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Doing business in China: Being efficient isn’t enough

Posted in China Business, Recommended Reading

Just read a fascinating post at a fascinating blog with which I was not previously familiar.  The blog is Global Michigan, and it is run by William Foreman as a “showcase” for the international research and other internationally related activity at the University of Michigan.  If you are interested in the world (and who isn’t), I recommend Global Michigan to you.

The post that initially drew my interest is entitled, Doing business in China: Being efficient isn’t enough and it highlights recently completed research by Brian Wu, an assistant professor of Strategy at the University of Michigan’s Ross School of Business.  According to Wu, the “natural selection” of which businesses thrive and which die off is not so natural at all in China:

The business world is often ruled by natural selection. Efficient new companies thrive. Stodgy old ones go bankrupt. But that’s less likely to happen in China, says Brian Wu, an assistant professor of strategy at the University of Michigan’s Ross School of Business.

Newer companies have a difficult time competing in China because of institutional barriers, Wu says. These include building relationships with government officials, dealing with local regulations and getting loans from banks.

*   *   *    *

“More efficient firms, they grow, expand and prosper. Less efficient ones just exit the market. In other words, there’s a one-to-one correspondence between economic efficiency and survival. It’s Darwin’s survival of the fittest idea.

But what we find in China based on Chinese census data is almost the opposite. We see a divergence between efficiency and survival. More efficient companies are more likely to exit the market.

Incumbent firms have an advantage in terms of survival. They can survive even if they are less efficient because they already have social, institutional, governmental connections. They can get better loans more easily. They can sell to another region more easily. So all these factors can increase their chances of survival.”

I fear Wu is largely right and if he is, what does that mean for foreign companies doing business in China?  I am going to go out on a limb here and say not much.  Not much simply because foreign firms for the most part have no choice but to play they hand they have been dealt and that hand will likely never include “social, institutional, governmental” connections equal or even close to equal to those of established domestic Chinese companies.  So should foreign companies “exit the market”?  No, they should simply play to their strengths, which oftentimes includes the prestige that comes with being a foreign company.

What do you think?

 

  • http://www.postlinearity.com gregorylent

    no right or wrong in this world, just cultural differences

  • Rob Schackne

    …and I’ll go out on a limb too, and say that if the only game that the foreign company can play is with the overweight, boring kid with rich parents, then there’s going to be a critical point when you decide to kick the ball over the road and walk away. Me, I’m seeing a greater share of a sense of “entitlement” lately, the old trope of victims and redress, as if the West were some charitable organization and China the beneficiary. Tell me that I’m wrong…and business generally isn’t suffering the modern equivalent of unequal treaties. Only my opinion.

  • Emilio Pucci

    State Banks funding SOEs. Nothing new there.

  • http://www.procurasia.com/ Etienne Charlier

    Over the last 15 years, the companies I have seen succeed (foreign and Chinese) are those that are effective. They concentrate resources to solve the problems they face before it gets out of hand. This is not efficient (at least in the short term) but it works.

    Chinese suppliers we deal with are not the most efficient, i.e. they do not optimize the use of their resources (money, people, inventory, …) but at the end of the day they get things done and grow fast.

    Somehow, I think there is a contradiction between efficiency at one point in time and the capacity to grow fast. And China is still in that phase.

    • Rob Schackne

      That’s a good point you make, Etienne. Many scholars have sleepless nights trying to guess what phase China is actually in right now. But I wonder about the lessons this learning phase is gleaning from the historical phase, and whether too much capitulation to effective inefficiency will eventually result in a slow-down of some significant kind. While one cannot argue with “what works”, failure to signal ways to avoid recurring problems — if it is not merely an historical aberration — might result in lending strength to a business culture that cannot last long in its present state.

      • http://www.procurasia.com/ Etienne Charlier

        Thanks Rob. As long as people are ready to put more effort and resources then others into getting the same or lower results, there is no problem.

        As we see, changes are slowly becoming visible in some regions: cost increases in coastal areas make it more important for companies to increase efficiency. Middle class aspiration for a good life make it unacceptable to have tainted food and continuous fog in cities like Beijing.

        As far as scholars are concerned, I suggest that they look at China not as a country but as a continent and look in the details per region. Situation has little in common in Zhejiang and Gansu !