Who Are We? Who Are They? The Real Facts of a Globalized Chimerica
Peter Nolan is director of the China Big Business Program at Cambridge University. His article is excerpted from a paper prepared for the US-China Business Council.
Cambridge—In the three decades of capitalist globalization, the global business system has experienced a profound transformation. A large fraction of the analysis of globalization has focused on trade. For example, international discussion of the impact of China’s rise has concentrated mainly on its trade surplus and foreign exchange reserves.
In fact, the era of capitalist globalization has witnessed an even more profound transformation in the nature of the firm than it has in trade relations. The firms that are the core of the global business structure have expanded their international operations in a fashion that far exceeds any previous era. This raises fundamental questions about the identity of the firm, the nature of national industrial policy and international relations.
The profound change in the nature of the firm in the era of globalization poses a challenge for governments and citizens in both high-income and developing countries. These issues have become even more pressing since the eruption of the global financial crisis.
Who are “we” in the high-income countries and who are “they” in the developing countries in the light of these changes?
The United States stands at the forefront of this process in the high-income countries. US firms occupy a large fraction of leading positions globally in high-technology products, branded goods and financial services. China stands at the forefront among developing countries. Since the early 1990s China has consistently stressed the goal of establishing a group of large state-owned globally competitive firms in strategic industries.
The way in which the complex interaction between the American and the Chinese business systems evolves in the years ahead will be centrally important for US-Chinese relations as well as for the overall trajectory of the global political economy.
1. Who Are We? Globalization and Industrial Concentration
Systems integrator firms. During the three decades of capitalist globalization, industrial concentration has taken place in almost every sector. Alongside a huge increase in global output, the number of leading firms in most industrial sectors has shrunk and the degree of global industrial concentration has increased greatly. The most visible part of the structure of industrial concentration is the well-known firms with superior technologies and powerful brands. These constitute the “systems integrators” or “organizing brains” at the apex of extended value chains. Their main customers are the global middle class.
The cascade effect. As they consolidated their leading positions, the systems integrator firms, with enormous procurement expenditure, have exerted intense pressure upon the supply chain in order to minimize costs and stimulate technical progress. As firms struggled to meet the strict requirements that are the condition of their participation in the systems integrators’ supply chains, industrial concentration increased rapidly. In sector after sector, a small number of firms account for a major share of the market within each segment of the supply chain. The close coordination by the systems integrators of legally independent firms across the supply chain constitutes a new form of separation of ownership and control.
This “cascade effect” has profound implications for the nature of competition and technical progress. It means that the challenge facing new entrant firms is far deeper than at first sight appears to be the case. They not only face immense difficulties in catching up with the leading systems integrators, who constitute the visible part of the “iceberg” of industrial structure but they also face great difficulties in catching up with the powerful firms that now occupy the commanding heights in almost every segment of global supply chains, in the invisible part of the “iceberg” that lies hidden from view beneath the water.
Technical progress. In 2007, the world’s top 1400 firms (the G-1400) invested a total of $545 billion in R&D. This constitutes the main body of global investment in technical progress. The era of globalization witnessed a drastic increase in the intensity of oligopolistic competition, and investment in technical progress is a key source of competitive advantage. The top 100 firms account for 60 percent of the total R&D spending of the G-1400. The bottom 100 firms account for less than 1 percent of the total. In other words, around 100 or so firms in a small number of high-technology industries sit at the center of technical progress in the era of globalization.
Globalization and “going out” by global firms
Building global business systems. Liberalization of trade flows has been a centrally important part of globalization. In the past two decades world exports have quadrupled in value and the share of world exports in global GDP has risen from 20 percent to 29 percent. However, the growth of international investment by transnational firms proceeded at a much faster pace than the growth of world trade. In 1990 the sales of foreign affiliates were equivalent to 27 percent of world GDP. By 2009 this had risen to 53 percent. By 2009 the sales of foreign affiliates were almost double world exports.
