumer terminal market shift and the expansion and upgrading of China’s domestic demand. 2

Analysis Framework of Domestic Demand-driven Export Pattern in Large Countries

According to the theory and practice of international trade for more than two hundred years, factor endowments and domestic demand are the two main driving factors for a country’s foreign trade development, which has also formed a factor-driven export pattern and a domestic demand-driven export pattern. The gap with the level of advanced technology determined by the stage of economic development, the characteristics of factor endowment structure, and the scale and level of domestic demand have an important impact on the main driving factors of a country’s foreign trade development and the resulting export pattern. Even so, the two export patterns have not only fundamental differences in the source of competitive advantage in foreign trade but also obvious differences in export structure and their upgrading mechanism. More importantly, the suitability of the two export patterns to countries of different sizes varies, so that even at the same stage of development, large countries are more inclined to adopt domestic demand-driven export patterns than small countries. (1)

The unsuitability of factor-driven export pattern to the development of foreign trade of large countries

Under a factor-driven export pattern, the structure of export products will be concentrated on a few products and production processes with comparative advantages of factor endowments, with products export-oriented toward foreign demand rather than domestic demand. Based on the comparative advantage of factor endowments, developing countries have formed a vertical trade pattern with developed countries and

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are less dependent on developed countries’ markets through exporting low-quality products and getting embedded in low-end links of the global value chain. On the contrary, a domestic demand-driven export pattern in line with international trade comes from the process of cultivating dynamic comparative advantages based on domestic demand and is formed by the endogenous evolution of domestic trade. The export structure under a domestic demand-driven export pattern is affected by foreign demand and yet rooted in domestic demand, with a strong linkage with the domestic market and relatively low dependence on foreign markets. Following comparative advantage strategy theory, applying factor endowments and a foreign demand-oriented export pattern, participating in the international division of labor with comparative advantage of factor endowments, small economies can obtain more economic surplus. This is conducive to the upgrading of the factor endowment structure, thereby driving the upgrading of technology and the industrial structure, achieving good economic growth performance, and thus forming an internal mechanism of the transformation and upgrading of foreign trade under a factor-driven export pattern. A factor-driven export pattern seeks to obtain technological learning opportunities through the rapid upgrade of the factor structure and a high degree of integration into the global division of labor, which may be an effective strategy for small countries that lack the local market demand capacity to achieve rapid development in the context of globalization. However, the large developing countries that intervene in the international division of labor with their overall factor endowment comparative advantages will deteriorate their terms of trade because of the large-country effect and reduce the economic surplus available for the upgrading of the factor structure, which will lead to the upgrading of industrial (trade) structure rigidity. Besides, the huge export-oriented supply of big countries is difficult to digest through the international market, thus intensifying trade frictions and making the performance of foreign trade mediocre. In addition, with less “rootedness”, that export pattern has a weak driving force and radiation effect on related domestic industries and a lower multiplier effect of exports. When the comparative advantage of factor endowments weakens, a large-scale transnational transfer of industries is prone to occur. Therefore, the factor-driven export pattern is less suitable for large countries than for small countries. More importantly, in the “structural blockade” trade pattern dominated by developed countries, a factor-driven export pattern will make big countries lose domestic demand, an important source of foreign trade competitiveness, and be constrained by the predicament of foreign trade transformation. Since the foothold of foreign trade transformation and upgrading is to seek high-level competitive advantages centered on technology and brand, and since the comparative advantage of factor endowment cannot strongly explain the sustainable competitiveness of enterprises, the creation and maintenance of high-level competitive advantages become a localization process based on domestic demand. Large domestic market demand and a relatively complete endogenous industrial system determine its import-oriented development pattern, showing that large countries are less dependent on international markets than small countries. This development pattern determined by the endogenous scale of the country also requires major countries to take full advantage

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of domestic demand. On one hand, due to the disconnection between trade structure and domestic industrial structure and the limited effect of export trade on promoting domestic technological progress and enterprise production efficiency, a factor-driven export pattern disconnected from local demand makes it impossible for exports and domestic industries to form a benign interaction and mutual promotion; on the other hand, the upgrading of the export structure of major countries is short of support from domestic market demand, a significant virtue, so the conversion path of local companies using local needs to build and improve their innovation capabilities has been cut off from market space, increasing the risk of being locked in a captive development pattern. (2)

Internal mechanism of the transformation and upgrading of foreign trade in major countries under domestic demand-driven export pattern

Large countries’ preference for a domestic demand-driven export pattern is not only due to the unsuitability of a factor-driven export pattern for the development of foreign trade in large countries, but more importantly, because a domestic demand-driven export pattern has a benign endogenous mechanism—“Domestic demand—endogenous evolution of competitive advantages of local enterprisesthe upgrading of trade structurethe improvement of export growth performance”. Under the trade pattern of developed countries controlling core technologies and implementing a "structural blockade" in the demand terminal market, local companies have natural advantages in technological innovation and brand building based on domestic demand owing to lower cost, information advantages, and fewer trade barriers. Better knowledge of local culture and institutions lets them better grasp the characteristics of domestic demand. Therefore, local enterprises generally have a “local preference” (Wolf, 2000) so that almost every successful international brand relies on domestic demand, grows slowly in the fierce domestic competition, and then is promoted to the world (Porter 1990; Zhibiao 2011). Domestic demand scale and multi-level demand structure of major countries can give a platform for high-level competition with technology and brand as the core, helping to upgrade the product export structure of local enterprises and breakthrough “low-end locking” in the global value chain, thereby achieving good export growth performance. Given that a high-level foreign trade competitive advantage is the foothold of foreign trade transformation and upgrading, the domestic demand of major countries provides pressure and feasibility for local companies to cultivate high-level foreign trade competitive advantages. First, the domestic market of large countries can step out of the dilemma between scale efficiency and competition mechanism, encouraging local companies to seek high-level foreign trade competitive advantages. For small countries, the number of manufacturers needs to be cut down to achieve an effective economic scale, while this will reduce market competition, thereby weakening companies’ motivation to cultivate high-level foreign trade competitive advantages. On the contrary, multilevel domestic demand and the huge demand scale of large states can support the scale economy of “niche products”, incubating more enterprises, forming a more crowded product space, and intensifying the competition in the big country market.

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In order not to be eliminated from the “self-selection” of fierce market competition, local companies are forced to seek higher levels of competitive advantage. Crowded product space will also lead to stronger product substitutability, and facing diverse choices, consumers will be more picky and professional, which is the source of pressure for local companies to pursue high-quality products and exquisite services. At the same time, with similar factor costs, market location, and upstream suppliers as well as fierce domestic market competition and picky consumers, many local companies in the huge market have no choice but to get rid of their dependence on low-level advantageous resource conditions, seek a higher level and more enduring competitive advantage with technology and brand as the core. In the end, the theoretical expectation, the larger the local market, the more innovation comes out. Second, huge domestic demand provides the possibility for the generation of high-level foreign trade competitive advantages centered on technology and brand. Innovation is a decisive factor for high-level foreign trade competitive advantages as demand is an important cause of innovation. Since innovation is essentially a process of creating value for consumers, truly successful innovation is considered to be consumer-driven rather than resource and technology-driven. With a large domestic demand amortizing innovation cost, multiple levels of demand increase the expected benefits of differentiated product innovation and create an endogenous incentive mechanism for innovation activities. Learning from consumers is an important source and direction of innovation for local companies. Compared with foreign companies, local companies are more familiar with their culture and systems. They have advantages in communication cost and information in the domestic market, enabling local businesses to better grasp the knowledge of local consumers than foreign companies, to make the best use of this country-specific advantage. At the same time, effective consumer feedback is an important foundation for technology marketization (new product promotion) and brand building. By virtue of their knowledge of the local market, domestic enterprises interact with consumers more effectively and understand the demands of domestic consumers quickly and at low cost, thereby promoting market penetration and brand building of new products. Moreover, “prospective needs” and “lead users” brought by the domestic multi-level demand structure of large countries are more widespread than those in small countries, which represents the quality of demand and important direction for local companies to improve product and service quality. Therefore, local demand plays a “locomotive” role in the process of shaping competitive advantages of industries and enterprises. Even with ordinary technology and resources, local firms can obtain sustainable competitiveness from their grasp of consumer knowledge, while the domestic demand of major countries is widely regarded as a country-specific advantage that benefits its local companies. Third, the siphon effect of a large domestic market has laid a high-quality element foundation for the cultivation of high-level foreign trade competitive advantages of large countries. The profit space offered by the domestic demand of major countries form an external economy by attracting industry clusters, with knowledge spillover as the main content; in turn, it will lead to higher-quality foreign investment, more advanced management experience, and higher-end talent inflows. This siphon effect

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on global high-quality elements has laid a high-quality element foundation for the generation of high-level foreign trade competitive advantages. The domestic demand of large countries has catalyzed the high-level competitive advantages of local enterprises in foreign trade, providing endogenous motivation for the upgrading of the trade structure between industries, within industries, and within products. To start with, for inter-industry and intra-industry trade, the upgrading of the trade structure is mainly reflected in the conversion from low-quality products to high-quality products and the diversification of the export product structure. The huge market and multi-level demand structure offer profit space for high-quality products and differentiated products and motivate the research and development of high-quality and differentiated products. Meanwhile, a huge domestic market brings about more intense market competition, squeezes the profit space of low-quality products and homogeneous products, and increases the pressure of local enterprises to obtain profit from high-quality products and differentiated products by absorbing more local enterprises. Furthermore, the siphon effect of the domestic market of major countries on global innovation factors guarantees high-quality factors for the production and research of such products. When the production of high-quality and differentiated products becomes a reality, scale economies based on the domestic demand scale can form cost advantages and the convenient domestic consumption feedback driving effect further improves the quality, thereby promoting the upgrading of the trade structure of major countries from low-quality products to high-quality products and the diversification of the export product structure. Next, for intra-product trade, the upgrading of the trade structure is mainly achieved through the construction of local enterprises’ technological capabilities to climb to both ends of the “smile curve”. As DeMarchiet et al. point out (2016), in a captive trade pattern, companies in developing countries will find it hard to achieve value chain climbs in the global value chain if they ignore domestic technological capacity building. The R&D capability and market capability are two aspects of technical capability building by local enterprises, for any enterprise’s innovation activities are the marketization of technology. The domestic demand space of major countries guarantees the value realization of technology investment by local enterprises, while the “demand-induced innovation” function and consumer feedback effect also provide a realistic way to cultivate technological research and development capabilities of local enterprises. Under the trend of personalized consumption, the “tailor-made” characteristics appear in many products and services. High-end value chain links such as research and development, design, and product sales are generally close to the end consumers. This reduces the cost of information search, collection, acquisition, and processing of consumer feedback information required for the “tailor-made” result. Therefore, high-end consumption and services tend to be concentrated in large cities, while manufacturing industry and basic consumer services mainly occur in ordinary cities and countries with smaller markets. Since local enterprises enjoy the advantages of convenient information and cultural proximity in the R&D and design of products for domestic demand and product sales, they more easily grasp the characteristics of local demand and form a competitive

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advantage in the local market in these high-end value chain links. Just as Staritz et al. (2011) pointed out, domestic demand has a decisive influence on the upgrading of the value chain.9 The key to the upgrading of the value chain of large developing countries is to take advantage of the huge market space and multi-level demand structure of large countries to break through the “structural blockade” value chain of developed countries. (3)

The market environment of domestic demand-driven export pattern in large countries

The essence of the domestic demand-driven export pattern is to realize the dual effective connection of “domestic demand-local supply-products export”, that is, local enterprises produce based on domestic demand and form competitiveness accordingly, which provides products needed by foreign countries. To this end, two aspects of the market environment are needed to ensure the realization of the “domestic demand leads to exports” mechanism. One is a market environment where a large domestic demand can be satisfied by local enterprises and be internationalized. Classic trade theories focused on the domestic market, whether new classical trade theory, new trade theory, or emerging new trade theory. These theories have two basic implicit assumptions; one, that large domestic demand can be met by local enterprises, and two, that domestic demand can be internationalized. With a defective market system or market failure, larger domestic demand, especially high-end demand that leads to export upgrades, may not necessarily be supplied by local companies. A faulty price mechanism prevents local companies from capturing the supply relationship of high-end demand products; uncompensated “positive externality” makes it impossible to generate new technologies and new industries that adapt to the upgrading of demand; administrative monopoly and arbitrage space will weaken the supply of high-end demand products; inadequate protection of intellectual property rights and restrictions on the flow of high-quality human capital and capital will reduce the supply capacity of high-end demand products. In addition, products with greater domestic demand may not necessarily be products in foreign demand. The needs of a country have both the characteristics of homogeneity with international needs and the unique characteristics of a country’s differentiation. In particular, the consistency of domestic and international standards, the circulation rate of consumer information, and unreasonable local systems such as imposing heavy taxes on domestic high-end consumption will strengthen the characteristics of local demand, affecting the integration of “overlapping demand” at home and abroad. The second aspect is a market environment where greater domestic demand leads to the competitiveness enhancement of local enterprises. A standardized and orderly market environment with fierce competition is the fundamental prerequisite 9

The relationship between local demand and value chain is a new topic to be studied under the background of global consumer terminal market shift. Just as Staritz et al.(2011, p.5),three experts on global value chains, point out “despite the governance structure and leading enterprises in the value chain upgrading there is a lot of focus on, but the role of the end market is not clearly discussed.”.

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for domestic demand to enhance the competitiveness of local enterprises. Under such circumstances, to avoid being eliminated from the “self-selection” of market competition, local companies will be forced to seek higher-level and non-replicable competitive advantages through innovation and brand building based on domestic demand. The absence of “non-innovative profit” in the economy is another prerequisite for the transformation of domestic demand into the competitiveness of local enterprises. Because of the characteristics of high risk and high cost of innovation, the enthusiasm of local enterprises to innovate based on domestic demand will be restrained when there is "non-innovative profit" space in the economy. Consumer feedback in the local market is an important mechanism to push local companies to enhance their competitiveness. This requires a good consumption environment and high-end picky consumers to put pressure on local companies to interpret and respond to consumers’ demands, and grasp the characteristics of domestic demand and its changing trends in time. Otherwise, the profit space brought by a large domestic market will not only fail to enhance the competitiveness of local companies but may weaken the motivation of local companies to cultivate high-level foreign trade competitive advantages based on domestic demand. 3

International Experience in Domestic Demand-driven Export Pattern

(1)

Measurement and typical facts of domestic demand-driven export pattern

The essential difference between a factor-driven export pattern and a domestic demand-driven export pattern lies in the fundamental difference in the source of the trade advantage according to theoretical analysis. The strong correlation between exports and domestic demand stems from the formation process of international trade under a domestic demand-driven export pattern. Based on classical trade theory centered on “Smith’s theorem”, in the process of the endogenous evolution of international trade from domestic trade, the foundation of a country’s foreign trade is the endogenous comparative advantage determined by the deepening of the division of labor which is affected by the size of the domestic market. Therefore, a country’s exports are the expansion of domestic demand in the international market, and the export structure depends on the domestic production structure and serves the domestic consumption structure. The correlation between exports and domestic demand is more evident under the framework of new trade theory—a country exports products with greater domestic demand. On the contrary, under a factor-driven export pattern, products exported will be concentrated on products with comparative advantage in factor endowments, which is not related to domestic demand, because products exported on the comparative advantage of factor endowments do not necessarily connect with domestic demand.10 For this reason, new classical trade theory clearly states that “comparative advantage of factor endowments cannot explain how domestic trade develops to international trade”. Therefore, a domestic demand-driven export index can be designed according to the overall degree of correlation between a country’s exports and domestic demand. See formula (6). 10

Just as South Africa exports a lot of gold (7.7% of exports), but has little domestic demand.

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   x f ei i ⎜ chki  ddtm = exp⎜ − n n  ⎝−  i=1  chki  x f ei i ⎛

n  

i=1

⎞ ⎟ ⎟ ⎠

(6)

i=1

where ddtm is a country’s domestic demand-driven export index, ranging from 0 to 1. In parentheses, it is the opposite of the degree of deviation between a country’s product export structure and domestic demand structure, that is, the overall degree of correlation between export and domestic demand. x f ei i is the domestic demand of industry i in this country, calculated by the sum of domestic production and import, chki is the export value of industry i in this country, and n is the total number of industries. It can be seen that the domestic demand-driven export index (ddtm) is directly proportional to the overall correlation between export and domestic demand. The lower the overall deviation between the export structure and the domestic demand structure, the higher the overall correlation between export and domestic demand, and the greater the ddtm index.11 It shows that domestic demand has become an important source of advantage for this country’s exports, and its foreign trade development is a domestic demand-driven export pattern. Conversely, the higher the overall deviation between the export structure and the domestic demand structure, the lower the overall correlation between export and domestic demand, and the smaller is the ddtm index. It shows that non-domestic demand factors such as factor endowments are the main factors driving the country’s export. Using the quartile International Standard Industrial Classification (ISIC) data of the United Nations Industrial Development Organization (UNIDO), the domestic demand-driven export index of 51 countries from 1997 to 2010 is calculated. The relationship between country size and the domestic demand-driven export index is shown in Fig. 9. The country size measured by GDP has a significant positive correlation with the domestic demand-driven export index, and the correlation coefficient reaches 0.5438, indicating that compared with small countries, large countries would prefer a domestic demand-driven export pattern. Developed countries with a large market scale now basically adopt a domestic demand-driven export pattern, such as the United States and Germany; the exports of small countries do not necessarily depend on domestic demand due to the small domestic market and the need to achieve scale economies in the large international market. For example, South Korea designed 11

As for the design of domestic demand-driven export index, One possible question is that “the more obvious the effect of the local market is, the more abnormal demand exists, the greater the absolute value of deviation between exports and domestic demand is, and ddtm is smaller”.The root of this doubt is that only one of local market effect is considered. Equation (4–6), in the framework of this study, takes into account the factors and domestic demand of two main sources of foreign trade advantages, from the level of national comparison, it is always true that the ddtm index of demand-driven export patterns is higher than that of factor driven export patterns. This is essentially the same with Lin Yifu’s (2002) technology choice index in terms of index design ideas and calculation methods, similar to “follow the development strategy of comparative advantage, technology choice index is low,while violate the the development strategy of comparative advantage, technology choice index is high”.

