Research Topics: Topics On China

China and Globalization

China and Globalization Summary China has transformed itself from the world’s greatest opponent of globalization, and greatest disrupter of the global institutions we created, into a committed member of those institutions and advocate of globalization. It is now a far more open economy than Japan and it is globalizing its institutions to a degree not seen in a big country since Meiji Japan. Adoption of the rule of law, of commitment to competition, of widespread use of English, of foreign education, and of many foreign laws and institutions are not just updating Chinese institutions but transforming Chinese civilization. All of China’s economic successes are associated with liberalization and globalization, and each aspect of globalization has brought China further successes. Never in world history have so many workers improved their standards of living so rapidly. Thus popular support for globalization is greater than in Japan, where postwar recovery occurred in a highly managed economy, or with the former Soviet Union, where shock therapy traumatized society. In consequence, China has effectively become an ally of U.S. and Southeast Asian promotion of freer trade and investment than is acceptable to Japan, India and Brazil. ____________ 1 The opinions and conclusions expressed in this testimony are the author’s alone and should not be interpreted as representing those of RAND or any of the sponsors of its research. This product is part of the RAND Corporation testimony series. RAND testimonies record testimony presented by RAND associates to federal, state, or local legislative committees; government-appointed commissions and panels; and private review and oversight bodies. The RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. Nonetheless, rapid Chinese globalization has required stressful adjustments. State enterprise employment has declined by 44 million. China has lost 25 million manufacturing jobs. 125 car companies are expected to consolidate rapidly into 3 to 6. China’s globalization successes are profoundly influencing its neighbors. India has learned from China the advantages of a more open economy. Asians schooled in antipathy to foreign investment and Latin Americans with protectionist traditions are going to have to be more open to foreign investment and less dependent on loans in order to compete with China. This will transform third world strategies of development and create broader global opportunities for our companies. Contrary to early fears, China’s rise has stimulated neighbors’ trade and foreign investment rather than depriving them. Indeed China’s recent growth spurt revived Japan’s economy and saved key neighbors from recession, possibly averting a dangerous global downturn. Chinese growth has brought American companies new markets. The flow of profits from China to the U.S. is as disproportionate as the flow of goods. Inexpensive products have substantially improved the living standards of poorer Americans. Inexpensive Chinese goods and Chinese financing of our deficit have kept U.S. inflation and interest rates down and prolonged our economic booms. At the same time, it has caused trade deficits and social adjustments. Chinese misappropriation of intellectual property creates losses for many of our companies. A manic construction and transportation boom has raised global raw materials prices, to the great benefit of producers and a great cost to consumers. China’s success is one of the most important developments of modern history, but projecting from current growth to Chinese global dominance or threats to our way of life is just wrong. Unlike the old Soviet Union, reformist China does not seek to alter any other country’s way of life. Its economy faces world history’s most severe combination of banking, urbanization and employment challenges, and by 2020 a demographic squeeze that will have few workers supporting many dependents. The best outcome for us would be a China that is eventually like Japan, prosperous, winning in some sectors, losing in others. Signs that China is making rapid progress in that direction should be welcomed, not feared. China and Globalization Before reform, China was the world’s most important opponent of globalization. It had an autarkic economy. It opposed the global economic order. It opposed the global political order and the major global institutions such as the IMF and the World Bank. It believed that global disorder was a good thing, and under Mao Zedong it actively promoted disorder throughout the world, including promotion of insurgencies in most of China’s neighbors, in much of Africa and Latin America, and even in our universities. Accompanying foreign policy disaffection was domestic cultural despair on a scale the world has seldom witnessed. In the Cultural Revolution, 1966-1976, China’s students and others, under the guidance of Mao Zedong’s peasant chiliasm, humiliated a majority of senior government and party leaders, attacked the country’s major educational, social and political institutions, destroyed much of China’s cultural heritage, and in general tried to smash the country’s establishment. For two centuries Chinese had tried a range of ways – socialism, capitalism, empire, republic, warlords, religious fundamentalism, and others. All failed. Alienation was so severe that, along with students, much of the country accepted that the world economic and political order, and the Chinese economic and political order, were so stacked against them that any path to success had to start with destruction of the existing order. The Cultural Revolution was actually just one small episode in the problems that Chinese impoverishment and political division created for the world and specifically for us. Had China been prosperous and unified throughout the twentieth century, we would have had European War II rather than World War II and World War I would have been quite different. China would have been able to deter or defeat Japanese aggression. The cost of those conflicts to the U.S. would have been radically smaller because Pearl Harbor and much else would not have happened. We and the world, not to speak of a billion Chinese citizens, have paid a horrible price, over more than a century, for China’s weakness. The world needs a healthy China. Because of China’s successful globalization we no longer have such problems. China is no longer a vacuum that sucks the world’s great powers into gigantic conflicts. China no longer sponsors insurgencies in Southeast Asia and Africa and Latin America. China no longer seeks to undermine the global financial institutions. We obtain benefits from a China that supports stable capitalist democracy in Thailand and the Philippines; that joins the IMF, World Bank, and WTO; and that counsels its neighbors about the benefits of political stability, free trade, and free investment. From the beginning of the Cold War, it has been the central tenet of U.S. foreign policy that, if we could engage as much of the world as possible in successful economic growth, through domestic reform and what came later to be called globalization, we could stabilize Europe and Asia, win the Cold War, and create a stable global order. Our military protected this process, but from the Marshall Plan to our aid missions in Asia and Africa, the core long-run strategy of our country has been to engage the world and stabilize it by enmeshing other countries in a web of institutions and successful economic practices that constitute the kind of world we want. This strategy has proved to be one of the most successful geopolitical strategies in human history, so much so that it has entangled our former enemies as well as our allies in the web we wove. Throughout, it has stimulated many controversies, and occasional waves of fear in this country. Key industries, including especially textiles and shoes, have successively opposed liberal trade with Japan, South Korea, Taiwan, Southeast Asia, China and Latin America. We had a wave of panic over whether Japan was going to take over all manufacturing and buy all our most important assets; after all, if they could triumph in steel, cars, and televisions, and buy Rockefeller Center, wasn’t everything in our economy at risk? Elsewhere, weren’t we sponsoring horrible dictatorships by encouraging the development of Taiwan and South Korea? Each time, our fears have proved excessive, and each time our strategy triumphed. The results have been good for our security, good for our prosperity, good for political liberalization overseas, and good for the people of our trading partners. Our concerns about China are the same. China’s globalization What we never expected from our strategy was that