Emerging market economies : Lessons from China*

The term emerging markets was introduced by financial market analysts during the early 80’s. It later became synonymous with emerging economies, a distinctive class of developing countries whose Gross National Income per capita amounts to $11,905 or less, according to the World Bank definitional criteria.

Emerging market economies are characterized as richer growing developing countries which have either liberalized or privatized significant parts of their economies in the process of integrating the global economy. They play an increasing role in trade, exports and imports, constituting nodal points in the global fragmentation of supply chains. Emerging market economies are both recipients and, increasingly, providers of Foreign Direct Investment. (Estrin and Cote, 2017).

Set against this background, China bears all the hallmarks of an emerging market economy. But it is much more, as we shall see. The IMF and the World Bank as well as scholars have established a set of criteria to identify and characterize emerging market economies. These are operationalized by the following indicators: Economic (GDP per capita and GDP growth); Institutions (governance, economic freedom, transparency); Resources (state of infrastructure, level of education, telecommunication and transportation facilities, R&D expenditure and technology readiness); Quality of life (environment, human development index), (Meyer and Grosse, 2017). The better the indicators, the higher the degree of development. So how does China fare on these scales?

Economic indicators

Economically, China is the largest economy of the world. It has an annual growth rate of almost 7%, but given its population of 1,3 billion inhabitants, its per capita income of $15,534 per price parity, the country is placed in the grid of emerging countries, as per The Economist definition.

Institutions

China has endeavored since 1978 to liberalize various sectors of its economy, adopting market driven types of policies, but institutional hurdles, both formal and informal, as theorized by Douglass North (1991), remained constraining factors.

On the formal side, the lack of a Rule of Law jurisdiction, underpinned by strict separation of powers, is often substituted by edicts from the one party-State or local authorities. However, business needs predictability to operate in an efficient manner. As a case in point, we were apprised during our visit to BMW headquarters in Beijing of how in some instances, the authorities would give indications to forthcoming regulations, but these could be decreed and enforced at any point in time. Such directorial manner of governance, lacking in transparency and consultation, as observed by Xu and Mayer (2013), is pregnant of risk and uncertainty due to high volatility of key economic, political and institutional variables.

On the informal side, as theorized by Xu and Meyer (2013:1323), “network-based behaviors are common, in part as a consequence of the less efficient markets, but arguably also due to social traditions,” which in China would equate to the practice of guanxi, gifts and favors giving, anathema to corruption under any advanced democracy jurisdiction. Nonetheless, grey areas in matters of legislation and governance have given rise to bold and multiple initiatives by individuals and firms, alike. As we could observe on the spot, innovative private initiatives such as bicycle renting and digital payments have been transformed into multibillion dollar businesses, even when the authorities have yet to initiate proper regulatory legislation.

All this attest that despite “institutional voids” (Khanna and Palepu, 1997), the Chinese bureaucracy is very pragmatic, which is good for business.

Resources

Since the opening of its economy in 1978, China has invested massively on infrastructure and subsequently, on human capital. According to Kroeber (2016), the development strategy was to focus on labour- intensive light industrial exports to generate foreign exchange. The receipts were in turn used to import capital equipment, create even more factories and jobs, and eventually provide public goods (roads, housing estates, electricity) and services (education, health, social security). This strategy is in line with Solow (1957) growth model pertaining to emerging countries, where the use of unskilled labour and savings are determining input factors for capital formation. Currently, China is making an increasing use of technology and innovation (automatization of industries and digital technology, as evidenced by the success of Alibaba, Tencent, Baidu, Huawei) as key drivers of its development - which is symptomatic of Solow (1975) growth model for developed economies.

Clearly, this is a country in transition.

Quality of life

If various indices show that China has achieved significant gains in terms of human and social development, environmental hazards, as evidenced by recurrent alarming pollution levels in the capital, constitute negative externalities. While burning coal to fuel its energy hungry industries, China became in 2007 the world’s most polluting nation in the world (Kroeber, 2016).

 In sum, set against the above indicators and given the heterogenous nature of the country, China constitutes, in fact, a patchwork of regions bearing, in various proportions, all the characteristics of developed (cities), emerging (towns) and developing (villages) economies.

Contrary to Japan, South Korea and Taiwan, FDI has played an important role in the East Asia development model of China. Beyond much needed capital, such investment is expected to help local firms through the transmission of knowledge (horizontal spillover) by way of exposure to new technology and managerial techniques. Further, Meyer and Sinani (2009:1076) hypothesize a “curvilinear relationship between spillovers from FDI and multiple dimensions of development, namely per capita income, human capital and institutional framework.” Some development economists like Dani Rodrik (1999) tend to be skeptical about the existence of such benefits. In the case of China, its State directed policies, for instance imposing foreign MNE’s to enter into joint ventures with local firms if they want to access the Chinese market, have delivered handsome dividends - if not on all counts as evoked by Meyer and Sinani (2009), at least on per capita income (downstream spillover) and soft technology diffusion (upstream spillover).

During our visit to China, we could observe that mobiles phones like Xiaomi and Oppo appeared to be either imitated or ameliorated versions of Iphone. (On subsequent visits to Morocco and Malaysia, we did witness that the Oppo brand was omnipresent. In some way the Chinese “good enough” rule or 80% quality at 60% price is having a killer effect among the rising consumer classes in developing countries). At Cheetah, a global software developer, we did meet with enthusiastic young Chinese managers and engineers, some coming from foreign MNE’s, working on next Apps solutions. At BMW, we were introduced to new Made in China models ready to hit the international market. Could such kinds of spillover happen in other emerging countries?

The Indonesian Jababeka case we studied illustrates how one conglomerate was trying to fill “institutional voids” by building infrastructure – industrial state, roads, port- and providing social services - university education, security - in a country where central planning is either lacking or the authorities appear too weak or corrupt or both to make things happen. In Mongolia, the Rio Tinto story evokes beyond some welcoming FDI and CSR benefits, a tale of “extractive institutions” (Acermoglu & Robinson, 2012) not necessarily in the best long-term interest of the country. South Africa’s domestic MNE’s running to invest and be incorporated abroad (Werker, 2014) appears synonymous with a capital flight rather than outward FDI.

Lessons learned: These countries could extract real horizontal and vertical spillovers if their governments, as in China, could adopt a holistic development strategy, underpinned by some measure of central planning, investing in basic infrastructure while encouraging FDI providers to team with local firms in non-extractive sectors of the economy. The name of the game is: Care for national interest but be also pragmatic. 

*This article is extracted from an assignment within the EGMiM (Executive Global Master in Management) 2016-2018 program at the London School of Economics.