2 Domestic Demand-Driven Export Pattern

179

Fig. 9 National scale and domestic demand-driven export index

its industrial structure for the international market, focusing on the development of steel, shipbuilding, petrochemical, automotive, electronics, and other industries, to make up for the narrowness of its domestic market. This macro-level international trend is also in line with the general experience of micro-enterprises internationalization. Most successful companies rely on domestic demand to cultivate competitiveness and then conduct multinational operations. Japan’s larger domestic demand is a key element in the formation of its companies’ international competitiveness: industries with a larger domestic demand, such as robots, photocopiers, semiconductors, consumer electronics, watches, and cameras, have cultivated international competitiveness through fierce domestic market competition and then internationalized (Sakakibara and Porter 2001). Successful companies in China, such as Huawei, Lenovo, and BYD, have also cultivated their competitiveness on the basis of domestic market sales and have gradually entered the international market (Changhong et al. 2011). One potential problem as to the relationship between country size and the domestic demand-driven export index described in Fig. 9 is that most small-scale countries may be in the early stages of economic development and most large-scale countries may be developed countries, so what is shown in Fig. 9 may be an exact positive relationship between the economic development stage and the domestic demand-driven export index. Then we further use Eq. (7) to extract the impact of the economic development stage (real per capita GDP) on the domestic demand-driven export index. The residual eit in Eq. (7) represents the domestic demand-driven export index that cannot be explained by the economic development stage. Similarly, we can extract the impact of factor endowment (wage rate per hour in the manufacturing industry)12 on the domestic demand-driven export index. 12

Data in manufacturing industry wage rates are derived from the Passport database.

180

4 Development Pattern of Large Developing Countries

ddtm it = λ log yit + eit

(7)

Figure 10 shows that the residuals at the development stage (mean) and the resid-

Fig. 10 Residuals in the development stage, factor endowment residuals and country scale

2 Domestic Demand-Driven Export Pattern

181

uals of factor endowments (mean) approach zero, indicating that the economic development stage and factor endowments are important determinants of a country’s export pattern. But at the same time, the residuals (mean) of the economic development stage and the residuals of factor endowment (the mean) are positively correlated with the size of the country, and the correlation coefficients are 0.28 and 0.419 respectively. Since development stage residuals (mean) and factor endowment residuals (mean) represent a domestic demand-driven export index that cannot be explained by development stage and factor endowment, the positive correlation between its residual and the size of the country shows that under the same development stage and factor endowment conditions, large countries are more inclined to adopt domestic demand-driven export patterns than small countries. (2)

An empirical test of large countries’ preference for domestic demand-driven export pattern

The theoretical analysis illuminates that as different export patterns have different suitabilities for countries of different sizes, the domestic demand-driven export pattern of large countries relies on domestic demand to cultivate high-level foreign trade competitive advantages, which is beneficial to the upgrading of the trade structure to realize good export growth performance. Under this theoretical logic, the contribution of exports to economic growth is affected by the export pattern; compared with small countries, large countries have a better export growth performance if implementing the domestic demand-driven export pattern. Therefore, the proposition to be further tested is whether the impact of a domestic demand-driven export pattern on export growth performance is significantly different between large and small countries and whether the impact of a domestic demand-driven export pattern on export growth performance in large countries is stronger than that in small countries. To test this proposition, according to Lin Yifu’s (2002) research, the following equation is to be considered: log yit − log yi(t−1) = C + β1 f (ddtm) log(exp or tit ) +



X it + eit

(8)

Here, yit is real per capita GDP of country i in year t, and the effect of exports on economic growth is affected by f (ddtm), f (ddtm) is the function of the export mode, X is the control variable, and eit is the disturbance term. The constant term C can be decomposed into a specific country effect and a specific time effect, that is, C = μi + κt . The economic growth performance of exports is affected by the export pattern, which is set as: ∧

f (ddtm) = α1 + α2 ddtm

(9)

The role of exports on economic growth has been supported by extensive experience, so α1 > 0, α2 > 0. We regard α1 as reflecting the fundamental role of exports on economic growth. In this way, for large countries, any improvement in ddtm caused

182

4 Development Pattern of Large Developing Countries

by following a domestic demand-driven export pattern will improve the performance of exports on economic growth. Substituting formula (9) into formula (8), the following formula can be obtained: log yit − log yi(t−1) = C + γ1 log(exp or tit ) + γ2 ddmtit × log(exp or tit )  (10) + X it + eit Here, C = μi + κi , γ1 = β1 α1 , γ2 = β1 α2 . Based on our theoretical analysis, the domestic demand-driven export pattern of large countries can improve the economic growth performance of exports compared with small countries. For this reason, we are particularly concerned about the regression results of γ 2 , and it is expected that γ2 will differ between large countries and small countries. Following the existing related research, effective country size is measured by domestic market size, and the domestic market size is measured by GDP plus imports minus exports. Large countries refer to economies with a country size greater than the average (logsize > median), and small ones are economies with a country size less than or equal to the average (logsize ≤ median). The control variables mainly include the initial level of economic development (yt-1 ), the investment share, government spending, education, and openness. The data come from Penn World Table 7.1(PWT 7.1) and World Bank Database. The Hausmann method is often used to calculate the technical complexity of export products, and the trade data are derived from the four-digit trade classification statistics of the United Nations Comtrade SITC. Import and export value, trade openness, and per capita GDP were at constant prices in 2005. Although the core variable of this study, the domestic demand-driven export index, ranges from 1997 to 2010, due to the lag term in the empirical analysis, other variables have been extended to 2011 to reduce sample loss (Table 10). Before checking formula (10), we use two methods to provide initial evidence for the proposition to be tested. The first method is to observe whether the longterm impact of exports on economic growth is related to a domestic demand-driven export pattern from a long-term perspective and whether this correlation is different between large and small countries. Based on the time series data from 1997 to 2011 of 51 countries, the long-term impact of exports on the economic growth of each country can be calculated, namely the marginal contribution of long-term export (log(exp or t)) to per capita GDP (log y) ρi . Then we can observe the relationship between ρi and the domestic demand-driven export index (ddtm i ) and the difference between large and small countries. log yi = bi + ρi log(exp or ti )

(11)

Figure 11 shows the relationship between the domestic demand-driven export index (ddtm i ) of 51 countries and the marginal contribution of exports to per capita GDP ρi . The relationship between the marginal contribution of exports to

2 Domestic Demand-Driven Export Pattern

183

Table 10 Descriptive statistics of main variables Variable name Variable meaning

Mean value

Logy

Log of real GDP per capita

9.237

Log (export)

Total export log

ddtm

Domestic demand-driven export index

Investshare

Investment share 23.23

Openness

Trade openness

78.60

Education

Human capital: enrollment ratio of college students

41.90

Gover_spend

Government consumption share

Log (size)

Upgrading

17.37 0.460

Minimum value 6.066 12.17 0.217

5.070 14.93

Maximum value

Standard deviation

Number of samples

10.68

0.040

735

21.36

0.072

784

0.005

548

0.260

735

1.500

735

0.634

58.08 220.4

0.507

95.07

0.840

747

0.930

21.07

0.119

735

Logarithm of 11.83 domestic market size

7.044

16.58

0.074

784

Complex logarithm of export product technology

8.024

0.312

539

8.115

9.418

9.872

Fig. 11 Domestic demand-driven export index and the marginal contribution of exports to GDP per capita

184

4 Development Pattern of Large Developing Countries

per capita GDP ρi and the domestic demand-driven export index (ddtm i ) is significantly different between large and small countries. For large countries, the marginal contribution of exports to per capita GDP is positively correlated with the domestic demand-driven export index, and the explanatory power of the domestic demanddriven export index to the marginal contribution of exports ρi is 0.036 (see Fig. 11). Correspondingly, for small countries, the marginal contribution of exports to per capita GDP is weakly negatively correlated with the domestic demand-driven export index, and the domestic demand-driven export index has a weaker explanatory power of export’s marginal contribution ρ i , which is only 0.019. This difference preliminarily demonstrates that the long-term effect of exports on economic growth is related to the domestic demand-driven export pattern, which differs between large and small countries: the domestic demand-driven export pattern can increase the long-term impact of large countries’ exports on economic growth, but cannot for small countries. This provides initial evidence that large countries are more inclined to adopt domestic demand-driven exports than small countries. The second method is to observe whether the correlation between exports and short-term changes in economic growth from a short-term perspective is different under the conditions of different country sizes and domestic demand-driven export indexes. Accordin11, the g to Table 4-correlation between export growth (logexport) and economic growth (logy) is different under the conditions of different country sizes and domestic demand-driven export indexes. In the case of a large country (logsize > median), when the domestic demand-driven export index is greater than the average (ddtm > median), the correlation coefficient between export growth and economic growth is 0.6277; when the domestic demand-driven export index is less than or equal to the mean (ddtm ≤ median), the correlation coefficient between export growth and economic growth is only 0.4808. The difference is 0.1469, showing that the implementation of a domestic demand-driven export pattern by major countries will increase the correlation between export growth and economic growth. In the case of a small country (logsize ≤ median), the correlation coefficient between export growth and economic growth in countries with a higher domestic demand-driven export index (ddtm > median) is 0.6047, and the correlation coefficient between export growth and economic growth in countries with a lower domestic demand-driven export index (ddtm ≤ median) is 0.5340. The difference is only 0.0707, much lower than the case before, indicating that whether small countries implement a domestic demand-driven export pattern is far less important than large countries. This further provides initial evidence for “big countries are more inclined to adopt domestic demand-driven export pattern than small countries” (Table 11). The next step is to evaluate regression Eq. (10) to figure out how different the impact of domestic demand-driven export patterns on export growth performance is between large and small countries. First, the Hausman test is used to determine whether individual effects are independent of disturbance terms, and the Hausman test supports fixed effects; to avoid the endogenous problem, the generalized moment estimation method is used to estimate formula (10). The longer time series data in this study is more suitable for the difference generalized moment estimation (GMM) method. The one-step GMM estimation method is used to avoid the downward bias

2 Domestic Demand-Driven Export Pattern

185

Table 11 Conditions between export and economic growth Variable

Condition 1

Condition 2

Correlation coefficient with logy

Significance level

Observations

log (export)

log(size) > median = 11.83

ddtm > median = 0.489

0.6277

0.000

187

log (export)

log(size) > median = 11.83

ddtm ≤ median = 0.489

0.4808

0.000

187

log (export)

log(size) ≤ median = 11.83

ddtm > median = 0.489

0.6047

0.000

182

log (export)

log(size) ≤ median = 11.83

ddtm ≤ median = 0.489

0.5340

0.000

150

Note  Represents added value, i.e. xt -xt-1

of the standard deviation of the two-step GMM estimation. Time effect is set as a strict exogenous variable, while the others are set as endogenous variables. The Sargan statistic is used to test the overall validity of instrumental variables, and the AR(2) test is used to determine whether there is a second-order serial correlation in the residual items. Special attention is paid to whether the impact of the interaction term (logexportit × ddtmit ) of exports and the domestic demand-driven export index on economic growth is significantly different between large (logsize > median) and small countries (logsize ≤ median). The test results of the two estimation methods are shown in Table 12. According to Table 12, consistent with existing research on economic growth, when log yit - 1 is negative, there is a latecomer advantage in economic growth, and both investment growth and improvement in human capital are conducive to economic growth. Comparing the difference GMM estimation result and the fixed effect estimation result, the estimated coefficients of the explanatory variables are generally increased in differential GMM estimation, indicating no consideration of the fact that fixed effect estimation for the endogenous problem has a downward bias problem. Whether in differential GMM estimation or fixed effect estimation, our focus is the interaction term (logexportit × ddtmit) coefficient of exports and the domestic demand-driven export index, which is significantly different between large and small countries. In all sample and sample estimates in small nations, both the fixed effect estimation and the differential GMM estimation results show that this interaction effect estimation coefficient cannot reject the null hypothesis that is apparently zero. In large country’ sample estimation, the results are that the estimated coefficient of the interaction effect of exports and the domestic demand-driven export index is positive at the 5% significance level. This robust conclusion demonstrates that the effect of a domestic demand-driven export pattern on export growth performance does have a significant difference between large and small countries, with a larger effect on the former one, so large countries are more likely to adopt domestic demanddriven export pattern than small ones.

−0.1530*** (0.0245) 0.0036*** (0.0007)

0.0009 (0.0014)

−0.1254*** (0.0152)

0.0022*** (0.0003)

0.0078 (0.0111)

log(exportit ) × ddtmit

log(yit−1 )

investshareit

log(opennessit )

Small country

log(educationit )

0.3301 (0.2254)

−0.0213 (0.1126)

510

0.4696

_cons

N

R-sq: within

F/Wald test

87.22***

354.66***

14.29 [0.647]

478

Sargan test p-value 14.850***

235 0.4766

0.42 [0.675]

0.5597

0.1308 (0.1617)

−0.0016** (0.0007)

0.0024 (0.0083)

0.0085 (0.0096)

0.0028*** (0.0003)

−0.1294*** (0.0125)

0.0014 (0.0012)

0.0751*** (0.0059)

AR(2) test p-value

19.714***

−0.0029 (0.0021)

−0.0023*** (0.0008)

gover_spendit

275

0.0096 (0.0150)

0.0330** (0.0143)

0.0086 (0.0094) −0.0017 (0.0011)

0.0080 (0.0158)

0.0019*** (0.0005)

−0.1286*** (0.0233)

0.0002 (0.0024)

0.0617*** (0.0106)

0.0128 (0.0182)

0.0023** (0.0010)

0.0431*** (0.0091)

0.0602*** (0.0068)

311.35***

30.61 [0.202]

0.63 [0.527]

251

−0.0034** (0.0016)

0.0314*** (0.0109)

0.0150 (0.0141)

0.0045*** (0.0005)

−0.1547*** (0.0186)

0.0027** (0.0013)

0.0465*** (0.0070)

Major powers

All samples

Major powers

All samples

log(exportit )

Generalized moment estimation

Fixed effect estimate

Explained variable: logyit − logyi(t−1)

Table 12 Domestic demand-driven export growth effect: the difference between large and small countries

(continued)

174.68***

23.21 [0.565]

-0.15 [0.877]

207

−0.0009 (0.0009)

0.0281** (0.0281)

0.0130 (0.0129)

0.0023*** (0.0004)

−0.1363*** (0.0185)

0.0011 (0.0019)

0.0738*** (0.0086)

Small country

186 4 Development Pattern of Large Developing Countries

Small country Yes

Yes

Yes

Major powers

All samples

Major powers Yes

All samples

Yes

Generalized moment estimation

Fixed effect estimate

Explained variable: logyit − logyi(t−1)

Yes

Small country

Note The empirical results are calculated and compiled by stata2.0. Numbers in parentheses are standard errors considering the robustness of heteroscedasticity, numbers in square brackets are the corresponding P values for the test. ∗ p < 0.1, ∗∗ p < 0.005, *** p < 0.01. The joint significance test for fixed effect estimation is the F test, and the joint significance test for GMM estimation is the Wald chi2 test

Year dummy variable

Table 12 (continued)

2 Domestic Demand-Driven Export Pattern 187

188

4 Development Pattern of Large Developing Countries

(3)

The mechanism test of domestic demand-driven export pattern in large countries

What waits to be found out is why domestic demand-driven export patterns in large countries realize export growth performance. Under a domestic demand-driven export pattern in large countries, local enterprises can rely on domestic demand to cultivate high-level foreign trade competitive advantages and achieve trade structure upgrades through theoretical analysis, which will be realized by local companies rooted in the domestic market and inevitably improve the growth performance of exports. To test this internal mechanism, the following equations are to be used: log yit − log yi(t−1) = C + α1 upgradingit +



X it + ξt + μt + eit

upgradingit = C + λ1 ddtm it + ξt + μt + eit

(12) (13)

