The Growth of China as a Political and Economic Power - Research Paper Example

Running Header: THE GROWTH OF CHINA The Growth of China as a Political and Economic Power TABLE OF CONTENTS Introduction…………………………………………………………………………… The Rise of Chinese Business Groups and Infrastructure Development……………… The Growth of Capital Markets and the Financial Industry………………………….. The Rise of Political Might and Influence……………………………………………. Implications for U.S. Multi-National Companies and Future Strategies……………… Conclusion…………………………………………………………………………….. References The Growth of China as an Economic and Political Power Introduction Up until the 21st Century, China sustained a political and economic structure that was built against Communist values. The Communist ideology asserts that society should be established to ensure an equitable and fair distribution of resources, including production output and tangible land resources, that will liberate the working man from arduous and alienating labor in an effort to explore their own lifestyle ideals and value-added social activities (Holmes, 2009). The Communist manifesto is designed to ensure that a classless society is created and that the individual member of society is given opportunities for ownership of important resources that include transportation for distribution of finished product, manufacturing plants, and all agricultural systems (Scott & Marshall, 2005). Many members of global society believe that Communist doctrines are dangerous and a threat to the stability of society, asserting that Communism ensures growing power and influence of government as a dictatorial and oppressive social regime. However, Communism is based solidly on fundamental values related to Socialism ideology, which also ensures that the top priority for society and government is to ensure the well-being and enhanced lifestyle of all citizens under a system that ensures equitable allocation of resources to all members of society regardless of their class position (Lamb & Docherty, 2006). The aforementioned Communist dogma that drove Chinese economic, social and political ideology did ultimately serve as an oppression for adopting principles of globalization that were becoming underpinning strategies to most developed and Westernized nations. Capitalistic economies which promote free market economic policy and private ownership of business was spreading rapidly across the world during the late 20th Century (Degen, 2008). This changed the dynamics of free trade between developed and developing nations, forcing China to adopt some of the principles of capitalistic ideology in order to remain competitive, improve national GDP, and develop strong political relationships with countries that would be contributing largely to improving the Chinese economy. The transition from Communist values to ideologies that are aligned with capitalism was the major, fundamental shift that made China, today, become such a potent economic and political power in the world in contemporary society. Research has indicated that social shifts, the role of government in monitoring and controlling business, government investment in a variety of sectors, and global trade patterns are the most influential factors that contributed to the rise of China as an economic and political power across the globe. The Rise of Chinese Business Groups and Infrastructure Development Up until the year 2000, China was considered a command economy, a system where manufacturing of products are firmly controlled by domineering and influential government policy (Bertell, 1997; Gorman, 2003; Myers 2004). Prior to the 21st Century, the government invested considerable economic capital toward maintaining majority ownership of major corporations that ensured government sustained complete control over manufacturing output, distribution of finished products, and the monetary policy that controlled banking and lending in the financial industry. Chinese government was instrumental in establishing many large, state-owned business organizations in which Board representation included many members of the traditionalist Communist party. Rather than adopting the Anglo-American model of corporate governance, in which satisfying the needs of stakeholders and shareholders is a paramount objective, government appointment of Communist leaders at the highest levels of governance ensured that business revenues and outputs would satisfy the power and authority expectations of government. Government was so influential in controlling business functions and strategies that companies were even instructed, through legal regulations, to provide ongoing social and economic support for the Communist Party as part of corporate procedures and policy (Huang & Orr, 2007). This prevented domestic Chinese businesses from establishing the standards of free trade that were beginning to dominate global trade policies and was limiting the country toward becoming an export-driven nation that would have provided the country with significant economic growth. In China, during the period where state-owned organizations were controlling the majority of product output, there were still 70 million different Communist Party members and, when the Board of Directors was appointed by government under Communist ideology, it provided government with even more control and authority over national business policy, even allowing government to be influential in making decisions regarding supplier procurement strategies and distribution strategies that impacted consumer lifestyle and the advancement of human welfare programs that are better sustained under Socialist or Capitalistic systems. The Communist manifesto is directly opposed to liberalism in relation to social and business policy development. Whilst Western values were beginning to become entrenched in corporate activity in the country, as a result of growing expatriate management and foreign direct investment from countries such as Britain and the United States, the government was, prior to the 21st Century, highly resistant to adopting liberal business policies that promote more control without government influence. Instead of adopting more liberal strategies that were associated with a free market economy, government continued to dominate multiple industries (i.e. the banking sector, corporatism, and capital market development) and refused to relinquish this control to satisfy long-standing government expectations for sustaining power distance between government and many other stakeholders in society, including social and business representatives. Though the government