How the "Hefei Model" Work in Chinese County-Level Economies

Transforming Local Industries When Big City Strategies Meet Rural Realities

Hello, my readers, for this week, let’s go through an article discussing Chinese industrial policy at the county level.

China's extensive network of industrial clusters has emerged from a combination of market forces, natural resource distribution, and coordinated investment attraction efforts by local governments across different administrative levels. The Hefei model exemplifies this approach. The municipal government of Hefei (Anhui Province) has established government-guided funds and industrial investment platforms, complemented by preferential policies for land use, taxation, and other incentives, to strategically attract and invest in high-tech enterprises and projects. Importantly, these initiatives don't operate in isolation—they're deliberately integrated into complete industrial chain ecosystems that encompass both upstream and downstream sectors.

More about Chinese industrial policies:

Having witnessed Hefei's success, many local governments are eager to replicate this model. However, a fundamental problem exists: not every county can feasibly produce electric vehicles. The Hefei Model requires substantial capital investment (Hefei is the capital city of Anhui province) and depends on identifying clear industrial chains, conditions that don't align with most counties' realities.

In their article How the 'Hefei Model' Can Be Embedded in County-Level Economies “合肥模式” 如何嵌入县域经济, Professors Song Lei and Sun Xiaodong analyze how this highly successful approach from a provincial capital can be effectively adapted to smaller county economies. The authors argue that simply transplanting the model is problematic. Instead, they highlight Taihe County's pharmaceutical industry as a case study of successful "dual embedding"—incorporating the investment-led attraction strategy of the Hefei Model into local policy frameworks while carefully controlling fiscal risks, and simultaneously integrating external enterprises into existing local economic networks.

Taihe's transformation of its pharmaceutical industry from sales-dominated to a fully integrated R&D-manufacturing-sales ecosystem demonstrates that county governments with limited resources should adapt provincial-level industrial policies to their unique economic conditions and industrial foundations, rather than pursuing unrealistic high-tech ambitions disconnected from local realities.

Professor Song teaches at the School of Government of Peking University. His research focuses on government-business relations and industrial strategies from a comparative political economy perspective, economic democracy, and strategic management of public organizations. His recent work examines the differentiation and integration of political-commercial relations and government-business relations in developmental state theory. With the kind authorization of Professor Song and

Beijing Cultural Review

, I am able to translate and present the complete article to my readers.

Professor Song Lei

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How the "Hefei Model" Can Be Embedded in County-Level Economies

Economic historians have summarized the characteristics of industrialization in late-developing countries as follows: "When a backward country finally launches industrialization, its industrialization process will show considerable differences compared to more advanced countries... These differences in the characteristics and speed of industrial development are largely the result of various institutional means, which rarely or never existed in already industrialized countries." From the context, these institutional means primarily refer to economic policies. Therefore, this argument contains an important but overlooked hypothesis: successful catching-up processes must be accompanied by economic policy innovation. In fact, this hypothesis has been verified by the policy histories of successfully catching-up late-developing powers such as the United States, Germany, and Japan. Thus, we have reason to infer that in contemporary China, the most successful late-developing large country, there should also exist economic policies with originality.

In China, if attracting investment can be considered an early representative of original policy practice, then government-guided funds represent a typical recent example. Notably, these two approaches have shown a trend of integration in recent years: various government-guided funds are becoming important measures for attracting investment. Generally speaking, the Hefei model represents this trend and has already become a model that many local governments are emulating.

With the establishment of multiple star projects that have developed well, the Hefei municipal government's approach of attracting investment through government-guided funds or public capital has gained widespread attention and has been summarized as the "Hefei Model." Undeniably, this model has improved the local development level and changed development expectations across various sectors. Therefore, at a time when industrial transformation and upgrading are urgently needed, the Hefei model is indeed worth studying and promoting.

Against this background, the Hefei model has naturally inspired imitation. However, it is necessary to note two important phenomena in this wave of imitation: First, the results of imitation have been mixed; second, many county-level governments have joined the ranks of imitators. Regarding the first phenomenon, the Hefei model is not universally successful in all regions, which suggests that our understanding of its essence may not be sufficient. A prerequisite for promoting this model is a comprehensive understanding of its essence. Regarding the second phenomenon, applying practices aimed at strategic industries from provincial capital cities with strong fiscal resources and administrative capabilities to county-level economies with weak economic foundations, enormous fiscal pressures, and predominantly traditional industries may carry risks. These two phenomena reflect issues that can be summarized as the essence of the Hefei model and the localization of the Hefei model.