Here, ξ represents the time effect, μ measures individual differences of different economies, and e is a random disturbance term. The term upgrading represents the upgrading of the trade structure, with its measurement based on the technical complexity of commonly used export products. As the domestic demand-driven export pattern in large countries pushes the upgrading of the trade structure, formula (13) is given. Joint formula (12) and formula (13) can test the mechanism of “domestic demand-driven export patternexport upgrade—economic growth”, which is expected to be more obvious in major countries. To make the conclusions more robust, the mechanism can be tested by joint formula (12) and formula (13). According to the theoretical analysis, the reason why this pattern can achieve a trade structure upgrade through domestic demand is that large-scale domestic demand and a multi-level demand structure are the cornerstones for local companies to cultivate high-level foreign trade competitive advantages and realize the upgrading of trade structure. In other words, the domestic demand of large countries can promote economic growth through the export upgrade of local enterprises. To solve the problem of correlation and synchronism between simultaneous equations, following the research of Alesina et al. (2005), we systematically estimate the equations composed by Eqs. (12) and (13), and equations composed by (12) and (14) by seemingly unrelated regression estimation method (SUR), to avoid simultaneous bias caused by independent estimation of Eq. (12), namely, reverse causality. At the same time, it can alleviate the endogenous problem of ddtm and marketsize in Eqs. (13) and (14), taking its lag period as instrumental variables of ddtm and marketsize to obtain a progressively effective estimator. upgradingit = C + λ1 maketsi zeit + ξt + μt + eit

(14)

The mechanism test of a domestic demand-driven export pattern is shown in Table 13. In the mechanism test of “domestic demand-driven export patternexport upgrade—economic growth”, all sample estimation results show that the upgrading of the trade structure can significantly promote economic growth, but the domestic

2 Domestic Demand-Driven Export Pattern

189

Table 13 Mechanism test of the domestic demand-driven export pattern in large countries (SUR Estimate) Mechanism

“Domestic demand drives export patterns-export upgrades-economic growth”

"Domestic demand-Export upgrade-Economic growth"

(1)

(3)

(1)

Small country

All samples Major powers

(2)

All samples Major powers

(2)

(3) Small country

Economic growth equation

Explained variable: logyit − logyi(t−1) Explained variable: logyit − logyi(t−1)

Upgradingit

0.137*** (0.038)

0.388 (0.059)

0.053 (0.058)

0.094*** (0.032)

0.237*** (0.061)

0.006 (0.046)

Log (yit-1 )

−0.065*** (0.021)

−0.049*** (0.014)

−0.091*** (0.015)

−0.033*** (0.008)

−0.021*** (0.007)

−0.040*** (0.006)

Log (opennessit )

0.039*** (0.014)

0.029** (0.013)

0.111*** (0.031)

0.034*** (0.012)

0.007 (0.012)

0.054** (0.024)

Gover_spendit

−0.001 (0.002)

−0.007** (0.003)

−0.005* (0.002)

−0.001 (0.001)

−0.006*** (0.002)

−0.001 (0.002)

Investshareit

0.002*** (0.001)

0.003*** (0.001)

0.002** (0.001)

0.002*** (0.000)

0.004*** (0.001)

0.002*** (0.001)

Log (educationit )

0.009 (0.016)

0.021 (0.018)

0.039 (0.025)

0.013 (0.012)

0.052*** (0.016)

0.000 (0.019)

Individual effect

Yes

Yes

Yes

Yes

Yes

Yes

Time effect

Yes

Yes

Yes

Yes

Yes

Yes

Export upgrade equation

Explained variable: upgrading

ddtmit

0.084 (0.054)

0.345*** (0.045)

Explained variable: upgrading

0.032 (0.086)

Log (sizeit )

0.014 (0.011)

0.044*** (0.009)

0.051 (0.047)

_cons

9.358 (0.028)

9.247*** (0.021)

9.215*** (0.050)

9.064*** (0.418)

8.953*** (0.572)

9.932*** (0.215)

Individual effect

Yes

Yes

Yes

Yes

Yes

Yes

Time effect

Yes

Yes

Yes

Yes

Yes

Yes

N

454

248

206

547

274

273

R2

0.514

0.652

0.510

0.455

0.558

0.457

chi2 p

0.000

0.000

0.000

0.000

0.000

0.000

Note The empirical results are calculated and compiled by stata2.0. Numbers in parentheses are standard errors considering the robustness of heteroscedasticity, ∗ p < 0.1, ∗∗ p < 0.005, *** p < 0.01

190

4 Development Pattern of Large Developing Countries

demand-driven export index has a minor effect on the upgrading of trade structure. In a small country (logsize ≤ median), the domestic demand-driven export index has a slight effect on the upgrading of trade structure and so does the latter on economic growth, which concludes that it is impossible to upgrade the trade structure and achieve economic growth through the implementation of a domestic demand-driven export pattern in small countries. Only in large countries (logsize > median), the domestic demand-driven export index can significantly promote the upgrading of the trade structure, thus driving economic growth. Therefore compared with small countries, implementing a domestic demand-driven export pattern in large countries does promote economic growth through the upgrading of the trade structure. According to the mechanism test, only when the scale of domestic demand is large can domestic demand promote economic growth by promoting the upgrading of the trade structure. This indicates that the domestic demand of large countries is the source of the advantage for the upgrading of the trade structure, and a domestic demand-driven export pattern based on a large domestic market helps to upgrade the trade structure, thus improving the growth performance of exports. This conclusion deepens the research of Poncet and Waldemar (2013) from the perspective of the fundamental source of foreign trade advantage. Although export upgrades may not necessarily better export growth performance (Poncet and Waldemar 2013), export upgrades rooted in the domestic market do improve export growth performance. The endogenous mechanism for the transformation and upgrading of foreign trade in major countries is to rely on local needs, foster high-level foreign trade competitive advantages, upgrade exports and improve export growth performance. In short, whether it is typical facts, initial evidence based on long-term and shortterm analysis, or empirical tests based on cross-country panels, all strongly prove that large countries are more inclined to adopt domestic demand-driven export patterns than small countries. Ultimately, as revealed by theoretical analysis and mechanism testing, the multiple levels of domestic demand and the huge scale of domestic demand in large countries are important sources of advantages for local companies to cultivate high-level foreign trade competitive advantages and achieve trade structure upgrades to improve the growth performance of large countries’ exports, compared with small countries. Therefore, big countries are more inclined to adopt domestic demand-driven export patterns than small countries. 4

Deviation of China’s Export Pattern from the Experience in Large Countries

Theoretical analysis and international experience have shown that large countries prefer a domestic demand-driven export pattern, which provides a special way for China’s foreign trade development. So, does China’s foreign trade development follow this international experience? (1)

Degree measurement and factor analysis of China’s departure from the experience of major powers

The domestic demand-driven export index measured by formula (6) shows that China had an average domestic demand-driven export index of 0.384 from 1997 to 2010,

2 Domestic Demand-Driven Export Pattern

191

while the average figure of 51 countries in the world in the same period was 0.446, and the average index of large countries was 0. 489. China’s domestic demanddriven export index is not only much lower than the average level of large countries but also is lower than the average level of small countries and the world average. (Table 14). On the whole, domestic demand makes a limited contribution to China’s exports. Although its huge domestic demand does not drive China’s exports powerfully, there is still a great potential for domestic demand to promote China’s exports. This conclusion is quite different from existing studies focusing on the effect of China’s local market, because these studies can only prove the causal relationship between domestic demand and exports, but cannot recognize the extent and potential of domestic demand for export promotion. The international comparison based on the domestic demand-driven export index shows that China’s foreign trade development has deviated from the basic international law of “large countries favoring a domestic demand-driven export pattern”, with a 21.56% deviation between China and the average level of large countries. But a further question is: is it a reasonable phenomenon that China’s foreign trade development deviates from the experience of major countries at a specific stage of China’s economic development? Admittedly, whether domestic demand can become an important source of advantages for a country’s exports may be a “normal phenomenon” affected by a series of comprehensive reasons, among which economic development stage and processing trade are two obvious and reasonable factors. As Hobday (1995) points out, latecomer companies in developing countries not only face the competitive disadvantage of the gap with cutting-edge technology but encounter a smaller local market size and low-end customers in the development process, as high-end customers are mainly concentrated in developed countries, making latecomer companies separated from the mainstream international market. Moreover, comparative advantage strategy theory emphasizes that the factor endowment structure of a country’s economic development stage has a decisive effect on its technology and industrial structure (Yifu 2002). Therefore, the gap with the level of cutting-edge technology determined by the stage of economic development, differences between domestic demand levels and international mainstream markets, and characteristics of factor endowment structure are critical elements to make domestic demand a source of foreign trade advantage and form a domestic demand-driven export pattern. This is also the objective reason why China’s foreign trade development needs to rely on the comparative advantage of factor endowments in the early stage of economic development, and form an external demand-oriented trade pattern that departs from domestic demand. At the same time, a large amount of processing trade may also be the objective reason for not forming a domestic demand-driven export pattern. As noted by many scholars, a great deal of “both-ends-abroad” processing trade makes China’s foreign trade structure show illusionary advanced development, so that “mirror image” of foreign trade structure does not reflect the “preimage” of industrial structure. Processing trade has played an important role in promoting employment and foreign trade growth. Therefore, the development of China’s foreign trade is a “reasonable phenomenon” at a specific stage of economic development, even if it deviates from international experience due to the stage of economic development and

5.96e–17

−2.46e–17

−0.0339

−0.0172

52.9

Non_ddtm1

Non_ddtm2

Economic freedom

64.244

0.026

0.0052

0.4893

Major powers (2)

60.003

−0.033

−0.0059

0.4002

Small country

78.363

−0.033

−0.003

0.515

America (3)

69.062

0.067

0.062

0.585

Germany

166.15%

751.92%

21.56%

Degree of divergence between China and major powers

0.75

4.80

3.98

The ratio of the degree of divergence between China and the US

Country scale 14.526 11.829 13.461 10.128 16.295 14.714  Note The formula for calculating the degree of divergence between China and major powers is: 100 × |(1) − (2)| (2); The formula for calculating the degree  of divergence between China and America is:|(1) − (2) | |(3) − (2) |, the values of (1), (2) and (3) in the formula correspond to the values of the corresponding columns in Table 14

62.172

0.4456

0.3838

World average

ddtm

China (1)

Table 14 International comparison of the domestic demand-driven export index in different scale Economies (Average from 1997 to 2010)

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processing trade. To identify whether the deviation is a “reasonable phenomenon”, we separate the structural deviation caused by the economic development stage (real per capita GDP) and intra-product specialization (iner)13 according to the following methods: 

ddtm it = α0 + α1 log yit + α2 inerit + α3 iner 2 + eit

(15)



non_ddtmlit = ddtm it − ddtm it

(16)



Here, ddtm is fitting the domestic demand-driven export index based on economic development stage and intra-product specialization, which is called “reasonable” demand-driven export index; non_ddtml refers to the difference between the actual domestic demand-driven export index and the “reasonable” demand-driven export index, representing the domestic demand-driven export index which has been cut off from the economic development stage and intra-product specialization. The comparison of the non_ddtm1 index of China (−0.0339) and other economies of different scales (see Table 14) shows that China’s actual domestic demand-driven export index is lower than the “reasonable” domestic demand-driven export index determined by the economic development stage and intra-product specialization. Correspondingly, the average non_ddtm1 index of large countries is 0.0052, and that of small countries is -0.0059, picturing that the actual domestic demand-driven export index of large countries is higher than the “reasonable” domestic demanddriven export index determined by the economic development stage and intra-product specialization, while small countries are the opposite. This further shows that big countries are indeed more inclined to adopt domestic demand-driven export patterns than small countries, while China has deviated from this basic international law. More importantly, the degree of deviation between China and major countries is only 21.56% according to the actual domestic demand-driven export index (ddtm), but after stripping off the “reasonable” factors like economic development stage and intra-product specialization, the degree of deviation calculated by non_ddtm1 index is as high as 751.92%. This is in sharp contrast to our intuition. One possible reason is that the reasonable domestic demand-driven export index is flawed, calculated in formula (15) according to the economic development stage and processing trade. So, the ratio of divergence between China and the United States is further used to avoid the influence of biased estimates. The reason behind this is that despite the biased estimate of formula (15), it should be symmetrical in China and the United 13

Processing trade is the product of intra-product division while intermediate trade is the essential feature of intra-product division. Therefore, the proportion of intermediate product exports in total exports is used to measure the degree of integration of a country into the intra-product division in global and reflect the impact of processing trade. The data comes from the intermediate product trade data (Intermediate Goods) of Broad Economic Categories (BEC) in Comtrade database. The analysis shows that there is an inverted U-shaped relationship between intra-product division and the export index driven by domestic demand. Therefore, the square term of intra-product division is added in Eq. (4–15) to enhance the explanatory power.

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States. Since the ratio of Sino-US divergence measured by actual domestic demanddriven export index (ddtm) is 3.98, and the ratio of Sino-US divergence measured by non_ddtm1 index is 4.80, China’s degree of departure from the United States has not decreased, after eliminating “reasonable" factors such as the economic development stage and intra-product specialization. Hence, the stage of economic development and intra-product specialization cannot explain China’s departure from the experience of major powers. Because although the economic development stage and intra-product specialization do affect the formation of the domestic demand-driven export pattern, the stage of economic development and intra-product specialization are general in other large countries rather than special elements of China.14 Why has China not followed the general experience of major countries’ foreign trade development and formed a domestic demand-driven export pattern despite its huge domestic demand? According to theoretical analysis, the formation of a domestic demand-driven export pattern requires a specific market environment to ensure effective docking of “domestic demand-local supply- product export”. We strip out structural deviation caused by the market environment (institution) as follows: 

ddtm2it = α0 + α1 institution it + eit

(17)



non_ddtm2it = ddtm it − ddtm 2it

(18)

The overall economic freedom index offered by the Heritage Foundation is used to measure the domestic market environment (Xianzhong et al. 2014). Table 14 shows the domestic demand-driven export index stripped of the market environment: China’s non_ddtm2 index is -0.0172, closer to zero than non_ddtm1 index (−0.039), implying that market environment can explain China’s export pattern better than the economic development stage and intra-product specialization. More importantly, calculated by non_ddtm1 index, the degree of divergence between China and the major countries is as high as 751.92%, and by non_ddtm2 index, the degree of divergence between China and the major countries has dropped to 166.51%. The ratio of the degree of divergence between China and the United States, which avoids the influence of biased estimation, is also significantly reduced. Measured by ddtm, non_ddtm1 and non_ddtm2, the ratios of divergence between China and the United States are 3.98, 4.80, and 0.75 respectively, further revealing that after excluding the influence of market environment, the degree of divergence between China and major countries will be significantly reduced. 14

In order to strip out the impact of processing trade from our analysis, we use data from 1252 national brand enterprises from 8 categories of worldwide consumer electronics to clearly describe the contribution of China’s domestic market to the export competitiveness of national brand enterprises. This analysis found that the population mean of deviation between the relative size of China’s domestic market and the export share of native brands enterprises is far higher than the average level for the rest of the world. Specifically, the average value of deviation from 2003 to 2012 is 746.42%, which is very similar to the deviation (751.92%) calculated using the non_ddtm1 index.

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Table 15 Degree of deviation between China and major powers after divesting the market (Average from 1997 to 2010) Market environment

China

World average

Major powers

America

Degree of divergence between China and major powers

The ratio of the degree of divergence between China and the US

Freedom of investment

35.31

57.76

60.80

72.50

80.17%

1.58

Property rights protection

26.88

58.36

66.22

89.38

36.79%

0.21

The degree without corruption

32.19

49.26

58.98

76.31

333.85%

2.97

Commercial freedom

52.59

68.75

72.37

87.59

78.62%

0.45

Financial freedom

36.25

55.88

59

79.38

131.97%

1.24

Source Author’s collation

The market environment (see Table 15) is further measured in five aspects: the government’s restrictions on investment through “investment freedom” in the economic freedom index; the legal environment of the market by “property protection”; the rent-seeking profit space in the economy by “the degree of corruption”; the degree of government intervention in enterprises by “commercial freedom”; and the perfection of capital markets with “financial freedom”.15 These market environment indexes of the five aspects of China are all lower than the world’s average, and far below the average of the major countries. The degree of deviation of both China and major countries is lower than the degree of deviation calculated by the non_ddtm1 index (751.92%), after excluding all aspects of the market environment. Moreover, the ratio of divergence between China and the United States without the influence of biased estimation is also lower than the ratio of divergence measured by ddtm and non_ddtm1 (3.98 and 4.80 respectively). Apparently, the undesirable market environment in China is the deep-seated reason for China’s deviated export pattern. Hereinto, the legal environment of the market, government intervention in enterprises and its restrictions on investment fields, and the sophistication of the capital market are more powerful in explaining China’s export pattern deviating from the experience of major countries. Relatively speaking, corruption is not a powerful explanation, which may be related to the “lubricant effect of corruption”.