it would entice our former adversaries, including China, into our web of economic institutions and our commitment to geopolitical stability. Although joining late, China has joined the globalized system much more enthusiastically than Japan. China’s economy is much more open than Japan. China’s trade in 2004 was equal to 70% of its GDP, Japan’s to 24%. China received .6 billion of foreign direct investment in 2004, while Japan, with an economy several times larger and in a phase of restructuring that should have attracted disproportionate foreign investment, received only .1 billion. China’s globalization is not confined to opening the economy but more importantly to globalization of institutions. Here the development strategy of contemporary China bears a striking resemblance to that of early Meiji (mid-nineteenth century) Japan, when the Japanese government was sending missions around the world to choose for emulation the best foreign navy (Britain), the best foreign education system (Germany), and so forth. In the intervening century and a half, Japanese practice has become more inward-looking, while China has evolved from Qing defensiveness and Maoist peasant xenophobia to an assimilative cosmopolitanism. Today China is the country that sends missions throughout the world seeking best practice. It adapts not just foreign technology and foreign corporate management techniques but also a wide variety of foreign institutions and practices: international accounting standards; British, U.S. and Hong Kong securities laws; French military acquisition systems; a central bank structure modeled on the U.S. Federal Reserve Bank; Taiwan-style regulations for foreign portfolio investment; an economic development strategy adapted from South Korea, Singapore and Taiwan; and many others. Among the most important of these changes are the decision to adopt the Western concept of rule of law; adoption of competition as a centrally important economic practice; and adoption of English language as virtually a second language for the educated Chinese population. Today I can lecture in Peking University and interview senior officials in Beijing and Shanghai without a translator. Perhaps most importantly, China has sent its elite youth abroad for education in an exercise of internationalism comparable to the Romans turning over their children to the Greeks. Of course, such changes occur gradually; you can’t instantly introduce Western accounting or Western law in a country that starts with no professional accountants or lawyers. But the changes are startlingly fast compared with what other countries do. More importantly, these are not technical adaptations in the manner of the old dynastic efforts to pursue “Western technology, Chinese culture.” These are transformative processes that in cases like rule of law and promotion of competition repudiate core aspects of traditional Chinese civilization that go back for millennia. China is also experiencing globalization of tastes. The exposure of the Chinese population to foreign brands has been incorporating them into global culture. To take one example, I spent many months studying the Chinese car industry. One of the questions we were asked was whether China might develop indigenous car models in a closed-off market like that of South Korea in the 1970s and 1980s. What we discovered was that the Chinese people have been so much more exposed to global culture than South Koreans of a generation ago that no car could succeed in China unless it incorporated global designs and prestigious foreign technologies. Ten to thirty years ago, when South Korea was at a phase of car industry development more comparable to China today, one virtually never saw a European or American car on the road, and they are still very rare today. But in China the roads are packed with Volkswagens and Buicks. China has come to believe in globalization more than most third world countries and many first world countries. China’s successes have all coincided with “reform and opening,” that is, with globalization. In contrast, Japan’s and South Korea’s successes occurred in an era when, although they were globalizing, they employed far stricter controls on trade, foreign investment, and domestic economic activity than today’s China. Globalization has required extremely painful adjustments by China. Employment in the state enterprises has declined from 110 million at the end of 1995 to 66 million in March 2005. Those who think there has been a simple transfer of U.S. manufacturing jobs to China will be surprised to know that manufacturing jobs in China have declined from over 54 million in 1994 to under 30 million today. Even these striking numbers understate the adjustments China has had to accept due to greater competition and lately from WTO membership. For instance, while employment in the car industry has remained relatively constant, the number of car manufacturers is expected to decline from 125 at the peak to somewhere between three and six. Meanwhile, foreign joint ventures have come to dominate much of the market. It is hard to overstate the social adjustment Chinese are experiencing. But because China has been willing to accept such adjustments, no large country in human history has ever experienced such rapid improvements in living standards and working conditions. When reform began, workers in Shanghai all wore the same clothes, looked tired and listless, and seldom owned basic appliances like televisions or even watches. In the countryside malnutrition was widespread. Today Shanghai workers wear colorful clothes and look confident and energetic. Today the average Chinese family owns slightly more than one television. Malnutrition has vanished. As a result, Chinese overwhelmingly support further globalization. China’s globalization and other countries China’s globalization has of course strongly influenced other countries too. The most important impact has been on India’s economic policy and performance. Since independence India’s economy had been hobbled by extremely protectionist trade policies, an antagonistic stance toward foreign direct investment, and a remarkable network of domestic socialist economic controls called the license raj, combined with strong foreign economic and political ties to the old Soviet Union. A 1991 foreign exchange squeeze and neighboring China’s success shocked India and also showed that abandoning the old hostility to globalization could lead to prosperity. While India started later than China and moved more slowly, India’s economic growth rates have doubled. The number of people in absolute poverty has declined sharply. Exports have boomed and foreign exchange reserves are ample for the first time in modern history. Visit India today, as I did last month, and you find the kind of hope and confidence and energy that once seemed confined to East Asia. As happened earlier with China, India’s newfound economic dynamism has shifted the balance of leaders’ priorities from conflictful geopolitical goals to mutual economic interests. India’s relations with its neighbors, sometimes including even Pakistan, and most notably with both China and ourselves, are much better than previously. Indeed, Indian-Chinese relations are better than at any time since the conflicts of the 1960s, and India’s business community has shifted from terror about competition with China to confidence in India’s competitive advantages and even some celebration of India’s recent trade surplus with China. China’s influence on India’s economic policies is just one example of a much wider phenomenon that is probably just beginning. Until recently, most of the third world plus Japan has taken a relatively hostile attitude toward foreign direct investment. Difficult licensing requirements, high taxes, unfair judicial treatment and an negative opinion climate have faced direct investors from Japan and South Korea to the Philippines and Thailand to India, not to mention most of Latin America. Instead of accepting foreign ownership, countries typically relied on foreign loans (South Korea, Southeast Asia, Latin America) or domestic loans (Japan), frequently creating an excessive burden of debt. Thailand imposed very high taxes and then reduced them for selected foreign investors; Indian groups attacked Kentucky Fried Chicken with distorted hygiene allegations. Now such tactics are waning. The success of China at balancing debt with equity, building upon the previous successes of Hong Kong, Taiwan and Singapore, is gradually changing the way much of the world manages economic development. This Chinese influence is going to be transformative, particularly in Asia. The old pattern has been to avoid dependence on foreign investment by taking domestic and