Can the Chinese economic system overcome its political system?

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It is fashionable to be optimistic about China. But the new book Can China lead? calls for a more cautious view of the country’s prospects, where government bureaucracy stifles innovation.

BY MICHAEL BLANDING

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

Trouble is, the same types of books – and sometimes the exact same titles – also appealed to book buyers around the turn of the 20th century, with entries including Rising China, the dragon awakensand China awakened. In between, China experienced tremendous upheaval in the communist revolution which firmly established the Chinese Communist Party in charge of all things political and economic.

If China is to keep its promise, says new book Can China 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 hurts nothing to say that the book answers its own question with, if not an outright nothen at least one highly qualified maybe.

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

“We think the future of the Chinese economy is bright; we think 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. “, continues Kirby. “But they will only be leaders if the Chinese government backs down.” He is the TM Chang Professor of Chinese Studies at Harvard University and the Spangler Family Professor of Business Administration at Harvard Business School.

DOING BUSINESS IN CHINA

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

Since the course began in 2007, they have together written more than 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 several 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.”

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,” says Kirby. Since the Communist Party takeover, however, the state has been both a blessing and a curse to the economic fortunes of the county.

On the one hand, it has invested heavily in improving infrastructure, as anyone who has witnessed the incredible growth of megacities such as Shanghai and Shenzhen can see. Along with this, modern China has transformed a long tradition of valuing education into some of the most remarkable 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 could China not lead?” said Kirby. “The answer is the political system. It’s empowering, but it’s also very restrictive – there’s a glass ceiling beyond which talent can’t rise.”

COMPETITION AGAINST THE STATE

Public banks exist to support public enterprises, leaving private entrepreneurs to raise funds from friends and family, or not at all. In many cases, in fact, the state actually undermines innovation for the benefit of 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 the 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 central government that is the biggest problem, but local and regional authorities that can exploit foreign investment for 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 into.

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

This means you need to make sure you have your own people on the ground in China to oversee the construction and development of your supply chain. It also means choosing partners carefully, both in business and in government. By the time you rely on the court 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 looking to do business in China will look for partners with whom he could also do business outside of China. There are stories of Chinese entrepreneurs who overcame state and Party limitations to achieve phenomenal success – take the case of Wanxiang, whose chairman 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 failing US auto parts companies; and becomes a leader in electric car technology.

“There are people like him all over China,” Kirby says. Their big challenges, however, are more at home than abroad. Until the Chinese state backs down and lets independent entrepreneurship flourish and grow, 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.

About the Author

Michael Blanding is a senior writer at Harvard Business School Practical Knowledge.

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