15

Each indicator is defined in Miller, Ambassador Terry, and Anthony B.Kim, “Defining Economic Freedom”, http://www.heritage.org/index/book/chapter-7.

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(2)

“Chinese characteristics” of the market environment and a further explanation of China’s deviation

The above analysis explains that realistic factors such as the stage of economic development and processing trade cannot reduce the degree of departure between China and the experience of major countries. Instead, it indicates that a defective market environment is a deeper reason affecting the formation of China’s domestic demand-driven export pattern. According to theoretical analysis, the formation of a domestic demand-driven export pattern requires an internationalized market environment where domestic demand leads to the improvement of the competitiveness of local enterprises and local enterprises can supply domestic demand. Only in this way can the dual docking of “domestic demand-local supply- products export” be guaranteed. China’s unsound market brought by a progressive reform makes it difficult to satisfy the market environment in these two aspects, inhibiting the formation of a domestic demand-driven export pattern. The first is the invalid function of domestic demand leading to the improvement of the competitiveness of local enterprises. The domestic demand-driven export pattern is based on large domestic demand and international competitiveness of products, while market environment problems such as disordered competition, non-innovative profit margins, and factor distortions inhibit the function of domestic demand leading to the improvement of the competitiveness of local enterprises. To start with, disorderly competition has reduced the pressure of local companies to cultivate highlevel foreign trade competitive advantages based on domestic demand, which stems from the market “self-selection” mechanism formed by fierce and orderly domestic market competition. According to the market legal environment measured by “Property Protection”, China’s index is only 26.88, much lower than the average level of large countries (66.22) (Table 15). Although certain achievements have been made in strengthening market supervision, rectifying market behavior, and regulating market order, the overlapping functions of management departments have led to repeated or inadequate supervision of multiple departments, selective and elastic law enforcement, and the lack of mechanisms to punish untrustworthy enterprises, which encourages disorderly competition. Phenomena of products with no production date, no manufacturer and no quality certificate, “knockoff products”, and bad money driving out good are still prominent, and such disorderly competition greatly hinders and weakens the market’s “self-selection” mechanism that pressures local enterprises to form a higher level of foreign trade through innovation and brand building. Next, “non-innovative profit” space has restrained the motivation of local companies to enhance their competitiveness relying on domestic demand. According to economic rent-seeking profit space measured by the “degree of corruption”, the Chinese index is only 32.19, far below the average level of large countries (58.98) (Table 15). Due to a defective system and the unbalanced advancement of market processes, China’s progressive reform has witnessed various forms of “non-innovative profit” space. For example, “low and homogeneous product profitability” caused by factor distortions, “speculation and profit” by administrative monopoly, and “rent-seeking and profit-seeking” by lagging government function

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reform and a flawed legal system (Xianzhong et al. 2016), greatly restrain the innovation of local businesses. Then, local businesses have no stress or capacity to turn consumers’ demands into product competitiveness under a poor consumer environment. In a healthy environment, local firms can interpret and respond to consumers’ demands through effective interaction, and grasp the features and trends of domestic demand promptly, which is not only a source of pressure for the pursuit of highquality and exquisite services but also an important direction for technological innovation and product upgrades. However, the domestic consumption environment is currently unsatisfying, with low consumer satisfaction and numerous infringements of consumers’ rights. In an environment where local enterprises have no pressure to respond to the consumers’ demand, a consumer-centric business model has not been established, personalized customization and flexible production and consumer value-added management models have not yet become mainstream, so they have no intention or ability to turn consumers’ demand into product competitiveness. Finally, under the export-oriented policy, factor distortion and market segmentation have solidified the dependence of local enterprises on the advantages of low-cost factors. The government generally adopts export tax rebates, export subsidies, and tax refund policies for exporting companies to lower the prices of production factors to achieve the goal of driving the rapid growth of local GDP through exports. As a result, the difference in the input cost of production factors and the input ratio of export enterprises are distorted (Bingzhan and Guoming 2012), solidifying the dependence of export enterprises on the advantages of low-cost factors. In addition, export-oriented policies have encouraged local governments to use export preferential policies to promote exports and grow the local economy, at the same time local industrial development has been protected through “beggar-thy-neighbor” market segmentation (Ming and Zhao 2009). This kind of local protection policy substituting the scale economy effect of the domestic market by the scale economy effect of international trade inhibits the opportunity for local companies to cultivate endogenous competitiveness. Market segmentation and factor distortion have solidified the behavior of local companies to obtain low-level competitiveness through factor cost advantages and scale economies in the international market, weakening the motivation of local companies to develop high-level foreign trade competitive advantages, and making it hard to narrow the “technical gap” between local companies and major export markets (developed countries). Under the export-oriented policy, local export companies can only adopt the strategy of “importing for export”, namely, importing advanced foreign machinery and equipment to fix their “technical gap” (Qiang and Zhibiao 2009), further consolidating an “extracorporeal circulation” export pattern which has not much connection with domestic demand. The second is the low level of “overlapping demand” at home and abroad supplied by local enterprises. Under a domestic demand-driven export pattern, products exported should reflect the “overlapping demand” at home and abroad, and local firms should supply this “overlapping-demand” product. Admittedly, one important factor that impacts the effective connection between domestic demand and international demand is the difference between domestic demand and international mainstream market demand owing to different economic development stages. However, China’s

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huge domestic demand strength is not only reflected in the scale of demand, but also in the multiple levels of demand, without worrying about the lack of “overlapping demand” with foreign countries. Nevertheless, the reason why it is difficult for domestic and foreign “overlapping demand” to be connected through the supply of local enterprises is insufficient effective local supply for high-level domestic demand and product quality standards. First of all, a defective market and a supplyside conversion lag have resulted in insufficient effective supply to satisfy domestic high-level demand by local companies. Disorderly competition, speculation, and rent-seeking weaken the motivation of local companies to meet high-level needs by improving the quality of products and services; lax protection of intellectual property rights and high judicial costs harden the generation of new technologies and new industries with “positive externalities”. As a result, domestic high-level demand can hardly be supplied by local companies, not to mention matching domestic and foreign "overlapping demands" through domestic supply and exports of local companies. Under the new normal of the economy, the domestic demand structure is already in the process of upgrading, as is shown in the transition from basic satisfaction to quality needs. But the conversion of supply-side lags behind the conversion of the demand side, so that a mass of high-end products with large domestic demand are not supplied by domestic companies. Especially, according to China Luxury Report in 2014, China is the world’s largest consumer of overseas luxury goods, yet enjoys no world-recognized national brands. Another important factor affecting the “overlapping demand” degree at home and abroad is the degree of internationalization of product quality standards. A country’s product quality standards reflect the trend of international demand, not only influencing the improvement of domestic demand quality, but also a prerequisite for the internationalization of domestic products. However, due to the late start of China’s standardization work, such problems as “absent and outdated standards”, “the divorce between standard and production” and poor execution stand out, and in the end, product quality standards have limited use in improving domestic demand quality and product quality. The disconnection between domestic standards and international ones has made domestic products difficult to be internationalized for a long time, with this difficulty mainly reflected in technical trade barriers becoming the largest trade barrier to China’s exports. For example, in 2014, 23.9% of export companies suffered from foreign technical trade barriers. 5 6

Foothold of China’s Foreign Trade Transformation and Upgrading and the Return of Export Pattern Foothold of China’s foreign trade transformation and upgrading

The deep-seated reason behind the “breakpoint” of China’s new competitive advantage in foreign trade and being confined to the dilemma of transformation is the export pattern without relying on domestic demand. In the trade pattern where developed countries control core technology and implement a “positional block” in the consumption terminal market, the development of innovative capabilities, based on the needs of the local market, is the source of competitive advantage for local enterprises in backward countries under open conditions (Feng and Ling 2003). It is the

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export upgrade of local enterprises based on local market demands that can drive long-term economic growth (Poncet and Waldemar 2013). Under the export pattern separated from domestic demand, local companies cannot rely on domestic demand to develop new advantages in high-level foreign trade competition centered on technology and brand, resulting in a slow trade structure upgrade in China and local companies being “captured” at the low end of the global value chain. For a large developing country like China with huge domestic market space, the expansion of the domestic market and the upgrading of the demand structure provide realistic conditions for getting rid of the dependence on the market and technology of developed countries. Extensive economic growth will be promoted if we blindly emphasize the opening of the market and the use of foreign capital and ignore the basic role of a large domestic market in cultivating high-level foreign trade competitive advantages of local enterprises. Meanwhile, foreign competitors will “gnaw” at the domestic market and compress market space for the growth of local enterprises, leading to the “collective absence” of high-level foreign trade competitive advantages of local enterprises (Zhibiao 2011; Feng and Yongding 2012). Under the economic new normal, China’s development strategy for participating in the global economy should be an open development strategy based on its large domestic market, effectively combining the use of domestic demand with the promotion of exports. Under this strategy, local companies can strive to build high-level foreign trade competitive advantages relying on the domestic market, enhance their competitiveness in the domestic market, and then “go global”. In the current “capture-type” trade pattern and the situation when developed countries have shifted their strategic focus from the global economy to the domestic economy,16 a huge local demand is not only a “bargaining chip” for mutual market opening with developed countries but also a “foothold” for developing high-level foreign trade competitive advantages of local enterprises and promoting foreign trade transformation and upgrading. Following the general laws of the development of foreign trade in major countries, China returns to a domestic demand-driven export pattern, not only to correct the unsustainable economic behavior of an export-oriented export pattern caused by changes in the internal and external economic environment, but also to seize the fleeting “strategic opportunity”. On one hand, the release of the effective demand of 1.37 billion people and the huge consumption “cumulative effect” brought by urbanization provides market space to enhance the brand value of “Made in China” and the continuous upgrading of the domestic demand structure strongly supports the upgrading of technology and the product structure. Relying on a huge domestic demand market to obtain development opportunities has become an important way for Chinese local companies to narrow the competitiveness gap with foreign companies. On the other hand, in the context of the global consumer terminal market, shifting from developed countries to large developing countries, foreign multinational companies have been increasingly competing for China’s huge market demand, an important strategic resource. In recent years, a high-end market demand coming with China’s 16

The return of manufacturing from developed countries, Brexit, the “Trump phenomenon” and China’s rejection of the Trans-Pacific Partnership (TPP) are all examples of this trend.

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rapid economic growth is bringing the competitive substitution of foreign companies and high-quality brands from overseas, which cuts off the transformation path from market space of Chinese local enterprises using domestic high-end demand to build high-level foreign trade competitive advantages. The capacity gaps of local enterprises have accordingly been solidified, with extensive development continuing or even worsening. As a consequence, the economy of China is increasingly vulnerable to external forces (Feng and Yongding 2012) Therefore, the significant “strategic opportunity” for China’s foreign trade transformation and upgrading is to develop new high-level foreign trade competitive advantages of local enterprises based on the rapid expansion and upgrading of domestic demand. (2)

Analysis of the way for China to return to domestic demand-driven export pattern.

The “big country experience” to promote China’s foreign trade transformation and upgrading is a return to a big domestic demand-driven export pattern, making effective use of fast-growing local market space and continuously upgrading the local demand structure, and developing high-end competitive advantages such as independent innovation capabilities and brands. To return to a domestic demand-driven export pattern, three sequential conditions must be met to achieve the dual effective connection of “domestic demand-local supply- products export”: the local supply capacity with strong domestic demand, competitiveness enhancement of local enterprises brought by domestic demand, and the internationalization of local enterprises’ competitive products. First, improve the local supply capacity for domestic demand through supply-side structural reform. Strong local supply capacity for products with greater domestic demand is the precondition for the realization of a domestic demand-driven export pattern. The current domestic demand structure is in the process of transitioning from basic satisfaction to quality needs, but a great number of high-end products with for which there is a large domestic demand are not supplied by local companies, which offers foreign competitors huge business opportunities. Supply-side structural reform serves as an effective way to improve the local supply capacity, with a focus on realizing the docking of supply and demand to improve the local supply capacity for domestic demand. This requires a complete price mechanism to realize market clearing in a timely manner and achieve a dynamic balance of supply and demand by straightening out the market prices of various products and elements and sorting out circulation links. Improve the “self-selection” mechanism of market competition to catalyze effective supply, realizing the balance between supply and demand through breaking the administrative monopoly. Use “visible hands” to make up for market failures and “externalities” in the process of generating new technologies and new industries. Promote new products and services fitting consumption upgrades through the in-depth promotion of “Made in China + Internet” and the implementation of high-tech service industry innovation projects. In the process of improving the local supply capacity for domestic demand through supply-side structural reform, what cannot be ignored is that through the import of intermediate products under global intra-product specialization, the technological advantages of developed countries can

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be effectively used to enhance the supply capacity of local enterprises to domestic demand. This is because the import of high-quality intermediate products can not only relax the technical constraints of local companies, facilitate local companies to produce products according to domestic demand, but trigger international technology spillovers and push local companies to learn. In turn it will result in faster productivity growth. At the same time, intermediate products help to improve supply capacity and the quality of supply, which will put pressure on domestic competitive companies, and use a “reversing mechanism” to encourage local companies to reduce production cost and perfect product quality, and enhance local supply capabilities for domestic demand. Second, improve the innovation-oriented market environment and strengthen the function of enhancing the competitiveness of local enterprises caused by domestic demand. The lack of competitiveness enhancement functions of local enterprises is an important reason why the current domestic demand is difficult to induce exports. Policy measures to foster high-level foreign trade competitive advantages should not be limited to preferential policies to encourage enterprises to invest more heavily in innovation, but should broaden the perspective to the inducing function of domestic demand on the competitiveness of micro-enterprises. First and foremost, form a competitive, orderly, and innovation-oriented market environment. China now is bound to accelerate the construction of a punishment mechanism for corporate dishonesty to govern the endless “counterfeit products”, avoid vicious price competition and realize market “self-selection” through orderly competition, optimize the enterprise innovation environment, and give play to “demand-induced innovation” function of the large domestic market. Just as important is to restrain “rentseeking” and “speculation” in the process of progressive transformation, reduce the space for “non-innovative profitability”, and force local companies to seek competitive advantages centered on technology and brand under domestic demand. Then, create a good consumption environment through strengthening quality supervision, improving consumer rights protection laws, and unblocking consumption rights protection channels. This not only helps release effective demand, but more importantly, transform consumer demand, especially professional and critical consumer demand, into pressure and direction for local companies to improve products and services, thus giving full play to the driving effect of consumer feedback of the big domestic market. Finally, market segmentation and the income gap greatly determine the scale of effective demand, which weakens the inducing effect of effective demand on the competitiveness of local enterprises. This requires clearing up local protection and departmental division policies, eliminating institutional barriers of commodity flows across sectors, industries, and regions, and building a unified national market. Relying on the culture and market of the domestic middle-income class to develop international brands is the basic experience of the world brand development process. This also demands measures such as managing “gray income” and expanding labor’s income share to change China’s current “dumbbell” income structure, expand the middle class, and release the huge demand for local brands. Third, encourage high-end demand and push the internationalization of standards, to connect “overlapping demands” at home and abroad. Whether the competitive

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products produced by local enterprises relying on domestic demand can be exported depends on the degree of “overlapping demand” at home and abroad. Admittedly, differences in domestic and foreign demand caused by various economic development stages affect the consistency of domestic and foreign demand. Under the economy’s new normal, the structure of domestic demand is rapidly escalating, giving a broad space for domestic demand to induce exports. China should seize the opportunity of upgrading domestic demand, increase the degree of “overlapping demand” by encouraging high-end demand and promoting the internationalization of standards, and finally realize the integration of “domestic demand—local supply— products export”. To start with, domestic high-end demand is an effective combination of domestic demand and international demand, whose built-in function of demand-induced innovation plays a key role in freeing domestic companies from the “structural blockade” set by developed countries with their market and technological power. It should be realized that demanding domestic consumers will stimulate the “craftsmanship” of local enterprises. To develop a high-end demand market is to increase the income distribution share of workers in corporate profits and enlarge the middle class in society. We should encourage high-end demand by reducing taxes on high-quality products, improve the circulation rate of consumer information to play the demonstration effect of high-end demand at home and abroad, and cultivate the correct concept of consumption, which are all beneficial to the development of a domestic high-end demand market, thereby further internationalizing domestic demand. Next, actively promote the unification of domestic and international standards, an important way to advance the connection of “overlapping demand” at home and abroad. As the American economist Pauli Cerro points out, countries with the greatest domestic market potential in the twenty-first century will participate in and lead the formulation of various rules for the operation of the international market. China’s domestic demand and supply scale provide conditions for promoting the internationalization of Chinese standards. At the same time, the role of product standards in leading consumption and innovation should be stressed. Relevant regulations like product safety, technical standards, environmental quality, energy efficiency should help consumers accept new products and new technologies and reflect international mainstream consumer trends. The standards of competitive advantage should be added to basic product standards, which can not only accelerate the improvement of domestic products making local enterprises leaders in international competitiveness, but also have a significant effect on guiding domestic consumption. When strict domestic standards are accepted by the world, new products from local companies will step into the world. In brief, impeccable product standards with strict implementation are related to the quality of people’s livelihood and will help China win in the new round of international competition.

