Since its reform and opening, China has impressed the world with a relatively successful transition to a market economy. A number of sectors, however, are still struggling to operate according to market principles. Of these, the electric power sector stands out as an important case. 1 Since the 1980s, China has carried out an impressive array of reforms in the power sector, aiming to introduce competition, enhance industry efficiency and establish an "orderly and open electricity market". 2 Reforms have diversified investment sources, separated power generation from transmission and created an independent regulator and an electricity exchange center. These policies seem to have demonstrated the central government's determination to push forward fundamental changes. They have also been carried out in a sequence that followed the standard model in other countries. 3 The actual results of the reform, however, have been meager. The sector remains largely monopolistic, and the goal of introducing market competition is far from being realized. Many of the other targeted problems-such as electricity shortages, rampant corruption and substantial losses of state assets-have remained unsolved or have even worsened.

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 (MNCs) 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.

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A rich literature has noted political business cycles in democracies. We argue that in an autocracy with strong bureaucratic institutions, the pressure of evaluation and promotion has also generated political cycles of tax-break policies. Furthermore, the timing and content of the evaluation have driven leaders to use tax breaks strategically to build economic performance, producing distributional consequences. Combining panel data of 1,510,153 firm-year observations, city-leader data from 1995 to 2007, and field interviews, we find that the tax-break rates dropped for most firms during mayors' turnover years. In the first year of office, that is, the "busy year," mayors needed to prioritize large firms and especially large foreign firms. Small domestic private firms bore the cost of tenure cycles. In the last year of the mayors' tenure, that is, the "dust-settled" year, there was little incentive to seek promotion, and even important firms could not gain the mayors' attention.

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