foreign bank loans. Governments then controlled the development of industry by channeling the bank loans. This made companies and countries overly dependent on banks, leading to periodic financial crises. It gave governments too much control over industries, encouraging mismanagement and corruption. It gave unfair advantages to large, politically favored companies over smaller companies and foreign companies. Importantly for us, it limited the opportunities for our own companies. Now competition with China will force most companies to open themselves to foreign investment. American companies will benefit not just in China but throughout the world. At the beginning of this decade, there were widespread fears that China’s success would suck the trade and investment away from its Asian neighbors, impoverishing them. In the event, the opposite has happened. Wherever rules have been changed to welcome foreign direct investment, as in India, South Korea, and Japan, such investment has boomed. China has taught others to attract foreign investment, and in response the total pool of foreign investment has greatly expanded. Amid the global slowdown following the tech bust, countries like South Korea and the Philippines found themselves saved from recession by Chinese demand. Most importantly, Chinese demand provided the stimulus that lifted Japan out of recession. It is difficult to overstate the risk the world economy faced from the Japanese situation, where mountainous debt created the risk of a domino-like collapse inside Japan and subsequent rippling collapses around the world. That risk seems to have passed, helped by a critical margin of stimulus from China. Few books are written about global depressions that never happened, but it is quite possible that China’s globalization saved us from beginning the new century with a drastic global economic squeeze. Many other peoples have benefited from Chinese demand that rose just as the world economy was slowing. Raw materials producers had become inured to terms of trade that deteriorated inexorably year after year. Suddenly our ally Australia found that its terms of trade have improved to the best in its entire history, largely because of Chinese demand. Many of the world’s poorest countries, including Laos, Papua New Guinea, and much of Africa, benefited just when they needed it most. No aid programs, no IMF gold sales could have come close to providing the improved livelihoods that resulted from increasing, sustained demand for their products. In short, the most important results of China’s rise are the same as the results for the world of America’s rise or of the recoveries of Japan and Europe: you are always better off with a rich neighbor than with a denizen of the slums. Benefits and costs for the U.S. China’s globalization has had numerous impacts on the U.S. Most obviously, China has become a vast market for U.S. goods. Arguments that this is a mythic “China Dream” have proved false. Coca Cola has long since surpassed the fabled goal of selling a billion Cokes. General Motors, once ridiculed by the China Dream theory, sells many Buicks in China, and, despite a current cyclical pause, profits from China have been a critical margin for GM during a difficult time. We gain from billions of dollars of profits remitted back to our country and from the improved health of our most successful companies as they compete against other foreign companies. Lower prices for basic goods have contributed significantly to American standards of living, particularly for our less prosperous citizens. While we do not yet have definitive studies, indications are that lower-income Americans achieve improvements in their standards of living of perhaps 5% to 10% as a result of being able to buy lower-priced imports from China. That impact is undoubtedly expanded by the fact that competition from China drives other countries to produce less expensive goods for our consumption. Inexpensive Chinese goods have kept down our inflation rates and enabled us to prolong the upswings of our business cycles because the Fed doesn’t have to raise interest rates so quickly in order to slow inflation. Similarly, Chinese purchases of U.S. Treasury bonds have helped to finance our budget deficits. Without those Chinese purchases we would either have to raise interest rates, slowing our growth, or we would have to run comparable trade deficits with other countries so that they could buy our bonds. We are just beginning to see another layer of benefits. The Chinese are beginning to invest here. Haier is now manufacturing refrigerators in this country. When China’s Lenovo bought IBM’s personal computer business, it saved jobs in a moribund division, freed IBM to move up into higher-tech markets, and helped finance that IBM move up. So far, this trend is small, but it will grow quickly. China’s goal for this year is to spend -40 billion buying resource and distribution companies. We also benefit indirectly from China’s boost to foreign economies like Japan and Australia. Having a prosperous partner is invaluable to the U.S. economy. We spent the 1980s fretting about Japan taking over the world, but we spent the 1990s worrying that Japan wasn’t doing its share to boost global growth. Those who worry about China’s success would have far more to worry about if China’s growth slowed drastically. Adjustment problems China’s globalization and growth also cause stresses for us. Some of these are politically eternal but economically and strategically tired. As countries get rich, the manufacture of textiles, and shoes, furniture and basic consumer electronics mostly migrates elsewhere. The manufacture of socks migrated from here to Japan, from Japan to South Korea and Taiwan, and thence to Southeast Asia and now China. That adjustment will continue. It has been gradual over many decades. We have had ten years to get ready for the current round of textile adjustments. We knew what was coming and we agreed to it, in return for China so stressful that they are virtually beyond Americans’ imagination. Our own adjustments are smaller than those of virtually any other country. These adjustments are smaller than we tend to believe, because China gets blamed for much that it does not cause. Virtually all of our job loss has been caused by productivity improvements. In fact, productivity gains have been sufficiently large that we should have experienced more job losses than we have. It is conceivable that our job losses have been smaller than they “should” have been because China has helped us adapt. We don’t know, because no lobby has been interested in paying for the research to find out how many jobs have been saved by partial moves to China decreasing the costs of endangered companies. And China is, of course, just part of a global readjustment caused by China, India, and the former Soviet Union joining our economic system. A more serious policy problem is hyper-competition created by cheap financing in China. The irrationalities of the Chinese financial system mean that in key sectors like steel China builds too many factories, and props up too many moribund companies, causing massive overcapacity. In recent years Chinese financial vagaries have led to excessive construction and huge demand for steel, aluminum, cement and others. For a while this has buoyed the global steel industry, including ours. But it has also led to construction of so many steel factories in China that soon China will have half of all world capacity. That means overproduction and eventually a steel price bust. This cycle creates problems for our industry, just as our Internet mania and tech bubble created problems for much of the world. It is fair for us to complain about such problems. It is fair to pressure the Chinese to reform their financial practices. It may be fair in some cases to view Chinese bank lending practices as constituting an inappropriate subsidy. The tone of our complaints and the substance of our policies needs, however, to reflect three facts. First, the Chinese are trying to reform their banks and put them on a market basis. Second, our financial vagaries cause them problems too. Third, the biggest price for their financial mismanagement will eventually be paid by them, because inappropriate lending eventually makes troubled banks much more troubled. China making steel today looks like Japan buying Rockefeller Center two decades ago; if you project their excesses indefinitely into the future, first the Japanese and now the Chinese look as if they are about to take over everything in the world. But when you look at their underlying finances, you see a black hole. The Japanese spent the 1990s in their black hole and are still trying to climb out. China will feel the