3 Patterns of Infrastructure Construction

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3 Patterns of Infrastructure Construction 1

Relation Between Infrastructure Construction and the Development of Large Countries

Major countries have the special advantage of large scale. Their economic development has distinct characteristics and rules, compared with small and medium-sized countries. It is no coincidence that China, India, Russia, and Brazil have realized economic growth almost simultaneously since the 1980 and 1990s. How to understand their economic development has become an emerging hot issue in the field of economic growth. Some researchers reckon that market size is an important economic advantage of major countries. Hereinto, market transaction costs, economic structure differences, and the degree of openness are key factors for the effect of a major country. According to a report by World Bank (1994), infrastructure, as the “gear” of economic activities, which is the most basic condition of economic activities, provides the most basic services of economic activities, facilitates the accumulation of material and human capital as well as promotes trade, reduces transaction costs and protects the environment through market linkage. At the same time, infrastructure investment directly increases employment and brings advanced technology and capital to backward areas. Connected infrastructure facilitates labor transfer and has a favorable income distribution effect. In fact, the lawmakers of emerging economies are investing heavily in infrastructure, while developed countries are also undergoing the process of infrastructure upgrades. In October 2016, the International Monetary Fund called on both developing and developed countries to make a big push for infrastructure investment to avoid long-term economic stagnation, proposed by Summers and others (IMF 2014). In addition, multilateral development banks (such as the World Bank and Asian Development Bank) have invested 70% of their loans in regional infrastructure construction, and the Asian Infrastructure Investment Bank (AIIB), established in 2015, signifies the importance of infrastructure investment from its name alone. The “Belt and Road” initiative advocated by the Chinese government is even more closely related to infrastructure. Specifically, we focus on the economic effects of infrastructure in the large developing country— China, because infrastructure investment plays a leading role in the investment-driven pattern of China’s economic growth. In the early stage of reform and opening up (1978), infrastructure investment only accounted for 5.44% of GDP. In 2010, this proportion reached 18.19%, more than triple, which was indeed eye-catching on China’s annual average with an economic growth rate of nearly 10%. So, what role does infrastructure play in the economic development of major countries? We answer this question through empirical analysis. It is found that infrastructure can promote market integration, broaden companies’ market boundaries, and expand the market for companies and countries, expanding the economic effect of major countries. Then, we further explore the internal mechanism of infrastructure to expand the market size of enterprises and large developing countries. The reason is that infrastructure reduces transportation and transaction costs, letting enterprises sell

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products in places they could not reach before, thus forming a larger overall market size. So we reveal the importance of infrastructure in large developing countries and echo the previous research on the economic effect of large countries. In fact, market transaction costs are a key factor for the great power effect cited in earlier research, of which transportation costs are obviously an important aspect. According to our study, infrastructure improvements can significantly reduce transportation costs, thereby expanding the market scale of enterprises and countries, which creates conditions for further development of the economies of major countries. Compared with previous studies, this section also made breakthroughs in empirical strategies. First of all, the data we use are mainly micro-industrial enterpriselevel data and city-level infrastructure data. The research on the relationship between infrastructure and economic development usually uses the method of adding data. For example, a large number of references follow the ideas of Aschauer (1989) to directly estimate the output elasticity of infrastructure. However, analyzing the economic development effect of infrastructure often encounters endogenous problems such as reverse causality, because economic development will require better infrastructure. Therefore, the improvement in the level of infrastructure can be either a cause or an effect, so it’s difficult to test clearly the relationship between infrastructure and economic development at the aggregate level. Exploring the relationship between infrastructure and business operations at the micro-enterprise level can help alleviate the problem of reverse causality. Second, the fixed effect at the firm level has made firm heterogeneity absorbed to a large extent, reducing the bias of missing variables in the estimation. The transmission of macro policies to micro enterprises has actually attracted more and more attention from academia. At the same time, we adopted a quasi-natural experiment method to further eliminate the endogenous interference of infrastructure, namely, to discuss the different roles that infrastructure may play in these different enterprise attributes according to the different characteristics of the industry or enterprise. Generally speaking, the attributes of enterprises can be regarded as exogenous. If the impact of infrastructure differs on the enterprises due to their attributes, the endogenous problem can be largely eliminated. 2

Hypothesis of the Economic Effect of Large Countries in Infrastructure Construction

This research starts with the economic development of major countries and their influencing factors. The economic effect of major powers is first proposed by Kremer (1993), whose empirical evidence shows the significant economic effect of major powers. Peigang (1992) proposes that development economics should be based on the characteristics of a large country, the problems of its development, and its special path. Smith (1972), Young (1928), Yang and Ng (1993) hold that the division of labor itself is restricted by market capacity, therefore market size is a source of economic advantage for big countries. Subsequent studies have marked that market size can also change the economic effect of major countries through such channels as economies of scale (Krugman 1991) and product diversification (Xiang and Chuanhai 2011) so that major countries usually have relatively complete and complementary industrial systems. The key logical chain behind these studies is that small transaction costs

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within and reduced transportation costs help realize the market’s integration, to put to work the scale effect and knowledge spillovers. The latest research of Junhua and Yao (2016) formally tests the existence of the economic effect of major powers from the perspective of general equilibrium and empirical analysis and finds that the decline in market transaction costs greatly expands the economic effect of major powers. Based on the above related research, it can be expected that infrastructure can play an important role in the economic effect of major countries. First of all, infrastructure has been confirmed by most documents to have a significant economic growth effect. The earliest relevant theoretical research can be traced back to Barro (1990), deeming that government public expenditure is external and can achieve endogenous growth. Aschauer (1989) first writes in normative empirical research on infrastructure and economic growth, using time series data from the United States from 1949 to 1985, and finds that a 10% increase in infrastructure stock can lead to a 4% increase in productivity. During the later years of this period, the decline in the scale of U.S. infrastructure investment from 1970 to 1985 was the most important cause of economic recession (stagflation). Similar to the conclusions of Aschauer (1989), Morrison and Schwartz (1996) studied developed countries and found that infrastructure is positively correlated with productivity and economic growth. Most studies on developing countries also draw a similar conclusion, seen in Binswanger et al. (1993) and Hulten et al. (2006). In turn, poor infrastructure has become a major obstacle to economic growth in developing countries. Lee and Anas (1992), after analyzing Nigeria’s data, find that the backwardness of infrastructure, especially Power supply shortage, hinders the further investment and expansion of enterprises, illustrating the importance of infrastructure to economic growth. As for China, Shenglong and Angang (2010) believe that infrastructure has a technology spillover effect on China’s economic growth. Guangnan and others (2010) verify the promotion effect of infrastructure investment on employment, output, and investment in China. Since this section focuses on the role of infrastructure in the economic development of major countries, it is necessary to stress the specific mechanism of infrastructure to promote the economic development of major countries. According to related research, a country’s market size is the key factor in the economic effect of major countries. Then, can infrastructure play a role in expanding the scale of the market? This has been discussed in past literature to a certain extent with the main conclusion that infrastructure speeds up the integration of trade and market. Banerjee et al. (2012) asserted that the availability of transportation networks will significantly affect the per capita GDP levels across China. They considered that a well-developed road network can contribute to economic growth by gearing up the flow of elements. The research of Duranton et al. (2014) verifies that interstate highways in the United States have significant impacts on developing trade. Faber (2014) finds that highway networks can promote the integration of trade and deepen industrialization in the node areas of a road network. Cosar and Demir (2016) estimated the positive effect of improving the quality of domestic road infrastructure on exports by using Turkish provincial-level data. Donaldson and Hornbeck (2016) finds through Indian colonial

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data that the construction of railways balanced the price between two places and increased bilateral trade flows and per capita income. According to the above research, infrastructure can promote market integration, to infer further, the improvement of infrastructure may enable companies to broaden market boundaries and enlarge the market scale of companies and countries which is conducive to the full play of the economic effect of major countries. Hypothesis 1 Infrastructure helps enlarge the market scale of enterprises, and thus expands the market scale of large developing countries to fully realize the economic effect of large countries. The next question is, what is the internal mechanism for infrastructure to expand the market scale of enterprises and large developing countries and exert the economic effect of large countries? In fact, the most essential reason is that the reduction of transportation and transaction costs brought by infrastructure permits companies to sell products to places that were previously untouched, making the overall market size larger than before. As to the relationship between infrastructure and transportation and trade costs, Keeler and Ying (1988) have given direct evidence that transportation infrastructure can significantly reduce the operating cost of transportation companies. Fernald (1999) finds through inspecting industry data that the productivity of industries more dependent on transportation is affected greatly by changes in transportation infrastructure investment. According to Bougheas et al. (1999) and Jacoby and Minten (2009), infrastructure can significantly reduce the transportation and trade cost of enterprises, thereby promoting trade and economic growth. Li and Li (2013) figured out that China has also significantly reduced transportation costs and correspondingly reduced corporate inventory requirements. Guangnan and Ran (2013) analyze that China’s transportation infrastructure is favorable to the reduction of production costs and factor input of China’s manufacturing industry. Therefore, the underlying mechanism should be rooted in the reduction of transportation or transaction costs to realize the expansion of market size of the large developing countries. According to Junhua and Yao (2016), the reduction of transportation or transaction costs is indeed important for the economic effect of major powers. Based on this, we propose a second hypothesis. Hypothesis 2 Infrastructure is beneficial to the expansion of the market size of large developing countries and the economic effect of major countries with its internal mechanism of infrastructure bringing down the transportation and transaction costs of enterprises. 3

Empirical Analysis of the Economic Effect of Infrastructure Construction in Large Countries

A detailed analysis of the role of infrastructure in the economic development of major countries has been conducted above, with corresponding hypotheses proposed. An empirical test of the hypothesis is as follows.

3 Patterns of Infrastructure Construction

(1)

207

Variables and data

To study the role of infrastructure in the economic development of major countries, we selected a method of combining enterprise-level data with city-level infrastructure data. The enterprise data all come from the industrial enterprise database, the city infrastructure data from the Statistical Yearbook of Chinese Cities, and the Statistical Yearbook of China. According to Hypotheses 1 and 2, the explained variables are the company’s market size and transportation costs. Since market size equals the company’s sales revenue, the logarithm of sales revenue is adopted to measure the company’s market size. The logarithmic value of the company’s commodity transportation time is used to measure transportation costs and the company’s lead time to estimate transportation time. The log value of the ratio of total road area to the city area of this city and neighboring cities is applied to measure the level of transportation infrastructure, the core explanatory variable. The empirical evidence of Li and Li (2013) shows that infrastructure has a significant spillover effect, that is, the infrastructure around an area will have a connection effect with local infrastructure, which may have an impact on the inventory adjustment of local enterprises. Therefore, both the infrastructure variables of this city and neighboring ones are considered. The empirical analysis also involves control variables that affect the company’s market size and transportation costs, including the gross profit margin of the company, the degree of competition in the industry (measured by the Herfindahl index), and the level of economic activity (measured by the number of vehicles per unit of highway mileage and the regional inflation rate). In addition, we control the dummy variable of firm age. The definitions of the variables mentioned are shown in Table 16. The empirical model is set as follows: yit = α0 + α1 I n f ra I t + Contr ols + θi + γt + u it

(19)

In this model yit represents the explained variable, namely, enterprise market size and transportation cost. I n f ra I t indicates the level of infrastructure in region I to Table 16 Variable definitions Variable

Definition

Infra

Logarithmic value of the ratio of highway area to urban area

Market

Logarithmic value of corporate sales revenue

Cost

The logarithm of the transportation time of the enterprise is calculated as 365/(cost of sales / account payable)

Margin

Gross profit margin

Busy

The activity of economic activities is calculated as the number of vehicles per unit of highway mileage

Inflation

Regional inflation rate

Competition The degree of competition in the industry, the Herfindahl index calculated by each industry in each city each year

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Table 17 Statistical description Variable

Number of samples

average value

Standard deviation

Minimum value

Maximum value

Infra

856,870

Market

863,463

−6.355

1.093

−10.969

−4.186

10.089

1.270

0.000

Cost

19.047

853,500

4.893

1.256

−8.275

17.408

Margin

863,463

0.139

0.117

−1.000

1.000

Busy

823,194

3.650

1.065

−0.701

6.344

Inflation

863,463

0.022

0.018

−0.018

0.066

Competition

863,463

4.800

1.019

0.314

6.580

which enterprise i belongs, including the city to which the enterprise belongs and neighboring cities. θi represents individual effect at the enterprise level, γt is time effect, and u it is a random disturbance term. In the specific regression analysis, with infrastructure treated as a city-level variable, it is necessary to cluster standard errors to the city level. Before conducting empirical analysis, it is necessary to process the variable data defined in Table 16. Since the city-level transportation infrastructure data began in 2001and the data in the industrial enterprise database were from 1998 to 2007, the data from 2001 to 2007 were chosen as the sample for analysis. We further eliminate samples with a lead time value less than or equal to 0 and match the remaining samples with city data. Table 17 is the basic statistical description of the variables. (2)

Infrastructure and enterprise market scale

At the start of the analysis, we select the benchmark relationship between infrastructure and enterprise market size, to test hypothesis 1. The regression analysis is performed with the dual fixed effect at the time and firm level. Table 18 reports the regression results. In column (1) of Table 18, we pay attention to the univariate regression of the firm’s market size and infrastructure, and on this basis, we control the fixed effect of firm age, firm individual, and time and cluster the standard errors to the city level. It is found that the positive coefficient of infrastructure proves that infrastructure is indeed conducive to expanding the market size of enterprises. In column (2) of Table 18, we further add control variables, with the coefficient of infrastructure still being positive, confirming the robust positive relationship between infrastructure and market size, that is, infrastructure can promote market integration, enable companies to further broaden market boundaries and achieve market expansion for companies and countries. To further verify the reliability of the conclusions, we exclude the enterprise samples of the five largest cities in terms of urban area, namely, Ordos, Chifeng, Jiuquan, Hulunbuir, and Chongqing in column (3) of Table 18, because the city area is too large to put the infrastructure fully serve enterprises. However, the corresponding regression results do not change significantly. On the whole, an increase in the scale

3 Patterns of Infrastructure Construction Table 18 Infrastructure and market size: benchmark Analysis

209 (1)

(2)

(3)

Market

Market

Market

0.184** (0.076)

0.172** (0.075)

0.173** (0.076)

Margin

0.014 (0.106)

0.004 (0.108)

Busy

−0.031* (0.018)

−0.033* (0.018)

Inflation

−0.134 (0.848)

−0.108 (0.866)

Competition

0.056*** (0.009)

0.055*** (0.009)

Infra

Age FE

Yes

Yes

Yes

Firm FE

Yes

Yes

Yes

Year FE

Yes

Yes

Yes

N

856,870

816,941

805,077

R-squared

0.905

0.907

0.907

Note 1. Robust standard errors in parentheses, clustered at the city level.* p < 0.1,** p < 0.05,*** p < 0.01 2. Columns (1) and (2) are full-sample regressions, and column (3) excludes the sample of enterprises from the five largest cities and performs subsample regression

of infrastructure by 1% can push up the scale of the market by 0.17% to 0.18%, which is economically significant and beneficial to the economic effect of major countries. (3)

Infrastructure and corporate transportation cost

Next, we will analyze the mechanism behind the expansion of a firm’s market size caused by infrastructure. According to the related discussion of hypothesis 2, the essential reason why infrastructure can broaden the market boundaries of enterprises and give play to the economic effect of major countries is that infrastructure reduces transportation and transaction costs, allowing companies to sell products in places that could not be previously accessed economically, making the overall market size larger than ever. In a word, the underlying mechanism should be rooted in the reduction of transportation costs to expand the market scale of large developing countries. Therefore, we further verify the mechanism of infrastructure expanding the market size, that is, the reduction effect of transportation costs. In Table 19, we test the empirical relationship between infrastructure and enterprise transportation costs. Consistent with Table 18, in all regressions, we control the fixed effect of firm age, firm individual, and time, and cluster standard errors to the city level. In column (1) of Table 19, we consider univariate regression with the negative coefficient of infrastructure, indicating that infrastructure is conducive to reducing transportation costs, thereby helping companies expand the market scale and playing a vital role in the economic development of major countries. In column

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Table 19 Infrastructure and transportation costs

(1)

(2)

(3)

Cost

Cost

Cost

−0.199*** (0.07)

−0.209*** (0.077)

−0.210*** (0.072)

Margin

1.326*** (0.117)

1.335*** (0.119)

Busy

0.062** (0.026)

0.064** (0.027)

Inflation

0.416 (0.702)

0.413 (0.725)

Competition

−0.043*** (0.010)

−0.044*** (0.010)

Infra

Age FE

Yes

Yes

Yes

Firm FE

Yes

Yes

Yes

Year FE

Yes

Yes

Yes

N

847,014

807,626

795,805

R-squared

0.810

0.817

0.817

Note 1. Robust standard errors in parentheses, clustered at the city level.* p < 0.1,** p < 0.05,*** p < 0.01 2. Columns (1) and (2) are full-sample regressions, and column (3) excludes the sample of enterprises from the five largest cities and performs subsample regression