Intertwining of the business systems of high-income countries: “I have you within me and you have me within you.” During the era of capitalist globalization the business structures of developed countries became increasingly intertwined. Firms with their headquarters in one developed country “went out” into other developed countries at the same time that firms from other developed countries “came in” to the home country. Between 1990 and 2009 the stock of outward FDI from the developed countries increased more than eightfold, rising from 11 percent of GDP to 41 percent. Most of this increase was in other developed countries. At the same time, the stock of inward FDI in the developed countries rose sevenfold, from 9 percent of GDP to 32 percent of GDP. By 2009 the inward stock of FDI amount to 22 percent of GDP in the US, 21 percent in Germany, 43 percent in France, and 52 percent in the UK.
After three decades of globalization and “going out,” the international assets, sales and employment of giant companies have outgrown those of the economy where they are headquartered. The foreign assets of the world’s 100 largest multinational companies are 57 percent of their total assets, foreign employment amounts to 58 percent of total employment, and foreign sales amount to 61 percent of total sales.
Among the large developed countries the UK is at the forefront of this process. The foreign assets, sales and employment of leading UK-based companies typically account for more than two-thirds of the total, and often for much more than this. Even though it is a continental-sized economy most of the leading US companies now have over one-half of their assets, sales and employment outside the US.
The relationship between giant multinational companies and their home country has progressively weakened. Their identity and interests are less and less bound up with that of the country in which they happened to have their headquarters. Leading international firms have less and less incentive to cooperate with the national governments of the countries in which they have their headquarters in order to construct a “national industrial policy.”
Between 1987 and 2008 there were 2,219 cross-border “mega-mergers” of over $1 billion, with a total value of $7,232 billion (UNCTAD, 2009: 11). In other words, over 2,200 large firms “gave up their national passport.” In most cases the firms concerned “gave up their passport” to firms from other high income countries. It could be said of the business system of the high countries after three decades of globalization: “You have me within you, and I have you within me.”
Disparity in business power between firms from developed countries and firms from developing countries. The “commanding heights” of the global business system are almost entirely occupied by firms from high-income countries.
In 2010 there were 79 firms from low- and middle-income countries in the FT 500, compared with just eight in the year 2000. This increase has prompted intense discussion in the popular press about an apparent shift in global business power. However, this is still a small number of firms in relation to the population of developing countries. The firms from developing countries in the FT 500 are concentrated in a small number of sectors, including 23 banks, 16 oil and gas producers, 11 metals and mining companies, and 9 telecommunications service companies. Almost all of these operate in protected domestic markets and are often state-owned enterprises which cannot be acquired by multinational companies. Moreover, these are sectors that make use of high technology, but do not themselves typically generate new technology. In the FT 500 there are no firms at all from developing countries in aerospace, chemicals, electronic and electrical equipment, retail, gas, water and utilities, healthcare, pharmaceuticals, industrial engineering, media, oil equipment and services, personal goods, or information technology hardware.
Firms from developing countries lag far behind firms from the high-income countries in terms of research and development. The US has much the largest number of firms in the G-1400, with a total of 368, amounting to 37 percent of the total. Firms from the US, Japan, Germany, France and the UK account for 80 percent of the total number. The low- and middle-income countries as a whole, which have 84 percent of the world’s population, have a total of just 37 firms in the G-1400.
The world’s top 100 brands are all owned by firms from high-income countries. Firms from the US have 50 of the top 100 global brands, and nine of the top 10. Firms from developing countries have no brands at all among the world’s top 100 brands.
Building business systems in developing countries. During the era of capitalist globalization, firms from the high-income countries not only invested heavily in each other’s economies but also constructed comprehensive business systems in developing countries. Between 1990 and 2009 the inward stock of FDI in developing countries rose from $525 billion in 1990 to $4.9 trillion in 2009, rising from 14 percent to 29 percent of GDP. The inward flow of FDI into developing countries was mainly from firms from the developed countries.
