Abstract

Over the past two decades, China has launched a nationwide endeavor to push domestic firms up the value chain. This article explores why, in some localities, Chinese firms had significant success in upgrading, while in other localities, firms were paradoxically trapped in a race-to-the-bottom competition. Drawing on national economic census data, a firm-level survey, and in-depth interviews, the article conducts a controlled comparison of China’s largest electronics manufacturing bases in the Yangtze and the Pearl River Deltas. It argues that the local government’s choice of global business allies shaped the upgrading behavior of domestic firms. When local governments allied with large multinational corporations at the top of the value chain, they reinforced the hierarchical structure of production, shrank the upgrading space for domestic firms, and squeezed them to the bottom of the value chain. In contrast, alliances with small foreign invested firms at the bottom helped break the hierarchical segregation and held more potential for local learning and innovation. The article sheds new light on the question of when industrial policies succeed or fail to facilitate domestic upgrading in a globalized era.