The impact of China’s new economic policy on corporations

August 8th, 2017

Here we have a topic I frequently use to discuss with students and companies. Two factors play in this context a decisive role for the corporate sector: the geographical location of the headquarters (home country) and the volume of activities.

If we concentrate the answer on a non-Chinese and probably not very small company, the following areas or departments of the company may feel or will/may be affected by the results of the new economic policy (if business with China is not too limited): strategy, sales (marketing), purchasing, product development, production, finance, human capital formation, investor relations, etc., i.e. major parts of the company in the case of quite extensive business with China. However, smaller foreign companies with more limited commercial relations to China may be affected by China’s economic reform policy as well.

The composition of Chinese imports from the developed world will in the future change a lot compared to the past two or three decades – the demand patterns of the young and urban population included. The application of digitalization will certainly increase rapidly in the – so far – second largest economy in the world. Digitalization will also affect many production processes. China wants to establish itself as a technological and an economic superpower – and means it seriously.

Consequently, many foreign companies will be forced to develop new business models and/or products for China. In certain cases may, for example, even future or potential reforms of the Chinese tax and fee system or educational reforms become parameters of interest for Western corporations.

It should be added that also many Chinese companies will have to change their business models, either to maintain current good positions, to expand in the future or in order to survive. This angle should not be neglected – and it will also affect purchasing managers in OECD countries. Competition within China will increase, too.

More could be mentioned. The objective of this little article is not to give a comprehensive answer to all possible effects of China’s new economic policy on corporate strategies and decisions in the rest of the world – but to indicate that there will be effects.

However, all the different kinds and volumes of these reform effects cannot be singled out today. More hints may come from the – probably – five new members of the Politburo’s Standing Committee. They will be selected at the 19th National Congress of the Communist Party of China this coming fall.

Do not hesitate to continuously watch political developments in China. The link to business with China is obvious and will become increasingly important!

 

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Hernando de Soto – institutions mean a lot

July 13th, 2017

Hernando de Soto, president of the Institute for Liberty and Democracy in Lima/Peru, received in spring 2017 the prestigious Swedish “Global Award for Entrepreneurship Research”. According to the price committee, de Soto’s analyses have led to “new ways to alleviate poverty and underdevelopment by reforming property right systems, business legislation and regulations. His contributions have

¤ led to a new and better understanding of the role of institutions for entrepreneurship, especially in developing countries;

¤ influenced policy worldwide, both in terms of conceptual understanding and practical policy measures;

¤ paved new ways to assess and measure how difficult it is for people to enter the formal sectors – this has been done by painstaking empirical field work;

¤ shown that the main problem in many developing countries is not capital per se but lack of property rights.”

By analyzing de Soto’s research, one can easily recognize the influence of his microeconomic work on the creation of the World Bank’s annual report “Doing Business”, dealing with institutional conditions in a large number of countries and – hopefully – improvements more recently. I regularly discuss the tables in “Doing Business” with my students – a statistical framework from the real world that easily explains what microeconomic and institutional economics (property rights) are all about. However, it should be reminded that well-working institutions alone cannot take lagging countries out of poverty.

Many friends in or of the emerging/developing world do hope that Hernando de Soto pretty soon will also receive what I here may call the Nobel Prize in Economics (officially: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel). This would be a good and courageous choice – as courageous as giving it to other prominent economists with similar research interests. One may hereby mention, for example, relatively young development economists like Esther Duflo and Daron Acemoglu (why not all three jointly?).

Such a courageous step could mean real encouragement for all poor and underperforming countries and the necessary research on their current conditions and the way to a better future. Combatting poverty – and the environment – should become even more important objectives for the whole globe. Not only for politics but also for research!

 

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Summer reflections – new opportunities for the EU, China and Africa

June 28th, 2017

Pro-European citizens in the currently 28 EU states certainly dislike the British decision to leave the European Union (EU), probably in 2019. However, the British departure from the EU should now encourage the remaining EU-member countries and Brussels to think more strategically and concretely about the future of the EU. What should be done? What can be done?

First signals in such a positive and more encouraging direction can already be recognized. Important topics and reform areas, however, should be addressed more transparently already in the near future. Many of them are well known, others have been scarcely discussed so far. Much can be done to rejuvenize the image of Europe and the EU itself. In this respect, the British withdrawal from the EU – with all its disadvantages – also offers new opportunities.