Endogenous Investment-Led Attraction Targeting Key Nodes: The Essence of the Hefei Model

Research on the Hefei model mostly begins by "telling the story" of how the locality successfully introduced large-scale projects multiple times, and then summarizes the key points of the related practices. The common denominator of these summaries has three points:

First, Hefei's investment attraction is not conducted randomly but relies on the locality's existing industrial structure. For example, the "chip-panel-car-AI" four major industries frequently mentioned in previous research all have close connections with Hefei's existing leading industries such as consumer electronics and automobiles: BOE's LCD panels and ChangXin's integrated chips can find users in Hefei's television and automobile enterprises; Hefei's existing automobile industry cluster helps newly-entered NIO improve its competitiveness; and the integration of artificial intelligence and modern manufacturing can rely on the support of local high-tech enterprises such as iFLYTEK.

Second, the three major state-owned investment and financing platforms—Xingtai, Jiantou, and Chantou—play a leading role in state-owned capital, emphasize exit mechanisms, and achieve sustainable investment.

Third, there are comprehensive risk control mechanisms and strict review procedures.

These three points are indeed Hefei's characteristics. However, these characteristics are summaries of the content of Hefei's related work and may not fully reveal the essence of the Hefei model. This summary finds it difficult to address the following questions: Why did the lean investment team and strict approval procedures fail to prevent failed investments in shipbuilding and pharmaceutical industries? How should imitators of the Hefei model avoid risks as much as possible? These questions obviously cannot be obscured by the statement that "venture or creative investment cannot be 100% successful."

In a provincial capital city that is not in a developed region, the achievement of creating multiple brand-new industries through innovative investment mechanisms is enough to give the Hefei model an important position in policy history. However, in the presence of failed cases, we need to abstract the essence of the Hefei model and the key points of learning this model. Of course, there is little information about failed cases, making it difficult to complete this abstraction. Here, we follow this approach: first summarize the patterns of successful cases, and then examine whether failed cases failed due to violations of these patterns.

Looking at three successful cases of LCD panels, electric vehicles, and storage chips, generally speaking, the formation of industrial competitiveness has three key nodes: investment capacity, technological capability, and market demand. First, all three projects require large investments. Second, perhaps somewhat surprisingly to readers, the production technologies of the early products of BOE, NIO, and ChangXin Memory in Hefei were either relatively mature or low-risk, which increased the success probability of these projects. The earliest project BOE invested in Hefei was the 6th generation LCD panel line, with this technology partly purchased from South Korea. At the same time, the LCD panel industry during this period showed a clear trend of internalization, meaning that the complexity of the production process was increasingly transferred to production equipment. In industries with obvious internalization trends, the financial ability to purchase equipment largely determines production capacity. NIO's electric vehicles were mainly manufactured by local company JAC Motors. Compared to internal combustion engine vehicles, the hardware part of electric vehicles has undergone obvious modularization, significantly reducing the difficulty of the production process. On one hand, the battery pack replaces the power system of internal combustion engine vehicles, and coordinating complex power systems is the core technology of traditional internal combustion engine automobile companies; on the other hand, the chassis processing technology, which originally had high requirements for an enterprise's technological capabilities, has also been gradually simplified. Therefore, for JAC Motors, which has long-term experience in producing internal combustion engine vehicles, producing electric vehicles is not difficult. The product ChangXin Memory initially mass-produced was memory chips, which had low technological risk. Third, as previous research has emphasized, Hefei's industrial structure meant that all three projects could find demand locally.

So far, it can be found that for the three successful cases, since the technical difficulty was not very high and there was stable local demand, the main factor hindering enterprise development was enormous investment. In other words, the key node for these enterprises to form competitiveness was the ability to invest, and Hefei's policy investment institutions provided financial support for the three projects. It is in such a process that "the industrial creation function of local government" proposed by Lu Feng, who was the first to pay attention to the Hefei model, was realized.

Looking at the two failed cases of shipbuilding and pharmaceuticals, with limited information, the author does not attempt to pretend to provide original analysis. However, comparing the successful group and the failed group is still beneficial. First, both projects required huge investments. Second, the technologies involved in both projects were basically mature technologies. Third, there was market demand for both projects. From public materials, Hefei provided funds for two projects that were technologically relatively mature; the failure of the shipbuilding case stemmed from drastic changes in market demand, and the failure of the pharmaceutical case was related to the governance mechanism of the investment target.

