China Attempts to Leverage Its Private Sector to Increase Its Military Might

The People’s Liberation Army (PLA) is racing to develop command, control, communication, computerization, information, surveillance and recognition (C4ISR) capabilities.  China’s defense budget, currently $115 billion, has increased at a double-digit rate for the past 15 years.2  However, China is facing three key challenges in modernizing its military.  First, China’s policy-makers are seeking to remove historical barriers between civilian and military industries.  Technologies that can be used for both civilian and defense economies, known as “dual use” technology, are at the heart of this effort.  Second, China is employing market-driven management concepts in their modernization program.   Since the late 1970s, China’s industrial sector, both civilian and military, has been structured into rigid hierarchical organizations.  Such vertically-structured silos largely or entirely restrict the flow of information within the organization to up-down lines of control, inhibiting or preventing cross-organizational communication and thus cross-fertilization and sharing.  Finally, China is struggling to develop environments that enable innovation.  The lack of both cross-fertilization and a competitive contract environment has a deleterious effect on innovation, including integration of technologies into increasingly large, complex, information-based systems.

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A Shenyang J-15 fighter takes off from the Liaoning aircraft carrier.

Military-Civilian Barriers

At the 18th Party Congress in October 2012, China’s leaders continued to promote “military-civilian integration” as a core component of the country’s military development strategy.  China’s leaders believe this integration will help China continue its rapid defense modernization without creating too great a drag on its economy.Deeply-rooted barriers, redundancies, and incompatibilities between the military and civilian sectors have yet to be resolved before this integration can occur.

The EU Council on Foreign Relations reports that, “Since the Cultural Revolution, the People’s Liberation Army (PLA) has acquired civilian industries, which it has helped to protect in stormy times, and which have become a source of profits for the military.” However, “Beginning in the 1980s, streamlining the arms industry entailed converting some military firms to civilian production.  Dual use development  has provided an indirect way to acquire foreign technologies, which could eventually be transferred to weapons production.”1 Dual use technologies include information technology, microelectronics, aerospace, and other commercial technologies that can be adopted for military purposes.

Technological trade with China, however, presents significant security risks for China’s advanced trading partners, such as the U.S., Japan and Europe.  Adam Segal of the Council for Foreign Relations has stated that the U.S. Defense Department also relies “increasingly on the U.S. commercial advanced technology sector to push the technological envelope and enable the Department to ‘run faster’ than its competitors.”  Thus U.S. national security is also tied “to the same global process of innovation through global competition and integration that indirectly contributes to the improvement of Chinese military capabilities.”2


Traditionally, the Chinese defense sector has been afflicted with some of the worst pathologies of the state-owned, centrally-planned economy:  low productivity, overcapacity, a lack of understanding of final markets, a dearth of management skills, and technological backwardness.2  China’s industrial sector has always been, from its socialist origins, a collection of vertical silos that do not allow for systems integration and competitive management. This is especially true of the defense industries.  Chinese leaders now believe that the barriers between industry sectors will need to be broken down to fulfil the need for informatised defense.  China has eleven industrial conglomerates in this model. They are “huge, vertically integrated behemoths that have a near monopoly control of the domestic defense market.”3  They also have a diverse set of strengths and weaknesses. Their strengths are that they have enormous experience and expertise in conducting defense work, they have strong ties to the military, and they have a well-established R&D base. Weaknesses, however, include an uneven track record of technological success, institutional cultures that are rooted in central planning and an “overwhelming focus on industrial era practices and processes” (e.g. heavy industry) that are not suited to developing or manufacturing information age military products.3


China does not have a robust system for indigenous innovation that could give it a competitive advantage in defense technology.  It lacks incentives for communication and cooperation between civilian and defense industries.  Even though a market economy now exists in China, its defense sector remains sheltered from market pressures.  Innovation requires competition and competition can be more effectively employed by a market economy.

In his book, “Fortifying China: The Struggle to Build a Modern Defense Economy” 3, Tai Ming Cheung, director of the Institute on Global Conflict and Cooperation (IGCC) at UC San Diego, poses the following question as to whether technological innovation can flourish in an authoritarian system:  “Is there a fundamental incompatibility between China’s efforts to be a world leader in technological innovation and its maintenance of a restrictive, authoritarian political system?” In particular, Cheung wonders if “the absence of a robust and independent legal system, highly controlled flows of information and knowledge within society and lack of encouragement of pluralism that would allow for greater autonomy and self-governance with the Science and Technology community” would doom this strategy from the outset.


The Chinese government has prioritized military-civilian integration, but implementation remains a work in progress.  Integration is hampered by China’s closed, vertically integrated military model that has limited potential for achieving major gains in its efforts to modernize its military.  China must overcome additional hurdles with respect to international dual use trade restrictions, as well as with its rigid management structures and lack of an effective environment to foster indigenous innovation.  Given the challenges it faces, it is reasonable to expect that the pace of innovation will be gradual at best.  Such a slow pace could provide additional incentives for China to steal the intellectual property of other countries.  China is the world’s largest source of IP theft.4  In addition to hundreds of billions of dollars of loss to the IP owners, theft of intellectual property is undermining both the means and the incentive for entrepreneurs to innovate, which will slow the development of new inventions and industries that can further expand the world economy and continue to raise the prosperity and quality of life for everyone.


  1. Godement, Francois, Kratz, Agatha, Lafferty, Brian, Puig, Emmanuel.  “The Reform of China’s Defence Economy.” EU Council on Foreign Relations.
  2. Segal, Adam. “New China Worries.” International Economy Magazine, Fall 2007.
  3. Cheung, Tai Ming. “Fortifying China: The Struggle to Build a Modern Defense Economy”, Cornell University Press, August 2013.
  4. “The IP Commission Report.” 2013.


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