(2), we add control variables; in column (3), we exclude the sample of enterprises in the five cities as well, and the corresponding results are still robust. (4)

Endogenous discussion: quasi-natural experiment

In the above empirical analysis, we confirm that infrastructure can reduce the transportation costs of enterprises, expand the market scale of large developing countries, and make the economic effect of large countries work. However, it may have potential endogenous problems possibly caused by the government’s choice of investing in highways in specific cities or business clusters. Therefore, we adopt the Li and Li (2013) method of a quasi-natural experiment to study the different roles that infrastructure may play in these industries according to different characteristics of industries or enterprises. The underlying assumption of this quasi-natural experimental analysis method is that enterprises have difficulty changing their attributes, so their attributes can be regarded as exogenous, and if the impact of infrastructure on a company differs depending on the nature of the company, the endogenous problems arising from the selective government investment can be largely eliminated. The first type of enterprise attribute we choose is the ownership structure of the enterprise. Specifically, we compare whether the role of infrastructure on transportation costs and market size is different in enterprises with different ownership structures. In fact, China’s state-owned enterprises usually have soft budget constraints, making their own goal not necessary to maximize profits. In addition, state-owned

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211

enterprises may also undertake national strategic tasks, making their behavior often different from private ones. Therefore, the market scale expansion effect of infrastructure possibly should only exist in private enterprises and the market behavior of state-owned enterprises is almost not affected by infrastructure. Table 20 shows the results of our quasi-natural experiment on the two types of dependent variables: market size and transportation cost. Each type of dependent variable includes the sample of state-owned enterprises (defined as enterprises whose state-owned capital accounts for more than 50%) and non-state-owned enterprises. In columns (1) and (3) of Table 20, the regression results based on a sample of state-owned enterprises are reported without obvious coefficients of infrastructure, showing a limited effect of infrastructure on state-owned enterprises. According to the sample of non-state-owned enterprises in columns (2) and (4), infrastructure can significantly reduce transportation costs and expand the market size of enterprises. The empirical results in Table 20 are in line with our expectations: the important role of infrastructure in large developing countries’ economies has been confirmed after overcoming the endogenous problem. Table 20 Infrastructure, transportation costs and market size: quasi-natural experiment of ownership structure Market

Cost

(1)

(2)

(3)

(4)

State-owned enterprise

Non-state-owned enterprise

State-owned enterprise

Non-state-owned enterprise

Infra

0.228 (0.148)

0.163** (0.072)

−0.204 (0.158)

−0.206*** (0.074)

Margin

0.124 (0.146)

−0.013 (0.114)

1.007*** (0.176)

1372*** (0.126)

Busy

0.029 (0.021)

−0.041* (0.020)*

0.004 (0.026)

0.067*** (0.029)

Inflation

1.146 (2.057)

−0.251 (0.921)

−2.028 (2.240)

0.714 (0.756)

Competition

-0.006 (0.022)

0.058*** (0.009)

−0.004 (0.022)

−0.045*** (0.010)

Age FE

Yes

Yes

Yes

Yes

Firm FE

Yes

Yes

Yes

Yes

Year FE

Yes

Yes

Yes

Yes

N

43,161

773,780

42,771

764,855

R-squared

0.960

0.903

0.887

0.810 level.*

Note 1. Robust standard errors in parentheses, clustered at the city p < 0.1,** p < 0.05,*** p < 0.01 2. Columns (1) and (3) are analyses of samples of state-owned enterprises; columns (2) and (4) are analyses of samples of non-state-owned enterprises

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4 Development Pattern of Large Developing Countries

The economic effect of infrastructure in major countries from the perspective of industry attributes will be further examined. According to the analysis above, infrastructure can significantly reduce the transportation costs of enterprises, so from the perspective of industry attributes, infrastructure has a stronger effect on transportation costs if the industry is more dependent on transportation. Therefore, industries can be divided in terms of infrastructure dependence. Taking Fernald’s (1999) research as a reference, the input–output tables of 42 industries in China are used to calculate the proportion of transportation input in total input to measure an industry’s infrastructure dependency. Next, calculate the industry median of infrastructure dependency and accordingly divide the sample into two parts, industries with more transportation dependency and industries with less. In columns (1) and (2) of Table 21, we conduct quasi-natural experiments based on these two samples. The results show that infrastructure has a significant transportation cost reduction effect on both types of industries. In terms of coefficient value and significance, the more dependent the industry is on infrastructure, the greater the effect, thus verifying our conjecture. To further determine whether the difference in coefficients is significant, in column (3), we perform regression on the full sample, but further, add dummy variables for industries with more transportation inputs and their interaction with infrastructure. The results demonstrate that the coefficient of the interaction term between infrastructure and dummy variable is distinctly negative, inferring that the effect of decreasing transportation costs is statistically more obvious in industries where infrastructure has more investment in transportation. Furthermore, in column (4), we switch to the ratio of transportation input to total input and its interaction with infrastructure, resulting in the negative interaction coefficient, consistent with our expectations. In summary, through the quasi-natural experiment of transportation investment, we have confirmed that infrastructure can significantly reduce transportation costs, expand the market scale of enterprises and benefit the economic effect of major countries. We are trying to understand the source of economic advantages of major countries in the light of infrastructure construction. Infrastructure, the “gear” of economic activities, has gained much attention from most developing and developed countries. The empirical analysis first finds that infrastructure can promote market integration, broaden companies’ market boundaries, and expand the market scale of companies and countries, giving full play to the economic effect of major countries. According to previous studies, market transaction costs are an important factor in the economic effect of major powers while transportation costs are obviously an important aspect of market transaction costs. We find that the reason why infrastructure can broaden the market boundaries of enterprises and give play to the economic effect of major countries lies in reducing transportation costs, making the overall market scale larger than it would have been without infrastructure, thus creating conditions for further development of major countries. Empirically, we have overcome the endogenous problem of infrastructure through the micro-transmission strategy of macro-policy and the quasi-natural experiment method. In terms of policy, we propose further increasing the quantity and quality of infrastructure. According to the results of our empirical analysis, infrastructure can

3 Patterns of Infrastructure Construction

213

Table 21 Infrastructure and transportation costs: quasi-natural experiment of transportation investment Cost

Infra

Cost

(1)

(2)

(3)

Industries with more transportation investment

Industries with less transportation investment

Cross-term effect

−0.238*** (0.082)

−1.73** (0.071)

−0.201*** (0.072)

Infra × D (Industry with more transportation investment)

−0.017* (0.009)

D (Industry with more transportation investment)

−0.117* (0.063)

(4)

−0.158** (0.076)

Infra × (Transport investment as a percentage of total investment)

−0.089** (0.034)

Transport investment as a percentage of total investment

−0.536** (0.228)

Margin

1.254*** (0.116)

1.413*** (0.130)

1.325*** (0.116)

1.324*** (0.116)

Busy

0.058** (0.027)

0.045 (0.030)

0.061** (0.026)

0.062** (0.026)

Inflation

0.134 (0.830)

0.182 (0.815)

0.414 (0.707)

0.412 (0.711)

Competition

−0.034*** (0.012)

−0.056*** (0.013)

−0.043*** (0.010)

−0.043*** (0.010)

Age FE

Yes

Yes

Yes

Yes

Firm FE

Yes

Yes

Yes

Yes

Year FE

Yes

Yes

Yes

Yes

N

406,788

400,838

807,626

807,626

R-squared

0.839

0.841

0.817

0.817

Note Robust standard errors in parentheses, clustered at the city level.* p < 0.1,** p < 0.05,*** p < 0.01

promote the economic effect of major countries. Therefore, when measuring the effect of infrastructure investment, we should not only look at its direct impact on total economic volume but also consider economies of scale and division of labor benefits brought by the economic effect of major powers. Especially in the current weak recovery of the world economy and with the difficulties in the “three phases” of

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the domestic economy, a moderate expansion of infrastructure investment can play a role in boosting domestic demand and preventing further economic decline. Of course, infrastructure investment should have a different emphasis for China’s eastern, central and western regions, due to the different stages of economic development. Infrastructure is relatively popular in the eastern region, and government should underline the cost reduction, perfection of the hardware quality of these infrastructures, especially the related software quality, to further promote the economic effect of major countries. Infrastructure investment in the central and western regions needs to focus on both quantity and quality, in particular, the economic effect of infrastructure in the western region has not been brought into full play. Investment should be increased and impoverished areas should be taken special care of.

4 Patterns of Public Goods Supply Compared with small countries, the economic operation of large countries has unique characteristics and strengths. For example, Ouyang Yao (2009) puts forward the concept of “comprehensive advantages of big powers”—“the formation of comprehensive advantages of major powers stems largely from economies of scale, diversity, multiple structures, and independent systems, and the advantages of the division of labor, complementarity, adaptability, and stability”. In addition, he proposed the concept of “endogenous capacity of major countries” in 2013 to illustrate the merits of major countries’ economies, declaring that super-scale countries have rich resources and broad market scope to expedite independent and coordinated economic development based on domestic resources and markets. Some scholars at present have studied the supply of public goods in major countries: Bierbrauer and Hellwig (2010) use Bayesian analysis to explore the supply mechanism of public goods in the economies of major powers; Kakinaka and Kotani (2011) study the issue of voluntary donations for public goods in the economies of large countries; Konishi and Shinohara (2014) research the supply of public goods with voluntary participation in the economies of major powers. However, few scholars have explored the economic advantages of major powers from the point of the supply of public goods. One of the distinguishing characteristics of a big country is its large population. This section proposes the concept of “the advantage of a big country’s public goods supply” to deepen the understanding of a large country’s economic strength and enrich the research of relevant economic theories, based on the definition of a major country and the characteristics of public goods. Compared with small countries, large countries have their own advantages in the supply of public goods. The economic logic of this advantage is as follows: under the same conditions, countries with large populations will gather more fiscal revenue, meaning that the government can provide more public products to society; and because public goods are non-competitive, everyone can gain utility from public goods instead of being averaged out by the size of the population. Therefore, large countries are more advantageous in the supply of public goods and everyone will be able to enjoy more public goods.

4 Patterns of Public Goods Supply

1

215

Concept of “Advantages in the Supply of Public Goods in Large Countries”

Before analyzing this concept, we must first understand the idea of major country and public goods. There is no uniform standard now for the definition of a great power in academia. For example, Kuznets (2005) refers to countries with a population greater than 10 million as major countries in his publication Economic Growth in Countries. Syrquin and Chenery (1989) called countries with a population greater than 20 million large countries in Patterns of Development: 1950–1970 vast territory, a large population, and rich resources. Yao and Huihua (2010) combine existing relevant research and select three easy-to-quantify initial conditions to define a large country—country scale, population size, and economic aggregate, among which the population size shall be greater than 40 million. Junhua and Yao (2016) hold that population size and land area are the most important natural characteristics of a major country. Besides, Alberto and Wacziarg (1998) use the population size of a country to measure its scale in studying issues related to the scale of a country. Countries with large populations are defined as large countries, considering that the advantages of major countries in the supply of public goods are mainly derived from the population size. Samuelson gives an authoritative definition of public goods: no cost of extending the utility of the product to others; being unable to exclude others from participating in sharing, such as national defense, national highways, and environmental protection. According to this definition, public goods have two characteristics: non-competitive and non-exclusive. The former refers to the fact that one’s consumption of this product will not affect others’ consumption of it; the latter means that the benefit in the consumption process cannot be exclusive to one and cannot exclude others from co-consumption. It is precisely because of these features that public goods are usually supplied by the government by collecting taxes from residents and then providing public goods to society. According to the definition of large countries and the characteristics of public goods, the concept of the advantage of the supply of public products in major countries is presented: in a very populous country, the government can easily obtain plentiful tax revenue to offer more public goods to the society and because of the non-competitive nature of public products, the utility that everyone obtains from public goods will not be averaged out because of the large population, so everyone in big countries can share more public goods. From this definition we see that this strength has a close relationship with the individual tax burden of residents: the advantages of public goods supply in large countries can lead to the advantages of residents’ individual tax burden. Other things being equal, if the supply of public goods in two countries is the same, residents’ individual tax burdens in a country with a larger population will be lower, while residents’ individual tax burdens in a country with a smaller population will be higher. In essence, the basis for the formation of these advantages is a very large population and the non-competitiveness of public products. As a saying goes, many hands make light work. A large population allows the government to obtain more fiscal revenue, which means the government can provide more public goods, and owing to the non-competitive nature of public

216

4 Development Pattern of Large Developing Countries

products, the consumption of public goods by a resident will not affect others so that the utility of each resident from public goods will not be averaged out. The idea of the advantages of the supply of public goods in major powers can be traced back to the study of taxes by Petty (1663), the founder of British classical political economy in the seventeenth century. His book, A Treatise of Taxes and Contribution, believes that a small population is real poverty. A country with a population of 8 million is more than twice as rich as a country with the same land and a population of only 4 million because administrative officials need a lot of money to maintain, but the same number of administrative officials can govern more or fewer civilians with almost similar competence. Petty has realized that the non-competitive nature of public goods makes residents of major countries more advantageous in sharing the supply cost of public goods despite giving no explicit concept. In addition, Lewis (1972) mentions in the book, The Theory of Economic Growth, that the larger the population, the better the utilization of public facilities. Apparently, he has become aware that the non-competitive nature of public goods enables major countries to make better use of public goods. It should be noted that advantages of public goods supply in major powers cannot be understood only as a country with a large population and a government that can easily collect more taxes. As tax revenue is not equal to public goods, a transformation process is needed. Therefore, the advantages should involve two parts: first, based on the advantage of population size, the government can easily obtain more tax revenue; second, the government uses tax revenue to supply public goods to society. The combination of these two parts forms the advantage of public goods supply in major countries. 2

Forming Process of “the Advantage of Public Goods Supply in Large Countries”

The economic logic of the advantages of the supply of public goods in major countries lies in: the government can easily obtain more tax revenue based on the advantage of population size, then the government can use tax revenue to supply public goods to society. In the meantime, because public goods are non-competitive, the utility gained by each individual from public goods will not be averaged out due to the large population size. Therefore its formation process includes two parts: firstly, the government obtains more tax revenue by using the advantage of population size; secondly, the government increases fiscal expenditure to provide more public goods to society. We will conduct a detailed analysis of this formation process and discuss some of the factors that affect the formation of the advantages of public goods supply in major countries. To clearly demonstrate the process of using the advantage of population size to easily obtain more tax revenue, the following uses the government budget equation to illustrate: G t = ωτ yn t

(20)

4 Patterns of Public Goods Supply

217

G t is fiscal expenditure, and ωτ yn t is the tax revenue after excluding taxation costs. The government must maintain a balance of revenue and expenditure, with fiscal expenditure equal to its tax revenue. In reality, sometimes fiscal expenditure is not equal to its tax revenue in the short term, but in the long run, it is, so it is reasonable to assume that fiscal expenditure is always equal to tax revenue. In Eq. (20), τ represents a proportional tax rate, the higher the value, the heavier the individual tax burden, with the range (0, 1); y represents individual income level, and n t the population size; ω represents a parameter to measure taxation costs and reflects taxation efficiency, the higher the value, the lower the taxation cost (the higher the taxation efficiency), ω falls within the range (0, 1). (1 − ω)τ yn t is the cost expiration in the taxation process of government. It can be found that under the same income level y, tax burden level τ , and tax cost ω, the higher n t , the greater G t , referring the larger the country’s population, the more tax revenue it will receive. Therefore, the government of large countries can easily obtain more tax revenue because of the advantages of population size. It can also be found from Eq. (20) that assuming that G t , y, and ω remain unchanged, the larger n t , the smaller τ , meaning the larger the population, the lower the individual tax burden. In other words, the advantages of public goods supply in major countries can reflect residents’ individual tax burden. The assumptions of formula (20) may be exaggerated in the real economy, because the individual income level is usually influenced by population nt , namely, yt = yt (nt ). Then formula (20) becomes: G t = ωτ yt (n t )n t

(21)

  n t dyt dG t = ωτ yt 1 + dn t yt dn t

(22)

The derivative of nt can be:

In formula (22), the  for the proportional relation between population  prerequisites dyt dyt n t dyt and tax revenue are: 1 + yt dn t > 0, namely, nytt dn >−1. nytt dn is a flexible concept t t here to measure the response degree of the individual income level to changes in population. According to neoclassical economic growth theory, an increase in the number of people may lead to a rise in total economic output, but usually, the indidyt < vidual income level is on the decline due to the law of diminishing returns, nytt dn t 0. However, according to Formula (22), if n t dyt yt dn t

n t dyt yt dn t

> −1, then

dG t dn t

> 0. Economically,

> −1means that the decline in personal income is less than the increase in

dyt > −1can reflect that larger population does not population. In other words, nytt dn t bring about a decline in economic aggregate. Usually, a country’s economy can meet this condition. In addition, according to Krugman’s new economic geography theory, if there is an increasing return to scale effect in the market, the increase in populadyt > 0. At this tion will raise the personal income level rather than lower it, so nytt dn t time, with the increase of population, the personal income level will increase and the country will get more fiscal revenue.