pain of its recent spree for many years. Having said these things, some excesses may require a policy response by us. Chinese theft of intellectual property has become a major issue. The IPR problems presented by China are similar to those presented by other developing countries. In the 1930s, Japan built cars that were half Ford parts and half GM parts, with DeSoto styling. In the early days of Japan’s postwar takeoff, a high proportion of its electronics exports infringed Texas Instruments’ patents. I, like numerous others, accumulated a library of knockoff books from Taiwan in the 1970s, and Taiwan still has the best knockoff watches. When I lived in Singapore in 1998, I could get knockoffs of most Hollywood movies at a six-story building within five minutes’ walk of my office, and indeed well into the 1990s official U.S. government briefings credited Singapore for some 70% of the knockoff computer software in Asia – at a time when China was getting most of the blame. China’s IPR practices today are not very different from those of India and Russia. But the scale and efficiency of China, and the extent of foreign direct investment in China, make the issue a larger one. Indeed, the IPR losses caused by Chinese practices are probably on a scale with those of other major emerging markets, like for instance American youth. It is appropriate for us to make very strong representations about IPR abuses. It is appropriate for us to implement policies that punish bad behavior and reward better behavior. It is also useful to maintain a certain historical perspective. The other side of the benefits Australia, Africa, Latin America, and other resource providers (including part of our own economy) have received from Chinese demand is a rise in prices for consumers, and we are more consumer than producer of raw materials. For many key materials, the biggest part of recent price rises has been cyclical. The Chinese mania for steel, aluminum and cement has peaked. In the case of petroleum, the cumulative increase in demand caused by China, India, Russia, and other developing countries may soon push against long-run supply constraints. This may compel us to make new, potentially urgent decisions about conservation, the kind of energy we use and the degree to which we compete or collaborate with the other major users. This would have happened eventually even without the rise of China, but China is certainly accelerating the issue. Finally, the rise of China raises questions about whether we face a major challenge to our role in the world or to our way of life. One part of this is easy. We do not face a challenge to our way of life. Unlike the Soviet Union, and unlike China under Mao Zedong, reformist China does not seek to change the way we organize ourselves or the world, but rather to join the world system we have created. Geopolitical competition raises more complicated issues. Like South Korea, as China grows it gets stronger. Its military becomes more modern. In one particular area, the Taiwan Straits, maintaining our dominance will become increasingly difficult. That is a serious and difficult and legitimate challenge for our military to cope with. But theories that China is going to take over the world suffer from the same flaws as theories two decades ago that Japan was going to take over the world. The Chinese military has to defend 11,000 miles of not-always-friendly borders, and its growing military is far from excessive for the tasks it faces. Economically, China is not going to manufacture everything in the world; no country can have a comparative advantage in everything. In the medium term China faces daunting challenges. Its banks are the worst in the world that we know about. In each generation a population about the size of the United States will move from China’s countryside to its cities. Each year 12-13 million new workers join the work force. The impact of productivity on employment in manufacturing is much more severe than in our country. All these people need jobs. For a considerable period China’s high growth can be sustained, but only through heroic reform measures by China’s leaders. If somehow China powers through these problems, by 2020 its aging population will have the worst ratio of workers to non-workers of any population in the world, including Japan’s. That is to say, without some miraculous new policies the Chinese economy may well hit a wall in that period. In 2020, they will still be a very poor country by our standards. Even if their success continues until then, they will not be taking over the world. The emergence of China as a principal advocate of globalization and stability creates a complex geopolitical situation for us. On issues of free trade and investment, and on a variety of economic issues like GMO crops, China is our principal ally. On North Korea, despite differences over tactics, we share the same goal and China is our only effective partner. On terrorism and crime, China is our principal Asian ally. We are now in a novel situation where Japan is our military ally and partial ideological soulmate, but China is effectively our ally on the important political and economic issues, with Japan either ineffectual or in opposition to us. This is a novel historical situation. Where Chinese influence has increased greatly at our expense, other than the unique situation in the Taiwan Straits, it has been because we and our traditional allies created a vacuum, not because China has aggressively asserted power. But there have been important shifts, and we need to be very conscious of them. On the dangerous North Korean issue, we have been divided at home, and our allies, most notably South Korea, have disagreed with our tactics. We have demanded that China play the central role, and China was hesitant to accept the invitation. In Southeast Asia, we have traditionally earned loyal support by organizing our policies around a core value of economic growth through liberalization and globalization. Today we are perceived as having abandoned that priority in favor of a more military focus on the war on terror, while China is seen having abandoned its Maoist geopolitical priorities in favor of a priority for mutual economic development through multilateral liberalization. Within our economic policies we are seen as having abandoned multilateral liberalization in favor of highly politicized bilateral free trade agreements, while China has become the principal supporter of multilateralism. China carefully joined ASEAN on trade, rather than asserting its own vision. Without exception, Southeast Asian (and many other Asian) elites see the 2003 APEC summit as a watershed that marked the U.S. and Chinese reversal of roles. The result of these Korean and Southeast Asian developments is a sea change in Asian geopolitics, but we are the ones who made the changes, not China, and we still can take the initiative if we wish to do so. We Americans must be very clear about the difference between success and failure. When our system of institutions and relationships pulls the unstable China of 1870 and the destructive China of 1970 into coherence, prosperity and support of the major global institutions that we have created, it is success for us, not failure. In fact, it is one of the great successes of history. When we have a prosperous economic partner, at the cost of historically minor adjustments, that is success for us, not failure. Of course, our successes to date provide no absolute assurance that China will always be friendly or supportive of our institutions. But if we welcome China’s prosperity, we maximize the chances of an auspicious outcome. If we reject it, we ensure the worst outcome. The best outcome for our relationship with a globalized China is that China becomes like Japan, a prosperous competitor with whom we have a mutually beneficial division of labor. Hopefully China will absorb useful political lessons from its Asian neighbors, and hopefully Japan and South Korea will learn the economic lessons of China’s superior openness to our investments. China’s turn to globalization has been one of the greatest foreign policy triumphs of American history. My first boss was Herman Kahn, who wrote a book called “The Emerging Japanese Superstate.” Japanese experts constantly worried that, if their economy really succeeded, we would intervene to put them down. Herman Kahn invariably replied, “You don’t understand Americans. We won’t attack you. We’ll take credit for everything you achieve.”  was a great American strategist and a great American patriot. Credit:ivythesis.typepad.com

China and Globalization

China and Globalization Summary China has transformed itself from the world’s greatest opponent of globalization, and greatest...