Although the outflow of FDI from developing countries increased substantially between 1990 and 2009, 84 percent of the increase in the global stock of outward FDI was from firms with their headquarters in the HIEs. The total outward stock of FDI from developing countries amounts to just 17 percent of that from the developed countries. The stock of inward FDI in developing countries is almost double the outward stock of FDI.
In the wake of the global financial crisis, global firms from high-income countries face prolonged stagnation in their home economies alongside continued robust growth in developing countries. Their focus is even more strongly geared toward expanding their business systems in developing countries, accentuating the trend of the preceding period.
2. Who Are They in the Developing Countries?
China catches up.China is at the forefront of the developing world in the era of capitalist globalization. In 1800 China accounted for around one-third of total global manufacturing output, compared with just 18 percent in the West. In the ensuing 200 years there took place the “Great Divergence” as China’s share of global GDP shrunk drastically. It is now commonplace to talk about a “Great Convergence” taking place between China and the West.
The pace at which China’s economy has caught up with the developed economies has astonished the world. By 2008 China’s Gross National Income (in parity purchasing) was larger than that of France, the UK and Germany combined and was 54 percent of that of the US. China’s manufacturing output had risen to 85 percent of that of the US and was 61 percent greater than that of Japan and over twice that of Germany.
In 2009 China overtook Germany to become the world’s largest exporter. By 2010 China had 42 firms in the Fortune 500 and 23 firms in the FT 500. The market capitalization of Chinese firms in the FT 500. was third, behind only the US and the UK, and in the banking sector the top two positions as well as the seventh position were occupied by Chinese banks. During the global financial crisis China continued to grow strongly while the high-income countries experienced their worst economic downturn since the 1930s.
China is still far from “catching up.” China’s population is 24 percent larger than that of all the high-income countries together. The intrinsic worth of each Chinese person is equal to that of an American or a European.
After more than two decades of rapid growth, there is still a wide development gap between China and the high-income countries. China’s national income is only one-fifth of that of the high-income countries, and national income per person is only 16 percent of that of the high-income countries. Its exports are only 13 percent of those of the high-income countries. It has just nine firms in the G-1400 list of companies and none in the top 100. Its household wealth is only 4 percent of that of the high-income countries. Even after the latest round of reforms is completed China’s voting rights in the International Monetary Fund will be only one-ninth of those of the high-income countries. There still are almost 500 million people in China who live on less than $2 per day.
It cannot be assumed that China will grow indefinitely at its current high speed. The passage from lower middle income to upper middle income will be extremely difficult. China is fast approaching the end of the so-called “Lewis” phase of “economic development with unlimited supplies of labor.”
It faces the prospect of a sharp rise in the proportion of old people in the population, reflecting the drastic restriction on births from the late 1970s onward under the one-child policy. These factors will fundamentally reshape the Chinese political economy. They are coming into play at an unusually early stage in China’s development, in which it is still a lower-middle-income country. The high degree of inequality in income and wealth is a threat to the country’s social and political stability. China also faces an increasingly hostile international political environment with a wide range of popular books and newspaper articles warning about the threat posed by “China’s Rise.”
The role of international capital in China’s “reform and opening up” is debated fiercely within the country. As a new generation of national leaders prepares to assume office the Chinese Communist Party is profoundly torn about the country’s development path. The system of political economy stands at a crossroads.
Multinational companies “going in” to China. It would be a serious misunderstanding of the strategy of multinational companies to exaggerate the significance of China compared with other parts of the developing world. For example, the growth of inward FDI into Latin America and the Caribbean has outpaced that into China by a wide margin. The stock of inward FDI in China is less than one-third of that in Latin America and the Caribbean.
However, China is a key part of the growth strategy of most multinational companies. It has been consistently the largest recipient of inward FDI among developing countries
The US has by far the largest stock of global outward FDI, amounting to 27 percent of the total for all developed countries in 2009. The US has a total of nearly 60,000 investment projects in China. In 2008 the sales volume of these enterprises in China totalled $147 billion, their export volume was $72 billion and their profits were nearly $8 billion. US companies have an estimated stock of $100 billion in inward FDI in China.