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4 Development Pattern of Large Developing Countries

In formula (21), in addition to the personal income level, taxation cost is also affected by population, ωt = ωt (n t ), so formula (21) will change into: G t = τ ωt (n t )yt (n t )n t

(23)

  n t dωt n t dyt dG t = τ ωt yt 1 + + dn t ωt dn t yt dn t

(24)

The derivative of n t can be:

t Here, ωn tt dω is also a flexible concept to measure how taxation costs respond to dn t t t > 0, or < 0. When ωn tt dω < 0, the cost changes in population size. Among them ωn tt dω dn t dn t of taxation will increase with more population, and vice versa. From formula (24), if   n t dωt dG t n t dωt n t dyt < 0, possibly dn t < 0, while, to formula (24), only if ωt dn t + yt dn t > −1, then ωt dn t

dG t dn t

> 0. In other words, as the population increases, the government’s tax revenue continues to advance, as long as the cost of taxation does not rise sharply and the level of personal income does not fall rapidly. It is conditional for the government to use the advantage of population size to obtain more tax revenue: there is no prominent drop in personal income and rise in taxation costs, without too high cost of taxation and extremely low-income level of residents from a static perspective. In addition, tax rate changes are one of the main factors in this relationship. However, according to the Laffer curve, there is a non-linear relationship between the tax rate and taxation which is very complicated, so here it is assumed that the tax rate is a constant and is not affected by other factors. The process of government using the tax revenue to provide public goods can be described by the public goods accumulation equation: g

g

K t+1 = (1 − δ)K t + ηG t g

(25)

In this equation, K t is society’s public capital stock and a proxy variable of public goods, δ is a depreciation rate, Gt is fiscal expenditure and η is a parameter to measure the efficiency of fiscal expenditure, with the range (0, 1). The larger η, the higher the efficiency of fiscal expenditure, and the more public goods provided by the same fiscal expenditure; the smaller η, the fewer public goods provided by the same fiscal expenditure. So the condition for this process is the fine efficiency of fiscal expenditure. To sum up, the formation of the advantages of public product supply in major countries is based on factors such as taxation cost, residents’ income level, and fiscal expenditure efficiency. Low taxation cost, a high income level of residents, and high efficiency of fiscal expenditure may bring advantages of public product supply in major countries; high taxation cost, a low income level of residents, and low efficiency of fiscal expenditure may hinder the advantages.

4 Patterns of Public Goods Supply

3.

219

Influence Mechanism of “the Advantages of Public Product Supply in Large Countries”

For the economies of large countries, the advantage of public product supply in large countries can significantly boost economic growth, because a larger supply of public goods can improve the market environment, increase production efficiency, enhance factor yields and promote economic growth. Hence the advantages of public product supply in major countries are regarded as one of the sources to promote economic growth, that is, the advantages of public product supply in major countries can form a driving force for economic development and boost economic growth. This is a new concept different from Ouyang Yao’s comprehensive advantages and endogenous capability of big countries, which complements the existing theory of the advantages of big countries. To clearly show the influence of major countries’ public product supply advantages on their economic growth, the following uses a brief economic growth model to illustrate. Assume that the production function of a representative firm is a Cobb–Douglas production function that includes public goods: yt = Aktα (ψ K t )1−α g

(26)

Given that the quality of public goods has an impact on economic growth, parameter ψ is set here to measure the quality level of public goods. The larger ψ, the higher the quality, with the range (0, 1). In addition, in formula (26), A is a constant to measure the level of technology, yt the output of a representative manufacturer, k t the stock of private capital, K g t the stock of social public capital, and a proxy variable for public goods, α the output elasticity coefficient of private capital stock with the range (0, 1), and (1 − α) the output elasticity coefficient of public goods. The changes in private capital stock and public goods are as follows: k˙t = i t − δki · g

(27) g

kt = ηG t − δkt

(28)

In these equations, i t refers to private investment, δ is the depreciation rate, G t is fiscal expenditure, and η is a parameter to measure the efficiency of fiscal expenditure. Assume that residents produce product, and the population size is n, ignoring population growth. The representative residents are Ramsey residents who exist indefinitely, and their utility function is:  U (ct ) = 0

∞

u(ct ) × e−ρt dt =

 0

∞

ct1−σ − 1 × e−ρt dt 1−σ

(29)

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4 Development Pattern of Large Developing Countries

In this equation ct is the consumption of the representative residents, σ1 is the intertemporal elasticity of substitution (where σ > 0), ρ is the time preference rate (where ρ > 0), reflecting that with the same consumption, the later the consumption, the less utility it will yield. The resource constraints of the representative residents are: g

yt = Akta (ψ K t )1−α = ct + i t +

1 Gt nω

(30)

1 ω in formulae (30) and (21) is a parameter to measure the cost of taxation and nω Gt is the tax paid by the representative residents. In order to simplify the processing, we assume that fiscal expenditure G t is obtained through non-distorting tax financing. Since formula (21) is a distorting tax financing equation, the simplification does not affect the main conclusions of this model. Under the constraints of formulae (27), (28), and (30), representative residents maximize their utility function (29). To gain the optimal choice of representative residents, the Hamilton equation is constructed to solve:

ct1−σ − 1 g × e−ρt + νt (i t − δki ) + μt (ηG t − δkt ) 1−σ   1 α ψ + λt Akt ( )1 − α − ct − i t − Gt nω

Ht =

(31)

The transversality condition is: lim [νt × kt ] = 0

(32)

t→∞

g

lim [μt × K t ] = 0

(33)

t→∞

·

g νt and μt are respectively shadow price of k˙t and kt . λt is Lagrange Multiplier related to (30). The partial derivative of Ht to ct 、i t and Gt is 0, ddkHtt + ν˙ t = 0 and d Ht ˙ t = 0. g + μ dK t

After a series of derivations:

γc =

1 [A(1 − α)(1−α) α α (ηωnψ)(1−α) − δ − ρ] σ   (1 − α)(nηωψ) (1−α) yt = A kt α

(34)

(35)

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221

Formula (34) gives γc , the consumption growth rate of the representative residents. Formula (35) is a production function, essentially an AK type. Hence, when the transversality conditions are met, the growth rate of household consumption is equal to the growth rate of firm output: γ y = γc =

1 [A(1 − α)(1−α) α α (ηωnψ)(1−α) − δ − ρ] σ

(36)

It can be observed that in formula (36), the output growth rate γ y is unrelated to the variables k t and K g t , and is a constant (an endogenous economic growth model). This conclusion is consistent with Barro (1990). Assuming that the parameter satisfies γ y > 0, the economy will continue to grow at the rate ofγ y , indicating that the advantages of large countries in the supply of public goods can drive economic growth and promote sustained economic growth. dγ Equation (36) shows dny > 0, whose economic significance is that the expansion of population size can increase the speed of economic growth. This is because the government can obtain more tax revenue with a larger population, which in turn enables it to provide more public goods to society, enhance factor yields, and promote d2 γ economic growth. Equation (36) indicates dndωy > 0, whose economic significance is that the increase of taxation cost (decrease of taxation efficiency) can reduce the positive impact of population size on economic growth. So even if a major country has a large population, if the taxation cost is very high, the promoting effect of population size on economic growth will be diminished, that is, the high taxation cost will weaken the promoting effect of the advantages of public goods supply on d2 γ economic growth in major countries. From formula (36), we know that dndηy > 0, whose economic significance is that the decline in the efficiency of fiscal expenditure can reduce the positive impact of population size on economic growth. Therefore, even if a big country has a large population, if the efficiency of fiscal expenditure is low, the promoting effect of population size on economic growth will be inhibited, that is, the efficiency of fiscal expenditure will weaken the promoting effect of the advantages of public goods supply on economic growth in major countries. From d2γ formula (36), we know that dndψy > 0, whose economic significance is that public goods with poor quality can reduce the positive impact of population size on economic growth. Therefore, even with a large population, the poor quality of public goods provided by the government will inhibit the role of population size in promoting economic growth. That is to say, the poor quality of public goods will weaken the promoting effect of the advantages of public goods supply on economic growth in major countries. It can be found that the advantages of public goods supply in major countries can become the driving force for sustained economic growth: the larger the population, the faster the economic growth. However, with a high cost of taxation, low efficiency of fiscal expenditure, and poor quality of public goods, population size will have a less positive impact on economic growth, weakening the positive impact of major countries’ public product supply advantages on their economic growth.

222

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Conclusion and Enlightenment

With the rapid rise of major countries such as Brazil, Russia, India, and China in the process of world economic development, more and more scholars have begun to study the economic phenomena of major countries. According to the definition of a major country and the characteristics of public goods, this section proposes the concept of the advantage of the supply of public goods in a major country and analyzes its formation process. With a large population, the government can obtain more tax revenues, provide more public goods to society, and because of the non-competitive nature of public products, the utility that everyone obtains from public products will not be averaged out due to large population, so everyone in big countries can share more public products. This is the advantage of the supply of public goods in a big country. It is formed on the basis of factors such as taxation cost, residents’ income levels, and fiscal expenditure efficiency. Low taxation cost, high income level of residents, and high efficiency of fiscal expenditure bring advantages of public product supply in major countries; high taxation cost, low income level of residents, and low efficiency of fiscal expenditure hinder the advantages. Finally, this section analyzes the influence of major countries’ public product supply on their economic growth, with results showing: the advantages of public goods supply in major countries can be the driving force for sustained economic growth, and the larger the population, the faster the economic growth rate. However, when the taxation cost becomes high, the efficiency of fiscal expenditure gets low, and the quality of public products becomes poor, the promoting effect of the advantages of public goods supply on economic growth in major countries will be weakened. The advantage of a major country’s public goods supply is a new concept complementing the existing theory of major country advantage. China’s population is more than 1.3 billion, ranking first in the world, a typical big country. Therefore, this theory can provide some suggestions regarding China’s economic growth. First, the advantage of the supply of public products in major countries can be regarded as one of the sources and driving forces of China’s economic growth, further promoting the sustained growth of the Chinese economy. In view of the economic situation, China has witnessed significant improvements in the supply of public goods such as infrastructure, education, and social security since the reform and opening up, one of the vital factors of the long-term growth of its economy. However, there is a big gap between China’s public product supply in quantity and quality compared with western developed countries, so the advantages of public product supply in major countries will still play an important role in promoting economic growth for a long time in the future. Second, lowering taxation costs, raising the efficiency of fiscal expenditures, and improving the quality of public products, will further highlight China’s strength in the supply of public products. At present, the cost of taxation in China is much higher than that of some developed countries. For example, the taxation cost in the United States is about 2%, while that of China is as high as around 8% (Xiongjun 2008). China’s fiscal expenditure efficiency is also dissatisfactory (Lulu and Xuehua 2015). Many problems in the quality of public products appear in China, like continuous jerry-built projects, and incidents such as road dilapidation, foundation settlement, and bridge collapse have occurred from time to time (Huang Shoufeng 2016). Therefore, despite the advantage of the large population

4 Patterns of Public Goods Supply

223

and public product supply, its high taxation cost, low fiscal expenditure efficiency, and poor public product quality will inhibit the use of this advantage. The Chinese government should now minimize taxation costs, improve the efficiency of fiscal expenditures, and improve the quality of public products. There are still shortcomings in the concept of the advantages of public goods supply in major countries and continued analysis of its formation process and influence will enrich the research on the economic theory of major countries. First, the advantage of large countries in public products supply we have discussed refers to the advantages in the quantity of their supply, without consideration of their quality which tends to link with the government’s public management capabilities and government integrity. If there is a correlation between population size and the government’s public management capabilities and cleanliness, then in the future, we can further explore whether major countries have advantages in the quality of public goods supply. Second, the public product we are studying is purely non-competitive and non-exclusive, without consideration of mixed public products. In the real economy, some public products may be mixed, possessing the properties of both public and private products, and whether major countries have an advantage in supply for this kind of mixed public products is a question worthy of further discussion.

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Chapter 5

Economic Transformation of Developing Countries

The previous chapters analyzed the development pattern of large developing countries, which is the pattern that reflects a scale effect. This chapter studies the economic transformation of large developing countries with two main implications: First, the economic development of large countries follows a particular pattern. Because of different economic development strategies and policies, some countries do not adopt this specific type, and therefore require transformation development; Second, the economic development of large countries has its own time. Some development strategy has been adopted in the initial stage. Since the economic development has reached a new stage, accordingly its strategy needs to be transformed and upgraded. This chapter will focus on the study of the economic transformation of large and medium-sized developing countries in terms of agricultural industrialization, the new urbanization, the productivity increase of all factors, the structure improvement of human capital, and the skipping over of the “middle-income trap”.

1 Agricultural Industrialization and Scale Operation 1

Views from Scholars at Home and Abroad

The dual structure of agriculture and industry is an important feature of developing countries. At present, developing countries have generally entered the period of industrialization development. It has become a necessity to promote agricultural industrialization and agricultural transformation. The so-called agricultural industrialization refers to the use of modern industrial equipment and technology in traditional agriculture for the improvement of production efficiency and agriculture management. In essence, it is the transformation from small traditional agriculture run manually to large-scale industrial agriculture. However, the small scale of agricultural operations is the main factor restricting the agricultural industrialization of developing countries. Taking full use of the advantages of the big country to promote © Peking University Press 2022 Y. Ouyang, Large Countries’ Development Path: Experience and Theory, https://doi.org/10.1007/978-981-16-5695-8_5

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agricultural scale operation and realize the industrialization of production and operation can improve the efficiency of agricultural production, increase the income of farmers, and realize the optimal transformation of agriculture. The earliest proponent of the idea of agricultural industrialization was Mr. Zhang Peigang. In his book “Agriculture and Industrialization”, he proposed that industrialization includes modernization and mechanization of both agricultural and industrial production (Peigang 1949), which guided the agricultural development in large developing countries. After that, domestic scholars have carried out a further qualitative and quantitative analysis on “what is agricultural industrialization and how to promote agricultural industrialization”. In terms of qualitative analysis, Maosong and Xinyu (2005) believe that agricultural industrialization is the process of continuous change of basic production functions in the process of agricultural production, and finally, the realization of the industrial integration of high-grade forms of agriculture and industry. At the same time, they believe that system innovation is a decisive factor to promote agricultural industrialization. Based on the actual situation of China, Yawen (2006) put forward the policy measures of agricultural industrialization from the aspects of agricultural industrialization management, system innovation, urbanization acceleration, and government macro-control. Xiaode (2011) believes that the new agricultural industrialization should recognize the disadvantages brought by capitalization and marketization, as well as the failure and crisis of traditional industrialization technology in the field of agriculture, and should follow the road of ecological agriculture development with Chinese characteristics. In terms of quantitative analysis, Fusheng et al. (2008) put forward measures to speed up the process of agricultural industrialization based on evaluating the index system of the agricultural industrialization process, and put forward the idea and thought of industrialization to promote agricultural industrialization step by step from organizational form and management behavior. Bin (2008) made a comparative analysis of county agricultural industrialization with the method of empirical analysis. He further asserted that county agricultural industrialization should depend on the enhancement of some leading enterprises under the operation mode of “leading enterprises supporting farmers.” In the main superior industries, a relatively complete industrial chain should be formed as soon as possible, which would help build up a cluster economy that meets the requirements of industrial production and promote agricultural industrialization. What is the effect of scale operation on agricultural economic development? Scholars at home and abroad hold two opposing views. On the one hand, scholars believe that scale operation may not necessarily promote the growth of the agricultural economy. For example, Schultz (1968), and Hayami and Ruttan (1986) deemed that the technical and institutional changes induced by relative changes in factors and product prices are contributing to agricultural economic growth and that agricultural economic growth did not necessarily rely on the concept of a fixed model of economies of scale. On the other hand, scholars believe that scale operation can effectively promote agricultural economic growth. According to Qing et al. (2011), the expansion of land management has a significant negative impact on unit production and total production cost. If other conditions remain the same, cost reduction

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is substantially consistent with the improvement of economic benefits. Therefore, the expansion of the agricultural management scale is conducive to the increase of farmers’ income. Wenming et al. (2015) argued that large-scale farmers are closer to the “rational economic man” hypothesis. There are suitable standards for rice scale management to be differentiated under different goal orientations. The importance of modern factors of production is more prominent, the surplus of agricultural labor tends to be reduced, and knowledge, experience, and skills have a significant positive effect on rice production. Xiurong (2016) believes that only by expanding the scale of the farm above the bottom line with the sustainability of the farm economy will there be a chance to alleviate a series of other problems in agriculture, otherwise, any agricultural policy measures are only palliative and unthorough. Then, for big developing countries, can scale operation promote agricultural industrialization? What is the path? This section will take China and India as the typical representatives to study the effect and path of scale operation on agricultural industrialization through theoretical analysis and empirical evidence, and put forward corresponding countermeasures and suggestions. 2 (1)

A Framework for Theoretical Analysis Important characteristics of agriculture in large developing countries: the insufficient cultivated land per capita