Comparing the two groups of cases, what conclusions can be drawn? First, the innovation of the Hefei model lies in the strategic use of government funds. Second, Hefei's successful cases are concentrated in industries with huge capital demands, relatively low technological risks, and local demand. Third, a deep understanding of the competitiveness formation process of specific industries is a prerequisite for the success of related policy practices. Since the key nodes of competitiveness in different industries are not the same, even professional teams with high investment skills find it difficult to avoid failure. In other words, industry characteristics are the key factors affecting the success or failure of government-guided funds.

At the current stage, we can summarize the essence of the Hefei model as endogenous investment-led attraction targeting key nodes in the competitiveness formation process of target industries: investment-led attraction refers to the government funds promoting the entry of external enterprises in the form of venture capital; endogenous means that the products of the attracted targets have clear demand locally; targeting key nodes means that government resources target key links in the competitiveness formation process. Therefore, implementing the Hefei model requires at least strong fiscal capacity, relatively mature production technology, clear local demand, and precise industrial analysis capabilities. In this sense, the difficulty for county-level economies to imitate the Hefei model is evident.

From Transplantation to Embedding: Taihe's Practice in Localizing the Hefei Model

At the current stage, there are two pathways for localizing the Hefei model, which can be characterized as dual transplantation and dual embedding.

The purpose of government-guided funds is mainly to attract investment. In our research, we found that some local governments, in the process of imitating the Hefei model, tend to directly transplant Hefei's practices into their local policy systems and subsequently transplant the target enterprises into their localities. We summarize this localization pathway as dual transplantation. However, this approach ignores the differences between the economic conditions of provincial capital cities and county-level economies, increasing the fiscal pressure on county-level economies. At the same time, because it does not emphasize the relationship between investment targets and local industrial structures, this pathway either finds it difficult to attract external enterprises or finds that attracted external enterprises struggle to take root locally, resulting in a high probability of failure.

Fortunately, there are successful cases in the imitation of the Hefei model. These successful cases represent another pathway: while adjusting Hefei's specific practices, controlling the scale of government fund investment, and making them conform to local realities, they rely on the enterprise networks derived from local community relationships to attract external enterprises to develop stably in the locality. We summarize the characteristics of this pathway as dual embedding. Of course, this success may not be designed in advance, but gradually formed in the interaction between government and enterprises. The case of Taihe County in Anhui Province reflects how local governments transition from dual transplantation to dual embedding in the process of imitating the Hefei model.

On March 2, 2023, the front-page headline of "Anhui Daily" titled "New Approach of the Eastern China Pharmaceutical Capital" affirmed a county-level practice in the field of investment attraction. Subsequently, relevant institutions of the Anhui provincial government advocated attention to this practice across the province. The reason authoritative media reported in this way and government departments affirmed it was partly because the approach of Taihe County, the "Eastern China Pharmaceutical Capital," had a significant promoting effect on the development of the local pharmaceutical industry, and partly because the local government had developed the Hefei model in a way that suited the county's conditions.

Taihe County, located in northern Anhui with high population density and limited land, was once a national-level poor county. In 2021, the output value of the county's four pillar industries—pharmaceuticals, new energy, hair styling, and industrial filter cloth—accounted for 73.6% of the total output value of the county's above-scale industries, with the pharmaceutical industry accounting for 33.4%. For a long period after the reform and opening up, Puning City in Guangdong Province and Taihe County in Anhui Province were the two major centers of Western medicine circulation in the south and north. The pharmaceutical industries in both Puning and Taihe originated from pharmaceutical sales. Even today, pharmaceutical sales still occupy an important position in the pharmaceutical industries of both places. At the end of the last century, after the central government regulated the pharmaceutical circulation market, Taihe County's pharmaceutical industry gradually standardized and maintained its position as a core industry. However, in recent years, Taihe County's pharmaceutical industry has faced successive challenges, forcing the local government to try policy innovation.

