China has built an extensive policy system to support manufacturing digitalisation. Yet the SMEs that most need help may be the least able to access it. New MIOIR research examines why — and what policymakers can do about it.

Digital policy is extensive, but access is uneven

Digital transformation is much harder for small manufacturers than for large firms. Many SMEs operate with limited budgets, small technical teams and highly specialised production processes. Firms may also struggle to recruit skilled workers, find suitable technologies and identify a clear commercial return from digital investment.

China has introduced an increasing set of policies to support digital manufacturing. However, the existence of extensive policy support does not mean that manufacturing SMEs can easily access or use it. Our research draws on more than 280 national and regional policy documents and 55 semi-structured interviews with SME owners and managers, external experts and academic researchers, with a focus on Guangdong, Liaoning and Hebei.

This identifies an important policy problem. Support may be formally available, but access often depends on capabilities firms already possess, including the ability to identify relevant programmes, meet eligibility requirements and convert policy resources into practical change. This can leave weaker firms and those in traditional industries at a disadvantage, even when policy support is formally available.

Understanding this problem matters beyond China. Manufacturing SMEs play a central role in industrial production, employment and innovation across many economies, yet they often face similar difficulties in accessing digital technologies, finance, skills and policy support. When policy mainly reaches firms that are already capable and visible, it can reinforce existing inequalities between firms and sectors.

China provides an important setting in which to examine this wider challenge because manufacturing SMEs form a large part of its industrial base and digital transformation has become a major policy priority. The key question is therefore not simply how to expand policy support, but how to prevent access conditions from reproducing existing advantages.

The hidden conditions attached to policy support

A broad policy mix does not automatically mean that support fits the needs of manufacturing SMEs. The central problem is conditional access: firms’ ability to use policy support often depends on financial strength, prior performance, policy knowledge and organisational capacity.

Financial instruments illustrate this tension. China’s policy mix includes lending, supply-chain finance and leasing for digital transformation. These instruments expand the formal availability of external finance, but smaller manufacturers may be reluctant to borrow because digital investment involves high initial costs, continuing expenses and uncertain returns. Financial institutions also commonly assess profitability, repayment capacity and demonstrated business performance.

Selection and recognition programmes can produce a similar pattern. For example, China’s tiered smart-factory programme and Specialised, Sophisticated, Distinctive and Innovative SMEs classify factories and companies from basic and advanced levels through to excellent and leading levels. Applicants for excellent-level recognition are expected to have already completed smart-factory development, and in principle, to have achieved advanced-level status. Such schemes help identify demonstrably capable firms, but they also illustrate a wider challenge: firms at an earlier stage of digital transformation may find it harder to enter support channels that reward existing digital readiness.

Policy information creates another condition of access. Relevant information is often dispersed across departments and administrative levels. Respondents described searching across government websites, WeChat accounts, online conferences and other sources to identify relevant information. One policy researcher noted that ‘policies may need to be traced separately across central, provincial, municipal and district-level sources because there is no single centralised channel’.

Firms with stronger finances, recognised status, specialist staff and external networks are better placed to convert formal policy instruments into usable resources. Firms with fewer internal capabilities and external resources face higher financial, informational and administrative barriers. The policy mix may therefore be formally extensive while remaining easier to use for firms that are already better prepared.

Can political connections compensate for difficult formal channels?

Political ties refer to formal and informal connections between firms and government officials or government-related organisations. In China, these ties can help SMEs obtain policy information, build legitimacy and connect with wider organisational networks.

Our empirical data indicate that these ties can have practical value. Respondents described closer relationships with government as providing earlier access to policy information and improving firms’ ability to obtain resources. Some SME leaders also participate in political advisory or consultative bodies, creating more direct channels into policy discussions and local policy networks.

However, building and maintaining political ties requires time, resources, visibility and bargaining power. Smaller firms often have less capacity to invest in these relationships and may face higher relative costs.

Political ties can provide an additional route when formal channels are difficult to navigate. However, this route tends to be more accessible to firms that are already visible, resourceful or well connected. It can help some firms overcome formal access barriers while reinforcing differences between firms.

Designing policy for the SMEs that need it most

Assess potential, not only past performance. The priority is to improve how existing support reaches firms with limited resources, weaker digital capabilities and less visibility within the policy system. Eligibility and evaluation should reflect firms’ starting conditions. Prior performance provides useful evidence, but it should not become the main basis for determining access. Evaluation should also consider transformation potential, sectoral characteristics, production needs and firms’ capacity to absorb risk. Qualified experts from the same industrial sector could contribute technical knowledge when assessing early-stage digital projects.

Reduce the financial risk of early-stage transformation. Financial support should reflect the uncertainty of early-stage transformation. Credit-based instruments remain important, but loans may be unsuitable for smaller firms facing uncertain returns and narrow margins. Grants, subsidies and tax incentives can reduce the initial cost of technology adoption. Public procurement can address another constraint by creating demand for SME products and services, giving firms a clearer commercial basis for digital investment.

Make policy support easier to access and understand. Policy information and application procedures should be easier to use. A unified official platform could bring together information currently dispersed across administrative levels and government departments. Eligibility requirements, application stages and evaluation criteria should be clearly stated. Technology centres, qualified consultants and capable industry associations could provide practical assistance to firms without specialist policy or digital expertise.

Give SMEs a stronger voice in policy design. Formal channels for SME participation should be strengthened. Regular consultation and feedback arrangements would allow manufacturing SMEs to communicate their needs during policy design, implementation and adjustment. Transparent application and assessment procedures would also reduce the importance of personal relationships in obtaining information or support. Industry associations could help aggregate SME concerns, provided that they are representative, capable and accountable.

The effectiveness of a policy mix depends on whether firms can identify relevant support, enter programmes under reasonable conditions and use the resources to address their production needs. The central thing is whether digital policy helps SMEs develop new capabilities without making those same capabilities a practical condition for receiving support.

About the research and author

This blog draws on the forthcoming working paper, “Bridging the Policy–Practice Gap: Supporting Digital Transformation in Manufacturing SMEs”. This work was supported by the MIOIR Small Grant scheme.

About the author: Dr Wanyu Zhang, a researcher at Manchester Institute of Innovation Research, with research interests in technological change, digital transformation and innovation policy. If you would like to find out more about the research, please get in touch with Wanyu Zhang at wanyu.zhang@manchester.ac.uk.

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