Should China Be Promoting Big Business Groups - Essay Example

? Should China be promoting big business groups? Introduction A large number of researchers have studied the role played by the and the large business enterprises in creating the East Asian miracle. However, not many studies have been conducted particularly on China and the role played by the large enterprises of the country in leading to the China Miracle (Keister, 1998?  Nolan, 2001?  Smyth et al., 2004?  Yiu et al 2005). By this time it has been widely agreed that the large enterprises in the country, some of which are state-owned have played a significant role in the economic miracle of China (Lo, 1999?  Nolan, 1996? Smyth et al., 2004). Within the sector of state-owned enterprises (SOEs) the development of large scale enterprises has been progressing (Nolan, 2001; Nolan, 2002). The policy makers in the country and the organizational leaders have made immense endeavour to nurture large enterprise groups. These leaders have aspired to upgrade these groups and transform them into internationally competitive transnational corporations (Sutherland, 2007). Such unorthodox development bore fruit and led to the outstanding growth for the country (Nolan, 2001). The China miracle: an overview China has exhibited significant growth for the last three decades, which has attracted attention of the developed countries. The tempo at which the country has transformed itself from being a peasant society to an industrial powerhouse, guarantees that the country has the potential to achieve a growth rate of several times greater than the current rate. If things continue in this pattern, China might surpass the present advanced countries of the western world (Krugman, 1994). Economic development had been initiated in China around 30 years before and the outcome is miraculous. The GDP growth rate in China on average has reached 9.8 percent in 2010 (Lin, 2010). It has surpassed the rate foreseen by analysts in 1980s and 1980s. These reforms had been initiated by Deng Xiaoping with the goal of increasing the GDP of the Chinese economy by four times within a span of twenty years. The vision with which Xiaoping had launched this reform was to achieve a 7.2 percent annual growth rate for the economy. Since 1979, China’s economic performance has improved at a massive rate. In 1979 the country’s “trade as a percentage of GDP was only 9.5 percent” (Lin, 2010), while by 2010, China has reserved for itself the position of the highest exporting country in the world and the third largest country in terms of imports. At present the country’s trade contributes approximately 70 percent of the country’s GDP. In this span of 30 years, 600 million Chinese residents have been brought out of poverty through this dazzling economic growth (Lin, 2010). The development path followed by China after the reforms of 1979 has been devised by the policy makers keeping in mind the real scenario of the country. It has therefore been possible to implement these policies successfully. While some contemporary economies had tried to bring radical changes or treat the economy with shock therapy, the effects of these changes have not been holistically beneficial for these economies. China has therefore been able to take exceptionally huge strides of performance and has moved ahead of most other developing nations of the world. This rapid growth experienced by the Chinese economy for thirty years at a stretch and the consequent sustainable improvement in the standard of living of its population of 1.3 billion has been termed by researchers and observers as “the China Miracle” (Liming, n.d.). By avoiding radical reforms and by following a step by step process of transformation the economy has been able to bypass the negative impacts of change and avoid striking social unrest within the country. The process of China’s transition China has primarily been an agrarian society. With industrial revolution the economy faced a speedy movement away from the traditional agricultural society in which almost 85 percent to 90 percent of the country’s labour force had been engaged in the traditional form of livelihood; i.e. agriculture (Lin, 2010). The movement from an agricultural society to a non-agricultural society has been gradual but relentless. In the beginning when the manufacturing sector was developing, it was highly labour-intensive. Later on, with advancements in technology, the production process in the country tilted towards being capital-intensive. In short, there has been an overall and uninterrupted structural change in the Chinese economy. The East Asian Miracle The vast change can be closely linked with the phenomenon of East Asian miracle. The countries in East Asia have displayed remarkably high rate of economic growth and they have also sustained this growth rate. Twenty three economies of this region have experienced faster rate of growth than any other region of the world. More precisely, eight economies in this region have been identified as the highest performing economies of Asia; these are the Republic of Korea, Singapore, Hong Kong and Taiwan (collectively known as “the four tigers”) (Page, 1994, p. 219), Japan, and three of South East Asia’s “newly industrializing economies (NIEs)” (Page, 1994, p. 219), namely, Thailand, Indonesia and Malaysia. The World Bank has accredited this high rate of performance by these countries to the neoliberal policies followed by these countries. Liberalism has been said to boost up the economic performance of these countries. However, other researchers have also laid strong emphasis on the industrial policies of the government of these countries. These countries had relatively authoritarian regime in the economies and experienced high growth rates following exports made to the rich and industrialized