This chapter points out the “seedbed effect” of the low-end part of China’s domestic market on Chinese indigenous firms in the process of accumulating technological capabilities and catching up to the superior foreign multinational brands. The scattered nature of China’s industrial organization – for example, the large number of new entrants into the competition, scattered market shares among homogeneous firms (brands) and spot-type short-term transactions among firms – has been widely explained from the viewpoint of supply-side factors, such as technological backwardness, immaturity regarding market economy norms and supportive roles of governments, etc. (Ohara 2001; Marukawa 2007; Kimura 2011; Ohara and Lin 2011). In contrast, this chapter focuses on the demand-side factors, namely, stratification of the domestic market, to explain the scattered nature of industrial development in contemporary China. In various industries in China, a large number of firms with homogeneous technological capabilities compete, which leads to harsh price competition (Ohara and Lin 2011). One of the main factors that we believe has brought about such a situation is the multiplicity of the domestic market. China’s domestic market has not perfectly integrated into a homogeneous national market but is still constituted by geographically and vertically different markets. Since different sets of firms/brands compete in each of the different submarkets, when observed at a national level, the image of highly scattered-type competition and industrial organization emerges.
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