China’s economic system struggles to overcome its political system

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One need only look up to the library to see the optimism attached to China’s rise as a global economic and political power. Titles like The Dragon wakes up; The rise of China; and When China rules the world predict an inevitable, if not entirely welcome, surge.

“If you look at these three things, you must be wondering how China not lead? “

The problem is, the same types of books – and sometimes exactly the same titles – were also attracting book buyers around the turn of the twentieth century, with entries including Rising China, The Dragon Awakens, and Awakened China. In between, China has experienced tremendous upheaval in the Communist Revolution which firmly established the Chinese Communist Party in charge of all matters relating to politics and economics.

If China keeps its promise, says new book Can China take the lead? : Reaching the Limits of Power and Growth, the country will first have to overcome the limits imposed on it by the Party. Or, as the authors call it, “Party, Inc.”

It’s not a waste to say that the book answers its own question with, if not outright no, then at least one highly qualified person maybe.

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China’s growth today continues the country’s strong history of trade development. Pictured is the Bund in Shanghai, the city’s financial district along the Huangpu River, in 1899.

“After reading this book, people shouldn’t be negative towards China, we are not negative towards China,” said the Harvard Business School professor. William C. Kirby, who wrote the book with Regina M. Abrami, a former HBS teacher now at Wharton School; and F. Warren McFarlan, HBS Albert H. Gordon Professor of Business Administration, Emeritus.

“We believe that the future of the Chinese economy is bright; we believe that the future of the Chinese people is bright; it’s a very sophisticated economy with some of the most educated and successful business people in the world, ”Kirby continues. “But they will only be leaders if the Chinese government takes a step back.” He is the TM Chang Chinese Studies Professor at Harvard University and the Spangler Family Business Administration Professor at Harvard Business School.

Doing Business in China

Kirby and his colleagues have collectively studied the country for decades and distils the book from ideas gleaned from teaching the HBS course, “Doing Business in China,” the school’s only course dedicated to a single country. It’s for good reason, Kirby said. “In our opinion, China is not just a country, it is a fifth of humanity. And it can be a very complicated place to do business.

Since the course began in 2007, they have collectively written over 30 business cases in the country, examining all aspects of the Chinese economy and how it will affect future MBAs.

“It’s not just one country, it has many different economies, different types of businesses and a whole range of opportunities,” says Kirby. “Whether or not they go to China, Chinese business practices will affect their lives for the rest of their years.

Book's extract

In fact, China has a history of private enterprise and entrepreneurship that predates the West. “It was a freer economy in 1800 than any part of Western Europe,” Kirby argues. Since the Communist Party’s takeover, however, the state has been both a blessing and a curse on the county’s economic fortunes.

On the one hand, it has invested heavily in improving infrastructure, as anyone who has witnessed the incredible growth of mega-cities such as Shanghai and Shenzhen can see. At the same time, modern China has transformed a long tradition of educational valuation into some of the most notable modern universities of the past century. And finally, the state has recently encouraged entrepreneurship with massive investments in research and development.

“If you look at these three things, you must be wondering how China not lead? ”Kirby said.“ The answer is the political system. It’s empowering, but it’s also very limiting: there is a glass ceiling beyond which talent cannot rise. “

Competing against the state

Public banks exist to support public enterprises, letting private entrepreneurs raise funds from friends and family, or not at all. In many cases, in fact, the state is interfering with innovation in order to benefit the Party. Take the case of Grace Vineyard, a private winery that produces the best wine in China.

“And yet, it has to compete with state-owned companies that control 70% of the red wine industry,” says Kirby. “Why does the state dominate the wine industry? Because it’s ridiculously profitable. Institutionally, you have these bottlenecks.”

Often, it is not the central government that is the biggest problem, but the local and regional officials who can harness foreign investment for the benefit of their own interests. For this reason, it is doubly important for those doing business in China to know who they are working with and what they are getting involved in.

“A lot of people do business and invest in China on the assumption that it is a growing market and that you have to be there. Our advice is that you need to be there, but you need to do your homework first. “

This means that you need to make sure you have your own field staff in China to oversee the construction and development of your supply chain. It also means choosing carefully your partners, both in business and in government. By the time you rely on the legal system to settle a dispute, Kirby says, you’ve already lost. “No one would be well advised to settle a commercial dispute in a Chinese court,” he warns. “You better not waste your time.”

The savvy businessman who wants to do business in China will look for partners with whom he can also do business outside of China. There are stories of Chinese entrepreneurs who overcame state and Party limits to achieve phenomenal success – take the case of Wanxiang, whose president, Lu Guanqiu, started with a tractor factory in the 1960s. and turned it into the world’s largest auto parts factory. company in the world.

Recently, the company even helped bail out Detroit by investing in American auto parts companies that were going bankrupt and are emerging as a leader in electric car technology.

“There are people like him all over China,” says Kirby.

Their big challenges, however, are more at home than abroad. Until the Chinese state pulls back and lets independent entrepreneurship flourish and develop, the country won’t be able to take the lead anytime soon.

Until then, argue Kirby and his colleagues, it remains for those doing business in China to seek partners with whom they can move forward together.


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