Human Resources Development in China

2.) What is “globalization”? What are the major changes to organizations brought about by globalization? How does it impact on China business and human resources practices? What is globalization?           Amicably, globalization has been hotly debated in such business arena over the years and has contributed a lot to such country’s economy and business such as in its market approaches and manpower activities particularly in China’s business and human resource practices as the focus for this assignment. As such definitions of globalization do vary widely and that perhaps, one of its core feature involves the “permeability of traditional boundaries of every kind” that would include physical borders such as Chinese nation states and less tangible borders such as those of cultural norms integration (Cited from, Parker, 1998, p. 6). Truly, globalization do integrate government plans like in their regulation with regards to such internet activities those that may include e-business in China and possibly create novel laws in such internet business. For instance, several Chinese efforts to introduce website censorship in order to series certain European Union directives dealing with issues such as copyright, internet businesses have been faced with growing tide of Internet regulation. Indeed, globalization brings about rapid changes in China as such business success relating to e-business may evenly require some regulation ranging from common global standards going direct to such legal reinforcements of such electronic signature for example. What are the major changes to organizations brought about by globalization?           The major changes to organizations due to globalization will be centering on several globalized organization that amiably depend on people, those people who are “willing to take personal initiative and to cooperate with one another, who have self-confidence and commitment to Chinese company and who are able to execute relatively routine tasks with the same proficiency as they are willing to learn new skills and ways to take the company to the next stages of ambition” (Cited from, Bartlett and Ghoshal, 1995, p. 11). Thus, the change within human resource is visible by then as globalization of human resource in Chinese organization can basically embrace some of underlying social process that may override the constraints of China’s geography and ethnicity indirectly (Cited from, Levitt, 1983). For instance, some of the members, no matter where they work, are acculturated to embrace the values and the beliefs of the globalized Chinese organization (Cited from, Nahavandi and Maleksadeh, 1988).           Furthermore, within the sanctions of globalized organization, it can be that the, human resource management or HRM will be acting as control system that ensures acculturation of such business members from within the organization and amiably directs their behavior towards better accomplishment of an ideal organizational mission and business objectives (Cited from, Eneroth and Larsson, 1996). Moreover, HRM in China in function does consists of aspects in selection, rewards, appraisal, social duties and the development of individual workers in order to contribute such desirable achievement to be utilized in realizing business environment functions as well as organization goals from within (Cited from, Eneroth and Larrson, 1996, p. 8). Thus, there can be changes within China’s HRM structure and context as brought about by strong effect of globalization, there can be such acknowledgment reality implying crucial dimension of global business approach or strategy, the change reflects as globalized organization in China do venture well into diverse structure arrangements that requires integration of business markets in lieu to certain strategic utilization of human resource practice, backed with economic support and application of technology and its related advances. Aside, such changes has equated the process of globalization in promoting awareness to democracy of such business economic growth in China and the opportunity to strengthen human resource management in practice that possibly converge the interests of stable countries as well as the rich nations. How does it impact on China business and human resources practices?           According to Secretary General of UNCTAD, the two causes of the South East Asian crises were: “excessive openness to the world economy” and “inability to manage this openness” on the part of the South East Asian governments. Rucipero recounts that, after the liberalization the 1990s, the trade deficit of those countries was three percentage points of GNP higher than it was in the 1970s, while their average economic development growth rate was lower by two percentage points. For his own opinion, globalization failed to assure sustainable economic growth in the developing countries (Cited from, UNCTAD, 1999). Believing that, other involved parties like, in business do simply blamed globalization for deepening vertical and horizontal income inequalities. Special criticism was reserved for those neo-classical economists who talked about wealth “trickle down” effects.           Besides, through joining the World Trade Organization, China has demonstrated her commitment towards further economic reform and engaging global economy. However, one of the critical areas of debate has been in the area of employment relations: issues such as implementation of international labour standards, the role of trade unions, working conditions, wage-price factors in relation to cost of production and export competition in global market, social protection and social inequality against fairness and justice, power of multinational corporations, global division of labour versus Chinese labour diversity in industrial democracy against power control and corruption and others (Cited from, Chan and Chuen, 2001). However, the imbalance of power within HR labour relations is quite obvious in such Chinese enterprises wherein management power has expanded without setting very defined limits and where labour has become increasingly passive and vulnerable. However, it is crucial for global community and the Chinese people to seek informed perspective on the current situation and the future engagement of Chinese economy into the global economic system, as well as China’s underlying reforms within economic and business levels.           