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January 15, 2005

The Odd Evolution of China's Corporate Capitalism

On alternate days I wonder how seriously we should take discussion of domestic policy, since in so many ways the future is being shaped by the 1.3 billion-person economy of China. It's hard to fight for labor standards in the United States when you have a giant dictatorship busting unions and inviting multinational corporations to relocate to exploit the result.

The Economist this past week had a fascinating feature (subscription required) on China's emerging large corporations. The continuing assault on workers rights in China to line the pockets of the politically-connected Communist Party elite running big Chinese conglomerates is hardly surprising at this point. What is more surprising is that the supposedly nationalist party leadership is increasingly handing control of their economy to multinational corporations.

Unlike South Korea and Japan, which successfully built national champions who went on to challenge US and European companies in high tech innovation, Chinese companies are being undercut by the multinationals the Chinese elite has invited into the economy. Unlike South Korea and Japan:

the central [Chinese] government has allowed foreign companies into China at a much earlier stage of its development and these now control the bulk of the country's industrial exports, have increasingly strong positions in its domestic markets and retain ownership of almost all technology. The result is a corporate landscape of a few big private companies such as Huawei, a mass of lumbering state-owned firms and increasingly powerful foreign multinationals.
The result is that what we might think of the "Chinese economy" -- those cheap DVDs imported for $29.99 at Wal-Mart -- are really Western companies exploiting Chinese workers and who control the technology production in that country:
foreign companies control virtually all the intellectual property in China and account for 85% of its technology exports.
Ironically, as The Economist explains, China is losing out on developing an indigenously controlled technology sector precisely because of its low wages:
China's low wages actually provide a disincentive to [technology] investment, since Chinese firms can often boost short-run profits by replacing capital with additional labour.
The sad thing is that the Chinese elite is repeating history by selling out the nation to Western capitalists and the country isn't even getting a future where Chinese institutions will have a strong role in directing the global economy. Instead, the Chinese elite is just strengthening the power of the increasingly rootless multinational corporations who are using China's low wage labor to undercut wage standards throughout the world.

Posted by Nathan at January 15, 2005 06:32 AM