Should China be Promoting Big Business Groups - Essay Example

Introduction China has made a decision to promote large enterprises and enterprise groups as a way to show its commitment in economic reforms. According to Smyth (1999), with the failing rate of enterprises in Japan and South Korea, china’s brilliant move to promote large scale enterprises has greatly been criticized. It is essential to note the fact that large scale enterprises have played a vital role in china’s development. Its decision to do so went in contrast with the World Bank rules. The big bang theorists criticize the development of large enterprises. They said that they did not perform exceptionally well and were pulling financial development behind. Some experts argue that the move by the Chinese government to promote large enterprises was plentiful and is rewarding even though it has been miss approved by most of the western communities. His move was already writing before the beginning of the financial crisis in Asia. Issues affecting the Chaebol and kierestsu enterprises verified the fact that china was being misguided in its efforts to reforms. This paper will try to relate the problems faced by large enterprises in other countries in Asia especially in North Korea and Japan. China may have learnt vital lessons from these countries misfortunes and their difficulties in finance. However, they are still encouraged to move on with their strategies. How has the enterprise groups performed? Chinas enterprise groups have performed better than any other enterprise. They are competitive and ready for the challenge of improving the nation’s economy. They have driven the economy of china to a higher level. The process of transforming these enterprises is better known as Jituanhua. By 2004, china transformed about 2692 enterprises into enterprise groups. This enterprise groups provided employment for almost 30 million people in china. Their output has grown up to 21% annually. These enterprise groups expanded more as many more companies joined in to work together. The national team policy According to (Dylan, 2007), “grasp the large, let go off the small” is the policy embraced in china for companies to come and work together so that they can produce more. China and the East Asian development strategy According to (baek, 2001), china has adopted the East Asian style to development. This started all the way from 1980s when it was realized to be one of the fast growing economies in East Asia. They key models imitated by the Chinese economy from other already developed states in East Asia are state controls over the finance, government intervention in state firms, substituting imports in some industries and high export activities. A lot of saving and investment is also encouraged locally. Much similarity is noticed between Taiwan and china since they both have private and state enterprise sectors that play the crucial role in their development strategies. In 1997 and 1998, there was a financial crisis that affected the East Asian countries though china was affected at a minimal degree. It is surprising that this was the case even though china shared most of the affected sector with other East Asian countries. The East Asian financial crisis According to (Yang & Tyes, 1999), the East Asian countries were doing remarkably well in the financial development around the year 1997. Financial and currency crisis affected this greatly. Many economies in this region that had expanded started to slow down. This era experienced currency depreciations. According to (Yang & Tyes, 1999) “The external crisis combined with domestic reforms and with the changes that were taking place in the macroeconomic policy to retard overall economic growth and an increase in employment.” The Chinese people had long valued the culture of saving and using the savings future which saved china’s economy from collapsing like the rest of the East Asian states. Japan experienced a drop in investment to about a tenth in the years 1997-1998. In some countries, the economy declined by a half. Production of goods and construction services fell remarkably and the purchasing power fell hence goods stayed in the market for long, and a low consumption was felt. What took place in china during the East Asian Crisis? Before 1997, there had been a fast growing economic and social development in china. During the Asian crisis, china continued normally without being affected. (Morrison & Lobonte, 2011) Why china did not suffer much from the East Asian crisis. The government closely supervised capital in successful businesses; there was the absence of capital convertibility and manageable debts borrowed from other countries. A large amount of trade surplus, enormous foreign exchange reserves and high profits saved china to experience the financial crisis in East Asian countries. Apart from china imitating the East Asian mode of development, they still reserved their way of doing a few things including having a hefty chunk of enterprises in the economy. According to (Yang & Tyes, 1999) a substantial investment base and low debt situation of china made it possible for it to stand the East Asian crisis. What is a large and middle sized enterprise in the Chinese Context? The reign of the CCP government in 1997, saw the approval of Zhuada Fangxiao, a reform program that was to promote the activities of LMEs. LMEs classification is in terms of fixed assets and technical possession. LMEs possess more than 500 workers. About 97% of the production is done by SOEs. In 1997, a research revealed that about 63% of LMEs were once SOEs. Most activities in LMEs are as a result of a joint effort of foreign investment and SOEs. HOW THE LARGE SCALE BUSINESSES HAVE PERFORMED AND THE LOGIC CHINA USED TO REACH ITS DECISION. There are some scholars who have supported China in it move on large enterprise promotion. They used two points to argue their case. They argued that enterprises had a good performance which was not appreciated. To reach a valid conclusion on this, this paper is going to examine the difference in performance between states owned business and a private sector. The truth is that the private sector is the one that is responsible in driving China to the point of development which it is enjoying now. The LMEs were responsible for 88% in the growth of industries in china in the year 1998. 