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Monthly Archives: December 2011
I’ve always found the notion of private enterprise in China somewhat confusing. This is not because private enterprises do not exist in China, but because it’s incredibly difficult to determine whether, or to what extent, “private” companies are really State-owned enterprises (SOEs) in disguise. This is especially true for large corporations.
With that in mind, I found a recent Economist article on the subject especially timely (see Capitalism Confined). The article details how Chinese companies fall into 4 general categories: large state-controlled enterprises (SOEs), joint ventures between private (often foreign) companies and SOEs, companies with minority state ownership but state influence, and companies backed by government-owned investment funds. The main take-away is that the Chinese government is still involved at almost every level of economic organization.
According to the Economist:
Given China’s increasing role in the global economy, I agree with the author’s inference about the implications of this kind of experimentation with economic organization. I also think it calls for further research into the costs and benefits of structuring economic activity in this way. One point the article details is how, as a consequence of state influence, Chinese companies have struggled to compete abroad. Although they benefit from cheap financing capital and political favor domestically, large Chinese companies struggle to compete with their more organizationally (and technologically) efficient foreign counterparts abroad.
Nevertheless, truly interesting stuff! I encourage you to read the article in its entirety.
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China clocks a humongous $60 billion in annual solar manufacturing output beating USA and Europe (Green World Investor, 9/2/15)
Is Pakistan getting suckered by China in infrastructure costs (Green World Investor, 8/4/15)
Online video in China is a mostly a desktop play (for now) (Telecom Ramblings, 8/31/15)
Early last week, India’s government looked set to change its retail laws, freeing up restrictions on foreign direct investment (see Let Walmart In, Wholesale Reform, Fury erupts as India opens door to Wal-Marts, IKEA set to announce retail plans for India). Foreign retailers that sell multiple brands (Walmart, Tesco, Carrefour, etc.) will now be allowed to own 51% of retail operations in India; single brand retailers (Ikea, Nike, Apple, etc.) will be allowed to own 100% of retail operations.
India’s hope? The hope is that foreign entry can help modernize infrastructure, distribution, and supply chains, and ultimately, reduce prices paid by end consumers. In this way, India views foreign investment as a way to stimulate the local economy.
For some foreign companies, this legal change is the green light they’ve been waiting for. IKEA, for example, which previously refused to enter the market, is now in India considering a retail foray. However, the change in law comes with a catch:
Political and public reaction has been split. Parliament and the opposition BJP (Bharatiya Janata Party) are outraged, some even going so far as threatening to burn down foreign-owned stores opened in the country.
Many small business owners fear the effects of foreign entry.
I am generally pro-trade, in favor of open economic exchange. So I believe that this would be a welcome change. Nevertheless, it will be interesting to watch how things play out politically.
There was word last week that, in the face of significant domestic pressure, the Indian government was actually reconsidering its decision. However, even if the Indian government decides to go ahead with the proposed law change, I’m not so sure that it will bring about a flood of foreign entry.
India, with its underdeveloped political and economic institutions, remains an exceptionally difficult place for foreign firms to conduct business, …even with the legal change. Moreover, the mandates built into the legislation (minimum $100m investment, mandated infrastructure development, etc.) are particularly onerous. It will make entry more costly, and potentially, unattractive. So although the law makes it theoretically more feasible for multinational retailers to conduct business in India, in practice, I’m not convinced it will have a great effect.
UPDATE: Bowing to public pressure, the Indian government decided to hold off on implementing the controversial retail law (allowing multibrand retailers to own 51% of their operations in India) until a broader consensus can be reached (see India retail reform unravels after backlash). It is interesting to note that the government has only suspended one of the two retail law changes; single brand retailers will still be able to own 100% of their retail operations.
Although I did not anticipate that the multibrand retail law change (had it taken effect) would result in mass foreign entry, I generally view any step closer to free trade and lower foreign entry barriers as a step in the right direction. For this reason, I think the Indian government is bowing to pressure from a powerful minority that runs counter to the greater national good.
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