In addition, one aspect of globalization debate is on the terrain of social regulation, specifically the regulation of the labour market and employment relations. One side of the argument claims that globalization appears to be eroding the power of nation-state, limiting its capacity to regulate labour relations and in turn reducing the potential leverage of organized labour to influence such regulation (Cited from, Elger and Edwards, 1999, pp. 1-40). The argument claims that there in fact, remain important actors in the regulation of labour, and this is not just through the passive provision of support and infrastructure to firms or industrial districts but also entails active choices regarding the way in which labour is regulated (Cited from, Elger and Edwards, 1999, p. 27). As for the case of Chinese economic reform and open door policy, consequence for terrains of labour market regulation and labour relations at macro level and micro level is vividly challengeable and complex. Another terrain of globalization argument has been closer to China’s home ground, for example the impact of globalization on labour markets and human resources within the East Asian region (Cited from, Warner, 2002, pp. 384-98; Zhu and Warner, 2003). There can be about labour-markets, one of imperative factors influenced by globalization and such influence had direct impact on human life of the people. Since labour is one of main resource of Asian developing countries, the HR in manpower market will amicably register to such impact due to the changes in business parameters of the country (Cited from, Warner, 2002, p. 388). Certainly, some of the critics regard globalization as being part of “zero-sum game” wherein benefits found in HR practice are not properly distributed between the key business players within the organization (Cited from, Warner, 2002, p. 388). Aside, presence of tough competition by means of providing cheap labour in order to magnet foreign investment can eventually result in race to the bottom within process of certain business operations (Cited from, Chuen, 2001, p. 34).           Ideally, Budhwar and Debrah (Cited from, 2004) mention that, HRM practices are largely driven by external factors in China within the important economic conditions, company size and the owner’s background and culture that HRM in China comprise set of practices in the service of the employers to maintain employment relationships. As there is a need to develop global approaching of competing in terms of production and human resource upgrading as the issues related to personnel management which does not only include personnel administration but there can be strategic point of view. Henceforth, HRM implies critical success factor for foreign companies operating in China as it stresses on the importance of focusing on human resource strategies that enables different context that the global approaches had impacted the people in terms of its culture, government, laws and systems as well as the culture of Chinese business.           Thus, globalization can brought about changes in business environment creates pressure which makes adaptations of business strategy inevitable and hence adaptations of human resource management in China. It can be true that there are certain preferences and shifts in company policies regarding manpower and succession planning, recruiting; training, performance and compensation management which is determined by the owner’s business is striving. The HR policies and practices have casual relationship with business realities in lieu of maintaining an optimum employment relationship through the challenges that brings global impact to human resource approaches and its HR practices. The impact has geared towards the intervention that has been minimal from setting up initiatives for long-term manpower development as the government may not favor laws mandating trade unionism from within such minimum wage for human labor. Hence, Snape and Chan (Cited from, 1999) offer three reasons for this: the small size of establishments in manufacturing and private sector services, cultural resistance of workers towards joining unions and openly challenging their employer’s hostility towards unions.           Instead of work-related issues, unions engage mostly in activities outside the workplace and providing educational and health services to members. The consequence of institutional permissiveness for HR managers is that they can adopt a set of highly versatile and flexible HR practices based on individual employment contracts (Cited from, Cheung et al., 2000; Ng and Wright, 2002). Firms can adjust their compensation based on individual performance and prevailing market conditions. Conversely, individuals can negotiate their wages and salaries according to their individual bargaining power. Furthermore, HR priorities should be prepared to place even more resources on supporting activities. Helping the business sectors meet their needs, university education should focus on training personnel for logistics management, process engineering, information systems, finance and management.           There has also been a greater emphasis on equal opportunities with the growth of pressure groups calling for greater rights for women and the beginning of an interest in racial issues. There is the presence of local Chinese family business having significant number of employees as the success was built on businesses in textiles, garment manufacturing and trading and that these family businesses have grown alongside economy to expand into innovative markets. Moreover, business decision makers and management have reached to the third generation succeeding their founders and their HR policies are more comprehensive and formalized even though the HR policies are different from those promulgated by the strategic partnership model. Thus, Redding (Cited from, 1993) and Westwood and Chan (Cited from, 1992) suggested that the Chinese heads and their businesses encapsulate the ethnocentric values of Confucian paternalism, patriarchy and personalism as seen in their power connected to ownership, a distinct style of benevolently autocratic leadership and personalistic as opposed to neutral relations and the management style is paternalistic emphasizing harmony and compliance (Cited from, Westwood and Chan, 1992) The Chinese management style propagates unique employment relationships marked by delicate blend and balance between a western outlook and traditional Chinese values.           However, the there has been a useful development which was accompanied by major growth in the financial and business services sectors and the associated upgrading in the occupations by a rise in the educational standards. The need to sustain harmonious relationships in the workplace is critical and a good deal of energy needs to be expended in establishing, building up and maintaining good interpersonal relationships and social networks, both within and outside organizations. This can be prime requirement in Chinese organizations that business relationships in these countries are facilitated on guanxi, which describes the quality of relationships that are developed over time and which centre on the social rules of favors and reciprocity and mutual obligation as guanxi networks are essential feature of doing business in China. There has such issue of diffuseness as it tends to mean that life spheres are less differentiated and fragmented in specific cultures as apparent where people in order for them not to engage in work related activities at any time in connection to such own business. There are influences in the development of HRM in China there refers to management practices as being used to regulate employment relationships in sizable organizations (Cited from, Armstrong and Long, 1994). The human resource management approach had taken over and that the labor pool had made available by the influx of combined immigrants from China (Cited from, Cheung et al., 2000).           