China must stop protecting its own companies, they can stand on their own two feet now
Mats Harborn says China’s economy, outbound investments and innovative firms belie its claim that it needs to shield domestic industries from global competition
Not long ago, Chinese enterprises inhabited the margins of the global innovation community, generally focusing their efforts on localising products and services developed by others, or relying on the technical know-how of their joint venture partners. This is no longer the case.
Highly innovative Chinese firms are now going toe to toe with their European competition and are reaching parity with, and even surpassing, global leaders in certain fields. In 2018, they passed an important threshold when, for the first time ever, a majority of European businesses said they found their Chinese counterparts to be equally, if not more, innovative than themselves.
Those of us doing business in China know exactly how competitive the landscape has become. Players from industries in which European firms once held comfortable leads increasingly report that they are having to do more with less.
International firms that rest on their laurels in China will quickly find themselves swamped by agile and efficient domestic firms, be they one of the 115 Chinese Fortune 500 companies or one of the many disruptive start-ups – including three of the world’s five largest unicorns – found across the country.
Many of these firms are no longer content to flex their muscles in the domestic arena and are increasingly going out and entering other markets. Three years ago, Chinese outbound investment outstripped its inbound foreign direct investment (FDI). Since then, Chinese mergers and acquisitions have been grabbing headlines the world over, and some brands that were once known exclusively in China’s home market are thriving in many places around the world.
The dynamism of the Chinese economy is undeniable. However, it stands in stark contrast to China’s claim that it is a developing country; after all, it certainly no longer behaves like one.
There is a clear contradiction between its self-proclaimed “developing” status and its dominance in multiple global industries, increasing leadership in cutting-edge fields, prolific outbound investment, and massive, ambitious projects like the “Belt and Road Initiative”. These demonstrations of economic strength are way beyond the means of most developed nations, let alone developing ones.
Watch: What makes Tencent such a tech goliath?
Despite the fact that Chinese companies are highly innovative, international enterprises are still being forced to transfer technology, with one in every five European enterprises in China reporting this as a condition for market access. This practice may have been acceptable in 2005 or 2007, when China’s gross domestic product had just surpassed that of France and Germany respectively.
After all, the World Trade Organisation has a clear framework within which technology transfers to developing economies are encouraged to speed up their growth. But now that China’s innovation capacity is on a par with other global leaders, continued reliance on this argument is untenable.
Domestic companies, and state-owned enterprises (SOEs) in particular, also continue to enjoy protection from international competition in the Chinese market that they no longer need. Unequal treatment has, for many years, forced European players to compete on an uneven playing field. Many Chinese businesses that are entirely independent of the government have proven they can compete both at home and abroad. Not only can they match their international counterparts, they can even teach them a thing or two.
Protection is also afforded to many Chinese enterprises by fencing off many sectors to outside competition. This is another example of a measure that is outdated and unnecessary. That so many Chinese companies have large footprints across global markets is indicative of their ability to compete on equal terms with the very companies that they are protected from domestically. This approach also has a large detrimental effect – by starving domestic companies of international competition, it blunts their capacity to innovate.
The extraordinary progress that China has made in the past two decades owes much to its integration into the multilateral trade and investment system. However, this system demands that participants accept responsibilities to uphold the global economic order.
In its earlier stages of development, any country would make the most of the rights of the system while being absolved of many duties. However, as a country’s level of development increases, it can enjoy the same rights but it must also shoulder an equal share of responsibilities.
China would benefit immensely from fully assuming the position of a responsible stakeholder in the global economy. President Xi Jinping’s commitment at the 2018 Boao Forum to accede to the WTO Agreement on Government Procurement is a good first step, but turning this into reality would be a true statement of intent.
The convergence of global pressure and China’s unfulfilled promises has created an imperative for China to reform and open its market, and to provide national treatment to international companies. This would lead to a surge of high-quality FDI, as there is no shortage of European companies lining up to increase their investments in China. They are just waiting for the right conditions.
Mats Harborn is president of the European Union Chamber of Commerce in China