wanted to maintain supremacy and absolute control over business practices, it was quickly realized by government that international business competition was beginning to outperform domestic Chinese company output. This ultimately forced the government to begin adopting many principles and strategies of the capitalistic system in order to make China competitive and viable related to international trade (Degen, 2008). Government, during this period, maintained majority equity in many different large corporations in a variety of industry sectors, however this severely limited the capability of conglomerates in the country to create more effective product pricing policies and it limited the ability of new business market entrants to enter the industry which oppressed free competition. Additionally, businesses, prior to the 21st Century, received the majority of their loans and other capital directly from government. This led to a very immature banking and financial lending industry and companies were, therefore, ill-equipped to sustain growth or improve their manufacturing operations without direct and oppressive reliance on government as an economic stimulator. Since government could no longer sustain serving as a major lending agency without affecting government revenues and the national economy, it became absolutely necessary to begin deregulation policy development for businesses, a strategy aligned with Western free market economy policies. However, still holding firm to many traditionalist Communist values, the government did not want to completely relinquish control over business practices and policies. Ultimately, the need for change and government wanting to maintain some level of dominance over business led to the development of business groups. Business groups are defined as conglomerates of organizations that are dependent on one another and those that have the capacity to operate in foreign and domestic markets. Business groups are inter-linked through formal connections (Khanna & Yafeh, 2005). To make the country competitive, government had to liberalize business policy to promote business group development that would allow internal executives and non-government appointed Board governance to have more control over business output, distribution methodologies, and foreign investment decision-making. Examples of business groups in China include the Dongfeng Motor Group and the SAIC Motor Group, multinational, state-supported businesses that operate as a blended hybrid between state influence and liberalization under a Western model of self-controlled business. Prior to 1994, government served as the centralized authority that determined pricing structures within the automobile industry. As a rather gluttonous and insatiable desire for government self-protectionism, the government did not believe that setting competitive pricing structures on automobiles would be viable for government revenue production. This created a situation where price-conscious Chinese consumers were beginning to provide significantly reduced demand for auto purchases. By 2004, in order to remain competitive with foreign auto producers that were flooding the Chinese market and gaining global market share through foreign direct investment, government loosened their controls on the act of price fixing which, in turn, created more competitive behaviors between major business group players in the market. Allowing businesses to serve as the controlling interest for price structuring in the auto industry, it improved demand and substantially increased domestic Chinese auto output into 2005 (Holweg, Luo & Oliver, 2008). The auto industry contributes, today, to a great deal of improvements in GDP which, in turn, makes the nation more competitive internationally and improves the government capital availability that can be better allocated to more worthwhile social welfare programs and overall commercial infrastructure development. Unlike historical government policy where resources were largely allocated in a distorted fashion (such as providing Communist-led businesses with capital injections to improve production), government was now equipped with rapid capital growth as a result of commercial success and improvement, making China a powerful economic force to be reckoned with across the world. With the emergence of more business groups in a variety of diverse industries, there was a growing need for obtaining credit and financial capital in order to sustain business redevelopment and corporate conglomerate expansion. With growth in the auto industry now contributing to a large portion of national GDP, it was realized that there was a substantial need to improve the national infrastructure (e.g. roadways). In 2013, the government provided a guarantee to provide a total of £94 billion on infrastructure improvement (Sweeney & Chiang, 2012). This fell on the heels of previous capital injection to improve infrastructure, which allowed rural Chinese consumers with new opportunities for career development and improvement of the holistic commercial infrastructure in urban centers. Government’s ongoing investment into infrastructure growth and redevelopment has contributed to China’s growth as an economic power, improving distribution capacity, urban development that provides more significant job growth in major Chinese cities, and the ability of foreign firms to provide important revenues that assisted in sustaining government influence and capabilities through taxation and other important economic benefits through foreign direct investment. Holistically, abandonment of many Communist-focused ideologies and business strategies improved the ability of suppliers of many industries to improve their global supply chain. As a result, it opened avenues for Chinese business groups and other conglomerates in the country to identify new cost controls and lower their switching costs for changing international suppliers, giving them new cost-related competitive advantages. Having new supply opportunities managed to increase national production in many different industries by a gigantic growth rate averaging 38.8 percent between 2002 and 2003. Furthermore, this new infrastructure for ensuring domestic and global trade improvements made it advantageous for China to enter the World Trade Organization which radically altered the dynamics of global trade, forcing the country to adopt more free market ideologies and strategies that ultimately led to China having considerable competitive prowess internationally. New opportunities associated with a newly developed international supply