Early pharmaceutical enterprises in Taihe County consisted of "traveling merchants" and "sedentary merchants." Locally, traveling merchants refer to sales enterprises marketing pharmaceutical products in other places, and sedentary merchants refer to wholesale enterprises operating pharmaceutical products locally. Taihe pharmaceutical merchants engaged in pharmaceutical sales across the country numbered about 100,000-150,000 at their peak. Considering that the population of Taihe County is around 1.8 million, this is an impressive number. The largest sedentary merchant was undoubtedly Anhui Huayuan Pharmaceutical Group Co., Ltd., which was transformed from the county pharmaceutical company. This company was not only the largest pharmaceutical wholesale enterprise in Anhui Province but also once ranked among the top in the country. In terms of external influence, the vast sales network meant that Taihe pharmaceutical merchants covered almost all county-level and above hospitals; in terms of internal influence, the developed pharmaceutical sales industry meant that knowledge about the pharmaceutical industry permeated the entire Taihe County. Additionally, since the 1990s, some Taihe pharmaceutical merchants who had accumulated funds through sales began to establish pharmaceutical manufacturing enterprises in other places, engaging in research and development and manufacturing.

In recent years, the challenges faced by the county's pharmaceutical enterprises are mainly changes in the business environment and market structure. If medical anti-corruption and the two-invoice system—which allows only two invoices in the sales process of pharmaceutical products, the first provided by manufacturing enterprises to sales enterprises, and the second issued by sales enterprises to hospitals—almost directly led to a decline in the profits of all pharmaceutical sales enterprises nationwide, then centralized procurement not only lowered the profits of pharmaceutical enterprises but also changed the competitive landscape of the pharmaceutical industry. It is well known that the purpose of centralized procurement is to lower drug prices by increasing buyer concentration. The rise in buyer concentration means that cost has become the focus of competition among pharmaceutical companies, and cost competition clearly favors large pharmaceutical enterprises. However, Taihe-native pharmaceutical manufacturing companies located outside the county are mostly medium-sized enterprises. Therefore, these pharmaceutical manufacturing enterprises urgently need to expand their scale to compete with large pharmaceutical enterprises. However, in the pharmaceutical industry, expanding scale is not an easy task.

During the same period, the county government also faced new challenges. On one hand, the former Taihe traveling merchants gradually took root in other regions, with their economic ties to Taihe becoming increasingly tenuous; while the sedentary merchants who had provided substantial tax revenue for the locality faced increasingly strong competition in the national market, contributing less tax revenue to the locality. On the other hand, achieving industrial transformation and upgrading, changing the locality's pharmaceutical industry from primarily sales-based to manufacturing and research and development, had become a task that the local government must accomplish.

Against this background, with the rise of the Hefei model, the local government began to attempt to attract investment through government-guided funds. In fact, there had been two government-guided funds dominated by public funds in the locality. However, due to lack of operational experience, these funds were either mainly dominated by external capital or tended to invest in other places, and neither achieved the local government's goal of developing the local pharmaceutical industry. Subsequently, the county government turned its attention to Taihe-native pharmaceutical manufacturing enterprises that had set up factories in other regions. The Taihe Baoxing Pharmaceutical Health Industrial Park, which has received recognition from provincial authoritative media and government, emerged against this backdrop.

In 2019, with the support of the county government, a pharmaceutical manufacturing enterprise established by a Taihe-native pharmaceutical merchant in another place built the Taihe Baoxing Pharmaceutical Health Industrial Park locally with self-raised funds. For this enterprise, the main purpose of building this industrial park was to transfer production capacity to the hometown, striving to develop into the "Foxconn of the pharmaceutical industry," relieving competitive pressure by expanding scale, and expanding the enterprise scale. However, for pharmaceutical manufacturing enterprises located in Taihe County, becoming a leading contract manufacturing enterprise in the pharmaceutical industry obviously presents difficulties. The turning point for the industrial park was government-enterprise interaction. The key point here is that developing the pharmaceutical manufacturing industry aligns with the county government's need to change the current status of the local pharmaceutical industry as primarily sales-based. In other words, this pharmaceutical manufacturing enterprise and the county government have aligned strategic goals. After repeated adjustments, the government and enterprise designed a new way of attracting investment according to local actual conditions. This approach both retained investment-led attraction as the core content of the Hefei model and, starting from the reality of the local tight budget, controlled the scale of public fund expenditure and investment risk as much as possible. More importantly, this approach fully utilized the true advantages of the local pharmaceutical industry, targeting the key nodes for developing a high-tech Western medicine industry in the county. By 2024, the industrial park had introduced 24 high-quality projects from Beijing, Shanghai, Chongqing, and other places, with a cumulative tax contribution exceeding 100 million yuan.