83% of profits and taxes were enjoyed by the government including 61 percent of sales per year. 22% of SOEs were LMEs from January to September. Large scale enterprises contribute a total of 95% profit and taxes. Why china chose to reform. China has learnt a lot from the developing countries. Things like establishing large firms and diversifying the types of business are some of the things China has learnt. (Smyth, 1999) Confess that many industries in the already industrialized countries had a different route. For instance, the Chanderlian firms emerged in Europe and the US. They produced products of based on core competences. This means their production happened on an exceedingly narrow line. As the company expanded, it ventured into different lines of production. This was again supported by Schumpeterian and the improvement of technology which made this industry be one of the international giant companies. According to (Deng & Kennedy, 2010), business lobbying is an extremely critical part when it comes to the financial freedoms associated in China. China is remarkably vibrant when it comes to making of any policies that can affect its financial struggle to development. It has been noted that china is experiencing a fast growth in trade associations of local and international firms. It is evident that lobbying rewards. In some industries like oil and gas, they have manipulated the government to reason and favor it in many ways. It is essential to look at strategies and tactics that will be used for enterprises in china to get the national recognition. WHY THE CHINA GOVERNMENT PROMOTES LARGE ENTERPRISES AND ENTERPRISE GROUPS. The two reasons include: 1. So that it can establish many enterprises that can match the international markets in production, both quality and quantity. 2. The other reason is to minimize on the country producing look a likes of products in other countries, which has given it immensely many problems with the external market. When in the market matters, the problem are to get the price right and the market will flow accordingly. The market environment argues that for any business to do well in the international sphere, it should have the ability to be comparative and avoid replication of production. According to (Smyth, 1999), “the most labor intensive commodities are the comparative advantage of the lowest wage producers.” The government is beneficial because it intervenes to nurture and promotes successful businesses. It will help in places where key competencies is not felt and add to the wages of the people whose pay is low and regulate the market in case there is a lack of adequate and up to date technology. The government should sponsor large firms in times of difficulties. There are other firms which are so young to invest in research for development and this is where the government should come in to help. A recent research shows that successful businesses are defined in terms of creating relevant information and not what it produces economically. It should enhance knowledge which will improve its employees and the environment at large. This idea has been emphasized especially for developing countries. When a business is diversified, there is a possibility of an added value and this business is in a better position to copy functions of established institutions in advanced capitalist economies. Critics on the Chinese decision on promoting large scale enterprises Criticism arises in four main areas including 1. There are reforms being made internally yet China paces a lot of strength is on how to make production at the east experience. 2. China might experience a financial collapse due to its many debts that are pending to be paid. 3. LMEs are distinct and should be treated like so. 4. As in South Korea, in china the gap between the governments, the LMEs and the bank are too narrow. Ambitious China China has totally focused on expansion forgetting other prominent spheres that are critical for a comfortable life. Some scholars claim that the state government is trying to, according to (Smyth, 1999) “forcefully weld sampans together to form an aircraft carrier.” This rapid fattening of enterprises includes companies being forced to merge and form large firms. Enterprise groups are firms that have been joined to get one large firm with different production lines. There enterprise groups are likely to fail because their management and skills are weak. I this respect, the government should first restructure a firm before deciding of such procedures. China looks at diversification as a way of reducing risk but blind diversification may lead the firms into many risks. China, debts and large entrepreneurship According to (Smyth, 1999), “the debt asset ratio and the ratio of non-performing loans is too high.” The state statistic bureau indicates a figure of 75-80% debt asset. If the hidden losses are incorporated then the figure could rise up to 85%. These figures take us back to South Korea where they experienced almost similar circumstances with their finances. This is so because the operating capital in almost all the LMEs was taken as a loan from the banks. According to a report by the World Bank, almost 20-30% of loans are non-performing and about 5% will not be recovered. Realistically When considering the financial problem in South Korea, it is not evident that the problems were caused by a rise in the debt rate, to top it all up, the World Bank gave a report that china was following in the steps of South Korea in banking issues. Remember that the Word Economic Forum rated southern Korea 5th in the best grounds for investments. The World Bank has advised the Chinese banks to fix its budget and be strict on loss making enterprises just as in South Korea. Diverting funds from more deserving recipients: financial support for LMEs Another criticism is the way LMEs are being given more funds than the rest of Business Empire in china. The LMEs are getting almost three quarter of domestic credit. They borrow a lot of money which amount to 65% of the total non-financial public debt. This makes it hard for china to settle is unsatisfactory debts. They should give this financial assistance to the most deserving financial firms. LMEs should receive a princely treat ad respect. There is something wrong with this statement. The