countries. This is one of the primary factors that charged up the growth rates of these economies. After the world had witnessed the effects of the industrial revolution, most economies maintained sustained growth by making constant technological innovation and also by diversifying and upgrading the existing industrial setup. Since China entered this race for growth at a later stage compared to the other developed countries in the world, backwardness acted as a boon for the economy which it could utilize for its growth. In order to make innovations, China could rely on the existing technical knowhow. It did not need to take the risks of making new inventions or spend resources on R&D. The country has the advantage to borrow these technologies form the advanced nations. Hence development of these industries has been a comparatively low cost process and it also involves lesser risks. The East Asian countries, inclusive of “the four small dragons” (Lin, 2010), Japan and China, all made good use of this advantage. China has been able to gain momentum in this process after it had undergone structural transformation in 1979. State-owned enterprises in China The approach of China’s reforms has been progressive and it has been able to bring in-depth reforms in the ownership pattern in the country. China has been able to establish a business system of multiple-ownership by promoting non-State entities in the business sphere, such as private firms. New entrepreneurs face a series of hurdles when they decide to make investments in China to start a new business (International Finance Organization, 2013). The reforms should also aim at improving the investment climate in the country and help the firms to function in an uninterrupted manner. The mixed-ownership enterprises, for example the share-holding companies and partnerships, play an incredibly significant role in the country’s economic growth. Presently the presence of the non-state entities can be found in various sectors in the economy and they contribute to almost 40 per cent or more of China’s GDP (People Daily, 2002). However, only State-run enterprises exist in some other industries, which are considered key sectors for the running of the economy, such as, transportation, telecommunications, defence, energy and some industries involving the use of high end technologies. Now, the point of discussion is that the nation has taken a number of decisions about reforming the structure and design of its industries, particularly the State-owned enterprises. These new changes are being brought within the existing framework of the economy and society of China. The law of the market is being followed while making these changes and scholars are engaged in a deep debate whether China should install the market mechanism in the country. The design to begin with “a modern corporate system” (People Daily, 2002) would be successful only if the country promotes large business houses in different sectors. The performance of the large and medium enterprises (LMEs) has been under scrutiny for some time now. However, the catch is that while all LMEs are not state owned, evaluation of performance of the LMEs are made by considering the state owned enterprises (SOEs) as a substitute or equivalent to the LMEs. This is a grievous misunderstanding since the performance of the LMEs is undermined when coupled with the rest of the enterprises of the country. One has to examine explicitly the performance of the LMEs in order to conclude whether to advocate or not the growth of large business houses within the economy. These large business groups in fact act as the paragons of Chinese industrialization (Smyth, 1994). State control of these enterprises is only one sided thought of managing the economy; on behalf of the bureaucrats. It puts reigns on free growth of these firms (Heritage, 2013). The business houses would have greater scope for development if they are provided with greater management autonomy rather than assigning administrative functions to several government bodies (Lin, 2003; Nolan and Wang, 1999; Nolan, 2001). As the management of these enterprises is trusted with the responsibility to focus upon the long run growth of the firm, the management manages the earning level of the workers in the industry. In this scenario, the government is pushed to the position of external stakeholder to the firm. For the development of these business houses direct interference of the leaders of the organization would allow more efficient working of the operations and management rather than bureaucratic government interference (People Daily, 2002). Several other researchers have also advocated the expansion path of large enterprises in China and emphasised that the evaluation process is erroneous (Nolan, 1996; Wang, 1996; Lo, 1997; Smyth, 1994; Nolan and Wang, 1999). The biggest examples of the large enterprises that have brought phenomenal growth to the Chinese economy primarily belong to the steel and the pharmaceuticals sectors. The cases of Capital Iron and Steel and Sanjiu might be considered in this case (Nolan and Xiaoqiang, 1997). A big proportion of their earnings have been ploughed back into the expansion process of the firm and modernization (Smyth et al, 2004). The reform activities in China display a strikingly prominent feature that departs from the traditional structure of the industry. China has taken the decision to make the large enterprises and groups the engine of growth by promoting them in the strategic sectors. This approach is basically contrasted to the policy of growth adopted by the Central Eastern Europe and the former Soviet Union (CEEFSU). The World Bank put its influence on the countries belonging to this economic zone strongly suggesting them to follow the path of downsizing the large and medium enterprises in