Multinational firms have made a critically important contribution to China’s growth and modernization. They have been central to its ability to benefit from the “advantages of the latecomer,” especially through the application of the world’s leading-edge technologies in almost every sector from soft drinks to aircraft.
Foreign-invested firms account for around 28 percent of the country’s overall industrial value-added. Their contribution is especially important in high technology. Foreign-invested enterprises account for around two-thirds of the overall value-added in high-technology industries, and within the sector they accounted for 71 percent of total value-added in the electronic and telecommunications equipment sector and 91 percent in the computer and office equipment sector. They account for 55 percent of China’s total exports and for 90 percent of exports of high-technology products, including 99 percent of its exports of computers and office equipment.
It is estimated that foreign-invested enterprises employ 37 percent of China’s total high-technology workforce and 41 percent of China’s scientists and engineers. The numbers of people working in China within the value chain of foreign firms is extremely large and beyond easy calculation.
China is unique among large latecomer countries in the degree of importance of foreign firms in its modernization and national economic catch-up. It is remarkable that such an exceptionally high degree of openness has occurred under Communist Party rule, in flat contradiction of the predictions of almost all international experts on “transition” from central planning.
Chinese firms “going out” of China: “I have you within me but and you do not have me within you.” China’s stock of outward FDI increased eightfold from $27 billion in 2000 to $230 billion in 2009. The fact that Chinese firms have “gone out” of China in order to invest in other countries has become a hot topic of discussion among international policy makers and in the international media.
In fact, there has been a large, persistent “deficit” in China’s FDI, with inflows consistently exceeding outflows of FDI. The excess of China’s inward stock of FDI over its outward stock increased from $165 billion in 2000 to $243 billion in 2009.
China’s firms are at the very earliest stage of building global production systems. In 2009 China’s outward stock of FDI was 27 percent of that of the Netherlands, 17 percent of that of Germany, 13 percent of that of France, 14 percent of that of the UK and 5 percent of that of the US.
It amounted to less than one-fiftieth of that of the high-income countries as a whole. China’s total stock of outward FDI (excluding Hong Kong) is just one-fifth of the value of GE’s foreign assets ($401 billion) or one-half of ExxonMobil’s ($161 billion). China’s total stock of FDI in the manufacturing sector is just $14 billion, on a par with the international assets of a single medium-sized global company, or the equivalent of a single acquisition by a leading US multinational, such as Kraft’s recent $19 billion acquisition of Cadbury’s, the iconic British confectionary company.
China’s outward FDI in the high-income countries is negligible. Sixty-eight percent of China’s outward stock of FDI is in Hong Kong/Macao. Only 11 percent of China’s total outward stock of FDI is in the high-income countries. China’s stock of outward FDI in the high-income countries is just $27 billion, compared with an inward stock of FDI of nearly $500 billion, most of which is from the high-income countries.
In other words, the high-income countries’ stock of FDI in China is almost twenty times as large as China’s FDI stock in the high-income countries. China’s stock of outward FDI in Germany and UK is $1.1 billion, while in France it is just $0.2 billion. Its stock of outward FDI in the United States is $3.3 billion, compared with the US’s stock of inward FDI into China of around $100 billion, in other words, a ratio of 30:1.
One can always speculate about the future. However, up until this point, Chinese firms have been extremely cautious in their international mergers and acquisitions, as well as in their international “greenfield” investments. They have failed in several efforts to acquire international companies, often on account of political obstacles to “their” firms acquiring “our” firms. China’s large firms are far removed from the global production systems that the world’s leading firms, mostly with their headquarters in the high-income countries, have established during the three decades of modern capitalist globalization.
Policy challenge for developed countries: Who are we?