During certain times, human resource management were administration oriented, perceived as less strategic and so personnel management would be a more fitting characterization as there was plentiful supply from the refugee pool and the postwar baby boom (Cited from, Chen, 2000) as some of the managerial positions were often filled by expatriates. (Cited from, Ng and Ip, 1999). The Chinese companies had adjusted to new business environment with revised HR measures (Cited from, Fosh et al., 1999; Cheung et al., 2000) as it was more cautious in recruitment and moved towards performance-based compensation as the companies needed to tackle new HR issues such as downsizing and employee retrenchment and identified the need for more structure and flexibility HR practices. (Cited from, Cheung, 2001). More companies have adopted strategic HRM as compared to traditional HRM. There was also more outsourcing of HR functions in training, development and recruitment. There is a spectrum of relative degrees of HRM partnership that underpinned HR policies and practices from strategic partnership administration at the other. This relative continuum of HR involvement in the business strategy is attributable to the size and the ownership of the firms. (Cited from, Redding and Wong, 1986; Shaw et al., 1993; Snape et al., 1998). However, the HRM functions are still found to be separated from the decision and power core of the businesses and from other business operations in the company, performing an administrative rather than strategic role. There was the effect of globalization as externally oriented and open economy and adopted international regulation and set up human rights commission (Cited from, Ng and Wright, 2002). Assessment           Positively, China possibly expresses growth in lieu to the development of HRM from such business that the country is open with and do compete from within the reality of a fast changing globalized business market as it can be that, several Chinese businesses will need to be more HR adaptive and eager to adopt to such changes and be effective in its HRM practices and principle oriented manners of handling employees/staff. Then, supporting the role of China in providing ideal service to people coming from positive dominance within the accessible functions of their business society. Lastly, there is a need for China to have precise advantage in technology utilization as it emphasizes global paradigm for the Chinese companies like the SME’s operating the country, to apply and execute well such as those planned and developed ways in strategically driven HR practices that do speed up the requirement within Chinese business in terms of better people management that is ideal for future situations that can change China as a whole.       REFERENCES Armstrong, M. and Long, P. (1994) The reality of strategic HRM, London: IPM. Bartlett, C.A., Goshal, S. (1995), “Rebuilding behavioral context: turn process reengineering into people rejuvenation”, Sloan Management Review, Vol. 37 No.1, pp.11-23 Budhwar, P.S. (2004). Managing Human Resources in Asia-Pacific, Routledge New York pp. 75-89 Chan, A . and Chuen L.T. (2001), “The impact of the WTO on workers in China, Part I”, The Chinese Economy, Vol. 34 No.3, pp.3-93. Chen, E.K.Y. (2000) “The economic setting, ” in D.G. Lethbridge and S.H. Ng (eds.) The business environment: Oxford University Press, pp. 3-46. Cheung, G., Ho, E.Y.Y., Ng, S.K. and Poon, C.Y.W. (2000) “Business restructuring in Hong Kong, ” in D.G. Lethbridge and S.H. Ng (eds.) The business environment in Hong Kong, Hong Kong: Oxford University Press, pp. 154-184. Cheung, S. (2001) Human resource management strategies and practices in Hong Kong: Hong Kong Institute of Human Resource Management. Chuen, L.T. (2001), “Several issues regarding the impact of the WTO on China’s social development”, The Chinese Economy, Vol. 34 No.3, pp.33-50 Elger, T., Edwards, P. (1999), “National states and the regulation of labour in the global economy: an introduction”, in Edwards, P., Elger, T. (Eds),The Global Economy, National State and the Regulation of Labour, Mansell, London and New York, NY, pp.1-41 Eneroth, K, Larsson, R. (1996), “The human side of strategic change”, International Studies of Management and Organization, Vol. 26 No.1, pp.3-15.   Enright, M., Scott, E. and Leung, E. (1999) Hong Kong’s competitiveness beyond the Asian crisis, Hong Kong: HKTDC Research Department. Fosh, P., Chan, A.W., Chow, W.W.S., Snape, E. and Westwood, R. (1999) Hong Kong management and labour: Change and continuity, London: Routledge. Levitt, T (1983), “The globalization of markets”, Harvard Business Review, Vol. 61 No.3, pp.92-102 Nahavandi, A., Malekzadeh, A.R. (1988), “Acculturation of mergers and acquisitions”, Academy of Management Review, Vol. 13 No.1, pp.79-90 Ng, S.H. and Ip, O. (1999) “Manpower, ” in L.C.H. Chow and Y.K. Fan (eds.) The other Hong Kong report 1998, HRM in Hong Kong: Chinese University of Hong Kong Press. Ng, S.H. and Wright, R. (2002) ” Hong Kong, ” in M. Zanko (ed.) Handbook of human resource management policies and practices in Asia-Pacific economies, Cheltenham: Edward Elgar, pp. 167-259. Parker, B. (1998), Globalization and Business Practice: Managing Across Boundaries, Sage, London Redding, G. and Wong, G.Y.Y. (1986) “The psychology of Chinese organizational behaviour, ” in M.H. Bond (ed.) The psychology of the Chinese people, Hong Kong: Oxford University Press Shaw, J.B., Tang, F.Y.T., Fisher, C.D. and Kirkbride, P.S. (1993) “Organizational and environmental factors related to HRM practices in Hong Kong: A cross cultural expanded replication, ” International Journal of Human Resource Management 4 (4): 785-815. Snape, E. and Chan, A. (1999) ” Hong Kong trade unions: In search of a role, ” in P. Fosh, A.W. Chan, W.W.S. Chow, E. Snape and R. Westwood (eds.) Hong Kong management and labour: Change and continuity, London: Routledge, pp. 255-270.   UNCTAD (1999), Report of the Secretary General of UNCTAD to UNCTAD X, United Nations, Geneva, Vol. TD/380 Warner, M. (1995), The Management of Human Resources in Chinese Industry, Macmillan, London and St Martins Press, New York, NY Warner, M. (2002), “Globalization, labour-markets and human resources in Asia-Pacific economies: an overview”, International Journal of Human Resource Management, Vol. 13 No.3, pp.384-98. Westwood, R. and Chan, A. (1992) “Headship and leadership, ” in R. Westwood (ed.) Organizational behaviour: Southeast Asian perspectives, Hong Kong: Longman, pp. 118-143. Zhu, Y., Warner, M. (2003), “HRM in East Asia”, in Harzing, A-W. (Eds),International Human Resource Management, Sage, London   Credit:ivythesis.typepad.com

Human Resources Development in China

2.) What is “globalization”? What are the major changes to organizations brought about by globalization? How does it impact on China busi...