the state-owned sector. According to Sachs & Woo (1994) these policy makers criticise the expansion of big enterprise groups based on the ground that the large SOEs are both way harmful for the economy of China. They are inefficient and also financially sick. These scholars fear that on allowing autonomy to the large group of enterprises it would create space for large “monopolistic corporate empires” that would become unmanageable and would work against the overall well being of the whole economy (Smyth et al, 2004). Smyth (1994) has revisited the debate about the Chinese industrial reforms and emphasizes that it is not necessary to consider that the industrialization decisions made by China are faulty. Taking into account the fate of the LMEs and SOEs in Japan and South Korea, Smyth has claimed that China might learn from the incidents and taking future steps in such a manner so as to avoid similar crisis in future. Logic behind advocating the promotion of large business enterprises in China LMEs in China Most LMEs constitute of more than 500 workers and keeping aside some LMEs, most of the large and medium and large scale enterprises are state-owned. These SOEs have contributed the lion share of the value of total output by the LMEs. After implementing the drive to corporatize the LMEs, a number of the SOEs have been transformed “into joint-stock companies” (Smyth, 1994, p.4). Although the proportion of state owned LMEs have declined after this transformation, the remaining proportion is still significant. The newly entering LMEs in the industry are opened as joint venture companies between the state-owned enterprises and some foreign investor (Lo, 1997). Supporters of large enterprises in China put forth two arguments that show that there has been misinterpretation and misunderstanding of the indicators of performers of the economy while assessing the economic performance of the country. Many scholars consider that the Chinese reforms of industry on line of promoting large business groups is a faulty decision and that it would affect the performance of the economy adversely. However, others strongly put that evaluating the level of efficiency is brought about by sectoral reforms by the state in the state owned enterprises. The common and mostly used way of comparing the activities and performances approach is to make a straight comparison between the growth and profitability of “the state-owned sector as a whole and the non-state sector” (Smyth, 1994, p. 5). This approach is not correct to the entirety. This is because the outcome of this analysis is found to be that the non-state sector of the economy is the primary drivers of economic growth and the responsibility of the financial lag is entirely shifted on to the state owned sector. The state owned sector is composed of a certain proportion of LMEs and the other LMEs do not belong to the state’s supervision. Hence the performance is not exclusively justifiable in this process of evaluation. There is no doubt that the state-owned sector displays a poor financial record on an average. According to the estimates of a report published by the World Bank (1997a) approximately 50 percent of the enterprises in the state owned sector are loss making enterprises. However, from this result it cannot be proposed as a corollary that the collectively owned enterprises outperform the LMEs. The process of transformation of the Chinese enterprises “into extended groups of enterprises” (Sutherland, 2007, p. 3) has subsumed a considerable portion of the state owned LMEs. With this process in progress China has achieved the remarkable growth rate. Growth of the large enterprises has been phenomenal over the last decade. This is suggestive of the fact that the introduction of big business groups has been so far beneficial for the economy of China. A group of enterprises have been identified by the policy makers that have exhibited maximum growth rate. These have been termed “as the national team” (Sutherland, 2001). These enterprises have been supervised by the State Council of China and the foremost choices for becoming the trans-national corporations. Conclusion There have been several arguments from different researchers and practitioners regarding the policy adoptions by China on their growth strategy in the industrial sphere. The path chosen by China has been contradictory to the path opted for by the other developing countries in East Asian (World Bank, 1993). The World Bank has strongly suggested that the country should downsize the growth rate of large state-owned enterprises. According to the World Bank the rapid industrial progress of China has been the outcome of speedy propagation of small business enterprises (World Bank, 1997b; World Bank, 2002). Form this point of view, large business enterprises and clusters are viewed as “dinosaurs of an otherwise dynamic economy” (Sutherland, 2007, p. 3). Some other scholars have, however argued that the large SOEs in the country have came into power with support from bureaucrats that hold powerful positions in the political system of the country and highly active in those regions in the country that are in need of help from these powerful political personalities (Nolan and Wang, 1999). Hence the growth of the LMEs is a phenomenon rooted deep within the economic system of China and cannot be stepped down easily. Business houses find greater scope for development when they get greater autonomy to manage their own business and operations (Lin, 2003; Nolan and Wang, 1999; Nolan, 2001). When the management finds all the responsibility in its own hand, it becomes more aware of the resource allocation and the extent to which the costs are incurred and profits earned. Hence it boosts up the efficiency of the organizations. 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