Social Sciences in China

Vol. 34, No. 3, 2013

“Double Surplus,” Capability Gaps and Innovation: A Macro- and a Micro-perspective on the Transformation of the Chinese Mode of Economic Development

(Abstract)

Lu Feng and Yu Yongding

In order to deploy the crucial levers in the transformation of the Chinese mode of economic development, it is necessary to identify the nature and reasons for the economy’s existing mode of operation. The paradox of China’s “double surplus” in the international balance of payments reflects the substantive issue of the appearance of a capability gap in Chinese economic development, which, interacting with dependence on FDI, hinders industry upgrading. As a result, the extensive mode of development has persisted and even worsened, rendering the Chinese economy more vulnerable to external shocks. At the historic juncture when the international economic environment is undergoing dramatic changes, the Chinese economy is likely to suffer severe setbacks due to its capability gap and dependence on FDI unless there is substantial development in its technological and organizational capacities and institution-building. Therefore, the critical variable in transforming the Chinese mode of economic development is capability growth.