chain, ability to sustain foreign direct investment by major Western companies through enhanced infrastructure development, and ability to control costs along the supply chain opened a variety of importation opportunities that assisted in improvements in national production capacity and output volumes that contributed strongly to economic power growth in the country. Industries that were kept wholly domestic such as electronics, textiles, automobiles, rubbers and auto financing services were now under much less government influence and regulation and these industries were becoming viable competitors internationally (Chen, 2012) and providing rapid supply replenishment to major industry players that often had their production delayed by reliance on inefficient suppliers controlled by government prior to the 21st Century. The Growth of Capital Markets and the Financial Industry In the 1990s, China had a very under-developed financial market (He, Mao, Rui & Zha, 2013). As aforementioned, government influence as a lending force and the agency that injected financial capital for business development made it exceedingly difficult for existing conglomerates and new, smaller market entrants in many industry sectors to procure financial capital to become more productive and efficient competitors in global and domestic markets. The issues associated with domestic financial lending was forcing organizations to become wholly reliant on traditional banking services that was, prior to 2005, the most substantial and viable method of gaining necessary corporate funding (He, et al., 2013). Financing organizations that were in operation at the time were growing significantly dissatisfied with state-owned conglomerates and were tightening their restrictions related to gaining approval for loans and credit generation. The productivity and revenue production of growing business groups and other smaller organizations were now providing more proven profit growth than state-owned industries and, as a result, state-controlled businesses were considered high risk for capital lending. As a result, the government had to develop strategies that would assist in providing both state-owned and private businesses new lending channels and opportunities for credit. The government became an influential force in providing a variety of alternative lending opportunities in the financial industry. Government, through policy development and financial capital allocation, become a very substantial player in helping to create a mature financial and lending industry that now allowed companies to obtain capital resources that improved business operations and allowed for more effective and profitable expansion. Government, prior to 2000, maintained a focus on crisis leadership, correcting many different market failures that had been hereditary from the traditional command economy (Peng, 2003). Productivity and profit production in many major industry players were also allowing many different lending institutions to loosen their credit and lending restrictions as a result of being able to guarantee recurring revenue growth successes. Hence, it should be recognized that government support for business groups and a new willingness to sacrifice government revenues for business development assisted in creating an advanced financial industry that allowed multi-national companies operating in China and domestic firms to improve production output and fulfill demands, through export strategies, in a variety of international developed and developing nations. The influence and growth of a mature financial industry, as a result of government intervention and investment, contributed to the rise of contemporary China’s economic authority across the world. In the 1980s, Chinese government and Chinese society realized that developed nations such as Britain and the United States were gaining considerable economic advantages as a result of a growing and sophisticated capital market (e.g. stock market). Growth in shareholder interest toward ownership of Western businesses was providing not only private citizen wealth, but creating alternative methodologies of procuring instant capital that could be allocated to business improvement and development. Many state-owned businesses, as a result, began to issue many different common stock shares in the hopes that it would serve as a catalyst for establishment of a secure and profitable securities market. Over time, into the 1990s, public citizen demand for share purchases was growing exponentially, forcing private-owned businesses to begin this same method of common stock issuance (Liang & Useem, 2009). By the year 2008, this immature yet developing capital market witnessed 540 different corporations become listed on the Shenzhen Stock Exchange that created a capital market that was valuated at one trillion RMB (Liang & Useem). By 2013, all stock exchanges in the country are valued at £1.3 trillion, making the country competitive with the capital markets in such countries as the United States and the United Kingdom, thus also giving businesses much more competitive advantage through finance and the ability to improve a variety of capacities that make the businesses more internationally viable and competitive. The Rise of Political Might and Influence It was upon the adoption of a capitalistic market philosophy and doctrine that countries current sustaining political influence and authority in global affairs began taking China seriously as a diplomatic partner. The majority of political influence of Chinese government representatives, however, was largely founded on success in business and the ability of Chinese firms to meet the growing demands for exportation of domestic Chinese product. Government began to reduce its long-standing practices of appointing business Board members from the Communist Party, something that satisfied the capitalistic leadership of many developed democracies worldwide. Adopting Western governance models that gave businesses more autonomy made it viable and rewarding, financially, for foreign businesses to invest in the Chinese stock markets. In turn, political leaders found that having a new Chinese focus on improving relationships and profitability with important shareholders could and should have wide-ranging economic benefits to developed countries. Governments in countries such as the United States began offering support and influencing American companies to consider foreign direct investment in China which provided concurrent revenue growth for American government. Companies were beginning to develop their own corporate and