6 Making Industries Innovative
Although some research suggests that the optimal economic size of a Chinese city is reached when its population is in the region of 5 million (Au and Henderson 2006a), other findings indicate that well-managed cities can continue growing in size without encountering decreasing returns. In fact, Overman and Venables (2005) observe that, for a city, being too small is more of a disadvantage than being too large. The implication is that both Beijing and Shanghai have ample scope for exploiting the productivity-enhancing benefits of scale and agglomeration economies.1 Shanghai may be further advantaged because it is a remarkably industrial city. The share of manufacturing in gross domestic product (GDP) is twice that of Beijing, four times greater than that of Tokyo, and six times that of New York. Even 40 years ago, manufacturing industries generated no more than one-quarter of Tokyo’s GDP and one-fifth of New York’s GDP. Shanghai’s manufacturing sector, moreover, is highly diversified—much more so than that of Beijing. Of the top six manufacturing subsectors, four comprise equipment of various kinds: general, communications, electronics, and transportation. If to these are added special-purpose equipment and instruments and office equipment, the six subsectors account for 55 percent of industrial GDP. Metallurgical and chemical industries together contribute 25 percent of the output, and industries producing textiles, food, furniture, paper, and plastic and wood products make up the rest. The strong export orientation of the leading industries is a good indicator of their competitiveness. With this product mix and industrial diversity, Shanghai can reap the benefits of urbanization economies as well as the advantages accruing from a strong focus on industries producing complex 1
This is especially so because the population density is also high, and agglomeration economies—specifically the induced accumulation of human capital—are particularly beneficial at earlier stages of development (Brülhart and Sbergami 2009). In addition, Shanghai has the advantage of its location at close to the midpoint of China’s coastline (H. Lu 2004). 137