World Bank reported that the economy of China is growing a remarkably fast rate and private firms are responsible for this growth. Upstream industries have also been noticed to grow. It is not fair to claim that development has been as a result of government based institutions alone. The private sector has worked tremendously hard so that this development is felt. The World Bank termed SOEs as loss making firms and proposed that a lot of resources should be invested in the productive private sector. Loses have been realized in several sector including the mining industry, oil and gas industry, machinery and textile industry. These industries were accountable for 54% of losses in 1991.it is also crucial to note that as much as the LMEs get a lot of financial support from the government, it also contributes largely to the government revenue. Its tax range is between 10-55%. The state sector should pay this like levies, fines and other charges while the private sector is exempted from taxes. Levies and taxes of the SOEs might be around 50-75 % of the total earning. SOEs carry the burden of funding for non productive facilities. SOE spend 15-20%on hospital, housing and schooling. After a research was carried out in a few counties in china I was noted that non state firms did not provide plans for housing, 41% on medical expenditure, 52% on insurance, 54% on pension. This means that the expenditure of the non state enterprise worker is much higher that the state enterprise worker. The gap between the government, bank and the enterprise There should be a sizeable gap when it comes to the three departments mentioned above. 1998 saw the incoming of 1000 firms and they were put right under control of ministry of finance, peoples bank of China, state economy and trade commission. A SETC committee was set and it was headed by Sheng Huaren. This was carried out to support the fact since these firms were state enterprises, this would solidify the tie. This move suffocates the LMEs as they will not be able to be independent in making decisions concerning the firms. A lot of attention might be given to the government policies and development while the firms will be forgotten. The government also started to interfere with the decisions made by these firms and this made decision making to be a longer process. The government policies leaned on the side of the firms and the economy depended significantly on the performance of the enterprises. When applying the lesson learnt from South Korea, the Chaebol efficient running was interrupted by emphasizing on the well fare of the government and not on the business firms and many other problems which have already been mentioned above. The Asian financial crisis According to Smyth (1999), Asian financial crisis was caused by the almost collapsed capitalism. The government intervened especially in the banks. The second cause was because of panic outflow in a brilliant but unregulated way. This was so due to the fact that firms had the freedom to borrow money from the outside countries without being controlled by the state government. The main cause of the Asian crisis was the way the government was involved in the running of the enterprises because key issues were overlooked. A close relation between the bank, the government and enterprise is referred to as crony capitalism as there was no transparency and some situations were favored more than others. We should never forget that using the large scale enterprises, Japan and South Korea’s has been successful as through them, the countries have been able to develop a rapidly growing economy globally. South Korea and Taiwan involved the government intensely and positive results were realized in about 15 years. This is therefore a vindication that although there might be a negative impact of the government getting involved in running the enterprises, there can also be results for positive impacts. Another positive happened in Japan where firms in Japan received a soft budget therefore did not suffer a lot of constrains. The Japanese firms had share holders and workers committed to the success of the firms and this yielded positive fruits as productivity was high. Following the above information, should china therefore promote large enterprise groups? Due to the above arguments, china has its targets set right despite the fact that it faces a lot of criticism due to the Asian crisis. According to (Smyth, 1999), there would be no any other alternative if china changed its mid-stream. The World Bank was involved in this when it gave CEEFSU capital to privatize and down size large firms. Could this bear positive results? The World Bank does poorly in funding small enterprises especially in developing countries. On the other hand it is valuable compare what exists and what is achievable. With China’s move to beat the decorating economy by lobbying its large enterprises, it is not going well with many scholars. They claim that china may export its goods at an affordable price but the quality is low. Another issue facing the lobbying process is the way china is imitating products that already exist in the market. This is profoundly affecting companies involved in making these items. The items include mobile phones and electronic appliances. China is affecting the US economy negatively and this has led to loss of jobs in many other ways. This includes their strategy to lobby for their successful enterprises. Note that china is highly dependent on the exports from the USA and this may affect its strategies. CONCLUSION According to the above facts, it has been made clear that if Japan want to promote large scale enterprises it might as well go right ahead for it maneuvered carefully and skillfully, it might help China to be fully developed. Taking the same route that some Asian countries took, it might bear hugely positive fruits. Looking at these countries, they include Japan and South Korea. There might be an Asian crisis, but that should not be a hindrance to china’s success. LMES are doing well in the in the market though it has its ups and downs according to the realistic nature of business. Comparing the progress of china to that of Japan and South Korea through CEEFSU, a conclusion is reached that china should go ahead with its plans of promoting big enterprises and enterprise groups. References Read More