competitive-based strategies that were no longer restricted by traditional Communist leadership ideologies. As a result, it opened the proverbial doors for diplomacy between Chinese government and developed nation governments that facilitated new trade agreements and ambassadorial exchanges. Under the traditional Communist ideology, political leaders maintained a highly centralized government system that isolated political authority within the government. Through new exportation agreements, tariff reductions that were facilitated through political systems involved with the World Trade Organization, and more transparency in political ideology, China became more involved with global politics. It was no longer viable for Chinese government to maintain a centralized system of authority and now it became necessary for a consensus-based political system in order to facilitate relationship development with political leaders that operated under capitalistic doctrines. Local-level governments in China, business leaders and even the general population citizenry were swiftly becoming harmonized under a decentralized system of government that demanded compromise and agreement in order to function properly in a new economy based on capitalistic principles and systems (Heilmann & Perry, 2011; Yang, 2004). Private corporate ownership began, through this consensus based political ideology, to play an important role in influencing political policy development. For instance, housing, education and employment had been centrally controlled by political leadership in China between 1900 and 1990, which weakened work systems in the country and limited the educational opportunities for Chinese citizens. Through political cooperation built as a result of improved trade negotiations and the influence of multi-national Chinese corporations that were now much less regulated by government, job availability improved and the skills required to enter job markets were being provided to Chinese citizens. It has also improved the construction and availability of affordable housing in urban regions in China and has established a more productive and effective educational infrastructure. As a result, consumer incomes have been increasing and commercialism running rampant as a social ideology in the country. Growth as an influential political figure domestically and internationally has revolutionized the job market in the country, grown government revenues through commercialism, and made a workforce that is highly competitive on a global basis. China’s political relationships have made the country viable for Western companies to move their operations into China, as a result of human capital improvements in the workforce, thus providing new expansionary opportunities for companies in countries such as the United States and Britain. In order to promote even further business development and success, Chinese government has been establishing a variety of regions known as free trade areas. Free trade areas are actually trade blocs in which member nations sign a free trade agreement that completely removes tariff impositions and quotas on import products. The political representatives in China believed that when free trade is able to be facilitated between member nations, it would open borders for foreign direct investment and ensure a type of economic integration that is necessary in a global trade environment. Under the command economy of the 20th Century, China remained closed to a majority of potential diplomatic discussions and opportunities with foreign political leadership, ensuring very little transparency in government in an effort to completely internalize Chinese policy and politics. By establishing free trade areas, it illustrated to foreign governments that China was legitimately adopting more structured and effective policies that could facilitate more economic growth for foreign national leadership, making diplomatic discussions with China more lucrative and incentivized. It is not just commercial developments and business productivity, however, that has made China become such a potent political influence across the world today. China’s business successes and ability for the government to ensure itself more financial capital has given the country incentive to provide concentrated financial investment into a revolutionary military modernization strategy. The restructuring of the People’s Liberation Army (PLA), founded in 1927, has been influential in giving China more military authority, especially in naval capacity, which gives the nation more national security (Beech, 2011; Scobell & Kamphausen 2007). Government in China has injected much more financial investment into improving offensive capacity in the naval services of the country and defensive missile production. Whereas the United States once maintained absolute naval superiority in Southeast Asia, China became a formidable military force to be reckoned with in modern times. Investments in Chinese military improvements have also given the country many different anti-ship missile capabilities that have the capacity to destroy some of the most sophisticated and modern aircraft carriers, thereby altering the balance of power in this region and deterring U.S. intimidation associated with Chinese national security (Craig, 2007). During a period where U.S. interests in military modernization is overstretched by strained federal budgets, China’s sudden investment and focus on military redevelopment and improvement provides the incentive to open talks by major military powers across the world as a means of securing positive relationships and ensuring foreign nation security (Mulvenon & Finkelstein, 2006; Crane, 2005). Implications for U.S. Multi-National Companies and Future Strategies Though U.S.-based multi-nationals have new advantages in China for moving their operations to exploit lower-cost labor wages, increased distribution networks and production capacities, and receive economic incentives for foreign direct investment, it is becoming increasingly difficult for Western companies to compete effectively due to growth in Chinese industry efficiency and capacity developments. China has become an export-driven economy and in 2006, exports contributed a whopping 36 percent of China’s entire national GDP (Coates, Horton & McNamee, 2006). Being a low-cost production nation gives China significant comparative and competitive advantages, especially in an international marketplace where rising costs associated with inflation complicate establishment of pricing structures on products that are both competitive and viable for corporate profitability. In most developed nations, consumers have considerable buying power due to the fact that Chinese production firms and Chinese marketers have opened the doors for improved competitive market entry. Buyers are able to force a backward integration on U.S.