Below, three examples are summed up and briefly elaborated on, dealing with digitalization and relations of the EU to China and Africa. All three different cases affect both politics and business, i.e. the EU as an institution and the corporate sector in the member states.

Readers of this article may wonder why an economist wants to deal with such a complicated political issue as the EU exit of the UK. The answer, however, is much easier than one may believe: political and economic developments have been interlinked in the past few decades to an extent that they in many cases cannot be separated from each other anymore. This is certainly true also what concerns the economic future of Europe. However, this obvious reality of internationalization and globalization has not reached out to all producers and users of economic forecasts so far.

A similar kind of lagging interdisciplinary understanding can also be found between the large areas of microeconomics and macroeconomics. Microeconomic improvements – for instance when it comes to education, innovation, entrepreneurship, working conditions for women, foreign direct investments, taxes, etc., can indeed have a positive impact on long-term macroeconomic GDP growth as well – a correlation that is often forgotten or neglected by forecasters, other kind of economists and politicians. The EU and its member countries should work with these microeconomic issues much more intensively and ambitiously than in the past. It could mean a good way into the future.

Let’s now get back to three above-mentioned examples of areas which the EU and its member countries should focus on in the next few years, among many others. These three areas serve only as exemplifications and do not reflect – despite their importance – any given preference of the author.

Digitalization

Digitalization is certainly an area that will gain much more momentum in the foreseeable future – a most probable development that should be taken increasingly seriously by the EU and its member states, employers and unions. Many new, interesting IT-products or products with applied IT-technology will enter domestic and international markets in the forthcoming years. To get there, the EU, its member states and corporations have to raise IT skills on all kind of research, development and application levels, also in order to meet all upcoming future cyber risks in an appropriate way.

All these needs urge for many future cross-border activities within the EU – as indicated also what concerns the important area of cyber security. Promising and in praxi working ways forward have also to be found in order to reduce the IT-outsider and IT-insider problem on the labor markets (applying here the outsider-research results of the great Swedish economist Assar Lindbeck who, by the way, really deserves the Nobel Prize in Economics as soon as possible).

China

EU relations with China should be regarded as another area that could be improved considerably, including bilateral trade and co-operation in research, investment, the environment, energy, urban planning, health care, institutional improvements, IT protection and cyber security, exchange of students, etc. Increasing trust between the EU and China could mean more trade and other commercial business between these two giants and, consequently, contribute to better economic growth on both sides.

Without doubt, the EU has now a fair chance to improve European co-operation with China which certainly would be a win-win situation for the EU and its member countries, China and the rest of the world – particularly if China really is willing to stick ambitiously to the Paris climate agreement. It should not be forgotten that more clarification and progress in EU-/China-relations could support European corporate activities in and with China in times when many companies have to change their business model for China already as a result of China’s ongoing reform policy. In this commercial context, generally improving European relations with China may appear even more relevant. This should be concluded without considering China’s self-proclaimed global role as prominent defender of free trade and the Paris climate agreement.

Africa

The third example for concrete new opportunities for the EU and its member countries deals with Africa. Africa must in most respects be considered as a lagging continent – but with a rapidly increasing population and still hidden good economic potential. Time has come when traditional European aid-oriented development politics for less advanced countries should be replaced by more concrete long-term growth strategies and measures – a necessary policy change that the German Chancellor Angela Merkel repeatedly has pointed at more recently.

Sure, a long-term perspective has to be applied in the hopefully modified EU relations with Africa. However, if taken seriously, it could be worth-while to increase efforts – from the north to the south of Africa but also for the EU itself. New commercial opportunities could show up – and possibly at some point less pressure from (potential) African migrants. It would, of course, be wonderful if more and more African citizens gradually prefer to stay in their home countries for one specific reason – i.e. that the future finally looks better and more promising.

Ways forward for the EU

Altogether, the examples chosen above hopefully give some alternatives how and where the EU could move forward in the forthcoming years. Certain positive changes may be quite costly, others relatively cheap – particularly when it comes to many institutional improvements.

“L’union fait la force”(“unity makes strength”) is an old proverb in a number of countries. These words are still valid – also in the Europe (EU) of today and tomorrow.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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