The government’s latest plan to invest $US323 billion in expanding fixed-line and wireless broadband connectivity will bring it one step closer to this goal by helping to spur the development of its service sector.

In the last quarter of 2012, Chinese broadband subscribers numbered around 175 million, totalling only 13 per cent of the population. The expansion aims to provide high-speed connectivity to almost all of its 1.3 billion citizens by 2020, easily making China the largest broadband market in the world, over the five leading broadband markets that currently reside in the US, Japan, Germany, France and the UK. It would also enable the creation of new goods and services, including the increased sale of products which utilise high-speed connectivity.

But it is the opportunity for the information, telecommunication, professional and financial business services sectors (among others) to experience significant growth that could move the Chinese economy toward a more stable long-term development position. As outlined in Peter Drysdale’s recent editorial in the East Asia Forum, an efficient and innovative service sector is the backbone of a modern, wealthy and developed economy. The increased creation and provision of domestic Chinese content, application and services will drive domestic and foreign investment, particularly by opening up new areas of employment in the service sector. The widespread availability of broadband connectivity services is also likely to open up new revenue streams for the service sector by increasing the marginal propensity to consume for individuals and households.

Firms in China’s economic base are likely to partake in increased capital deepening, leading to long-term productivity effects. For example, new fixed capital equipment that utilises electronic business services will reduce labour time and therefore decrease the costs of production. Firms will have the opportunity to more readily outsource activities to the tertiary sector, conveying the efficiency effects from increased divisions of labour. From this outsourcing, service firms will also have the opportunity to achieve economies of scale in production. With labour costs rising, China knows it cannot continue its past model and that it must grasp future opportunities to increase its productivity and maintain its competitive advantage in the global economy. The announcement of this investment appears to be a move to fulfil this goal.

Yet the broadband stimulus carries the same caveat as all grandiose infrastructure projects. Productive infrastructures are necessary precursors for economic development but not absolute guarantees. Of course, no one doubts the Chinese Government’s drive and ambition for development. One needs only to skim China’s economic statistics to see its unprecedented transformation since 1978. But too often there is a tendency to gloss over the negative effects of innovation when it is in reality a two-sided coin that allows for both the creation and destruction of economic activities (à la Schumpeter). This has the long-term potential to open up parts of the Chinese economy to strong competitive forces, perhaps from developed nations that already have a solid foothold in the service sector.

China’s colossal investment will also be susceptible to the usual time-lag associated with (particularly ICT) technological innovations. Individuals and firms need time to get to grips with these new technologies, and to figure out how to put them to good use. Individuals need to become comfortable using them. Firms need time to restructure their internal organisation and try out new business processes. In Europe, broadband infrastructure projects have invested money in addressing the human aspects of ICT utilisation, providing skills to those firms that cannot see immediate uses for these new connectivity services.

It is worth noting that China is not the only economy with a pressing need to achieve a sectoral balance. In the wake of the global financial crisis, the UK also knows that it needs to rebalance its economy — albeit away from an overreliance on services, not manufacturing (an aim that it has so far failed to achieve). The days of governments’ espousing the dogma of sustainable, single-sector miracle growth are over and it is now clearer than ever that diversity and balance are key to sustain resilient long-term economic development. China is embedding this firmly in its strategic economic vision. Broadband is certainly one piece of this puzzle, but there are many other factors that China needs to address in order to transform its vision into tangible economic development outcomes.

Edward Oughton is a doctoral researcher at The Cambridge Centre for Climate Change Mitigation Research (4CMR) at the University of Cambridge and part of the UK’s Infrastructure Transitions Research Consortium.