-based and other developed nation multi-nationals that make them considerate of pricing for those consumers that can easily defect to other suppliers in many different industries. China exports, when flooding markets in North America, Europe and Australia, give consumers many different options for product variety that allows them to control pricing. When this occurs, multi-national companies attempting to compete against Chinese business prowess are forced to either absorb less operational profit by setting prices low to combat Chinese corporate ability to keep prices on exported products lower than domestically-produced products in countries such as the U.S. and United Kingdom. A combative strategy for multi-nationals in this instance is to rely on marketing and promotion as a means of gaining consumer interest in domestically-produced products without necessarily being concerned about pricing as a primary selective factor that drives consumption behavior. For instance, multi-national product marketers can utilize contemporary strategies in marketing theory such as lifestyle marketing and brand management as a means of creating psycho-social connections between company or brand and the consuming public. Many multi-nationals are able to position their company reputations or product brands as a means of differentiating against foreign Chinese competition. For instance, marketing literature describing best practices to create important emotional connections with product indicate that when consumers believe a product can enhance their lifestyles and ensure social self-expansion, they are more apt to have preference for the product (Zhang and Chan, 2009). The aforementioned method of building psycho-social connections as a promotional tool combats Chinese economic growth through commercial development. Chinese businesses, having only recently matured to maintain modern principles of sales strategy and marketing, are ill-equipped to gain brand equity as corporate leaders are unfamiliar with Western models of consumption and consumer behavior attributes. Multi-nationals are actually able to create higher levels of consumer demand for domestically produced products by using advertising and other tools to make a product or service stand out from foreign, Chinese competitors. By using a variety of consistent and integrated marketing communications strategies, brand preference is established which undercuts the performance and profit potential of Chinese export products that are relevant in an existing market. Additionally, Western multi-nationals that are attempting to compete with Chinese-made products can create important strategic alliances with other non-Chinese product producers across the world. Strategic alliances provide opportunities for Western multi-nationals to exploit new knowledge resources in areas of manufacturing competency, technology development, and even share financial resources to create a new subsidiary that is co-owned by developed nation companies. This improves the innovation capacity of other multi-nationals not headquartered in China which is crucial for establishing market dominance for products, allowing multi-nationals to undercut Chinese competitive prowess. For instance, companies can develop what is referred to as disruptive innovations, products with the ability to completely disrupt an established market and quickly seize market share from Chinese competitors. Sharing of human-based resources, economic resources, and knowledge-based resources establish the capacity for creating revolutionary products in a variety of sectors. When businesses in such a strategic alliance create a disruptive innovation, it limits the capacity of Chinese organizations to replicate the technology or benefits of this innovative product that extends the product life cycle and ensures more revenue growth for the subsidiary that now holds a dominant market position. This is one of the most viable strategies for engaging in corporate warfare against Chinese efficiencies by being first-to-market. According to theory, consumers often judge late movers in a market against the original pioneer that created a revolutionary product and judge the late mover unfavorably against the original producer (Agarwal & Gort, 2001). Developed nation multi-nationals outside of China are much more adept at being innovative as having internal control over business strategy development, in Chinese companies, has been stifled for decades by rigid governmental influence, regulation and control. This is a quality advantage to combat the growing economic power of China that is founded on corporate Chinese development. Conclusion As illustrated by research, China has become a potent economic and political powerhouse as a result of limiting government influence and control over businesses, ongoing government financial investment in infrastructure and the capital markets, the growing instances of better lending and financial services in the country, and return on investment for government-sponsored ventures that improve the commercial environment in the country. All of these improvements have led to more political authority that is underpinned by developed nation governments finding economic advantages, military advantages, and trade advantages associated with a more liberal China. Shifting values moving from traditional Communism to capitalistic ideologies, additionally, have secured a more stable China that is able to compete economically and politically in a rapidly globalizing world. References Agarwal, R. & Gort, M. (2001). First-mover Advantage and the Speed of Competitive Entry, Journal of Law and Economics, 44(April), pp.161-177. Beech, H. (2011). Meet China’s Newest Soldiers: An Online Blue Army, Time Magazine, May 27. Bertell, O. (1997). Market Socialism: The Debate among Socialists. United States: Routledge. Chen, I.S. (2012). History of China Automobile Industry. Retrieved January 25, 2014 from http://ivysiyuchen.wikidot.com/history Coates, B., Horton, D. & McNamee, L. (2006). China: Prospects for Export-Driven Growth, Economic Roundup, 4(December), pp.79-102. Craig, S.L. (2007). Chinese Perceptions of Traditional and Nontraditional Security Threats. Carlisle: Strategic Studies Institute, U.S. Army War College. Crane, K. (2005). 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