After many years of working on China, I can still be surprised by just how big it is. It’s simple to say “China is huge,” but harder to really think through what it means. Nonetheless, a lot of people seem to think that size does not matter in any fundamental sense–the example I have in mind is the gent who years ago told me that “China is just Japan 20 years later and 10 times bigger,” which in fact is a surprisingly powerful rule of thumb. But I have to say that I suspect that some things do work differently in China because of its size, and that this is not well understood because we have no comparable examples to work with. We might call this the view, sometimes attributed to Stalin, that “quantity has a quality all its own.”

This question came to mind again after I read some interesting comments in a recent paper by the excellent Carsten Holz, the world’s foremost expert on Chinese statistics as well as a generally very thoughtful guy. The paper is not mostly about this question of size but he discusses it in passing:

China’s size is a new phenomenon in the study of developing economies. South Korea tried to develop a broad industrial base but soon began to specialize. Taiwan quickly abandoned plans for broad-based economic growth and focused on developing areas of comparative advantage, in many instances serving niche markets around the world. However, for China there are as yet no signs of significant specialization.

Across virtually all industries in China, the optimal firm size—the firm size with lowest per-unit production costs—is below market demand. I.e., there is sufficient market demand in every sector of the economy for several firms to co-exist and compete. The prospect of historically unprecedented domestic market size may yet lead to innovations in optimal firm size at lower per-unit production costs than hitherto experienced around the world.

Viewed from an international perspective, focusing on comparative advantage makes little sense for China: world demand may simply not be big enough to support any substantial degree of specialization in China. For example, for some electronics products China may already be the dominant world supplier, without, however, the electronics manufacturing industry dominating the Chinese manufacturing sector. In this case, world demand has driven specialization in production by China, except that in the Chinese economy the resulting degree of specialization is barely noticeable. As a result, one can expect to see ongoing investment across virtually every sector of the Chinese economy.

I found this a very striking idea, as one of the (many) things about China’s economy that has puzzled me in recent years is the apparent lack of specialization in its exports. There was fairly dramatic structural change in China’s exports up until about 2007, but since then the export structure has been largely stable. Exports have been growing, and China’s global market share has been rising until very recently. So China has generally been steadily becoming a more successful exporter. But as this has happened it has not shown much sign of becoming more specialized in particular types of products, which is usually one of the things that happens in countries that are successful exporters.

I had speculated that global demand was a limiting factor here: in the aftermath of the financial crisis, global demand for the kinds of things that China wants to specialize in–capital goods and equipment–has probably not expanded rapidly enough for China to have exported a lot more of those goods. But perhaps, as Carsten suggests, the issue is more fundamental, and one we have not really encountered before: China’s export industries might already large enough, relative to total world demand, that even a very successful export performance will not show up as much specialization. This is one to ponder further.

Update. Here is a more precise measure of export specialization — a simple Herfindahl-Hirschman index of concentration, calculated at the 4-digit HS level (it’s the sum of the squares of the share of each product in the total). This actually shows export concentration has been bouncing around in a range since around 2003-04, so it looks less like a cyclical post-crisis phenomenon.