State Capitalism: Politics or Business?

It has been 12 years since China was admitted to the World Trade Organization, and if you ask Western business leaders what has enabled the country’s rise to become the world’s second-largest economy, many will cite state capitalism as the primary factory. Never mind that the governments of many Western countries practice their own version of state capitalism, but it’s the Chinese example – and only the Chinese example, with its State-Owned-Enterprises (SOEs) as the most conspicuous manifestation – that gives State Capitalism a dirty name.

But the fact that a particular Chinese SOE has taken share from an American or EU competitor because it has been given easy credit or some other type of unfair advantage by its patron, the Chinese government, can be a ruse thrown up by Western business leaders. It is a ruse because after recognizing that the Chinese economy is effectively the lynchpin of the global economy these days, it is hard to swallow the fact that the emergence of an electronics manufacturer, for example,  has been due not to easy credit or the use of low-wage labour but rather to astute management (even Western trained) and the fact that the manufacturer has leveraged its intellectual capital to move up the value chain.

Much as China’s membership in the World Trade Organization was hard won, so too will be recognition in the West that China’s companies, whether huge resource companies or much smaller medical equipment manufacturers, for example, owe their leadership to the same factors as their American counterparts, for example. There always will be doubters, those who see SOEs as proxies for the state and its ideology, but there also be more and more Western business leaders, ever the pragmatists, who are willing to say, “Let’s do business.”

I have always believed that a business deal with a company in another country – whether that country ‘s government is autocratic or democratic – is a window into its government’s thinking, especially its wants and fears, and especially those of its people. The “deal” is like an international sports competition – a vehicle that stretches our minds and opens them to all that is possible when we meet and communicate instead of remain silent and at home.

In an excellent paper on Chinese SOEs, lawyer Margaret Cornish, Bennett Jones’ Commercial Consulting Senior Advisor (China) and Beijing Chief Representative of Bennett Jones Commercial Consulting Inc. wrote, “…Investments in Canadian resources by Chinese SOEs offer an opportunity to Canadian firms (and governments) to accelerate this adaptive process of augmenting existing supply chains, managerial networks, and sources of technology. At the same time, Canada is in a position to assist Chinese resource SOEs in demonstrating that they are able to successfully operate in an OECD-level regulatory system for environmental protection, labour standards and health and safety.” The paper was prepared for the Canadian Council of Chief Executives and the Canadian International Council.

In my interview with Also Mussachio, who has spent a good number of years observing the behaviour of SOEs, the scholar and business historian said that, “In the past, managers of SOEs were sometimes eselected according to political interests. There also wasn’t any transparency in their operations. But today, they are selected more carefully, sometimes even on merit. In governance, they have gone to great lengths to overcome the agency problems that used to vex SOEs, namely where directors’ private interests diverged from the interest of the firms they have managed. One of the reasons they have made these changes is that at least some Western observers, who previously objected to the opacity of governance practices, will now open their doors. “Let’s do business.”

Stephen Bernhut