The core of this approach is the formation of three platforms—research and development, manufacturing, and sales—around the government-guided fund. Taihe County's government-guided fund makes venture investments in pharmaceutical R&D enterprises in first-tier cities, providing them with an R&D platform. If the R&D fails, the fund bears the loss; if the R&D succeeds, the pharmaceutical R&D enterprise that received the investment must transfer the production rights (known in the industry as the "B certificate") to the Taihe Baoxing Pharmaceutical Health Industrial Park, which assumes the responsibility of the manufacturing platform. The sales platform is a service platform provided by the local government for Taihe-native pharmaceutical sales enterprises. In addition to general public services and sales settlement services, sales enterprises that enter this platform and invest in the government-guided fund can enjoy priority rights to sell drugs manufactured by the industrial park.

Obviously, the government-guided fund is the key to linking the three platforms. It is in this sense that the Taihe practice contains elements of the Hefei model. However, the composition of Taihe County's government-guided fund has quite local characteristics. Taking the first fund that has been put into operation as an example, the county government's economic development zone's platform company contributed 20%, the investment and development group of Fuyang City (where Taihe County is located) contributed 10%, the industrial park operator contributed 20%, and the remaining funds came from Taihe-native pharmaceutical sales enterprises or local or external enterprises closely related to Taihe's pharmaceutical industry. Unlike the Hefei model where the government contributes a large amount, 70% of the funds in Taihe County's government-guided fund are "social capital," mainly from Taihe-native pharmaceutical manufacturing and sales enterprises. This design significantly reduces the fiscal burden on the local government.

Besides controlling the scale of contribution, the county government controls risks through three methods. First, to ensure enterprises land locally, the county government signs agreements with industrial park operating enterprises to legally guarantee that production activities take place locally. Second, the government retains veto power over specific investment projects. Investment funds consist of limited partners (LPs) and general partners (GPs). In the financial market, limited partners are the main contributors and do not participate in the specific operation of the fund; general partners contribute very little and are responsible for specific operations and investment decisions. Generally speaking, most government-guided funds hire market-oriented fund management companies to serve as general partners. Government-guided funds have the nature of venture capital, and their operation involves risks. The general partners who actually manage the funds can completely use this nature to "seek rent," because venture investments cannot or need not be 100% successful, making it difficult to hold such "rent-seeking" behavior accountable. In practice, many government-guided funds have experienced related problems. For county-level economies with tight budgets, such risks that are difficult to hold accountable are unbearable. To reduce risk, the Taihe County government invited the fund management company belonging to the Fuyang City government, as the superior government, to contribute 1% and serve as one of the two general partners of Taihe County's pharmaceutical industry guidance fund. This arrangement allows the two levels of government to retain veto power over high-risk investment projects, suppressing the internal risks of market-operated government-guided funds. In fact, how to control the scale of county-level government contributions and suppress various risks accompanying venture investment is a key issue in the localization of the Hefei model. Taihe County's relevant institutional arrangements have relatively effectively responded to these issues. Third, the Taihe County government requires that the first of the two invoices for all drugs produced in the industrial park must be issued in Taihe, ensuring that value-added tax remains local.

Of course, controlling the scale of government contributions and suppressing various risks accompanying venture investment does not mean that government-guided funds will definitely promote the development of local industries. In fact, another key point of the Taihe practice is to fully exploit the true advantages of the local pharmaceutical industry, connect the three links in the pharmaceutical industry, and form a business model embedded in local economic and social relations. The Western medicine industry consists of three links: R&D, manufacturing, and sales. In the new policy environment, Taihe-native medium-sized pharmaceutical manufacturing enterprises and small and medium-sized sales enterprises, which could originally operate independently, now find it difficult to face environmental changes and need to develop in the direction of vertical integration, fully connecting the three links. Resource-rich large pharmaceutical enterprises can vertically integrate the three links within the enterprise. However, for Taihe-native pharmaceutical manufacturing and sales enterprises, limited by scale, vertical integration relying on their own resources is highly difficult. On one hand, although some Taihe-native pharmaceutical manufacturing enterprises, such as the operator of the industrial park, are involved in all three links, compared to large pharmaceutical enterprises, Taihe-native pharmaceutical manufacturing enterprises do not have obvious advantages. On the other hand, sales enterprises, as the main body of Taihe-native pharmaceutical enterprises, find it difficult to enter the manufacturing and R&D links with capital and technological barriers. Therefore, for Taihe County, how to connect the three links locally is the key to developing pharmaceutical enterprises.