PRC Business Environment

Question 1. The FIE             The Foreign Investment Enterprises (FIEs) are the foreign entities that have an independent or joint engagement directly in China which is in accordance to the Chinese Law. These are also commonly established as the companies in the limited liability. The FIEs also can build as the join stock companies including the non-legal person. These are also structured as the Chinese-foreign contractual joint ventures (CJVs); the Chinese-Foreign Equity ventures (EJVs) or the wholly foreign owned enterprises (WFOEs).             The Chinese Foreign Equity Joint Ventures (EJVs) are set up by the foreign and the Chinese entities sharing their profits. Accordingly, the losses and the risks of the given project are proportionate to their share of registered capital. The foreign party’s contribution as well should be made up of the tangible assets as the buildings, the equipments, the cash, materials or the intangible assets as the land-use rights and not the labour and the intellectual property rights. The common set up is that the Chinese is the one providing the manufacturing capability as well as the market knowledge while the foreign party is the one providing the manufacturing, the technology, the marketing expertise and the management practices. In this kind of FIE, the Chinese government chose this because it offers a high level of stability for the foreign investors. The Chinese Foreign Contractual Joint Ventures (CJV) is the organization which had been formed for the purpose of generating profit by at least one foreign cooperator and one Chinese cooperator including the partnership, corporation, and or to the other organization. The company is also flexible wherein it can organize the business and there is a contract behind it. This is advantageous as to avoid paying heavy taxes due to the fact that the Chinese partners avoids transferring of land into equity joint venture company which in effects avoids the heavy land transfer of taxes as well. Aside form that, it also practice the obstructing the Chinese regulation whereas the foreign investors enters into the market and not directly due to the contract in the Chinese company which is in the market. Lastly, the Chinese party will own the land but there is no clear title.             The Wholly-Foreign Owned Enterprises (WFOEs) are the enterprise that had been established in the PRC with the help of the foreign investors and of course in accordance to the Chinese Law and their own capital are exclusive. There are many advantages of the WFOEs in the investment. One of these is the having no Chinese partner. In this case, the foreign investors can have to manage and operate the WFOE independently. The second advantage is that the foreign investors is entitle for all of the profits that generated in the enterprise due to their advance technology and intellectual property. Lastly, the WFOE can have a greater control in their intellectual property and to their technology that can be use in the joint venture.             The shortcomings that can be encounter by the WFOE are the lacks of the Chinese partners that need in order to develop the businesses. The foreign investors in this kind of FIE also are not able in relying to the Chinese partners so that it can provide an operational site. In short, the foreign investors need to have its land use arrangements.     Processing and Assembling             In the processing and assembling, the foreign investors is the one providing the auxiliary material, the raw materials, and the drawing and the components. On the other hand, the one that process and assembles the said materials and taking into finish products are the Chinese. These finish materials are being return into the foreign party so that it can market the products. In this scenario, the foreign party had been provides productive equipment with the aide of the Chinese and this is with or without funds and in return the Chinese will have to collects a processing fee or the cost of the production which had been purchased by the foreign partners. The foreign processing and assembling is advantageous whereas it do not require Chinese enterprise that it can be use as a scarce in the foreign exchange; it can also make a good size of investment while having costly equipment. It can also increase the pressure from the domestic exports and sales that created as the semi-finish materials and shortages as well as spare parts.  It this scenario, the enterprise must obtain consent in the trade department so that it can have a proper engagement in the trade. The enterprise also should have to finish registration in the local custom. Lastly, the Chinese community does not impose quotas in the material imports.   Comparison             The two business strategies are merely important in diversifying the cosmetic in China. In the FIE it has many requirements in putting up a business. There are also many laws that supports upon the diversification. In connection to this, there a huge risks to face by the company in using this technique. There are also stages that this method will face on as the feasibility study, the project listing, the articles and registration for as business license, and the approval contract. On the other hand, at the P&A techniques there are only few risks that will be facing on. Besides, there is the assurance of high quality products to be produced. However, there is only little profit to come and it will only go to the production and imports. It had also extended its is efforts whereas the foreign investors can now have to manage and control their exports and their imports and bring their equipments and material duty free for as long as they are being engaged in the production export.   The Decision             The P&A is advisable for the cosmetic company to diverse in China due to the fact that profit can be handed fast and efficient. Aside from that there is also no need to invest additional money in order to come into the business in China. Besides part of the specialty in the China manufacturing is the packaging that is why there is an assurance that the investment and the product will have to purchase precisely. Additionally, at the midst of the modernization, the Chinese are also considered to be one of the best producers when it comes to the cosmetics and arts. This will also create a large profit due to the quality of the products that had been made in China. Aside from that competitors had been widely seen in China and therefore needs to avoid that by using the method and sell the products to the other countries where competition is not too stiff.     Question 2             There are many reason and advantages on why to put up a business in China. One of the companies that encouraged in putting its hats in the China’s business ring is the Google. Google is a multinational IT company. After putting up a business in the China, the Google had declined its business due to its local competitors in China. According to the survey, 80% used Baidu only 20% uses the Google that tells that majority of the Chinese chose to support the eBay. The reasons for not choosing Google are the poor faring on the internet. Aside form that there are also censorship issue arouse in the failure of the Google. There are also slow hiring practices that the Google did. Switching from Google to Baidu (the competitor) had been done due to the slow internet connection where the Baidu had never encountered those problems.             In this incident it had been found out that services and the products are important in the Chinese internet users. As the Google continuous to rise up in the America, it has been determine as well that in order to gain the China it must have a remedy on the English speaking market. The internet companies therefore needs to have a development on the products and the services as well as the process in the Chinese citizens directly and not to bring the work from US to China. It must also be understand by the foreign internet companies that China is about 140 million users of which are actively and precisely engage in e-commerce and they are also brings them to the total market.  The China market is too big and therefore needs to consider the China market. The huge system need to put so that it can compete in the multinational Chinese internet firms. Other factor that brings down the Google in China is bringing the Baidu’s mp3 function, which is the factor that made weak performance of the Google which had been mentioned. This only means that the Google needs to have services like this so that it can have a proper competition.             The failure of the Google in China is the result of not only the censorship which was highlighted by most of the critics. The Google therefore needs to change the outdated practices so that it can continue to raise its stocks. The company needs to have a proper and right management team, localize services so that it client can relate on that, and should have a delegate authority to them. In the expansion of Google in China, it must bring right talents that produce right services. It is also advisable that the internet companies needs to develop its products, its services and the process that will target the Chinese directly and not to bring the US culture to the China. Generally, the major reason for the failure of Google in China is that the company remained too American, lacks local bandwidth whereas it cannot adapt to the Chinese environment and culture, the micromanagement to its infrastructure abroad, and the respect to the international law.        Bibliography Foreign Investment Enterprise (2002, June 22). Asian Projects and Construction Update. Mallesons Stephen Jaques Retrieved January 24, 2008, from http://www.mallesons.com/publications/Asian_Projects_and_Construction_Update/5964973W.htm Foreign Investment Enterprises, Mao & McMath Legal Consultants. Retrieved January 24, 2008, from http://www.mao-mcmath.com/Fdi.html Rein, S., Has Google Failed in China? (2007, February 5). Seeking Alpha.  Retrieved January 24, 2008, from http://seekingalpha.com/article/26033-has-google-failed-in-china Sy, G. (2005). Foreign Direct Investment in China. International Legal News, 2 (1)               Credit:ivythesis.typepad.com

PRC Business Environment

Question 1. The FIE The Foreign Investment Enterprises (FIEs) are the foreign entities that have an independent or joint eng...