Can a closed internet be good industrial policy?

The latest round in the seemingly inexorable tightening of restrictions on internet use in China has gotten a lot of press coverage. And indeed, the mass of mechanisms blocking internet users in China from many major global sites and services, collectively known as the “Great Firewall,” hits people like me and foreign journalists hard, since we are physically located in China but have to stay linked to the outside world for professional reasons. It’s a terrible situation that keeps getting worse. While I could complain more about this, I’d rather try to think through some of the questions it raises. The spark for this is some recent Chinese statements justifying the internet controls, not for the usual political and moral reasons, but for economic ones–that they helped create China’s very large and successful internet companies.

The idea that Chinese internet companies are only successful because they can hide behind trade barriers is a pretty common view among foreigners here: how could a Chinese search engine out-compete Google if Google was not blocked? But most of my friends who work in the Chinese internet industry have always dismissed this line as uninformed, biased Western propaganda. They tend to say that the big American internet companies lost the China market because of their own mistakes. I’m a lot more sympathetic to this view than I used to be; my company has published detailed profiles of Alibaba and Tencent (sorry, subscribers only), and their history definitely supports the idea that these firms are successful because they came up with unique services that worked very well in China. People who don’t understand those companies, in my experience, consistently under-estimate how much business-model innovation they have done; in fact Alibaba and Tencent do not do at all the same thing as Google/Facebook/whoever. So it’s funny to see some quasi-official voices now coming out to say, in essence, those critics were right and in fact our internet companies do depend on market barriers erected by government policy.

Here are the two sources for this. Wen Ku, an official at the Ministry of Industry and Information Technology, had to answer a question at a press conference about the tightening of internet restrictions, and came pretty close to saying that can be justified because of how they help domestic companies (my translation):

In China, the Internet sector has developed very well, some good companies have growth rates of around 40-50%. Everyone can see Alibaba’s achievement in getting listed in the US. All of this comes from the Chinese government ensuring there is a good policy environment for the development of internet companies. Internet development in China must be in accord with China’s laws and regulations, and any unhealthy information should be managed according to Chinese laws.

In case those bureaucratic circumlocutions did not get the point across, the Global Times newspaper, a reliable purveyor of nationalist screeds, then made the claim much more directly in an editorial (again, my translation from the Chinese):

China’s Great Firewall is in fact a success, it has created the reality of China’s internet development today. China has produced network giants like BAT (Baidu-Alibaba-Tencent), they fulfill the vast majority of Chinese internet users’ needs, and are even expanding abroad. This is possibly an unintended consequence of the Great Firewall. If there was not this kind of management, then China today would perhaps be dominated by “Google China”, “Yahoo China” and “Facebook China”.

So here’s the big question: are these folks right? Is blocking global internet companies from offering all their services in China actually a good industrial policy, that is justified because it helps foster Chinese internet companies? And would this in turn mean that the Great Firewall, paradoxically, allows for more innovation and competition in the internet globally, because it is not dominated by an American oligopoly? I think this worth actually thinking about rather than dismissing out of hand. As much as I would like to be able to use my Gmail more easily, it’s not obviously the case that everyone in China would be better off if there was in fact no big domestic internet sector and everyone just used Google.

In essence the argument seems to be one for import-substituting industrial policies; by blocking the import of various internet services, China can create domestic companies and jobs that otherwise would not exist. Yet I do not think this argument is correct, and the reasons go back to the same ones that led import substitution policies to often fail in other industries and other countries. As my old colleague Joe Studwell showed very clearly in his book How Asia Works, the industrial policies that have been successful in Asia have in fact not been about blocking imports; instead, they encourage exports.

Blocking imports typically does not do much to encourage domestic companies to raise their game and improve technology. Particularly in lower-income countries, domestic markets are often small and underdeveloped, and are easily dominated by local tycoons or oligopolies that can turn policy and regulators to their advantage. Rather than increasing competition, import substitution reduces it, and lowers the incentive for domestic companies to meet or match the global technological level–they don’t have to, because they a captive market. So instead of giving domestic companies a free ride, good industrial policies force them to go out and compete in the global marketplace, where they can’t survive solely on the favoritism of regulators and have to adapt and innovate.

This is not to say that some Chinese internet companies do not prosper because of the government’s barriers; there is a whole sub-industry of companies offering local equivalents of global internet services. But it would be a mistake for the Chinese government to think that because they have both 1) some large successful internet companies, and 2) the Great Firewall, that having more of 2) means they will also get more of 1). The history and logic of industrial policy suggests they will not. A better course, again based on parallels with industrial policy for other sectors, might be to reward internet companies that are successful in selling their services outside of China. Though there is probably not much actual need for the government to do this, given the enormous slums sloshing around in venture-capital funds looking for the next big thing in the Chinese internet.

Ultimately, though, I doubt economic or industrial-policy motivations are really behind the policy of restricting access to the global internet, so I wouldn’t expect these criticisms (even when articulated by someone more influential than me) to have much effect. The politics are much more important.

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