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.

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“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?