Taihe County's solution is to initiate a government-guided fund, entering the R&D link by investing in pharmaceutical R&D enterprises, while encouraging Taihe-native pharmaceutical sales enterprises to join the government-guided fund and obtain priority sales rights for pharmaceutical products. In this model, R&D, manufacturing, and sales enterprises are closely linked together: external R&D enterprises, while receiving R&D funds, produce through Taihe-native pharmaceutical manufacturing enterprises and achieve marketization with the help of Taihe-native sales enterprises; Taihe-native pharmaceutical manufacturing enterprises can extend to the upstream of the industrial chain through R&D enterprises and enter the market through sales enterprises; Taihe-native sales enterprises obtain priority sales rights for drugs through connections with R&D enterprises and pharmaceutical manufacturing enterprises. It is in such a relationship network that external R&D enterprises are embedded in the local pharmaceutical industry network. Among them, encouraging local pharmaceutical sales enterprises to join the government-guided fund is the master stroke: the pharmaceutical sales network is both the starting point and advantage of Taihe's pharmaceutical industry, as well as the main contributor to the government-guided fund. In this case, the inter-enterprise network relationships or community mechanisms of Taihe County directly played an important promoting role, a characteristic that does not exist in the Hefei model.

Investment-Led Attraction Based on Local Characteristics and Industrial Attributes: Reflections on the Localization of the Hefei Model

In the economic geography classic "Regional Advantage," AnnaLee Saxenian, after detailed analysis of how the center of high-tech industries in the United States shifted from near Route 128 on the East Coast to the Silicon Valley region on the West Coast, summarized the core content of the book as follows: "While network-based industrial systems in other regions may provide broad templates for policymakers, regional industrial strategies can only work when they adapt to the specific problems and specific conditions of particular regions and their industries." If slightly modified, this can express our understanding of the Taihe practice as a pathway for localizing the Hefei model: While the investment-led attraction approach pioneered by the Hefei model can provide important references for county-level economies to achieve industrial upgrading, the Hefei model can only play a role when it adapts to the specific problems and specific conditions of specific county-level economies and their industries. In short, the key point of the Taihe practice lies in dual embedding: First, according to local fiscal conditions, embedding the essence of the Hefei model into the local policy system; second, relying on local community networks to embed attracted enterprises into the transaction relationship network of relevant local industries.

First, due to different fiscal resources and administrative capabilities, county-level governments learning from the Hefei model should not directly transplant it but should embed investment-led attraction into their local policy systems. Specifically, the fragility of county-level economies dictates that county-level governments need to control the scale of government investment in the process of investment-led attraction, which is the first level of embedding.

Second, the dominant industries in county-level economies are mostly traditional industries with industrial cluster characteristics. For a long time, we have often emphasized that such industrial clusters are technologically backward and lack competitiveness. However, these industrial clusters are mostly local economic pillars, and it is unrealistic to discuss industrial upgrading detached from this industrial foundation. After all, large-scale development of strategic industries in county-level economies faces many objective constraints. Therefore, how to achieve the transformation and upgrading of traditional industrial clusters is a more realistic policy issue. Research on traditional industrial clusters shows that the emergence and development of these clusters often derive resilient inter-enterprise relationship networks or community mechanisms. In our research on county-level economies including many places in Anhui, we have repeatedly noticed that such inter-enterprise networks or mechanisms are often the true competitive advantages of local traditional industries and can become aids to the successful implementation of industrial strategies or the localization of the Hefei model. Another key point of the Taihe practice is to attract investment by activating local inter-enterprise relationship networks or community mechanisms. Attracting investment through personal relationships or geographical relationships with external enterprises is a common measure of local policies. However, this approach to attracting investment relies on emotional factors rather than business logic. Taihe County's approach starts from business logic, introducing external R&D enterprises through the locality's true competitive advantage—the Taihe-native enterprise network widely distributed in Western medicine manufacturing and sales links—thereby connecting the three links of the Western medicine industry locally. In this process, external R&D enterprises entering Taihe based on business logic form interdependent relationships with Taihe-native pharmaceutical manufacturing enterprises and sales enterprises. For these three types of enterprises, only mutual dependence can fully exploit their respective advantages. The dependent relationship derived from this business logic ensures that external enterprises can cooperate relatively stably with local enterprises. This is the second level of embedding.

Let us return to the argument of the economic historian mentioned at the beginning: successful catching-up processes must be accompanied by original economic policies. We believe that there are also original economic policies in Chinese practice that can provide inspiration for other late-developing countries. However, it should be noted that the economic historian's research was conducted at the national level. In a country as geographically vast and with as many administrative levels as China, original economic policies may come from central or provincial governments, or may originate in county-level economies or even township economies.