A vast land area and large agricultural population are the main characteristics of agricultural scale in large developing countries. These two characteristics not only provide favorable factors for the agricultural development of large developing countries but also hinder their agricultural transformation. On the one hand, the vast land area provides a high base of cultivated land area for agricultural development, and the large agricultural population provides an abundant labor force for agricultural development, which has set the innate advantages of agricultural economic development in large developing countries in an agricultural society and the primary stage of industrialization. The data for 2015 show that China and India have 135 million hectares of cultivated land and 156 million hectares of cultivated land respectively, accounting for 20.67 percent of the world’s total cultivated land. China and India have agricultural workforces of 215 million and 205.6 million respectively, accounting for 5.72% of the world’s total. Correspondently, grain production in the two countries reached 565.38 million tons and 235 million tons respectively, accounting for 28.41% of the world’s total grain production. However, on the other hand, the large agricultural population has lowered the per capita share of cultivated land area, so that there is no way to carry out large-scale mechanization and intensive production, which is not conducive to the popularization and application of high-tech agriculture and the adjustment of management modes. Due to the inability to make good use of scale economies and the advancement in technology, farmers in large developing countries cannot accumulate funds by reducing costs or increasing their gains, thus resulting in the farmers’ persistent low income per capita. The low per capita income induces a large number of the agricultural population to give up agriculture to enter the non-agricultural industry,

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so the quantity of the agricultural labor force and the level of human capital continue to decline. Consequently, and the competitiveness of the agricultural industry and its international competitiveness are restricted, thus forming the inferior position of agricultural development in large developing countries. In China, for example, the per capita cultivated land fell by 0.003 hectares from 2000 to 2015, corresponding to a 39.19% decline in the agricultural labor force, a 7.7% decline in the annual growth rate of fixed-asset investment of farmers, and a 5.9% decline in the added value of the primary industry. (2)

Scale operation, agricultural industrialization, and agricultural development in large developing countries

As mentioned above, an important characteristic of agriculture in large developing countries is the low value of per capita cultivated land, which also is an important factor restricting agricultural industrialization. The moderate scale operation of agriculture not only provides the basic conditions for developing countries to promote agricultural industrialization but also promotes the transformation and development of agriculture from the perspective of efficiency and income (See Fig. 1). First is the scale operation, agricultural industrialization, and agricultural development from an efficiency perspective. Using modern industrial equipment and technology to equip agriculture is an important manifestation of agricultural industrialization in large developing countries. Its essence is the substitution of a modern highefficiency production mode for the traditional low-efficiency production mode, which is embodied in the transformation of both production and management modes. The transformation of the production mode is mainly shown by the use of high-efficiency agricultural machinery and equipment, the application of high-tech pesticides and

Fig. 1 Mechanism path of scale operation agricultural industrialization and agricultural development in large developing countries

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chemical fertilizer, the improvement of agricultural human capital level, etc. The transformation of the management mode is mainly embodied in the transformation of the extensive management mode into an intensive management mode. The transformation of the production and management modes determines the promotion of production efficiency, as well as the rise in operating costs. In the absence of enough cultivated land, the rise in the benefits from the improvement in agricultural production efficiency is far from keeping up with the rise in operating costs. Farmers’ demand for a modern high-efficiency production mode is weak. Quite on the contrary, if farmers carry out moderate scale operations, they can effectively reduce the operating cost of using a modern high-efficiency production mode per unit of cultivated land. In the case of constant output per unit of cultivated land, the cost–benefit ratio is changed, and then the desire to replace the traditional production mode with a modern high-efficiency production mode is strengthened, which is beneficial to the promotion of agricultural industrialization and the improvement of agricultural production efficiency. In addition, the use of a modern high-efficiency production mode and management mode should be based on the premise of scale operation. At present, China’s industry is fully able to equip modern agriculture. For example, on average, China and India use 6.9 and 3.0 tractors per 1,000 hectares of cultivated land. However, agricultural machinery is not able to play its full part because of insufficient land operation scale, which is not conducive to the industrialization of agricultural production. China, India, Russia, and Brazil are typical large developing countries that can be divided into two groups. China and India have adopted a pattern of peasant households with an average cultivated land area of 0.5931 hectares and 0.7588 hectares for the economically active agricultural population; Russia1 and Brazil2 use a pattern of scale-based farms with an average cultivated land area of 25.2599 hectares and 5.2321 hectares for the economically active agricultural population. Table 1 shows that the scale of agricultural operations in large developing countries has a significant positive relationship with agricultural labor productivity. Russia and Brazil, which have higher per capita cultivated land, have relatively high agricultural labor productivity of $11,540.05 and $11,149.67, respectively. For China and India with a lower per capita share of cultivated land, the agricultural labor productivity is relatively low, being $1,465.44 and $1,156.21, respectively. This confirms the previous analysis that agricultural operation scale can effectively increase agricultural labor productivity. From the perspective of the level of agricultural mechanization, although the average tractor use per 1,000 hectares of cultivated land in China and India is significantly higher than that in Russia and Brazil, the productivity level is still relatively low. As for the reason, it may be due to the small scale of agricultural operations in China

1

Russia actively promotes the privatization of agricultural land, allowing farmers to form private family farms, and the issue of agricultural land transfer has been preliminarily solved, and large-scale agriculture is constantly developing. 2 Brazilian agriculture operates cooperative-based industrialization with export-oriented characteristics.

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Table 1 Scale operation agricultural industrialization and agricultural development from the perspective of efficiency Average arable land area of agricultural economically active population (Hectares/person)

Average tractor usage per thousand hectares of arable land (Number/thousand hectares)

Agricultural labor Agricultural productivity business mode (Per capita value added of agricultural workers, calculated at constant 2010 US dollars)

China

0.5931

6.9

1465.44

Family contract

India

0.77588

3

1156.21

Farmer Management

Russia

25.2599

0.7

11,540.05

Modern farm

Brazil

5.2321

0.8

11,149.67

Family farm

Source Calculated from the original data of the “Brics Joint Statistical Manual (2015)”, where agricultural labor productivity is calculated by combining agricultural added value and agricultural economic activity population indicators

and India, and the lack of conditions for the extension and application of advanced agricultural machinery and equipment (Table 1). Second is the scale operation, agricultural industrialization, and agricultural development from an income perspective. It is an important path for agricultural industrialization in large developing countries to promote the significant improvement of the agricultural output level through the effective accumulation of material capital and human capital while raising the income level of farmers. This is the premise underlying the realization of this path. Under the condition of insufficient cultivated land occupied by farmers, even if the output level per unit of cultivated land is increased, the total output and total income of farmers cannot be improved, and it is not conducive to the effective accumulation of material capital at the same time. In addition, to expand income channels, a large number of young and middle-aged laborers in rural areas are transferred to non-agricultural industries, which leads to the loss of agricultural human resources and the decline of human capital, which is not conducive to the effective accumulation of human capital. As far as the “quantity” is concerned, the moderate scale of operation makes the total output level of the peasant household increase under the condition of the unit output unchanged, and the income level also increases accordingly. As far as “quality” is concerned, a moderate scale of operation makes the level of mechanization and science and technology in agricultural production increase, with the efficiency of agricultural production, the level of agricultural output, and the income level of farmers increasing accordingly under the effect of scale economy. At the same time, with the application of advanced agricultural technology in agricultural production, the quality of agricultural products is better, the added value of products is higher, the market competitiveness is stronger, and the income level of farmers is also improved (Lei 2013). In addition, with the increase of farmers’ income level, farmers are more willing to purchase advanced equipment to optimize the mode of agricultural production, at the same

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time, and to improve the level of human capital and management through education and training, which will be conducive to the improvement of the level of agricultural industrialization. Table 2 shows that for Russia and Brazil, where modern farm and family farm patterns are carried out, the level of agricultural output is relatively high, with an average annual grain production of 21.8919 tons and 7.1481 tons for the economically active agricultural population, respectively. The agricultural products exported to countries overseas sell well and are influential in the international market. The agricultural products exports and raw material exports account for 2.15% and 4.70% respectively in the total exports of goods. For China and India, where householdcontracted and peasant household models are implemented, the level of agricultural output is relatively low, with an average annual grain production of 2.4452 tons and 1.1625 tons for the economically active agricultural population, respectively. The competitiveness of their agricultural products in the international market is relatively low, and the proportion of agricultural raw materials exported to the total export of goods is 0.40% and 1.53% respectively. This confirms the previous analysis that agricultural scale operation can effectively enhance the agricultural output level and the competitiveness of agricultural products, and then enhance the income level of farmers. Based on the above analysis, the following two hypotheses can be proposed: Hypothesis 1 For large developing countries, moderate scale operation can promote agricultural industrialization through the substitution of a modern high-efficiency agricultural production mode for the traditional production mode, and then improve the production efficiency of agriculture. Hypothesis 2 For large developing countries, moderate scale operation can promote agricultural industrialization by increasing the level of agricultural output and the competitiveness of agricultural products, and then improve the per capita income level of farmers. Table 2 Scale operation and agricultural industrialization and agricultural development from the perspective of income level Average arable land area of agricultural economically active population (Hectare/person)

Average annual cereal output of agricultural economically active population (Ton/person)

The proportion of agricultural raw material exports in total exports of goods (%)

Agricultural business mode

China

0.5931

2.4452

0.4

Family contract

India

0.77588

1.1625

1.53

Farmer Management

Russia

25.2599

21.8919

2.15

Modern farm

Brazil

5.2321

7.1481

4.7

Family farm

Source Calculated from the raw data of the《Brics Joint Statistical Manual (2015)》

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5 Economic Transformation of Developing Countries

Empirical Test Empirical test of scale operation affecting agricultural production efficiency Variable selection and model construction

Predicted variable: Agricultural Production Efficiency (agp). This section measures agricultural production efficiency by the per capita value-added value of agricultural workers (in constant US dollars in 2010). The greater the value of this indicator, the more output per unit of the agricultural economically active population, that is, the stronger the agricultural production efficiency. The data comes from the World Bank database. Explanatory variables: ➀ Agricultural scale management (scm). Agricultural scale operation refers to the number of business objects (such as arable land area) that each agricultural labor force undertakes under the premise of ensuring an increase in land productivity. It is adaptable to local social, economic, scientific, and technological development. Based on this, this section measures the “amount of agricultural land managed by a single agricultural economically active population” indicator. The higher the value of this indicator, the higher the level of agricultural scale operation. ➁ Industrial Structure (ids). This section measures it with the ratio of agricultural added value to GDP (%). The higher the value of this indicator, the higher the contribution of agriculture to the country’s economic output, and the higher the importance attached to agriculture. ➂ National Agricultural Territory (nat). This section measures it with the ratio of agricultural land to land area (%). The higher the value of this indicator, the richer the agricultural land resources in the country. ➃ Grain Relying Dependence (grd). This section measures it with the ratio of agricultural raw materials imports to goods imports (%). The higher the value of this indicator, the higher the country’s proportion of agricultural imports, and the higher the dependency of agricultural production. The above-mentioned indicator data comes from the processing of the original data of the World Bank database. The empirical sample is panel data from China, India, Russia, and Brazil from 2000 to 2015. To eliminate unit differences and possible heteroscedasticity of indicators, the authors have performed logarithmic processing on each indicator. According to the above theoretical analysis, the regression model of the empirical test is constructed as follows: ln(agp) = β0 + β1 ln(scm) + β2 ln(ids) + β3 ln(nat) + β4 ln(gr d) + u t

(1)

In this model, βi are the coefficient of the first variable and u t is the disturbance term. To verify the difference in the effects of scale operation in different stages of agricultural industrialization, this section performs a quantile regression analysis, a method put forward by Koenker and Bassett (1978). This method is mainly used to estimate the linear relationship between a set of independent variables X and the dependent variable Y at different quantiles between (0, 1). The calculation of quantile regression estimates is based on the minimum of the absolute value of residuals of an asymmetric form. Assume that the overall q quantile yq (x) of the conditional

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 distribution y x is a linear function of x, that is: yq (x) = xi βq

(2)

Among them, βq is the estimated coefficient under the condition of q quantile, and its estimator βq can be defined by the following minimization problem: 

min βq

n 

q|yi − xi βq | +

i:yi ≥xi βq

n 

(1 − q)|yi − xi βq |

(3)

i:yi B, the √ parameters of the enterprise’s technological capabilities meet 30r /4 ≤ M ≤ 2r , the enterprise should adopt the technology catching up mode of imitation innovation. In fact, √the √ no matter what initial marginal cost of the enterprise is, if the parameters meet 30r /4 ≤ M ≤ 2r , enterprises should adopt the technology √ catch-up mode√of imitating innovation. When the parameters meet 0 < M < 30r /4 or M > 2r , enterprises should adopt indigenous innovation to catch up (see Fig. 3). (2)

The comparison between imitation innovation and cooperative innovation

According to the comparison results, we can get Proposition 2.  √ 9r −21rβ+15rβ 2 −3r 36−120β+232β 2 −140β 3 +25β 4 Proposition 2 When 0 ≤ M ≤ the 4(−2β+β 2 ) enterprise focuses on imitative innovation and in other cases cooperative innovation.  √ 9r −21rβ+15rβ 2 −3r 36−120β+232β 2 −140β 3 +25β 4 , then imitative innovation Set N1 = 4(−2β+β 2 ) and cooperative innovation can be shown in Fig. 4. (3)

The comparison between cooperative innovation and indigenous innovation

According to the calculation result, we can get Proposition 3: √ √ √ Proposition 3 When M > 3 2r /2 or 3r /2 < M < 3 r /2, the enterprise should adopt the mode of indigenous innovation to reduce the R & D investment and ensure that the enterprise has sufficient factors to invest in technology catch-up. When 5

In order to save space, the calculation process is omitted, and the comparison results are given directly here.

2 From Imitating Innovation to Indigenous Innovation

319

N1

 imitative innovation

cooperative innovation

Fig. 4 Comparison of R&D investment between imitative innovation and cooperative innovation

0

cooperative innovation

cooperative innovation

Indigenous innovation

indigenous innovation

Fig. 5 Comparison of R & D investment between indigenous innovation and cooperative innovation

√ the √ enterprise’s technological capabilities is 0 < M ≤ 3r /2 or √ parameters of the 3 r /2 ≤ M ≤ 3 2r /2, the mode of cooperative innovation should be taken to maximize the profits of the enterprise (see Fig. 5). To make a comprehensive comparison, we need to consider several critical values now. In in imitative innovation and cooperative innovation,  comparing investment √ 9r −21rβ+15rβ 2 −3r 36−120β+232β 2 −140β 3 +25β 4 , as 0 ≤ β ≤ 1, we set. N1 = 4(−2β+β 2 ) 2 3 4 ∂K K = 36 − 120β + 232β − 140β + 25β , ∂β = −120 + 464β − 420β 2 + 100β 3 , ∂K2 ∂2β

√ 21− 93 ∂ K 2 , ∂ 2 β ≥ 0, ∂∂βK is an 15 √ 21− 93 , ∂∂βK > 0. In other words, 15

= 464 − 840β + 300β 2 . Then, if 0 ≤ β ≤

increasing function; if β = 0,

∂K ∂β

< 0; if β = √

there must be a point β0 between 0 and 21−15 93 that is the intersection point with the horizontal axis. In this case, if 0 ≤ β ≤ β0 , ∂∂βK < 0, K is a decreasing function, and if √ 21− 93 ∂ K , 15 √ ∂β 21− 93 Similarly, if 15
0, i.e., if β0 < β ≤ 1, K is a decreasing function. At this time, K is an increasing function. To judge the extreme value of the function K, you considerthe value at 0, β 0 , and 1. Therefore, if 0 ≤ K ≤ 36,  only need to 2 2 then 9r4−21rβ+15rβ ≤ N1 ≤ −9r4−21rβ+15rβ . And if the previous formula does not (−2β+β 2 ) (−2β+β 2 ) 2 2 hold, then N1 ≤ −9r4−21rβ+15rβ . Set U = −9r4−21rβ+15rβ . Take the derivative of (−2β+β 2 ) (−2β+β 2 ) ∂U < 0. U is a functions within radical with respect to β, and get ∂β = − 18+9β(β−2) 4β 2 (β−2) 15r decreasing function of β. When β = 1, the minimum value of U is 4 , and then N1 ≤

√

60r . 4

2

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6 Innovation Strategy of Large Developing Countries √

Proposition 4 When N1 ≤ 60r and the technological capability parameter M ≤ 4 of imitative innovation to catch up with advanced N1 , most enterprises adopt the way √ 72r technology; when N1 < M ≤ 4 , cooperative innovation is adopted to catch up with advanced technology; when M > While √ 30r 4

√ 30r 4

< N1 ≤

32r , 4

72r , 4

72r , 4

enterprises adopt the way of imitative innovation; when

innovation is adopted. When √

√

36r , 4

36r 4

< N1 ≤

√

60r 4

√ 72r , 4

indigenous

and the technological capability

most enterprises adopt imitative innovation; when

M ≤ N1 , cooperative innovation is adopted; when M > is adopted.

√ 36r 4