The development of China's solar photovoltaic industry: why industrial policy failed

This article studies China's central-local government relations in the formation and implementation of an industry policy. In China, the central government is responsible for policy formation and the local governments are responsible for policy implementation, where local governments are allowed ample flexibility in the ways to achieve the policy mandate. This arrangement is conducive to local competition, but there is no built-in mechanism in the system to regulate such competition. The system is defective in the execution of an industrial policy in that it fails to discipline the recipients of policy favours and to make efficient exit selections. Because local competition involves policy resources as well as economic resources, the outcome of competition is not necessarily consistent with the comparative advantage of the region. The more that policy is emphasised in industrial development, the more that competition tends to favour large and rich cities. After a certain period of hands-off local competition, the timing of which is unpredictable but will come when the industry runs into troubles, the central government holds the ultimate power to determine the winners. The central government typically picks the 'large and strong' firms as the winners, which are crowned as a national team and became eligible for further policy support. This institutional set-up produces a rapidly growing industry, which often results in over-capacity but not necessarily a competitive industry. I use the case of China's solar photovoltaic industry to illustrate these points.