The other side of competition

Foreign firms should focus more on the diversity of local markets in China

There is nothing new about competition in the Chinese market. Multinational corporations have been facing problems with market access and technology transfers since the beginning of market reforms 30 years ago.

As newcomers move into the Chinese markets, lessons from the past are fading and new demands are being made. But newcomers have to be aware that they are facing an unknown Chinese economy when they move into the lower-tier markets.

Three recent major surveys of foreign enterprises in China deal with the changing market environment and find different problems and conclusions. At the more politicized end of the spectrum, the Economist Intelligence Unit's 2011 report finds that government interference is a major reason for an increasingly difficult operating environment for multinationals and advises caution.

The 2012 AmCham White Paper with its traditional emphasis on specific industries and regions is more optimistic and recommends detailed regulatory reform as a way to solve problems faced by US and other multinationals.

A 2012 CEIBS report with a focus on managerial issues and changes in the market environment points to the intense competition from China's growing private SME sector and issues that arise from the deeper market penetration by multinational corporations.

There is, however, agreement among the three reports that the private sector is a source of intense competition for foreign investors. Undoubtedly, China's fast growing private sector has become one of the main drivers of economic growth and global integration. But the emphasis on the role of constitutional guarantees, laws and regulations in this process does not prove that central authorities wield full control over local business environments.

Complaints by multinational corporations about local protectionism, government interference or corrupt conduct are linked to their increasing exposure to markets in lower levels of the administrative hierarchy. In these jurisdictions with little recourse to central legislation and legal appeals, government intervention can be the only way to secure functioning markets.

Market-enhancing local government actions do not automatically harm multinational corporations. Local government intervention can equally be in favor or against local Chinese competitors as well. In such environments, multinational corporations might accelerate institutional change by using the leverage of their economic reach with higher levels of administration. Multinational corporations can thus become part of institutional change that benefits their Chinese competitors as much as them.

This complex institutional environment breeds intense competition as well as public-private collusion. Entrepreneurs have to rely on local government support to gain access to finance and markets.

Local jurisdictions in turn are competing to attract investors to boost local economic growth and employment.

In summary, reports of the end of the China boom for multinationals seem exaggerated. The deeper reach of multinational corporations into China's hinterland brings encounters with institutional complexities that can be safely disregarded as long as the multinational corporations were expanding from developed areas into first and second-tier capital cities. The opening of new markets creates problems but also produces better institutional understanding of what regulatory solutions can be enforced locally.

This means that for practical purposes market solutions will take precedence in cases where regulatory reforms are only a long-term solution. Multinational corporations have national and international strategic options to their avail. They have to adapt their domestic strategies to the diversity of local markets by moving closer to customers and paying more attention to private domestic competitors.

As Chinese markets become more mature and Chinese outbound investment gains momentum, new strategies are emerging that involve strategic cooperation between multinationals and Chinese partners. There will eventually be some reversal of roles when Chinese investment and innovations start reaching Western markets.

The author is a professor of Chinese political economy at the University of Sydney.

(China Daily 05/18/2012 page7)