Managing the Authoritarian Business Risk
China is a market of one billion consumers becoming ever most prosperous. We have to access that market. It’s where much of our future growth will come from. To access the market, we have been willing to do what it takes — embark on joint ventures, share intellectual property — whatever.
So claimed a C-suite executive in a leading multinational company during a recent conversation.
In his recent speech in San Francisco, President Xi stimulated these sentiments further: “China is a super-large economy and a super-large market…modernization for 1.4bn Chinese is a huge opportunity that China provides to the world.” It earned him a standing ovation from the business audience.
The sentiments are understandable. Business leaders applauded because they are human beings. We all tend to believe what we want to believe rather than necessarily what is true.
Besides being a promising market, China (and others) is also a country in the grip of an authoritarian regime. Success in such countries requires a good understanding of the leadership’s mindset and how that affects the opportunities and risks available.
Leaders of such states tend to see themselves as the embodiment of the state itself. In China’s case, one interpretation of Confucian philosophy casts the leader as the authoritative and paternalistic father figure of what is an extended family encompassing all Chinese. In all cases, the interests of the state are paramount. All are expected to serve those interests.
Most Western businesses see their role as delivering financial value to their shareholders by providing products and services to their customers. That which President Xi was playing upon when presenting China as a financial bonanza. They do not see their role as serving the interests of the state. Rather, it is often believed to be the other way around — the state apparatus is there to serve the interests of business — the ‘wealth creators.’
It is therefore as well to recognize that Western companies operating in such states are starting from a fundamentally different, maybe opposite, philosophical position. Corporations, and particularly foreign corporations, do not have the same status in such centralised states as they have in Western style democracies. Their position is subordinate to the interests of the state. As we have seen, even successful local businesses will be suppressed if they are perceived to threaten state supremacy.
When President Putin came to power, establishing the supremacy of state interests was one of his first tasks. Oligarchs like Boris Berezovsky who refused to accept their subordinate position were marginalized and exiled. In China, the approach has been different. Periodic investigations of western businesses seem designed to send a signal of state supremacy without totally scaring off foreign investment. That has only been partially successful as foreign direct investment into China is falling and a number of corporations have exited the market. Xi’s speech seems designed as an attempt to reverse that trend, appealing to Western business leaders’ appetite for financial rewards while attempting to position China as welcoming. How successful that will be remains to be seen. It is a psychological battle between greed and realism.
In evaluating their future in centrally controlled states, corporate leaders need to be clear-eyed about what value they are bringing to such states. As Xi made clear, he sees the primary objective as ‘modernization for 1.4bn Chinese.’ How do Western corporations contribute to that objective?
As always, success depends on the ability to see oneself through others’ eyes. Rather than the usual questions around service to customers and creating shareholder value, corporations operating in such states need to ask themselves different questions. What is my perceived value to the state? How long will that value last? What might happen when that perceived value decreases or is overtaken by other political priorities?
Only by developing realistic answers to these questions untainted by Western democratic thinking can companies evaluate the opportunities and risks associated with operating in these markets or doing deals with companies owned or directed by the state.
For China and others, the main value of foreign corporations lies in the transfer of knowhow and intellectual property, in foreign direct investment to develop an industrial base and employment, and in providing routes to access foreign markets. These bring real value to the state and its citizens. Yet all are likely to be wasting assets over time as more and more gets transferred to local corporations — preferably state-owned or state-directed — and the added value from foreign corporations steadily decreases.
Finally, there is the ever-present possibility of a stochastic shock that upends everything. Russia’s invasion of Ukraine was one such shock. For China, there is the ever-present tension over Taiwan. This is an issue that would be foolish to ignore seeing as, following the utter failure of the ‘one country two systems’ approach to Hong Kong, Taiwan’s reunification is now seen as an existential issue by the Chinese regime; one that Xi has elevated as being central to his personal legacy. Any corporation operating in China has to have a clear view as to how a Taiwan escalation would affect their ability to continue Chinese operations. The financial impact of a forced departure from China would make exiting the Russian market seem trivial in comparison.