During the three decades of capitalist globalization, firms from high-income countries have greatly expanded their international operations. The large firm has become truly global. The fact that firms have a decreasing fraction of their assets, sales and employment within the country where they happen to have their headquarters poses a challenge for governments and people in the home country. The close identification of large corporations, including those of the US, with a particular country has greatly weakened. Although the bulk of inward FDI takes places between high-income countries, the share of inward FDI in developing countries has increased to around two-fifths of the total and has risen rapidly since the onset of the global financial crisis.
Since the onset of the global financial crisis in the high-income countries there have been economic stagnation and high levels of unemployment, especially among young people and those with low skills. At the same time large firms from these countries have enjoyed buoyant sales and profits, thanks to the continued growth of their international operations, particularly in developing countries.
As capitalist globalization continues in the decades ahead, these trends are likely to intensify. The disjuncture between the interests of individual governments in the developed countries and the interests of transnational firms will increase inexorably. Today’s developing countries, with China at the forefront, will become an ever-increasing part of the structure, interests and culture of firms from the developed countries.
Policy challenge for developing countries: Who are they? After three decades of capitalist globalization, the outward stock of FDI from firms from developing countries is far smaller than the inward stock from firms from high income countries. China is at the forefront of economic growth in developing countries.
Despite widespread perceptions in the international media that Chinese firms are “buying the world,” their presence in the high-income countries is negligible. This is a remarkable situation for a country that is the world’s largest exporter and its second-largest economy and manufacturer.
Global firms, with their headquarters in the high-income countries, are increasingly “inside” the developing countries, typically occupying commanding positions within their business structure in high value-added sectors. In other words, “we” are inside “them,” but “they” are not inside “us.”
Most of the successful large firms from developing countries are protected by the national government, through state ownership as well as other measures of support. These are mainly in industries such as banking, metals and mining, retail, construction, transport, and telecom services, which often use high-technology products but do not typically produce these products themselves.
This poses a severe policy challenge for governments and people in developing countries, not least in China, where there is intense debate about this situation. In view of the extremely uneven nature of international business competition, it is unsurprising that China has attempted to nurture “national champion” firms through state-led industrial policy measures. China’s 70-odd “national champion” firms are the central focus of its effort to catch up with the world’s leading international firms.
These national champion firms are all majority-owned by the Chinese state. Their CEOs and chairmen are all appointed by the Central Organization Department of the Chinese Communist Party. To date China has been unsuccessful in its efforts to nurture a group of globally competitive “national champion” firms with leading global technologies and brands. Whether it will be successful in the future remains an open question. Defending the position of state-owned national champion firms in a large and fast-growing domestic economy is quite different from constructing globally competitive firms.
Complexity of catching up. The example of China’s banks and aircraft industry demonstrates just how severe is the challenge facing firms from developing countries. In the past decade China’s commercial banks have been transformed beyond the imagination of most people outside the country. A key part of that transformation involves the tremendous progress in the application of information technology. The key components of the transformation of the IT systems in China’s banks have been supplied by the global giants of the IT industry, mainly with their headquarters in the US.
It is a remarkable achievement for China to have built its own indigenous regional jet, and, even more remarkable, to be entering direct competition with Boeing and Airbus in the market for large commercial aircraft. However, there remains a long and complicated battle to dislodge the world’s leading systems integrators from their entrenched position within the world aircraft industry. Moreover, the sub-systems inside the ARJ21 and C919 are all from the global giants of the industry. These all have their headquarters in the high-income countries, principally in the US.
China now understands fully the severity of the competitive challenge that it faces across the whole value chain due to the process of industrial consolidation and international expansion of business operations that has taken place among firms from the developed countries in the last three decades. China is attempting to build its own globally competitive “systems integrator” firms. In order to achieve this it has opened its doors wide to leading global firms in the most sensitive of all industries, banks and aerospace. High-technology firms from the US are at the forefront of this process, occupying leading positions deep within the value chain.
Will developed countries in general, and the US in particular, also open their doors to Chinese firms in the future?
Will the time come when it can be said: “We are inside you, but you also are inside us”?
The question of “who are we” and “who are they” is far from resolved.